##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED September 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR
THE TRANSITION PERIOD
FROM                TO
 Commission File Number 000-50667 INTERMOUNTAIN COMMUNITY BANCORP  Idaho
    
    82-0499463(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 231 N. Third Avenue, 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 Sections 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 x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x 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, 2004Common Stock (no par value)
    
    3,741,771




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##### Table of Contents



InterMountain Community Bancorp FORM 10-Q
For the Quarter Ended September 30, 2004  
 TABLE OF CONTENTS PART I  Financial InformationItem 1 - Financial Statements (Unaudited)Consolidated Balance Sheets for September 30, 2004 and December 31, 2003Consolidated Statements of Income for the three months ended September 30, 2004 and 2003, and the nine months ended September 30, 2004 and 2003Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003Consolidated Statements of Comprehensive Income for the three months ended September 30, 2004 and 2003 and the nine months ended September 30, 2004 and 2003Notes to Consolidated Financial StatementsItem 2 - Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3 - Quantitative and Qualitative Disclosures About Market RiskItem 4 - Controls and ProceduresPART II  Other InformationItem 1 - Legal ProceedingsItem 2 - Unregistered Sales of Equity Securities and Use of ProceedsItem 3 - Defaults Upon Senior SecuritiesItem 4 - Submission of Matters to a Vote of Security HoldersItem 5 - Other InformationItem 6 - ExhibitsSignaturesEXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32EXHIBIT 99.1




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##### Table of Contents



PART I  Financial Information 
 Item 1  Financial Statements
 InterMountain Community Bancorp
 
 Consolidated Balance Sheets
 (Unaudited)
 September 30,
    
    December 31,2004
    
    2003(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    18
    
    
    $
    14Non-interest bearing and vault
    
    
    11,462
    
    
    
    10,226Restricted
    
    
    844
    
    
    
    995Federal funds sold
    
    
    15,400
    
    
    
    5,710Interest bearing certificates of deposit
    
    
    
    
    
    
    298Available for sale securities, at fair value
    
    
    89,523
    
    
    
    76,601Held to maturity securities, at amortized cost
    
    
    3,609
    
    
    
    3,336Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,101
    
    
    
    642Loans held for sale
    
    
    4,850
    
    
    
    3,287Loans receivable, net
    
    
    334,283
    
    
    
    287,256Accrued interest receivable
    
    
    3,185
    
    
    
    2,694Office properties and equipment, net
    
    
    10,476
    
    
    
    9,442Bank-owned life insurance
    
    
    5,572
    
    
    
    5,381Goodwill
    
    
    1,150
    
    
    
    1,150Other intangible assets
    
    
    589
    
    
    
    642Prepaid expenses and other assets, net
    
    
    3,080
    
    
    
    2,085Total assets
    
    $
    485,142
    
    
    $
    409,759LIABILITIES:Deposits
    
    $
    412,102
    
    
    $
    344,866Securities sold subject to repurchase agreements
    
    
    13,472
    
    
    
    17,155Advances from Federal Home Loan Bank
    
    
    5,000
    
    
    
    5,000Cashiers checks issued and payable
    
    
    4,552
    
    
    
    4,814Accrued interest payable
    
    
    635
    
    
    
    332Other borrowings
    
    
    16,527
    
    
    
    8,279Accrued expenses and other liabilities
    
    
    2,718
    
    
    
    2,235Total liabilities
    
    
    455,006
    
    
    
    382,681Commitments and contingent liabilitiesSTOCKHOLDERS EQUITY:Common stock, no par value; 7,084,000 shares
authorized; 3,234,076 and 3,164,973 shares issued and
outstanding
    
    
    16,839
    
    
    
    16,390Treasury stock, at cost (2,093 shares)
    
    
    (47
    )
    
    
    Accumulated other comprehensive income (loss)
    
    
    (329
    )
    
    
    275Retained earnings
    
    
    13,673
    
    
    
    10,413Total stockholders equity
    
    
    30,136
    
    
    
    27,078Total liabilities and stockholders equity
    
    $
    485,142
    
    
    $
    409,759
 The accompanying notes are an integral part of the consolidated financial
statements.  1




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##### Table of Contents



InterMountain Community Bancorp 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands, except per share data)Interest income:Loans
    
    $
    6,009
    
    
    $
    5,242
    
    
    $
    16,832
    
    
    $
    14,600Investments
    
    
    832
    
    
    
    569
    
    
    
    2,377
    
    
    
    1,907Total interest income
    
    
    6,841
    
    
    
    5,811
    
    
    
    19,209
    
    
    
    16,507Interest expense:Deposits
    
    
    1,156
    
    
    
    1,064
    
    
    
    3,211
    
    
    
    3,267Short-term borrowings
    
    
    302
    
    
    
    192
    
    
    
    771
    
    
    
    558Total interest expense
    
    
    1,458
    
    
    
    1,256
    
    
    
    3,982
    
    
    
    3,825Net interest income
    
    
    5,383
    
    
    
    4,555
    
    
    
    15,227
    
    
    
    12,682Provision for losses on loans
    
    
    (168
    )
    
    
    (178
    )
    
    
    (997
    )
    
    
    (822
    )Net interest income after provision for
losses on loans
    
    
    5,215
    
    
    
    4,377
    
    
    
    14,230
    
    
    
    11,860Other income:Fees and service charges
    
    
    1,568
    
    
    
    1,491
    
    
    
    4,306
    
    
    
    4,041Bank owned life insurance
    
    
    63
    
    
    
    91
    
    
    
    191
    
    
    
    205Other
    
    
    273
    
    
    
    94
    
    
    
    641
    
    
    
    255Total other income
    
    
    1,904
    
    
    
    1,676
    
    
    
    5,138
    
    
    
    4,501Operating expenses
    
    
    5,139
    
    
    
    4,343
    
    
    
    14,286
    
    
    
    11,937Income before income taxes
    
    
    1,980
    
    
    
    1,710
    
    
    
    5,082
    
    
    
    4,424Income tax provision
    
    
    (721
    )
    
    
    (622
    )
    
    
    (1,822
    )
    
    
    (1,582
    )Net income
    
    $
    1,259
    
    
    $
    1,088
    
    
    $
    3,260
    
    
    $
    2,842Earnings per
share - basic
    
    $
    0.39
    
    
    $
    0.35
    
    
    $
    1.02
    
    
    $
    0.90Earnings per
share - diluted
    
    $
    0.35
    
    
    $
    0.32
    
    
    $
    0.91
    
    
    $
    0.84Weighted
average shares outstanding - basic
    
    
    3,228,247
    
    
    
    3,153,939
    
    
    
    3,207,828
    
    
    
    3,143,740Weighted average shares outstanding -
diluted
    
    
    3,583,085
    
    
    
    3,406,229
    
    
    
    3,577,379
    
    
    
    3,401,295
 The accompanying notes are an integral part of the consolidated financial
statements. 2




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InterMountain Community Bancorp 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30,2004
    
    2003(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    3,260
    
    
    $
    2,842Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    948
    
    
    
