Edgar Filing: INTERMOUNTAIN COMMUNITY BANCORP

IMCB-2012.6.30 Q2 10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



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

For the quarterly period ended June 30, 2012



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		(IRS Employer
incorporation or organization)		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

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 þ No o

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



Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	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

The number of shares outstanding of the registrant’s Voting Common Stock, no par value per share, as of August 3, 2012 was 26,028,223 and the number of shares of Non-Voting Common Stock, no par value per share, was 38,396,837.

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Intermountain Community Bancorp

FORM 10-Q

For the Quarter Ended June 30, 2012

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PART I — Financial Information
Item 1 — Financial Statements (Unaudited)
Consolidated Balance Sheets for June 30, 2012 and December 31, 2011	3
Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011	4
Consolidated Statements of Cash Flows for the three and six months ended June 30, 2012 and 2011	7
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011	6
Notes to Consolidated Financial Statements	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	60
Item 4 — Controls and Procedures	60
PART II — Other Information
Item 1 — Legal Proceedings	60
Item 1A — Risk Factors	60
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3 — Defaults Upon Senior Securities	68
Item 4 —Mine Safety Disclosure	68
Item 5 — Other Information	68
Item 6 — Exhibits	68
Signatures	68
EX-3.1 Amended and Restated Articles of Incorporation
EX-31.1
EX-31.2
EX-32
EX-101

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PART I — Financial Information

Item - 1 Financial Statements

Intermountain Community Bancorp

Consolidated Balance Sheets

(Unaudited)



	June 30, 2012			December 31, 2011
	(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Interest-bearing	$	39,871		$	82,242
Non-interest bearing and vault	18,934			24,958
Restricted cash	12,464			2,668
Available-for-sale securities, at fair value	285,095			219,039
Held-to-maturity securities, at amortized cost	14,990			16,143
Federal Home Loan Bank (“FHLB”) of Seattle stock, at cost	2,310			2,310
Loans held for sale	4,083			5,561
Loans receivable, net	510,684			502,252
Accrued interest receivable	4,522			4,100
Office properties and equipment, net	36,530			37,687
Bank-owned life insurance ("BOLI")	9,301			9,127
Other intangibles	130			189
Other real estate owned (“OREO”)	5,267			6,650
Prepaid expenses and other assets	18,903			21,292
Total assets	$	963,084		$	934,218
LIABILITIES
Deposits	$	726,009		$	729,373
Securities sold subject to repurchase agreements	65,458			85,104
Advances from Federal Home Loan Bank	29,000			29,000
Unexercised stock warrant liability	850			—
Cashier checks issued and payable	282			481
Accrued interest payable	1,979			1,676
Other borrowings	16,527			16,527
Accrued expenses and other liabilities	11,326			10,441
Total liabilities	851,431			872,602
STOCKHOLDERS’ EQUITY
Common stock 300,000,000 shares authorized; 26,028,243 and 8,427,212 shares issued and 26,023,025 and 8,409,840 shares outstanding as of June 30, 2012 and December 31, 2011, respectively	96,290			78,916
Common stock - non-voting 100,000,000 shares authorized; 38,396,837 and 0 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively	31,941			—
Preferred stock, Series A, 27,000 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively; liquidation preference of $1,000 per share	26,335			26,149
Accumulated other comprehensive income, net of tax	2,272			2,370
Accumulated deficit	(45,185		)	(45,819		)
Total stockholders’ equity	111,653			61,616
Total liabilities and stockholders’ equity	$	963,084		$	934,218

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

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Intermountain Community Bancorp

Consolidated Statements of Operations

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	7,054		$	8,432		$	14,126		$	16,766
Investments	2,072			2,358			4,120			4,512
Total interest income	9,126			10,790			18,246			21,278
Interest expense:
Deposits	744			1,134			1,566			2,382
Other borrowings	571			671			1,247			1,200
Total interest expense	1,315			1,805			2,813			3,582
Net interest income	7,811			8,985			15,433			17,696
Provision for losses on loans	(1,575		)	(2,712		)	(2,534		)	(4,345		)
Net interest income after provision for losses on loans	6,236			6,273			12,899			13,351
Other income:
Fees and service charges	1,619			1,863			3,244			3,534
Loan related fee income	659			545			1,240			1,120
Net gain on sale of securities	—			—			585			—
Net gain (loss) on sale of other assets	18			(50		)	22			(47		)
Other-than-temporary impairment (“OTTI”) losses on investments (1)	(52		)	—			(323		)	—
Bank-owned life insurance	87			91			174			180
Fair value adjustment on cash flow hedge	90			—			(294		)	—
Unexercised warrant liability fair value adjustment	158			—			158			—
Other	189			284			398			609
Total other income	2,768			2,733			5,204			5,396
Operating expenses:
Salaries and employee benefits	3,871			4,887			8,006			9,833
Occupancy expense	1,623			1,708			3,307			3,496
Advertising	168			214			280			344
Fees and service charges	629			632			1,250			1,283
Printing, postage and supplies	300			302			601			638
Legal and accounting	396			447			746			682
FDIC assessment	308			331			621			776
OREO operations	120			150			224			626
Other expenses	807			940			1,485			1,673
Total operating expenses	8,222			9,611			16,520			19,351
Net income (loss) before income taxes	782			(605		)	1,583			(604		)
Income tax (provision) benefit	—			—			—			—
Net income (loss)	782			(605		)	1,583			(604		)
Preferred stock dividend	481			448			947			891
Net income (loss) applicable to common stockholders	$	301		$	(1,053	)	$	636		$	(1,495	)
Earnings (loss) per share — basic	$	0.01		$	(0.13	)	$	0.01		$	(0.18	)
Earnings (loss) per share — diluted	$	0.01		$	(0.13	)	$	0.01		$	(0.18	)
Weighted average common shares outstanding — basic	59,013,211			8,409,786			51,645,760			8,403,177
Weighted average common shares outstanding — diluted (2)	59,191,877			8,409,786			51,811,093			8,403,177


(1)	Consisting of $0, $0, $7 and $0 of total other-than-temporary impairment net losses, net of $(52), $0, $(316) and $0, recognized in other comprehensive income, for the three and six months ended June 30, 2012, and June 30, 2011, respectively.

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(2) Includes the weighted average number of non-voting common shares that would be outstanding if the warrants issued in the January 2012 private offering are exercised directly for 1,700,000 non-voting common shares, utilizing the Treasury stock method.

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

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Intermountain Community Bancorp

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(Dollars in thousands)
Net income (loss)	$	782		$	(605	)	$	1,583		$	(604	)
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	292			3,719			(439		)	3,945
Realized net gains reclassified from other comprehensive income	—			—			(585		)	—
Non-credit loss on impairment on available-for-sale debt securities	52			—			316			—
Less deferred income tax benefit (provision) on securities	(136		)	(1,472		)	280			(1,561		)
Change in fair value of qualifying cash flow hedge, net of tax	—			(6		)	330			7
Net other comprehensive income (loss)	208			2,241			(98		)	2,391
Comprehensive income	$	990		$	1,636		$	1,485		$	1,787

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

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Intermountain Community Bancorp

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended
	June 30,
	2012			2011
	(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)	$	1,583		$	(604	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	1,341			1,524
Stock-based compensation expense	43			122
Net amortization of premiums on securities	2,485			1,171
Provisions for losses on loans	2,534			4,345
Amortization of core deposit intangibles	58			61
(Gain) on sale of loans, investments, property and equipment	(1,413		)	(287		)
Impact of hedge dedesignation and current fair value adjustment	374			—
OTTI credit loss on available-for-sale investments	323			—
OREO valuation adjustments	30			326
Accretion of deferred gain on sale of branch property	(8		)	(8		)
Net accretion of loan and deposit discounts and premiums	(7		)	(7		)
Increase in cash surrender value of bank-owned life insurance	(174		)	(181		)
Change in:
Accrued interest receivable	(422		)	177
Prepaid expenses and other assets	2,385			1,079
Accrued interest payable and other liabilities	605			78
Accrued expenses and other cashiers checks	(199		)	1,941
Proceeds from sale of loans originated for sale	38,824			23,728
Loans originated for sale	(36,533		)	(21,630		)
Net cash provided by operating activities	11,829			11,835
Cash flows from investing activities:
Purchases of available-for-sale securities	(100,754		)	(47,352		)
Proceeds from sales, calls or maturities of available-for-sale securities	2,967			157
Principal payments on mortgage-backed securities	28,692			23,000
Proceeds from sales, calls or maturities of held-to-maturity securities	1,261			47
Origination of loans, net principal payments	(11,653		)	2,580
Purchase of office properties and equipment	(184		)	(259		)
Proceeds from sale of office properties and equipment	16			—
Proceeds from sale of other real estate owned	2,047			4,400
Net change in restricted cash	(9,796		)	459
Net cash used in investing activities	(87,404		)	(16,968		)
Cash flows from financing activities:
Proceeds from issuance of series B preferred stock, gross	32,460			—
Proceeds from issuance of common stock, gross	22,532			—
Proceeds from issuance of warrant, gross	1,007			—
Capital issuance costs	(5,651		)	—
Net change in demand, money market and savings deposits	14,903			(14,526		)
Net change in certificates of deposit	(18,266		)	(28,279		)
Net change in repurchase agreements	(19,646		)	(5,429		)
Change in value of stock warrants	(158		)	—
Retirement of treasury stock	—			(4		)
Net cash provided by (used in) financing activities	27,181			(48,238		)
Net change in cash and cash equivalents	(48,394		)	(53,371		)
Cash and cash equivalents, beginning of period	107,199			144,666
Cash and cash equivalents, end of period	$	58,805		$	91,295
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,812		$	3,503
Income taxes, net of tax refunds received	$	—		$	8
Noncash investing and financing activities:
Loans converted to other real estate owned	$	694		$	8,115
Accrual of preferred stock dividend	$	763		$	716

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

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Intermountain Community Bancorp

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation:

The foregoing unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2011. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.

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

2. Investments:

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

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	Available-for-Sale
	Amortized Cost		Cumulative Non-Credit OTTI (Losses) Recognized in OCI			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value/ Carrying Value
June 30, 2012
State and municipal securities	$	51,281	$	—		$	1,947	$	(33	)	$	53,195
Mortgage-backed securities - Agency Pass Throughs	85,144		—			2,134		(423		)	86,855
Mortgage-backed securities - Agency CMO's	108,529		—			1,960		(251		)	110,238
SBA Pools	21,539		—			—		(233		)	21,306
Mortgage-backed securities - Non Agency CMO's (investment grade)	5,305		—			383		—			5,688
Mortgage-backed securities - Non Agency CMO's (below investment grade)	9,547		(1,695		)	461		(500		)	7,813
	$	281,345	$	(1,695	)	$	6,885	$	(1,440	)	$	285,095
December 31, 2011
U.S. treasury securities and obligations of U.S. government agencies	$	21	$	—		$	—	$	—		$	21
State and municipal securities	35,352		—			1,791		(8		)	37,135
Mortgage-backed securities - Agency Pass Throughs	59,436		—			2,252		(126		)	61,562
Mortgage-backed securities - Agency CMO's	103,349		—			2,526		(328		)	105,547
Mortgage-backed securities - Non Agency CMO's (investment grade)	5,934		—			389		—			6,323
Mortgage-backed securities - Non Agency CMO's (below investment grade)	10,489		(2,011		)	435		(462		)	8,451
	$	214,581	$	(2,011	)	$	7,393	$	(924	)	$	219,039
	Held-to-Maturity
	Carrying Value / Amortized Cost		Cumulative Non-Credit OTTI (Losses) Recognized in OCI			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2012
State and municipal securities	$	14,990	$	—		$	1,502	$	—		$	16,492
December 31, 2011
State and municipal securities	$	16,143	$	—		$	1,328	$	—		$	17,471

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
June 30, 2012	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Residential mortgage-backed securities	$	78,263	$	(634	)	$	5,231	$	(540	)	$	83,494	$	(1,174	)
SBA Pools	21,306		(233		)	—		—			21,306		(233		)
State and municipal securities	6,049		(33		)	—		—			6,049		(33		)
Total	$	105,618	$	(900	)	$	5,231	$	(540	)	$	110,849	$	(1,440	)

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	Less Than 12 Months					12 Months or Longer					Total
December 31, 2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and municipal securities	$	1,659	$	(8	)	$	—	$	—		$	1,659	$	(8	)
Mortgage-backed securities & CMO’s	39,905		(433		)	3,993		(483		)	43,898		(916		)
Total	$	41,564	$	(441	)	$	3,993	$	(483	)	$	45,557	$	(924	)

At June 30, 2012, 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 Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	—	$	—	$	130	$	130
After one year through five years	2,865		2,990		2,364		2,507
After five years through ten years	—		—		7,750		8,504
After ten years	48,416		50,205		4,746		5,351
Subtotal	51,281		53,195		14,990		16,492
Mortgage-backed securities	208,525		210,594		—		—
SBA Pools	21,539		21,306		—		—
Total Securities	$	281,345	$	285,095	$	14,990	$	16,492

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

Intermountain’s investment portfolios are managed to provide and maintain liquidity; to maintain a balance of high quality, diversified investments to minimize risk; to offset other asset portfolio elements in managing interest rate risk; to provide collateral for pledging; and to maximize returns. At June 30, 2012, 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 other-than-temporary impairment (“OTTI”) were considered by management to be temporary in nature.

The following table presents the OTTI losses for the six months ended June 30, 2012 and June 30, 2011:



	2012				2011
	Held To Maturity		Available For Sale		Held To Maturity		Available For Sale
Total other-than-temporary impairment losses	$	—	$	7	$	—	$	—
Portion of other-than-temporary impairment losses transferred from (recognized in) other comprehensive income (1)	—		316		—		—
Net impairment losses recognized in earnings (2)	$	—	$	323	$	—	$	—

_____________________________


(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 relates to two non-agency collateralized mortgage obligations. 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, 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 equal to the yield anticipated at the time the security was purchased. We review the actual collateral performance of these securities on a

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quarterly basis and update the inputs as appropriate to determine the projected cash flows.

