10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2009

OR

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

FOR THE TRANSITION PERIOD FROM            TO           

Commission File Number 000-50667

INTERMOUNTAIN COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

Class	Outstanding as of November 10, 2009
Common Stock (no par value)	8,365,726

Intermountain Community Bancorp

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

TABLE OF CONTENTS

PART I — Financial Information	3
Item 1 — Financial Statements (Unaudited)	3
Consolidated Balance Sheets for September 30, 2009 and December 31, 2008	3
Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008	4
Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2009 and 2008	5
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2009 and 2008	7
Notes to Consolidated Financial Statements	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	43
Item 4 — Controls and Procedures	43
PART II — Other Information	44
Item 1 — Legal Proceedings	44
Item 1A — Risk Factors	44
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3 — Defaults Upon Senior Securities	49
Item 4 — Submission of Matters to a Vote of Security Holders	49
Item 5 — Other Information	49
Item 6 — Exhibits	50
Signatures	51
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32

2 

PART I — Financial Information

Item 1 — Financial Statements
Intermountain Community Bancorp

Consolidated Balance Sheets
(Unaudited)

	September 30,			December 31,
	2009			2008
	(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Interest-bearing	$	32,974		$	1,354
Non-interest bearing and vault		10,562			21,553
Restricted cash		6,983			468
Federal funds sold		—			71,450
Available-for-sale securities, at fair value		180,808			147,618
Held-to-maturity securities, at amortized cost		15,189			17,604
Federal Home Loan Bank (“FHLB”) of Seattle stock, at cost		2,310			2,310
Loans held for sale		4,048			933
Loans receivable, net		699,047			752,615
Accrued interest receivable		6,780			6,449
Office properties and equipment, net		42,749			44,296
Bank-owned life insurance		8,308			8,037
Goodwill		11,662			11,662
Other intangibles		472			576
Other real estate owned (“OREO”)		14,395			4,541
Prepaid expenses and other assets		22,038			14,089
Total assets	$	1,058,325		$	1,105,555
LIABILITIES
Deposits	$	838,665		$	790,412
Securities sold subject to repurchase agreements		70,493			109,006
Advances from Federal Home Loan Bank		24,000			46,000
Cashier checks issued and payable		899			922
Accrued interest payable		1,299			2,275
Other borrowings		16,527			40,613
Accrued expenses and other liabilities		8,840			5,842
Total liabilities		960,723			995,070
Commitments and contingent liabilities
STOCKHOLDERS’ EQUITY
Common stock 29,040,000 shares authorized; 8,439,456 and 8,429,576 shares issued and 8,365,726 and 8,333,009 shares outstanding as of September 30, 2009 and December 31, 2008		78,481			78,261
Preferred stock 1,000,000 shares authorized; 27,000 shares issued and outstanding as of September 30, 2009 and December 31, 2008		25,381			25,149
Accumulated other comprehensive loss, net of tax		(4,663	)		(5,935	)
Retained earnings (deficit)		(1,597	)		13,010
Total stockholders’ equity		97,602			110,485
Total liabilities and stockholders’ equity	$	1,058,325		$	1,105,555

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

3

Intermountain Community Bancorp
Consolidated Statements of Operations
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(Dollars in thousands, except per						(Dollars in thousands, except per
	share data)						share data)
Interest income:
Loans	$	11,051		$	14,098		$	34,403		$	43,058
Investments		2,552			1,991			8,030			6,073
Total interest income		13,603			16,089			42,433			49,131
Interest expense:
Deposits		3,022			3,627			9,609			10,932
Other borrowings		920			1,352			3,049			4,588
Total interest expense		3,942			4,979			12,658			15,520
Net interest income		9,661			11,110			29,775			33,611
Provision for losses on loans		(3,756	)		(2,474	)		(25,210	)		(4,872	)
Net interest income (loss) after provision for losses on loans		5,905			8,636			4,565			28,739
Other income:
Fees and service charges		1,941			1,973			5,497			5,812
Loan related fee income		624			765			1,828			2,064
Other-than-temporary impairment (“OTTI”) losses on investments (1)		(198	)		—			(442	)		—
Bank-owned life insurance		91			83			271			238
Net gain on sale of securities		500			—			1,795			2,182
Other		149			193			376			728
Total other income		3,107			3,014			9,325			11,024
Operating expenses		12,956			11,422			36,395			33,316
Income (loss) before income taxes		(3,944	)		228			(22,505	)		6,447
Income tax (provision) benefit		1,702			(2	)		9,143			(2,298	)
Net income (loss)		(2,242	)		226			(13,362	)		4,149
Preferred stock dividend		416			—			1,245			—
Net income (loss) applicable to common stockholders	$	(2,658	)	$	226		$	(14,607	)	$	4,149
Earnings (loss) per share — basic	$	(0.32	)	$	0.03		$	(1.75	)	$	0.50
Earnings (loss) per share — diluted	$	(0.32	)	$	0.03		$	(1.75	)	$	0.49
Weighted average common shares outstanding — basic		8,365,836			8,305,236			8,358,908			8,287,541
Weighted average common shares outstanding — diluted		8,365,836			8,461,591			8,358,908			8,531,037

(1) Consisting of $198,000 and $442,000 of total other-than-temporary impairment net losses, net of $436,000 and $1,310,000 recognized in other comprehensive income, for the quarter and nine months ended September 30, 2009, respectively.

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

4

Intermountain Community Bancorp
Consolidated Statements of Cash Flows
(Unaudited)

	Nine months ended
	September 30,
	2009			2008
	(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)	$	(13,362	)	$	4,149
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		2,587			2,615
Stock-based compensation expense		272			(244	)
Net amortization of premiums (discounts) on securities		507			(143	)
Provisions for losses on loans		25,210			4,872
Proceeds from sale of loans		70,320			28,972
Originations of loans held for sale		(72,567	)		(26,271	)
Amortization of core deposit intangibles		104			111
(Gain) on sale of loans, investments, property and equipment		(2,584	)		(2,681	)
(Gain) loss on sale of other real estate owned		254			5
OTTI credit loss on available-for-sale investments		442			—
Charge down on OREO		2,312			—
Accretion of deferred gain on sale of branch property		(11	)		(9	)
Net accretion of loan and deposit discounts and premiums		(53	)		(17	)
Increase in cash surrender value of bank-owned life insurance		(271	)		(238	)
Change in:
Accrued interest receivable		(331	)		1,431
Prepaid expenses and other assets		(8,724	)		(4,130	)
Accrued interest payable		(976	)		(970	)
Accrued expenses and other liabilities		3,106			(2,222	)
Net cash provided by operating activities		6,235			5,230
Cash flows from investing activities:
Purchases of available-for-sale securities		(118,947	)		(47,374	)
Purchases of FHLB Stock		—			(705	)
Proceeds from redemption of FHLB Stock		—			175
Proceeds from calls or maturities of available-for-sale securities		59,623			59,022
Principal payments on mortgage-backed securities		28,741			10,272
Purchases of held-to-maturity securities		(65	)		(6,127	)
Proceeds from calls or maturities of held-to-maturity securities		2,420			1,305
Loans made to customers less (greater) than principal collected on loans		13,409			(12,696	)
Purchase of office properties and equipment		(1,123	)		(5,554	)
Proceeds from sale of office properties and equipment		—			8
Net change in federal funds sold		71,450			(13,750	)
Proceeds from sale of other real estate owned		2,583			471
Net change in certificates of deposit with other institutions		—			(192	)
Net change in restricted cash		(6,515	)		1,781
Net cash (used in) investing activities		51,576			(13,364	)

5

	Nine months ended
	September 30,
	2009			2008
	(Dollars in thousands)
Cash flows from financing activities:
Net change in demand, money market and savings deposits	$	19,683		$	(3,484	)
Net change in certificates of deposit		28,570			16,008
Net change in repurchase agreements		(38,513	)		(36,913	)
Principal reduction of note payable		(23,941	)		(31	)
Payoff of credit line		(23,145	)		—
Proceeds from exercise of stock options		56			102
Retirement of treasury stock		(7	)		(193	)
Repayments of FHLB borrowings		(36,000	)		(5,000	)
Proceeds from FHLB borrowings		14,000			30,000
Proceeds from other borrowings		23,000			3,657
Cash dividends paid to preferred stockholders		(885	)		—
Net cash provided by (used in) financing activities		(37,182	)		4,146
Net change in cash and cash equivalents		20,629			(3,988	)
Cash and cash equivalents, beginning of period		22,907			27,000
Cash and cash equivalents, end of period	$	43,536		$	23,012
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	12,497		$	15,974
Income taxes		—			3,585
Noncash investing and financing activities:
Restricted stock issued		—			647
Accrual of liability for split dollar life insurance		—			389
Loans converted to other real estate owned		15,004			1,743

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

6

Intermountain Community Bancorp
Consolidated Statements of Comprehensive Income
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(Dollars in thousands)						(Dollars in thousands)
Net income (loss)	$	(2,242	)	$	226		$	(13,362	)	$	4,149
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		2,421			(2,660	)		3,010			(7,221	)
Non-credit loss on impairment on available-for-sale debt		198			—			(1,310	)		—
Less deferred income tax provision (benefit)		(1,037	)		1,053			(672	)		2,859
Change in fair value of qualifying cash flow hedge		(75	)		(315	)		244			(315	)
Net other comprehensive income (loss)		1,507			(1,922	)		1,272			(4,677	)
Comprehensive loss	$	(735	)	$	(1,696	)	$	(12,090	)	$	(528	)

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

7

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, 2008. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.
	The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Intermountain Community Bancorp’s (“Intermountain’s” or “the Company’s”) consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Intermountain’s consolidated financial position and results of operations.

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

	Available-for-Sale
			Non-Credit
			OTTI
			Recognized			Gross		Gross
	Amortized		in OCI			Unrealized		Unrealized			Fair Value/
	Cost		(Losses)			Gains		Losses			Carrying Value
September 30, 2009
U.S. treasury securities and obligations of U.S. government agencies	$	56	$	—		$	—	$	—		$	56
Residential mortgage-backed securities		187,247		(1,310	)		3,311		(8,496	)		180,752
	$	187,303	$	(1,310	)	$	3,311	$	(8,496	)	$	180,808
December 31, 2008
U.S. treasury securities and obligations of U.S. government agencies	$	7,569	$	—		$	48	$	—		$	7,617
Residential mortgage-backed securities		148,244		—			2,550		(10,793	)		140,001
	$	155,813	$	—		$	2,598	$	(10,793	)	$	147,618

	Held-to-Maturity
			Non-Credit
	Carrying		OTTI
	Value/		Recognized		Gross		Gross
	Amortized		in OCI		Unrealized		Unrealized
	Cost		(Losses)		Gains		Losses			Fair Value
September 30, 2009
State and municipal securities	$	15,189	$	—	$	412	$	—		$	15,601
December 31, 2008
State and municipal securities	$	17,604	$	—	$	70	$	(149	)	$	17,525

8

The following table summarizes the duration of Intermountain’s unrealized losses on available-for-sale and held-to-maturity securities as of the dates indicated (in thousands).

	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized				Unrealized
September 30, 2009	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
State and municipal securities	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		1,898		163		57,864		8,333		59,762		8,496
Total	$	1,898	$	163	$	57,864	$	8,333	$	59,762	$	8,496

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

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

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
One year or less	$	—	$	—	$	636	$	647
After one year through five years		56		56		458		477
After five years through ten years		—		—		2,651		2,839
After ten years		—		—		11,444		11,638
		56		56		15,189		15,601
Mortgage-backed securities		187,247		180,752		—		—
	$	187,303	$	180,808	$	15,189	$	15,601

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

Intermountain’s investment portfolios are managed to provide and maintain liquidity; to maintain a balance of high quality, diversified investments to minimize risk; to offset other asset portfolio elements in managing interest rate risk; to provide collateral for pledging; and to maximize returns. At September 30, 2009, the Company does not intend to sell any of its available-for-sale securities that have a loss position and it is not likely that it will be required to sell the available-for-sale securities before the anticipated recovery of their remaining amortized cost. The unrealized losses on residential mortgage-backed securities without other-than-temporary impairment were considered by management to be temporary in nature.

At March 31, 2009, residential mortgage-backed securities included a security comprised of a pool of mortgages with a remaining unpaid balance of $4.2 million. Due to the lack of an orderly market for the security and the declining national economic and housing market, its fair value was determined to be $2.5 million at March 31, 2009 based on analytical modeling taking into consideration a range of factors normally found in an orderly market. Of the $1.7 million other-than-temporary impairment on this security, based on an analysis of projected cash flows, $244,000 was charged to earnings as a credit loss and $1.5 million was recognized in other comprehensive income. Impairment loss on securities charged to earnings in the three months ended March 31, 2009 was $244,000. The Company recorded additional $198,000 credit loss impairment in the third quarter of 2009. However, the overall estimated market value on the security improved during this time, reducing the non-credit value impairment to $1.3 million. At this time, the Company anticipates holding the security until its value is recovered or until maturity, and will continue to adjust its other comprehensive income and capital position to reflect the security’s current market value. The Company calculated the credit loss charge against earnings by subtracting the estimated present value of future cash flows on the security from its amortized cost.

See Note 9 “Fair Value of Measurements” for more information on the calculation of fair or carrying value for the investment securities.

3.	Advances from the Federal Home Loan Bank of Seattle:
	During September 2007, the Bank obtained two advances from the FHLB Seattle in the amounts of $10.0 million and $14.0 million with interest only payable at 4.96% and 4.90% and maturities in September 2010 and September 2009, respectively. The

9

September 2009 maturity was replaced with three advances in the amount of $5.0 million, $5.0 million and $4.0 million. These advances have interest only payments payable at 0.86%, 1.49% and 3.11% and maturities of September 2010, September 2011 and September 2014, respectively. During May 2008, the Bank obtained an advance from the FHLB Seattle in the amount of $12.0 million with interest only payable at 2.88% and a maturity in August 2009. This advance matured and was not renewed.

Advances from FHLB Seattle are collateralized by certain qualifying loans. At September 30, 2009, Intermountain had the ability to borrow $112.8 million from FHLB Seattle, of which $24.0 million was utilized. The Bank’s credit line with FHLB Seattle is limited to a percentage of its total regulatory assets subject to collateralization requirements. Intermountain would be able to borrow amounts in excess of this total from the FHLB Seattle with the placement of additional available collateral.

4. Other Borrowings:

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

	September 30,		December 31,
	2009		2008
Term note payable (1)	$	8,279	$	8,279
Term note payable (2)		8,248		8,248
Term note payable (3)		—		941
Term note payable (4)		—		23,145
Total other borrowings	$	16,527	$	40,613

(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 3.53% at September 30, 2009. The debt is callable by the Company quarterly and matures in March 2033. During the third quarter of 2008, the Company entered into an interest rate swap contract with Pacific Coast Bankers Bank. The purpose of the $8.2 million notional value swap is to convert the variable rate payments made on our Trust Preferred I obligation to a series of fixed rate payments for five years, as a hedging strategy to help manage the Company’s interest-rate risk. See Note A.
(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 3.31% at September 30, 2009. The debt is callable by the Company quarterly and matures in April 2034. See Note A.
(3)	In January 2006, the Company purchased land to build its new headquarters, the Sandpoint Center in Sandpoint, Idaho. It entered into a Note Payable with the sellers of the property in the amount of $1.13 million, with a fixed rate of 6.65%, payable in equal installments. The note matures in February 2026, but was paid off in May 2009 as part of the refinance of the borrowing discussed in Footnote 4 immediately below.
(4)	In March 2007, the Company entered into a borrowing agreement with Pacific Coast Bankers Bank (“PCBB”) in the amount of $18.0 million and in December 2007 increased the amount to $25.0 million. The borrowing agreement was a non-revolving line of credit with a variable rate of interest tied to LIBOR and was collateralized by Bank stock and the Sandpoint Center. This line was used primarily to fund the construction costs of the Company’s new headquarters building in Sandpoint. The balance at December 31, 2008 was $23.1 million at a fixed interest rate of 7.0%. The borrowing had a maturity of January 2009 and was extended for 90 days with a fixed rate of 7.0%. In May 2009, the Company negotiated new loan facilities with Pacific Coast Bankers Bank to refinance this credit line into three longer-term, amortizing loans. The loans were as follows: $9.0 million with a fixed interest rate of 7.0% secured by the Sandpoint Center and Panhandle State Bank stock, $11.0 million with a variable rate of 2.35% plus the rate on the $11.0 million 12-month certificate of deposit used to secure this loan (the loan rate for the first year is 4.35%), and $3.0 million with a rate of 10.0% secured by the Sandpoint Center and Panhandle State Bank stock. In August 2009, the Sandpoint Center was sold in a direct financing transaction with an outside party. As part of this transaction the three loans were paid off.

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

10

5.	Earnings Per Share:
	The following table presents the basic and diluted earnings per share computations:

	Three months Ended September 30,					Nine months Ended September 30,
	2009			2008		2009			2008
Numerator:
Net income (loss) — basic and diluted	$	(2,242	)	$	226	$	(13,362	)	$	4,149
Preferred stock dividend		416			—		1,245			—
Net Income (loss) applicable to commons stockholders	$	(2,658	)	$	226	$	(14,607	)	$	4,149
Denominator:
Weighted average shares outstanding — basic		8,365,836			8,305,236		8,358,908			8,287,541
Dilutive effect of common stock options, restricted stock awards		—			156,355		—			243,496
Weighted average shares outstanding — diluted		8,365,836			8,461,591		8,358,908			8,531,037
Earnings (loss) per share — basic and diluted:
Earnings (loss) per share — basic	$	(0.32	)	$	0.03	$	(1.75	)	$	0.50
Effect of dilutive common stock options		—			—		—			(0.01	)
Earnings (loss) per share — diluted	$	(0.32	)	$	0.03	$	(1.75	)	$	0.49

The weighted average number of potentially dilutive common shares excluded in calculating diluted net income per common share due to the anti-dilutive effect is 265,710 and 93,145 shares for the three months ended September 30, 2009 and 2008, respectively. The weighted average number of potentially dilutive common shares excluded in calculating diluted net income per common share due to the anti-dilutive effect is 260,879 and 53,332 shares for the nine months ended September 30, 2009 and 2008, respectively. Common stock equivalents were calculated using the treasury stock method.

6.  Operating Expenses:

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2009		2008		2009		2008
Salaries and employee benefits	$	5,673	$	6,446	$	17,031	$	18,922
Occupancy expense		1,814		2,005		5,590		5,596
Advertising		366		378		1,010		1,069
Fees and service charges		919		452		2,148		1,421
Printing, postage and supplies		375		396		1,028		1,105
Legal and accounting		549		406		1,322		1,342
Other expense		3,260		1,338		8,266		3,861
Total operating expenses	$	12,956	$	11,421	$	36,395	$	33,316

Salaries and employee benefits expense decreased $1.9 million or 10.0%, over the nine month period last year as a result of decreased staffing levels and lower incentive compensation expense. Third quarter salaries and employee benefits expense decreased $773,000, or 12.0% compared to the same quarter one year ago as a result of the same factors. Efforts to control compensation expense continue in 2009, as the Company has suspended salary increases for executives and officers, maintained a hiring freeze and reduced other compensation plans.

Occupancy expenses decreased $6,000, or 0.1%, for the nine month period ended September 30, 2009 compared to the same period one year ago. Occupancy expenses decreased $191,000, or 9.5%, for the three month period ended September 30, 2009 compared to the same period one year ago. The decreases were comprised of a decrease in computer hardware and software expenses as additional cost control measures have been implemented. The Company expects these expenses to continue declining in 2009, as it has postponed building expansion plans and limited new hardware and software purchases.

The advertising expense decrease of $59,000 for the nine month period and $12,000 for the three month period ended September 30, 2009 compared to the same periods one year ago reflected reductions in general advertising offset by additional donations and community service expenses associated with the Company’s Powered by Community initiative. The $727,000 increase in fees and service charges for the nine month period and $467,000 increase for the three-month period ended September 30, 2009 compared to the same period one year ago primarily reflected increased loan collection and repossession expenses and higher

11

expenses for the Company’s internet banking services, as usage increased significantly. The Company has recently re-negotiated fee structures and taken other steps to reduce the future impact of its online offerings. Printing, postage and supplies decreased $77,000 for the nine-month period and $21,000 for the third quarter, in comparison to last year’s totals. The decrease reflected efficiencies gained in statement and other printing, and tighter control over supplies expense. Legal and accounting fees decreased by $20,000 in comparison to the same nine month period in 2008 as increasing legal expenses related to loan collection were offset by a reduction in consulting fees. Higher legal fees on loans also produced the $143,000 increase in third quarter 2009 results versus the prior year.

Other expenses increased $4.4 million or 114.1%, for the nine month period over the same period last year. The increase primarily consists of $1.4 million in additional FDIC insurance expense and $2.7 million additional expense related to the Company’s Other Real Estate Owned (“OREO”). The OREO increase is a combination of additional property write-downs to reflect updated valuations and other carrying expenses. Collection and repossession expenses and the provision for unfunded loan commitments also contributed to the increase in other expenses over the same period last year. Other expenses increased $1.9 million, or 143.7%, for the three month period over the same period last year. The increases reflect a $264,000 increase in FDIC insurance expense and an additional $1.5 million in OREO write-downs and expense for the three months ended September 30, 2009, compared to last year. Both the three-month and nine-month totals for 2009 also include $324,000 in non-recurring expenses related to the sale of the Sandpoint Center.

7.    Stock-Based Compensation Plans:

The Company utilized its stock to compensate employees and directors under the 1999 Director Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together the “Stock Option Plans”). Options to purchase Intermountain common stock had been granted to employees and directors under the Stock Option Plans at prices equal to the fair market value of the underlying stock on the dates the options were granted. The options vest 20% per year, over a five-year period, and expire in 10 years. For the nine months ended September 30, 2009 and 2008, stock option expense totaled $0 and $101,000, respectively. The Company did not have any remaining expense related to the non-vested stock options outstanding at September 30, 2009.

On January 14, 2009, the terms of the Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan and the 1999 Director Stock Option Plan expired. Upon recommendation of management and approval of the Board of Directors, it was determined that, due to the economic uncertainty, the Board would not seek to implement a new plan at this time. The 1988 Employee Stock Option Plan was a predecessor plan to the Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan. Because each of these plans has expired, shares may no longer be awarded under these plans. However, awards remain unexercised or unvested under these plans. The Company did not grant options to purchase Intermountain common stock or restricted stock during the nine months ended September 30, 2009.

In 2003, stockholders approved a change to the 1999 Employee Option Plan to provide for the granting of restricted stock awards. The Company granted restricted stock to directors and employees beginning in 2005. The restricted stock vests 20% per year, over a five-year period. The Company granted 0 and 51,633 restricted shares with a grant date fair value of $0 and $647,000 during the nine months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, restricted stock expense totaled $272,000 and $247,000, respectively. Total expense related to stock-based compensation is comprised of restricted stock expense for the nine months ended September 30, 2009 and restricted stock expense, stock option expense and expense related to the 2006-2008 Long-Term Incentive Plan (“LTIP”) for the nine months ended September 30, 2008. LTIP expense in 2008 was based on anticipated company performance over a 3-year period and had a 5-year vesting period. During the nine months ended September 30, 2008, the Company reversed $640,000 in accrued incentives related to the LTIP as it appeared that asset growth and ROE targets required by the plan would not be met by the end of the incentive accrual period. During the nine months ended September 30, 2009, the Company did not have a Long-Term Incentive Plan and therefore did not have expense related to this portion of stock-based compensation. Total expense related to stock-based compensation recorded in the nine months ended September 30, 2009 and 2008 was $272,000 and ($245,000), respectively.

12

A summary of the changes in stock options outstanding for the nine months ended September 30, 2009, is presented below:

	Nine months ended September 30, 2009
	(dollars in thousands, except per share amounts)
				Weighted		Weighted
	Number			Average		Average
	of			Exercise		Remaining
	Shares			Price		Life (Years)
Beginning Options Outstanding, Jan 1, 2009		325,482		$	6.00
Options Granted		—			—
Exercises		(12,721	)		4.41
Forfeitures		(47,048	)		4.42
Ending options outstanding, September 30, 2009		265,713			6.29		2.8
Exercisable at September 30, 2009		262,263		$	6.20		2.8

The total intrinsic value of options exercised during the nine months ended September 30, 2009 and 2008 was $7,000 and $104,000, respectively. A summary of the Company’s nonvested restricted shares for the nine months ended September 30, 2009, is presented below:

				Weighted-
				Average
				Grant-Date
Nonvested Shares	Shares			Fair Value
Balance at January 1, 2009		96,567		$	16.06
Granted		—			—
Vested		(21,913	)		17.06
Forfeited		(1,621	)		17.95
Balance at September 30, 2009		73,033		$	15.72

As of September 30, 2009, there was $927,000 of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under this plan. This cost is expected to be recognized over a weighted-average period of 2.8 years.

8.       Derivative Financial Instruments

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

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

In accordance with ASC 815, Derivatives and Hedging (formerly SFAS 133), the Company recognizes all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Derivative financial instruments are included in other assets or other liabilities, as appropriate, on the Consolidated Balance Sheet. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective hedges, are recorded as a component of other comprehensive income, net of deferred taxes. Changes in fair values of derivative financial instruments not qualifying as hedges pursuant to ASC 815 are reported in non-interest income. Derivative contracts are valued by the counter party and are periodically validated by management.

Interest Rate Swaps — Designated as Cash Flow Hedges

The tables below identify the Company’s interest rate swaps at September 30, 2009 and December 31, 2008, which were entered into to hedge certain LIBOR-based trust preferred debentures and designated as cash flow hedges pursuant to ASC 815 (dollars in thousands):

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September 30, 2009

Fair Value Gain

Receive Rate

Pay Rate

Type of Hedging

Maturity Date

Notional Amount

(Loss)

(LIBOR)

(Fixed)

Relationship

Pay Fixed, Receive Variable:

October 2013

$

8,248

$

(741

)

0.51

%

4.58

%

Cash Flow

December 31, 2008

Fair Value Gain

Receive Rate

Pay Rate

Type of Hedging

Maturity Date

Notional Amount

(Loss)

(LIBOR)

(Fixed)

Relationship

Pay Fixed, Receive Variable:

October 2013

$

8,248

$

(985

)

4.75

%

4.58

%

Cash Flow

The fair values, or unrealized losses, of $741,000 at September 30, 2009 and $985,000 at December 31, 2008 are included in other liabilities. These hedges were considered highly effective during the quarter ended September 30, 2009, and none of the change in fair value of these derivatives was attributed to hedge ineffectiveness. The changes in fair value, net of tax, are separately disclosed in the statement of changes in stockholders’ equity as a component of comprehensive income. Net cash flows from these interest rate swaps are included in interest expense on trust preferred debentures. The unrealized loss at September 30, 2009 is a component of comprehensive income for September 30, 2009. At September 30, 2009, Intermountain had $862,000 in pledged certificates of deposit and $50,000 in restricted cash as collateral for the cash flow hedge. A rollfoward of the amounts in accumulated other comprehensive income related to interest rate swaps designated as cash flow hedges follows:

	Nine Months Ended
	Sept 30,			Sept 30,
	2009			2008
Unrealized gain (loss) at beginning of period	$	(985	)	$	—
Amount of gain (loss) recognized in other comprehensive income		244			—
Unrealized gain (loss) at end of period	$	(741	)	$	—

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

The Company has purchased certain derivative products to allow the Company to effectively convert a fixed rate loan to a variable rate payment stream. The Company economically hedges derivative transactions by entering into offsetting derivatives executed with third parties upon the origination of a fixed rate loan with a customer. Derivative transactions executed as part of this program are not designated as ASC 815 hedge relationships and are, therefore, marked to market through earnings each period. In most cases the derivatives have mirror-image terms, which result in the positions’ changes in fair value offsetting completely through earnings each period. However, to the extent that the derivatives are not a mirror-image, changes in fair value will not completely offset, resulting in some earnings impact each period. Changes in the fair value of these interest rate swaps are included in other non-interest income. The following table summarizes these interest rate swaps as of September 30, 2009 and December 31, 2008 (dollars in thousands):

	September 30, 2009				December 31, 2008
	Notional		Fair Value Gain		Notional		Fair Value Gain
	Amount		(Loss)		Amount		(Loss)
Interest rate swaps with third party financial institutions	$	2,559	$	8	$	—	$	—

Because these are fair value hedges, at September 30, 2009, the loss in fair value included in loans receivable totaled $8,000, which was offset by the fair value hedge gain. At December 31, 2008, other assets included $0 of derivative assets and other liabilities included $0 of derivative liabilities related to these interest rate swap transactions, because they were executed in 2009. At September 30, 2009, the interest rate swaps had a maturity date of March 2019. At September 30, 2009, Intermountain had $72,000 in restricted cash for the interest rate swap.