    886Stock issued as compensation
    
    
    27
    
    
    
    174Net amortization of premiums on securities
    
    
    370
    
    
    
    637Stock dividends on FHLB stock
    
    
    (26
    )
    
    
    (141
    )Provisions for losses on loans
    
    
    997
    
    
    
    822Amortization of core deposit intangibles
    
    
    53
    
    
    
    47Loss on sale of investments
    
    
    33
    
    
    
    29Gain on sale of loans
    
    
    (2
    )
    
    
    Net accretion of loan discounts and premiums
    
    
    (123
    )
    
    
    (197
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (191
    )
    
    
    (205
    )Change in (net of acquisition of business):Loans held for sale
    
    
    (1,563
    )
    
    
    1,820Accrued interest receivable
    
    
    (491
    )
    
    
    (387
    )Prepaid expenses and other assets
    
    
    (359
    )
    
    
    (460
    )Accrued interest payable
    
    
    303
    
    
    
    110Accrued expenses and other liabilities
    
    
    221
    
    
    
    1,743Net cash provided by operating activities
    
    
    3,457
    
    
    
    7,720Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (46,881
    )
    
    
    (70,225
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    21,706
    
    
    
    29,058Principal payments on mortgage-backed securities
    
    
    10,900
    
    
    
    13,639Purchases of held-to-maturity securities
    
    
    (512
    )
    
    
    (880
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    199
    
    
    
    710Proceeds from sale of FHLB stock
    
    
    
    
    
    
    8Origination of loans, net of principal payments
    
    
    (50,624
    )
    
    
    (46,377
    )Proceeds from sale of loans
    
    
    2,724
    
    
    
    Net cash and cash equivalents acquired as part of acquisition
    
    
    
    
    
    
    14,709Proceeds from sale of properties and equipment
    
    
    
    
    
    
    110Purchase of office properties and equipment
    
    
    (1,982
    )
    
    
    (1,821
    )Net change in federal funds sold
    
    
    (9,690
    )
    
    
    920Purchase of FHLB stock
    
    
    (433
    )
    
    
    Proceeds from matured certificates of deposit
    
    
    298
    
    
    
    396Net decrease in restricted cash
    
    
    151
    
    
    
    1,715Investment in affiliate
    
    
    (248
    )
    
    
    (249
    )Net cash used in investing activities
    
    
    (74,392
    )
    
    
    (58,287
    )
 3




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##### Table of Contents



InterMountain Community BancorpConsolidated Statements of Cash Flows (continued)
(Unaudited) Nine Months EndedSeptember 30,2004
    
    2003(Dollars in thousands)Cash flows from financing activities:Net increase in demand, money market and savings deposits
    
    $
    49,952
    
    
    $
    34,422Net increase in certificates of deposit
    
    
    17,284
    
    
    
    10,278Net change in repurchase agreements
    
    
    (3,683
    )
    
    
    (2,526
    )Proceeds from exercise of stock options
    
    
    421
    
    
    
    160Payments for fractional shares
    
    
    
    
    
    
    (4
    )Repurchase of stock
    
    
    (47
    )
    
    
    (399
    )Proceeds from debenture issuance
    
    
    8,248
    
    
    
    8,279Proceeds from FHLB borrowings
    
    
    
    
    
    
    5,000Net cash provided by financing activities
    
    
    72,175
    
    
    
    55,210Net change in cash and cash equivalents
    
    
    1,240
    
    
    
    4,643Cash and cash equivalents, beginning of period
    
    
    10,240
    
    
    
    8,691Cash and cash equivalents, end of period
    
    $
    11,480
    
    
    $
    13,334Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    3,673
    
    
    $
    3,579Income taxes
    
    
    1,871
    
    
    
    1,410Noncash investment and financing activities:Common Stock Dividend
    
    $
    
    
    
    $
    3,526Cancellation of treasury stock
    
    
    
    
    
    
    399Net liabilities assumed from business combination
    
    
    
    
    
    
    16,567
 The accompanying notes are an integral part of the consolidated financial
statements. 4




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InterMountain Community Bancorp 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Net income
    
    $
    1,259
    
    
    $
    1,088
    
    
    $
    3,260
    
    
    $
    2,842Other comprehensive income (loss):Change in unrealized gains (losses)
on investments, net of
reclassification adjustments
    
    
    1,013
    
    
    
    (521
    )
    
    
    (992
    )
    
    
    (601
    )Less deferred income tax benefit
(provision)
    
    
    (398
    )
    
    
    219
    
    
    
    388
    
    
    
    237Net other comprehensive income (loss)
    
    
    615
    
    
    
    (302
    )
    
    
    (604
    )
    
    
    (364
    )Comprehensive income
    
    $
    1,874
    
    

    $
    786
    
    
    $
    2,656
    
    
    $
    2,478
 The accompanying notes are an integral part of the consolidated financial
statements. 5




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##### Table of Contents



InterMountain Community Bancorp 
 Notes to Consolidated Financial Statements
  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,
2003. In the opinion of management, the unaudited interim consolidated
financial statements furnished herein include all 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) 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.
    
    Other Borrowings:The components of other borrowings are as follows (in thousands): September
    
    December30,
    
    31,2004
    
    2003Term note payable(1)
    
    $
    8,279
    
    
    $
    8,279Term note payable(2)
    
    
    8,248
    
    
    
    Total other borrowings
    
    $
    16,527
    
    
    $
    8,279
   (1)
    
    In January 2003, InterMountain issued $8.0 million of
debentures through its subsidiary InterMountain Statutory Trust I.
The debt associated with these securities bear interest at 6.75%.
Interest only payments are made quarterly starting in June 2003.
The debt is callable by InterMountain in March 2008 and matures in
March 2033.(2)
    
    In March 2004 InterMountain issued $8.0 million of debentures
through its subsidiary InterMountain Statutory Trust II. The debt
associated with these securities bear interest based on the London
Interbank Offering Rate (LIBOR) with a beginning rate of 3.91%,
adjusted and paid quarterly (the rate at September 30, 2004 was
4.40%). These debentures are callable by InterMountain in March
2009 and mature in March 2034.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 Financial Interpretation
No. 46 (Revised), Consolidation of Variable Interest Entities (FIN No. 46R), the
trusts are not consolidated and the debentures and related amounts
are treated as debt of InterMountain. 6




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##### Table of Contents



3.
    
    Earnings Per Share:The following table presents the basic and diluted earnings per share
computations: Three Months Ended September 30,(Dollars in thousands, except per share amounts)2004Weighted
    
    
    
    
    
    
    
    
    
    2003Net
    
    Avg.
    