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

3. Loans and Allowance for Loan Losses:

The components of loans receivable are as follows (in thousands):



	June 30, 2012
	Loans Receivable			%		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial	$	115,481		22.2	%	$	7,810	$	107,671
Commercial real estate	182,045			35.0		5,892		176,153
Commercial construction	3,496			0.7		—		3,496
Land and land development loans	32,271			6.2		3,227		29,044
Agriculture	91,983			17.7		2,187		89,796
Multifamily	18,325			3.5		—		18,325
Residential real estate	58,580			11.3		2,823		55,757
Residential construction	160			—		—		160
Consumer	10,120			1.9		225		9,895
Municipal	8,138			1.5		—		8,138
Total loans receivable	520,599			100.0	%	$	22,164	$	498,435
Allowance for loan losses	(10,233		)
Deferred loan fees, net of direct origination costs	318
Loans receivable, net	$	510,684
Weighted average interest rate	5.50		%



	December 31, 2011
	Loans Receivable			%		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial	$	110,395		21.4	%	$	8,585	$	101,810
Commercial real estate	167,586			32.6		10,918		156,668
Commercial construction	6,335			1.2		747		5,588
Land and land development loans	38,499			7.5		5,173		33,326
Agriculture	81,316			15.8		2,423		78,893
Multifamily	26,038			5.1		—		26,038
Residential real estate	58,861			11.4		4,013		54,848
Residential construction	2,742			0.5		—		2,742
Consumer	11,847			2.3		276		11,571
Municipal	11,063			2.2		—		11,063
Total loans receivable	514,682			100.0	%	$	32,135	$	482,547
Allowance for loan losses	(12,690		)
Deferred loan fees, net of direct origination costs	260
Loans receivable, net	$	502,252
Weighted average interest rate	5.69		%

The components of allowance for loan loss by types are as follows (in thousands):

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	June 30, 2012
	Total Allowance		Individually Evaluated Allowance		Collectively Evaluated Allowance
Commercial	$	2,429	$	813	$	1,616
Commercial real estate	4,032		1,876		2,156
Commercial construction	94		—		94
Land and land development loans	1,565		324		1,241
Agriculture	207		10		197
Multifamily	57		—		57
Residential real estate	1,601		961		640
Residential construction	4		—		4
Consumer	201		117		84
Municipal	43		—		43
Total	$	10,233	$	4,101	$	6,132



	December 31, 2011
	Total Allowance		Individually Evaluated Allowance		Collectively Evaluated Allowance
Commercial	$	2,817	$	1,300	$	1,517
Commercial real estate	4,880		2,804		2,076
Commercial construction	500		252		248
Land and land development loans	2,273		728		1,545
Agriculture	172		32		140
Multifamily	91		—		91
Residential real estate	1,566		939		627
Residential construction	59		—		59
Consumer	295		195		100
Municipal	37		—		37
Total	$	12,690	$	6,250	$	6,440

A summary of current, past due and nonaccrual loans as of June 30, 2012 is as follows, (in thousands):



	Current		30-89 Days Past Due		90 Days or More Past Due and Accruing		Nonaccrual		Total
Commercial	$	110,869	$	329	$	—	$	4,283	$	115,481
Commercial real estate	181,058		305		—		682		182,045
Commercial construction	3,496		—		—		—		3,496
Land and land development loans	30,978		38		—		1,255		32,271
Agriculture	91,716		233		—		34		91,983
Multifamily	18,325		—		—		—		18,325
Residential real estate	57,881		378		—		321		58,580
Residential construction	160		—		—		—		160
Consumer	10,075		25		—		20		10,120
Municipal	8,138		—		—		—		8,138
Total	$	512,696	$	1,308	$	—	$	6,595	$	520,599

A summary of current, past due and nonaccrual loans as of December 31, 2011 is as follows, (in thousands):

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	Current		30-89 Days Past Due		90 Days or More Past Due and Accruing		Nonaccrual		Total
Commercial	$	106,509	$	200	$	—	$	3,686	$	110,395
Commercial real estate	164,578		705		—		2,303		167,586
Commercial construction	6,289		—		—		46		6,335
Land and land development loans	35,835		12		—		2,652		38,499
Agriculture	81,129		—		—		187		81,316
Multifamily	26,038		—		—		—		26,038
Residential real estate	58,037		423		—		401		58,861
Residential construction	2,742		—		—		—		2,742
Consumer	11,739		91		—		17		11,847
Municipal	11,063		—		—		—		11,063
Total	$	503,959	$	1,431	$	—	$	9,292	$	514,682

The following table provides a summary of Troubled Debt Restructuring ("TDR") by performing status, (in thousands).




	June 30, 2012						December 31, 2011
Troubled Debt Restructurings	Nonaccrual		Accrual		Total		Nonaccrual		Accrual			Total
Commercial	$	42	$	663	$	705	$	571	$	371		$	942
Commercial real estate	44		2,332		2,376		382		1,889			2,271
Commercial construction	—		—		—		295		46			341
Land and land development loans	—		1,280		1,280		794		782			1,576
Agriculture	—		110		110		—		22		.	22
Residential real estate	—		725		725		1,377		—			1,377
Consumer	—		40		40		64		27			91
Total	$	86	$	5,150	$	5,236	$	3,483	$	3,137		$	6,620

A modified loan is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. Modified terms are dependent upon the financial position and needs of the individual borrower, as the Company does not employ modification programs for temporary or trial periods. The most common types of modifications include interest rate adjustments, covenant modifications, forbearance and/or other concessions. If the modification agreement is violated, the loan is handled by the Company's Special Assets group for resolution, which may result in foreclosure or other asset disposition.

Generally, TDRs are classified as impaired loans and are TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.

The Company's loans that were modified in the three and six month period ended June 30, 2012 and 2011 and considered a TDR are as follows (dollars in thousands):

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	Three Months Ended June 30, 2012					Six Months Ended June 30, 2012
	Number	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number	Pre-Modification Recorded Investment	Post-Modification Recorded Investment
Commercial	—	$	—	$	—	1	75	75
Commercial real estate	—	—		—		1	100	100
Agriculture	—	—		—		1	110	110
	—	$	—	$	—	3	285	285



	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Number	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number	Pre-Modification Recorded Investment	Post-Modification Recorded Investment
Commercial	—	$	—	$	—	2	1,742	1,742
Land and land development loans	2	$	250	$	250	5	2,262	2,261
Agriculture	1	$	58	$	58	1	58	58
Residential real estate	6	$	937	$	937	6	937	937
Residential construction	1	123		123		1	123	123
Consumer	5	128		128		5	128	128
	15	$	1,496	$	1,496	20	5,250	5,249

The balances below provide information as to how the loans were modified as TDRs during the three and six months ended June 30, 2012 and 2011, (in thousands).



	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
	Adjusted Interest Rate Only		Other*		Adjusted Interest Rate Only		Other*
Commercial	$	—	$	—	$	75	$	—
Commercial real estate	—		—		—		100
Agriculture	—		—		110		—
	$	—	$	—	$	185	$	100
(*) Other includes term or principal concessions or a combination of concessions, including interest rates.

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	Three Months Ended June 30, 2011				Six Months Ended June 30, 2011
	Adjusted Interest Rate Only		Other*		Adjusted Interest Rate Only		Other*
Commercial	$	—	$	—	$	—	$	1,742
Land and land development loans	$	250	$	—	$	250	$	2,011
Agriculture	$	—	$	58	$	—	$	58
Residential real estate	$	904	$	33	$	904	$	33
Residential construction	—		122		—		122
Consumer	128		—		128		—
	$	1,282	$	213	$	1,282	$	3,966
(*) Other includes term or principal concessions or a combination of concessions, including interest rates.

As of June 30, 2012, the Company had specific reserves of $1.7 million on TDRs, and there were no TDRs in default.

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 reporting dates. The allowance for loan losses and reserve for unfunded commitments are based on management’s assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses and the reserve for unfunded commitments during the three and six month periods ended June 30, 2012 and 2011 are as follows:



	Allowance for Loan Losses for the three months ended June 30, 2012
	Balance, Beginning of Quarter		Charge-Offs Apr 1 through Jun 30, 2012			Recoveries Apr 1 through Jun 30 2012		Provision			Balance, End of Period
	(Dollars in thousands)
Commercial	$	2,577	$	(1,078	)	$	289	$	641		$	2,429
Commercial real estate	3,953		(841		)	134		786			4,032
Commercial construction	474		(243		)	3		(140		)	94
Land and land development loans	2,210		(711		)	229		(163		)	1,565
Agriculture	138		(1		)	18		52			207
Multifamily	77		—			—		(20		)	57
Residential real estate	1,575		(502		)	60		468			1,601
Residential construction	62		—			—		(58		)	4
Consumer	258		(127		)	56		14			201
Municipal	48		—			—		(5		)	43
Allowance for loan losses	$	11,372	$	(3,503	)	$	789	$	1,575		$	10,233

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	Allowance for Loan Losses for the six months ended June 30, 2012
	Balance, Beginning of Year		Charge-Offs Jan 1 through Jun 30, 2012			Recoveries Jan 1 through Jun 30 2012		Provision			Balance, End of Period
	(Dollars in thousands)
Commercial	$	2,817	$	(1,757	)	$	326	$	1,043		$	2,429
Commercial real estate	4,880		(1,978		)	219		911			4,032
Commercial construction	500		(243		)	5		(168		)	94
Land and land development loans	2,273		(1,184		)	267		209			1,565
Agriculture	172		(32		)	69		(2		)	207
Multifamily	91		—			—		(34		)	57
Residential real estate	1,566		(665		)	114		586			1,601
Residential construction	59		—			7		(62		)	4
Consumer	295		(254		)	115		45			201
Municipal	37		—			—		6			43
Allowance for loan losses	$	12,690	$	(6,113	)	$	1,122	$	2,534		$	10,233



	Allowance for Loan Losses for the three months ended June 30, 2011
	Balance, Beginning of Quarter		Charge-Offs Apr 1 through Jun 30, 2011			Recoveries Apr through Jun 30, 2011			Provision			Balance, End of Period
	(Dollars in thousands)
Commercial	$	2,411	$	(803	)	$	265		$	909		$	2,782
Commercial real estate	4,092		(201		)	149			1,046			5,086
Commercial construction	568		382			(58		)	(164		)	728
Land and land development loans	2,478		(1,117		)	148			537			2,046
Agriculture	845		(37		)	2			99			909
Multifamily	73		—			—			17			90
Residential real estate	1,259		(186		)	20			231			1,324
Residential construction	118		(18		)	—			19			119
Consumer	577		(93		)	40			53			577
Municipal	61		—			—			(35		)	26
Allowances for loan losses	$	12,482	$	(2,073	)	$	566		$	2,712		$	13,687

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	Allowance for Loan Losses for the six months ended June 30, 2011
	Balance, Beginning of Year		Charge-Offs Jan 1 through Jun 30, 2011			Recoveries Jan 1 through Jun 30, 2011		Provision			Balance, End of Period
	(Dollars in thousands)
Commercial	$	2,925	$	(803	)	$	265	$	395		$	2,782
Commercial real estate	3,655		(679		)	150		1,960			5,086
Commercial construction	540		—			—		188			728
Land and land development loans	2,408		(1,593		)	302		929			2,046
Agriculture	779		(331		)	42		419			909
Multifamily	83		—			—		7			90
Residential real estate	1,252		(399		)	60		411			1,324
Residential construction	65		(18		)	—		72			119
Consumer	613		(191		)	82		73			577
Municipal	135		—			—		(109		)	26
Allowances for loan losses	$	12,455	$	(4,014	)	$	901	$	4,345		$	13,687

Allowance for Unfunded Commitments



	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
						(Dollars in thousands)
Beginning of period	$	14	$	18		$	13	$	17
Adjustment	1		(4		)	2		(3		)
Allowance — Unfunded Commitments at end of period	$	15	$	14		$	15	$	14

Management's 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 current cash flow information, updated appraisals or similar real estate evaluations, equipment, inventory or similar collateral evaluations, accepted offers on loan sales or negotiated discounts, and/or guarantor asset valuations. In situations where problem loans are dependent on collateral liquidation for repayment, management obtains updated independent valuations, such as appraisals or broker opinions, 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, the Company monitors market conditions for any significant event or events that would materially change the valuations, and updates them as appropriate. If the valuations suggest an increase in collateral values, the Company does not recover prior amounts charged off until the assets are actually sold and the increase realized. However, if the updated valuations suggest additional loss, the Company charges off the additional amount.

The following tables summarize impaired loans:

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	Impaired Loans
	June 30, 2012						December 31, 2011
	Recorded Investment		Principal Balance		Related Allowance		Recorded Investment		Principal Balance		Related Allowance
	(Dollars in thousands)
With an allowance recorded:
Commercial	$	2,085	$	2,387	$	813	$	2,942	$	3,323	$	1,300
Commercial real estate	4,285		4,918		1,876		7,439		8,732		2,804
Commercial construction	—		—		—		747		902		252
Land and land development loans	1,851		1,851		324		1,745		3,237		728
Agriculture	31		31		10		32		405		32
Multifamily	—		—		—		—		—		—
Residential real estate	1,856		1,884		961		1,928		2,165		939
Residential construction	—		—		—		—		—		—
Consumer	192		193		117		247		264		195
Municipal	—		—		—		—		—		—
Total	$	10,300	$	11,264	$	4,101	$	15,080	$	19,028	$	6,250
Without an allowance recorded:
Commercial	$	5,725	$	7,740	$	—	$	5,643	$	9,099	$	—
Commercial real estate	1,607		2,328		—		3,479		5,038		—
Commercial construction	—		—		—		—		198		—
Land and land development loans	1,376		2,552		—		3,428		6,165		—
Agriculture	2,156		2,158		—		2,391		2,512		—
Multifamily	—		—		—		—		—		—
Residential real estate	967		1,018		—		2,085		2,296		—
Residential construction	—		—		—		—		—		—
Consumer	33		58		—		29		56		—
Municipal	—		—		—		—		—		—
Total	$	11,864	$	15,854	$	—	$	17,055	$	25,364	$	—
Total:
Commercial	$	7,810	$	10,127	$	813	$	8,585	$	12,422	$	1,300
Commercial real estate	5,892		7,246		1,876		10,918		13,770		2,804
Commercial construction	—		—		—		747		1,100		252
Land and land development loans	3,227		4,403		324		5,173		9,402		728
Agriculture	2,187		2,189		10		2,423		2,917		32
Multifamily	—		—		—		—		—		—
Residential real estate	2,823		2,902		961		4,013		4,461		939
Residential construction	—		—		—		—		—		—
Consumer	225		251		117		276		320		195
Municipal	—		—		—		—		—		—
Total	$	22,164	$	27,118	$	4,101	$	32,135	$	44,392	$	6,250

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	Impaired Loans
	Six Months Ended June 30, 2012				Six Months Ended June 30, 2011
	Average Recorded Investment		Interest Income Recognized (*)		Average Recorded Investment		Interest Income Recognized (*)
	(Dollars in thousands)
With an allowance recorded:
Commercial	$	2,668	$	99	$	2,823	$	163
Commercial real estate	5,605		222		6,525		504
Commercial construction	400		—		648		33
Land and land development loans	1,921		95		2,851		63
Agriculture	21		3		213		23
Multifamily	—		—		—		—
Residential real estate	1,870		66		1,273		64
Residential construction	—		—		43		26
Consumer	230		10		494		21
Municipal	—		—		—		—
Total	$	12,715	$	495	$	14,870	$	897
Without an allowance recorded:
Commercial	$	5,920	$	549	$	8,327	$	724
Commercial real estate	2,618		162		5,728		308
Commercial construction	97		—		312		31
Land and land development loans	2,396		137		5,721		422
Agriculture	2,305		124		806		83
Multifamily	—		—		—		—
Residential real estate	1,698		52		2,145		105
Residential construction	—		—		204		6
Consumer	35		4		270		8
Municipal	—		—		—		—
Total	$	15,069	$	1,028	$	23,513	$	1,687
Total:
Commercial	$	8,588	$	648	$	11,150	$	887
Commercial real estate	8,223		384		12,253		812
Commercial construction	497		—		960		64
Land and land development loans	4,317		232		8,572		485
Agriculture	2,326		127		1,019		106
Multifamily	—		—		—		—
Residential real estate	3,568		118		3,418		169
Residential construction	—		—		247		32
Consumer	265		14		764		29
Municipal	—		—		—		—
Total	$	27,784	$	1,523	$	38,383	$	2,584
(*) Interest Income on individually impaired loans is calculated using the cash-basis method, using year to date Interest on loans outstanding at 6/30/12.

Loan Risk Factors

The following is a recap of the risk characteristics associated with each of the Company's major loan portfolio segments.

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Commercial Loans: Although the impacts of the long economic downturn have increased losses and continue to heighten risk in the commercial portfolio, management does not consider the portfolio to present “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 discussed in more detail below, 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.

Commercial Real Estate Loans: Difficult economic conditions and depressed real estate values continue to heighten risk in the non-residential component of the commercial real estate portfolio. However, in comparison to its national peer group and the risk that existed in its construction and development portfolio, the Company 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 18.0%, industrial 15.7%, health care 12.0% and retail 9.1%. The other 45.2% 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 2.0% of the commercial real estate portfolio.

While 64.8% 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.

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, although general economic weakness continues to negatively impact results.

Construction and Development Loans: After the aggressive reduction efforts of the last three years, the land development and construction loan components pose much lower concentration risk for the total loan portfolio. The substantial portfolio reduction, combined with stabilizing housing prices, has reduced risk in this portfolio to a level where it no longer represents a significant concentration risk. Management is maintaining its aggressive resolution efforts to further reduce its risk.

Agricultural Loans: The agricultural portfolio represents a larger percentage of the loans in the Bank's southern Idaho region. At the end of the period, agricultural loans and agricultural real estate loans totaled $92.0 million or 17.7% of the total loan portfolio. The agricultural portfolio consists of loans secured by livestock, crops and real estate. Agriculture has typically been a cyclical industry with periods of both strong and weak performance. Current conditions are very strong and are projected to remain solid for the next couple years. 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 significant agricultural segment that has been under extreme pressure for the past few years.

Multifamily: The multifamily segment comprises $18.3 million or 3.5% of the total loan portfolio at the end of the period. This portfolio represents relatively low risk for the Company, as a result of the strong current market for multifamily properties and low vacancy rates across the Company's footprint.

