##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM                      TO
 Commission File Number 000-50667
 INTERMOUNTAIN COMMUNITY BANCORP
  Idaho
    
    82-0499463(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 231 N. Third Avenue, Sandpoint, Idaho 83864
 (208) 263-0505
 þ o
  o þ o
 o þ
  Class
    
    Outstanding as of August 3, 2007Common Stock (no par value)
    
    8,221,911




---



##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended June 30, 2007
 TABLE OF CONTENTS
 PART I  Financial InformationItem 1 - Financial Statements (Unaudited)Consolidated Balance Sheets for June 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006
    
    
    5Consolidated Statements of Comprehensive Income for the three and six months ended June
30, 2007 and 2006
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3 - Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4 - Controls and Procedures
    
    
    25PART II - Other InformationItem 1 - Legal Proceedings
    
    
    26Item 1A - Risk Factors
    
    
    26Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3 - Defaults Upon Senior Securities
    
    
    26Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    26Item 5 - Other Information
    
    
    27Item 6 - Exhibits
    
    
    27Signatures
    
    
    28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




---



##### Table of Contents



PART I  Financial Information
 
 Item 1  Financial Statements
 Intermountain Community Bancorp
 
 Consolidated Balance Sheets
(Unaudited)
 June 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    85
    
    
    $
    72Non-interest bearing and vault
    
    
    21,742
    
    
    
    24,305Restricted cash
    
    
    595
    
    
    
    888Federal funds sold
    
    
    12,910
    
    
    
    35,385Available-for-sale securities, at fair value
    
    
    115,108
    
    
    
    118,490Held-to-maturity securities, at amortized cost
    
    
    6,949
    
    
    
    6,719Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,779
    
    
    
    1,779Loans held for sale
    
    
    4,821
    
    
    
    8,945Loans receivable, net
    
    
    741,025
    
    
    
    664,403Accrued interest receivable
    
    
    7,813
    
    
    
    7,329Office properties and equipment, net
    
    
    34,755
    
    
    
    25,444Bank-owned life insurance
    
    
    7,558
    
    
    
    7,400Goodwill
    
    
    11,662
    
    
    
    11,662Other intangible assets
    
    
    801
    
    
    
    881Prepaid expenses and other assets, net
    
    
    9,351
    
    
    
    6,164Total assets
    
    $
    976,954
    
    
    $
    919,866LIABILITIES:Deposits
    
    $
    734,398
    
    
    $
    693,686Securities sold subject to repurchase agreements
    
    
    110,568
    
    
    
    106,250Advances from Federal Home Loan Bank of Seattle
    
    
    5,000
    
    
    
    5,000Cashiers checks issued and payable
    
    
    6,116
    
    
    
    6,501Accrued interest payable
    
    
    2,956
    
    
    
    1,909Other borrowings
    
    
    29,403
    
    
    
    22,602Accrued expenses and other liabilities
    
    
    5,575
    
    
    
    5,838Total liabilities
    
    
    894,016
    
    
    
    841,786Commitments and contingent liabilitiesCommon stock, no par value; 29,040,000 shares authorized;
8,282,514 and 7,423,904 shares issued and 8,217,636 and
7,382,912 shares outstanding
    
    
    76,419
    
    
    
    60,395Accumulated other comprehensive loss
    
    
    (359
    )
    
    
    (111
    )Retained earnings
    
    
    6,878
    
    
    
    17,796Total stockholders equity
    
    
    82,938
    
    
    
    78,080Total liabilities and stockholders equity
    
    $
    976,954
    
    
    $
    919,866
  3




---



##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Income
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands, except per
    
    
    (Dollars in thousands, except pershare data)
    
    
    share data)Interest income:Loans
    
    $
    16,310
    
    
    $
    12,970
    
    
    $
    31,371
    
    
    $
    24,577Investments
    
    
    1,642
    
    
    
    943
    
    
    
    3,638
    
    
    
    1,964Total interest income
    
    
    17,952
    
    
    
    13,913
    
    
    
    35,009
    
    
    
    26,541Interest expense:Deposits
    
    
    4,630
    
    
    
    2,955
    
    
    
    9,064
    
    
    
    5,607Other borrowings
    
    
    1,852
    
    
    
    715
    
    
    
    3,626
    
    
    
    1,400Total interest expense
    
    
    6,482
    
    
    
    3,670
    
    
    
    12,690
    
    
    
    7,007Net interest income
    
    
    11,470
    
    
    
    10,243
    
    
    
    22,319
    
    
    
    19,534Provision for losses on loans
    
    
    (1,172
    )
    
    
    (762
    )
    
    
    (2,006
    )
    
    
    (666
    )Net interest income after provision for losses on
loans
    
    
    10,298
    
    
    
    9,481
    
    
    