    Per Share
    
    Net
    
    Weighted
    
    Per ShareIncome
    
    Shares
    
    Amount
    
    Income
    
    Avg. Shares
    
    AmountBasic computations
    
    $
    1,259
    
    
    
    3,228,247
    
    
    $
    0.39
    
    
    $
    1,088
    
    
    
    3,153,939
    
    
    $
    0.35Effect of dilutive
securities:Common stock options
    
    
    
    
    
    
    354,838
    
    
    
    (0.04
    )
    
    
    
    
    
    
    252,290
    
    
    
    (0.03
    )Diluted computations
    
    $
    1,259
    
    
    
    3,583,085
    
    
    $
    0.35
    
    
    $
    1,088
    
    
    
    3,406,229
    
    
    $
    0.32Antidilutive
options not
included in diluted
earnings per share
    
    
    
    
    
    
    4,500
    
    
    
    
    
    
    
    
    
    
    
    
 Nine Months Ended September 30,(Dollars in thousands, except per share amounts)2004Weighted
    
    
    
    
    
    
    
    
    
    2003Net
    
    Avg.
    
    Per Share
    
    Net
    
    Weighted
    
    Per ShareIncome
    
    Shares
    
    Amount
    
    Income
    
    Avg. Shares
    
    AmountBasic computations
    
    $
    3,260
    
    
    
    3,207,828
    
    
    $
    1.02
    
    
    $
    2,842
    
    
    
    3,143,740
    
    
    $
    0.90Effect of dilutive
securities:Common stock options
    
    
    
    
    
    
    369,551
    
    
    
    (0.11
    )
    
    
    
    
    
    
    257,555
    
    
    
    (0.06
    )Diluted computations
    
    $
    3,260
    
    
    
    3,577,379
    
    
    $
    0.91
    
    
    $
    2,842
    
    
    
    3,401,295
    
    
    $
    0.84Antidilutive
options not
included in diluted
earnings per share
    
    
    
    
    
    
    2,513
    
    
    
    
    
    
    
    
    
    
    
    
 7




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##### Table of Contents



4.
    
    Operating Expenses:The following table details InterMountains components of total operating
expenses: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    3,083
    
    
    $
    2,590
    
    
    $
    8,448
    
    
    $
    7,254Occupancy expense
    
    
    768
    
    
    
    748
    
    
    
    2,002
    
    
    
    1,785Other expense
    
    
    519
    
    
    
    334
    
    
    
    1,474
    
    
    
    1,018Fees and service charges
    
    
    202
    
    
    
    237
    
    
    
    782
    
    
    
    632Printing, postage and supplies
    
    
    243
    
    
    
    190
    
    
    
    638
    
    
    
    594Legal and accounting
    
    
    154
    
    
    
    87
    
    
    
    547
    
    
    
    305Advertising
    
    
    170
    
    
    
    157
    
    
    
    395
    
    
    
    349Total operating expenses
    
    $
    5,139
    
    
    $
    4,343
    
    
    $
    14,286
    
    
    $
    11,937
  5.
    
    Stock Options:As allowed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), InterMountain
has elected to retain the compensation measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25), and its related interpretations, for stock
options. Under APB No. 25, compensation cost is recognized at the
measurement date of the amount, if any, that the quoted market price of
InterMountains common stock exceeds the option exercise price. The
measurement date is the date at which both the number of options and the
exercise price for each option are known.Had compensation cost for InterMountains plans been determined based on
the fair value at the grant dates for awards under the plans,
InterMountains reported net income and earnings per share would have
been changed to the pro forma amounts indicated below: 8




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands, except per share amounts)Reported net income
    
    $
    1,259
    
    
    $
    1,088
    
    
    $
    3,260
    
    
    $
    2,842Add back: Stock-based employee
compensation expense, net of
related tax effects
    
    
    17
    
    
    
    10
    
    
    
    17
    
    
    
    106Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    41
    
    
    
    25
    
    
    
    115
    
    
    
    191Pro forma
    
    $
    1,235
    
    
    $
    1,073
    
    
    $
    3,162
    
    
    $
    2,757Basic earnings per share:Reported earnings per share
    
    $
    0.39
    
    
    $
    0.35
    
    
    $
    1.02
    
    
    $
    0.90Stock-based employee
compensation, fair value
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.03
    )
    
    
    (0.03
    )Pro forma earnings per share
    
    $
    0.38
    
    
    $
    0.34
    
    
    $
    0.99
    
    
    $
    0.87Diluted earnings per share:Reported earnings per share
    
    $
    0.35
    
    
    $
    0.32
    
    
    $
    0.91
    
    
    $
    0.84Stock-based employee
compensation, fair value
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.03
    )
    
    
    (0.03
    )Pro forma earnings per share
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.88
    
    
    $
    0.81
  6.
    
    Subsequent EventsEffective November 2, 2004, InterMountain completed the merger with Snake
River Bancorp, Inc. Snake River Bancorp, Inc was merged into
InterMountain and Magic Valley Bank, a subsidiary of Snake River Bancorp,
Inc. was merged into Panhandle State Bank, a subsidiary of InterMountain.
Under the terms of the Merger Agreement and Plan of Merger, Snake River
shareholders received $8.22 in cash and 0.93 shares of InterMountain
stock (plus cash in lieu of fractional shares) for each share of Snake
River Bancorp stock. InterMountain issued approximately 504,000 of
InterMountain shares as a result of the merger. InterMountain acquired
approximately $67.7 million in loans and $70.0 million in deposits. Magic
Valley Bank will continue to operate its three branches under its current
name as a division of Panhandle State Bank. The transaction is expected
to be accretive to InterMountain Community Bancorps 2005 earnings.7.
    
    New Accounting Policies:In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (FIN No. 46). In December 2003, the FASB issued a
revision to this interpretation (FIN No. 46(r)). FIN No. 46(r)
clarifies the application of Accounting Research Bulletin No. 51 to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
InterMountain adopted FIN 46(r) effective January 1, 2004. As a result of
the issuance of FIN No. 46(r) and the accounting professions application
of the guidance provided by the FASB, issuer trusts, like InterMountain
Statutory Trust I and InterMountain Statutory Trust II (collectively
referred to as the Trusts), are generally variable interest entities. We
have determined that we are not the primary beneficiaries under the
trusts, and accordingly InterMountain has not consolidated the financial
statements of the Trusts into its consolidated financial statements. The amounts payable to these
Trusts continue to be treated as other borrowings.In December 2003, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer. SOP No. 03-3 addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investors initial investment in loans
acquired in a transfer if those differences are attributable, at least in
part, to credit quality. SOP No. 03-3 is effective for loans acquired in
fiscal years beginning after December 15, 2004. InterMountain believes
the implementation of SOP No. 03-3 will not have a material effect on
InterMountains consolidated financial statements.In September 2004, the Financial Accounting Standards Board (FASB)
agreed to issue additional guidance on the application of Emerging Issues
Task Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments. The FASB also
deferred the measurement and recognition guidance contained in EITF Issue
03-1. This delay does not suspend the requirement to recognize
other-than-temporary impairments as required by existing authoritative
literature. During the period of the delay, InterMountain will continue
to apply relevant other-than-temporary guidance to its investment
portfolio, as applicable. The FASBs final guidance on EITF Issue 03-1
may alter the criteria by which InterMountain assesses if impairment is
temporary or permanent. The FASB is expected to release the additional
guidance by the end of 2004. 9