Residential Real Estate, Residential Construction and Consumer: Residential real estate, residential construction and consumer loans total $68.9 million or 13.2% of the total loan portfolio. Management does not believe they represent significant concentration risk. However, continuing high unemployment and loss of equity is putting pressure on segments of this portfolio, particularly home equity lines and second mortgages.

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Municipal loans: Municipal loans comprise $8.1 million or 1.5% of the total loan portfolio. The small size of the portfolio and careful underwriting of the loans within it limit overall concentration risk in this segment.

Credit quality indicators

The risk grade analyses included as part of the Company's credit quality indicators for loans and leases are developed through review of individual borrowers on an ongoing basis. Each loan is evaluated at the time of origination and each subsequent renewal. Loans with principal balances exceeding $500,000 are evaluated on a more frequent basis. Trigger events (such as loan delinquencies, customer contact, and significant collateral devaluation) also require an updated credit quality review. Loans with risk grades four through eight are evaluated at least annually with more frequent evaluations often done as borrower, collateral or market conditions change. 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.

Other measurements used to assess credit quality, including delinquency statistics, non accrual and OREO levels, net chargeoff activity, and classified asset trends, are updated and evaluated monthly.

These risk grades 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 the primary repayment source and 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.

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:

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	Loan Portfolio Credit Grades by Type June 30, 2012
	Satisfactory Grade 1-3		Internal Watch Grade 4		Special Mention Grade 5		Substandard Grade 6		Doubtful Grade 7		Total
	(Dollars in thousands)
Commercial	$	73,839	$	31,928	$	300	$	9,414	$	—	$	115,481
Commercial real estate	122,546		50,355		—		9,144		—		182,045
Commercial construction	474		3,022		—		—		—		3,496
Land and land development loans	11,124		16,726		—		4,421		—		32,271
Agriculture	73,496		16,200		—		2,287		—		91,983
Multifamily	2,332		9,782		—		6,211		—		18,325
Residential real estate	44,948		9,732		—		3,900		—		58,580
Residential construction	160		—		—		—		—		160
Consumer	9,103		630		—		387		—		10,120
Municipal	7,973		165		—		—		—		8,138
Loans receivable, net	$	345,995	$	138,540	$	300	$	35,764	$	—	$	520,599



	Loan Portfolio Credit Grades by Type December 31, 2011
	Satisfactory Grade 1-3		Internal Watch Grade 4		Special Mention Grade 5		Substandard Grade 6		Doubtful Grade 7		Total
	(Dollars in thousands)
Commercial	$	65,843	$	32,293	$	—	$	12,259	$	—	$	110,395
Commercial real estate	107,984		43,305		—		16,297		—		167,586
Commercial construction	413		5,175		—		747		—		6,335
Land and land development loans	8,658		20,031		1,392		8,418		—		38,499
Agriculture	65,563		12,827		—		2,926		—		81,316
Multifamily	9,721		9,708		—		6,609		—		26,038
Residential real estate	43,419		10,066		—		5,376		—		58,861
Residential construction	2,742		—		—		—		—		2,742
Consumer	10,476		797		—		574		—		11,847
Municipal	11,063		—		—		—		—		11,063
Loans receivable, net	$	325,882	$	134,202	$	1,392	$	53,206	$	—	$	514,682

A summary of non-performing assets and classified loans at the dates indicated is as follows:



	June 30, 2012		December 31, 2011
	(Dollars in thousands)
Loans past due in excess of 90 days and still accruing	$	—	$	—
Non-accrual loans	6,595		9,292
Total non-performing loans	6,595		9,292
Other real estate owned (“OREO”)	5,267		6,650
Total non-performing assets (“NPAs”)	$	11,862	$	15,942
Classified loans (1)	$	35,764	$	53,206

_____________________________


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.

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Classified loans include 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.

4. Other Real Estate Owned:

At the applicable foreclosure date, OREO is recorded at the fair value of the real estate, less the estimated costs to sell the real estate. The carrying value of OREO is regularly evaluated and, if necessary, the carrying value is reduced to net realizable value. The following table presents OREO for the periods presented:



	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
	(Dollars in thousands)						(Dollars in thousands)
Balance, beginning of period	$	6,852		$	3,686		$	6,650		$	4,429
Additions to OREO	74			7,226			694			8,115
Proceeds from sale of OREO	(1,609		)	(3,130		)	(2,047		)	(4,400		)
Valuation Adjustments in the period (1)	(50		)	36			(30		)	(326		)
Balance, end of period, June 30	$	5,267		$	7,818		$	5,267		$	7,818

___________________________


(1)	Amount includes chargedowns and gains/losses on sale of OREO

The balance of OREO decreased by $1.6 million during the second quarter of 2012, primarily as a result of sales of OREO. For the periods indicated, OREO assets consisted of the following (in thousands):



	June 30, 2012				December 31, 2011
Single family residence	$	158	3.0	%	$	166	2.5	%
Developed residential lots	1,308		24.8	%	2,048		30.8	%
Commercial buildings	—		—	%	483		7.3	%
Raw land	3,801		72.2	%	3,953		59.4	%
Total OREO	$	5,267	100.0	%	$	6,650	100.0	%

The Company’s Special Assets Group continues to dispose of OREO properties through a combination of individual sales to investors and bulk sales to investors.

5. Advances from the Federal Home Loan Bank of Seattle:

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 June 30, 2012 and December 31, 2011, this credit line represented a total borrowing capacity of$109.9 million and$100.3 million, of which $78.9 million and $69.3 million was available, respectively. The advances from FHLB at June 30, 2012 and December 31, 2011 are repayable as follows (in thousands):



	June 30, 2012				December 31, 2011
	Amount		Weighted Average Interest Rate		Amount		Weighted Average Interest Rate
Due within 1 year	$	25,000	2.06	%	$	25,000	2.06	%
Due in 1 to 2 years	—		—				—
Due in 2 to 3 years	4,000		3.11		4,000		3.11
Due in 3 to 4 years	—		—		—		—
Due in 4 to 5 years	—		—		—		—
	$	29,000	2.20	%	$	29,000	2.20	%

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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 June 30, 2012 and December 31, 2011, Panhandle held $2.3 million 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.

6. Other Borrowings:

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



	June 30, 2012		December 31, 2011
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 3.71% at June 30, 2012. The debt is callable by the Company quarterly and matures in March 2033. See Note A and B below.

(2)

In March 2004, the Company issued $8.0 million of Trust Preferred securities through its subsidiary, Intermountain Statutory Trust II. The debt associated with these securities bears interest on a variable basis tied to the 90-day LIBOR index plus 2.8%, with interest only paid quarterly. The rate on this borrowing was 3.27% at June 30, 2012. The debt is callable by the Company quarterly and matures in April 2034. 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 below:


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, the trusts are not consolidated and the debentures and related amounts are treated as debt of Intermountain.

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”) 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.

7. Earnings Per Share:

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

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	Three Months Ended June 30, 2012					Six Months Ended June 30, 2012
	2012		2011			2012		2011
Numerator:
Net income (loss) - basic and diluted	$	782	$	(605	)	$	1,583	$	(604	)
Preferred stock dividend	481		448			947		891
Net income (loss) applicable to common stockholders	$	301	$	(1,053	)	$	636	$	(1,495	)
Denominator:
Weighted average shares outstanding - basic	59,013,211		8,409,786			51,645,760		8,403,177
Dilutive effect of common stock options, warrants, restricted stock awards	178,666					165,333		—
Weighted average shares outstanding — diluted	59,191,877		8,409,786			51,811,093		8,403,177
Earnings (loss) per share — basic and diluted:
Earnings (loss) per share — basic	$	0.01	$	(0.13	)	$	0.01	$	(0.18	)
Effect of dilutive common stock options, warrants, restricted stock awards	—		—			—		—
Earnings (loss) per share — diluted	$	0.01	$	(0.13	)	$	0.01	$	(0.18	)
Anti-dilutive securities not included in diluted earnings per share:
Common stock options	148,063		175,444			150,644		175,444
Common stock warrant - Series A	653,226		653,226			653,226		653,226
Restricted shares	—		18,573			—		25,884
Total anti-dilutive shares	801,289		847,243			803,870		854,554

As part of the Company's January 2012 capital raise (see Note 8 Stockholders' Equity), warrants were issued for 1,700,000 shares of non-voting common stock. The impacts of these warrants were included in diluted earnings per share, and were calculated using the treasury stock method.

8. 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 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, and the estimated value of the warrants was included in equity. 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.

Dividends on the Series A 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 Series A Preferred Stock, beginning in December 2009. The shares of Series A 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 Series A Preferred Stock has priority over the Company’s common stock with regard to the payment of dividends and liquidation distributions. The Series A 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 Series A 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.

As part of the Company's capital raise in January, 2012, the Company authorized up to 864,600 shares of Mandatorily Convertible Cumulative Participating Preferred Stock, Series B, no par value with a liquidation preference of $0.01 per share (“Series B Preferred Stock”), 698,993 of which were issued. Each of these shares automatically converted into 50 shares of a new series of non-voting common stock at a conversion price of $1.00 per share (the “Non-Voting Common Stock”) in May, 2012 after shareholder approval of such Non-Voting Common Stock. The Non-Voting Common Stock has equal rights in terms of dividends

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and liquidation preference to the Company's Voting Common Stock, but does not provide holders with voting rights on shareholder matters.

In addition, as part of the Company's January 2012 capital raise, warrants to purchase 1,700,000 shares of the Company's Voting Common or Non-Voting Common to two of the shareholders participating in the raise. The cash proceeds of the January offering were allocated between the warrants, the Common Stock and the Series B Preferred Stock based on the relative estimated fair values at the date of issuance. The fair value of the warrants was determined using common valuation modeling. The modeling 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 $1.00 per share, but is adjusted down if the Company recorded or otherwise issues shares at a price lower than the strike price. As such, the warrants are accounted for as a liability and listed at fair value on the Company's financial statements. Adjustments to the fair value are measured quarterly and any changes are recorded through non-interest income.

In May 2012, the Company successfully completed an $8.7 million Common Stock rights offering, including the purchase of unsubscribed shares by investors in the Company's January private placement. As a result of the raise, the Company issued 5.3 million shares of Voting Common stock and 3.4 million shares of Non-Voting Common Stock.

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 had 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 is 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. The Company is currently evaluating its position and future plans regarding these dividends.

9. Income Taxes:

For the three- and six-month periods ended June 30, 2012 and June 30, 2011, respectively, the Company recorded no income tax provision. For 2011, no provision was recorded as a result of net losses incurred during the period. In 2012, the Company generated positive net income before income taxes, but again recorded no provision as it offset current income against carryforward losses from prior years. The Company maintained a net deferred tax asset of $13.2 million and $13.2 million as of June 30, 2012 and December 31, 2011, net of a valuation allowance of $8.8 million for each period end.

Intermountain uses an estimate of future earnings, future reversal of taxable temporary differences, and tax planning strategies to determine whether it is more likely than not that the benefit of the deferred tax asset will be realized. At June 30, 2012, 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 three-year cumulative loss for the period ended December 31, 2011, and challenging economic conditions continued to outweigh the positive evidence. Therefore, Intermountain maintained the valuation allowance of $8.8 million against its deferred tax asset that was established in 2010. The Company analyzes the deferred tax asset on a quarterly basis and may increase the allowance or release a portion or all of this allowance depending on actual results and estimates of future profitability.

In conducting its valuation allowance analysis, the Company developed an estimate of future earnings 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 2012, 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 2012, but at lower levels than those experienced in 2009 through 2011, followed by improvement in ensuing years as the Company’s loan portfolio continues to turn over. It also assumes: (1) a compressed net interest margin in 2012 and 2013, with gradual improvement in future years, as the Company is able to convert some of its cash position to higher yielding instruments; and (2) reductions in operating expenses as credit costs abate and its other cost reduction strategies continue.

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The completion of the $47.3 million capital raise in January 2012 will trigger Internal Revenue Code Section 382 limitations on the amount of tax benefit from net operating loss carryforwards that the Company can utilize annually, because of the level of investment by several of the larger investors. This could impact the amount and timing of the release of the valuation allowance, largely depending on the level of market interest rates and the fair value of the Company’s balance sheet at the time the offering was completed. The evaluation of this impact is still being completed and will likely not be known until the end of 2012.

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 June 30, 2012. Intermountain’s tax positions for the years 2008 through 2011 remain subject to review by the Internal Revenue Service. Intermountain does not expect unrecognized tax benefits to significantly change within the next twelve months.

10. Derivative Financial Instruments:

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

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

Management monitors the market risk and credit risk associated with derivative financial instruments as part of its overall Asset/Liability management process.

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

Interest Rate Swaps — Previously designated as Cash Flow Hedges

The tables below identify the Company’s interest rate swap which was entered into to hedge certain LIBOR-based trust preferred debentures and designated as a cash flow hedges pursuant to ASC 815, which no longer qualifies for hedge accounting as of June 30, 2012 (dollars in thousands):



						June 30, 2012
						Receive Rate		Pay Rate
Maturity Date	Notional Amount		Fair Value (Loss)			(LIBOR)		(Fixed)
Pay Fixed, Receive Variable:
October 2013	$	8,248	$	(463	)	0.47	%	4.58	%



						December 31, 2011
						Receive Rate		Pay Rate
Maturity Date	Notional Amount		Fair Value (Loss)			(LIBOR)		(Fixed)
Pay Fixed, Receive Variable:
October 2013	$	8,248	$	(635	)	0.2495	%	4.58	%

The fair value loss of $463,000 at June 30, 2012 and $635,000 at December 31, 2011 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.

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As a result of the deferred interest payments, a calculation of the effectiveness of the hedge has been prepared each quarter. In March 2012, it was concluded that the hedge no longer qualified for hedge accounting treatment, based on the mismatch between the deferred payments on the underlying Trust Preferred instrument and the required and expected payments on the derivative. As a result, the Company recorded $169,111 in interest expense and a negative $294,009 fair value adjustment on its cash flow hedge in the Company's Statement of Operations. Net cash flows from these interest rate swaps are included in interest expense on trust preferred debentures. In the second quarter of 2012, the Company recorded an additional $6,000 in interest expense and a positive $90,000 fair value adjustment on this hedge. At June 30, 2012, Intermountain had $600,000 in restricted cash pledged 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):



	Six Months Ended
	June 30, 2012			June 30, 2011
Unrealized loss at beginning of period	$	(635	)	$	(892	)
Amount of gross gain (loss) recognized in earnings gain (loss)	(374		)	90
Amount of gross gain recognized in other comprehensive income gain (loss)	546			11
Unrealized loss at end of period	$	(463	)	$	(791	)

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

The Company has purchased certain derivative products to allow the Company to effectively convert a fixed rate loan to a variable rate payment stream. The Company economically hedges derivative transactions by entering into offsetting derivatives executed with third parties upon the origination of a fixed rate loan with a customer. Derivative transactions executed as part of this program are not designated as ASC 815 hedge relationships and are, therefore, marked to market through earnings each period. In most cases the derivatives have mirror-image terms to the underlying transaction being hedged, which result in the positions’ changes in fair value offsetting completely through earnings each period. However, to the extent that the derivatives are not a mirror-image, changes in fair value will not completely offset, resulting in some earnings impact each period. Changes in the fair value of these interest rate swaps are included in other non-interest income. The following table summarizes these interest rate swaps as of June 30, 2012 and December 31, 2011 (in thousands):



	June 30, 2012					December 31, 2011
	Notional Amount		Fair Value Loss			Notional Amount		Fair Value Loss
Interest rate swaps with third party financial institutions	$	2,559	$	(252	)	$	2,559	$	(215	)

At June 30, 2012, loans receivable included $252,000 of derivative assets and other liabilities included $0 of derivative assets related to these interest rate swap transactions. At June 30, 2012, the interest rate swaps had a maturity date of March 2019 and April 2024 and Intermountain had $72,000 in restricted cash as collateral for the interest rate swaps.