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9.      Fair Value Measurements

Fair value is defined under ASC 820-10 (formerly SFAS 157) as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. In support of this principle ASC 820-10 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

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

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

     Level 3 inputs — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation.

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of September 30, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (dollars in thousands).

			Fair Value Measurements
			At September 30, 2009, Using
			Quoted Prices
			In Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value		Identical Assets		Inputs		Inputs
Description	Sept 30, 2009		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
U.S. treasury securities and obligations of U.S. government agencies	$	56	$	—	$	56	$	—
Residential mortgage backed securities (“MBS”)		180,752		—		147,032		33,720
Other Assets — Derivative		8		—		—		8
Total Assets Measured at Fair Value	$	180,816	$	—	$	147,088	$	33,728
Other Liabilities — Derivatives	$	749	$	—	$	—	$	749

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

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 are summarized as follows (in thousands):

Fair Value Measurement Transfers- Assets

	Fair Value Measurements Using Significant
	Unobservable Inputs ( Level 3)
Description	Residential MBS			Derivatives		Total
January 1, 2009 Balance	$	38,664		$	—	$	38,664
Total gains or losses (realized/unrealized)
Included in earnings		(442	)		8		(434	)
Included in other comprehensive income		3,757			—		3,757
Principal Payments		(8,259	)		—		(8,259	)
Transfers in and /or out of Level 3		—			—		—
September 30, 2009 Balance	$	33,720		$	8	$	33,728

15

Fair Value Measurement Transfers- Liabilities

	Fair Value Measurements
	Using Significant Unobservable
	Inputs ( Level 3)
Description	Derivatives
January 1, 2009 Balance	$	985
Total gains or losses (realized/unrealized)
Included in earnings		8
Included in other comprehensive income		(244	)
September 30, 2009 Balance	$	749

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

	Fair Value Measurements
	At September 30, 2009, Using
			Quoted Prices
			In Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value		Identical Assets		Inputs		Inputs
Description	Sept 30, 2009		(Level 1)		(Level 2)		(Level 3)
Loans(1)	$	51,602	$	—	$	—	$	51,602
Other real estate owned		14,395		—		—		14,395
Total Assets Measured at Fair Value	$	65,997	$	—	$	—	$	65,997

(1) Represents collateral-dependent impaired loans, net, which are included in loans.

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

     The following is a further description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments.

Securities

     The fair values of securities, other than those categorized as level 3 described above, are based principally on market prices and dealer quotes. Certain fair values are estimated using pricing models or are based on comparisons to market prices of similar securities. The fair value of stock in the FHLB equals its carrying amount since such stock is only redeemable at its par value.

     Available for Sale Securities. Securities totaling $147.1 million classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtained fair value measurements from an independent pricing service and internally validated these measurements. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus, prepayment speeds, credit information and the bond’s terms and conditions, among other things.

     The available for sale portfolio also includes $33.7 million in super senior or senior tranche collateralized mortgage obligations not backed by a government or other agency guarantee. These securities are collateralized by fixed rate prime or Alt A mortgages, are structured to provide credit support to the senior tranches, and are carefully analyzed and monitored by management. Because of disruptions in the current market for mortgage-backed securities and collateralized mortgage obligations, an active market did not exist for these securities at September 30, 2009. This is evidenced by a significant widening in the bid-ask spread for these types of securities and the limited volume of actual trades made. As a result, less reliance can be placed on easily observable market data, such

16

as pricing on transactions involving similar types of securities, in determining their current fair value. As such, significant adjustments were required to determine the fair value at the September 30, 2009 measurement date. These securities are valued using Level 3 inputs.

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

     In evaluating securities in the investment portfolio for “Other-than-temporary Impairment,” the Company evaluated the following factors:

• The length of time and the extent to which the market value of the securities has been lower than their cost;

• The financial condition and near-term prospects of the issuer or obligation, including any specific events, which may influence the operations of the issuer or obligation such as credit defaults and losses in mortgages underlying the security, changes in technology that impair the earnings potential of the investment or the discontinuation of a segment of the business that may affect the future earnings potential; and

• The intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

     Based on the factors above, the Company has determined that one security comprised of a pool of mortgages was subject to “Other-than-Temporary Impairment,” (“OTTI”) as of March 31, 2009. During that quarter, the Company recorded an OTTI of $1,751,000 on this security. Of the total $1,751,000 OTTI, $244,000 was related to credit losses and was a charge against earnings. The remaining $1,507,000 reflected non-credit value impairment and was charged against the Company’s other comprehensive income and reported capital on the balance sheet. The Company conducted a similar analysis on the estimated cash flows in June, 2009 and as a result of this analysis, did not record additional OTTI adjustments in the second quarter of 2009. Due to the continued lack of an orderly market for the security and the declining national economic and housing market, the Company conducted a similar analysis on the estimated cash flows in September, 2009 and as a result of this analysis, recorded an additional credit loss impairment of $198,000 against earnings in the third quarter of 2009. At this time, the Company anticipates holding the security until its value is recovered or maturity, and will continue to adjust its other comprehensive income and capital position to reflect the security’s current market value. The Company calculates the credit loss charge against earnings by subtracting the estimated present value of estimated future cash flows on the security from its amortized cost.

     Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan less selling costs. Real estate collateral on these loans and the Company’s other real estate owned (“OREO”) is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. Management reviews these valuations and makes additional valuation adjustments, as necessary, including subtracting estimated costs of liquidating the collateral or selling the OREO. The related nonrecurring fair value measurement adjustments have generally been classified as Level 3 because of the volatility and the uncertainty in the current markets. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $51.6 million at September 30, 2009, of which $51.6 million were classified as Level 3.

17

     Other Real Estate Owned. At the applicable foreclosure date, other real estate owned is recorded at fair value of the real estate, less the costs to sell the real estate. Subsequently, other real estate owned, is carried at the lower of cost or net realizable value (fair value less estimated selling costs), and is periodically assessed for impairment based on fair value at the reporting date. Fair value is determined from external appraisals using judgments and estimates of external professionals. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. The Company’s OREO at September 30, 2009 totaled $14.4 million, all of which was classified as Level 3.

     Interest Rate Swaps. During the third quarter of 2008, the Company entered into an interest rate swap contract with Pacific Coast Bankers Bank. The purpose of the $8.2 million notional value swap is to convert the variable rate payments made on the Trust Preferred I obligation (see Note 4 — Other Borrowings) to a series of fixed rate payments for five years, as a hedging strategy to help manage the Company’s interest-rate risk. This contract is carried as an asset or liability at fair value, and as of September 30, 2009, it was a liability with a fair value of $749,000.

     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 September 30, 2009, it was an asset with a fair value of $14,000. During the second quarter of 2009, the Company entered into an interest rate swap contract with Pacific Coast Bankers Bank. The purpose of the $1.0 million notional value swap is to convert the fixed rate payments earned on a loan receivable to a series of variable rate payments for ten years, as a hedging strategy to help manage the Company’s interest-rate risk. This contract is carried as an asset or liability at fair value, and as of September 30, 2009, it was a liability with a fair value of $6,000.

     Intermountain is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at September 30, 2009 based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values.

     The estimated fair value of the financial instruments as of September 30, 2009 and December 31, 2008, are as follows (in thousands):

	September 30, 2009				December 31, 2008
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash, cash equivalents, restricted cash and federal funds sold	$	49,657	$	49,657	$	93,653	$	93,653
Interest bearing certificates of deposit		862		862		1,172		1,172
Available-for-sale securities		180,808		180,808		147,618		147,618
Held-to-maturity securities		15,189		15,601		17,604		17,525
Loans held for sale		4,048		4,048		933		933
Loans receivable, net		699,047		711,815		752,615		754,772
Accrued interest receivable		6,780		6,780		6,449		6,449
BOLI		8,308		8,308		8,037		8,037
Financial liabilities:
Deposit liabilities		838,665		816,691		790,412		777,710
Other borrowed funds		111,020		110,951		195,619		193,747
Accrued interest payable		1,299		1,299		2,275		2,275

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

Cash, Cash Equivalents, Federal Funds and Certificates of Deposit

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

18

Investments and BOLI

     See the discussion above regarding the fair values of investment securities. The fair value of BOLI is equal to the cash surrender value of the life insurance policies.

Loans Receivable and Loans Held For Sale

     The fair value of performing mortgage loans, commercial real estate, construction, consumer and commercial loans is estimated by discounting the cash flows using interest rates that consider the interest rate risk inherent in the loans and current economic and lending conditions. Non-accrual loans are assumed to be carried at their current fair value and therefore are not adjusted.

Deposits

     The fair values for deposits subject to immediate withdrawal such as interest and non-interest bearing checking, savings and money market deposit accounts are discounted using market rates for replacement dollars and using industry statistics for decay/maturity dates. The carrying amounts for variable-rate certificates of deposit and other time deposits approximate their fair value at the reporting date. Fair values for fixed-rate certificates of deposit are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities.

Borrowings

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

Accrued Interest

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

10. Subsequent Events

     Intermountain performed an evaluation of subsequent events through November 13, 2009, the date upon which Intermountain’s quarterly report on Form 10-Q was filed with the Securities and Exchange Commission.

     During the quarter ended September 30, 2009, the Company downstreamed $7.8 million, with an additional $3.2 million downstreamed in October 2009. This is substantially all of the net proceeds from the sale of its Sandpoint Headquarters. The transfer of equity to its Bank subsidiary further strengthens the Bank’s capital position and liquidity. Reflecting the Company’s ongoing strategy to prudently manage through the current economic cycle, the decision to maximize equity and liquidity at the Bank level has correspondingly reduced cash available at the parent Company. Consequently, to conserve the liquid assets of the parent Company, the Board of Directors of the Company has approved deferral of regularly scheduled interest payments on its outstanding Junior Subordinated Debentures related to its Trust Preferred Securities (“TRUPS Debentures”), and also deferral of regular quarterly cash dividend payments on its preferred stock held by the U.S. Treasury, beginning in December 2009. The Company is permitted to defer payments of interest on the TRUPS Debentures for up to 20 consecutive quarterly periods without default. During the deferral period, the Company may not pay any dividends or distributions on, or redeem, purchase or acquire, or make a liquidation payment with respect to the Company’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Company that rank equally or junior to the TRUPS Debentures. Under the terms of the preferred stock, if the Company does not pay dividends for six quarterly dividend periods (whether or not consecutive), Treasury would be entitled to appoint two members to the Company’s board of directors. Deferred payments compound for both the TRUPS Debentures and preferred stock. Although these expenses will be accrued on the consolidated income statements for the Company, deferring these interest and dividend payments will preserve approximately $477,000 per quarter in cash for the Company. Notwithstanding the pending deferral of interest and dividend payments, the Company fully intends to meet all of its obligations to the Treasury and holders of the TRUPS Debentures as quickly as it is prudent to do so.

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11. New Accounting Pronouncements:

In December 2007, FASB revised FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquired entity and the goodwill acquired. Furthermore, acquisition-related and other costs will now be expensed rather than treated as cost components of the acquisition. FASB ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The revision to this guidance applies prospectively to business combinations for which the acquisition date occurs on or after January 1, 2009. We do not expect the adoption of revised FASB ASC 805 will have a material impact on our consolidated financial statements as related to business combinations consummated prior to January 1, 2009. The adoption of these revisions will increase the costs charged to operations for acquisitions consummated on or after January 1, 2009.

In December 2007, FASB amended FASB ASC 810, Consolidation. This amendment establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The standard also requires additional disclosures that clearly identify and distinguish between the interest of the parent’s owners and the interest of the noncontrolling owners of the subsidiary. This statement is effective on January 1, 2009 for the Company, to be applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2008, FASB amended FASB ASC 260, Earnings per Share. This amendment concluded that nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This amendment is effective for fiscal years beginning after December 15, 2008, to be applied retrospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2009, FASB amended FASB ASC 325-40, Investments—Other. This amendment addressed certain practice issues related to the recognition of interest income and impairment on purchased beneficial interests and beneficial interests that continue to be held by a transferor in securitized financial assets, by making its other-than-temporary impairment (“OTTI”) assessment guidance consistent with FASB ASC 320, Investments—Debt and Equity Securities. The amendment removes the reference to the consideration of a market participant’s estimates of cash flows and instead requires an assessment of whether it is probable, based on current information and events, that the holder of the security will be unable to collect all amounts due according to the contractual terms. If it is probable that there has been an adverse change in estimated cash flows, an OTTI is deemed to exist, and a corresponding loss shall be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value at the balance sheet date of the reporting period for which the assessment is made. This amendment became effective for interim and annual reporting periods ending after December 15, 2008, and is applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2009, FASB amended FASB ASC 820, Fair Value Measurements and Disclosures, to address issues related to the determination of fair value when the volume and level of activity for an asset or liability has significantly decreased, and identifying transactions that are not orderly. The revisions affirm the objective that fair value is the price that would be received to sell an asset in an orderly transaction (that is not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions, even if the market is inactive. The amendment provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have decreased significantly. It also provides guidance on identifying circumstances that indicate a transaction is not orderly. If determined that a quoted price is distressed (not orderly), and thereby not representative of fair value, the entity may need to make adjustments to the quoted price or utilize an alternative valuation technique (e.g. income approach or multiple valuation techniques) to determine fair value. Additionally, an entity must incorporate appropriate risk premium adjustments, reflective of an orderly transaction under current market conditions, due to uncertainty in cash flows. The revised guidance requires disclosures in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires financial institutions to disclose the fair values of investment securities by major security type. The changes are effective for the interim reporting period ending after June 15, 2009, but could have been applied to interim and annual periods ending after March 15, 2009. The Company did early adopt the FSPs effective January 1, 2009 and it resulted in a portion of other-than-temporary impairment being recorded in other comprehensive income instead of earnings in the amount of $1.5 million for the three months ended March 31, 2009. and are to be applied prospectively.

In April 2009, FASB revised FASB ASC 320, Investments—Debt and Equity Securities, to change the OTTI model for debt securities. Previously, an entity was required to assess whether it has the intent and ability to hold a security to recovery in determining whether an impairment of that security is other-than-temporary. If the impairment was deemed other-than-temporarily

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impaired, the investment was written-down to fair value through earnings. Under the revised guidance, OTTI is triggered if an entity has the intent to sell the security, it is likely that it will be required to sell the security before recovery, or if the entity does not expect to recover the entire amortized cost basis of the security. If the entity intends to sell the security or it is likely it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the entity does not intend to sell the security and it is not likely that the entity will be required to sell the security but the entity does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings as an OTTI. The credit loss is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected of a security. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, would be recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are to be presented as a separate category within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is reevaluated accordingly based on the procedures described above. Upon adoption of the revised guidance, the noncredit portion of previously recognized OTTI shall be reclassified to accumulated OCI by a cumulative-effect adjustment to the opening balance of retained earnings. The revisions are effective for the interim reporting period ending after June 15, 2009, but could have been applied to interim and annual periods ending after March 15, 2009. The Company did early adopt the FSPs effective January 1, 2009 and it resulted in a portion of other-than-temporary impairment being recorded in other comprehensive income instead of earnings in the amount of $1.5 million for the three months ended March 31, 2009 and are to be applied prospectively.

In April 2009, FASB revised FASB ASC 825, Financial Instruments, to require fair value disclosures in the notes of an entity’s interim financial statements for all financial instruments, whether or not recognized in the statement of financial position. The changes are effective for the interim reporting period ending after June 15, 2009, but could have been applied to interim and annual periods ending after March 15, 2009. The Company did early adopt the FSPs effective January 1, 2009 and it resulted in a portion of other-than-temporary impairment being recorded in other comprehensive income instead of earnings in the amount of $1.5 million for the three months ended March 31, 2009. and are to be applied prospectively.

In May 2009, FASB amended FASB ASC 855, Subsequent Events. The updated guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The revisions should not result in significant changes in the subsequent events that an entity reports, either through recognition or disclosure in its financial statements. It does require disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. We adopted the provisions of this guidance for the interim period ended June 30, 2009, and the impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140. This statement has not yet been codified into the FASB ASC. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This statement is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. The Company is currently evaluating the impact of the adoption of SFAS No. 166.

In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This statement has not yet been codified into the FASB ASC. SFAS No. 167 eliminates FASB Interpretations 46(R) (“FIN 46(R)”) exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS No. 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FIN 46(R) provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. This statement requires additional disclosures regarding an entity’s involvement in a variable interest entity. This statement is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. The Company is currently evaluating the impact of the adoption of SFAS No. 167.

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In June 2009, FASB codified FASB ASC 105, Generally Accepted Accounting Principles, to establish the FASB ASC (the “Codification”). The Codification is not expected to change U.S. GAAP, but combines all authoritative standards into a comprehensive, topically organized online database. Following this guidance, the Financial Accounting Standards Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) to update the Codification. After the launch of the Codification on July 1, 2009 only one level of authoritative U.S. GAAP for non governmental entities will exist, other than guidance issued by the Securities and Exchange Commission. This statement is effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the FASB ASC 105 did not have any impact on the Company’s consolidated financial statements, and only affects how the Company references authoritative accounting guidance going forward.

In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value. This update amends FASB ASC 820, Fair Value Measurements and Disclosure, in regards to the fair value measurement of liabilities. FASB ASC 820 clarifies that in circumstances in which a quoted price for an identical liability in an active market is not available, a reporting entity shall utilize one or more of the following techniques: i) the quoted price of the identical liability when traded as an asset, ii) the quoted price for a similar liability or a similar liability when traded as an asset, or iii) another valuation technique that is consistent with the principles of FASB ASC 820. In all instances a reporting entity shall utilize the approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. Also, when measuring the fair value of a liability, a reporting entity shall not include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update is effective for the Company in the fourth quarter of 2009. We do not expect the adoption of FASB ASU 2009-05 will have a material impact on the Company’s consolidated financial statements.

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

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

General

     Intermountain Community Bancorp (“Intermountain” or the “Company”) 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 June 2000, Panhandle Bancorp changed its name to Intermountain Community Bancorp.

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

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

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

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

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

Current Economic Challenges and Future Outlook

     While some encouraging economic signs emerged in the third quarter, both the national and regional economies continue to present unprecedented challenges for banking institutions. Unemployment increased throughout the Company’s footprint, but at slower rates than in prior quarters. Real estate valuations began to stabilize in some of the Company’s markets, but continued to drop in others. Borrower defaults and foreclosures remain at very high levels and are likely to do so for the next few quarters. Against this backdrop, management continued to focus on balance sheet management, and in particular, its asset quality, capital and liquidity positions, as the most critical elements.

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

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

     Company performance during the third quarter was substantially improved from second quarter results, but continued to reflect the challenges facing the economy and financial industry. In particular, the Company experienced the following:

• Lower interest income, largely as a result of reversals of interest on loans that were placed in non-accrual status or charged off or down during the quarter. The Company, however, also saw a decrease in interest expense, and continues to maintain a relatively low cost of interest-bearing liabilities in comparison to its peer group.

• Lower, but still elevated, provisions for loan losses as a result of high default rates, declining collateral valuations, and aggressive problem loan identification, workout and liquidation efforts. Third quarter chargeoffs largely reflected losses that were identified and reserved for in the second quarter.

• Continuing high FDIC insurance, loan collection and OREO expenses, offsetting ongoing expense improvements the Company is making.

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

     Although encouraged by signs that certain markets may be stabilizing, we anticipate that both the national and regional economy will remain very challenging in the near future. As such, we do not anticipate a rapid return to high levels of industry or Company profitability for the next few quarters. We continue to believe, however, that long-term opportunities will arise for institutions that position themselves to capitalize on them, and we are taking such steps. In particular, we continue to be “well-capitalized” for regulatory purposes and have solid liquidity, we’re balancing deposit-growth efforts with reductions in our cost of funds, and we’re increasing our already strong leadership positions in the communities we serve. Through our corporate-wide initiative, Powered by

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Community, we’re leading numerous efforts designed to foster economic growth in our communities and create business development opportunities for the Bank. We also continue to focus on improving our internal business processes, with the joint goal of enhancing our customers’ experience and reducing costs. Initiatives already implemented have improved our deposit volumes and customer experience metrics while simultaneously resulting in decreased compensation costs. A number of additional initiatives are scheduled for implementation through the balance of this year and next.

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

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

Critical Accounting Policies

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

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

     Allowance For Loan Losses. In general, determining the amount of the allowance for loan losses requires significant judgment and the use of estimates by management. This analysis is designed to determine an appropriate level and allocation of the allowance for losses among loan types and loan classifications by considering factors affecting loan losses, including: specific losses; levels and trends in impaired and nonperforming loans; historical bank and industry loan loss experience; current national and local economic conditions; volume, growth and composition of the portfolio; regulatory guidance; and other relevant factors. Management monitors the loan portfolio to evaluate the adequacy of the allowance. The allowance can increase or decrease based upon the results of management’s analysis.

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

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

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

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

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

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

     Management evaluates investment securities for other-than-temporary declines in fair value on a periodic basis. If the fair value of investment securities falls below their amortized cost and the decline is deemed to be other-than-temporary, the securities fair value will be analyzed based on market conditions and expected cash flows on the investment security. The company calculates a credit loss charge against earnings by subtracting the estimated present value of estimated future cash flows on the security from its amortized cost. At September 30, 2009, residential mortgage-backed securities included a security comprised of a pool of mortgages with a remaining unpaid balance of $3.8 million. Due to the lack of an orderly market for the security, its fair value was determined to be $2.8 million at September 30, 2009 based on analytical modeling taking into consideration a range of factors normally found in an orderly market. Of the $1.7 million unrealized loss on the security, based on an analysis of projected cash flows, a total of $442,000 has been charged to earnings as a credit loss in 2009, including $244,000 in the first quarter and $198,000 in the third quarter. The remaining $1.3 million was recognized in other comprehensive income.. See Notes to Consolidated Financial Statements, notes 2 and 9 for more information on the other-than-temporary impairment and the calculation of fair or carrying value for the investment securities. Charges to income could occur in future periods due to a change in management’s intent to hold the investments to maturity, a change in management’s assessment of credit risk, or a change in regulatory or accounting requirements.

     Goodwill and Other Intangible Assets. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Intermountain’s goodwill relates to value inherent in the banking business and the value is dependent upon Intermountain’s ability to provide quality, cost-effective services in a competitive market place. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill

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that could adversely impact earnings in future periods. Goodwill is not amortized, but is subjected to impairment analysis each December. In addition, generally accepted accounting principles require an impairment analysis to be conducted any time a “triggering event” occurs in relation to goodwill. Management believes that the significant market disruption in the financial sector and the declining market valuations experienced over the past year created a “triggering event.” As such, management conducted an interim evaluation of the carrying value of goodwill in September 30, 2009. As a result of this analysis, no impairment was considered necessary as of September 30, 2009. Major assumptions used in determining impairment were projected increases in future income, sales multiples in determining terminal value and the discount rate applied to future cash flows. However, future events could cause management to conclude that Intermountain’s goodwill is impaired, which would result in the recording of an impairment loss. Any resulting impairment loss could have a material adverse impact on Intermountain’s financial condition and results of operations. Other intangible assets consisting of core-deposit intangibles with definite lives are amortized over the estimated life of the acquired depositor relationships. At September 30, 2009, the carrying value of the Company’s goodwill and core deposit intangible was $11.7 million and $472,000, respectively.

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

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

     Fair Value Measurements. ASC 820-10 (formerly SFAS 157 establishes a standard framework for measuring fair value in GAAP, clarifies the definition of “fair value” within that framework, and expands disclosures about the use of fair value measurements. A number of valuation techniques are used to determine the fair value of assets and liabilities in Intermountain’s financial statements. These include quoted market prices for securities, interest rate swap valuations based upon the modeling of termination values adjusted for credit spreads with counterparties and appraisals of real estate from independent licensed appraisers, among other valuation techniques. Fair value measurements for assets and liabilities where there exists limited or no observable market data are based primarily upon estimates, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Significant changes in the aggregate fair value of assets and liabilities required to be measured at fair value or for impairment will be recognized in the income statement under the framework established by GAAP. If impairment is determined, it could limit the ability of Intermountain’s banking subsidiaries to pay dividends or make other payments to the Holding Company. See Note 9 to the Consolidated Financial Statements for more information on fair value measurements.

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

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

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Results of Operations

     Overview. Intermountain recorded a net loss to common stockholders of $2.7 million, or $0.32 per diluted share for the three months ended September 30, 2009, compared with a net loss of $11.4 million or $1.37 per diluted share for the second quarter of 2009 and net income of $226,000 or $0.03 per diluted share, for the three months ended September 30, 2008. Intermountain recorded a net loss to common stockholders of $14.6 million, or $1.75 per diluted share, for the nine months ended September 30, 2009, compared with net income of $4.1 million, or $0.49 per diluted share, for the nine months ended September 30, 2008. The smaller loss over the sequential quarter primarily reflects a smaller loan loss provision, as the Company’s assessment of its credit portfolio required a much smaller charge to earnings than its second quarter provision. Still, results for the comparative nine-month periods reflect much higher loss provisions in 2009, as well as decreased net interest income from reduced loan volume and increased nonperforming assets, and increased credit expenses and FDIC assessments.

     The annualized return on average assets (“ROA”) was -0.82%, -4.02 %, and 0.09% for the three months ended September 30, 2009, June 30, 2009 and September 30, 2008, respectively, and -1.64% and 0.53% for the nine months ended September 30, 2009 and 2008, respectively. The annualized return on average common equity (“ROE”) was -14.49, -58.2%, and 1.01% for the three months ended September 30, 2009, June 30, 2009 and September 30, 2008, respectively, and -24.8% and 6.1% for the nine months ended September 30, 2009 and 2008, respectively.

     While substantially better than second quarter 2009 results, the Company’s 2009 third quarter and year-to-date results continue to reflect extremely challenging economic and credit conditions, which have put pressure on both revenue and expense streams. In response to this adverse environment, management continues to focus on strong balance sheet management, particularly in maintaining a “well-capitalized” designation for regulatory purposes and strong liquidity. Some of its actions, including the maintenance of excess funds in relatively low-yielding cash equivalent and investment securities, the reduction in its loan portfolio, and the maintenance of elevated loss reserves have negative impacts on earnings to common stockholders in the short-term, but provide a foundation from which we expect to recover and grow when economic conditions improve. In addition, the Company expects that its strong focus on balancing local deposit growth with reducing funding costs will enhance future opportunities when rates increase and higher levels of customer borrowing demand return.

     Net Interest Income. The most significant component of earnings for the Company is net interest income, which is the difference between interest income from the Company’s loan and investment portfolios, and interest expense from deposits, repurchase agreements and other borrowings. During the three months ended September 30, 2009, June 30, 2009 and September 30, 2008, net interest income was $9.7 million, $10.2 million, and $11.1 million, respectively. During the nine months ended September 30, 2009 and 2008, net interest income was $29.8 million and $33.6 million, respectively. The reduction in net interest income from the prior quarter primarily reflects reversals and forgone interest on loans that were placed in non-accrual status or written down in the third quarter. Nine-month comparables are impacted by interest reversals as well, but also include the impacts of a more conservative, lower-yielding asset mix and overall reductions in market rates since the third quarter of last year.