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations InterMountain Community Bancorp
Comparison of the Three and Nine Months Ended September 30, 2004 and 2003 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. General InterMountain Community Bancorp (InterMountain) is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
Panhandle State Bank (Panhandle), a wholly owned subsidiary of InterMountain,
was first opened in 1981 to serve the local banking needs of Bonner County,
Idaho. Since then, Panhandle has continued to grow by opening additional
branch offices throughout Idaho and Oregon. InterMountain conducts its primary business through its bank subsidiary,
Panhandle State Bank. Panhandle maintains its main office in Sandpoint, Idaho
and has 11 other branches. In addition to the main office, six branch offices
operate under the name of Panhandle State Bank and five of the branches are
operated under the name of InterMountain Community Bank, a division of
Panhandle State Bank. InterMountain focuses its banking and other services on
individuals, professionals, and small to medium-sized businesses throughout its
market area. At September 30, 2004, InterMountain had total consolidated
assets of $485.1 million. Panhandle is regulated by the Idaho Department of
Finance, 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. In addition, effective November 2, 2004,
pursuant to the merger with Snake River Bancorp, Inc., Panhandle State Bank
will operate three additional branches under the division of Magic Valley Bank.
See Footnote 6 in Notes to Consolidated Financial Statements. InterMountain competes with a number of international banking groups,
out-of-state banking companies, state-wide banking organizations, several local
community banks, savings banks, savings and loans, and credit unions throughout
its market area. Based on total deposit market share as of December 31, 2003,
InterMountain ranked fourteenth of financial institutions in Idaho and is the
states third largest independent community bank. InterMountain offers a variety of services to the community including
lending activities, deposit services, investment and other services.
InterMountain offers a variety of loans to meet the credit needs of the
communities it serves. Types of loans offered include consumer loans, real
estate loans, business loans, and agricultural loans. A full range of deposit
services are available including checking accounts, savings accounts, money
market accounts and various types of certificates of deposit. Investment
services are provided through third-party vendors, including annuities,
securities, mutual funds and brokerage services. InterMountain operates a multi-branch banking system and is executing
plans for the formation and acquisition of banks and bank branches that can
operate under a decentralized community bank structure. InterMountain plans
expansion in markets that are contiguous, within 150 miles of its existing
branches in Idaho, Oregon, Washington, and Montana. InterMountain is pursuing
a balance of asset and earnings growth by focusing on increasing its market
share in its present locations, building new branches and merging and/or
acquiring community banks. 10




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##### Table of Contents



Critical Accounting Policies The accounting and reporting policies of InterMountain conform to 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. 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, InterMountain discontinues the accrual of interest and any
previously accrued interest recognized in income deemed uncollectible is
reversed. 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 collectibility 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. InterMountain maintains an allowance for loan losses
to absorb probable losses in the loan portfolio based on a periodic analysis of
the portfolio and expected future losses. This analysis is designed to
determine an appropriate level and allocation of the allowance for losses among
loan types by considering factors affecting loan losses, including: specific
losses; levels and trends in impaired and nonperforming loans; historical 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 loss experience for each loan type. The
allowance for loan losses related to impaired loans usually is based on the
fair value of the collateral for certain collateral dependent loans. This
evaluation requires management to make estimates of the value of the collateral
and any associated holding and selling costs. 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 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, 2004. While management uses available information to provide for
loan losses, the ultimate collectibility 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 slowdown in
economic activity could adversely affect cash flows for both commercial and
individual borrowers, as a result of which InterMountain could experience
increases in nonperforming assets, delinquencies and losses on loans. 11




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##### Table of Contents



Investments.Assets in the investment portfolios 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 will be written down to current market
value and the write down will be deducted from earnings. There were no
investment securities which management identified to be other-than-temporarily
impaired for the nine months ended September 30, 2004. Charges to income could
occur in future periods due to a change in managements intent to hold the
investments to maturity, a change in managements assessment of credit risk, or
a change in regulatory or accounting requirements. Goodwill and Other Intangible Assets.Goodwill arising from business
combinations represents the value attributable to unidentifiable intangible
elements in the business acquired. InterMountains goodwill relates to value
inherent in the banking business and the value is dependent upon
InterMountains ability to provide quality, cost effective services in a
competitive market place. As such, goodwill value is supported ultimately by
revenue that is driven by the volume of business transacted. A decline in
earnings as a result of a lack of growth or the inability to deliver cost
effective services over sustained periods can lead to impairment of goodwill
that could adversely impact earnings in future periods. Goodwill is not
amortized, but is subjected to impairment analysis periodically. No impairment
was considered necessary during the nine months ended September 30, 2004.
However, future events could cause management to conclude that InterMountains
goodwill is impaired, which would result in InterMountain recording 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. 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. Development and improvement costs relating to the property are
capitalized to the extent they are deemed to be recoverable. An allowance for losses on real estate owned is designed to include
amounts for estimated losses as a result of impairment in value of the real
property after repossession. 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, an allowance for loss is recognized. As a result of
changes in the real estate markets in which these properties are located, it is
reasonably possible that the carrying values could be reduced in the near term. 12




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##### Table of Contents



Results of Operations Overview. InterMountain recorded net income of $1.3 million, or $0.35 per
diluted share, for the three months ended September 30, 2004, compared with net
income of $1.1 million, or $0.32 per diluted share, for the three months ended
September 30, 2003. InterMountain recorded net income of $3.3 million, or
$0.91 per diluted share for the nine months ended September 30, 2004, compared
with $2.8 million, or $0.84 per diluted share, for the nine months ended
September 30, 2003. The increase in net income for both periods reflected an
increase in net interest income and other income. The annualized return on average assets was 1.06% and 1.10% for the three
months ended September 30, 2004 and 2003, respectively. For the nine months
ended September 30, 2004 and 2003, the annualized return on average assets was
0.97% and 1.05%, respectively. The annualized return on average equity was
17.3% and 16.8% for the three months ended September 30, 2004 and 2003,
respectively. The annualized return on average equity was 15.3% and 15.1% for
the nine months ended September 30, 2004 and 2003, respectively. The return on
average equity increased for the quarter and nine months ending September 30,
2004, primarily as a result of increases in net interest income and other
income. Improvements in both these areas offset an increase in non-interest
expense caused by both general asset growth and expenses incurred in changing
processing software and filing with the SEC as a public reporting company. Net Interest Income. The most significant component of earnings for a
financial institution typically is net interest income, which is the difference
between interest income, primarily from loan and investment portfolios, and
interest expense, primarily on deposits and other borrowings. During the three
months ended September 30, 2004 and 2003, net interest income was $5.4 million
and $4.6 million, respectively, an increase of 18.2%. For the nine months
ended September 30, 2004 and 2003, net interest income was $15.2 million and
$12.7 million, an increase of 20.0%. The increase in net interest income
during the three and nine months ended September 30, 2004, compared to the same
periods in 2003, was primarily due to an increase in loan volumes and relative
stability in the net interest spread. Changes in net interest income results from changes in volume and in the
net interest spread. Volume refers to the dollar level of interest-earning
assets and interest-bearing liabilities. Net interest spread refers to the
difference between the yield on interest-earning assets and the rate paid on
interest-bearing liabilities. Net interest margin, a similar measure to net
interest spread, refers to net interest income divided by total
interest-earning assets and is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities. Average interest-earning assets for the three months ended September 30,
2004 and 2003 were $443.2 million and $371.5 million, respectively. Average
loans increased by $52.8 million, while average investments increased by $18.9
million over the same period in 2003. Average net interest spread during the
three months ended September 30, 2004 and 2003 was 4.85% and 4.91%,
respectively. The average net interest margin for the three months ended
September 30, 2004 and 2003 was 4.83% and 4.86%, respectively. Net interest
margin decreased slightly due to lower yields on earning assets as declining
market rates continued to put pressure on rates earned on the investment and
loan portfolios. Net interest spread decreased primarily because the yield on
loans and investments declined slightly more than the cost of deposits during
this period. Average interest-earning assets for the nine months ended September 30,
2004 and 2003 were $412.8 million and $339.5 million, respectively. Average
loans increased by $56.3 million, while average investments increased by $17.0
million over the same period in 2003. Net interest spread during the nine
months ended September 30, 2004 and 2003 was 4.92% and 4.98%, respectively.
The net interest margin for the nine months ended September 30, 2004 and 2003
was 4.93% and 4.99%, respectively. As with the three-month results, the net
interest margin decreased primarily due to lower yields on earning assets. Net
interest spread decreased primarily because the yield on loans declined
slightly more than the cost of deposits. While net interest spread and margin
were down for both periods, the decline was relatively small in relation to the
decline in market interest rates. 13