11. 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. Fair value estimates are based on quoted market prices, if available. If quoted market prices are not available fair value estimates are based on quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk and other assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

In support of these representations, ASC 820-10 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

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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 tables present information about the Company’s assets measured at fair value on a recurring basis as of June 30, 2012, and December 31, 2011, 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 June 30, 2012, Using
	Fair Value			Quoted Prices In Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
Description	June 30, 2012			(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
State and municipal securities	$	53,195		$	—	$	53,195	$	—
Residential mortgage backed securities (“MBS”)	231,900			—		218,399		13,501
Other Assets — Derivative	(252		)	—		—		(252		)
Total Assets Measured at Fair Value	$	284,843		$	—	$	271,594	$	13,249
Other Liabilities — Derivatives	$	463		$	—	$	—	$	463
Unexercised Warrants	850			—		—		850
Total Liabilities Measured at Fair Value	$	1,313		$	—	$	—	$	1,313



	Fair Value Measurements At December 31, 2011 Using
	Fair Value			Quoted Prices In Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
Description	December 31, 2011			(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
U.S. treasury securities and obligations of U.S. government agencies	$	—		$	—	$	—	$	—
State and municipal securities	37,135			—		37,135		—
Residential mortgage backed securities (“MBS”)	181,904			—		167,130		14,774
Other Assets — Derivative	(215		)	—		—		(215		)
Total Assets Measured at Fair Value	$	218,824		$	—	$	204,265	$	14,559
Other Liabilities — Derivatives	$	635		$	—	$	—	$	635

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 are summarized as follows (in thousands):

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	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Description	Residential MBS			Derivatives			Total
January 1, 2012 Balance	$	14,774		$	(215	)	$	14,559
Total gains or losses (realized/unrealized):
Included in earnings	(323		)	(37		)	(360		)
Included in other comprehensive income	427			—			427
Principal Payments	(1,377		)	—			(1,377		)
Sales of Securities	—			—			—
Transfers in and /or out of Level 3	—			—			—
June 30, 2012 Balance	$	13,501		$	(252	)	$	13,249



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Description	Unexercised Warrants			Derivatives			Total
January 1, 2012 Balance	$	—		$	635		$	635
Total gains or losses (realized/unrealized):
Included in earnings	(157		)	374			217
Included in other comprehensive income	—			(546		)	(546		)
Unexercised warrants issued in capital raise	1,007			—			1,007
Transfers in and /or out of Level 3	—			—			—
June 30, 2012 Balance	$	850		$	463		$	1,313



	Fair Value Measurements Using Significant Unobservable Inputs ( Level 3)
Description	Residential MBS			Derivatives			Total
January 1, 2011 Balance	$	29,514		$	(38	)	$	29,476
Total gains or losses (realized/unrealized):
Included in earnings	(1,273		)	(177		)	(1,450		)
Included in other comprehensive income	2,338			—			2,338
Principal Payments	(3,874		)	—			(3,874		)
Sales of Securities	(11,931		)	—			(11,931		)
Transfers in and /or out of Level 3	—			—			—
December 31, 2011 Balance	$	14,774		$	(215	)	$	14,559



	Fair Value Measurements Using Significant Unobservable Inputs ( Level 3)
Description	Derivatives
January 1, 2011 Balance	$	892
Total gains or losses:
Included in earnings	(86		)
Included in other comprehensive income	(171		)
December 31, 2011 Balance	$	635

The following tables present additional quantitative information about assets and liabilities measured at fair value on a recurring basis and for which the company has utilized Level 3 inputs to determine fair value, as of June 30, 2012:

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	Quantitative Information about Level 3 Fair Value Measurements - Assets
June 30, 2012	Fair Value Estimate			Valuation Techniques	Unobservable Input	Range of Inputs
Residential mortgage-backed securities	$	13,501		Discounted cash flow and consensus pricing	Prepayment	4.02 to 36.77 CPR (1)
					Default rates	0 to 10.55 CDR (2)
					Loss severities	0% to 131.78%
Interest Rate Derivatives	$	(252	)	Discounted cash flow modeling and market indications	Cash flows of underlying instruments	Various payment mismatches based on characteristics of underlying loans
					Swap rates	0.50% to 1.00%
					LIBOR rates	0.25% to 0.75%
(1) CPR: Constant prepayment rate
(2) CDR: Constant default rate



	Quantitative Information about Level 3 Fair Value Measurements - Liabilities
June 30, 2012	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range of Inputs
Unexercised Warrants	$	850	Warrant valuation models	Estimated underlying stock price volatility	90% to 100%
				Duration	2.5 to 3.0 years
				Risk-free rate	0.35% to 1.00%
Interest Rate Derivatives	$	463	Discounted cash flow modeling and market indications	Cash flows of underlying instruments	Various payment mismatches based on characteristics of underlying loans
				Swap rates	0.50% to 1.00%
				LIBOR rates	0.25% to 0.75%

Intermountain may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis. The following table presents the carrying value for these financial assets as of June 30, 2012 and December 31, 2011 (in thousands):



	Fair Value Measurements At June 30, 2012, Using
	Fair Value		Quoted Prices In Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
Description	June 30, 2012		(Level 1)		(Level 2)		(Level 3)
Loans(1)	$	18,063	$	—	$	—	$	18,063
OREO	5,267		—		—		5,267
Total Assets Measured at Fair Value	$	23,330	$	—	$	—	$	23,330

_____________________________


(1)	Represents impaired loans, net of allowance for loan loss, which are included in loans.

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	Fair Value Measurements At December 31, 2011, Using
	Fair Value		Quoted Prices In Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Loans(1)	$	25,885	$	—	$	—	$	25,885
OREO	6,650		—		—		6,650
Total Assets Measured at Fair Value	$	32,535	$	—	$	—	$	32,535

_____________________________


(1)	Represents impaired loans, net of allowance for loan loss, which are included in loans.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the company has utilized Level 3 inputs to determine fair value:



	Quantitative Information about Level 3 Fair Value Measurements - Liabilities
June 30, 2012	Fair Value Estimate	Valuation Techniques	Unobservable Input	Range of Inputs
Impaired Loans	$18,063	Discounted cash flows and appraisal of collateral	Amount and timing of cash flows	No payment deferral to indefinite payment deferral
			Discount Rate	4% to 9%
			Appraisal adjustments	10% to 15%
			Liquidation Expenses	10% to 15%
OREO	$5,267	Appraisal of collateral	Appraisal adjustments	10% to 35%
OREO	$5,267	Appraisal of collateral	Liquidation Expenses	10% to 15%

The loans above represent impaired loans that have been adjusted to fair value. When a loan is identified as impaired, the impairment is measured using either the present value of the estimated future cash flows of the loan or for loans that are collateral dependent, 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 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 estimated 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 as a component of non-interest expense.

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 $271.6 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,

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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 $13.5 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, an active market did not exist for these securities at June 30, 2012. This is evidenced by a significant widening in the bid-ask spread for these types of securities and the limited volume of actual trades made. As a result, less reliance can be placed on easily observable market data, such as pricing on transactions involving similar types of securities, in determining their current fair value. As such, significant adjustments were required to determine the fair value at the June 30, 2012 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.

Loans. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for impaired loans when establishing the allowance for credit losses. Such amounts are generally based on either the estimated fair value of the cash flows to be received or the fair value of the underlying collateral supporting the loan less selling costs. Real estate collateral on these loans and the Company’s OREO is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. Management reviews these valuations and makes additional valuation adjustments, as necessary, including subtracting estimated costs of liquidating the collateral or selling the OREO. The related nonrecurring fair value measurement adjustments have generally been classified as Level 3 because of the significant assumptions required estimating future cash flows on these loans, and the rapidly changing and uncertain collateral values underlying the loans. 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 $18.1 million at June 30, 2012 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 June 30, 2012 totaled $5.3 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 6 — Other Borrowings) to a series of fixed rate payments for five years, as a hedging strategy to help manage the Company’s interest-rate risk.

This contract is carried as an asset or liability at fair value, and as of June 30, 2012, it was a liability with a fair value of $463,000.

During the first quarter of 2009, the Company entered into an interest rate swap contract with Pacific Coast Bankers Bank. The purpose of the $1.6 million notional value swap is to convert the fixed rate payments earned on a loan receivable to a series of variable rate payments for ten years, as a hedging strategy to help manage the Company’s interest-rate risk. This contract is carried as an asset or liability at fair value, and as of June 30, 2012, it was an asset with a fair value of $(151,000). 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

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series of variable rate payments for ten years, as a hedging strategy to help manage the Company’s interest-rate risk. This contract is carried as an asset or liability at fair value, and as of June 30, 2012, it was an asset with a fair value of $(101,000).

Unexercised Warrant Liability. A liability for unexercised warrants was created as part of the Company's capital raise in January, 2012 (see Note 8--Stockholders' Equity). The liability is carried at fair value and adjustments are made periodically through non-interest income to record changes in the fair value. The fair value is measured using warrant valuation modeling techniques, which seek to estimate the market price that the unexercised options would bring if sold. Assumptions used in calculating the value include the volatility of the underlying stock, the risk-free interest rate, the expected term of the warrants, the market price of the underlying stock and the dividend yield on the stock. The fair value at June 30, 2012 was a liability of $850 thousand.

Intermountain is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at June 30, 2012 based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values.

The estimated fair value of the financial instruments as of June 30, 2012 and December 31, 2011, are as follows (in thousands):



	June 30, 2012
	Carrying Amount		Fair Value		Quoted Priced in Active Markets for identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash, cash equivalents, restricted cash and federal funds sold	$	71,269	$	71,269	$	71,269	$	—	$	—
Available-for-sale securities	285,095		285,095		—		271,594		13,501
Held-to-maturity securities	14,990		16,492		—		16,492		—
Loans held for sale	4,083		4,083		—		4,083		—
Loans receivable, net	510,684		547,689		—		—		547,689
Accrued interest receivable	4,522		4,522		—		4,522		—
BOLI	9,301		9,301		9,301		—		—
Financial liabilities:							—		—
Deposit liabilities	726,009		707,078		—		—		707,078
Borrowings	110,985		110,580		—		—		110,580
Accrued interest payable	1,979		1,979		—		1,979		—
Unexercised warrants	850		850		—		—		850

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	December 31, 2011
	Carrying Amount		Fair Value
Financial assets:
Cash, cash equivalents, restricted cash and federal funds sold	$	109,868	$	109,868
Available-for-sale securities	219,039		219,039
Held-to-maturity securities	16,143		17,471
Loans held for sale	5,561		5,561
Loans receivable, net	502,252		515,737
Accrued interest receivable	4,100		4,100
BOLI	9,127		9,127
Financial liabilities:
Deposit liabilities	729,373		709,534
Borrowings	130,631		131,202
Accrued interest payable	1,676		1,676

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. See the above discussion for fair valuation of impaired loans. 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 Company and industry statistics for decay/maturity dates. The carrying amounts for variable-rate certificates of deposit and other time deposits approximate their fair value at the reporting date. Fair values for fixed-rate certificates of deposit are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities.

Borrowings

The carrying amounts of short-term borrowings under repurchase agreements approximate their fair values due to the relatively short period of time between the origination of the instruments and their expected payment. The fair value of long-term FHLB Seattle advances and other long-term borrowings is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements with similar remaining terms.

Accrued Interest

The carrying amounts of accrued interest payable and receivable approximate their fair value.

12. New Accounting Pronouncements:

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” ASU

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No. 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. The provisions of ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The provisions of ASU No. 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012. As the Company accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this ASU did not have a material impact on the Company's statements of operation and financial condition.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity's net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity's shareholders' equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The provisions of ASU No. 2011-04 are effective for the Company's interim reporting period beginning on or after December 15, 2011. The adoption of ASU No. 2011-04 did not have a material impact on the Company's statements of operation and financial condition.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU No. 2011-05 are effective for the Company's interim reporting period beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 is expected to result in presentation changes to the Company's statements of operations and the addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 did not have an impact on the Company's statements of condition.

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

This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see “Forward-Looking Statements.” Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in Intermountain’s Form 10-K for the year ended December 31, 2011.

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 stockholders on November 19, 1997 and became effective on January 27, 1998. In September 2000, Panhandle

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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. Intermountain also operates a Trust & Investment Services division, which provides investment, insurance, wealth management and trust services to its clients.

The national economic recession and continuing soft local markets have slowed the Company’s growth over the past several years. In response, Company management shifted its priorities to improving asset quality, raising additional capital, maintaining a conservative balance sheet and improving the efficiency of its operations. Significant progress has been made in these areas, and management is now pursuing prudent growth opportunities.

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

Business Strategy & Opportunities

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

The Company’s strengths include a strong, committed team of experienced banking officers, a loyal and low-cost deposit base, a strong net interest margin, a sophisticated risk management system, and a strong operational and compliance infrastructure. In the current slow-growth environment, the Company is leveraging these strengths to seek prudent growth opportunities, further reduce risk on its balance sheet, and lower interest and non-interest expense. In particular, Company management is focused on the following:

•

Increasing and diversifying its loan origination activity by pursuing attractive small and 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, expanding and diversifying its agricultural portfolio, and expanding its already strong government-guaranteed loan marketing efforts.


•	Maintaining a conservative balance sheet and effectively managing Company risk amidst a still uncertain economic and regulatory environment.


•	Increasing the efficiency of its operations by continuing to restructure processes, re-negotiate contracts and rationalize various business functions.


•	Increasing local, transactional deposit balances while continuing to minimize interest expense by increasing referral activity and targeting specific business and non-profit groups.


•	Offsetting anticipated regulatory pressures on current non-interest income streams by expanding its trust, investment and insurance sales, restructuring current product pricing plans, and pursuing opportunities to diversify into new fee-based programs serving both its existing clientele and new potential markets.

In further pursuit of these goals, the Company successfully completed two capital raises in the first six months of the year, raising a net total of $50.3 million. The completion of these offerings will allow the Company additional flexibility to pursue the above goals. In addition, management believes that disruption and consolidation in the market may lead to other opportunities as well, either through direct acquisition of other banks or by capitalizing on opportunities created by market disruption to attract strong new employees and customers.

Critical Accounting Policies

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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.

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

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

Management evaluates investment securities for other-than-temporary declines in fair value on a periodic basis. If the fair value of 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 unrealized loss is considered an other-than-temporary impairment. The Company then 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. The other-than-temporary impairment less the credit loss charge against earnings is a component of other comprehensive income.

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.

Management believes the allowance for loan losses was adequate at June 30, 2012. 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. The allowance requires considerable judgment on the part of management, and material changes in the allowance can have a significant impact on the Company's financial position and results of operations.

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

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to pay dividends or make other payments to the Holding Company. See Note 11 to the Consolidated Financial Statements for more information on fair value measurements.

Derivative Financial Instruments and Hedging Activities. In various aspects of its business, the Company uses derivative financial instruments to modify its exposure to changes in interest rates and market prices for other financial instruments. Many of these derivative financial instruments are designated as hedges for financial accounting purposes. Intermountain’s hedge accounting policy requires the assessment of hedge effectiveness, identification of similar hedged item groupings, and measurement of changes in the fair value of hedged items. If the derivative financial instruments identified as hedges no longer qualify for hedge accounting treatment, changes in the fair value of these hedged items are recognized in current period earnings, and the impact on the consolidated results of operations and reported earnings could be significant. During 2012, the Company identified one derivative that no longer qualified for hedge accounting, resulting in a reduction in earnings for the six-month period. See Note 10 to the Consolidated Financial Statements for more information on this derivative.

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 June 30, 2012, 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 three-year cumulative loss for the period ended December 31, 2011, and challenging economic conditions continued to outweigh the positive evidence. Therefore, Intermountain maintained a valuation allowance of $8.8 million against its deferred tax asset. The company analyzes the deferred tax asset on a quarterly basis and may recapture a portion or all of this allowance depending on future profitability. Including the valuation allowance, Intermountain had a net deferred tax asset of $13.2 million as of June 30, 2012, compared to a net deferred tax asset of $13.2 million as of December 31, 2011.

The completion of the capital raise noted in the "Business Strategy & Opportunities" section above triggered Internal Revenue Code Section 382 limitations on the amount of tax benefit from net operating loss carryforwards that the Company can claim annually. The effect of this limitation is currently being evaluated and is influenced by the level of market interest rates and the fair value of the Company's balance sheet at the time the offering was completed. This could impact the amount and timing of the release of the valuation allowance. The evaluation of this impact is currently in process and will likely not be known until the end of 2012.