     Average interest-earning assets increased by 1.2% to $980.6 million for the three months ended September 30, 2009, compared to $968.9 million for the three months ended September 30, 2008. The growth was driven by an increase in average investments and cash of $77.5 million or 45.6% over the three month period in 2008, offset by a decrease of $65.9 million or 8.2% in average loans. For the nine months ended September 30, 2009, average interest-earning assets increased 4.6%, or $43.7 million compared to the same period in 2008. During this period, average loans decreased $36.0 million while investments and cash increased $79.7 million. Loan volumes continued to reflect paydowns and write-downs of existing loan balances, and a downturn in loan originations caused by the slowing economy, lower demand and tighter underwriting standards. The increase in investments and cash resulted from strong deposit growth and the Company’s decision to place the additional funding in short-term investments and cash equivalents to enhance liquidity.

     Average interest-bearing liabilities increased by 1.4% or $13.4 million, including $62.7 million or 8.2% growth in average deposits, which offset a $49.3 million or 25.4% decrease in FHLB advances and other borrowings for the three month period ended September 30, 2009 compared to September 30, 2008. For the nine months ended September 30, 2009, average interest-bearing liabilities increased 3.9% or $36.8 million compared to the nine months ended September 30, 2008, fueled by growth in average deposits of $71.6 million, or 9.7%. Increases in average deposits compared to both prior periods primarily reflected deposit growth from the Bank’s local markets as branch staff successfully acquired additional customer balances.

     The positive impacts of increases in earning assets over the past year were more than offset by declines in the net interest margin. Net interest spread during the three months ended September 30, 2009, June, 2009, and September 30, 2008 equaled 3.90%, 4.08%, and 4.54%, respectively. Net interest margin was 3.91% for the three months ended September 30, 2009, a 0.20% decrease from the three months ended June 30, 2009 and a 0.65% decrease from the same period last year. Net interest margins for the nine months

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ended September 30, 2009 and September 30, 2008 were 4.02% and 4.74%, respectively. Comparative margin results continue to be negatively impacted by forgone and reversed interest on non-performing loans, lower market interest rates, and the shift to a more conservative asset mix.

     While growing deposits, the Company has continued to focus on lowering its cost of funds. The cost of funds on interest-bearing liabilities dropped from 2.06% to 1.61% for the comparable three-month periods of last year and this year and from 2.22% to 1.74% for the comparable nine-month periods. The Company has sought to manage liability costs carefully, and its cost of funds continues to be at the low end of its peer group. As a result of these efforts and continuing stronger asset yields, the Company’s net interest spread and margin remain near the top of its peer group.

     Given the current economic conditions, the Company believes that non-accrual loans and conservative asset management will continue to negatively impact the net interest margin. However, declining funding costs and stabilizing market interest rates should offset some or all of these impacts. As such, management is focusing on building a balance sheet and core customer base to sustain the current margin, and prepare for resumption of more normal economic and rate conditions in the future.

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

     The provision for losses on loans totaled $3.8 million for the three months ended September 30, 2009, compared to a provision of $18.7 million for the three months ended June 30, 2009, and $2.5 million for the three months ended September 30, 2008. For the comparative nine-month periods, the provision totaled $25.2 million in 2009 versus $4.9 million in 2008 reflecting an increase in net charge-offs of $20.4 million for the same periods, respectively. The following table summarizes provision and loan loss allowance activity for the periods indicated.

	Nine months ended September 30,
	2009			2008
	(Dollars in thousands)
Balance at January 1	$	16,433		$	11,761
Provision for losses on loans		25,210			4,872
Amounts written off, net of recoveries		(24,030	)		(3,600	)
Allowance — loans, September 30		17,613			13,033
Allowance — unfunded commitments, January 1		14			18
Adjustment		164			(10	)
Allowance — unfunded commitments, September 30		178			8
Total credit allowance including unfunded commitments	$	17,791		$	13,041

     The loan loss allowance to total loans ratio was 2.46% at September 30, 2009, compared to 3.31% at June 30, 2009 and 1.67% at September 30, 2008, respectively. Third quarter net chargeoffs totaled $10.4 million compared to $11.8 million for the three months ended June 30, 2009, and $2.3 million for the three months ended September 30, 2008. Third quarter charge-offs primarily reflect write downs in the southwestern Idaho (Treasure Valley and Valley County) residential construction and development portfolio that were identified and reserved for in the preceding quarter. At the end of the quarter, the allowance for loan loss totaled 78.9% of nonperforming loans compared to 65.6% of nonperforming loans a year ago. At June 30, 2009 the allowance totaled 88.4% of nonperforming loans. Management believes the current level of loan loss allowance is adequate for the balance and the mix of the loan portfolio at this time.

     Residential land and construction assets continue to comprise most of the nonperforming loans and OREO totals, reflecting the weakness in the housing market. The geographic breakout of the nonperforming loans below reflects the stronger market presence the Company holds in Northern Idaho and Eastern Washington and reductions in non-performing assets in the greater Boise market through property sales and loan writedowns already booked. The following table summarizes nonperforming assets (“NPA”) by geographic region.

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										Southwest
NPA by location	North Idaho									Idaho,
September 30, 2009	— Eastern			Magic Valley			Greater Boise			excluding
(Dollars in thousands)	Washington			Idaho			Area			Boise-Oregon			Other			Total
Commercial	$	2,903		$	350		$	516		$	190		$	—		$	3,959		10.8	%
Commercial real estate		2,051			1,149			402			9			32			3,643		9.9	%
Commercial construction, including all land development loans		2,267			2,355			4,163			1,675			2,875			13,335		36.3	%
Multifamily		—			188			—			—			—			188		0.5	%
Residential real estate		2,278			149			1,668			984			103			5,182		14.1	%
Residential construction		9,401			—			914			—			—			10,315		28.1	%
Consumer		52			28			21			1			—			102		0.3	%
Total	$	18,952		$	4,219		$	7,684		$	2,859		$	3,010		$	36,724		100.0	%
Percent of total NPA		51.6	%		11.5	%		20.9	%		7.8	%		8.2	%		100.0	%

     For comparative purposes to the table above, the Company’s loan portfolio is spread throughout its market area, with about 50% of the portfolio in north Idaho and eastern Washington based on branch of origin, 18% in southwest Idaho and eastern Oregon, 14% in the greater Boise area, and 8% in the Magic Valley area of southern Idaho. Generally, North Idaho, Spokane and the Magic Valley economies and real estate markets have remained stronger than the Boise areas so far in this downturn. Much of the Company’s portfolio in southwestern Idaho is resident in the ‘Tri-County’ area along the border of Idaho and Oregon, which are largely agribusiness communities, and are doing relatively well.

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

	Loan Quality
	September 30,		June 30,		December 31,
	2009		2009		2008
	(dollars in thousands)
Loans past due in excess of 90 days and still accruing	$	471	$	2,966	$	913
Non-accrual loans		21,858		24,532		26,365
Total non-performing loans		22,329		27,498		27,278
OREO		14,395		13,650		4,541
Total non-performing assets (“NPA”)	$	36,724	$	41,148	$	31,819
Classified loans(1)	$	93,768	$	91,986	$	53,847
Troubled debt restructured loans (2)	$	38,063	$	30,357	$	13,424

(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)	Loans restructured and in compliance with modified terms; excludes non-accrual loans

Non-accrual loans as a percentage of net loans receivable	3.13	%	3.45	%	3.50	%
Total non-performing loans as a % of net loans receivable	3.19	%	3.87	%	3.62	%
Total NPA as a % of loans receivable	5.25	%	5.79	%	4.23	%
Allowance for loan losses (“ALLL”) as a % of non-performing loans	78.9	%	88.4	%	60.2	%
Total NPA as a % of total assets	3.47	%	3.73	%	2.88	%
Total NPA as a % of tangible capital + ALLL (“Texas Ratio”)	35.63	%	37.17	%	27.75	%
Loan delinquency ratio (30 days and over)	1.48	%	2.10	%	0.90	%

     The $21.9 million balance in non-accrual loans as of September 30, 2009 consists primarily of residential land, subdivision and construction loans where repayment is primarily reliant on selling the asset. The Company has evaluated the borrowers and the collateral underlying these loans and determined the probability of recovery of the loans’ principal balance. Given the volatility in the

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current housing market, the Company continues to monitor these assets closely and revalue the collateral on a frequent and periodic basis. This re-evaluation may create the need for additional write-downs or additional loss reserves on these assets. The balance of non-accrual loans was $24.5 million and $26.4 million as of June 30, 2009 and December 31, 2008, respectively.

     Residential land and construction assets continue to comprise most of the non-performing loan and other real estate owned totals, reflecting the ongoing severe weakness in the housing market. While general economic pressures are starting to impact the Company’s other loan portfolios, the effects have been minor thus far. Given projected increases in unemployment and continuing economic weakness, we anticipate elevated levels of problem assets to continue for the next several quarters. In response, the Company has shifted executive management focus and added skilled and experienced collection resources to manage the portfolio, with a continued focus on identifying and resolving problem loans as quickly as possible. As troubled loans arise, management is analyzing current and projected conditions and working closely with borrowers to evaluate carefully whether to try to avoid liquidation or begin the process of liquidation. Management also continues to execute on its problem asset disposition strategy to reduce its balance of classified assets in an expeditious but orderly fashion. Given the worsening economic forecast, some level of heightened loss activity is likely to continue, but based on its internal analysis, including stress testing of its portfolio under differing economic scenarios, management continues to believe that its current level of loan loss reserves and capital can withstand credit losses well in excess of those reasonably anticipated.

     Internally classified loans also appear to have stabilized during the third quarter. At September 30, Intermountain’s total internally classified loans were $93.8 million, compared with $92.0 million at June 30, 2009 and $53.8 million at December 31, 2008. Classified loans are loans for which management believes it may experience some problems in obtaining repayment under the contractual terms of the loan. However, categorizing a loan as classified does not necessarily mean that the Company will experience any or significant loss of expected principal or interest.

     As a result of the decrease in non-performing loans, non-performing assets as a percentage of total assets and tangible equity plus the loan loss allowance improved in the third quarter. Non-performing assets comprised 3.5% of total assets at September 30, 2009, and 3.7% and 2.9% at June 30, 2009 and December 31, 2008, respectively. Non-performing assets to tangible equity plus the loan loss allowance (the “Texas Ratio”) equaled 35.6% at September 30, 2009 versus 37.2% at June 30, 2009 and 27.8% at December 31, 2008. The 30-day and over loan delinquency rate also improved in the third quarter and stood at 1.48% at September 30, 2009, versus 2.10% at June 30, 2009, and 0.90% at December 31, 2008. Management continues to focus its efforts on managing down the level of non-performing assets, classified loans and delinquencies.

     Other Income. Total other income was $3.1 million, $2.7 million, and $3.0 million for the three months ended September 30, 2009, June 30, 2009, and September 30, 2008, respectively. Total other income was $9.3 million and $11.0 million for the nine months ended September 30, 2009 and 2008, respectively.

     Fees and service charges in the third quarter increased by $55,000 from the sequential quarter, as deposit account activity picked up from the very low levels experienced in the second quarter. The third quarter amount was still $32,000 lower than the quarter ended September 30, 2008, as the recession continued to take a toll on transaction and overdraft fees. Fees and service charges for the nine-month period ended September 30, 2009 totaled $5.5 million versus $5.8 million for the same period last year, primarily reflecting the significant slowdown in consumer transaction activity. The Company continues to implement new products and enhanced training to boost its fee income.

     Loan related fee income decreased by $141,000, or 18.4%, for the three months ended September 30, 2009 compared to one year ago and by $236,000, or 11.4%, for the nine months ended September 30, 2009 compared to one year ago due to lower mortgage loan sale volumes and smaller gains on each loan. Income from bank-owned life insurance increased over both periods, but secured credit card contract income continued to decline in 2009 as credit-wary borrowers further reduced credit card application volumes.

     The Company recognized $500,000 in gains on securities transactions during the third quarter, which more than offset the additional $198,000 credit loss impairment on the private mortgage-backed security on which it had recognized an other-than-temporary- impairment (“OTTI”) during the first quarter of 2009.

     Operating Expenses. Operating expense for the third quarter of 2009 totaled $13.0 million, an increase of $289,000 over the sequential quarter and an increase of $1.5 million over third quarter 2008. Operating expense for the nine months ended September 30, 2009 totaled $36.4 million, an increase of $3.1 million, or 9.2% over the same period one year ago. The increases in operating expense reflect higher FDIC insurance premium expense, higher credit-related costs, and additional writedowns on the Company’s other real estate owned (“OREO”) portfolio.

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     Salaries and employee benefits expense for the three months ended September 30, 2009 decreased $773,000, or 12.0% compared to the same period one year ago. For the first nine months of 2009, compensation and benefits expense decreased $1.9 million, or 10.0% below the comparable period in 2008, even with a reversal of $640,000 in executive compensation expense in second quarter 2008 related to the termination of an executive bonus plan. Salary and compensation expense for the nine months ended September 30, 2008 would have been $2.5 million, or 13% lower for the nine-month comparative period if the $640,000 salary reversal had not taken place in the second quarter of 2008. Efforts to control compensation expense continue in 2009, as the Company has suspended salary increases for executives and officers, maintained a hiring freeze and reduced other compensation plans. At September 30, 2009, full-time-equivalent employees totaled 412, compared with 442 at September 30, 2008.

     Occupancy expenses were $1.8 million for the three months ended September 30, 2009, a 0.3% increase compared to June 30, 2009 and a 9.5% decrease compared to September 30, 2008. The decrease over last year reflects reduced hardware, software, and equipment purchasing activity, as previous infrastructure investments made have enhanced efficiency and reduced the need for additional purchasing activity. Occupancy expenses were $5.6 million for the nine months ended September 30, 2009, a 0.1% decrease compared to September 30, 2008.

     Per its original plan, the Company sold the Sandpoint Center, its Company headquarters, in August 2009 to a third party in order to reduce debt and increase the Company’s future flexibility. The building was sold for $24.8 million with financing provided by Panhandle State Bank. Because of the non-recourse financing terms offered by Panhandle State Bank, the lease is treated as an operating lease utilizing the financing method for accounting purposes. Consequently, there was no gain recognized at the time of the transaction and the building will remain on the consolidated financial statements with depreciation and interest expense recognized over the life of the lease. Panhandle State Bank executed an agreement to lease the building from the purchaser for an initial lease amount of $1.6 million per year with an initial term of 20 years with three successive PSB options to extend the lease for an additional 10 years each. Utilizing the financing method, the Company will record approximately $444,000 in depreciation expense and $652,000 in interest expense for the first year of the lease.

     Other expenses increased $5.0 million for the nine month period over the same period last year. The increase primarily consists of $1.4 million in additional FDIC insurance expense and $2.7 million additional expense related to the Company’s Other Real Estate Owned (“OREO”) portfolio. Of the $1.4 million of increased FDIC insurance, $475,000 represents the accrual of the FDIC’s special assessment which was paid on September 30, 2009. The OREO increase is a combination of carrying expenses and additional property write-downs to reflect updated valuations. Other expenses increased $1.9 million for the three month period over the same period last year, reflecting a $264,000 increase in FDIC insurance expense, and $1.5 million in additional OREO write-downs and expenses. Both the three-month and nine-month totals for 2009 also include $324,000 in non-recurring expenses related to the sale of the Sandpoint Center.

     Credit-related and FDIC expense increases have offset the significant efforts the Company has made to reduce expenses in other areas, particularly salary and benefits, advertising, printing, supply, travel and consulting and other expenses.

     The Company’s efficiency ratio was 101.5% for the three months ended September 30, 2009, compared to 98.1% for the three months ended June 30, 2009 and 80.9% for the three months ended September 30, 2008. For the nine-month period, the Company’s efficiency ratio increased to 93.1% in 2009 compared to 74.6% in 2008. The Company has been executing strategies to reduce controllable expenses to improve efficiency. However, flat asset growth, decreases in the net interest margin and fee income, and substantially higher credit-related expenses and FDIC insurance premiums have hampered efficiency gains. With economic conditions likely to remain challenging in the near future, company management plans to execute more aggressive efficiency and cost-cutting efforts. Management anticipates that as it completes the action plans developed under prior initiatives and undertakes its new plans, the Company’s efficiency and expense ratios will improve. Stabilization and improvement in economic conditions in the future will also improve efficiency, as credit-related costs subside.

     Income Tax Provision. Intermountain recorded federal and state income tax benefits of $1.7 million and $7.4 million for the three months ended September 30, 2009 and June 30, 2009, respectively and a tax provision of $2,000 for the three months ended September 30, 2008. Intermountain recorded federal and state income tax benefit of $9.1 million for the nine months ended September 30, 2009 and a tax provision of $2.3 million for the nine months ended September 30, 2008. The effective tax rates used to calculate the tax benefit were (43.2%) and (40.3%) for the quarters ending September 30, 2009, and June 30, 2009, respectively, and the tax rate used to calculate the tax provision was 0.88% for the quarter ending September 30, 2008. The effective tax rate used to calculate the tax benefit was (40.6%) for the nine months ended September 30, 2009, compared to a 35.6% effective tax rate used to calculate the

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provision for the nine months ended September 30, 2008. The substantial change in the tax benefit and effective tax rate over the periods last year reflects the pre-tax losses experienced in 2009.

     Intermountain uses an estimate of future earnings, and an evaluation of its loss carryback ability and tax planning strategies to determine whether or not the benefit of its net deferred tax asset will be realized. At September 30, 2009, the Company assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset and determined that the benefits of its deferred tax asset would more than likely be realized.

Financial Position

     Assets. At September 30, 2009, Intermountain’s assets were $1.06 billion, down $47.0 million from $1.11 billion at December 31, 2008. During this period, increases in investments available-for-sale were offset by decreases in cash and cash equivalents and loans receivable. Given the challenging economic climate, the Company continues to manage its balance sheet cautiously, limiting asset growth and shifting the mix from loans to more conservative and liquid investments.

     Investments. Intermountain’s investment portfolio at September 30, 2009 was $198.3 million, an increase of $30.8 million from the December 31, 2008 balance of $167.5 million. The increase was primarily due to the net purchase of agency-guaranteed mortgage backed securities (“MBS”). Funds for this increase were provided by a decrease in federal funds balances as the Company moved lower yielding federal funds balances to higher yielding short-term available-for-sale investments. During the nine months ended September 30, 2009, the Company sold $25.9 million in investment securities resulting in a $1.5 million pre-tax gain, while simultaneously positioning the portfolio to perform better in unchanged or rising rate environments. As of September 30, 2009, the balance of the unrealized loss on investment securities, net of federal income taxes, was $4.6 million, compared to an unrealized loss at December 31, 2008 of $4.9 million. Illiquid markets for some of the Company’s securities, and increasing long-term interest rates produced the unrealized loss for both periods.

     During the first quarter of 2009, the Company recorded an other-than-temporary impairment (“OTTI”) of $1,751,000 on one non-agency guaranteed mortgage-backed security. Of the total $1,751,000 OTTI, $244,000 was related to potential credit losses, and under accounting guidance, was charged against earnings. The remaining $1,507,000 reflects non-credit value impairment and was charged against the Company’s other comprehensive income and reported capital on the balance sheet. The Company recorded an additional $198,000 credit loss impairment in the third quarter of 2009, reducing the non-credit value impairment to $1.3 million. At this time, the Company anticipates holding the security until its value is recovered or until maturity, and will continue to adjust its other comprehensive income and capital position to reflect the security’s current market value. The Company calculated the credit loss charge against earnings by subtracting the estimated present value of future cash flows on the security from its amortized cost. See Notes 2 and 9 of the Consolidated Financial Statements for additional information.

     Loans Receivable. At September 30, 2009 net loans receivable totaled $699.0 million, down $53.6 million or 7.12% from $752.6 million at December 31, 2008. During the nine months ended September 30, 2009, total loan originations were $322.0 million compared to $440.9 million for the prior year’s comparable period. The decline in originations from the prior year reflects slowing economic conditions, decreased borrowing demand and tighter underwriting standards. As part of its Powered By Community initiative, the Company continues to market residential and commercial lending programs to ensure the credit needs of its communities are met.

     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.

	September 30, 2009					December 31, 2008
	Amount			%		Amount			%
	(Dollars in thousands)
Commercial	$	222,381			31.04	$	227,521			29.58
Commercial real estate		176,347			24.61		154,273			20.05
Commercial construction, includes all land development loans		74,032			10.33		84,276			10.96
Multifamily		17,938			2.50		18,617			2.42
Residential real estate		94,659			13.21		103,937			13.51
Residential construction		105,960			14.79		152,295			19.80
Consumer		19,424			2.71		23,245			3.02
Municipal		5,835			0.81		5,109			0.66
Total loans receivable		716,576			100.00		769,273			100.00
Net deferred origination fees		84					(225	)
Allowance for losses on loans		(17,613	)				(16,433	)
Loans receivable, net	$	699,047				$	752,615
Weighted average yield at end of period		6.04	%				6.38	%

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     As a result of the Company’s efforts to reduce construction and land development exposure, the Company’s commercial and residential construction portfolios have dropped from $236.6 million, or 31.4% of net loans receivable at year end 2008 to $180.0 million or 25.7% of net loans receivable at September 30, 2009. The Company continues to reduce its exposure to residential land, construction and subdivision loans by actively managing and liquidating existing loans in the portfolio and limiting new loan production. As noted before, loans in this portfolio represent most of the Company’s problem loan portfolio. Builders and developers in the Company’s southwestern Idaho markets have been particularly hard hit, as oversupply and weak economic factors have led to rapidly decreasing valuations. In contrast, land and construction loans in north Idaho and Spokane have fared better during the current downturn, but are also under some stress.

     The commercial real estate portfolio 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. While tough economic conditions are increasing the risk in this portfolio, it continues to perform well with low delinquency and loss rates.

     The commercial portfolio is comprised of a mix of small business and agricultural loans that have held up well during this economic downturn. Most agricultural markets continue to perform well, and the Company has very limited exposure to the severely impacted dairy market. The Company’s small business portfolio is spread across the markets it serves, which has provided diversification benefits as many of its markets have performed better economically than the national market.

     The residential and consumer portfolios consist primarily of first and second mortgage loans, unsecured loans to individuals, and auto, boat and RV loans. These loans have generally been underwritten with relatively conservative loan to values and continue to perform well, especially given the economic challenges.

     Management believes that rising unemployment and declining real estate values will continue to challenge all of the Company’s loan segments in the short-term, leading to higher credit losses and costs than would be experienced in normal economic times. However, management believes that the Company’s current portfolio composition and credit management, along with its “well-capitalized” designation under applicable regulatory standards and solid liquidity position, will enable the Company to successfully navigate through the current challenges.

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

	Three months ended							Nine months ended
	September 30,							September 30,
	2009		2008		% Change			2009		2008		% Change
	(Dollars in thousands)
Commercial	$	37,187	$	48,545		(23.4	)	$	123,843	$	173,189		(28.5	)
Commercial real estate		46,432		64,898		(28.5	)		97,497		198,337		(50.8	)
Residential real estate		25,697		20,078		28.0			92,524		59,745		54.9
Consumer		2,196		2,695		(18.5	)		7,113		8,943		(20.5	)
Municipal		336		165		103.7			1,033		640		61.2
Total loans originated	$	111,848	$	136,381		(18.0	)	$	322,010	$	440,854		(27.0	)

     Third quarter 2009 origination results reflect declining demand in all categories except residential real estate and municipal loans. Spurred by record low rates and the federal government’s first time homebuyer credit program, residential real estate activity remained at comparatively high levels. Activity in this segment over the next few quarters will likely remain dependent on rates and the potential extension of the federal government program. Tough economic conditions and high unemployment are likely to depress borrowing demand in other segments for the next few quarters, until consumers and businesses feel more positive about the future.

     Office Properties and Equipment. Office properties and equipment decreased 3.5% to $42.8 million from $44.3 million at December 31, 2008 due primarily to depreciation recorded for the nine months ended September 30, 2009. Reflecting efficiencies gained from prior infrastructure investments, the Company has been able to reduce its hardware, software and equipment purchases.

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     Per its original plan, the Company sold the Sandpoint Center, its Company headquarters, in August 2009 to a third party in order to reduce debt and increase the Company’s future flexibility. The building was sold for $24.8 million with financing provided by Panhandle State Bank. Because of the non-recourse financing terms offered by Panhandle State Bank, the lease is treated as an operating lease utilizing the financing method for accounting purposes. Consequently, there was no gain recognized at the time of the transaction and the building will remain on the consolidated financial statements with depreciation and interest expense recognized over the life of the lease. Panhandle State Bank executed an agreement to lease the building from the purchaser with an initial term of 20 years with three successive PSB options to extend the lease for an additional 10 years each.

     Other Real Estate Owned. Other real estate owned increased to $14.4 million at September 30, 2009 from $4.5 million at December 31, 2008. The increase was primarily due to increases in home, land and lot foreclosures resulting from current economic conditions. The Company continues to actively market and liquidate its OREO properties, selling $2.6 million over the first nine months of this year.

     Intangible Assets. Intangible assets decreased slightly as a result of continuing amortization of the core deposit intangible. As discussed above in the Critical Accounting Policies section, the Company again evaluated its goodwill asset in the third quarter and determined that no impairment existed at September 30, 2009.

     BOLI and All Other Assets. Bank-owned life insurance (“BOLI”) and other assets increased to $37.1 million at September 30, 2009 from $28.6 million at December 31, 2008. The increase was primarily due to increases in the net deferred tax asset, related to both increased temporary tax differences and an anticipated tax-loss carryforward resulting from the Company’s year-to-date loss.

     Deposits. Total deposits increased $48.3 million to $838.7 million at September 30, 2009 from $790.4 million at December 31, 2008, despite slowing economic conditions and competitive market conditions. The Company continues to focus on deposit growth from local customers as a critical priority in building for the future. Management has shifted resources and implemented compensation plans, promotional strategies and new products to spur local deposit growth.

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

	September 30, 2009					December 31, 2008
	Amount		%			Amount		%
	(Dollars in thousands)
Demand	$	153,271		18.3		$	154,265		19.5
NOW and money market 0.0% to 5.25%		340,722		40.6			321,556		40.7
Savings and IRA 0.0% to 5.75%		80,182		9.6			78,671		9.9
Certificate of deposit accounts (CDs)		89,457		10.7			85,504		10.8
Jumbo CDs		83,774		10.0			76,935		9.8
Brokered CDs		76,136		9.0			57,956		7.3
CDARS CDs to local customers		15,123		1.8			15,525		2.0
Total deposits	$	838,665		100.0		$	790,412		100.0
Weighted average interest rate on certificates of deposit				2.73	%				3.22	%
Core Deposits as a percentage of total deposits (1)				78.4	%				81.7	%
Deposits generated from the Company’s market area as a % of total deposits				91.0	%				92.7	%

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

     The Company continues to focus on balancing deposit growth with maintaining and improving its already low cost of funds. Interest bearing checking accounts and retail CD growth generated much of the growth since year end, despite lower interest rates and a competitive deposit environment. In the third quarter, the Company also purchased $20.3 million in long-term callable brokered certificates of deposit at very favorable rates, anticipating the runoff of a similar amount at much higher rates in the fourth quarter of this year. The Company’s strong local, core funding base, high percentage of checking, money market and savings balances and careful management of its brokered CD funding provide lower-cost, more reliable funding to the Company than most of its peers and add to the liquidity strength of the Bank. Growing the local funding base at a reasonable cost remains a critical priority for the Company’s management and production staff.

     The Company recently received written notification that the Company for which it holds and services deposit accounts securing credit cards issued by that company is terminating the contract, effective November 7, 2009. However, the transition timing is uncertain and management now anticipates that the resulting reduction in deposit totals and fee revenue may not occur until sometime later next year. Activity and balances under this contract have been decreasing for the last several years, and management believes that it will be able to replace the deposits and at least part of the revenue from other sources.

     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 $111.0 million and $195.6 million at September 30, 2009 and December 31, 2008, respectively. The decrease resulted from reductions in advances and repurchase agreements, as deposit growth replaced the need for these funds. In addition, the Company paid off $23.1 million in debt outstanding from the sale of the Sandpoint Center . See “Liquidity and Sources of Funds” for additional information.