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##### Table of Contents



Provision for Losses on Loans.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 future economic
trends, historical loan losses, delinquencies, underlying collateral values, as
well as current and potential risks identified in the portfolio. InterMountain recorded provisions for losses on loans of $168 thousand and
$178 thousand for the three months ended September 30, 2004 and 2003,
respectively. InterMountain recorded provisions for losses on loans of $997
thousand and $822 thousand for the nine months ended September 30, 2004 and
2003, respectively. The current provision reflects the analysis and assessment
of the relevant factors mentioned in the preceding paragraph. The increase in
the loss provision from the prior period resulted from growth in the loan
portfolio and the need to reserve more for several specific credits that had
deteriorated during the second quarter. The following table summarizes loan loss allowance activity for the
periods indicated. Nine Months EndedSeptember 30,2004
    
    2003(Dollars in thousands)Balance at January 1
    
    $
    5,118
    
    
    $
    3,259Acquired allowance for loan losses
    
    
    
    
    
    
    1,624Allowance associated with the sale of loans
    
    
    (213
    )
    
    
    Provision for losses on loans
    
    
    997
    
    
    
    822Amounts written off net of recoveries
    
    
    (289
    )
    
    
    (261
    )Balance at September 30
    
    $
    5,613
    
    
    $
    5,444
 At September 30, 2004, Intermountains total classified assets were $4.6
million, compared with $3.1 million at September 30, 2003. Total nonperforming
loans were $1.4 million at September 30, 2004, compared with $0.5 million at
September 30, 2003. The increase in classified assets was primarily
attributable to the addition of 3 loan relationships, all of which management
feels are adequately provided for in the allowance for loan loss. The increase
in nonperforming loans was primarily attributable to the addition of 2 loans
for one borrower totaling approximately $700,000. At September 30, 2004,
InterMountains loan delinquency rate (30 days or more) as a percentage of
total loans was 0.42%, compared with 1.89% at September 30, 2003. Other Income.Total other income was $1.9 million and $1.7 million for
the three months ended September 30, 2004 and 2003, respectively and $5.1
million and $4.5 million for the nine months ended September 30, 2004 and 2003.
Fees and service charge income increased by 5.1% to $1.6 million for the
three months ended September 30, 2004 from $1.5 million for the same period
last year. Fees and service charge income increased by 6.6% to $4.3 million
for the nine months ended September 30, 2004 from $4.0 million for the same
period last year. Deposit service fees increased, reflecting continued account
and customer growth, and price increases enacted in April 2004. Deferred fee
income on commercial, real estate and consumer loans also improved, offsetting
decreases in fees generated by mortgage banking activity. Increases in other income for both the three-month and nine-month periods
ending September 30, 2004 also reflected improvement in investment referrals
and merchant credit card acceptance fees, and increases in fees from the
servicing of bank deposits securing credit cards. This line of business was
included as part of the acquisition of Orchard Bank in January 2003. 14




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##### Table of Contents



Operating Expenses. Operating expenses were $5.1 million and $4.3 million
for the three months ended September 30, 2004 and 2003, respectively.
Operating expenses were $14.3 million and $11.9 million for the nine months
ended September 30, 2004 and 2003, respectively. The higher level of operating
expenses was primarily a result of expanded staffing and fixed asset
depreciation to support continued loan and deposit growth and increases in
market share, particularly in the banks newer markets. InterMountain also
incurred additional expenses in the second and third quarters of 2004 related
to upgrading its core data and item processing technology. In doing so, the
company purchased substantial new hardware and software, terminated some
existing technology contracts and incurred significant training and overtime
expenses. In addition, the company incurred legal and professional fees
related to its June 2004 filing as a public reporting company with the
Securities and Exchange Commission. Salaries and employee benefits were $3.1 million and $2.6 million for the
three months ended September 30, 2004 and 2003, respectively. Salaries and
employee benefits were $8.4 million and $7.3 million for the nine months ended
September 30, 2004 and 2003, respectively. The employee costs reflected
increased branch staffing, increased mortgage banking staff and additional
administrative staff as a result of continued new branch growth and expansion.
At September 30, 2004, full-time-equivalent employees were 227, compared with
201 at September 30, 2003. Occupancy expenses were $768 thousand and $748 thousand for the three
months ended September 30, 2004 and 2003, respectively. Occupancy expenses
were $2.0 million and $1.8 million for the nine months ended September 30, 2004
and 2003, respectively. The increase was primarily due to costs associated
with the Ontario acquisition, the new Post Falls and Caldwell offices and
additional administrative facilities. Income Tax Provision. InterMountain recorded federal and state income tax
provisions of $721 thousand and $622 thousand for the three months ended
September 30, 2004 and 2003, respectively. For the nine months ended September
30, 2004 and 2003, InterMountain recorded federal and state income tax
provisions of $1.8 million and $1.6 million, respectively. The increased tax
provision in 2004 over 2003 is due to the increase in pre-tax net income. The
effective tax rates for both three month periods were 36.4% and 35.8% for both
nine month periods. Financial Position Assets. At September 30, 2004, InterMountains assets were $485.1
million, up $75.3 million or 18.4% from $409.8 million at December 31, 2003.
Growth in assets reflected increases in both investments and loans receivable,
and were supported by increases in customer deposits. Investments. InterMountains investment portfolio at September 30, 2004
was $94.2 million, an increase of $13.6 million or 16.9% from the December 31,
2003 balance of $80.6 million. The increase was primarily due to net purchases
of government agencies and mortgage-backed securities utilizing excess
liquidity created from increases in customer deposits and the proceeds of the
debentures issued in March 2004. Loans Receivable. At September 30, 2004, net loans receivable were $334.3
million, up $47.0 million or 16.4% from $287.3 million at December 31, 2003.
The increase was primarily due to net increases in business and agricultural
loans. During the nine months ended September 30, 2004, total loan
originations were $285.1 million compared with $212.2 million for the prior
years comparable period, reflecting growing loan demand in the companys
markets. 15