Note 12, “New Accounting Pronouncements” in the Notes to the Consolidated Financial Statements, 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.

Results of Operations

Overview. Intermountain recorded net income applicable to common stockholders of $301,000 and $636,000, or $0.01 per diluted share for the three and six months ended June 30, 2012, compared with a net loss applicable to common stockholders of $1.1 million and $1.5 million, or $0.13 and $0.18 per diluted share for the comparable periods in 2011. The positive net income for the quarter reflected a decrease in net interest income which was offset by significant decreases in loan loss provision and operating expense.

The annualized return on average assets (“ROAA”) was 0.33% for the six months ended June 30, 2012, as compared to -0.12% in the same period last year, and the annualized return on average common equity (“ROAE”) was 1.82% in 2012 and -8.93% in 2011, respectively.

Net Interest Income. The most significant component of earnings for the Company is net interest income, which is the difference between interest income from the Company’s loan and investment portfolios, and interest expense on deposits, repurchase agreements and other borrowings. During the six months ended June 30, 2012 and June 30. 2011, net interest income was $15.4 million and $17.7 million, respectively. The decrease in net interest income from last year primarily reflects lower interest income on loans resulting from declines in both volume and rate. Very low market rates and intense competition for strong borrowers are pressuring both the Company's and its competitors' loan yields. However, the Company did increase loan volume by $17.7 million, or 3.6% in the second quarter, which if growth continues, may help stabilize loan interest income. Investment portfolio income is also down, as increases in volume have been offset by significant decreases in yields on fixed income securities over

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the past year. Interest expense on deposits continued to decrease as deposit rates declined in response to lower market rates, and CD volumes continued to contract. The increase in interest expense on other borrowings from the same six-month period last year reflected higher interest expense on an ineffective cash flow hedge.

Average interest-earning assets decreased by 3.6% to $858.9 million for the six months ended June 30, 2012, compared to $891.2 million for the six months ended June 30, 2011. The decrease was driven by a reduction of $47.3 million or 8.4% in average loans. Average investments and cash increased by $15.0 million or 4.5% over the six month period in 2011. Lower loan volumes continued to reflect paydowns and liquidation of existing loan balances, particularly in the second half of 2011. As noted earlier, loans have rebounded in the second quarter of this year and now stand at their highest level since September of last year.

Average interest-bearing liabilities decreased by 7.6% or $68.5 million for the six month period ended June 30, 2012 compared to June 30, 2011. Average deposit balances decreased $31.0 million, or 4.1%, Federal Home Loan Bank advances decreased $5.0 million, or 14.7%, and other borrowings decreased $32.5 million, or 28.5%. The decreases reflected management’s focus on lowering interest expense and reducing higher rate or non-relationship funding. Part of this money transitioned into non-FDIC insured investments offered through the Company's trust and investments division.

The net interest margin was 3.61% for the six months ended June 30, 2012 as compared to 4.0% in the comparable period of 2011. Decreases in the average yields on both loans and investments more than offset lower borrowing costs.

The unprecedented low rate environment, in which the Fed Funds target rate is less than 0.25% and the 10-year US Treasury yield is hovering around 1.5%, continues to have a very significant negative impact on asset yields and the interest revenue generated from earning assets. Management has been working diligently to redeploy cash assets into higher yielding loans and investments, and in particular is now focused on more rapid expansion of the loan portfolio to offset some of the pressure on yields. The Company also continues to focus on lowering its overall cost of funds, while maintaining transaction deposit balances from core relationship customers. The cost on interest-bearing liabilities dropped from 0.80% for the first six months of 2011 to 0.68% for the same period in 2012, even with the impact of the ineffective hedge noted above. Management believes that some opportunities still remain to further lower funding costs. However, given the already low level of market rates and the Company’s cost of funds, any future gains are likely to be less than those already experienced.

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

The provision for losses on loans totaled $2.5 million for the six months ended June 30, 2012, compared to a provision of $4.3 million for the comparable period last year. Lower provision costs reflect continued improvements in the quality of the Company's loan portfolio. The following table summarizes provision and loan loss allowance activity for the periods indicated.

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	Six months ended June 30
	2012			2011
	(Dollars in thousands)
Balance Beginning January 1	$	(12,690	)	$	(12,455	)
Charge-Offs
Commercial loans	1,757			803
Commercial real estate loans	1,978			679
Commercial construction loans	243			—
Land and land development loans	1,184			1,593
Agriculture loans	32			331
Multifamily loans	—			—
Residential loans	665			399
Residential construction loans	—			18
Consumer loans	254			191
Municipal loans	—			—
Total Charge-offs	6,113			4,014
Recoveries
Commercial loans	(326		)	(265		)
Commercial real estate loans	(219		)	(150		)
Commercial construction loans	(5		)	—
Land and land development loans	(267		)	(302		)
Agriculture loans	(69		)	(42		)
Multifamily loans	—			—
Residential loans	(114		)	(60		)
Residential construction loans	(7		)	—
Consumer loans	(115		)	(82		)
Municipal loans	—			—
Total Recoveries	(1,122		)	(901		)
Net charge-offs	4,991			3,113
Transfers	—			—
Provision for losses on loans	(2,534		)	(4,345		)
Sale of loans	—			—
Balance at June 30	$	(10,233	)	$	(13,687	)
Allowance — Unfunded Commitments Balance Beginning January 1	$	(13	)	$	(17	)
Adjustment	(2		)	3
Transfers	—			—
Allowance — Unfunded Commitments at June 30	$	(15	)	$	(14	)

Net chargeoffs totaled $5.0 million in the first six months of 2012, compared to $3.1 million in the first six months of 2011. The Company made a strong push in the second quarter this year to resolve a larger number of remaining special credits, which lowered its problem assets materially, but required chargeoffs on credits that were largely already reserved for. These credits were concentrated in the commercial and commercial real estate segments. In general, portfolio losses are no longer concentrated in any particular industry or loan type, as prior efforts to reduce exposure in construction, land development and commercial real estate loans have decreased the exposure in these segments considerably. The Company continues to resolve or liquidate its problem loans aggressively, particularly those with higher loss exposures, and now believes that the risk of future large losses is reduced. The loan loss allowance to total loans ratio was 1.96% at June 30, 2012, compared to 2.44% at June 30, 2011. At the end of the June 2012, the allowance for loan losses totaled 155.2% of non-performing loans compared to 127.5% at June 30, 2011. The increase in this coverage ratio reflects the reduction of non-performing loans over the prior period.

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Given current economic uncertainty, management continues to evaluate and adjust the loan loss allowance carefully and frequently to reflect the most current information available concerning the Company’s markets and loan portfolio. In its evaluation, management considers current economic and borrower conditions in both the pool of loans subject to specific impairment, and the pool subject to a more generalized allowance based on historical and other factors. When a loan is characterized as impaired, the Company performs a specific evaluation of the loan, focusing on potential future cash flows likely to be generated by the loan, current collateral values underlying the loan, and other factors such as government guarantees or guarantor support that may impact repayment. Based on this evaluation, it sets aside a specific reserve for this loan and/or charges down the loan to its net realizable value (selling price less estimated closing costs) if it is unlikely that the Company will receive any cash flow beyond the amount obtained from liquidation of the collateral. If the loan continues to be impaired, management periodically re-evaluates the loan for additional potential impairment, and charges it down or adds to reserves if appropriate. On the pool of loans not subject to specific impairment, management evaluates regional, bank 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. The 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.

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



	June 30, 2012			March 31, 2012			December 31, 2011			June 30, 2011
	(Dollars in thousands)
Total non-performing loans (“NPLs”)	$	6,595		$	8,000		$	9,292		$	10,732
OREO	5,267			6,852			6,650			7,818
Total non-performing assets (“NPAs”)	$	11,862		$	14,852		$	15,942		$	18,550
Classified loans (1)	$	35,764		$	49,511		$	53,207		$	58,745
Troubled debt restructured loans (2)	$	5,237		$	6,462		$	6,620		$	6,543
Total allowance related to non-accrual loans	$	368		$	305		$	676		$	731
Interest income recorded on non-accrual loans (3)	$	166		$	63		$	716		$	309
Non-accrual loans as a percentage of net loans receivable	1.29		%	1.62		%	1.85		%	1.96		%
Total non-performing loans as a % of net loans receivable	1.29		%	1.62		%	1.85		%	1.96		%
Allowance for loan losses (“ALLL”) as a percentage of non-performing loans	155.2		%	142.2		%	136.6		%	127.5		%
Total NPAs as a % of total assets (4)	1.23		%	1.55		%	1.71		%	1.93		%
Total NPAs as a % of tangible capital + ALLL (“Texas Ratio”) (4)	9.74		%	13.01		%	21.51		%	25.11		%
Loan delinquency ratio (30 days and over)	0.25		%	0.19		%	0.28		%	0.32		%

_____________________________


(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)	Includes accruing restructured loans of $5.2 million and non-accruing restructured loans of $86,000. No other funds are available for disbursement on restructured loans.


(3)	Interest income on non-accrual loans based on year-to-date interest totals


(4)	NPAs include both nonperforming loans and OREO

The decrease in NPLs and classified loans from the same period one year ago reflects continued loan resolution activity. The Company’s special assets team continues to migrate loans through the collections process and has made rapid progress in reducing classified and non-accrual loans in the past couple years 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. 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

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due) were down to 0.25% from 0.32% at June 30, 2011, and continue at very low levels.

The following tables summarize NPAs by type and geographic region, and provides trending information over the past year:

Nonperforming Asset Trending By Category



	6/30/2012		3/31/2012		6/30/2011
	(Dollars in thousands)
Commercial loans	$	4,283	$	4,040	$	4,400
Commercial real estate loans	682		1,252		3,440
Commercial construction loans	—		43		45
Land and land development loans	6,364		8,262		8,547
Agriculture loans	34		123		380
Multifamily loans	—		—		—
Residential real estate loans	479		1,106		1,344
Residential construction loans	—		2		20
Consumer loans	20		24		374
Total NPAs by Categories	$	11,862	$	14,852	$	18,550



June 30, 2012	North Idaho — Eastern Washington			Magic Valley Idaho			Greater Boise Area			E. Oregon, SW Idaho Excluding Boise			Other			Total			% of Loan Type to Total Non-Performing Assets
	(Dollars in thousands)
Commercial loans	$	3,582		$	345		$	41		$	66		$	249		$	4,283		36.1	%
Commercial real estate loans	537			68			20			57			—			682			5.7	%
Commercial construction loans	—			—			—			—			—			—			—	%
Land and land development loans	6,351			—			—			—			13			6,364			53.7	%
Agriculture loans	—			34			—			—			—			34			0.3	%
Multifamily loans	—			—			—			—			—			—			—	%
Residential real estate loans	180			—			8			196			95			479			4.0	%
Residential construction loans	—			—			—			—			—			—			—	%
Consumer loans	12			—			8			—			—			20			0.2	%
Total	$	10,662		$	447		$	77		$	319		$	357		$	11,862		100.0	%
Percent of total NPAs	89.9		%	3.8		%	0.6		%	2.7		%	3.0		%	100.0		%
Percent of NPAs to total loans in each region	3.7		%	1.4		%	0.1		%	0.3		%	1.0		%	2.3		%

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NPAs by location December 31, 2011	North Idaho —Eastern Washington			Magic Valley Idaho			Greater Boise Area			E. Oregon, SW Idaho Excluding Boise			Other			Total			% of Loan Type to Total Non-Performing Assets
	(Dollars in thousands)
Commercial loans	$	3,030		$	357		$	252		$	27		$	20		$	3,686		23.0	%
Commercial real estate loans	841			131			332			238			1,244			2,786			17.5	%
Commercial construction loans	44			—			—			—			—			44			0.3	%
Land and land development loans	8,308			76			240			14			15			8,653			54.3	%
Agriculture loans	—			36			66			53			32			187			1.2	%
Multifamily loans	—			—			—			—			—			—			—	%
Residential real estate loans	308			—			78			75			106			567			3.6	%
Residential construction loans	2			—			—			—			—			2			—	%
Consumer loans	15			—			—			—			2			17			0.1	%
Total	$	12,548		$	600		$	968		$	407		$	1,419		$	15,942		100.0	%
Percent of total NPAs	78.7		%	3.8		%	6.1		%	2.5		%	8.9		%	100.0		%
Percent of NPAs to total loans in each region	4.3		%	1.7		%	1.7		%	0.4		%	5.0		%	3.1		%

Land development assets continue to represent the highest segment of non-performing assets, and primarily reflect one large $5.2 million OREO property. The totals for the other segments are relatively small and have largely declined since last year. The geographic breakout of NPAs reflects the OREO property noted above, the stronger market presence the Company holds in Northern Idaho and Eastern Washington, and aggressive reductions in non-performing assets in the greater Boise and Magic Valley markets through property sales and loan writedowns. The overall level of NPAs remains below the average of the Company’s peer group.

At June 30, 2012 and December 31, 2011 classified loans (loans with risk grades 6, 7 or 8) by loan type are as follows:



	June 30, 2012				December 31, 2011
	Amount		% of Total		Amount		% of Total
	(Dollars in thousands)
Commercial loans	$	9,414	26.3	%	$	12,259	23.0	%
Commercial real estate loans	9,144		25.6		16,297		30.6
Commercial construction loans	—		—		748		1.4
Land and land development loans	4,421		12.4		8,418		15.8
Agriculture loans	2,287		6.4		2,927		5.5
Multifamily loans	6,211		17.4		6,609		12.4
Residential real estate loans	3,900		10.9		5,375		10.1
Residential construction loans	—		—		—		—
Consumer loans	387		1.0		574		1.2
Municipal loans	—		—		—		—
Total classified loans	$	35,764	100.0	%	$	53,207	100.0	%

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.

Classified loans decreased by $17.4 million, or 32.8%, from December 31, 2011, as the Company resolved a number of problem credits during the period. The commercial, commercial real estate and land development segments experienced the largest decreases, as the Company continued to focus on reducing exposure in these higher risk areas.

As with NPAs, the geographical distribution of the Company’s classified loans reflects the distribution of the Company’s loan

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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, a sector of the economy that is performing well.

Local economies are still challenged and conditions remain volatile, as various world and national events impact local confidence and business investment. Within the local economies, there are relatively wide variations in the strength of different industry segments. Agriculture, manufacturing, technology, health-care and mining businesses are strong and improving, offset by continued weakness in the construction and government sectors. Full recovery in the region is likely to occur slowly and over a multi-year period. As such, management believes that classified loans and non-performing assets will likely remain elevated through the remainder of 2012, but at levels lower than those experienced in recent periods. In addition, as noted above, loss exposure from these loans appears to have decreased significantly, and should continue to be lower than the heavy losses experienced in 2009 and 2010. Given market volatility and future uncertainties, as with all forward-looking statements, management cannot assure nor guarantee the accuracy of these future forecasts.

Management anticipates continued reductions in the level of non-performing assets, classified loans and loss exposures. 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.

Other Income.

The following table details dollar amount and percentage changes of certain categories of other income for the three- and six- month periods ended June 30, 2012.