Interest Rate Risk

     The results of operations for financial institutions may be materially and adversely affected by changes in prevailing economic conditions, including rapid changes in interest rates, declines in real estate market values and the monetary and fiscal policies of the federal government. Like all financial institutions, Intermountain’s net interest income and its NPV (the net present value of financial assets, liabilities and off-balance sheet contracts), are subject to fluctuations in interest rates. Intermountain utilizes various tools to assess and manage interest rate risk, including an internal income simulation model that seeks to estimate the impact of various rate changes on the net interest income and net income of the bank. This model is validated by comparing results against various third-party estimations. Currently, the model and third-party estimates indicate that Intermountain is slightly asset-sensitive. An asset-sensitive bank generally sees improved net interest income and net income in a rising rate environment, as its assets reprice more rapidly and/or to a greater degree than its liabilities. The opposite is true in a falling interest rate environment. When market rates fall, an asset-sensitive bank tends to see declining income. Net interest income results for the past year reflect this, as short-term market rates fell over the past 24 months, resulting in lower net interest income and net income levels, particularly in relation to the level of interest-earning assets.

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     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 unusual 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. However, in the current tight credit markets, prepayment speeds, with the exception of first mortgage loans, are relatively slow even given the significant drop in market interest rates. Prepayments may affect the levels of loans retained in an institution’s portfolio, as well as its net interest income. Intermountain maintains an asset and liability management program intended to manage net interest income through interest rate cycles and to protect its income by controlling its exposure to changing interest rates.

     On the liability side, Intermountain seeks to manage its interest rate risk exposure by maintaining a relatively high percentage of non-interest bearing demand deposits, interest-bearing demand deposits, savings and money market accounts. These instruments tend to lag changes in market rates and may afford the bank more protection in increasing interest rate environments, but can also be changed relatively quickly in a declining rate environment. The Bank utilizes various deposit pricing strategies and other borrowing sources to manage its rate risk.

     As discussed above, Intermountain uses a simulation model designed to measure the sensitivity of net interest income and net income to changes in interest rates. This simulation model is designed to enable Intermountain to generate a forecast of net interest income and net income given various interest rate forecasts and alternative strategies. The model is also designed to measure the anticipated impact that prepayment risk, basis risk, customer maturity preferences, volumes of new business and changes in the relationship between long-term and short-term interest rates have on the performance of Intermountain. Because of highly unusual current market rate conditions, the results of modeling indicate potential increases in net interest income in both a 100 and 300 basis point upward adjustment in interest rates that are higher than the guidelines established by management. In addition, potential increases in net income in a 100 and 300 basis point upward adjustment in interest rates are higher than guidelines. Because the results indicate improvements in net interest income and net income in these scenarios, and management believes there is a greater likelihood of flat or higher market rates in the future than lower rates, it perceives its current level of interest rate risk as moderate. The scenario analysis for net income has been impacted by the unusual current year operating results of the Company, which increases the impact of upward adjustments.

     Intermountain is continuing to pursue strategies to manage the level of its interest rate risk while increasing its long-term net interest income and net income; 1) through the origination and retention of variable and fixed-rate consumer, business banking, construction and commercial real estate loans, which generally have higher yields than residential permanent loans; and 2) by increasing the level of its core deposits, which are generally a lower-cost, less rate-sensitive funding source than wholesale borrowings. There can be no assurance that Intermountain will be successful implementing any of these strategies or that, if these strategies are implemented, they will have the intended effect of reducing interest rate risk or increasing net interest income.

Liquidity and Sources of Funds

     As a financial institution, Intermountain’s primary sources of funds from assets include the collection of loan principal and interest payments, cash flows from various investment securities, and sales of loans, investments or other assets. Liability financing sources consist primarily of customer deposits, repurchase obligations with local customers, advances from FHLB Seattle and correspondent bank borrowings.

     Deposits increased to $838.7 million at September 30, 2009 from $790.4 million at December 31, 2008, primarily due to increases in certificates of deposit (“CDs”) and NOW and money market accounts. This increase, along with decreases in loan balances, offset a reduction in repurchase agreement balances outstanding. At September 30, 2009 and December 31, 2008, securities sold subject to repurchase agreements were $70.5 million and $109.0 million, respectively. The drop reflected seasonal fluctuations, reductions in municipal customer balances related to economic factors, and the movement of funds by customers to higher-yielding sources, both inside and outside the Bank. 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.

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     During the nine months ended September 30, 2009, cash provided by investing activities consisted primarily of the decrease in Fed Funds Sold, principal payments and proceeds from the sales and maturities of available-for-sale investment securities offset by the purchase of additional available-for-sale investment securities. During the same period, cash provided by increases in demand, money market, savings accounts and certificates of deposits offset the decrease in repurchase agreements.

     Intermountain’s credit line with FHLB Seattle provides for borrowings up to a percentage of its total assets subject to general collateralization requirements. At September 30, 2009, the Company’s FHLB Seattle credit line represented a total borrowing capacity of approximately $112.8 million, of which $24.0 million was being utilized. Additional collateralized funding availability at the Federal Reserve totaled $36.2 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 September 30, 2009, the Company had approximately $35.0 million of overnight funding available from its unsecured correspondent banking sources. In addition, up to $1.0 million in funding is available on a semiannual basis from the State of Idaho in the form of negotiated certificates of deposit. Correspondent banks and other financial entities provided total additional borrowing capacity of $160.1 million at September 30, 2009. As of September 30, 2009 there were no unsecured funds borrowed.

     In May 2009, the Company negotiated new loan facilities with Pacific Coast Bankers Bank to refinance the existing holding company credit line used to construct the Sandpoint Center into three longer-term, amortizing loans. In August 2009, the Company sold the Sandpoint Center to a third party, paying off the three loans with Pacific Coast Bankers Bank.

     Intermountain maintains an active liquidity monitoring and management plan, and has worked aggressively over the past year to expand its sources of alternative liquidity. Given continuing volatile economic conditions, the Company has taken additional protective measures to enhance liquidity, including intensive customer education and communication efforts, movement of funds into highly liquid assets and increased emphasis on deposit-gathering efforts. Because of its relatively low reliance on non-core funding sources and the additional efforts undertaken to improve liquidity discussed above, management believes that the Company’s current liquidity risk is moderate and manageable.

     Management continues to monitor its liquidity position carefully, and 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.

Capital Resources

     Intermountain’s total stockholders’ equity was $97.6 million at September 30, 2009, compared with $110.5 million at December 31, 2008. The decrease in total stockholders’ equity was primarily due to the net loss for the nine months ended September 30, 2009, and preferred stock dividends, offset by a small decrease in the unrealized loss on the investment portfolio. Stockholders’ equity was 9.2% of total assets at September 30, 2009 and 10.0% at December 31, 2008. Tangible shareholders’ equity as a percentage of tangible assets was 8.2 % for September 30, 2009 and 9.0% for December 31, 2008. Tangible common equity as a percentage of tangible assets was 5.7% for September 30, 2009 and 6.7% for December 31, 2008.

     At September 30, 2009, Intermountain had unrealized losses of $3.9 million, net of related income taxes, on investments classified as available-for-sale and $741,000 in unrealized losses on cash flow hedges, as compared to unrealized losses of $4.9 million, net of related income taxes, on investments classified as available-for-sale and $985,000 unrealized losses on cash flow hedges at December 31, 2008. Improvements in market valuations for some of the Company’s private mortgage backed securities created most of the improvement since year end, although illiquid markets for some of these securities continue to produce the overall unrealized loss. Fluctuations in prevailing interest rates and turmoil in global debt markets continue to cause volatility in this component of accumulated comprehensive loss in stockholders’ equity and may continue to do so in future periods.

     On December 19, 2008, the Company entered into a definitive agreement with the U.S. Treasury. Pursuant to this Agreement, the Company sold 27,000 shares of Preferred Stock, no par value, having a liquidation amount equal to $1,000 per share, including a warrant (“The Warrant”) to purchase 653,226 shares of the Company’s common stock, no par value, to the U.S. Treasury.

     The preferred stock qualifies as Tier 1 capital and provides for cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. The preferred stock may be redeemed with the approval of the U.S Treasury in the first three years with the proceeds from the issuance of certain qualifying Tier 1 capital or after three years at par value plus accrued and unpaid dividends. The original terms governing the Preferred Stock prohibited the Company from redeeming the shares during the first three

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years other than from proceeds received from a qualifying equity offering. However, subsequent legislation was passed that may now permit the Company to redeem the shares of preferred stock upon consultation between Treasury and the Company’s primary federal regulator.

     The Warrant has a 10-year term with 50% vesting immediately upon issuance and the remaining 50% vesting on January 1, 2010 if the Company has not redeemed the preferred stock. The Warrant has an exercise price, subject to anti-dilution adjustments, equal to $6.20 per share of common stock.

     Intermountain issued and has outstanding $16.5 million of Trust Preferred Securities. The indenture governing the Trust Preferred Securities limits the ability of Intermountain under certain circumstances to pay dividends or to make other capital distributions. The Trust Preferred Securities are treated as debt of Intermountain. These Trust Preferred Securities can be called for redemption beginning in March 2008 by the Company at 100% of the aggregate principal plus accrued and unpaid interest. See Note 4 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, although there can be no assurance in this regard. At September 30, 2009, Intermountain exceeded both its internal guidelines and all such regulatory capital requirements and was “well-capitalized” pursuant to Federal Financial Institutions Examination Council “FFIEC” regulations. Given current economic conditions, the Company’s internal standards call for minimum capital levels higher than those required by regulators to be considered “well capitalized.”

     The following tables set forth the amounts and ratios regarding actual and minimum core Tier 1 risk-based and total risk-based capital requirements, together with the amounts and ratios required in order to meet the definition of a “well-capitalized” institution as reported on the quarterly Federal Financial Institutions Examination Council “FFIEC” call report at September 30, 2009 (dollars in thousands).

											Well-Capitalized
	Actual					Capital Requirements					Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets):
The Company	$	111,049		13.11	%	$	67,759		8	%	$	84,699		10	%
Panhandle State Bank		108,523		12.81	%		67,774		8	%		84,717		10	%
Tier I capital (to risk-weighted assets):
The Company		100,373		11.85	%		33,880		4	%		50,819		6	%
Panhandle State Bank		97,839		11.55	%		33,887		4	%		50,830		6	%
Tier I capital (to average assets):
The Company		100,373		9.44	%		42,527		4	%		53,159		5	%
Panhandle State Bank		97,839		9.44	%		41,475		4	%		51,844		5	%

     During the quarter ended September 30, 2009, the Company downstreamed $7.8 million as equity to the Bank, with an additional $3.2 million downstreamed in October 2009. These amounts represent substantially all of the net proceeds from the sale of the Company’s Sandpoint Headquarters (discussed above). This equity contribution by the Company to the Bank further strengthens the Bank’s capital position and liquidity. Reflecting the Company’s ongoing strategy to prudently manage through the current economic cycle, the decision to maximize equity and liquidity at the Bank level has correspondingly reduced cash available at the parent Company. Consequently, to conserve the liquid assets of the parent Company, the Company will be deferring regularly scheduled interest payments on its outstanding Junior Subordinated Debentures related to its Trust Preferred Securities (“TRUPS Debentures”), and also deferring regular quarterly cash dividend payments on its preferred stock held by the U.S. Treasury, beginning in December 2009. The Company is permitted to defer payments of interest on the TRUPS Debentures for up to 20 consecutive quarterly periods without default. During the deferral period, the Company may not pay any dividends or distributions on, or redeem, purchase or acquire, or make a liquidation payment with respect to the Company’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Company that rank equally or junior to the TRUPS Debentures. Under the terms of the preferred stock, if the Company does not pay dividends for six quarterly dividend periods (whether or not consecutive), Treasury would be entitled to appoint two members to the Company’s board of directors. Deferred payments compound for both the TRUPS Debentures and preferred stock. Although these expenses will be accrued on the consolidated income statements for the Company, deferring these interest and dividend payments will preserve approximately $477,000 per quarter in cash for the Company.

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Notwithstanding the pending deferral of interest and dividend payments, the Company fully intends to meet all of its obligations to the Treasury and holders of the TRUPS Debentures as quickly as it is prudent to do so.

Off Balance Sheet Arrangements and Contractual Obligations

     The Company, in the conduct of ordinary business operations routinely enters into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for the early termination of the contracts. The Company is also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Management does not believe that these off-balance 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 September 30, 2009.

	Payments Due by Period
			Less than		1 to		Over 3 to		More than
	Total		1 Year		3 Years		5 Years		5 Years
	(Dollars in thousands)
Long-term debt(1)	$	69,800	$	764	$	36,451	$	5,375	$	27,210
Short-term debt		56,033		56,033		—		—		—
Capital lease obligations		—		—		—		—		—
Operating lease obligations(2)		13,220		847		1,444		1,197		9,732
Purchase obligations(3)		254		254		—		—		—
Direct financing obligations(4)		35,360		1,635		3,270		3,352		27,103
Total	$	174,667	$	59,533	$	41,165	$	9,924	$	64,045

(1)	Includes interest payments related to long-term debt agreements.
(2)	Excludes recurring accounts payable, accrued expenses and other liabilities, repurchase agreements and customer deposits, all of which are recorded on the registrant’s balance sheet. See Notes 3 and 4 of Notes to Consolidated Financial Statements.
(3)	Consists of construction contract to complete a portion of the Sandpoint Center for new tenant improvements.
(4)	Sandpoint Center Building lease payments related to direct financing transaction executed in August 2009.

New Accounting Pronouncements

In December 2007, FASB revised FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquired entity and the goodwill acquired. Furthermore, acquisition-related and other costs will now be expensed rather than treated as cost components of the acquisition. FASB ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The revision to this guidance applies prospectively to business combinations for which the acquisition date occurs on or after January 1, 2009. We do not expect the adoption of revised FASB ASC 805 will have a material impact on our consolidated financial statements as related to business combinations consummated prior to January 1, 2009. The adoption of these revisions will increase the costs charged to operations for acquisitions consummated on or after January 1, 2009.

In December 2007, FASB amended FASB ASC 810, Consolidation. This amendment establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The standard also requires additional disclosures that clearly identify and distinguish between the interest of the parent’s owners and the interest of the noncontrolling owners of the subsidiary. This statement is effective on January 1, 2009 for the Company, to be applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.

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In June 2008, FASB amended FASB ASC 260, Earnings per Share. This amendment concluded that nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This amendment is effective for fiscal years beginning after December 15, 2008, to be applied retrospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2009, FASB amended FASB ASC 325-40, Investments—Other. This amendment addressed certain practice issues related to the recognition of interest income and impairment on purchased beneficial interests and beneficial interests that continue to be held by a transferor in securitized financial assets, by making its other-than-temporary impairment (“OTTI”) assessment guidance consistent with FASB ASC 320, Investments—Debt and Equity Securities. The amendment removes the reference to the consideration of a market participant’s estimates of cash flows and instead requires an assessment of whether it is probable, based on current information and events, that the holder of the security will be unable to collect all amounts due according to the contractual terms. If it is probable that there has been an adverse change in estimated cash flows, an OTTI is deemed to exist, and a corresponding loss shall be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value at the balance sheet date of the reporting period for which the assessment is made. This amendment became effective for interim and annual reporting periods ending after December 15, 2008, and is applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2009, FASB amended FASB ASC 820, Fair Value Measurements and Disclosures, to address issues related to the determination of fair value when the volume and level of activity for an asset or liability has significantly decreased, and identifying transactions that are not orderly. The revisions affirm the objective that fair value is the price that would be received to sell an asset in an orderly transaction (that is not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions, even if the market is inactive. The amendment provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have decreased significantly. It also provides guidance on identifying circumstances that indicate a transaction is not orderly. If determined that a quoted price is distressed (not orderly), and thereby not representative of fair value, the entity may need to make adjustments to the quoted price or utilize an alternative valuation technique (e.g. income approach or multiple valuation techniques) to determine fair value. Additionally, an entity must incorporate appropriate risk premium adjustments, reflective of an orderly transaction under current market conditions, due to uncertainty in cash flows. The revised guidance requires disclosures in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires financial institutions to disclose the fair values of investment securities by major security type. The changes are effective for the interim reporting period ending after June 15, 2009, but could have been applied to interim and annual periods ending after March 15, 2009. The Company did early adopt the FSPs effective January 1, 2009 and it resulted in a portion of other-than-temporary impairment being recorded in other comprehensive income instead of earnings in the amount of $1.5 million for the three months ended March 31, 2009. and are to be applied prospectively.

In April 2009, FASB revised FASB ASC 320, Investments—Debt and Equity Securities, to change the OTTI model for debt securities. Previously, an entity was required to assess whether it has the intent and ability to hold a security to recovery in determining whether an impairment of that security is other-than-temporary. If the impairment was deemed other-than-temporarily impaired, the investment was written-down to fair value through earnings. Under the revised guidance, OTTI is triggered if an entity has the intent to sell the security, it is likely that it will be required to sell the security before recovery, or if the entity does not expect to recover the entire amortized cost basis of the security. If the entity intends to sell the security or it is likely it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the entity does not intend to sell the security and it is not likely that the entity will be required to sell the security but the entity does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings as an OTTI. The credit loss is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected of a security. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, would be recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are to be presented as a separate category within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is reevaluated accordingly based on the procedures described above. Upon adoption of the revised guidance, the noncredit portion of previously recognized OTTI shall be reclassified to accumulated OCI by a cumulative-effect adjustment to the opening balance of retained earnings. The revisions are effective for the interim reporting period ending after June 15, 2009, but could have been applied to interim and annual periods ending after March 15, 2009. The Company did early adopt the FSPs effective January 1, 2009 and it

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resulted in a portion of other-than-temporary impairment being recorded in other comprehensive income instead of earnings in the amount of $1.5 million for the three months ended March 31, 2009. and are to be applied prospectively.

In April 2009, FASB revised FASB ASC 825, Financial Instruments, to require fair value disclosures in the notes of an entity’s interim financial statements for all financial instruments, whether or not recognized in the statement of financial position. The changes are effective for the interim reporting period ending after June 15, 2009, but could have been applied to interim and annual periods ending after March 15, 2009. The Company did early adopt the FSPs effective January 1, 2009 and it resulted in a portion of other-than-temporary impairment being recorded in other comprehensive income instead of earnings in the amount of $1.5 million for the three months ended March 31, 2009. and are to be applied prospectively.

In May 2009, FASB amended FASB ASC 855, Subsequent Events. The updated guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The revisions should not result in significant changes in the subsequent events that an entity reports, either through recognition or disclosure in its financial statements. It does require disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. We adopted the provisions of this guidance for the interim period ended June 30, 2009, and the impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140. This statement has not yet been codified into the FASB ASC. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This statement is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. The Company is currently evaluating the impact of the adoption of SFAS No. 166.

In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This statement has not yet been codified into the FASB ASC. SFAS No. 167 eliminates FASB Interpretations 46(R) (“FIN 46(R)”) exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS No. 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FIN 46(R) provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. This statement requires additional disclosures regarding an entity’s involvement in a variable interest entity. This statement is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. The Company is currently evaluating the impact of the adoption of SFAS No. 167.

In June 2009, FASB codified FASB ASC 105, Generally Accepted Accounting Principles, to establish the FASB ASC (the “Codification”). The Codification is not expected to change U.S. GAAP, but combines all authoritative standards into a comprehensive, topically organized online database. Following this guidance, the Financial Accounting Standards Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) to update the Codification. After the launch of the Codification on July 1, 2009 only one level of authoritative U.S. GAAP for non governmental entities will exist, other than guidance issued by the Securities and Exchange Commission. This statement is effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the FASB ASC 105 did not have any impact on the Company’s consolidated financial statements, and only affects how the Company’s references authoritative accounting guidance going forward.

In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value. This update amends FASB ASC 820, Fair Value Measurements and Disclosure, in regards to the fair value measurement of liabilities. FASB ASC 820 clarifies that in circumstances in which a quoted price for a identical liability in an active market in not available, a reporting entity shall utilize one or more of the following techniques: i) the quoted price of the identical liability when traded as an asset, ii) the quoted price for a similar liability or a similar liability when traded as an asset, or iii) another valuation technique that is consistent with the principles of FASB ASC 820. In all instances a reporting entity shall utilize the approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. Also, when measuring the fair value of a liability a reporting entity shall not include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update is effective for the Company in the fourth quarter of 2009. We do not expect the adoption of FASB ASU 2009-05 will have a material impact on the Company’s consolidated financial statements.

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Forward-Looking Statements

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     From time to time, Intermountain and its senior managers have made and will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are contained in this report and may be contained in other documents that Intermountain files with the Securities and Exchange Commission. Such statements may also be made by Intermountain and its senior managers in oral or written presentations to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Also, forward-looking statements can generally be identified by words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “seek,” “expect,” “intend,” “plan” and similar expressions.

     Forward-looking statements provide our expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made. There are a number of factors, many of which are beyond our control, which could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors, some of which are discussed elsewhere in this report, include:

• inflation and interest rate levels, and market and monetary fluctuations;

• the risks associated with lending and potential adverse changes in credit quality;

• changes in market interest rates and spreads, which could adversely affect our net interest income and profitability;

• increased delinquency rates;

• trade, monetary and fiscal policies and laws, including interest rate and income tax policies of the federal government;

• applicable laws and regulations and legislative or regulatory changes;

• the timely development and acceptance of new products and services of Intermountain;

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

• Intermountain’s success in gaining regulatory approvals, when required;

• technological and management changes;

• changes in estimates and assumptions used in financial accounting;

• growth and acquisition strategies;

• the Company’s critical accounting policies and the implementation of such policies;

• 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;

• declines in real estate values supporting loan collateral; and

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• Intermountain’s success at managing the risks involved in the foregoing.

     Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 and “Risk Factors” in Part II, Item 1A of this report, and in the section titled “Business” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

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, 2008, is hereby incorporated herein by reference.

Item 4 — Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of Intermountain’s disclosure controls and procedures (as required by section 13a — 15(b) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of Intermountain’s management, including the Chief Executive Officer and the Chief Financial Officer. Our Chief Executive Officer and Chief Financial Officer concluded that based on that evaluation, our disclosure controls and procedures as currently in effect are effective, as of September 30, 2009, in ensuring that the information required to be disclosed by us in the reports we file or submit under the Act is (i) accumulated and communicated to Intermountain’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control over Financial Reporting: In the three months ended September 30, 2009, 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.

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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

We cannot accurately predict the effect of the national economic recession on our future results of operations or market price of our stock.

     The national economy and the financial services sector in particular are currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current economic recession, which has adversely impacted the markets we serve. Any further deterioration in the economies of the nation as a whole or in our local markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how long these recessionary conditions may exist, the economic downturn could continue to present risks for some time for the industry and our company.

Our earnings are dependent upon the performance of our bank as well as on business, economic, and political conditions.

     Intermountain is a legal entity separate and distinct from the Bank. Our right to participate in the assets of the Bank upon the Bank’s liquidation, reorganization or otherwise will be subject to the claims of the Bank’s creditors, which will take priority except to the extent that we may be a creditor with a recognized claim.

     The Company is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. These restrictions may affect the amount of dividends the Company may declare for distribution to its stockholders in the future.

     Earnings are impacted by business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy and the local economies in which we operate. Business and economic conditions that negatively impact household or corporate incomes could decrease the demand for our products and increase the number of customers who fail to pay their loans.

We have a high concentration of loans secured by real estate so a further downturn in the markets we serve could continue to adversely impact our earnings and could increase credit risk associated with the loan portfolio.

     The economic downturn has significantly affected our market areas. The Company has a high loan concentration in the real estate market so any further deterioration in the local economies or real estate markets could negatively impact our banking business. Because we primarily serve individuals and businesses located in northern, southwestern and south central Idaho, eastern Washington and southeastern Oregon, a significant portion of our total loan portfolio is originated in these areas or secured by real estate or other assets located in these areas. As a result of this geographic concentration, the ability of customers to repay their loans, and consequently our results, are impacted by the economic and business conditions in our market areas. Any adverse economic or business developments or natural disasters in these areas could cause uninsured damage and other loss of value to real estate that secures our loans or could negatively affect the ability of borrowers to make payments of principal and interest on the underlying loans. In the event of such adverse development or natural disaster, our results of operations or financial condition could be adversely affected, perhaps materially. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would more likely suffer losses on defaulted loans.

     Furthermore, current uncertain geopolitical trends and variable economic trends, including uncertainty regarding economic growth, inflation and unemployment may negatively impact businesses in our markets. While the short-term and long-term effects of these events remain uncertain, they could adversely affect general economic conditions, consumer confidence, market liquidity or result in changes in interest rates, any of which could have a material negative impact on our financial condition and results of operations.

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Our loan portfolio mix, which has a concentration of loans secured by real estate, could result in increased credit risk in an economic recession.

     Our loan portfolio is concentrated in commercial real estate loans and commercial business loans. These types of loans, as well as real estate construction loans and land development loans, acquisition and development loans related to the for sale housing industry, generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about heavy concentrations of commercial real estate loans. These types of loans also typically are larger than residential real estate loans and other commercial loans. Because our loan portfolio contains a significant number of construction, commercial business and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in our non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.

The allowance for loan losses may not be adequate to absorb future losses.

     Our loan customers may not repay their loans according to the terms of the loans, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We therefore may experience significant loan losses, which could have a material adverse effect on our operating results.

     We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for loan losses. By closely monitoring credit quality, we attempt to identify deteriorating loans before they become nonperforming assets and adjust the allowance for loan loss accordingly, resulting in an expense for the period. However, because future events are uncertain, and if the economy continues to deteriorate, there may be loans that deteriorate to a nonperforming status in an accelerated time frame. Additionally, banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to increase the allowance which could have an adverse effect, perhaps material, on our financial condition and results of operation.

     Our loans are primarily secured by real estate, including a concentration of properties located in northern, southwestern and south central Idaho, eastern Washington and southeastern Oregon. If an earthquake, volcanic eruption or other natural disaster were to occur in one of our major market areas, loan losses could occur that are not incorporated in the existing allowance for loan losses.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.

     At December 31, 2008 and September 30, 2009, our nonperforming loans (which consist of non-accrual loans and loans that are 90 days or more past due) were 3.62% and 3.19% of the loan portfolio, respectively. At December 31, 2008 and September 30, 2009, our nonperforming assets (which also include foreclosed real estate) were 2.88% and 3.47% of total assets, respectively. Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to an increase in non-performing loans. We do not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss. These loans and other real estate owned also increase our risk profile and the capital our regulators believe is appropriate in light of such risks. While we have reduced our problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial conditions, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. There can be no assurance that we will not experience further increases in nonperforming loans in the future.

There can be no assurance as to the timing or amount, if any, of dividends that we will pay on our common stock.

     We have not paid a stock dividend on our common stock since May 2007. We have not historically paid cash dividends on our common stock. Our ability to pay dividends on our common stock depends on a variety of factors. Recent guidance from the Federal Reserve Bank may have the effect of limiting our ability to pay dividends to the extent our earnings do not support the payment of dividends. There can be no assurance as to the timing or amount, if any, of cash or stock dividends that we will be able to pay on our common stock.

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Additional market concern over investment securities backed by mortgage loans could create losses in the Company’s investment portfolio.

     A majority of the Company’s investment portfolio is comprised of securities where mortgages are the underlying collateral. These securities include agency-guaranteed mortgage backed securities and collateralized mortgage obligations and non-agency-guaranteed mortgage-backed securities and collateralized mortgage obligations. With the national downturn in real estate markets and the rising mortgage delinquency and foreclosure rates, investors remain concerned about these types of securities. The potential for credit losses in the underlying portfolio and subsequent discounting, if continuing for a long period of time, could lead to other-than-temporary impairment in the value of these investments. This impairment could negatively impact earnings and the Company’s capital position.

Changes in market interest rates could adversely affect our earnings.

     Our earnings are impacted by changing market interest rates. Changes in market interest rates impact the level of loans, deposits and investments, the credit profile of existing loans and the rates received on loans and investment securities and the rates paid on deposits and borrowings. One of our primary sources of income from operations is net interest income, which is equal to the difference between the interest income received on interest-earning assets (usually, loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually, deposits and borrowings). These rates are highly sensitive to many factors beyond our control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities. Net interest income can be affected significantly by changes in market interest rates. Changes in relative interest rates may reduce net interest income as the difference between interest income and interest expense decreases.