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##### Table of Contents



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, 2004
    
    December 31, 2003Amount
    
    %
    
    Amount
    
    %(Dollars in thousands)Commercial
    
    $
    241,676
    
    
    
    71.10
    
    
    $
    215,396
    
    
    
    73.65Residential real estate
    
    
    77,378
    
    
    
    22.76
    
    
    
    58,728
    
    
    
    20.08Consumer
    
    
    18,383
    
    
    
    5.41
    
    
    
    16,552
    
    
    
    5.66Municipal
    
    
    2,472
    
    
    
    0.73
    
    
    
    1,751
    
    
    
    0.61Total loans receivable
    
    
    339,909
    
    
    
    100.00
    
    
    
    292,427
    
    
    
    100.00Net deferred origination fees
    
    
    (13
    )
    
    
    
    
    
    
    (53
    )Allowance for losses on loans
    
    
    (5,613
    )
    
    
    
    
    
    
    (5,118
    )Loans receivable, net
    
    $
    334,283
    
    
    
    
    
    
    $
    287,256Weighted average yield at end of period
    
    
    6.62
    %
    
    
    
    
    
    
    6.60
    %
 The following table sets forth InterMountains loan originations for the
periods indicated. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % Change(Dollars in thousands)Commercial
    
    $
    65,595
    
    
    $
    46,731
    
    
    
    40.4
    
    
    $
    207,959
    
    
    $
    150,020
    
    
    
    38.6Residential real estate
    
    
    22,654
    
    
    
    21,069
    
    
    
    7.5
    
    
    
    61,436
    
    
    
    48,881
    
    
    
    25.7Consumer
    
    
    4,718
    
    
    
    3,571
    
    
    
    32.1
    
    
    
    11,814
    
    
    
    9,505
    
    
    
    24.3Municipal
    
    
    3,828
    
    
    
    3,613
    
    
    
    6.0
    
    
    
    3,843
    
    
    
    3,837
    
    
    
    0.2Total loans originated
    
    $
    96,795
    
    
    $
    74,984
    
    
    
    29.1
    
    
    $
    285,052
    
    
    $
    212,243
    
    
    
    34.3
 BOLI and All Other Assets. Bank-owned life insurance (BOLI) and other
assets increased to $8.7 million at September 30, 2004 from $7.5 million at
December 31, 2003. The increase was primarily due to an increase in assets
related to the growth of the bank. 16




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##### Table of Contents



Deposits. Total deposits increased $67.2 million or 19.5% to $412.1
million at September 30, 2004 from $344.9 million at December 31, 2003,
primarily due to increases in non-interest bearing demand accounts, savings and
certificates of deposit accounts. Ongoing business development efforts in the
Companys existing markets, along with development of the relatively new
Kootenai County and Caldwell markets were primary contributors to the increase
in deposits over the time period measured. The following table sets forth the composition of InterMountains
deposits at the dates indicated. September 30, 2004
    
    December 31, 2003Amount
    
    %
    
    Amount
    
    %(Dollars in thousands)Demand
    
    $
    93,061
    
    
    
    22.6
    
    
    $
    76,439
    
    
    
    22.2NOW and money market 0.0% to 2.2%
    
    
    137,664
    
    
    
    33.4
    
    
    
    114,322
    
    
    
    33.1Savings and IRA 0.0% to 6.4%
    
    
    55,795
    
    
    
    13.5
    
    
    
    45,807
    
    
    
    13.3Certificate of deposit accounts
    
    
    125,582
    
    
    
    30.5
    
    
    
    108,298
    
    
    
    31.4Total deposits
    
    $
    412,102
    
    
    
    100.0
    
    
    $
    344,866
    
    
    
    100.0Weighted average interest rate
on certificates of deposit
    
    
    
    
    
    
    2.77
    %
    
    
    
    
    
    
    2.57
    %
 Borrowings. Deposit accounts are InterMountains primary source of funds.
InterMountain does, however, rely upon advances from the Federal Home Loan
Bank of Seattle (FHLB Seattle), reverse repurchase agreements and other
borrowings to supplement its funding and to meet deposit withdrawal
requirements. The total of such borrowings were $35.0 million and $30.4
million at September 30, 2004 and December 31, 2003, respectively. See
Liquidity and Sources of Funds. 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. Currently, InterMountains
interest-bearing liabilities, consisting primarily of deposits, mature or
reprice more rapidly, or on different terms, than do its interest-earning
assets, consisting primarily of loans receivable and investments. The fact that
liabilities mature or reprice more frequently on average than assets may be
beneficial in times of declining interest rates; however, such an
asset/liability structure may result in declining net interest income during
periods of rising interest rates. The nature of InterMountains short-term
deposits and the use of pricing strategies on the liability side, combined with
variable rate loan products tied to an internal cost of funds and the prime
lending rate index typically mitigates the negative impact in a rising interest
rate environment. 17




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##### Table of Contents



To minimize the 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, i.e. deposits and borrowings. This approach historically has
contributed to a consistent interest rate spread 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 more
likely to prepay loans. 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 NPV by
controlling its exposure to changing interest rates. InterMountain uses a simulation model designed to measure the sensitivity
of net interest income and NPV to changes in interest rates. This simulation
model is designed to enable InterMountain to generate a forecast of net
interest income and NPV 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. InterMountain is continuing to pursue strategies to manage the level of
its interest rate risk while increasing its net interest income and NPV through
the origination and retention of variable-rate consumer, business banking,
construction and commercial real estate loans, which generally have higher
yields than residential permanent loans, by the sale of certain long-term
fixed-rate loans and investments, and 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 IRR or
increasing net interest income. InterMountain also uses gap analysis, a traditional analytical tool
designed to measure the difference between the amount of interest-earning
assets and the amount of interest-bearing liabilities expected to reprice in a
given period. InterMountain calculated its one-year cumulative repricing gap
position to be a negative 16.5% and a negative 11.4% at September 30, 2004 and
December 31, 2003, respectively. Management attempts to maintain
InterMountains gap position between positive 20% and negative 20%. At
September 30, 2004, InterMountains gap positions were within limits
established by its Board of Directors. Management is pursuing strategies to
increase its net interest income without significantly increasing its
cumulative gap positions in future periods. There can be no assurance that
InterMountain will be successful implementing these strategies or that, if
these strategies are implemented, they will have the intended effect of
increasing its net interest income. See Results of Operations  Net Interest
Income and Capital Resources. 18