Three Months Ended	June 30, 2012			% of		Percent Change		June 30, 2011			% of
Other Income	Amount			Total		Previous Year		Amount			Total
	(Dollars in thousands)
Fees and service charges	$	1,619		58	%	(13	)%	$	1,863		69	%
Loan related fee income	659			24	%	21	%	545			20	%
Net gain (loss) on sale of securities	—			—	%	—	%	—			—	%
Net gain (loss) on sale of other assets	18			1	%	136	%	(50		)	(2	)%
Other-than-temporary credit impairment on investment securities	(52		)	(2	)%	—	%	—			—	%
BOLI income	87			3	%	(4	)%	91			3	%
Hedge Fair Value Adjustment	90			3	%	—	%	—			—
Unexercised Warrant Liability Fair Value	158			6	%	—		—			—
Other income	189			7	%	(33	)%	284			10	%
Total	$	2,768		100	%	1	%	$	2,733		100	%



Six Months Ended	June 30, 2012			% of		Percent Change		June 30, 2011			% of
Other Income	Amount			Total		Previous Year		Amount			Total
	(Dollars in thousands)
Fees and service charges	$	3,244		62	%	(8	)%	$	3,534		66	%
Loan related fee income	1,240			24	%	11	%	1,120			21	%
Net gain (loss) on sale of securities	585			11	%	—	%	—			—	%
Net gain (loss) on sale of other assets	22			—	%	147	%	(47		)	(1	)%
Other-than-temporary credit impairment on investment securities	(323		)	(6	)%	—	%	—			—	%
BOLI income	174			3	%	(3	)%	180			3	%
Hedge Fair Value Adjustment	(294		)	(5	)%	—	%	—			—	%
Unexercised Warrant Liability Fair Value	158			3	%	—		—			—
Other income	398			8	%	(35	)%	609			11	%
Total	$	5,204		100	%	(4	)%	$	5,396		100	%

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Total other income was $2.8 million and $2.7 million for the six months ended June 30, 2012 and June 30, 2011, respectively. For the comparable six-month periods, total other income was $5.2 million in 2012 and $5.4 million in 2011. For the three-month comparable periods, positive fair value adjustments and improvement in loan-related fee income offset decreases in fees and service charges and secured savings contract income. The decrease in the comparable six-month periods primarily reflected decreases in service charges, credit loss impairments on investment securities and negative fair value adjustments.

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 in the first six months of 2012 decreased by $290,000 from the comparable 2011 period as a result of reductions in overdraft fee income, partially offset by increases in debit card and investment services income. Changes to the Company's pricing on deposit products were announced in June which should lead to improvements in this area in future periods. In addition, the Company continues to emphasize and expand its investment and trust services.

Loan related fee income was up from the same period last year, as a result of stronger mortgage refinance and purchase activity. Low mortgage rates, government programs and modest improvements in the housing market should continue to drive additional activity for the next couple quarters.

The Company recognized a $585,000 gain on the sale of two longer-maturity municipal securities, which helped offset additional credit impairments on the two securities that are classified as other than temporarily impaired ("OTTI"). Greater loss severities on defaulted loans underlying these securities resulted in the increased loss. The Company also recorded a net negative $294,000 fair value adjustment related to a cash flow hedge on one of the Company's trust preferred obligations. The adjustment resulted from the loss of hedge effectiveness on the instrument and will be recovered as the hedge reaches maturity in 2013. Partially offsetting this negative adjustment was a $158,000 positive fair value adjustment taken on the Company's unexercised warrant liability. This liability was created by the issuance of 1.7 million three-year warrants to investors as part of the Company's January 2012 capital raise and must be fair-valued every quarter. As such, there are likely to be fluctuating adjustments in future periods.

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 totaled $398,000 for the six-month period, compared to $609,000 for the comparable prior period. The reductions reflect continued decreases in the Company's secured card contract as this contract winds down and is expected to terminate in the fourth quarter of 2012. The termination of this contract will result in an annual reduction in revenue of about $600,000, which the Company is seeking to replace with other card or payment-based initiatives.

Operating Expenses.

The following table details dollar amount and percentage changes of certain categories of other expense for the three and six months ended June 30, 2012 and June 30, 2011.



Three Months Ended	June 30, 2012		% of		Percent Change		June 30, 2011		% of
Other Expense	Amount		Total		Previous Year		Amount		Total
	(Dollars in thousands)
Salaries and employee benefits	$	3,871	46	%	(21	)%	$	4,887	50	%
Occupancy expense	1,623		20		(5	)%	1,708		18
Advertising	168		2		(22	)%	214		2
Fees and service charges	629		8		—	%	632		7
Printing, postage and supplies	300		4		(1	)%	302		3
Legal and accounting	396		5		(11	)%	447		5
FDIC assessment	308		4		(7	)%	331		3
OREO operations(1)	120		1		(20	)%	150		2
Other expense	807		10		(14	)%	940		10
Total	$	8,222	100	%	(14	)%	$	9,611	100	%

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Six Months Ended	June 30, 2012		% of		Percent Change		June 30, 2011		% of
Other Expense	Amount		Total		Previous Year		Amount		Total
	(Dollars in thousands)
Salaries and employee benefits	$	8,006	48	%	(19	)%	$	9,833	51	%
Occupancy expense	3,307		20		(5	)%	3,496		18
Advertising	280		2		(19	)%	344		2
Fees and service charges	1,250		8		(3	)%	1,283		7
Printing, postage and supplies	601		4		(6	)%	638		3
Legal and accounting	746		5		9	%	682		3
FDIC assessment	621		3		(20	)%	776		4
OREO operations(1)	224		1		(64	)%	626		3
Other expense	1,485		9		(11	)%	1,673		9
Total	$	16,520	100	%	(15	)%	$	19,351	100	%


(1)	Amount includes chargedowns and gains and losses on sale of OREO

Operating expense for the second quarter of 2012 totaled $8.2 million, down $1.4 million, or 14.5% from the quarter ended June 30, 2011. For the six-month period, operating expenses in 2012 were $16.5 million, down $2.8 million, or 14.6% from the comparable period a year ago.

At $8.0 million, compensation and benefits expense decreased $1.8 million or 18.6% from the first six months of last year. Staffing reductions in the latter part of 2011 created most of the change, as the employee full time equivalent number decreased from 333 to 273, a decline of 18.0%. Although the Company has largely completed its staff restructuring efforts, it continues to evaluate opportunities to improve staff efficiency while positioning itself for balance sheet growth.

Occupancy expenses decreased $189,000 from the prior six-month period, reflecting lower depreciation, software and rent expense. The Company continues to review asset and software purchases carefully, re-negotiate contracts, and in in the process of completing a comprehensive core systems evaluation, which it anticipates will result in significant savings in future years.

The advertising expense decrease of $64,000 from the prior six-month period reflects reductions in the use of broad media in favor of more targeted and individualized marketing techniques. Lower collection and credit service fees produced lower fees and service charges and reductions in mailed statements and leased printing equipment have lowered printing and postage expenses. OREO expense declined significantly over the six-month period ending June 30, 2011 as the overall OREO portfolio and new OREO activity has dropped considerably. Legal and accounting fees increased over last year as a result of outsourcing some former internal functions, and higher legal fees paid in connection with a complex proxy and shareholder meeting and increased correspondence with regulators and investors.

FDIC expenses decreased $155,000 over the same six-month period last year as a result of changes in the FDIC assessment formula and lower asset balances than in the prior year.

Other expenses decreased $188,000 from 2011, reflecting the Company's ongoing efforts to reduce operational losses and training, travel, courier, armored car and meeting expenses. The Company continues to evaluate opportunities for additional expense reduction in many of the categories included in this line item, and anticipates further reductions in 2012.

Annualized operating expense as a percentage of average assets was 3.49% and 3.97% for the six-month periods ending June 30, 2012 and June 30, 2011, respectively. The Company’s efficiency ratio (noninterest expense divided by the sum of net interest income and noninterest income) was 80.1% for the six months ended June 30, 2012, compared to 83.8% for the comparable period one year ago. With economic conditions likely to remain challenging in the near future, the Company continues to develop and implement additional efficiency and cost-cutting efforts. Management anticipates that as it completes its current initiatives, the efficiency and expense ratios will continue to improve. Stabilization and improvement in economic conditions in the future should also improve efficiency, as net interest income rebounds and credit-related costs continue to subside.

Income Tax Provision.

The Company did not record an income tax provision for either of the six month periods ended June 30, 2012 and June 30, 2011, respectively. The effective tax rates used to calculate the tax provision or benefit were 0.0%, and 0.0% for each of these periods. Intermountain maintained a net deferred tax asset of $13.2 million and $13.2 million as of June 30, 2012 and December 31, 2011, net of a valuation allowance of $8.8 million in each period.

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Intermountain uses an estimate of future earnings, future reversal of taxable temporary difference, and tax planning strategies to determine whether it is more likely than not that the benefit of the deferred tax asset will be realized. At June 30, 2012, 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 three-year cumulative loss for the period ended December 31, 2011, and challenging economic conditions continued to outweigh the positive evidence. Therefore, Intermountain maintained the valuation allowance of $8.8 million against its deferred tax asset that was established in 2010. The Company analyzes the deferred tax asset on a quarterly basis and may increase the allowance or release a portion or all of this allowance depending on actual results and estimates of future profitability.

The completion of the $47.3 million capital raise in January 2012 triggered Internal Revenue Code Section 382 limitations on the amount of tax benefit from net operating loss carryforwards that the Company can utilize annually, because of the level of investment by several of the larger investors. This could impact the amount and timing of the release of the valuation allowance, largely depending on the level of market interest rates and the fair value of the Company’s balance sheet at the time the offering was completed. The evaluation of this impact is still being completed and will likely not be known until the end of 2012.

Financial Position

Assets. At June 30, 2012, Intermountain’s assets were $963.1 million, up $28.9 million from $934.2 million at December 31, 2011. The increase in assets was funded by the Company's two capital raises, totaling $50 million, which offset reductions in the Company's repurchase obligations. The funds received, along with some of the Company's cash balances, were used to purchase additional investments and grow the loan portfolio.

Investments. Intermountain’s investment portfolio at June, 2012 was $300.1 million, an increase of $64.9 million, or 27.6% from the December 31, 2011 balance of $235.2 million. The increase was primarily due to the purchase of $100.8 million in available-for-sale securities in the first quarter as the Company deployed funds from the capital raise and from lower yielding cash equivalents into higher yielding investments. Management remains cautious about the volatile investment environment and continues to maintain short portfolio duration with strong regular incoming cash flows. As of June 30, 2012, the balance of the unrealized gain on investment securities, net of federal income taxes, was $2.3 million, compared to an unrealized gain at December 31, 2011 of $2.7 million. The decrease reflected the sale of several securities and the conversion of unrealized gain into recognized income.

The Company currently holds two residential MBS, with an unpaid principal balance totaling $9.1 million that are determined to have other than temporary impairments (“OTTI”), as detailed in the table below (dollars in thousands):



	Principal		Fair		Unrealized		Cumulative OTTI Credit Loss Recorded in			Cumulative OTTI Impairment Loss Recorded in
	Balance		Value		(Loss) Gain		Income			OCI
Security 1	$	1,967	$	1,646	$	447	$	(983	)	$	(768	)
Security 2	5,590		4,677		14		(839		)	(927		)
Total	$	7,557	$	6,323	$	461	$	(1,822	)	$	(1,695	)

As indicated in the table above, impairment for these two securities totals $3.5 million, of which $1.8 million has been recorded as credit loss impairment in income and the remainder in other comprehensive income. The Company recorded additional credit loss impairment for Security 1 in the first six months of 2012 of $37,000 and additional impairment for Security 2 of $286,000. 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 (loss) 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 less the total of previous credit loss impairment at the end of each period.

Loans Receivable. At June 30, 2012 net loans receivable totaled $510.7 million, up $8.4 million or 1.7% from $502.3 million

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at December 31, 2011. The increase reflected growth in commercial, agricultural and commercial real estate loans, which offset continued reductions in construction and land development loans.

The following table sets forth the composition of Intermountain’s loan portfolio at the dates indicated. Loan balances exclude deferred loan origination costs and fees and allowances for loan losses.



	June 30, 2012				December 31, 2011
	Amount			%	Amount			%
	(Dollars in thousands)
Commercial loans	$	115,481		22.2	$	110,395		21.4
Commercial real estate loans	182,045			35.0	167,586			32.6
Commercial construction loans	3,496			0.7	6,335			1.2
Land and land development loans	32,271			6.2	38,499			7.5
Agriculture loans	91,983			17.7	81,316			15.8
Multifamily loans	18,325			3.5	26,038			5.1
Residential real estate loans	58,580			11.3	58,861			11.4
Residential construction loans	160			—	2,742			0.5
Consumer loans	10,120			1.9	11,847			2.3
Municipal loans	8,138			1.5	11,063			2.2
Total loans	520,599			100.0	514,682			100.0
Allowance for loan losses	(10,233		)		(12,690		)
Deferred loan fees, net of direct origination costs	318				260
Loans receivable, net	$	510,684			$	502,252
Weighted average interest rate	5.50		%		5.69		%

The increase in commercial and commercial real estate volumes reflects both the expansion of existing customer relationships and the development of new business. Development of new customers and seasonal borrowing by farmers and ranchers through the growing season is driving the increase in agricultural loans. Land and land development loans continue to post the largest decreases, reflecting ongoing liquidation activity. The decrease in multifamily loans and part of the increase in commercial real estate loans was attributable to the reclassification of one large loan between the two segments. Municipal loans were impacted by the conversion of one construction loan into a bond, and the modest reductions in the consumer and residential segments reflect refinance activity and the generally muted consumer borrowing demand in the Company's market areas.

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 continues to experience a some stress in this portfolio. 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. Commercial customers continue to watch economic conditions very closely, but have recently shown more optimism and stronger borrowing demand. Quality commercial borrowers are highly sought after, resulting in keen competition and competitive pricing for these customers.

The commercial real estate portfolio is also well-diversified and consists of a mix of owner and non-owner occupied properties, with relatively few true non-owner-occupied investment properties. The Company has lower concentrations in this segment than most of its peers, and has underwritten these properties cautiously. In particular, it has limited exposure to speculative investment office buildings and retail strip malls, two of the higher risk segments in this category. While tough economic conditions continue to heighten the risk in this portfolio, it continues to perform well with relatively low delinquency and loss rates. The Company believes it has some opportunity to increase prudent lending in this area and did fund some new activity during the first six months, but again competition is keen for these borrowers.

Most agricultural markets continue to perform very well, and the Company has very limited exposure to the severely impacted dairy market. As noted above, 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. As production costs increase, borrowing activity may pick up in this sector.

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 generally performed well with limited delinquencies and defaults, although the Company has seen some pressure on its home equity portfolio. While these loans have generally been underwritten with

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relatively conservative loan-to-values and strong debt-to-income ratios, the continued weak economy and falling home prices have resulted in some losses in this loan type.

Economic conditions and property values remain volatile, but now appear to be improving slowly in most of the Company's markets. 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 projected to continue declining through the balance of the next couple years.

Geographic Distribution

As of June 30, 2012, the Company’s loan portfolio by loan type and geographical market area was:



	North Idaho — Eastern			Magic Valley			Greater Boise			E. Oregon, SW Idaho, excluding									% of Loan type to total
Loan Portfolio by Location	Washington			Idaho			Area			Boise			Other			Total			loans
	(Dollars in thousands)
Commercial loans	$	82,019		$	5,510		$	7,986		$	15,775		$	4,191		$	115,481		22.2	%
Commercial real estate loans	117,920			9,679			12,928			18,783			22,735			182,045			35.0	%
Commercial construction loans	228			2,984			—			—			284			3,496			0.7	%
Land and land development loans	22,778			1,974			4,967			1,467			1,085			32,271			6.2	%
Agriculture loans	2,054			4,920			17,152			64,480			3,377			91,983			17.7	%
Multifamily loans	11,238			152			6,904			31			—			18,325			3.5	%
Residential real estate loans	39,543			3,782			3,509			7,725			4,021			58,580			11.3	%
Residential construction loans	114			—			—			46			—			160			—	%
Consumer loans	5,801			1,106			673			2,239			301			10,120			1.9	%
Municipal loans	6,703			1,435			—			—			—			8,138			1.5	%
Total	$	288,398		$	31,542		$	54,119		$	110,546		$	35,994		$	520,599		100.0	%
Percent of total loans in geographic area	55.4		%	6.1		%	10.4		%	21.2		%	6.9		%	100.0		%
Percent of total loans where real estate is the primary collateral	67.0		%	65.0		%	55.0		%	43.9		%	79.1		%	61.6		%

As of December 31, 2011, the Company’s loan portfolio by loan type and geographical market area was:

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	North Idaho — Eastern			Magic Valley			Greater Boise			E. Oregon, SW Idaho, excluding									% of Loan type to total
Loan Portfolio by Location	Washington			Idaho			Area			Boise			Other			Total			loans
	(Dollars in thousands)
Commercial loans	$	75,677		$	6,785		$	7,686		$	18,498		$	1,749		$	110,395		21.4	%
Commercial real estate loans	114,211			11,763			14,242			15,692			11,678			167,586			32.6	%
Commercial construction loans	2,964			3,137			74			—			160			6,335			1.2	%
Land and land development loans	28,844			2,229			5,095			1,202			1,129			38,499			7.5	%
Agriculture loans	1,168			4,097			17,237			57,154			1,660			81,316			15.8	%
Multifamily loans	10,378			—			7,299			—			8,361			26,038			5.1	%
Residential real estate loans	39,610			5,031			3,273			7,723			3,224			58,861			11.4	%
Residential construction loans	2,742			—			—			—			—			2,742			0.5	%
Consumer loans	6,745			1,176			1,082			2,605			239			11,847			2.3	%
Municipal loans	9,592			1,471			—			—			—			11,063			2.2	%
Total	$	291,931		$	35,689		$	55,988		$	102,874		$	28,200		$	514,682		100.0	%
Percent of total loans in geographic area	56.7		%	6.9		%	10.9		%	20.0		%	5.5		%	100.0		%
Percent of total loans where real estate is the primary collateral	68.2		%	67.2		%	57.2		%	36.4		%	87.9		%	61.7		%

As illustrated, 55% of the Company’s loans are in north Idaho and eastern Washington, with the next highest percentage in the rural markets of southwest Idaho outside of Boise. Economic trends and real estate valuations are showing modest improvement in all the Company's markets now, after a four-year decline. 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. 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 Arizona, but no single state comprising more than 2.7% of the total loan portfolio.