     Market interest rates have shown considerable volatility over the past several years. After rising through much of 2005 and the first half of 2006, short-term market rates flattened and the yield curve inverted through the latter half of 2006 and the first half of 2007. In this environment, short-term market rates were higher than long-term market rates, and the amount of interest we paid on deposits and borrowings increased more quickly than the amount of interest we received on our loans, mortgage-related securities and investment securities. In the latter half of 2007 and throughout 2008, short-term market rates declined significantly and unexpectedly, causing asset yields to decline and margin compression to occur. Short-term market rates have remained at very low levels throughout 2009, resulting in continued pressure on net interest margin. If this trend continues, it could cause our net interest margin to remain at relatively low levels, and create continued pressure on profits.

     Should rates start rising again, interest rates would likely reduce the value of our investment securities and may decrease demand for loans. Rising rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations, and may also depress property values, which could affect the value of collateral securing our loans. These circumstances could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to the allowances for loan losses.

     Although unlikely given the current level of market interest rates, should they fall further, rates on our assets may fall faster than rates on our liabilities, resulting in decreased income for the bank. Fluctuations in interest rates may also result in disintermediation, which is the flow of funds away from depository institutions into direct investments that pay a higher rate of return and may affect the value of our investment securities and other interest-earning assets.

     Our cost of funds may increase because of general economic conditions, unfavorable conditions in the capital markets, interest rates and competitive pressures. We have traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures, or other factors, our level of deposits decrease relative to our overall banking operation, we may have to rely more heavily on borrowings as a source of funds in the future, which may negatively impact net interest margin.

The FDIC has increased insurance premiums to restore and maintain the federal deposit insurance fund, which has increased our costs and could adversely affect our business.

     The FDIC adopted a final rule revising its risk-based assessment system, effective April 1, 2009. The changes to the assessment system involve adjustments to the risk-based calculation of an institution’s unsecured debt, secured liabilities and brokered deposits. The potential increase in FDIC insurance premiums could have a significant impact on the Company.

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     On September 30, 2009, the Bank paid $487,894 for an FDIC special assessment that was imposed on May 22, 2009. The special deposit insurance assessment of five basis points on all insured institutions deposits as of June 30, 2009, was in addition to the regular quarterly risk-based deposit insurance assessment.

     The FDIC has recently proposed requiring insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 and for 2010, 2011 and 2012, and to increase the regular assessment rate by three basis points effective January 1, 2011, as a means of replenishing the deposit insurance fund. The prepayment would be collected on December 30, 2009, and would be accounted for as a prepaid expense amortized over the prepayment period. Although the FDIC could exempt institutions from the prepayment requirement when prepayment would impact the institution’s safety and soundness, the FDIC has stated it expects few exemptions to be granted, and the Company would not expect to apply for an exemption. If the proposed rule becomes final, the prepayment of premiums could have an adverse impact on our liquidity.

     The FDIC deposit insurance fund may suffer additional losses in the future due to bank failures. There can be no assurance that there will not be additional significant deposit insurance premium increases or special assessments in order to restore the insurance fund’s reserve ratio.

If the goodwill recorded in connection with acquisitions becomes impaired, it could have an adverse impact on earnings and capital.

     Our estimates of the fair value of our goodwill may change as a result of changes in our business or other factors. As a result of new estimates, we may determine that an impairment charge for the decline in the value of goodwill is necessary. Estimates of fair value are based on a complex model using, among other things, cash flows and company comparison. If our estimates of future cash flows or other components of our fair value calculations are inaccurate, the fair value of goodwill reflected in our financial statements could be inaccurate and we could be required to take additional impairment charges, which could have a material adverse effect on our results of operations and financial condition.

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

     We have pursued and intend to continue to pursue an internal growth strategy, the success of which will depend primarily on generating an increasing level of loans and deposits at acceptable risk levels and terms without proportionate increases in non-interest expenses. There can be no assurance that we will be successful in implementing our internal growth strategy. Furthermore, the success of our growth strategy will depend on maintaining sufficient regulatory capital levels and on favorable economic conditions in our market areas.

There are risks associated with potential acquisitions.

     We may make opportunistic acquisitions of other banks or financial institutions from time to time that further our business strategy. These acquisitions could involve numerous risks including lower than expected performance or higher than expected costs, difficulties in the integration of operations, services, products and personnel, the diversion of management’s attention from other business concerns, changes in relationships with customers and the potential loss of key employees. Any acquisitions will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approvals. We may not be successful in identifying further acquisition candidates, integrating acquired institutions or preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions in our market area is highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into our operations. Our ability to grow may be limited if we are unable to successfully make future acquisitions.

We may not be able to replace key members of management or attract and retain qualified relationship managers in the future.

     We depend on the services of existing management to carry out our business and investment strategies. As we expand, we will need to continue to attract and retain additional management and other qualified staff. In particular, because we plan to continue to expand our locations, products and services, we will need to continue to attract and retain qualified commercial banking personnel and investment advisors. Competition for such personnel is significant in our geographic market areas. The loss of the services of any management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our results of operations, financial conditions and prospects.

Our stock price can be volatile; we cannot accurately predict the effects of the current economic downturn on our future results of operations or market price of our stock.

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     Our stock price is not traded at a consistent volume and can fluctuate widely in response to a variety of factors, including actual or anticipated variations in quarterly operating results, recommendations by securities analysts and news reports relating to trends, concerns and other issues in the financial services industry. Other factors include new technology used or services offered by our competitors, operating and stock price performance of other companies that investors deem comparable to us, and changes in government regulations.

     The national economy and the financial services sector in particular are currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current economic downturn, which has adversely impacted the markets we serve. Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline.

A continued tightening of the credit markets may make it difficult to obtain adequate funding for loan growth, which could adversely affect our earnings.

     A continued tightening of the credit markets and the inability to obtain or retain adequate money to fund continued loan growth at an acceptable cost may 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 Company also relies on alternative funding sources through correspondent banks, the national certificates of deposit market and borrowing lines with the Federal Reserve Bank and FHLB to fund loans. In the event the current economic downturn continues, particularly in the housing market, these resources could be negatively affected, both as to price and availability, which would limit and or raise the cost of the funds available to the Company.

We operate in a highly regulated environment and may be adversely affected by changes in federal state and local laws and regulations.

     We are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on us and 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. In that regard, proposals for legislation restructuring the regulation of the financial services industry are currently under consideration. Adoption of such proposals could, among other things, 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. These powers recently 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.

     On October 3, 2008, Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides the United States Treasury Department (“Treasury”) with broad authority to implement action intended to help restore stability and liquidity to the U.S. financial markets. The EESA also increased the amount of deposit account insurance coverage from $100,000 to $250,000 effective until December 31, 2009, which was recently extended to December 31, 2013 under the Helping Families Save Their Homes Act of 2009.

     In early 2009, the Treasury also announced the Financial Stability Plan which, among other things, provides a new capital program called the Capital Assistance Program, which establishes a public-private investment fund for the purchase of troubled assets, and expands the Term Asset-Backed Securities Loan Facility. The full effect of this broad legislation on the national economy and financial institutions, particularly on mid-sized institutions like the Company, cannot now be predicted. In addition, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law on February 17, 2009, and includes, among other things, extensive new restrictions on the compensation and governance arrangements of financial institutions participating in the Treasury’s Troubled Asset Relief Program. The SEC recently has proposed expanding some of the reforms in ARRA to apply to all public companies. Other recent proposals include the Secretary of the Treasury’s June 17, 2009 proposal to fundamentally change the regulation of financial institutions, markets and products, and the Federal Reserve’s proposed guidance issued on October 22, 2009 regarding incentive compensation practices at institutions it regulates, including the Company.

     In summary, numerous actions have been taken by the Federal Reserve, the U.S. Congress, the Treasury, the FDIC, the SEC and others to address the liquidity and credit crisis. The Company cannot predict the actual effects of EESA, the ARRA, the proposed regulatory reform measures and various governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets, on the Company and its subsidiary. The terms and costs of these activities, or the failure of these

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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 market price of our common stock.

Negative publicity regarding the liquidity of financial institutions may have a negative impact on Company operations.

     Publicity and press coverage of the banking industry has been decidedly negative recently. Continued negative reports about the industry may cause both customers and stockholders to question the safety, soundness and liquidity of banks in general or our bank in particular. This may have an adverse impact on both the operations of the Company and its stock price.

Weak future operating performance may cause the Company to violate covenants or other requirements of its borrowing facilities.

     The Company’s various credit facilities have conditions and covenants that require the Company to perform certain activities and maintain certain performance levels. Future weakness in its operating performance may cause the Company to violate these conditions.

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

     Not applicable.

Item 3 — Defaults Upon Senior Securities

     Not applicable.

Item 4 — Submission of Matters to a Vote of Security Holders

     Not applicable.

Item 5 — Other Information

     Please see the discussion above, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources,” regarding deferral of interest and dividend payments related to the Company’s Trust Preferred Securities and preferred stock, respectively.

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Item 6 — Exhibits

Exhibit No.	Exhibit
10.1	Real Estate Purchase and Sale Agreement dated as of August 26, 2009 by and between the Company, as seller, and Sandpoint Center, LLC and Sandpoint Center II, LLC, as buyer
10.2	Lease Agreement dated as of August 28, 2009 by and between Sandpoint Center, LLC and Sandpoint Center II, LLC, as landlord, and Panhandle State Bank, as tenant.
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.

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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)
November 13, 2009	By:	/s/ Curt Hecker
Date		Curt Hecker
		President and Chief Executive Officer
November 13, 2009	By:	/s/ Doug Wright
Date		Doug Wright
		Executive Vice President and Chief Financial Officer

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EX-10.1

Exhibit 10.1

REAL ESTATE PURCHASE AND SALE AGREEMENT
by and between

INTERMOUNTAIN COMMUNITY BANCORP,
an Idaho corporation

as “Seller”

and

SANDPOINT CENTER, LLC,
an Idaho limited liability company and
SANDPOINT CENTER II, LLC,
an Idaho limited liability company

collectively, as “Buyer”

TABLE OF CONTENTS

SECTION 1 — SALE OF PROPERTY		1
1.1	Real Property	1
1.2	Personal Property	1
1.3	Plans	1
1.4	Records	1
1.5	Intangible Property	1
SECTION 2 — PURCHASE PRICE; PAYMENT		1
2.1	Purchase Price	1
2.2	Payment of Purchase Price	2
SECTION 3 — BUYER’S CONTINGENCIES		2
3.1	Contingencies	2
3.2	Unilateral Right to Terminate Before the Contingency Date	3
3.3	Contingency Date; Notice to Proceed	3
3.4	Buyer’s Reports	3
SECTION 4 — CLOSING		3
4.1	Closing; Closing Date	3
4.2	Seller’s Closing Documents	3
4.3	Buyer’s Closing Documents	4
4.4	Buyer’s Conditions Precedent	5
4.5	Seller’s Conditions Precedent	5
SECTION 5 — CLOSING COSTS AND PRORATIONS		5
5.1	Title Insurance and Closing Fee	5
5.2	Real Estate Taxes and Special Assessments	5
SECTION 6 — TITLE EXAMINATION		6
6.1	Title Commitment and Survey	6
6.2	Buyer’s Objections	6
6.3	Supplemental Commitments; Objections	6
SECTION 7 — REPRESENTATIONS AND WARRANTIES		6
7.1	Seller’s Representations and Warranties	6
7.2	Seller’s Indemnity	8
7.3	Seller’s Knowledge	8
7.4	Buyer’s Representations and Warranties	8
7.5	Buyer’s Indemnity	8
7.6	Buyer’s Acknowledgement	8
7.7	Property Sold As Is	9
7.8	Hazardous Materials; Compliance With Laws	9
7.9	Waiver	10
SECTION 8 — COVENANTS OF SELLER		10
8.1	Normal Operations	10
8.2	Management	10
8.3	Insurance	10
8.4	Further Assurances	10
SECTION 9 — CASUALTY; CONDEMNATION		10

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SECTION 10 — ASSIGNMENT		11
SECTION 11 — NOTICES		11
SECTION 12 — REMEDIES		12
SECTION 13 — TAX DEFERRED EXCHANGE		12
SECTION 14 — GENERAL PROVISIONS		12
14.1	Entire Agreement	12
14.2	Construction	12
14.3	Attorneys’ Fees	13
14.4	Additional Documents	13
14.5	Binding	13
14.6	Time of the Essence	13
14.7	Applicable Law and Venue	13
14.8	Counterparts; Facsimile Signatures	13
14.9	Survival	13
14.10	Brokers	13
14.11	Extension of Time	14
14.12	Confidentiality	14

SCHEDULES AND EXHIBITS

Schedule 1.1(a)	Legal Description of Sandpoint Center
Schedule 1.1(b)	Legal Description of Parking Lot
Schedule 1.2	Personal Property
Schedule 3.1(b)	Due Diligence Materials
Exhibit A	Deed
Exhibit B	Bill of Sale
Exhibit C	General Assignment
Exhibit D	PSB Lease
Exhibit E	CTA Assignment

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REAL ESTATE PURCHASE AND SALE AGREEMENT

     THIS REAL ESTATE PURCHASE AND SALE AGREEMENT (“Agreement”) is entered into as of August 26, 2009 (the “Effective Date”) by and between INTERMOUNTAIN COMMUNITY BANCORP, an Idaho corporation (“Seller”) and SANDPOINT CENTER, LLC, an Idaho limited liability company, and SANDPOINT CENTER II, LLC, an Idaho limited liability company, or their assigns (collectively “Buyer”). In consideration of this Agreement, Seller and Buyer agree as follows:

SECTION 1 — SALE OF PROPERTY

     Seller agrees to sell to Buyer, and Buyer agrees to buy from Seller, the following property (collectively, “Property”):

     1.1 Real Property. The following real properties located in the City of Sandpoint, Bonner County, Idaho (collectively the “Real Property”):

          (a) Sandpoint Center. The real property located at 414 Church Street, Sandpoint, Idaho, described on the attached Schedule 1.1 (a) together with (i) the commercial office building and other improvements constructed or located thereon (the “Building”), and (ii) all easements and rights benefiting or appurtenant thereto (collectively “Sandpoint Center”).

          (b) Parking Lot. That certain real property located at the Southwest corner of 5th and Pine Street in Sandpoint, Idaho, described on the attached Schedule 1.1(b) together with all easements and rights benefiting or appurtenant thereto (the “Parking Lot”).

     1.2 Personal Property. The personal property owned by Seller described on the inventory attached as Schedule 1.2 (the “Personal Property”).

     1.3 Plans. All originals and copies of the as-built blueprints, plans and specifications regarding the Real Property and the Personal Property, if any (“Plans”).

     1.4 Records. All records of Seller regarding the Real Property and the Personal Property, including all records regarding management and leasing, real estate taxes and assessments, insurance, tenants, maintenance, repairs, capital improvements and services, but excluding tax returns and such other records as are normally viewed as confidential (“Records”).

     1.5 Intangible Property. All intangible property, trade names, trademarks, and service marks relating to the Real Property, specifically including the name “Sandpoint Center” (“Intangible Property”) excluding, however, any trade names relating to any business of the Seller or its subsidiaries, including without limitation, “Intermountain Community Bancorp” and “Panhandle State Bank”.

SECTION 2 — PURCHASE PRICE; PAYMENT

     2.1 Purchase Price. The total purchase price (“Purchase Price”) to be paid for the Property shall be Twenty-Four Million Eight Hundred Thousand Dollars ($24,800,000).

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     2.2 Payment of Purchase Price. The Purchase Price shall be payable as follows:

          (a) Earnest Money. On the Effective Date, Buyer shall deposit Two Hundred Fifty Thousand Dollars ($250,000) as earnest money (“Earnest Money”) which Earnest Money shall be held by Sandpoint Title Insurance, Inc. (the “Title Company”) who shall apply or dispose of the Earnest Money as provided in this Agreement. Upon receipt, Title Company shall deposit the Earnest Money in an interest-bearing account. Any interest earned on the Earnest Money will be part of and distributed with the Earnest Money under this Agreement.

          (b) Balance Due At Closing. The balance of the Purchase Price as adjusted by the prorations and credits specified herein shall be paid by Buyer in cash or by wire transfer of funds on the Closing Date.

SECTION 3 — BUYER’S CONTINGENCIES

     3.1 Contingencies. The obligations of Buyer under this Agreement are contingent upon each of the following:

          (a) Title. Title shall have been found acceptable, or been made acceptable, in accordance with the requirements and terms of Section 6 below.

          (b) Access and Inspection. Seller shall have allowed Buyer, and Buyer’s agents, access to the Property without charge and at all reasonable times for the purpose of Buyer’s investigation and testing the same (including environmental testing); provided, however, that Buyer shall not perform any invasive testing including environmental inspections beyond Phase I assessment or contact the tenants or property management personnel without obtaining the Seller’s prior written consent, which shall not be unreasonably withheld or delayed. Seller shall make available to Buyer and Buyer’s agents without charge all plans and specifications, surveys, contracts, leases, maintenance agreements, reports, notices, records, warranties, operating statements, financial statements, inventories, licenses, permits and correspondence in Seller’s possession relating to the Property (including, without limitation, any information with respect to Hazardous Materials); and the right to interview all tenants and any employees of Seller who may have knowledge of such matters. Buyer acknowledges its receipt of the materials set forth on the attached Schedule 3.1(b) (the “Due Diligence Materials”). Buyer shall pay all costs and expenses of such investigation and testing, shall restore the Property, and shall hold Seller and the Property harmless from all costs and liabilities relating to Buyer’s activities (excluding liability resulting from the mere discovery of existing conditions). On or before the Contingency Date (defined below), Buyer shall have been satisfied (in its sole and absolute discretion) with the results of all tests and investigations performed by it or on its behalf.

          (c) Loan for Property. Buyer shall have obtained the binding commitment from PSB to fund a new first loan in the amount of not more than Twenty One Million Eighty Thousand Dollars ($21,080,000.00), due in not less than twenty (20) years, to bear interest at a rate not to exceed five percent (5%) for years one to ten of the loan term, six percent (6%) for the eleventh through fifteenth year of the loan term, and seven percent (7%) for the sixteenth through twentieth year of the loan term, with interest-only payments for the first five years of the loan term and the remaining payments over the term of the loan amortized over not less than twenty-

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five (25) years, and secured by a new first mortgage or deed of trust on the Property (the “Loan”), and Buyer shall have approved the documents to evidence the Loan, which approval shall be granted in Buyer’s sole and absolute discretion.

     3.2 Unilateral Right to Terminate Before the Contingency Date. Notwithstanding anything contained within this Agreement to the contrary, Seller acknowledges and understands that up through and until 5:00 p.m. Pacific Time on the Contingency Date, Buyer may within its sole discretion and for any or no reason notify Seller in writing that Buyer elects to terminate this Agreement. Seller acknowledges that Buyer has the right to so terminate this Agreement, regardless of whether Seller would be willing or able to cure any such matter to which Buyer objects. Upon such unilateral notice from Buyer, this Agreement shall terminate, Title Company shall remit the Earnest Money immediately to Buyer, together with any other funds, documents, or instruments that Buyer has deposited with Title Company and neither party will have any further obligation to the other, except those obligations that expressly survive the termination of this Agreement.

     3.3 Contingency Date; Notice to Proceed. Following Buyer’s investigations per Section 3.1 above, if Buyer, in its sole discretion, decides to proceed with the purchase of the Property, then Buyer shall deliver written notice of its election (the “Notice to Proceed”) to Seller on or before 5:00 p.m. Pacific Time on the Effective Date (the “Contingency Date”) at which time the Earnest Money will become non-refundable except as otherwise provided herein. If Buyer in its sole discretion decides that it will not proceed with the purchase of the Property, Buyer may on or before the Contingency Date give notice to Seller that it is terminating this Agreement. If Buyer fails to notify Seller of its decision on or before the Contingency Date, Buyer will be deemed to have notified Seller on the Contingency Date that Buyer is terminating this Agreement.

     3.4 Buyer’s Reports. If either party terminates this Agreement for any reason, Buyer shall promptly deliver to Seller, at Buyer’s sole cost and expense, copies of all reports, studies, surveys, drawings, and other documents relating to the Property as are in Buyer’s possession or control.

SECTION 4 — CLOSING

     4.1 Closing: Closing Date. The closing of the purchase and sale contemplated by this Agreement (the “Closing”) shall occur on August 28, 2009, or such earlier date as is mutually agreed to in writing by Buyer and Seller (the “Closing Date”). The Closing shall take place at the office of the Title Company at 120 South Second Sandpoint, Idaho. Seller agrees to deliver possession of the Property to Buyer on the Closing Date.

     4.2 Seller’s Closing Documents. On the Closing Date, Seller shall execute and deliver to Buyer the following (collectively, “Seller’s Closing Documents”), all in form and content reasonably satisfactory to Buyer:

          (a) Deed. A Warranty Deed in the form attached as Exhibit A to this Agreement conveying the Property to Buyer, free and clear of all encumbrances, except the Permitted Encumbrances.

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          (b) Bill of Sale. A Bill of Sale in the form attached as Exhibit B to this Agreement conveying the Personal Property to Buyer without warranty (but free and clear of any liens).

          (c) Assignment of Contracts and Intangibles. Two (2) counterpart Assignment of Contracts and Intangibles in the form attached as Exhibit C to this Agreement conveying Seller’s interest in such documents to Buyer (the “General Assignment”).

          (d) PSB Lease. Two (2) counterpart leases by and between Buyer, as landlord, and Panhandle State Bank, an Idaho state bank (“PSB”), as tenant, in the form attached as Exhibit D to this Agreement (the “PSB Lease”).

          (e) CTA Assignment. Three (3) counterpart lease assignment and subordination agreements in the form attached as Exhibit E to this Agreement (the “CTA Assignment”) executed by between Seller, PSB, and CTA, Inc., a Montana corporation.

          (f) FIRPTA Affidavit. A non-foreign affidavit, properly executed, containing such information as is required by Internal Revenue Code Section 1445(b)(2) and its regulations.

          (g) IRS Forms. A Designation Agreement designating the “reporting person” for purposes of completing Internal Revenue Form 1099 and, if applicable, Internal Revenue Form 8594.

          (h) Other Documents. All other documents reasonably determined by Buyer or the Title Company to be necessary to effectuate the transfer the Property to Buyer.

     4.3 Buyer’s Closing Documents. On the Closing Date, Buyer will execute and deliver to Seller the following (collectively, “Buyer’s Closing Documents”):

          (a) Purchase Price. Funds representing the Purchase Price, in cash or by wire transfer.

          (b) General Assignment. Two (2) counterpart General Assignments executed by Buyer.

          (c) PSB Lease. Two (2) counterparts of the PSB Lease executed by Buyer, as landlord, and PSB, as tenant.

          (d) CTA Assignment. Three (3) counterpart CTA Assignments executed by Buyer.

          (e) IRS Form. A Designation Agreement designating the “reporting person” for purposes of completing Internal Revenue Form 1099 and, if applicable, Internal Revenue Form 8594.

          (f) Other Documents. All other documents reasonably determined by Seller or the Title Company to be necessary to effectuate the transfer the Property to Buyer.

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     4.4 Buyer’s Conditions Precedent. The obligation of Buyer to consummate the conveyance of the Property hereunder is subject to the satisfaction of each of the following conditions precedent:

          (a) The representations and warranties of Seller contained in Section 7.1 above shall be true on and as of the Closing Date as if the same were made on and as of that date.

          (b) Seller shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by Seller prior to or on the Closing Date.

          (c) Buyer’s timely approval or deemed approval of all contingencies referred to in Section 3.1.

          (d) Buyer’s receipt of written confirmation from the Title Company that the Title Policy shall issue concurrently with, and as of, the Closing Date with no exceptions other than the PSB Lease and the Permitted Exceptions.

     4.5 Seller’s Conditions Precedent. The obligation of Seller to consummate the conveyance of the Property hereunder is subject to the satisfaction of each of the following conditions precedent:

          (a) The representations and warranties of Buyer contained in Section 7.4 shall be true on and as of the Close of Escrow as if the same were made on and as of that date.

          (b) Buyer shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by Buyer prior to or on the Close of Escrow.

          (c) There shall not have been filed by or against Buyer at any time prior to the Close of Escrow any voluntary bankruptcy, reorganization or arrangement petition.

SECTION 5 — CLOSING COSTS AND PRORATIONS

     Seller and Buyer agree to the prorations and allocation of costs as set forth in this Section 5. Unless otherwise provided below, the following are to be adjusted and prorated between Seller and Buyer as of 12:01 A.M., Pacific Time, on the Closing Date, based upon a 365 day year, and the net amount thereof shall be added to (if such net amount is in Seller’s favor) or deducted from (if such net amount is in Buyer’s favor) the Purchase Price payable at Closing:

     5.1 Title Insurance and Closing Fee. Seller will pay all costs of the Title Commitment, and the portion of the premium for Buyer’s title insurance policy attributable to ALTA standard coverage, together with any endorsements which Seller consents to provide in order to remedy any of Buyer’s title objections. Buyer will pay all additional premiums required for extended coverage, endorsements, or the issuance of any mortgagee’s title policy. Seller and Buyer will each pay one-half (1/2) of any closing fee or charge imposed the Title Company.

     5.2 Real Estate Taxes and Special Assessments. [Intentionally omitted].

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SECTION 6 — TITLE EXAMINATION

     Buyer’s title examination will be conducted as follows:

     6.1 Title Commitment and Survey. Buyer acknowledges its receipt of: (a) a commitment (“Title Commitment”) for an ALTA Form 2006 Owner’s Policy of Title Insurance insuring title to the Property in the amount of the Purchase Price, issued by the Title Company, and (b) a current, ALTA/ACSM survey of the Property prepared by J-U-B Engineers, Inc. (the “Survey”), and certified to Buyer.

     6.2 Buyer’s Objections. If Buyer has any objections to the form and/or contents of the Title Commitment or the Survey (“Objections”), Buyer will give written notice of such Objections to Seller on or before the Contingency Date. Buyer’s failure to provide written notice of the Objections within such time period will constitute waiver of the Objections. The PSB Lease and any matter shown on the Title Commitment and not objected to by Buyer shall be a “Permitted Encumbrance” hereunder. Seller will have five (5) days after receipt of the Objections to cure the Objections, during which period the Closing will be postponed, if necessary. Seller shall use its best efforts to correct any Objections. If the Objections are not cured within such 5-day period, Buyer will have the option to either: (a) terminate this Agreement; or (b) waive the Objections and proceed to close. Buyer hereby objects to, and Seller hereby agrees to remove, all deeds of trust, mechanics’ liens, judgments and other monetary liens against the Property (except non-delinquent real property taxes).

     6.3. Supplemental Commitments; Objections. Seller shall cause the Title Company to provide to Seller and Buyer supplemental reports to the Title Commitment (together with copies of any underling exceptions identified therein) covering any additions or deletions from the date of the Title Commitment through the Closing Date. Buyer shall have five (5) business days following the receipt of a supplemental report to notify Seller in writing of its disapproval of any exception contained in that supplemental report; if Buyer’s disapproval of any supplemental report exception is not so communicated to Seller, the exception shall be considered a Permitted Encumbrance.

SECTION 7 — REPRESENTATIONS AND WARRANTIES

     7.1 Seller’s Representations and Warranties. Seller represents and warrants to Buyer as follows:

          (a) Seller is a corporation duly organized and validly existing under the laws of the State of Idaho. Execution of this Agreement by Seller and its delivery to Buyer have been duly authorized by its respective members, and no further action is necessary on the part of Seller to make this Agreement fully and completely binding upon Seller in accordance with its terms. The execution, delivery, and performance of this Agreement will not conflict with or constitute a breach or default under the organizational documents of Seller or, to Seller’s knowledge, (i) any material instrument, contract, or other agreement to which Seller is a party which affects the Property; or (ii) any statute or any regulation, order, judgment, or decree of any court or governmental authority.

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          (b) Seller is not a “foreign person”, “foreign partnership”, “foreign trust” or “foreign estate”, as those terms are defined in Section 1445 of the Internal Revenue Code.

          (c) There is no action, litigation, investigation, condemnation or proceeding of any kind pending or to the best knowledge of Seller threatened against Seller or any portion of the Property which would prevent Seller from performing its obligations under this Agreement. Seller has not commenced any claim, suit, action or other proceeding of any kind against a third party with respect to the Property.