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##### Table of Contents



Liquidity and Sources of Funds As a financial institution, InterMountains primary sources of funds are
investing and financing activities, including the collection of loan principal
and interest payments. Financing activities consist primarily of customer
deposits, advances from FHLB Seattle and other borrowings. Deposits increased
to $412.1 million at September 30, 2004 from $344.9 million at December 31,
2003, primarily due to increases in interest bearing demand accounts,
non-interest demand accounts and certificates of deposit. The net increase in
deposits was primarily used to fund loans and pay down other borrowings. At
September 30, 2004 and December 31, 2003, securities sold subject to repurchase
agreements were $13.5 million and $17.2 million, respectively. 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. During the nine months ended September 30, 2004, cash used in investing
activities consisted primarily of the purchase of available-for-sale securities
in the investment portfolio and new loan volume net of calls, maturities and
prepayments. The levels of these prepayments increase or decrease depending on
the size of the loan and the general trend and level of interest rates, which
influences the level of refinancing and mortgage prepayments. During the same
period, cash provided by financing activities consisted primarily of increases
in certificates of deposit, demand deposits and the issuance of debentures. InterMountains credit line with FHLB Seattle provides for borrowings up
to a percentage of its total assets subject to collateralization requirements.
At September 30, 2004, this credit line represented a total borrowing capacity
of approximately $15.8 million, of which $10.8 million was available.
InterMountain also borrows on an unsecured basis from correspondent banks and
other financial entities. As of September 30, 2004 there were no outstanding
amounts. InterMountain actively manages its liquidity to maintain an adequate
margin over the level necessary to support expected and potential loan fundings
and deposit withdrawals. This is balanced with the need to maximize yield on
alternative investments. The liquidity ratio may vary from time to time,
depending on economic conditions, savings flows and loan funding needs. Capital Resources InterMountains total stockholders equity was $30.1 million at September
30, 2004 compared with $27.1 million at December 31, 2003. The increase in
total stockholders equity was primarily due to the increase in net income net
of the change to unrealized gains and losses on securities. Stockholders
equity was 6.2% of total assets at September 30, 2004 compared with 6.6% at
December 31, 2003. The decrease in this ratio is due to the increase in total
assets at September 30, 2004 as compared to December 31, 2003 which was
proportionately larger than the increase in equity due to net income. At September 30, 2004, InterMountain had an unrealized loss of $329
thousand, net of related income taxes, on investments classified as available
for sale. At December 31, 2003, InterMountain had an unrealized gain of $275
thousand, net of related income taxes, on investments classified as available
for sale. Fluctuations in prevailing interest rates continue to cause
volatility in this component of accumulated comprehensive income or loss in
stockholders equity and may continue to do so in future periods. 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 2 of Notes to
Consolidated Financial Statements. 19




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##### Table of Contents



InterMountain and Panhandle 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 Panhandle will endeavor to enhance its 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, 2004, InterMountain exceeded all such regulatory
capital requirements and was well-capitalized pursuant to FFIEC regulations. 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 FFIEC call
report at September 30, 2004. Capital
    
    Well-CapitalizedActual
    
    Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total capital (to
risk-weighted
assets)
    
    $
    49,626
    
    
    
    12.76
    %
    
    $
    31,113
    
    
    
    8.00
    %
    
    $
    38,892
    
    
    
    10.00
    %Tier 1 capital to
(to risk-weighted
assets)
    
    
    38,881
    
    
    
    10.00
    
    
    
    15,557
    
    
    
    4.00
    
    
    
    23,329
    
    
    
    6.00Tier 1 capital (to
average assets)
    
    
    38,881
    
    
    
    8.15
    
    
    
    19,083
    
    
    
    4.00
    
    
    
    28,624
    
    
    
    6.00
 Off Balance Sheet Arrangements and Contractual Obligations InterMountain, 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. Intermountain 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 InterMountain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. 20




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##### Table of Contents



The following table represents InterMountains on-and-off balance sheet
aggregate contractual obligations to make future payments as of September 30,
2004. Payments Due by PeriodOverLess than
    
    1 to 3
    
    3 to 5
    
    More thanTotal
    
    1 year
    
    years
    
    years
    
    5 years(Dollars in thousands)Long-term debt(1)
    
    $
    21,527
    
    
    $
    
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    16,527Capital lease obligations(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    3,450
    
    
    
    355
    
    
    
    535
    
    
    
    519
    
    
    
    2,041Purchase obligations(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
reflected on the
registrants balance sheet
under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    24,977
    
    
    $
    355
    
    
    $
    535
    
    
    $
    5,519
    
    
    $
    18,568
   (1)
    
    Excludes interest payments.(2)
    
    Excludes recurring accounts payable, accrued expenses and other
liabilities, repurchase agreements and customer deposits, all of which
are recorded on the Companys balance sheet. 21




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##### Table of Contents



New Accounting Policies In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46). In December 2003, the FASB issued
a revision to this interpretation (FIN No. 46(r)). FIN No. 46(r) clarifies
the application of Accounting Research Bulletin No. 51 to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. InterMountain adopted FIN No. 46(r) effective January 1, 2004.
As a result of the issuance of FIN No. 46(r) and the accounting professions
application of the guidance provided by the FASB, issuer trusts, like
InterMountain Statutory Trust I and InterMountain Statutory Trust II
(collectively referred to as the Trusts), are generally variable interest
entities. We have determined that we are not the primary beneficiaries under
the trusts, and accordingly InterMountain has not consolidated the financial
statements of the Trusts into its consolidated financial statements. The
amounts payable to these trusts continues to be treated as other borrowings. In December 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. SOP No. 03-3
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investors initial investment in loans
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. SOP No. 03-3 is effective for loans acquired in fiscal
years beginning after December 15, 2004. InterMountain believes the
implementation of SOP No. 03-3 will not have a material effect on
InterMountains consolidated financial statements. In September 2004, the Financial Accounting Standards Board (FASB)
agreed to issue additional guidance on the application of Emerging Issues Task
Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments. The FASB also deferred the
measurement and recognition guidance contained in EITF Issue 03-1. This delay
does not suspend the requirement to recognize other-than-temporary impairments
as required by existing authoritative literature. During the period of the
delay, InterMountain will continue to apply relevant other-than-temporary
guidance to its investment portfolio, as applicable. The FASBs final guidance
on EITF Issue 03-1may alter the criteria by which InterMountain assesses if
impairment is temporary or permanent. The FASB is expected to release the
additional guidance by the end of 2004. Regulation and Compliance InterMountain is subject to many laws and regulations applicable to
banking activities. As a bank holding company, InterMountain is subject to
regulation, supervision and examination by the Federal Reserve. Panhandle is
an Idaho commercial bank operating in Idaho, with one branch in Oregon, and
deposits are insured by the FDIC. As a result, Panhandle is subject to
supervision and regulation by the Idaho Department of Finance, the FDIC, and
with respect to the State of Oregon, the Division of Finance and Corporate
Securities. These agencies have the authority to prohibit banks from engaging
in what they believe constitute unsafe or unsound banking practices. In July 2002, the Sarbanes-Oxley Act of 2002 (the SOA) was enacted with
the intent of protecting investors by improving the accuracy and reliability of
corporate disclosures. The SOA, among other things: requires enhanced
financial disclosures; requires greater accountability from management,
including the principal executive officer and principal financial officer;
demands greater independence of audit functions and provides for enhanced
penalties for accounting and auditing improprieties at publicly traded
companies. The SOA directs the Securities and Exchange Commission (SEC) and
securities exchanges to adopt rules that implement these and other
requirements. A number of rules have been adopted and continue to be proposed
and implemented pursuant to the SOA. 22