    20,313
    
    
    
    18,868Other income:Fees and service charges
    
    
    2,756
    
    
    
    2,813
    
    
    
    5,272
    
    
    
    4,867Bank-owned life insurance
    
    
    81
    
    
    
    77
    
    
    
    158
    
    
    
    152Gain/(loss) on sale of securities
    
    
    
    
    
    
    (983
    )
    
    
    
    
    
    
    (983
    )Other
    
    
    360
    
    
    
    457
    
    
    
    808
    
    
    
    769Total other income
    
    
    3,197
    
    
    
    2,364
    
    
    
    6,238
    
    
    
    4,805Operating expenses
    
    
    9,957
    
    
    
    8,889
    
    
    
    19,635
    
    
    
    16,594Income before income taxes
    
    
    3,538
    
    
    
    2,956
    
    
    
    6,916
    
    
    
    7,079Income tax provision
    
    
    (1,354
    )
    
    
    (1,117
    )
    
    
    (2,639
    )
    
    
    (2,678
    )Net income
    
    $
    2,184
    
    
    $
    1,839
    
    
    $
    4,277
    
    
    $
    4,401Earnings per share  basic
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.52
    
    
    $
    0.55Earnings per share  diluted
    
    $
    0.25
    
    
    $
    0.22
    
    
    $
    0.50
    
    
    $
    0.52Weighted
average shares outstanding - basic
    
    
    8,194,522
    
    
    
    8,023,276
    
    
    
    8,178,025
    
    
    
    7,997,847Weighted
average shares outstanding - diluted
    
    
    8,605,032
    
    
    
    8,448,791
    
    
    
    8,610,927
    
    
    
    8,433,640
  4




---



##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Six Months EndedJune 30,2007
    
    
    2006(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    4,277
    
    
    $
    4,401Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,189
    
    
    
    992Stock-based compensation expense
    
    
    195
    
    
    
    145Net amortization of premiums on securities
    
    
    (243
    )
    
    
    31Excess tax benefit related to stock-based compensation
    
    
    (346
    )
    
    
    (36
    )Provisions for losses on loans
    
    
    2,006
    
    
    
    666Amortization of core deposit intangibles
    
    
    80
    
    
    
    87Gain on sale of loans, investments, property and equipment
    
    
    (220
    )
    
    
    Loss on sale of loans, investments, property and equipment
    
    
    
    
    
    
    983Accretion of deferred gain on sale of branch property
    
    
    (8
    )
    
    
    Net accretion of loan and deposit discounts and premiums
    
    
    (33
    )
    
    
    (54
    )Deferred income tax benefit
    
    
    321
    
    
    
    137Increase in cash surrender value of bank-owned life insurance
    
    
    (158
    )
    
    
    (152
    )Change in:Loans held for sale
    
    
    4,124
    
    
    
    (1,857
    )Accrued interest receivable
    
    
    (484
    )
    
    
    (232
    )Prepaid expenses and other assets
    
    
    (3,294
    )
    
    
    (3,079
    )Accrued interest payable
    
    
    1,047
    
    
    
    251Accrued expenses and other liabilities
    
    
    (863
    )
    
    
    (72
    )Net cash provided by operating activities
    
    
    7,590
    
    
    
    2,211Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (56,849
    )
    
    
    (26,500
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    56,281
    
    
    
    29,165Principal payments on mortgage-backed securities
    
    
    3,811
    
    
    
    3,833Purchases of held-to-maturity securities
    
    
    (300
    )
    
    
    (649
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    42
    
    
    
    Origination of loans, net of principal payments
    
    
    (81,606
    )
    
    
    (59,279
    )Proceeds from sale of loans
    
    
    3,215
    
    
    
    3,425Purchase of office properties and equipment
    
    
    (12,421
    )
    
    
    (3,900
    )Proceeds from sale of office properties and equipment
    
    
    2,242
    
    
    
    Net change in federal funds sold
    
    
    22,475
    
    
    
    5,880Improvements and other changes in other real estate owned
    
    
    271
    
    
    
    795Net change in restricted cash
    
    
    293
    
    
    
    (256
    )Net cash used in investing activities
    
    
    (62,546
    )
    
    
    (47,486
    )
 5




---



##### Table of Contents



Intermountain Community Bancorp
Consolidated Statements of Cash Flows (continued)
(Unaudited)
 Six Months EndedJune 30,2007
    
    
    2006(Dollars in thousands)Cash flows from financing activities:Net change in demand, money market and savings deposits
    
    $
    48,416
    
    
    $
    35,216Net change in certificates of deposit
    
    
    (7,699
    )
    
    
    8,127Net change in repurchase agreements
    
    
    4,318
    
    
    
    1,287Principal reduction of note payable
    
    
    (18
    )
    