          (d) Seller is the sole fee owner of the Property and has good and marketable title thereto.

          (e) Seller has obtained, or will obtain before Closing, all licenses, permits, and approvals of any governmental authorities necessary for the operation of an office building on the Property. No violations are or have been recorded in respect of any such licenses or permits and, to Seller’s knowledge, no proceedings are pending or threatened in writing, concerning the revocation or limitation of any such license or permit. There is no governmental or public action, pending or threatened in writing that would limit or affect operation of the Property.

          (f) Seller has not received written notice of any violation of any statute, law, ordinance, or regulation of any governmental authority that would require remedial action by Seller or would require repairs or alterations to the Property.

          (g) There is no pending or, to Seller’s knowledge, threatened condemnation affecting the Property. There is no pending or, to Seller’s knowledge, threatened proceeding that would adversely affect access to the Property.

          (h) Seller has not caused or with knowledge allowed the use, generation, manufacture, production, treatment, storage, release, discharge, or disposal of any Hazardous Materials (as defined below) on, under, or about the Property and has not caused or allowed the transportation of any Hazardous Materials to or from the Property. Seller has not received any notice of violation, administrative complaint, judicial complaint, or other notice (i) alleging that conditions on the Property are or have been in violation of any Environmental Law (as defined below), (ii) informing Seller that the Property is subject to investigation or inquiry regarding the presence of Hazardous Materials on or about the Property or (iii) alleging the potential violation of any Environmental Law.

          (i) To the best of Seller’s knowledge, all documentation provided to Buyer under this Agreement is true, correct, and complete in all material respects.

          (j) Seller is not a party to any written sales contract, option agreement, right of first refusal agreement, or other contract or agreement providing for the sale or other conveyance of the Property, or any portion thereof, except for this Agreement.

          (k) Seller is not in default under any agreement, lease or contract concerning the Property to which Seller is a party, and, to Seller’s knowledge, there exists no event, condition, or occurrence which, after notice or lapse of time, or both, would constitute such a

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default by Seller of any of the foregoing. Seller has furnished or made available to Buyer true and correct copies of all documents described in exhibits to this Agreement.

          (l) No real estate, mortgage broker or any other commissions are owed in connection with the sale of the Property to Buyer, or in connection with any other transaction affecting the Property.

     7.2 Seller’s Indemnity. Seller will indemnify Buyer, its successors and assigns, against, and will hold Buyer, its successors and assigns, harmless from, any expenses or damages, including reasonable attorneys’ fees, that Buyer incurs because of the breach of any of the above representations and warranties, whether such breach is discovered before or after Closing.

     7.3 Seller’s Knowledge. Wherever herein a representation is made “to the best knowledge of Seller”, such representation is limited to the actual active knowledge of Seller’s Chief Financial Officer, Douglas M. Wright, without duty of investigation or inquiry. Seller hereby represents that such individual is the person affiliated with the Seller who is most involved with the operation, management, and leasing of the Property, and is most likely to have knowledge about the Property.

     7.4 Buyer’s Representations and Warranties. Buyer represents and warrants to Seller as follows:

          (a) Buyer is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Idaho. Execution of this Agreement by Buyer and its delivery to Seller have been duly authorized by its respective members, and no further action is necessary on the part of Buyer to make this Agreement fully and completely binding upon Buyer in accordance with its terms. The execution, delivery, and performance of this Agreement will not conflict with or constitute a breach or default under the organizational documents of Buyer or, to Buyer’s knowledge, (i) any material instrument, contract, or other agreement to which Buyer is a party which affects the Property; or (ii) any statute or any regulation, order, judgment, or decree of any court or governmental authority.

          (b) There is no action, litigation, investigation, condemnation or proceeding of any kind pending or to the best knowledge of Buyer threatened against Buyer which would prevent Buyer from paying and performing its obligations under this Agreement.

     7.5 Buyer’s Indemnity. Buyer will indemnify Seller, its successors and assigns, against, and will hold Seller, its successors and assigns, harmless from, any expenses or damages, including reasonable attorneys’ fees, that Seller incurs because of the breach of any of the above representations and warranties, whether such breach is discovered before or after Closing.

     7.6 Buyer’s Acknowledgement. Buyer acknowledges that Buyer has or will have had before the expiration of the inspection period set forth in Section 3 adequate opportunity to become fully acquainted with the nature and condition, in all respects, of the Property, including but not limited to zoning, access, visibility, signage, and the condition of Seller’s title thereto, the existence or availability of all permits and approvals from governmental authorities, the soil and

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geology thereof and the manner of construction and the condition and state of repair or lack of repair of any improvements to the Property.

     7.7 Property Sold As Is. As a material inducement to the execution and delivery of this Agreement by Seller and the performance by Seller of its duties and obligations hereunder, Buyer hereby acknowledges, represents, warrants, and agrees to and with Seller that:

          (a) Buyer is expressly purchasing the Property in its existing condition, “AS IS, WHERE IS, AND WITH ALL FAULTS” with respect to any and all facts, circumstances, conditions and defects relating to the Property;

          (b) Seller has no obligation to repair or correct any such facts, circumstances, conditions or defects or to compensate Buyer for same;

          (c) Seller has specifically bargained for the assumption by Buyer of all responsibility to inspect and investigate the Property and of all risk of adverse conditions and has structured the purchase price in consideration thereof;

          (d) Buyer has, or will have before satisfaction of the contingencies set forth in Section 3.1, undertaken all such physical and/or legal inspections and examinations of the Property as Buyer deems necessary or appropriate under the circumstances as to the condition of the Property and the suitability of the Property for Buyer’s intended use, and based upon same, Buyer is and will be relying strictly and solely upon such inspections and examinations and the advice and counsel of its own agents; and

          (e) except as expressly set forth elsewhere in this Agreement, Seller is not making and has not made any representations or warranties with respect to the physical condition or any other aspect of all or any part of the Property as an inducement to Buyer to enter into this Agreement and thereafter to purchase the Property, or for any other purpose.

     7.8 Hazardous Materials; Compliance With Laws. Without limiting the generality of the foregoing but expressly subject to Seller’s representations set forth in Section 7.1 above and Seller’s obligation to indemnify Buyer pursuant to Section 7.2 above, Buyer specifically agrees that Seller shall have no liability to Buyer and Buyer hereby waives any right to recourse against Seller, whether arising at law or in equity, under contract, tort law, or statute (specifically including any laws regulating Hazardous Materials (defined below)) with respect to:

          (a) the presence or absence of defects or other adverse circumstances related in any way to the Property or improvements thereon;

          (b) the condition of the soil;

          (c) the existence or non-existence Hazardous Materials;

          (d) any past use of the Property;

          (e) any legal or other restriction of the Property;

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          (f) the economic feasibility of the Property; or

          (g) the Property’s compliance or non-compliance with all laws, rules, or regulations affecting the Property, including, without limitation, all Environmental Laws (defined below) and the requirements of the Americans with Disabilities Act, and the Fair Housing Amendments Act, or any similar state or local statutes, ordinances, or regulations.

As used in this Agreement, the term “Hazardous Material” shall mean any substance or material now or hereafter defined or regulated as a Hazardous Material, hazardous waste, toxic substance, pollutant, or contaminant under any Environmental Law, including, without limitation, petroleum, petroleum by-products, and asbestos. As used in this Agreement, the term “Environmental Law” shall mean any federal, state, or local law, regulation or ordinance governing any substances that could cause actual or suspected harm to human health or the environment.

     7.9 Waiver. Consummation of the transactions contemplated under this Agreement by Buyer with actual knowledge of any breach by Seller of the representations and warranties set forth herein shall constitute a waiver and release by Buyer of any claims due to such breach.

SECTION 8 — COVENANTS OF SELLER

     8.1 Normal Operations. Until the Closing Date, Seller shall continue to operate the Property in substantially the same manner as in the past and will make all required repairs and perform all necessary maintenance to the Property.

     8.2 Management. Seller, or Seller’s agent or management company, shall continue to manage the Property until Closing.

     8.3 Insurance. Until Closing, Seller shall maintain substantially the same liability. casualty, and all other insurance on the Property as is in effect as of the Effective Date.

     8.4 Further Assurances. For a reasonable time subsequent to Closing, Seller shall execute and deliver such further instruments of transfer and shall take such other actions as Buyer, its counsel or lender may reasonably request in order to effectively transfer the Property to Buyer and complete all of the transactions contemplated by this Agreement.

SECTION 9 — CASUALTY; CONDEMNATION

     If all or any part of the Property is substantially damaged by fire, casualty, the elements or any other cause, Seller shall immediately give notice to Buyer, and Buyer shall have the right to terminate this Agreement by giving notice within ten (10) days after Seller’s notice. If Buyer shall fail to give the notice, then the parties shall proceed to Closing, and Seller shall assign to Buyer all rights to insurance proceeds resulting from such event and credit Buyer for any insurance deductible. If eminent domain proceedings are threatened or commenced against all or any part of the Real Property, Seller shall immediately give notice to Buyer, and Buyer shall have the right to terminate this Agreement by giving notice within ten (10) days after Seller’s notice. If Buyer shall fail to give the notice, then the parties shall proceed to Closing, and Seller shall assign to Buyer all rights to appear in and receive any award from such proceedings.

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SECTION 10 — ASSIGNMENT

     Except as set forth in Section 14 below, Buyer may not assign its rights under this Agreement without the prior written consent of Seller, which consent shall not be unreasonably withheld; provided, however, Buyer may assign this Agreement without Seller’s consent (but with prior written notice) to any affiliated entity. Notwithstanding anything herein to the contrary, any such assignment will not relieve such assigning party of its obligations under this Agreement until the Closing.

SECTION 11 — NOTICES

     Any notice required or permitted hereunder shall be given by personal delivery upon an authorized representative of a party hereto; or if mailed by United States registered or certified mail, return receipt requested, postage prepaid; or if transmitted by facsimile copy (as verified with electronic confirmation); or if deposited cost paid with a nationally recognized, reputable overnight courier, properly addressed as follows:

If to Seller:	Intermountain Community Bancorp
	801 W Riverside, Suite 400
	Spokane, WA 99201
	Attn: Douglas M. Wright
	Fax #: (509)363-0640
w/ copy to:	Alston, Courtnage & Bassetti LLP
and to:	Kane Corporation
If to Buyer:	Sandpoint Center, LLC
	Sandpoint Center II, LLC
w/ copy to:	Lukins & Annis, P.S.

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Notices shall be deemed effective on the earlier of the date of receipt or the date of deposit, as aforesaid; provided, however, that if notice is given by deposit, the time for response to any notice by the other party shall commence to run one business day after any such deposit. Any party may change its address for the service of notice by giving notice of such change three (3) days prior to the effective date of such change.

SECTION 12 — REMEDIES

     If Seller fails without legal excuse to complete the sale of the Property, Buyer may, as its sole and exclusive remedy, terminate this Agreement, receive a refund of the Earnest Money, together with the sum of Two Hundred Fifty Thousand Dollars ($250,000.00) as liquidated damages from Seller. In no event shall Buyer have any claim for specific performance hereunder. Buyer’s remedies are cumulative and the exercise of one remedy by Buyer will not preclude the exercise of any other remedies.

     If Buyer fails without legal excuse to complete the purchase of the Property, Seller may, as its sole and exclusive remedy, terminate this Agreement by written notice delivered to Buyer in which case the Earnest Money shall be forfeited to Seller as liquidated damages. In no event shall Seller have any claim for specific performance hereunder. In any suit, action or appeal therefrom, to enforce this Agreement or any term or provisions hereof, or to interpret this Agreement, the prevailing party shall be entitled to recover its costs incurred therein, including reasonable attorneys’ fees.

Seller’s Initials:                               Buyer’s Initials:                     ;                     

SECTION 13 — TAX DEFERRED EXCHANGE

     Buyer may, at its option, elect to purchase the Property as part of a tax deferred exchange under Section 1031 of the Internal Revenue Code and may (notwithstanding the provisions of Section 10 above), assign this Agreement to one or more third party exchange intermediaries for the purpose of effecting the exchange. Seller agrees to cooperate with Buyer in effecting such exchange provided that Seller shall not be required to incur any cost or liability as a result of such cooperation. The failure of the exchange to qualify as an exchange under Section 1031 shall not constitute grounds for rescission by either party and shall not be deemed to be a failure of consideration.

SECTION 14 — GENERAL PROVISIONS

     14.1 Entire Agreement. This Agreement contains the entire understanding between the parties and supersedes any prior understandings and agreements between them respecting the subject matter hereof. There are no other representations, agreements, arrangements or understandings, oral or written, between the parties hereto, relating to the subject matter of this Agreement. No amendment of or supplement to this Agreement shall be valid or effective unless made in writing and executed by the parties hereto.

     14.2 Construction. The headings and subheadings throughout this Agreement are for convenience and reference only and the words contained in them shall not be held to expand,

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modify, amplify or aid in the interpretation, construction or meaning of this Agreement. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identification of the person or persons, firm or firms, corporation or corporations may require. All parties hereto have been represented by legal counsel in this transaction and accordingly hereby waive the general rule of construction that an agreement shall be construed against its drafter.

     14.3 Attorneys’ Fees. In the event of litigation between the parties hereto, declaratory or otherwise, in connection with or arising out of this Agreement, the prevailing party shall recover from the non-prevailing party all actual costs, actual damages and actual expenses, including attorneys’ fees and charges, paralegal and clerical fees and charges and other professional or consultants’ fees and charges expended or incurred in connection therewith, as set by the court, including for appeals, which shall be determined and fixed by the court as part of the judgment.

     14.4 Additional Documents. Each party agrees to take such actions and to execute, acknowledge and deliver any and all documents and instruments as may be reasonably requested by the other party to carry out the purposes of this Agreement more effectively.

     14.5 Binding. Subject to any limiting provisions otherwise set forth in this Agreement, this Agreement shall insure to the benefit of and be binding upon the successors and assigns of the parties hereto.

     14.6 Time of the Essence. Time is of the essence in each and every covenant and condition of this Agreement.

     14.7 Applicable Law and Venue. This Agreement shall be construed and interpreted under the laws of the State of Idaho. Any cause of action arising from or relating to this Agreement shall be brought in the Bonner County, Idaho, and the parties hereby waive any argument that such forum is not convenient.

     14.8 Counterparts; Facsimile Signatures. This Agreement may be executed in any number of counterparts and all counterparts shall be deemed to constitute a single agreement. The execution of one counterpart by any party shall have the same force and effect as if that party had signed all other counterparts. The signatures to this Agreement may be executed on separate pages and when attached to this Agreement shall constitute one complete document. This Agreement may be signed by facsimile, and each facsimile copy so signed shall be deemed an original hereof.

     14.9 Survival. All provisions of this Agreement having to do with indemnification, liens, remedies, notices, attorneys’ fees, and brokerage commissions shall survive any termination of this Agreement.

     14.10 Brokers . Each party represents and warrants to the other that it has not dealt with any other brokers, finders or the like in connection with this transaction, and agrees to indemnify and hold the non-indemnifying party harmless from all claims, damages, costs or expenses of or for any other such fees or commissions resulting from the indemnifying party’s actions or agreements regarding the execution or performance of this Agreement, and will pay all costs of

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defending any action or lawsuit brought to recover any such fees or commissions incurred by the non-indemnifying party, including reasonable attorneys’ fees. The provisions of this Section 14.10 shall survive the Closing.

     14.11 Extension of Time. If the date for any performance under this Agreement falls on a weekend or holiday, the time shall be extended to the next business day.

     14.12 Confidentiality. Buyer and Seller shall each maintain as confidential any and all material obtained about the other and, in the case of Buyer, about the Property, and shall not disclose such information to any third party, except as necessary for the performance of the parties’ obligations hereunder and the completion of the transactions described herein. This provision shall survive the Closing or any termination of this Agreement.

[Signatures on following page]

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     IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of the Effective Date.

SELLER:

INTERMOUNTAIN COMMUNITY BANCORP,
an Idaho corporation

Curt Hecker, Chief Executive Officer 

BUYER:

SANDPOINT CENTER, LLC, an Idaho limited liability company
By:
	Name:
	Title:

SANDPOINT CENTER II, LLC, an Idaho limited liability company
By:
	Name:
	Title:

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EX-10.2

Exhibit 10.2

LEASE AGREEMENT

by and between

SANDPOINT CENTER, LLC,
an Idaho limited liability company,
and SANDPOINT CENTER II, LLC,
an Idaho limited liability company

collectively, as “Landlord”

and

PANHANDLE STATE BANK,
an Idaho state charted bank

as “Tenant”

TABLE OF CONTENTS

			Page No.
SECTION 1 — FUNDAMENTAL TERMS				1
	1.1	Building		1
	1.2	Land		1
	1.3	Premises		1
	1.4	Commencement Date		1
	1.5	Base Term		1
	1.6	Extension Options		1
	1.7	Minimum Rent		1
	1.8	Use		1
	1.9	Notice Addresses		2
	1.10	Exhibits		2
SECTION 2 — PREMISES				2
	2.1	Lease to Tenant		2
	2.2	Condition of Premises		2
SECTION 3 — TERM				2
	3.1	Lease Term		2
	3.2	Extension Options		3
SECTION 4 — RENT				3
	4.1	Minimum Rent		3
	4.2	Payment of Minimum Rent		4
	4.3	Net Lease		5
SECTION 5 — TAXES AND UTILITIES; CAPITAL RESERVE ACCOUNT				5
	5.1	Real Property Taxes		5
	5.2	Payment in Installments		5
	5.3	Right to Contest		6
	5.4	Personal Property Taxes		6
	5.5	Utility Charges		6
	5.6	Assessments		6
	5.7	Capital Reserve Account		6
SECTION 6 — CONDUCT OF BUSINESS				7
	6.1	Use of Premises		7
	6.2	Liens and Encumbrances		7
	6.3	Hazardous Substances		7
	6.4	Signs		8
SECTION 7 — LETTER OF CREDIT				8
SECTION 8 — MAINTENANCE OF PREMISES				9
SECTION 9 — ALTERATIONS				10
SECTION 10 — SURRENDER OF PREMISES				10
	10.1	Condition of Premises		10
	10.2	Removal at Termination		10
SECTION 11 — INSURANCE AND INDEMNITY				10
	11.1	Liability Insurance		10
	11.2	Casualty Insurance		11

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			Page No.
	11.3	Insurance Policy Requirements		11
	11.4	Restoration of Damage		12
	11.5	Form of Insurance		12
	11.6	Indemnification		12
SECTION 12 — TRANSFER AND SUBLETTING				13
	12.1	Transfer		13
	12.2	Subleasing		13
	12.3	Sublease Recognition		13
	12.4	Recognition Agreement		15
	12.5	Landlord Put Right		15
SECTION 13 — EMINENT DOMAIN				15
	13.1	Substantial Taking		15
	13.2	Partial Taking		15
	13.3	Transfer in Lieu of Condemnation		16
SECTION 14 — DEFAULT				16
	14.1	Payment Default		16
	14.2	Non-Monetary Default		16
	14.3	Credit Default		16
SECTION 15 — REMEDIES				16
	15.1	Termination; Retake Possession		16
	15.2	Draw Upon Letter of Credit		17
	15.3	Damages for Default		17
	15.4	Continuation of Lease		17
	15.5	Receipt of Moneys		17
	15.6	No Waiver		18
	15.7	Tenant’s Late Payments; Late Charges		18
	15.8	Mitigation		18
SECTION 16 — ACCESS BY LANDLORD				18
SECTION 17 — SUBORDINATION; ESTOPPEL				19
	17.1	Subordination		19
	17.2	Estoppel		19
SECTION 18 — QUIET ENJOYMENT				19
SECTION 19 — TENANT FINANCING				19
SECTION 20 — MISCELLANEOUS				19
	20.1	Notices		19
	20.2	Successors or Assigns		20
	20.3	Brokerage Commissions		20
	20.4	Partial Invalidity		20
	20.5	Recording		20
	20.6	Holding Over		20
	20.7	Legal Expenses		20
	20.8	Force Majeure		20
	20.9	Authority		21
	20.10	Headings		21
	20.11	Gender		21
	20.12	Counterparts		21

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			Page No.
	20.13	Entire Agreement; Amendments		21
	20.14	Governing Law		21
SECTION 21 — PURCHASE OPTION				21
	21.1	Option to Purchase		21
	21.2	Title Report		21
	21.3	Purchase Price		22
	21.4	Closing Procedure		22

EXHIBITS

Exhibit A-1	Legal Description — Sandpoint Center
Exhibit A-2	Legal Description — Parking Lot
Exhibit B	Letter of Credit
Exhibit C	Memorandum of Lease

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LEASE AGREEMENT

     THIS LEASE AGREEMENT (“Lease”) is made as of the 28th day of August, 2009, by and between SANDPOINT CENTER, LLC, an Idaho limited liability company, and SANDPOINT CENTER II, LLC, an Idaho limited liability company, as tenants-in-common (collectively, “Landlord”), and PANHANDLE STATE BANK, an Idaho state charted bank (“Tenant”). For and in consideration of the mutual promises, covenants and conditions set forth in this Lease, Landlord and Tenant agree as follows:

SECTION 1 — FUNDAMENTAL TERMS

     The following definitions shall apply for purposes of this Lease, except as otherwise specifically modified herein:

     1.1 Building. That certain three-story commercial office building with an agreed area of 86,000 square feet commonly known as Sandpoint Center with the street address of 414 Church Street, Sandpoint, Idaho.

     1.2 Land. The “Land’’ consists of the following: (a) that certain parcel of real property upon which the Building is located which is more particularly described on the attached Exhibit A-1, and (b) the parking lot located at the corner of 5th and Pine Street, Sandpoint, Idaho, situated on the land more particularly described on the attached Exhibit A-2.

     1.3 Premises. The “Premises” consist of the Building and the Land, collectively.

     1.4 Commencement Date. Means the date that Landlord acquires fee title to the Premises.

     1.5 Base Term. Approximately twenty (20) years commencing on the Commencement Date and terminating on the last day of the twentieth (20th) Lease Year. See Section 3.1.

     1.6 Extension Options. Tenant shall have three (3) ten (10) year extension options. See Section 3.2.

     1.7 Minimum Rent. During the first five (5) Lease Years, Tenant shall pay annual minimum Rent in the amount of One Million Six Hundred Thirty Five Thousand and No/100ths Dollars ($1,635,000.00). See Section 4.1(a). Upon commencement of each Option Term, Minimum Rent shall be adjusted to current market rates. See Section 4.1(b). During the Term, Minimum Rent shall be adjusted every five (5) Lease Years (excluding the first Lease Year of any Option Period). See Sections 4.1(c) and (d).

     1.8 Use. Any lawful commercial or retail use, except as provided in Section 6.1.

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     1.9 Notice Addresses,

Landlord:	Sandpoint Center, LLC
and to:	Sandpoint Center II, LLC
Tenant:	Panhandle State Bank 414 Church Street P.O. Box 967 Sandpoint, ID 83864

     1.10 Exhibits. The following exhibits are made a part of this Lease:

          Exhibit A-1           Legal Description — Sandpoint Center

          Exhibit A-2           Legal Description — Parking Lot

          Exhibit B               Letter of Credit

          Exhibit C               Memorandum of Lease

SECTION 2 — PREMISES

     2.1 Lease to Tenant. Landlord hereby leases the Premises to Tenant, and Tenant hereby leases the Premises from Landlord, subject to and within the benefits of the terms and conditions of this Lease.

     2.2 Condition of Premises. Landlord has acquired the Premises from Tenant’s affiliate, Intermountain Community Bancorp, an Idaho corporation (“ICB”). Tenant has occupied the Premises since March, 2008, and is fully familiar with all aspects of the Premises. Accordingly, Tenant accepts the Premises in an “AS IS” condition, with all existing improvements suitable to Tenant, and subject to all applicable laws, ordinances, regulations, covenants and restrictions. Landlord will have no obligation to perform or pay for any repair or work within the Premises during the Term.

SECTION 3 — TERM

     3.1 Lease Term. The Base Term shall commence on the Commencement Date and shall terminate at midnight on the last day of the twentieth (20th) Lease Year (the “Expiration Date”). For purposes of this Lease, a “Lease Year” shall mean, in the case of the first Lease Year, the twelve (12) calendar months plus any partial month following the Commencement Date. Thereafter, a “Lease Year” shall be each successive twelve (12) month period following the expiration of the first Lease Year.

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     3.2 Extension Options. Provided Tenant has not been in material default beyond the expiration of any applicable notice and cure period of a monetary covenant or a material non-monetary covenant under this Lease more than five (5) times in any ten (10) year period, Tenant shall have the option to extend the Expiration Date for three (3) periods of ten (10) years each (each an “Option Period”). To exercise an available extension option Tenant must give Landlord written notice thereof (the “Option Notice”) not less than three hundred sixty (360) days prior to the Expiration Date (as the same may be extended). If Tenant timely exercises an available extension option, this Lease shall continue in effect as written, except that Minimum Rent payable upon commencement of the applicable Option Period shall be adjusted as provided for in Section 4.1(b) below. As used herein “Term” shall mean the Base Term and any exercised Option Periods.

SECTION 4 — RENT

     4.1 Minimum Rent.

          (a) Base Term. Tenant shall pay to Landlord at the address specified in Section 1.9, or at such other address as may be specified by Landlord from time to time, without notice, setoff or deduction whatsoever, as fixed annual minimum rent during the Base Term, the amounts set forth in Section 1.7 (“Minimum Rent”).

          (b) Option Periods. Tenant’s issuance of an Option Notice and Landlord’s receipt thereof shall be sufficient to make this Lease binding for the applicable Option Period without further act of the parties, who shall then be bound to take the steps required in the determination of the Minimum Rent as specified herein. The Minimum Rent for each Option Period shall be an amount equal to the fair market rental value of the Premises. In determining fair market rental, consideration shall be given to the then current market rate for similarly improved properties for uses comparable to the Tenant’s permitted use in the general vicinity of the Premises. If the parties do not agree upon the Minimum Rent by the date that is one hundred twenty (120) days prior to the Expiration Date (as the same may be extended) (the “Trigger Date"), then Minimum Rent shall be determined by arbitration. The parties shall select a mutually agreeable arbitrator within ten (10) days after the Trigger Date. The arbitrator selected must be a member of the American Institute of Real Estate Appraisers, or if it shall not then be in existence, a member of the most nearly comparable organization, and have a minimum of five (5) years experience in the Sandpoint, Idaho office leasing market, be licensed by the State of Idaho and not be affiliated with either party or involved in an active transaction in which either party is also involved. If the parties are unable to agree on an arbitrator within such 10-day period, then either party may seek appointment of an arbitrator by the Chief Judge of the District Court of County in which the Premises are located. Within thirty (30) days after the arbitrator’s appointment, each party shall submit its estimate of the fair market rental value of the Premises along with any documentary evidence that it may have supporting its estimate. Within fourteen (14) days after the arbitrator’s receipt of each party’s estimate and evidence, if any, the arbitrator shall select the estimate that he or she determines is closest to the actual fair market rental value of the Premises. The cost of the arbitrator shall be shared equally by Landlord and Tenant. In no event shall the Minimum Rent for the Option Period be less than the Minimum Rent payable prior to the Expiration Date (as the same may be extended).

