Income Taxes:

The tax effects of the principal temporary differences giving rise to deferred tax assets and liabilities as of December 31, 2012 and 2011 were as follows (in thousands):



	2012						2011
	Assets			Liabilities			Assets			Liabilities
Allowance for losses on loans	$	3,152		$	—		$	4,960		$	—
Warrant liability	—			(71		)	—			—
Investments and Derivatives	—			(2,180		)	—			(1,766		)
OTTI	735			—			594			—
OREO chargeoffs	13			—			40			—
NOL carryforward	16,061			—			16,094			—
Deferred gain on sale of premises	76			—			1,161			—
Deferred rent	85			—			329			—
FHLB stock	—			(74		)	—			(74		)
Office properties and equipment	1,984			—			—			(844		)
Deferred compensation	449			—			792			—
Core deposit intangible	64			—			37			—
Goodwill	212			—			324			—
Other	333			—			292			—
Total	23,164			(2,325		)	24,623			(2,684		)
Deferred tax asset valuation allowance	(8,492		)	—			(8,766		)	—
Total deferred income taxes	$	14,672		$	(2,325	)	$	15,857		$	(2,684	)

The components of Intermountain’s income tax provision are as follows (in thousands):



	Year Ended December 31,
	2012			2011			2010
Current income taxes (benefit):
Federal	$	—		$	—		$	—
State	(8		)	—			—
	(8		)	—			—
Deferred income taxes (benefit):
Federal	—			(123		)	(8,468		)
State	—			(29		)	(1,180		)
Total deferred income tax (benefit)	—			(152		)	(9,648		)
Deferred tax asset valuation allowance	—			—			8,766
Total income tax provision (benefit)	$	(8	)	$	(152	)	$	(882	)

The deferred federal and state tax expense includes a deferred tax asset valuation allowance of $8.8 million for the year ended December 31, 2010.

A reconciliation of the income tax provision and the amount of income taxes computed by applying the statutory federal corporate income tax rate to income before income (loss) taxes for the years ended December 31, 2012, 2011 and 2010, is as follows (dollars in thousands):



	2012					2011					2010
	Amount			%		Amount			%		Amount			%
Income tax provision (benefit) at federal statutory rate	$	1,323		35.0	%	$	(52	)	(35.0	)%	$	(11,416	)	(35.0	)%
Tax effect of:
State taxes (net of federal tax benefit)	(76		)	(2.0	)%	(29		)	(19.4	)%	(1,180		)	(5.1	)%
Goodwill impairment	—			—	%	—			—	%	3,587			11.0	%
Deferred Tax Asset Valuation	(274		)	(7.3	)%	—			—	%	8,766			26.5	%
Tax exempt income and other, net	(981		)	(25.7	)%	(71		)	(47.4	)%	(639		)	(0.1	)%
	$	(8	)	—	%	$	(152	)	(101.8	)%	$	(882	)	(2.7	)%

The Company has recorded income tax net operating loss and tax credit carryforwards related to state tax losses over the past few years, as well as state and federal tax credits that cannot be used against current or prior period federal and state income taxes. The amount of deferred tax assets related to federal and state net operating loss carryforwards totaled $16.1 million at December 31, 2012 compared to $16.1 million at December 31, 2011. Intermountain used $5.9 million of the 2009 tax benefit as a loss carryback to offset taxes paid in previous years, resulting in an income tax receivable. Intermountain applied for the associated refund and received it in the second quarter of 2010. Under IRS regulations, the operating loss carryforwards can generally be carried forward for 20 years, and as such, the tax benefits related to the Company's current carryforwards will begin expiring in 2029 if unused prior to then.

Intermountain uses an estimate of future earnings, future reversal of taxable temporary difference, and tax planning strategies to determine whether it is more likely than not that the benefit of the deferred tax asset will be realized. At December 31, 2012, Intermountain assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. Intermountain determined that the negative evidence associated with a three-year cumulative loss for the period ended December 31, 2011, and challenging economic conditions continued to outweigh the positive evidence. Therefore, Intermountain maintained a valuation allowance of $8.5 million against its deferred tax asset at December 31, 2012, as compared to an $8.8 million valuation allowance at the end of both 2011 and 2010. The Company analyzes the deferred tax asset on a quarterly basis and may increase the allowance or release a portion or all of this allowance depending on actual results and estimates of future profitability. Including the valuation allowance, Intermountain had a net deferred tax asset of $12.3 million as of December 31, 2012, compared to a net deferred tax asset of $13.2 million as of December 31, 2011. The decrease in the net deferred asset from December 31, 2011 is primarily due to decreases in the tax assets associated with the allowance for loan losses and deferred compensation, and an increase in the deferred liability associated with unrealized gains on investment securities. This was partially offset by net increases in the tax assets associated with office properties and equipment.

In conducting its valuation allowance analysis, the Company developed an estimate of future earnings to determine both the need for a valuation allowance and the size of the allowance. In conducting this analysis, management has assumed economic conditions will continue to be challenging in 2013, followed by gradual improvement in the ensuing years. As such, its estimates include lower credit losses in 2013 and ensuing years as the Company’s loan portfolio continues to turn over. It also assumes: (1) a compressed net interest margin in 2013 and 2014, with gradual improvement in future years, as the Company is able to convert some of its cash position to higher yielding instruments; and (2) reductions in operating expenses as credit costs abate and its other cost reduction strategies continue.

The completion of the $47.3 million capital raise in January 2012 triggered Internal Revenue Code Section 382 limitations on the amount of tax benefit from net operating loss carryforwards that the Company can utilize annually, because of the level of investment by several of the larger investors. This could impact the amount and timing of the release of the valuation allowance, largely depending on the level of market interest rates and the fair value of the Company’s balance sheet at the time the offering was completed. The evaluation of this impact is still being completed and will likely not be known until its 2012 tax return is finalized in 2013. Based on its preliminary analysis, the Company believes that it should be able to recapture most or all of its tax benefit from the net operating loss carryforwards in the 20-year carryforward period, even given the Section 382 limitations. As with other future estimates, the Company cannot guarantee these future results.

Intermountain has performed an analysis of its uncertain tax positions and has not recorded any potential penalties, interest or additional tax in its financial statements as of December 31, 2012. If Intermountain did incur penalties or interest, they would be reported in the income tax provision. Intermountain’s tax positions for the years 2009 through 2011 remain subject to review by the Internal Revenue Service. Intermountain does not expect unrecognized tax benefits to significantly change within the next twelve months.