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##### Table of Contents



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:  
    
    the strength of the United States economy in
general and the strength of the local economies in which InterMountain
conducts its operations;
    
    the effects of inflation, interest rate levels
and market and monetary fluctuations;
    
    trade, monetary and fiscal policies and laws,
including interest rate 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;
    
    growth and acquisition strategies;
    
    InterMountains ability to successfully integrate
entities that may be or have been acquired;
    
    changes in consumer spending and saving habits;
and
    
    InterMountains success at managing the risks
involved in the foregoing. 23




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##### Table of Contents



Item 3  Quantitative and Qualitative Disclosures About Market Risk For a discussion of InterMountains market risks, see Managements
Discussion and Analysis  Asset and Liability Management. 
 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 the end of the
period covered by this report, 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 Controls: In the quarter ended September 30,
2004, the Bank did not make any significant changes in, nor take any
corrective actions regarding, its internal controls or other factors that
could significantly affect these controls. 
 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 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 24




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##### Table of Contents



Item 5   Other Information Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers Effective November 9, 2004, Registrant announced certain changes in its
executive management team. A copy of the press release is attached as Exhibit
99.1 and is incorporated herein in its entirety by reference. David Smith is resigning from his position as Registrants chief financial
officer, and he will continue his employment as Registrants senior financial
officer until his anticipated retirement in May 2005. Doug Wright,
Registrants executive vice president and current chief operating officer, will
become Registrants chief financial officer. Pamela Rasmussen, who recently
commenced employment with Registrant upon consummation of its merger with Snake
River Bancorp, Inc., will assume the position of senior vice president and
chief operating officer of Panhandle State Bank, Registrants wholly owned
banking subsidiary. Doug Wright Mr. Wright joined Registrant and Panhandle State Bank in 2002. From 1996 to
2002, Mr. Wright, who is 40 years of age, served as a senior vice president and
production manager of Sterling Savings Bank. In this capacity, Mr. Wright was
responsible for overseeing the credit, operational, and financial functions for
the branch division of a multi-state regional financial institution. Before
that time, Mr. Wright was a vice president at WestOne Bank from 1987 to 1996. In connection with his employment, Mr. Wright and Panhandle State Bank are
parties to an Executive Severance Agreement, effective December 17, 2003. This
agreement provides that Mr. Wright may receive a severance payment if a
definitive agreement providing for a change of control (as defined) is entered
into during his employment or within 12 months after he terminates his
employment for good reason (as defined) or is involuntarily terminated other
than for cause, disability, death or retirement (as each term is defined). The
amount of the severance payment would equal two (2) times the average of the
total base compensation and short term bonus payments received by Mr. Wright
for each of the two most recent calendar years. So long as Mr. Wright remains
employed, he will not automatically receive the severance payment upon a change
in control; rather, he will receive the payment if he terminates his employment
for good reason or is involuntarily terminated other than for cause,
disability, death or retirement during the 24 month post-change in control
salary protection period. The amount of any payment to Mr. Wright will be
reduced so that it does not constitute a parachute payment under Section 280G
of the Internal Revenue Code. Pamela Rasmussen Prior to beginning her employment with Registrant, Ms. Rasmussen, who is 44
years of age, was the chief financial officer and senior vice president of
Snake River Bancorp, Inc. and its wholly owned subsidiary, Magic Valley Bank.
Prior to joining Magic Valley Bank in 2002, Ms. Rasmussen served as the
internal audit manager from 1999 to 2000 & vice president and manager of
operations from 2000 to 2002 for Stockman Financial Bancorp, Inc. in Miles
City, Montana. In connection with her employment, Ms. Rasmussen and Panhandle State Bank are
parties to an employment agreement, the term of which commenced on November 2,
2004, the effective date of Registrants merger with Snake River Bancorp.
Effective November 9, 2004, the employment agreement has been amended and
restated to reflect certain changes related to Ms. Rasmussens new position
with Panhandle State Bank. Ms. Rasmussens employment agreement has a term of two (2) years, and provides
for a current salary of $110,000 per year, eligibility for bonuses pursuant to
Magic Valley Banks existing bonus plan for 2004, and commencing in 2005,
eligibility to participate in Panhandle State Banks short-term bonus plan and 25




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##### Table of Contents



other incentives. Ms. Rasmussen has also entered into a stock purchase
agreement with Registrant, pursuant to which (i) she agrees to purchase shares
of Intermountain common stock with a market value of $9,000; and (ii)
Registrant agrees to reimburse her for those purchases pursuant to a three-year
vesting schedule. Ms. Rasmussens employment agreement provides that if she is terminated without
Cause (as defined) or she terminates her agreement for Good Reason (as
defined), she will receive a severance payment equal to two (2) times her
current base salary, payable over a two-year period in accordance with
Panhandle State Banks regular payroll schedules, policies, and procedures. If
Ms. Rasmussen voluntarily terminates her employment for whatever reason during
the second year of the agreement term, she will be entitled to receive her base
salary for the balance of the employment term in accordance with Panhandles
regular payroll schedules, policies, and procedures. If Ms. Rasmussen is
terminated for Cause or terminates her employment without Good Reason during
the first year of the employment term, Registrant will be responsible only for
salary earned and expenses reimbursable through the date of termination, and
Ms. Rasmussen will have no rights to other compensation or benefits under the
agreement. The amount of any payments to Ms. Rasmussen will be reduced so that
the aggregate amount received does not constitute a parachute payment under
Section 280G of the Internal Revenue Code. 
 Item 6   Exhibits Exhibit No.
    
    Exhibit10.1
    
    Employment Agreement between Panhandle State Bank and Pamela
Rasmussen, as amended and restated as of November 9, 2004.31.1
    
    Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes Oxley Act of 2002.32
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant
To Section 906 of the Sarbanes Oxley Act of 2002.99.1
    
    Press Release dated November 12, 2004 announcing changes in
Registrants Executive Management team.
 26




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##### Table of Contents



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, INC.(Registrant)November 10, 2004
    
    By:
    
    /s/ Curt HeckerDate
    
    
    
    Curt HeckerPresidentand Chief Executive OfficerNovember 10, 2004
    
    By:
    
    /s/ Doug WrightDate
    
    
    
    Doug WrightExecutive Vice Presidentand Chief Financial Officer
 27