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          (c) Adjustment at Sixth and Sixteenth Lease Years of Base Term and Sixth Lease Year of Option Periods. Effective as of the first day of the sixth (6th) and sixteenth (16th) Lease Years, and as of the first day of the sixth (6th) Lease Year of any exercised Option Period (each, an “Adjustment Date”) Minimum Rent will be determined by dividing the amount of Minimum Rent payable prior to the applicable Adjustment Date by the index number of the United States Department of Labor, Bureau of Labor Statistics U.S. Consumer Price Index, All Urban Consumers, All Items, U.S. City Average (the “CPI”) published for the calendar month that is five (5) years prior to the calendar month during which such Adjustment Date occurs, and then multiplying the resulting amount by the index number for the CPI published for the calendar month during which the Adjustment Date occurs. In the event that the CPI is not issued timely or is unavailable for any reason, it is agreed that the Tenant shall pay the incremental difference retroactively when, as and if, the CPI becomes available. If the CPI is no longer published, Landlord shall substitute a mutually agreed upon inflation index which most closely follows the CPI or which has replaced the CPI. No delay or failure by the Landlord to enforce this provision or any part thereof as to the Tenant, shall be deemed to be a waiver hereof or prevent any subsequent or other enforcement hereof. Notwithstanding anything herein to the contrary, (i) Minimum Rent following the first (1st) Adjustment Date and any Adjustment Date occurring during an Option Period shall never be less than one hundred and five percent (105%) or more than one hundred fifteen percent (115%) of the amount of Minimum Rent payable immediately prior to such Adjustment Date, and (ii) Minimum Rent following the second (2nd) Adjustment Date shall not be less than one hundred and five percent (105%) or more than one hundred ten percent (110%) of the amount of Minimum Rent payable immediately prior to such Adjustment Date.

          (d) Eleventh Lease Year Adjustment. Effective as of the first day of the eleventh (11th) Lease Year Minimum Rent will be determined by multiplying the amount of Minimum Rent payable in the tenth (10th) Lease Year by one hundred and fifteen percent (115%).

     4.2 Payment of Minimum Rent. Annual installments of Minimum Rent are due in advance on or before the first day of each Lease Year. Tenant shall make its first payment of Minimum Rent for the first Lease Year on the Commencement Date. Notwithstanding the foregoing, until the PSB Loan has been paid in full, Tenant shall pay to Landlord on the Commencement Date and each anniversary of the Commencement Date an amount equal to the amount of Minimum Rent payable for such Lease Year, minus the Annual Loan Payments for such Lease Year. During the remainder of the applicable Lease Year, Tenant shall pay, on behalf of Landlord, all regularly occurring principal, interest, and reserve payments when due to the holder of the PSB Loan; provided, however, that Tenant shall not be required to pay more than the amount of Minimum Rent due hereunder during any given Lease Year. For purposes of this Section 4.2:

          (a) “Annual Loan Payments” means, with respect to any given Lease Year, all payments of principal, interest, and other amounts (including, without limitation, reserve payments) which shall become due and payable under the PSB Loan Documents during such Lease Year (excluding, however, any amounts due at maturity or following acceleration of the PSB Loan).

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          (b) “PSB Loan” means that certain mortgage loan in the original principal amount of $21,080,000 from Panhandle State Bank to Landlord secured by a deed of trust with respect to the Property

          (c) “PSB Loan Documents” means, collectively, the promissory note, deed of trust, replacement reserve agreement and any other documents evidencing the PSB Loan.

     4.3 Net Lease. In addition to Minimum Rent Tenant shall pay to Landlord (or provided Tenant is not in default hereunder, directly to the appropriate third party, as applicable) all other sums that this Lease requires Tenant to pay (the “Additional Rent”). It is the intent and effect of this Lease that such rental paid by Tenant shall be an absolute net return to Landlord. Landlord shall not be responsible for payment of any existing or future costs, expense, charge, or premium under this Lease relative to the Premises leased to Tenant. As used herein the term “Rent” refers to both Minimum Rent and Additional Rent.

SECTION 5 — TAXES AND UTILITIES; CAPITAL RESERVE ACCOUNT

     5.1 Real Property Taxes. Commencing on the Commencement Date and continuing throughout the Term, Tenant will pay or cause to be paid, prior to delinquency, all real property taxes and assessments now or hereafter levied or assessed against the Premises (the “Taxes”). Notwithstanding the foregoing, Taxes shall not include (a) any inheritance, estate, succession, transfer, gift, franchise, or capital stock tax; (b) any gross or net income taxes of Landlord; or (c) any excise taxes imposed upon Landlord based upon gross or net rentals or other income received by it (collectively, the “Excluded Taxes”), unless the present method of assessment or taxation is changed so that the whole or any part of the taxes, assessments, levies or charges now levied, assessed or imposed on real estate and improvements thereon are changed or discontinued and as a substitute therefore, taxes, assessments, levies or charges are levied, assessed and/or imposed wholly or partially upon Landlord in the form of one or more of the Excluded Taxes, in which event Taxes will include the Excluded Taxes to the extent so levied, assessed or imposed. Taxes will be prorated between the parties for any partial year after the Commencement Date or at the expiration or other termination of this Lease. Tenant shall pay Taxes assessed against the Premises directly to the taxing authority prior to delinquency and shall provide Landlord with copies of paid tax receipts or other evidence of payment within ten (10) business days following such payment. If Tenant fails to pay any Taxes when required to be paid hereunder and that failure continues for more than five (5) business days after written notice from Landlord, then, in addition to any other remedies available to Landlord under this Lease, Landlord may pay such Taxes, in which event Tenant must immediately reimburse Landlord for the amount thus advanced by Landlord, together with the administrative charge and interest at the Default Rate on such sums as provided in Section 15.7. Any refunds, rebates and discounts received by Landlord in connection with such Taxes shall be credited against the next installment of Rent due hereunder.

     5.2 Payment in Installments. If the taxes or assessments are payable in installments, only installments coming due during the Term will be the responsibility of Tenant under this Lease. If either party’s consent is required to cause the bonding of any assessment or to contest any taxes, the party will not unreasonably withhold or delay its consent upon request.

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     5.3 Right to Contest. Tenant will be permitted to contest any tax, assessment, lien or other charge on the Premises claimed or asserted by any party if a good faith dispute exists as to the amount or the obligation to pay. If the Premises are subjected to a lien as a result of nonpayment, Tenant shall provide Landlord with adequate security or assurances reasonably acceptable to Landlord that Tenant can and will satisfy the lien before enforcement against the Premises. Any contest pursued by Tenant shall be completed at no cost or expense to Landlord.

     5.4 Personal Property Taxes. Tenant shall pay, before delinquency, all personal property taxes assessed against its leasehold improvements, equipment, furniture, fixtures, inventory and any of its personal property in, on or about the Premises.

     5.5 Utility Charges. Tenant is responsible for all utility charges from and after the Commencement Date and agrees to pay, prior to delinquency, all charges for electricity, gas, water, sewage and/or all other public and private service charges used in the Premises. Landlord will not be liable for (and Tenant waives and releases Landlord from any claims arising in connection with) any interruption, failure or unavailability of any utility services to the Premises.

     5.6 Assessments. Tenant shall pay all assessments and other amounts required to be paid with respect to the Premises under any documents of record as of the Effective Date or as to which this Lease is otherwise subject. Such amounts will be paid and, as applicable, prorated in the manner and at the times and otherwise as such amounts would be required to be paid under Section 5.1 if such amounts were Taxes and will be subject to Landlord’s remedies as set forth in such section or elsewhere in this Lease to the same extent as though such amounts were Taxes.

     5.7 Capital Reserve Account. Subject to Section 4.2 above, Commencing on the first day of the eleventh (11th) Lease Year, and continuing on the first day of every Lease Year until the twentieth (20th) Lease Year, Tenant shall remit the sum of Fifty Thousand Dollars ($50,000.00) to Landlord to be held by Landlord as a capital reserve account (the “Capital Reserve Account”) for the future payment of costs and expenses which may be incurred by Landlord following the Term for the replacement of roofs, chimneys, gutters, downspouts, paving, curbs, ramps, driveways, balconies, porches, patios, exterior walls, exterior doors and doorways, windows, elevators and mechanical and HVAC equipment. Notwithstanding Tenant’s funding of the Capital Reserve Account, Tenant shall not be relieved of its obligation to repair and maintain the Premises as provided herein at its sole cost and expense throughout the Term without any use of the funds held in the Capital Reserve Account, and Tenant shall at no time have any claim to or interest in the funds held in the Capital Reserve Account to compensate or otherwise reimburse Tenant for making repairs or replacements required of Tenant hereunder. Upon the expiration of the Term, Landlord shall retain the Capital Reserve Account for purposes of making capital improvements or replacements on the Property. Notwithstanding the forgoing, if Tenant exercises its first option to extend the Lease Term under Section 3.2 above, then Tenant shall be entitled to disbursements from the Capital Reserve Account to solely reimburse Tenant for the cost of replacement of capital items, which shall be previously approved by Landlord in writing (not to be unreasonably withheld, conditioned, or delayed), during the first Option Period. Funds shall be disbursed to Tenant upon presentation to Landlord of (a) copies of paid invoices, (b) lien waivers from Tenant’s contractor, if any, and (c) such other documentation as may be reasonably requested by Landlord. Landlord has no obligation to deliver any additional funds to Tenant for any repair or work within the Premises

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during the Term except for the funds in the Capital Reserve Account as specifically provided in this Section.

SECTION 6 — CONDUCT OF BUSINESS

     6.1 Use of Premises. Tenant may use the Premises for any lawful commercial or retail purpose, provided however, that the Premises shall not be used for: (a) an off-track betting, gaming or bingo establishment; (b) a flea market; (c) any use which produces fire, explosion or other damaging or dangerous hazard, including the storage, display or sale of explosives or fireworks; (d) an assembling, manufacturing, industrial, distilling, refining or smelting facility; (e) an animal raising operation; (f) a massage parlor; (g) an adult type bookstore or other establishment selling, renting, displaying or exhibiting pornographic or obscene materials (including without limitation: magazines, books, movies, videos, photographs or so called “sexual toys”) or providing adult type entertainment or activities (including, without limitation, any displays of a variety involving, exhibiting or depicting sexual themes, nudity or lewd acts; (h) a cemetery, crematorium, mausoleum, mortuary, funeral parlor or similar service establishment; (i) any use which will materially impair or reduce the value of the Premises; or (j) any other use prohibited by any document of record as of the Effective Date, or prohibited by any law or regulation of the City of Sandpoint, State of Idaho, or any other governmental entity having jurisdiction over the Premises. Tenant shall keep the Premises to be kept in good condition and repair and shall not commit or allow waste of the Premises. Except as provided in this Section, Tenant shall have sole rule making authority relative to the use of the Premises by Tenant, its subtenants, and their respective agents, employees, contractors, licensees, and invitees.

     6.2 Liens and Encumbrances. Tenant must pay or cause to be paid all costs for work done by it or caused to be done by it on, and for materials furnished to the Premises. Tenant shall keep the Premises free and clear of all liens and encumbrances arising or growing out of its use and occupancy of the Premises. Tenant agrees to and will indemnify, defend and save Landlord free and harmless against all charges, fees, fines, expenses, liabilities, suits, causes of action, costs, losses, damages and penalties of every kind and nature arising on account of claims of lien of laborers or material suppliers or others for work performed or materials or supplies furnished to the Premises. If any lien is filed against the Premises as a result of the action or inaction of Tenant or its employees, agents or contractors, Tenant shall within thirty (30) days of Landlord’s written demand therefor discharge such lien by payment or post a bond sufficient in amount to cause the lien to be removed of record or insured over. If Tenant, after thirty (30) days from receipt of Landlord’s written notice, fails to cause the lien to be discharged (by either payment or bonding), Landlord, in addition to any other remedies available to Landlord under this Lease, may cause such lien to be discharged (whether by payment, bonding or otherwise, at Landlord’s election), in which event Tenant must immediately reimburse Landlord for the amount thus advanced by Landlord, together with the administrative charge and interest at the Default Rate on such sums as provided in Section 15.7.

     6.3 Hazardous Substances. Tenant shall not keep any substances designated as, or containing components designated as, hazardous, dangerous, toxic, or harmful, and/or subject to regulation under any federal, state, or local law, regulation, or ordinance (“Hazardous Substances”) on or about the Building, the Land, or the Premises, except for such Hazardous Substances as may be used by Tenant in connection with its permitted use of the Premises and approved in advance by

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Landlord, but only if Tenant shall use, store and dispose of such in accordance with manufacturers’ and suppliers’ recommendations and all applicable laws, regulations and ordinances. Tenant shall indemnify, defend and hold Landlord harmless with respect to, any and all cleanup costs and any and all other charges, fees, fines, expenses, liabilities, suits, causes of action, costs, losses, damages and penalties of every kind and nature relating to or growing out of Tenant’s or its contractors, agents, employees, subtenants, guests or invitees use, storage, disposal, transportation, generation, release or sale of Hazardous Substances in, on, under, about or from the Premises. Tenant’s obligations under this Section 6.3 shall survive expiration or termination of this Lease.

     6.4 Signs. During the Term, Tenant may attach signage to the Building and erect signs upon any portion of the Premises. All signs shall be installed in a good and workmanlike manner, and in conformance with applicable laws in effect. Upon the expiration of the Term, Tenant shall remove all signs installed by Tenant upon the Premises, and Tenant shall repair any damage caused by such removal.

SECTION 7 — LETTER OF CREDIT

     Tenant shall deliver to Landlord concurrently with its execution of this Lease, as security for the payment and performance of Tenant’s covenants and obligations under this Lease, an original irrevocable standby letter of credit in the initial amount of Three Million Two Hundred Thousand and No/100ths Dollars ($3,200,000.00) (the “Letter of Credit”). Thirty (30) days following the commencement of the second (2nd) Lease Year and thirty (30) days following the commencement each Lease Year thereafter the required amount of the Letter of Credit shall be reduced as follows:

Lease Year:	Letter of Credit:
Second	$	2,634,000.00
Third	$	2,068,000.00
Fourth	$	1,502,000.00
Fifth	$	936,000.00
Sixth	$	511,000.00
Seventh	$	166,000.00
Eighth	$	0.00

     The Letter of Credit shall name Landlord as beneficiary, which Landlord may draw upon in accordance with the terms and conditions provided in this Lease. The Letter of Credit shall (i) be issued by the Federal Home Loan Bank of Seattle or such other commercial bank acceptable to Landlord in its sole discretion, (ii) have a term of not less than one (1) year which expires not less than thirty (30) days following the first day of each Lease Year, (iii) require that the issuing bank give Landlord written notice of the issuing bank’s election not to renew the Letter of Credit no later than thirty (30) days prior to the expiration thereof, and (iv) shall provide that Landlord may make partial and multiple draws thereunder, up to the face amount thereof. The Letter of Credit shall be in the form attached hereto as Exhibit B. and otherwise in form and content reasonably satisfactory to Landlord in its discretion, and shall provide for payment to Landlord upon the issuer’s receipt of a sight draft from Landlord together with a statement by Landlord that the requested sum is due and payable from Tenant to Landlord in

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accordance with the provisions of this Lease and certifying to the issuer of the Letter of Credit that Landlord has the right to draw on the Letter of Credit pursuant to this Lease.

     Until such time as the amount of the Letter of Credit is reduced to $0.00 in accordance with the preceding schedule, Tenant shall provide evidence of renewal of the Letter of Credit to Landlord at least thirty (30) days prior to the date the Letter of Credit expires. If Landlord draws on the Letter of Credit pursuant to the terms hereof, Tenant shall, within three (3) business days after such draw, replenish the Letter of Credit or provide Landlord with an additional letter of credit conforming to the requirement of this Section 7 so that the amount available to Landlord from the Letter of Credit(s) provided hereunder is the amount required under this Section for the applicable period. Tenant’s failure to deliver any replacement, additional or extension of the Letter of Credit within the time specified under this Lease shall entitle Landlord to draw upon the Letter of Credit then in effect. If Landlord liquidates the Letter of Credit as provided in the preceding sentence or for any other reason, unless an Event of Default by Tenant exists hereunder, Landlord shall hold the funds received from the Letter of Credit as security for Tenant’s performance under this Lease. Notwithstanding the foregoing, if an Event of Default exists at the time Landlord draws upon the Letter of Credit, the funds received from the Letter of Credit shall not be held as security for Tenant’s performance, and Landlord shall be entitled to those remedies set forth in Section 15.2 of this Lease.

     In the event that the bank issuing the Letter of Credit shall become insolvent or shall cease honoring letters of credit it has issued, then Tenant shall promptly obtain a Letter of Credit from some other commercial bank acceptable to Landlord, in Landlord’s sole discretion. Notwithstanding the foregoing, if Tenant fails to obtain a replacement Letter of Credit within thirty (30) days, then Tenant shall, upon Landlord’s written demand, provide Landlord with either a cash deposit or some other form of collateral acceptable to Landlord in its reasonable business judgment of an amount equal to the required amount of the Letter of Credit.

SECTION 8 — MAINTENANCE OF PREMISES

     Tenant shall keep the Premises, the Building, and any other improvements located thereon from time to time in a neat, clean, safe, sanitary condition, keep the glass of all windows and doors within the Premises clean and presentable and in good repair, and keep and maintain the Buildings in a good state of repair and in compliance with all applicable laws, consistent in all respects with a first class office building. Tenant will maintain and repair (or cause to be maintained and repaired) the walls, roof and all other structural components of the Building and will be responsible for all repair and maintenance of the interior and exterior portion of the Building, including but not limited to, all painting, electrical, plumbing and other utility systems, doors, glass and all of Tenant’s personal property. Tenant shall also be responsible for the maintenance, operation and repair of the landscaping, driveways, site improvements, curb cuts, parking lots, lighting, fences, signs, sidewalks on the Premises and all utility systems within the Building, including the cost of connection to the utility distribution systems. Tenant shall remove trash, snow and debris from the Premises and adjoining sidewalks and maintain them in a clean condition in a good state of repair and in compliance with all applicable laws.

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SECTION 9 — ALTERATIONS

     During the Term, signs, machinery and personal property may be installed and alterations and improvements may be made to the Premises without Landlord’s approval; provided that any such alterations and improvements shall be made in a good and workmanlike manner and in compliance with applicable laws and ordinances, including the limitations imposed by local building laws and governmental requirements. Landlord shall cooperate, at no cost to Landlord, if required to enable Tenant or any subtenant to obtain any permit, license, variance or other governmental approval required to make alterations or improvements to the Premises. Upon their construction or installation, all alterations, additions and improvements will become a part of the Premises and, unless replaced, will remain a part thereof and may not removed by Tenant upon the expiration or earlier termination of this Lease.

SECTION 10 — SURRENDER OF PREMISES

     10.1 Condition of Premises. Upon expiration of the Term or earlier termination on account of an Event of Default or other reason pursuant to this Lease: (a) Tenant shall deliver to Landlord possession of the Premises, in the condition this Lease requires, subject to any loss that this Lease does not require Tenant to restore or repair; (b) Tenant shall surrender any right, title, or interest in and to the Premises and deliver such evidence and confirmation thereof as Landlord reasonably requires; (c) Tenant shall deliver the Premises free and clear of all liens except liens that Landlord or any of its agents caused; (d) Tenant shall assign to Landlord, without recourse, and give Landlord copies or originals of, all assignable licenses, permits, contracts, warranties, and guarantees then in effect for the Premises; (e)the parties shall cooperate to achieve an orderly transition of operations from Tenant to Landlord without interruption, including delivery of such books and records (or copies thereof) as Landlord reasonably requires; (f) the parties shall adjust for Taxes and all other expenses and income of the Premises and any prepaid rent and shall make such payments as shall be appropriate on account of such adjustment in the same manner as in a sale of the Premises (but any sums otherwise payable to Tenant shall first be applied to cure any Event of Default); (g) the parties shall terminate any recorded Memorandum of Lease; and (h) Tenant shall assign to Landlord, and Landlord shall reimburse Tenant for, all utility and other service provider deposits for the Premises, provided however, that any deposits shall not be reimbursed and instead shall be assigned to Landlord in the event the sums on deposit are necessary to cure any Event of Default.

     10.2 Removal at Termination . Upon expiration or other termination of this Lease, Tenant shall remove, all of Tenant’s equipment, machinery, signs, fixtures, furnishings and other personal property. Tenant shall repair any damage caused by such removal. Any personal property left in, on or about the Premises by Tenant twenty (20) days after expiration or termination of this Lease shall conclusively be considered abandoned and Landlord will be entitled to use or dispose of it free of any interest of Tenant.

SECTION 11 — INSURANCE AND INDEMNITY

     11.1 Liability Insurance. During the Term, Tenant, at its cost, shall maintain commercial general liability insurance (including contractual liability and products and completed operations liability) with liability limits of not less than $2,000,000 per occurrence,

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and $3,000,000 annual aggregate, insuring against ail liability of Tenant and its authorized representatives arising out of or in connection with Tenant’s use and occupancy of the Premises. Landlord will be named as an additional insured, and the liability insurance will otherwise comply with Section 11.3 below.

     11.2 Casualty Insurance. During the Term, Tenant shall continuously maintain at its expense all risk property damage insurance against fire, windstorm, lightning, riot, civil commotion, malicious mischief, vandalism and those perils included from time to time in the standard extended coverage endorsement, on the Building, in an amount not less than the full replacement cost, subject to reasonable deductibles.

     11.3 Insurance Policy Requirements. All insurance provided under this Lease shall comply with the following:

          (a) Insurers. The policies shall be issued by insurance companies authorized to do business in the state of Idaho and having a claims paying financial strength rating equal to or better than “A” and financial size category of IX or better, based on the latest rating publication of Property and Casualty Insurers by A.M. Best Company (or its equivalent if such publication ceases to be published).

          (b) Insureds. Tenant’s liability insurance policies shall name Landlord and Landlord’s lender as an “additional insured”. Notwithstanding anything to the contrary in this paragraph, all property insurance proceeds shall be paid and applied as this Lease provides.

          (c) Primary Coverage. All policies shall be written as primary policies not contributing to or in excess of any coverage that Landlord may carry.

          (d) Contractual Liability. Tenant’s liability insurance policies shall contain contractual liability coverage, for Tenant’s indemnity obligations under this Lease, to the extent covered by customary contractual liability insurance coverage. Tenant’s failure to obtain such contractual liability coverage shall not relieve Tenant from any indemnity obligation under this Lease and will not be construed or interpreted in any way to restrict, limit or modify Tenant’s waiver, indemnification or other obligations or to in any way limit Tenant’s obligations under this Lease.

          (e) Notice to Landlord. All policies of insurance hereunder must contain a provision that the company writing the policy will give Landlord thirty (30) days notice in writing in advance of any cancellation or lapse or the effective date of any material change in the policy, including any reduction in the amounts of insurance

          (f) Deliveries to Landlord. On or before the Commencement Date, and no later than twenty (20) days before any such insurance expires or is cancelled, Tenant shall deliver to Landlord evidence of Tenant’s maintenance of all insurance this Lease requires (which may include, at Landlord’s direction, a certificate of insurance setting forth the coverage, the limits of liability, the carrier, the policy number and the expiration date), including any endorsement required to name Landlord and its lender as an additional insured pursuant to Section 11.3(b), and, in each case, providing coverage for at least one year from the date delivered.

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          (g) No Representation. Neither party makes any representation that the limits, scope, or forms of insurance coverage this Lease requires are adequate or sufficient. The amount of any insurance coverage under this Section 11 shall be subject to increase (but never decreased from the initial amounts set forth in this Section 11) at the commencement of each Option Period by such reasonable amount as the Landlord may request in writing for the purpose of reflecting increases in generally prevailing coverages for similar buildings, similarly situated, based upon the written advice of an independent insurance broker.

          (h) Waiver of Subrogation. Neither party shall be liable to the other for any loss or damage covered by any casualty insurance policy maintained by the other party or required to be maintained by a party hereunder, and there shall be no subrogated claim by one party’s insurance carrier against the other party arising out of any such loss or damage.

     11.4 Restoration of Damage. In the event of any casualty to the Building, Tenant shall promptly, at its expense and using any available insurance proceeds (or, if no or insufficient insurance proceeds are received by Tenant for any reason, using Tenant’s own funds), repair and restore the Premises to as nearly as practical their condition immediately prior to the damage or destruction, or such other condition as Landlord may approve in writing. Landlord may, at its option, condition disbursement of the proceeds on Landlord’s approval of such plans and specifications prepared by an architect satisfactory to Landlord, contractor’s cost estimates, architect’s certificates, waivers of liens, sworn statements of mechanics and materialmen, and such other evidence of costs, percentage of completion of construction, application of payments, and satisfaction of liens as Landlord may reasonably require. Minimum Rent shall not be abated.

     11.5 Form of Insurance. All policies which Tenant is required to maintain hereunder may be part of blanket coverage relating to various properties operated by Tenant.

     11.6 Indemnification.

          (a) To the fullest extent permitted by law, Tenant shall indemnity, defend and hold Landlord harmless from all losses, damages, fines, penalties, liabilities and expenses (including attorneys’ fees and other costs incurred in connection with such claims, regardless of whether claims involve litigation) resulting from (i) any actual or alleged injury to any person occurring in, on, or about the Premises; (ii) from any actual or alleged loss of or damage to any property attributed to Tenant’s operation or occupation of the Premises; (iii) or caused by or resulting from any act, error, omission or negligence of Tenant or any licensee, assignee, or concessionaire, or of any officer, agent, employee, guest or invitee of any such person in, on or about the Premises, including, but not limited to Tenant’s breach of its obligations hereunder or under applicable law.

          (b) Landlord shall indemnify, defend and hold Tenant, its respective officers, agents, employees and contractors, harmless from all losses, damages, fines, penalties, liabilities and expenses (including Tenant’s personnel and overhead costs and attorneys’ fees and other costs incurred in connection with such claims, regardless of whether claims involve litigation) resulting from any actual or alleged injury to any person or from any actual or alleged loss of or damage to any property attributed to the negligence or intentional misconduct of Landlord or any agent or employees of Landlord.

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          (c) Notwithstanding any of the foregoing, if losses, liabilities, damages, liens, costs and expenses so arising are caused by the concurrent negligence of both Landlord and Tenant, their employees, agents, invitees and licensees, the indemnifying party shall indemnify the other party only to the extent of the indemnifying party’s own negligence or that of its officers, agents, employees, guests or invitees. The indemnifications provided for in this Section 11.6 with respect to acts or omissions during the term of this Lease shall survive termination or expiration of this Lease, including any termination pursuant to Section 15.2 hereof. Tenant shall promptly notify Landlord of casualties or accidents occurring in or about the Premises. LANDLORD AND TENANT ACKNOWLEDGE THAT THE INDEMNIFICATION PROVISIONS OF THIS SECTION 11.6 WERE SPECIFICALLY NEGOTIATED AND AGREED UPON BY THEM.

SECTION 12 — TRANSFER AND SUBLETTING

     12.1 Transfer. Except as otherwise expressly provided in this Section 12.1 and in Section 12.2 below, Tenant may not convey, transfer, sell, assign, gift, hypothecate, mortgage, pledge, encumber or hypothecate (each, a “Transfer”) any interest in this Lease without the prior consent of Landlord, which shall not be unreasonably withheld, conditioned or delayed. Notwithstanding any other provisions of this Section 12.1, the following shall not be deemed a Transfer and Tenant shall not be required to obtain Landlord’s consent: (a) assignment of this Lease or sublease of the Premises to a corporation or entity that is: (i) a parent, subsidiary, affiliate or franchisor of Tenant; (ii) wholly owned by Tenant or Tenant’s parent corporation; (iii) a corporation or other entity with which Tenant merges; (iv) a result of a reorganization, or the surviving corporation or entity following a consolidation, merger or other corporate or business restructuring; (v) a purchaser of Tenant’s assets; or (b) a sale of less than fifty percent (50%) of Tenant’s membership interests or stock (each a “Permitted Transfer”). Any permitted transferee of all of Tenant’s interest hereunder shall expressly assume and agree to fully pay and perform all of Tenant’s obligations under this Lease arising or accruing from and after the date of such assignment. Tenant shall remain liable hereunder following any Transfer. Tenant shall provide written notice to Landlord of any Transfer of this Lease.

     12.2 Subleasing. Tenant may sublet all or any portion of the Premises at any time without Landlord’s consent, provided that such sublease is not entered into for the sole or primary purpose of thwarting, impairing or diminishing Landlord’s approval rights arising under Section 12.1. No sublease shall release Tenant from Tenant’s obligations under this Lease unless Landlord expressly agrees to such a release.