Participation loans where Intermountain purchased part of the loan and was not the lead bank totaled $7.9 million at June 30, 2012. $6.2 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.

The following table sets forth the composition of Intermountain’s loan originations for the periods indicated.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2012		2011		% Change		2012		2011		% Change
	(Dollars in thousands)
Commercial loans	$	20,568	$	13,308	54.6		$	29,103	$	38,281	(24.0	)
Commercial real estate loans	13,601		7,840		73.5		14,382		9,606		49.7
Commercial construction loans	400		2,459		—		854		2,459		(65.3	)
Land and land development loans	2,060		469		339.2		2,526		1,113		127.0
Agriculture loans	18,817		17,587		7.0		31,474		35,995		(12.6	)
Multifamily loans	1,191		—		—		1,191		—		—
Residential real estate loans	24,434		11,289		116.4		45,081		29,856		51.0
Residential construction loans	473		1,208		(60.8	)	789		1,908		(58.6	)
Consumer	694		1,150		(39.7	)	1,223		2,097		(41.7	)
Municipal	2,823		202		1,297.5		3,120		16,972		(81.6	)
Total loans originated (1)	$	85,061	$	55,512	53.2		$	129,743	$	138,287	(6.2	)

Renewed Loans (1)	$	46,762					$	105,673
(1) 2011 totals include all new loans plus renewed loans that were assigned a new loan number. 2012 totals were segmented to reflect new loans separately. 2012 renewed loans include all renewed loans.

Overall, 2012 origination activity continues to reflect the muted borrowing demand from virtually all sectors in the current environment, as commercial borrowers remain cautious about pursuing new real estate purchase, expansion or construction activities, and as agricultural customers experience strong cash flows. However, economic conditions and borrowing demand did pickup moderately in the second quarter, with modestly stronger commercial, commercial real estate and agricultural activity. The pickup in residential activity primarily reflects refinance activity created by record low interest rates and government refinance programs. Origination activity is likely to continue improving from earlier totals, but will still be under pressure from slow economic and employment growth and aggressive industry competition for strong borrowers. Those banks that have low-cost funding structures and strong relationship networks will perform relatively better in this environment.

Office Properties and Equipment. Office properties and equipment decreased 3.1% to $36.5 million at June 30, 2012 from year end as a result of depreciation as the Company continues to limit new purchase activity.

Other Real Estate Owned. Other real estate owned decreased by $1.4 million, or 20.8% from year end. The Company sold 13 properties totaling $2.0 million in the first six months of 2012, had net valuation adjustments of $30,000 and added 7 properties totaling $694,000. A total of 7 properties remained in the OREO portfolio at June 30, consisting of $5.1 million in land development properties and $158,000 in residential real estate.

Overall, the Company’s current OREO portfolio is lower than most of its peer group and management anticipates reductions in the total in the future. The following table details OREO activity during the first six months of 2012 and 2011.

Other Real Estate Owned Activity



	2012			2011
	(Dollars in thousands)
Balance, beginning of period, January 1	$	6,650		$	4,429
Additions to OREO	694			8,115
Proceeds from sale of OREO	(2,047		)	(4,400		)
Valuation Adjustments in the period(1)	(30		)	(326		)
Balance, end of period, June 30	$	5,267		$	7,818

_____________________________


(1)	Amount includes chargedowns and gains/losses on sale of OREO

Intangible Assets. Intangible assets now consist only of a small core deposit intangible derived from prior acquisitions that is amortizing down as time progresses.

Deferred Tax Asset. At June 30, 2012, the Company’s deferred tax asset, net of the valuation allowance noted above remained

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at $13.2 million, stable from year end. At June 30, 2012, 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 three-year cumulative loss for the period ending December 31, 2011, and the continued uncertain economic conditions outweighed the positive evidence. Therefore, Intermountain maintained a valuation allowance of $8.8 million against its deferred tax asset. See the Income Tax Provision section above for more information.

BOLI and Other Assets. Bank-owned life insurance (“BOLI”) and other assets decreased to $19.6 million at June, 2012 from $21.5 million at year end, 2011. The decrease reflected lower prepaid expenses and other miscellaneous assets.

Deposits. Total deposits decreased $3.4 million to $726.0 million at June 30, 2012 from $729.4 million at December 31, 2011. Increases in non-interest bearing demand and money market balances largely offset continued planned reductions in the CD portfolio, including a $10.3 million decrease in brokered CDs. The Company continues to focus on managing relationship customers closely, lowering its cost of funds, and moving CD customers seeking higher yields into our investment products. Overall, transaction account deposits comprised 70.7% of total deposits at June 30, 2012, up from 68.4% at the prior year end.

The following table sets forth the composition of Intermountain’s deposits at the dates indicated.



	June 30, 2012				December 31, 2011
	Amount		% of total deposits		Amount		% of total deposits
	(Dollars in thousands)
Non-interest bearing demand accounts	$	193,278	26.6	%	$	190,074	26.1	%
NOW and money market 0.0% to 4.07%	320,103		44.1	%	308,713		42.3	%
Savings and IRA 0.0% to 4.91%	73,803		10.2	%	73,493		10.1	%
Certificate of deposit accounts (CDs)	50,185		6.9	%	59,199		8.1	%
Jumbo CDs	60,524		8.3	%	56,177		7.7	%
Brokered CDs	26,667		3.7	%	37,000		5.1	%
CDARS CDs to local customers	1,449		0.2	%	4,717		0.6	%
Total deposits	$	726,009	100.0	%	$	729,373	100.0	%
Weighted average interest rate on certificates of deposit			1.34	%			1.23	%
Core Deposits as a percentage of total deposits (1)			87.7	%			86.2	%
Deposits generated from the Company’s market area as a % of total deposits			96.3	%			94.9	%

_____________________________


(1)	Core deposits consist of non-interest bearing checking, money market checking, savings accounts, and certificate of deposit accounts of less than $100,000 (excluding public deposits).

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 many 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.

Deposits by location are as follows (dollars in thousands):



	June 30, 2012		% of total deposits		December 31, 2011		% of total deposits		June 30, 2011		% of total deposits
Deposits by Location	June 30, 2012		% of total deposits		December 31, 2011		% of total deposits		June 30, 2011		% of total deposits
North Idaho — Eastern Washington	$	337,540	46.5	%	$	351,643	48.2	%	$	360,124	48.9	%
Magic Valley Idaho	68,184		21.3	%	65,629		9.0	%	65,545		8.9	%
Greater Boise Area	62,770		8.6	%	70,094		9.6	%	63,838		8.7	%
Southwest Idaho — Oregon, excluding Boise	154,551		9.4	%	154,446		21.2	%	156,618		21.3	%
Administration, Secured Savings	102,964		14.2	%	87,561		12.0	%	89,904		12.2	%
Total	$	726,009	100.0	%	$	729,373	100.0	%	$	736,029	100.0	%

The Company attempts to, and has been successful in balancing loan and deposit balances in each of the market areas it serves.

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Northern Idaho and eastern Washington deposits currently exceed those in the Company’s southern Idaho and eastern Oregon markets, reflecting the longer presence it has had in these markets. The Company’s deposit market share has grown significantly over the past ten years, and it now ranks third in overall market share in its core markets. Intermountain continues to be the deposit market share leader in five of the eleven counties in which it operates. The Company anticipates the termination of the secured card contract it has maintained since 2003 in the latter part of 2012, which will reduce savings balances by approximately $13 million. The Company has long anticipated this termination and can absorb the decrease by reducing its current cash position.

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 $94.5 million and $130.6 million at June 30, 2012 and December 31, 2011, respectively. The decrease from year end reflects fluctuations in municipal repurchase activity.

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’s interest rate profile is neutral to 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. The Company has become less asset-sensitive over the preceding year, as many of its variable-rate loans have hit contractual floors and the duration of its liability portfolio has shortened.

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. Prepayment speeds accelerated in 2009, most of 2010 and over the last few quarters, as borrowers refinanced into lower rates, paid down debt to improve their financial position, or liquidated 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. Prepayments on loans and mortgage-backed securities are likely to continue at a higher pace in the next couple quarters as a result of continuing low interest rates and government-sponsored refinance programs, but will likely stabilize or slow thereafter, particularly when the economy improves and rates begin rising.

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 than other short-term borrowings, 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 noted above, the duration of the Company’s liabilities has generally shortened over the past two years, as customers have preferred shorter-term deposit products and the Company has not replaced longer-term brokered and wholesale funding instruments as they have come due.

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. As part of this program, 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 are within the guidelines established by management. The estimated impact of changing rates on net interest income in a 100 basis point downward adjustment in market interest rates is just outside of the Company's guidelines over a 12-month and 24-month forward looking period. The impacts of changing rates on the Company's modeled economic value of equity are also within the Company's guidelines and

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reflect a minimum risk profile. The current scenario analysis for net income has been impacted by the relatively low current and prior year operating results of the Company, which increases the impact of both upward and downward adjustments on the percentage increase and decrease. Given this, management has tended to place more reliance on the net interest income and economic value of equity modeling.

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; 2) by prudently managing its investment portfolio to provide relative stability in the face of changing rate environments; and 3) 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.

Deposits decreased modestly to $726.0 million at June 30, 2012 from $729.3 million at December 31, 2011, as increases in non-interest bearing demand and money market balances were offset by decreases in brokered and other CDs. Repurchase agreements decreased by $19.6 million, reflecting seasonal fluctuations in municipal repurchase activity. These reductions, combined with increases in the Company's loan and investment portfolio as the Company deployed the capital it raised, resulted in a decrease of $48.3 million in the Company’s unrestricted cash position at June 30, 2012 from year end, 2011.

During the six months ended June 30, 2012, cash used by investing activities consisted primarily of the purchase of available-for-sale investment securities and increases in net loans receivable. During the same period, cash provided by financing activities consisted primarily of increases in common stock and increases in checking and money market deposits, partially offset by decreases in CDs and repurchase agreements.

Securities sold subject to repurchase agreements totaled $65.5 million at June 30, 2012. These borrowings are required to be collateralized by investments with a market value exceeding the face value of 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 June, 2012, the Company’s FHLB Seattle credit line represented a total borrowing capacity of approximately $109.9 million, of which $31.1 million was being utilized. Additional collateralized funding availability at the Federal Reserve totaled $21.0 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 June 30, 2012, the Company had approximately $35.0 million of overnight funding available from its unsecured correspondent banking sources.

Intermountain and its subsidiary Bank maintain an active liquidity monitoring and management plan, and have worked aggressively over the past several years to expand sources of alternative liquidity. Given continuing volatile economic conditions, the Bank has taken additional protective measures to enhance liquidity, including issuance of new capital, movement of funds into more liquid assets and increased emphasis on relationship 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 subsidiary Bank’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 in the subsidiary Bank. 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. In the first six months of 2012, the Company successfully raised $50.3 million in additional funds, net of transaction costs. The Company immediately transferred $30 million of the funds to the subsidiary Bank, resulting in increased liquidity for both the Bank and the parent company. Management projects that available resources will be sufficient to meet the parent Company’s projected funding needs for quite some time.

Capital Resources

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Intermountain’s total stockholders’ equity was $111.7 million at June 30, 2012, compared with $61.6 million at December 31, 2011, reflecting the addition of $50.3 million in capital from the Company's successful offerings in January and May, 2012. Stockholders’ equity and tangible stockholders' equity was 11.6% of total assets at June 30, 2012 and 6.6% at December 31, 2011, respectively. Tangible common equity as a percentage of tangible assets was 8.9% at June 30, 2012 and 3.8% for December 31, 2011.

At June 30, 2012 Intermountain had unrealized gains of $2.3 million (including cumulative OTTI recognized through other comprehensive income), net of related income taxes, on investments classified as available-for-sale and $0 in unrealized losses on cash flow hedges, net of related income taxes, as compared to unrealized gains of $2.7 million, net of related income taxes, on investments classified as available-for-sale and $330,000 unrealized losses on cash flow hedges at December 31, 2011. The decrease in the unrealized gain on investments reflected the sale of several securities and the conversion of unrealized gain into recognized income. The unrealized loss on cash flow hedges converted to a reported loss during the first quarter of 2012 as the Company recorded a negative fair value adjustment. The adjustment resulted from the loss of hedge effectiveness on the instrument and will be recovered as the interest rate swap reaches maturity in 2013.

On January 23, 2012, the Company announced that it had successfully closed a $47.3 million private capital raise through the issuance and sale of shares of common stock at $1.00 per share and a newly-created mandatorily convertible series of preferred stock which automatically converted into shares of a new series of non-voting common stock at a conversion price of $1.00 in May when the Company's shareholders approved such non-voting common stock. The Company also issued for no additional consideration, warrants to purchase 1.7 million of non-voting common stock at $1.00 per share.

The Company expects to use the $50.3 million net proceeds after expenses from both offerings to strengthen its balance sheet, reinvest in its communities and for other general corporate purposes, including, subject to regulatory approval, using all or a portion of such proceeds to redeem its Series A Preferred Stock held by the U.S. Treasury as part of the TARP Capital Purchase Program.

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 Series A 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 Series A 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 Series A 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 Series A 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 Series A 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 by the Company at 100% of the aggregate principal plus accrued and unpaid interest. See Note 6 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. At June 30, 2012, Intermountain exceeded the minimum published regulatory capital requirements to be considered “well-capitalized” pursuant to Federal Financial Institutions Examination Council “FFIEC” regulations.

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									Well-Capitalized
	Actual				Capital Requirements				Requirements
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets):
The Company	$	122,057	20.14	%	$	48,494	8	%	$	60,617	10	%
Panhandle State Bank	111,684		18.43	%	48,478		8	%	60,598		10	%
Tier I capital (to risk-weighted assets):
The Company	114,447		18.88	%	24,247		4	%	36,370		6	%
Panhandle State Bank	104,153		17.19	%	24,239		4	%	36,359		6	%
Tier I capital (to average assets):
The Company	114,447		12.13	%	37,746		4	%	47,183		5	%
Panhandle State Bank	104,153		11.17	%	37,309		4	%	46,636		5	%

Reflecting the Company’s ongoing strategy to prudently manage through the current economic cycle, 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. The tenth payment deferral occurred in April, 2012, allowing Treasury the contractual right to appoint the two 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 preserves approximately $477,000 per quarter in cash for the Company.

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 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 June 30, 2012.



	Payments Due by Period
	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
	(in thousands)
Long-term debt (1)	$	32,987	$	701	$	5,303	$	1,153	$	25,830
Short-term debt	90,630		90,630		—		—		—
Capital lease obligations	—		—		—		—		—
Operating lease obligations (2)	13,232		995		1,684		1,717		8,836
Direct financing obligations (3)	32,091		1,635		3,352		3,434		23,670
Total	$	168,940	$	93,961	$	10,339	$	6,304	$	58,336


(1)	Includes interest payments related to long-term debt agreements.

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(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 5 and 6 of Notes to Consolidated Financial Statements.


(3)	Sandpoint Center Building lease payments related to direct financing transaction executed in August 2009.

New Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. The provisions of ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The provisions of ASU No. 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012. As the Company accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this ASU did not have a material impact on the Company's statements of operation and financial condition.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU No. 2011-05 are effective for the Company's interim reporting period beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 is expected to result in presentation changes to the Company's statements of operation and the addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 did not have an impact on the Company's statements of condition.

Forward-Looking Statements

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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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, such as the statements in this report regarding expected or projected asset quality and losses, expenses, and the parent Company's liquidity, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “will likely," “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as applicable, in this report and our Annual Report on Form 10-K for the year ended December 31, 2011, the following factors, among others, could cause actual results to differ materially from the anticipated results:


•	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 informal regulatory actions issued to us;


•	the effects of any further adverse regulatory action;


•	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 financial regulatory reform legislation and related regulations and the restrictions imposed on participants in the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, 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;


•	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 loan 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 our new products and services;


•	the willingness of customers to substitute competitors’ products and services for our 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;


•	our critical accounting policies and the implementation of such policies;


•	growth and acquisition strategies;


•	lower-than-expected revenue or cost savings or other issues in connection with mergers and acquisitions;


•	changes in consumer spending, saving and borrowing habits;


•	the strength of the United States economy in general and the strength of the local economies in which Intermountain conducts its operations;


•	our ability to attract new deposits and loans and leases;


•	competitive market pricing factors;


•	stability of funding sources and continued availability of borrowings;


•	our success in gaining regulatory approvals, when required;


•	results of regulatory examinations that could restrict growth; and

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•	our 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 3 —Quantitative and Qualitative Disclosures About Market Risk

There have not been any material changes to the information set forth under the caption “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Item 4 —Controls and Procedures

(a) Evaluation of 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 Securities Exchange Act of 1934 (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.

(b) Changes in Internal Control over Financial Reporting: In the three months ended June 30, 2012, there were no changes in Intermountain’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, Intermountain’s internal control over financial reporting.

PART II — Other Information



Item 1.	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 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, 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 moderately improved 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;

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•	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. With respect to real estate loans and property taken in satisfaction of such loans (“other real estate owned” or “OREO”), we can be required to recognize significant declines in the value of the underlying real estate collateral or OREO quite suddenly as new appraisals are performed in the normal course of monitoring the credit quality of the loans. There are many factors that can cause the appraised value of real estate to decline, including declines in the general real estate market, changes in methodology applied by the appraiser, and/or using a different appraiser than was used for the prior appraisal. Our ability to recover on real estate loans by selling or disposing of the underlying real estate collateral is adversely impacted by declining appraised values, which increases the likelihood we will suffer losses on defaulted loans beyond the amounts provided for in the allowance for loan losses. This, in turn, could require material increases in our provision 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.

As a result of the transactions contemplated by the securities purchase agreements with certain investors ("Purchase Agreements"), Castle Creek Capital Partners IV, L.P. (“Castle Creek”) and affiliates of Stadium Capital Management LLC (“Stadium”) became substantial holders of our Common Stock.

Upon the completion of the transactions contemplated by the Purchase Agreements, Castle Creek and Stadium each became holders of a 33.3% ownership interest, and 9.9% and 14.9% voting interest, respectively, in Intermountain (after giving effect to the exercise of certain warrants issued thereby). Stadium has a representative on our board and each has the right to an observer and has a representative on the Bank's Board of Directors. Although Castle Creek and Stadium each entered into certain passivity agreements with the Federal Reserve in connection with their investments in us, Castle Creek and Stadium each have substantial influence over our corporate policy and business strategy. In pursuing their economic interests, Castle Creek and Stadium may have interests that are different from the interests of our other shareholders.

Resales of our Common Shares in the public market may cause the market price of our Common Shares to fall.

We issued a large number of shares of Common Stock and securities convertible into common stock to the Investors pursuant to the Purchase Agreements. The Investors have certain registration rights with respect to the shares of Common Stock and securities convertible into common stock held by them. The registration rights for certain Investors will allow them to sell their shares without compliance with the volume and manner of sale limitations under Rule 144 promulgated under the Securities Act. The market value of our Common Stock could decline as a result of sales by the Investors from time to time of a substantial amount of the shares of Common Stock and securities convertible into common stock held by them.

Additional provisions for credit loss may be necessary to supplement the allowance for loan and lease losses in the future, which could affect our financial condition.

We have incurred significant losses in recent years. While there has been continued improvement in the quality of our loan portfolio and a corresponding improvement in operating results, economic conditions remain uncertain. As such, significant additional provisions for credit losses may be necessary to supplement the allowance for loan and lease losses in the future, which 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 areas. At June 30, 2012, 61.6% of our loans were secured with real estate as the primary collateral. Further deterioration or a slow recovery in the local economies

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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. In light of the continuing effects of the economic downturn of the past four years, real estate values have been adversely affected. As we have experienced, significant declines in real estate collateral can occur quite suddenly as new appraisals are performed in the normal course of monitoring the credit quality of the loan. Significant declines in the value of real estate collateral due to new appraisals can occur due to declines in the real estate market, changes in methodology applied by the appraiser, and/or using a different appraiser than was used for the prior appraisal. 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.

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. Under normal circumstances, these dividends are the principal source of funds to fund holding company expenses and 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. 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 shareholders 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 “Series A Preferred Stock”). As of July, 2012, we have not paid dividends on the Series A Preferred Stock for a total of twelve quarterly dividend periods, which gives the U.S. Treasury the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. At present, the U.S Treasury has not exercised this right. If we do not make payments on our trust preferred securities for over 20 consecutive quarters, we could be in default under those securities.

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.

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%.

On February 7, 2011, the FDIC issued final rules, effective April 1, 2011, implementing changes to the assessment rules resulting from the Dodd-Frank Act. The adopted regulations: (1) modify the definition of an institution's deposit insurance assessment base; (2) alter certain adjustments to the assessment rates; (3) revise the assessment rate schedules in light of the new assessment base and altered adjustments; and (4) provide for the automatic adjustment of the assessment rates in the future when the reserve ratio reaches certain milestones.

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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 may 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 available-for-sale securities portfolio has grown to $285.1 million at June 30, 2012 or 29.6% of our assets from $219 million at December 31, 2011 or 23.4% of our assets. This increase is principally because of the investment of the proceeds of our recent stock offering. Our securities portfolio contains whole loan private mortgage-backed securities and currently includes securities with unrecognized losses. The 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. 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 June 30, 2012, two securities had been determined to be other than temporarily impaired (“OTTI”), with the cumulative impairment totaling $3.5 million. Of this $3.5 million, $1.8 million has been recognized as a credit loss through the Company's income statement since the determination of OTTI. The remaining $1.7 million has been recognized in other comprehensive income. Future evaluations of our securities portfolio may require us to recognize additional impairment charges with respect to these and other holdings. For example, it is possible that government-sponsored programs to allow mortgages to be refinanced to lower rates could materially adversely impact the yield on our portfolio of mortgage-backed securities, since a significant portion of our investment portfolio is composed of such securities.

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 June 30, 2012, 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 June 30, 2012, we did not recognize an impairment charge related to our FHLB stock holdings. However, future negative changes to the financial condition of the FHLB may require us to recognize an impairment charge with respect to FHLB stock.

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 from time-to-time for over the last several 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, we may experience various adverse effects, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

We operate in a highly regulated environment and we cannot predict the effects of recent and pending federal legislation.

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 legislation (i) created a new Bureau of Consumer Financial Protection with broad powers to regulate consumer financial products such as credit cards and mortgages, (ii) created 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) requires the Securities and Exchange Commission and national stock exchanges to adopt significant new corporate governance and executive compensation reforms.

The third installment of the Basel Accords (the “Basel III”) for U.S. financial institutions is expected to be phased in between 2013 and 2019. Basel III sets forth more robust global regulatory standards on capital adequacy, qualifying capital instruments, leverage ratios, market liquidity risk, and stress testing, which may be stricter than standards currently in place. The implementation of these new standards could have an adverse impact on our financial position and future earnings due to, among other things, the increased minimum Tier 1 capital ratio requirements that will be implemented.

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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.

The current unusual interest rate environment poses particular challenges. Market rates are extremely low right now and the Federal Reserve Board has indicated that it will likely maintain low short-term interest rates for the foreseeable future. This extended period of low rates, when combined with keen competition for high-quality borrowers, may cause additional downward pressure on the yield on the Company's loan and investment portfolios. Since the Company's cost of interest-bearing liabilities is already at record lows, the impact of decreasing asset yields may have a more adverse impact on the Company's net interest income.

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 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 finance companies, brokerage firms, insurance companies, credit unions, and other financial intermediaries. In particular, our competitors include both 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, and credit unions, whose tax-advantaged status allow them to compete aggressively. 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 maintain or grow our loans or deposits.

We may not be able to successfully implement our internal growth strategy.

Over the long-term, 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. We may not 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 since we experienced 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.

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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 shareholder or a group of shareholders, 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 imposes 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. The completion of our $47.3 million capital raise constituted an “ownership change”, which may cause the annual limit of Section 382 to defer our ability to use some, or all, of the built-in losses to offset taxable income. We are still calculating the potential impacts of the “ownership change”.

Unexpected losses, our inability to successfully implement our tax planning strategies in future reporting periods, or IRS Section 382 limitations resulting from the successful completion of the capital raise may either restrict our ability to release the existing valuation allowance against our deferred income tax assets or require us to increase the valuation allowance in the future.

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 reporting period. In this regard, we established a valuation allowance for deferred income tax assets of $8.8 million in 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 carryback or carryforward periods under the tax law.

The recoverability of tax benefits resulting from net operating loss carryforwards will be limited by the sale of securities pursuant to the Purchase Agreements, because such sale caused an “ownership change”, as defined in IRC Section 382. 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.

As noted above, based on the composition of the investors, the completion of the $47.3 million capital raise is likely to trigger IRC Section 382 limitations on the amount of tax benefit from net operating losses and other carryforwards that the Company can claim annually. These anticipated IRC Section 382 limitations will impact the amount and timing of the recapture of the valuation allowance, the calculation of which is dependent on the level of market interest rates and the fair value of the Company's balance sheet at the time the capital raise closed.

We are subject to a variety of operational risks, including reputational risk, legal risk and compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations.

We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.

If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may

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give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors') business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of us to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition and results of operations, perhaps materially.

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 market for our Common Stock historically has experienced significant price and volume fluctuations.

The market for our Common Stock historically has experienced and may continue to experience significant price and volume fluctuations similar to those experienced by the broader stock market in recent years. Generally, the fluctuations experienced by the broader stock market have affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our Common Stock. In addition, our announcements of our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us, our affiliates or our competitors could cause the market price of our Common Stock to fluctuate substantially.

We have not paid dividends on our Common Stock historically, are currently restricted from paying dividends, and may not pay any cash dividends on our common stock for the foreseeable future.

We have not paid cash dividends historically, nor do we expect to pay cash dividends in the foreseeable future. Cash dividends will depend on sufficient earnings to support them. We are subject to certain restrictions on the amount of dividends we may pay and we may not pay cash dividends on our Common Stock without prior written regulatory approval. In addition, we are currently restricted from paying dividends on our Common Stock due to the deferral of interest and dividend payments on our junior subordinated debentures and the Series A Preferred Stock issued to the U.S. Treasury

Our profitability measures could be adversely affected if we are unable to effectively deploy the capital raised in our recent capital raise.

We expect to use the proceeds from the recent capital raise and the proposed rights offering to make capital contributions to and strengthen the balance sheet of the Bank, for other general corporate purposes and as otherwise provided for in the securities purchase agreements with investors. Investing the proceeds of the capital raise and the rights offering in securities until we are able to deploy the proceeds would provide lower margins than we generally earn on loans, potentially adversely impacting shareholder returns, by adversely affecting earnings per share, net interest margin, return on assets and return on equity, and other common performance measures.

We may pursue additional capital in the future, which could dilute the holders of our outstanding Common Stock and may adversely affect the market price of our Common Stock.

Although we have just completed a significant capital raise, 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. Such alternatives may include issuance and sale of common stock or preferred stock, or borrowings by the Company, with proceeds contributed to the Bank. Any such capital raising alternatives could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.

Our common stock is equity and therefore is subordinate to our indebtedness and preferred stock.

Shares of our common stock are equity interests in the Company and do not constitute indebtedness. As such, shares of our common stock will rank junior to all indebtedness and other non-equity claims on the Company with respect to assets available to satisfy claims on the Company, including in a liquidation of the Company. Additionally, holders of our common stock are subject to the prior dividend and liquidation rights of any holders of our preferred stock then outstanding.

Our Series A Preferred Stock diminishes the net income available to our common stockholders and earnings per common share.

We have issued $27.0 million of Series A Preferred Stock to the U.S. Treasury pursuant to the Troubled Asset Relief Program (“TARP”) Capital Purchase Program. The dividends accrued on the Series A Preferred Stock reduce the net income available to

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common stockholders and our earnings per common share. The Series A 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 Series A Preferred Stock, beginning in December 2009. Despite these deferrals, the Company fully intends to meet all of its obligations to the Treasury as quickly as it is prudent to do so. The dividend rate on the Series A Preferred Stock will increase from 5% to 9% per annum five years after its original issuance, or December 2013, if not earlier redeemed. If we are unable to redeem the Series A 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 Series A Preferred Stock annual dividend rate could have a material adverse effect on our earnings available to common shareholders and could also adversely affect our ability to pay dividends on our common shares. Shares of Series A 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 Series A 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 Series A 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 Series A Preferred Stock (the “Preferred Stock”) have certain voting rights that may adversely affect our common shareholders, and the holders of the Preferred Stock may have interests different from our common shareholders.

In the event that we do not pay dividends on the Series A Preferred Stock for a total of at least six quarterly dividend periods (whether or not consecutive), as is currently the case, the authorized number of directors of the Corporation shall automatically be increased by two and the U.S. Treasury will have the right to appoint two directors to fill such positions on our board of directors until all accrued but unpaid dividends have been paid. At present, the U.S Treasury has not exercised this right. As noted above, we intend to pay the deferred dividends as quickly as it is prudent to do so upon receipt of regulatory approval and resume regular dividend payments. 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 shareholders required by law or our Articles of Incorporation, the vote or consent of holders of at least 66 2/3% of the shares of Series A Preferred Stock outstanding is required for:


•	any authorization or issuance of shares ranking senior to the respective series of preferred stock;


•	any amendments to the rights of the respective series of preferred stock so as to adversely effect the rights, preferences, privileges or voting power of the respective series of preferred stock; or

•

consummation of any merger, share exchange or similar transaction unless the shares of the respective series 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 the respective series of preferred stock remaining outstanding or such preference securities have the rights, preferences, privileges and voting power of the respective series of preferred stock.

The holders of the preferred stock, including 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.

Certain provisions in our Articles of Incorporation could make a third party acquisition of us difficult.

Our Articles of Incorporation contain provisions that could make it more difficult for a third party to acquire us by means of a tender offer, a proxy contest, merger or otherwise (even if doing so would be beneficial to our shareholders) and for holders of our common stock to receive any related takeover premium for their common stock. These provisions may have the effect of lengthening the time required for a person to acquire control of us through a tender offer, a proxy contest, merger or otherwise, and may deter any potentially hostile offers or other efforts to obtain control of us. These provisions could also limit the price that investors might be willing to pay in the future for shares 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

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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.

Item 2 —Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3 —Defaults Upon Senior Securities

Not applicable.

Item 4 —Mine Safety Disclosures

Not applicable.

Item 5 — Other Information

Not applicable.

Item 6 —Exhibits

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Exhibit No.			Exhibit
3.1			Amended and Restated Articles of Incorporation

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.

101*			The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Operations, (iii) the Unaudited Consolidated Statements of Changes in Cash Flows, (iv) the Unaudited Consolidated Statements of Comprehensive Income (Loss),and (v) the Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text.

*			Furnished herewith

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





	INTERMOUNTAIN COMMUNITY BANCORP (Registrant)

August 6, 2012	By:	/s/ Curt Hecker
Date		Curt Hecker
		President and Chief Executive Officer

August 6, 2012	By:	/s/ Doug Wright
Date		Doug Wright
		Executive Vice President and Chief Financial Officer