     12.3 Sublease Recognition. If Landlord elects to terminate this Lease due to the occurrence of an Event of Default, Landlord agrees to recognize any Material Sublease entered into by Tenant during the Term as a direct contract between Landlord and the subtenant. Such recognition shall be effective as of the date of the termination of this Lease (the “Recognition Date”), and Landlord shall not disturb the subtenant’s possession and occupancy of the sublet premises during the term of the Material Sublease. As used in this Lease the term “Material Sublease” means a sublease between Tenant, as sublandlord, and a third party, as subtenant, for all or a portion of the Premises which satisfies the following conditions:

          (a) The effective rent per square foot (based on rentable floor area) to be paid by the subtenant under the Material Sublease (including all minimum rent and additional rent)

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for the portion of the Building included within the Material Sublease (the “Sublease NNN/SF Rent”) on the Recognition Date equals or exceeds the applicable Master Lease NNN/SF Rent, and the Sublease NNN/SF Rent to become due on the Material Sublease throughout the remaining term of such Material Sublease will, at all times, equal or exceed the Master Lease NNN/SF Rent to become due under this Lease for such term. As used in this Lease the term “Master Lease NNN/SF Rent” means the amount of Minimum Rent payable hereunder during the proposed sublease term divided by the Building area set forth in Section 1.1 above.

          (b) The subtenant under the Material Sublease shall not have been in material default beyond the expiration of any applicable cure period of a monetary covenant or a material non-monetary covenant under the Material Sublease more than three (3) times in any ten (10) year period.

          (c) The Material Sublease shall not have a term (including available options) that extends beyond the Expiration Date.

          (d) The subtenant agrees in the Material Sublease that as of the Recognition Date it shall:

               (i) Attorn to and accept Landlord as its direct landlord under the Material Sublease for the remainder of the term under the Material Sublease; provided, however, subtenant shall agree that Landlord shall not be (A) liable for any previous act or omission by Tenant under any such sublease, (B) subject to any offset of rent that shall have accrued to any such subtenant against Tenant, (C) bound by any previous prepayment of rent made by any such subtenant to Tenant for more than the current month, or (D) liable to any such subtenant for any security deposit made by any such subtenant to Tenant unless Tenant pays such security deposit over to Landlord;

               (ii) Comply with the applicable terms and conditions of this Lease and perform all obligations of Tenant under this Lease with respect to the sublet premises; and comply with all the terms and conditions of the Material Sublease, and perform all of its obligations thereunder;

               (iii) Pay directly to Landlord the rent and all other amounts payable under the Material Sublease, when due thereunder;

          (e) As of the Recognition Date, the subtenant agrees in the Material Sublease that Landlord may communicate directly with and proceed directly against the subtenant, with or without notice to or the involvement of Tenant, to enforce all of the obligations of Tenant under this Lease or the obligations of subtenant under the Material Sublease with respect to the sublet premises;

          (f) If this Lease terminates due to the occurrence of an Event of Default, Tenant remains primarily liable for the performance of all of its agreements, covenants, obligations under this Lease (including, without limitation, the obligations to pay the full amount of Rent, and pay other sums, charges, and reimbursements set forth in this Lease), and any payment obligations that arise in connection with any act or omission of any subtenant.

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     12.4 Recognition Agreement. Upon Tenant’s request, Landlord shall execute and deliver an agreement in recordable form in favor of any subtenant under a Material Sublease which incorporates the terms of and conditions in Section 12.3 above together with such other commercially reasonable terms and conditions as may be requested by such subtenant and reasonably approved by Landlord. Landlord will not be required to enter into or negotiate a non-disturbance agreement with Tenant or any subtenant that is affiliated with Tenant. A copy of the signed or proposed sublease shall be delivered to Landlord concurrently with any request for a non-disturbance agreement.

     12.5 Landlord Put Right. In the event of any sale (or series of related sales or similar transactions) which results in either (i) the transfer of more than fifty percent (50%) of Tenant’s membership interests or stock or assets of Tenant or its parent, or (ii) the transfer of control of Tenant’s banking operations (each, a “Majority Sale”) to a state or federally chartered bank, bank holding company, financial holding company, credit union, or an affiliate of any of the foregoing, having assets of greater value than that of Tenant as of the time of such sale, Tenant hereby grants to Landlord the right to put the Premises to the Tenant (the “Put Right"). The parties hereby acknowledge and agree that the Put Right is an integral and inseparable part of this Lease, that the Put Right constitutes a substantial inducement for Landlord to enter into this Lease, and without the Put Right, Landlord would not enter into this Lease. Landlord may exercise the Put Right by giving written notice of Landlord’s election (the “Put Notice”) no later than the one hundred eightieth (180th) day following the closing of the Majority Sale. Upon the exercise of the Put Right, Tenant shall be obligated to purchase the Property from Landlord, and Landlord shall be obligated to sell the Property for the sum of Twenty Four Million Eight Hundred Thousand Dollars ($24,800,000.00). In the event that Landlord exercises its Put Right, the closing of the sale of the Premises shall take place on the same terms contained within Section 21.2 and Section 21.4, except that references to the “Option Notice” in such sections shall be deemed substituted to refer to the “Put Notice.” In the event Landlord fails to exercise its Put Right within the specified timeframe, Landlord’s Put Right shall cease and be of no further force or effect.

SECTION 13 — EMINENT DOMAIN

     13.1 Substantial Taking. If the entire Premises are condemned, or if such a substantial portion of the Premises, or means of access to an adjacent roadway or parking is taken which renders the Premises unsuitable for Tenant’s use, then this Lease shall terminate as of the date upon which possession is taken by the condemning authority. Tenant and Landlord will each be entitled to separately pursue any and all condemnation awards to which they may be legally entitled with respect to the Premises.

     13.2 Partial Taking. In the event of a partial taking by condemnation of the Premises, or means of access to an adjacent roadway or parking such that Section 13.1 does not apply, the net condemnation proceeds shall be made available to Tenant to make necessary repairs and alterations to the Premises (as appropriate) so as to permit Tenant to continue its operations and to restore the Premises or other property not so taken. Any net condemnation proceeds from the taking which are not used to repair, alter and restore the Premises shall belong to Tenant.

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     13.3 Transfer in Lieu of Condemnation. Any sale of all or any portion of the Premises to a purchaser with the power of eminent domain in the face of a threat or the probability of the exercise of the power shall be treated as a taking by condemnation.

SECTION 14 — DEFAULT

     An “Event of Default” means the occurrence of any one or more of the following:

     14.1 Payment Default. There shall exist a “Payment Default” should Tenant fail to make any Rent or other monetary payment due under this Lease (whether payable to Landlord or directly to another party entitled thereto) within ten (10) days after receipt of written notice of nonpayment.

     14.2 Non-Monetary Default. There shall exist a “Non-Monetary Default” should Tenant fail to comply with any term or condition or fulfill any obligation (other than the obligation to pay Rent) under this Lease within thirty (30) days after written notice by Landlord specifying the nature of the default with reasonable particularity (provided, if the default is of such a nature that it cannot be remedied fully within the 30-day period, Tenant shall be deemed to have cured the default if Tenant shall (a) advise Landlord in writing of Tenant’s intention to take all reasonable steps to cure such Non-Monetary Default, including explaining such steps and the reasonable time required to complete such steps; (b) duly commence such cure within such period, and then diligently prosecute such cure to completion; and (c) complete such cure within a reasonable time under the circumstances).

     14.3 Credit Default. There shall exist a “Credit Default” should any of the foregoing apply: (a) all of Tenant’s interest in the Premises is taken by execution or other process of law; (b) Tenant becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of Tenant’s creditors; (c) Tenant files a petition seeking relief under any section or chapter of the United Stated Bankruptcy Code (11 U.S.C. Section 101 et seq.), or under any similar law or statute of the United States or any state thereof (collectively, the “Bankruptcy Laws”); (d) Tenant is adjudged bankrupt or insolvent by any court of the United States or any state thereof; (e) a petition seeking an order for relief is filed against Tenant under any of the Bankruptcy Laws; or (f) a receiver or trustee (including, but not limited to, the Federal Deposit Insurance Corporation, or any agency thereof) is appointed for all or substantially all of the assets of Tenant.

SECTION 15 — REMEDIES

     Upon the occurrence of any Event of Default, Landlord will have the right to pursue and enforce any and all rights and remedies available to Landlord hereunder or at law or in equity, including, without limitation, the following:

     15.1 Termination; Retake Possession. Following an Event of Default, Landlord may (a) terminate Tenant’s right to possess the Premises by any lawful means, in which case this Lease and the Term shall terminate and Tenant shall immediately surrender possession to Landlord or (b) re-enter and retake possession of the Premises, with or without having terminated this Lease, and without thereby being liable for damages or trespass. No re-entry by Landlord, whether taken by summary proceedings or otherwise, shall absolve or discharge

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Tenant from liability under this Lease. Landlord may use the Premises for Landlord’s own purposes or relet it upon any reasonable terms in Landlord’s discretion without prejudice to any other remedies that Landlord may have by reason of Tenant’s default.

     15.2 Draw Upon Letter of Credit. Should an Event of Default occur, Landlord shall be entitled to immediately and without further notice to Tenant draw upon the entire sum then available under the Letter of Credit. All sums received by Landlord from the Letter of Credit shall be deemed to be immediately earned by Landlord, with Tenant having no further right or claim thereto. Such payment shall not be deemed a penalty, and unless specifically provided herein, shall not be credited against Minimum Rent or any other obligation of Tenant hereunder or held as security for Tenant’s obligations under this Lease. The parties hereby acknowledge and agree that the ability of Landlord to draw on and utilize the sums from the Letter of Credit as stated in this Section 15.2 is an integral and inseparable part of this Lease, that such terms have been specifically negotiated by the parties, that such right constitutes a substantial inducement for Landlord to enter into this Lease, and without such right, Landlord would not enter into this Lease. Notwithstanding anything herein to the contrary, if Landlord draws upon the Letter of Credit pursuant to this Section 15.2, the Letter of Credit proceeds shall be forfeited to Landlord as liquidated damages as Landlord’s sole and exclusive remedy for Tenant’s breach of this Lease, provided however, that the foregoing shall not limit Tenant’s indemnity obligations under this Lease, and Tenant’s obligation to indemnify Landlord pursuant to this Lease shall survive any termination of this Lease or acceptance of the sums received from the Letter of Credit as liquidated damages. In the event Landlord draws upon the Letter of Credit pursuant to this Section 15.2, Tenant shall remain in possession of the Premises and Tenant’s obligation to pay Rent hereunder shall be abated.

     15.3 Damages for Default. Whether or not Landlord retakes possession or relets the Premises, Landlord may following an Event of Default, recover all reasonable damages caused by the default (including, but not limited to unpaid Rent, and other costs and expenses to be borne by Tenant under this Lease, and reasonable attorneys’ fees relating to the default and reasonable costs of reletting, including real estate commissions). Landlord may sue periodically to recover damages as they accrue through the Expiration Date without barring a later action for further damages. Landlord may at any time bring an action for accrued damages plus damages for the remaining Term through the Expiration Date equal to the difference between the Rent specified in this Lease and the reasonable rental value of the Premises for the remainder of the Term, discounted to the time of judgment at the Default Rate. Notwithstanding anything to the contrary contained in this Lease. Rent shall not be accelerated except in case of a Payment Default.

     15.4 Continuation of Lease. Landlord may, at Landlord’s option, elect not to terminate this Lease, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event, Landlord shall be entitled to enforce all of Landlord’s rights and remedies under this Lease, including the right to terminate the Lease, retake possession and/or recover the rent and any other charges as they may become due under this Lease.

     15.5 Receipt of Moneys. No receipt of money by Landlord from Tenant after termination of this Lease, shall reinstate, continue, or extend this Lease or affect any notice

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theretofore given to Tenant, or waive Landlord’s right to enforce payment of any Rent payable or later falling due, or Landlord’s right to recover possession by proper remedy, except as this Lease expressly states otherwise, it being agreed that after service of notice to terminate this Lease or the commencement of suit or summary proceedings, or after final order or judgment for possession, Landlord may demand, receive, and collect any moneys due or thereafter falling due without in any manner affecting such notice, proceeding, order, suit or judgment, all such moneys collected being deemed payments on account of use and occupation or, at Landlord’s election, on account of Tenant’s liability.

     15.6 No Waiver. No failure by Landlord to insist upon strict performance of any covenant, agreement, term, or condition of this Lease or to exercise any right or remedy upon an Event of Default, and no acceptance of full or partial rent during continuance of any such Event of Default, shall waive any such Event of Default or such covenant, agreement, term, or condition. No covenant, agreement, term, or condition of this Lease to be performed or complied with by Tenant, and no Event of Default, shall be modified except by a written instrument executed by Landlord. No waiver of any Event of Default shall modify this Lease. Each and every covenant, agreement, term, and condition of this Lease shall continue in full force and effect with respect to any other then-existing or subsequent Event of Default of such covenant, agreement, term or condition of this Lease.

     15.7 Tenant’s Late Payments; Late Charges. If Tenant fails to make any payment to Landlord required under this Lease within ten (10) days after such payment is first due and payable, then in addition to any other remedies of Landlord, and without reducing or adversely affecting any of Landlord’s other rights and remedies, Tenant shall pay Landlord within ten (10) days after demand interest at the Default Rate on such late payment, beginning on the date such payment was first due and payable and continuing until the date when Tenant actually makes such payment. In addition, and without limiting any other rights or remedies of Landlord, Tenant shall pay Landlord, as additional rent, an administrative charge equal to the lesser of either Three Thousand Dollars ($3,000) or three percent (3%) of any payment that Tenant fails to pay within ten (10) days after such payment is first due and payable. Such administrative charge is intended to compensate Landlord for the inconvenience and staff time incurred by Landlord to handle the late or missed payment, shall not be deemed a penalty or compensation for use of funds, and shall not be credited against any other obligations of Tenant under this Lease.

     15.8 Mitigation. Following any Event of Default by Tenant under this Lease, Landlord shall, in each case, use reasonable efforts to relet the Premises upon commercially reasonable terms.

SECTION 16 — ACCESS BY LANDLORD

     Provided Landlord takes all reasonable measures to avoid interfering with Tenant’s (or any subtenant’s) use of the Premises, Landlord and its agents shall have the right to enter the Premises at any time upon reasonable prior notice to Tenant, to examine the same (including conducting an environmental audit and performing any testing or sampling as may be required by Landlord in its discretion), to show them to prospective purchasers, lenders or tenants.

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SECTION 17 — SUBORDINATION; ESTOPPEL

     17.1 Subordination. Unless otherwise designated by Landlord, this Lease shall be subordinate to all existing or future mortgages and deeds of trust on the Premises, and to any extensions, renewals or replacements thereof. As to any secured loan, Landlord agrees to deliver to Tenant, and Tenant agrees to sign and return within fifteen (15) business days of receipt, a commercially reasonable subordination, non-disturbance and attornment agreement in a form reasonably acceptable to Tenant and such Lender, which provides that so long as Tenant is not in default under this Lease beyond any applicable notice and cure period, Tenant’s occupancy of the Premises under this Lease will not be disturbed and Tenant will not be joined by the holder of any mortgage or deed of trust in any action or proceeding to foreclose thereunder, except for joinder where such is necessary for jurisdictional reasons. Tenant agrees to attorn to Landlord’s successor following any foreclosure sale or transfer in lieu thereof.

     17.2 Estoppel. Within fifteen (15) business days of Landlord’s request therefor, Tenant shall promptly execute and deliver to third parties designated by Landlord an estoppel certificate or letter in the form requested by Landlord or its Lender that correctly recites the facts with respect to this Lease and its existence, terms and status.

SECTION 18 — QUIET ENJOYMENT

     Tenant, upon fully complying with and promptly performing all of the terms, covenants and conditions of this Lease on its part to be performed, shall have and quietly enjoy the Premises free from claims arising by, through or under Landlord, but not otherwise, for the Term, if Tenant’s performance of such terms, covenants and conditions continues for such period, subject, however, to matters of record on the date hereof and to those matters to which this Lease may be subsequently subordinated in accordance with the terms hereof.

SECTION 19 — TENANT FINANCING

     Tenant shall have the right from time to time to grant and assign a mortgage or other security interest in all of Tenant’s personal property located within the Premises to its lenders in connection with Tenant’s financing arrangements, and any lien of Landlord against Tenant’s personal property (whether by statute or under the terms of this Lease) shall be subject and subordinate to such security interest. Landlord shall execute such documents as Tenant’s lenders may reasonably request in connection with any such financing

SECTION 20 — MISCELLANEOUS

     20.1 Notices. Any notices required in accordance with any of the provisions herein shall be in writing and delivered, sent by fax, overnight courier or mailed by registered or certified mail to Landlord and Tenant at the addresses set forth in Section 1.9, or to such other address as a party shall from time to time advise the other party by a written notice given in accordance with this Section 20.1. If Tenant is a partnership or joint enterprise, any notice required or permitted hereunder may be given by or to any one partner thereof with the same force and effect as if given by or to all thereof. If mailed, a notice shall be deemed received five (5) business days after the postmark affixed on the envelope by the United States Post Office.

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     20.2 Successors or Assigns. All of the terms, conditions, covenants and agreements of this Lease shall extend to and be binding upon Landlord, Tenant and their respective heirs, administrators, executors, successors and permitted assigns, and upon any person or persons coming into ownership or possession of any interest in the Premises by operation of law or otherwise, and shall be construed as covenants running with the land.

     20.3 Brokerage Commissions. Landlord represents and warrants to Tenant, that there are no claims for brokerage commissions or finder’s fees in connection with this Lease as a result of the contracts, contacts or actions of Landlord and Landlord agrees to indemnify Tenant and hold it harmless from all liabilities arising from an alleged agreement or act by Landlord (including, without limitation, the cost of counsel fees in connection therewith); such agreement to survive the termination of this Lease. Tenant represents and warrants to Landlord that there are no claims for brokerage commissions or finder’s fees in connection with this Lease as a result of the contracts, contacts or actions of Tenant, and Tenant agrees to indemnify Landlord and hold it harmless from all liabilities arising from any such claim arising from an alleged agreement or act by Tenant (including, without limitation, the cost of counsel fees in connection therewith); such agreement to survive the termination of this Lease.

     20.4 Partial Invalidity. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance is, to any extent, invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law.

     20.5 Recording. This Lease shall not be recorded, but the parties shall execute a memorandum of this Lease in the form attached as Exhibit C to this Lease which shall be recorded.

     20.6 Holding Over. If Tenant holds over after the end of the Term with Landlord’s prior written consent, such shall be as a tenancy from month to month on the terms and conditions set forth herein, which tenancy may be terminated by either party upon thirty (30) days written notice to the other party. Any holding over by Tenant after the expiration of the term hereof without Landlord’s prior written consent shall be deemed to be a tenancy at will, terminable at any time by Landlord at a rental rate equal to one hundred twenty-five percent (125%) of the rental rate in effect on the date of expiration of the Lease term, prorated on a daily basis, and otherwise on the terms, covenants and conditions of this Lease to the extent applicable.

     20.7 Legal Expenses. If either party consults an attorney in order to enforce this Lease or if any litigation arises in connection with the Lease, the prevailing party shall be entitled to reimbursement from the non-prevailing party for the prevailing party’s reasonable costs and attorneys’ fee, whether such costs and attorneys’ fees are incurred with or without litigation, in a bankruptcy court or on appeal.

     20.8 Force Majeure. Landlord and Tenant shall not be deemed in default hereof nor liable for damages arising from its failure to perform its duties or obligations hereunder if such is due to causes beyond its reasonable control, including, but not limited to, acts of God, acts of civil

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or military authorities, acts of terrorism, embargoes, fires, floods, windstorms, earthquakes, strikes, lockouts, boycotts or other labor disturbances, civil disturbances or commotion or war.

     20.9 Authority. Landlord and Tenant each represent and warrant to the other that it has the power and authority to enter into this Lease and that the person(s) signing this Lease on its behalf were duly authorized to do so.

     20.10 Headings. The headings in this Lease are for convenience only and do not in any way limit or affect the terms and provisions hereof.

     20.11 Gender. Wherever appropriate in this Lease, the singular shall be deemed to refer to the plural and the plural to the singular, and pronouns of certain genders shall be deemed to include either or both of the other genders.

     20.12 Counterparts. This Lease may be executed in counterparts, each of which shall be deemed an original, but which when taken together shall constitute one and the same instrument.

     20.13 Entire Agreement; Amendments. This Lease and the Exhibits attached hereto, and by this reference incorporated herein, set forth the entire agreement of Landlord and Tenant concerning the Premises, and there are no other agreements or understanding, oral or written, between Landlord and Tenant concerning the Premises. Any subsequent modification or amendment of this Lease shall be binding upon Landlord and Tenant only if reduced to writing and signed by them.

     20.14 Governing Law. This Lease shall be governed by, and construed in accordance with the laws of the State of Idaho.

SECTION 21 — PURCHASE OPTION

     21.1 Option to Purchase. Landlord hereby grants to Tenant the sole and exclusive option to purchase the Property on the terms and conditions set forth in this Section 21 (the “Option”). The parties hereby acknowledge and agree that this Option is an integral and inseparable part of this Lease, that the Option constitutes a substantial inducement for Tenant to enter into this Lease, and without the Option, Tenant would not enter into this Lease. Tenant may exercise the Option by giving written notice of Tenant’s election (the “Option Notice”) no earlier than the last day of the tenth (10th) Lease Year, and no later than one hundred eighty (180) days after the last day of the tenth (10th) Lease Year. Upon the exercise of the Option, Tenant shall be obligated to purchase the Property from Landlord, and Landlord shall be obligated to sell the Property for the price and in the manner set forth in this Section 21. In the event Tenant fails to timely exercise its Option, Tenant’s Option shall cease and be of no further force or effect.

     21.2 Title Report. Within fourteen (14) days after Tenant’s issuance of the Option Notice, Tenant shall obtain an ALTA Title Commitment from Sandpoint Title Insurance Company, Inc., or such other title insurance company designated by Tenant (the “Title Company^) showing no interest, encumbrance, lien or claim against the fee title to the Property (other than matters to be satisfied with the proceeds of sale), except for this Lease, any

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exceptions existing as of the Commencement Date, and such other exceptions approved or created by Tenant.

     21.3 Purchase Price. If Tenant exercises the Option, the “Purchase Price” for the Property shall be Twenty-Five Million Nine Hundred Sixteen Thousand and No/100ths Dollars ($25,916,000.00), which sum is to be paid in cash at Closing.

     21.4 Closing Procedure.

          (a) Closing Date. The closing of the sale of the Property shall occur on a date selected by Landlord and reasonably acceptable to Tenant, but in no event later than the date that is ninety (90) days after the date Tenant issues the Option Notice (the “Closing Date”); provided, however, that Landlord may elect to extend the Closing Date for sixty (60) days by giving Tenant written notice of Landlord’s election no later than fifteen (15) days prior to the then-scheduled Closing Date.

          (b) Prorations. At Closing, Rent shall be prorated as of the Closing Date.

          (c) Manner and Place of Closing. This transaction shall be closed in escrow by Title Company at its offices in Sandpoint, Idaho. Closing shall take place in the manner specified herein.

          (d) Closing. On the Closing Date the transaction will be closed as follows:

               (i) The prorations described above will be made and the parties shall be charged and credited accordingly.

               (ii) Landlord will convey the Property to Tenant by Warranty Deed in the same form as ICB conveyed the Property to Landlord (the “Deed”), free and clear of all liens and encumbrances except only those relating to this Lease or shown on the title report provided pursuant to Section 21.2 above (but not including any lien, deed of trust or mortgage created by or through Landlord or any affiliate of Landlord). Landlord will also execute and deliver a FIRPTA affidavit in form satisfactory to Tenant and Title Company. In no event shall Tenant’s cooperation with any lender of Landlord or Tenant’s execution of a Subordination and Nondisturbance Agreement, Estoppel or other instrument for any lender, lienholder or third party claiming through or under Landlord or any third person be deemed approval by Tenant of any such lien or matter to survive closing of the acquisition of the Property by Tenant.

               (iii) Landlord shall cause all secured parties with any UCC security interest and all other parties with any lien, claim, right, title or interest in or to all or any of the Property claiming through or under Landlord and not created by Tenant to release such security interest, lien, claim, right, title or other interest of record in a manner satisfactory to Tenant and Title Company.

               (iv) Tenant shall pay to Landlord the total Purchase Price for the Property in cash, adjusted for the charges and credits set forth above, with credit for any amounts owed Tenant.

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               (v) If Tenant so elects, Landlord shall cooperate with Title Company to issue to Tenant an ALTA owner’s title insurance policy insuring Tenant as the sole fee owner of the Property. Tenant shall pay any premium required by the Title Company for the issuance of an owner’s policy, or for any endorsement requested by Tenant in connection with Tenant’s acquisition of the Property.

               (vi) Any escrow fee shall be divided equally between the parties.

               (vii) Tenant shall pay any excise, stamp or transfer tax. No broker’s or finder’s fees shall be payable in connection with the sale transaction, and each party shall hold the other harmless for, from and against any claim of a broker’s or finder’s fee or commission arising out of the sale of the Property pursuant to this Lease through such party.

          (e) Like-Kind Exchange. Landlord may, at its option, elect to sell the Property as part of a tax deferred exchange under Section 1031 of the Internal Revenue Code and may assign its rights under this Section 21 to one or more third party exchange intermediaries for the purpose of effecting the exchange. Tenant agrees to cooperate with Landlord in effecting such exchange provided that Tenant shall not be required to incur any cost or liability as a result of such cooperation. The failure of the exchange to qualify as an exchange under Section 1031 shall not constitute grounds for rescission by either party and shall not be deemed to be a failure of consideration.

          (f) Extension of Time. If the date for any performance under this Section 21 falls on a weekend or holiday, the time shall be extended to the next business day.

[Signatures on following page]

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     DATED as of the day and year first written above.

LANDLORD:

SANDPOINT CENTER LLC, an Idaho limited
liability company

STATE OF ___________	)
	) ss.
COUNTY OF _________	)

     On this _________ day of August, 2009, before me, the undersigned, a Notary Public in and for the State of ____________, duly commissioned and sworn personally appeared, known to me to be the Manager of SANDPOINT CENTER, LLC, the limited liability company that executed the foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said limited liability company, for the purposes therein mentioned, and on oath stated that he was authorized to execute said instrument.

     I certify that I know or have satisfactory evidence that the person appearing before me and making this acknowledgment is the person whose true signature appears on this document.

     WITNESS my hand and official seal hereto affixed the day and year in the certificate above written.

Signature 

Print Name 

NOTARY PUBLIC in and for the State of
_______, residing at __________.
My commission expires __________. 

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LANDLORD:

SANDPOINT CENTER II, LLC, an Idaho limited
liability company

[Acknowledgement on following page]

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[ATTACH CALIFORNIA ACKNOWLEDGEMENT]

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TENANT:

PANHANDLE STATE BANK, an Idaho state
chartered bank

Curt Hecker, Chief Executive Officer 

STATE OF IDAHO	)
	) ss.
COUNTY OF BONNER	)

     On this _________ day of August, 2009, before me, a Notary Public in and for the State of Idaho, duly commissioned and sworn, personally appeared Curt Hecker, to me known to be the Chief Executive Officer of PANHANDLE STATE BANK, the state chartered bank named in and which executed the foregoing instrument; and he acknowledged to me that he signed the same as the free and voluntary act and deed of said state chartered bank for the uses and purposes therein mentioned.

     I certify that I know or have satisfactory evidence that the person appearing before me and making this acknowledgment is the person whose true signature appears on this document.

     WITNESS my hand and official seal the day and year in this certificate above written,

Signature 

Print Name 

NOTARY PUBLIC in and for the State of
Idaho, residing at _______________.
My commission expires ___________. 

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Curt Hecker, certify that:

1.	I have reviewed this quarterly report of Intermountain Community Bancorp;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2009

/s/ Curt Hecker  

Curt Hecker 

President and Chief Executive Officer 

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Doug Wright, certify that:

1.	I have reviewed this quarterly report of Intermountain Community Bancorp;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2009

/s/ Doug Wright  

Doug Wright 

Executive Vice President and Chief Financial Officer 

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Intermountain Community Bancorp (the “Company”) on Form 10-Q for the period ending September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Curt Hecker, Chief Executive Officer, and Doug Wright, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: November 13, 2009

/s/ Curt Hecker	/s/ Doug Wright
Curt Hecker Chief Executive Officer	Doug Wright Chief Financial Officer