    
    (98
    )Excess tax benefit related to stock-based compensation
    
    
    346
    
    
    
    36Proceeds from exercise of stock options
    
    
    224
    
    
    
    181Proceeds from other borrowings
    
    
    6,819
    
    
    
    375Net cash provided by financing activities
    
    
    52,406
    
    
    
    45,124Net change in cash and cash equivalents
    
    
    (2,550
    )
    
    
    (151
    )Cash and cash equivalents, beginning of period
    
    
    24,377
    
    
    
    23,875Cash and cash equivalents, end of period
    
    $
    21,827
    
    
    $
    23,724Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    13,459
    
    
    $
    6,744Income taxes
    
    
    3,090
    
    
    
    3,550Noncash investing and financing activities:Restricted stock issued
    
    
    698
    
    
    
    435Deferred gain on sale/leaseback
    
    
    312
    
    
    
    Purchase of land
    
    
    
    
    
    
    1,13010% stock dividend
    
    
    15,186
    
    
    
    13,637Loans converted to Other Real Estate Owned
    
    
    
    
    
    
    398
  6




---



##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Comprehensive Income
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net income
    
    $
    2,184
    
    
    $
    1,839
    
    
    $
    4,277
    
    
    $
    4,401Other comprehensive income (loss):Change in unrealized gains (losses)
on investments, net of reclassification
adjustments
    
    
    (941
    )
    
    
    572
    
    
    
    (412
    )
    
    
    126Less deferred income tax (expense) benefit
    
    
    372
    
    
    
    (237
    )
    
    
    163
    
    
    
    (43
    )Net other comprehensive income (loss)
    
    
    (569
    )
    
    
    335
    
    
    
    (249
    )
    
    
    83Comprehensive income
    
    $
    1,615
    
    
    $
    2,174
    
    
    $
    4,028
    
    
    $
    4,484
  7




---



##### 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, 2006. In the
opinion of management, the unaudited interim consolidated financial statements furnished
herein include adjustments, all of which are of a normal recurring nature, necessary for a
fair statement of the results for the interim periods presented.The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date the financial statements are
published, and the reported amounts of revenues and expenses during the reporting period.
Uncertainties with respect to such estimates and assumptions are inherent in the preparation
of Intermountain Community Bancorps (Intermountains or  the Companys ) consolidated
financial statements; accordingly, it is possible that the actual results could differ from
these estimates and assumptions, which could have a material effect on the reported amounts
of Intermountains consolidated financial position and results of operations.2.
    
    Advances from the Federal Home Loan Bank of Seattle:The Company had an advance from the Federal Home Loan Bank of Seattle totaling $5.0 million
at June 30, 2007. The advance bears a fixed interest rate of 2.71% and matures on June 18,
2008.3.
    
    Other Borrowings:The components of other borrowings are as follows (in thousands):
 June 30,
    
    
    December 31,2007
    
    
    2006Term note payable (1)
    
    $
    8,279
    
    
    $
    8,279Term note payable (2)
    
    
    8,248
    
    
    
    8,248Term note payable (3)
    
    
    997
    
    
    
    1,015Term note payable (4)
    
    
    11,879
    
    
    
    Term note payable (5)
    
    
    
    
    
    
    5,060Total other borrowings
    
    $
    29,403
    
    
    $
    22,602
 
 (1)
    
    In January 2003, the Company issued $8.0 million of Trust Preferred securities
through its subsidiary, Intermountain Statutory Trust I. The debt associated with
these securities bears interest at 6.75%, with interest only paid quarterly starting in
June 2003. The debt is callable by the Company in March 2008 and matures in March
2033.(2)
    
    In March 2004, the Company issued $8.0 million of Trust Preferred securities
through its subsidiary, Intermountain Statutory Trust II. The debt associated with
these securities bears interest on a variable basis tied to the 90-day LIBOR (London
Inter-Bank Offering Rate) index plus 2.8%, with interest only paid quarterly. The rate
on this borrowing was 8.16% at June 30, 2007. The debt is callable by the Company in
April 2009 and matures in April 2034.(3)
    
    In January 2006, the Company purchased land to build the Financial and
Technical Center in Sandpoint, Idaho. It entered into a Note Payable with the sellers
of the property in the amount of $1.13 million, with a fixed rate of 6.65%. The note
matures in February 2026.(4)
    
    In March 2007, the Company entered into a borrowing agreement with Pacific
Coast Bankers Bank in the amount of $18.0 million. The borrowing agreement is a
revolving line of credit with a variable rate of interest of Prime less 1.00%. At June
30, 2007, the balance outstanding was $11,879,000 at 7.25%.(5)
    
    In January 2006, the Company entered into a borrowing agreement with US Bank in
the amount of $5.0 million which was raised to $10.0 million in September 2006. The
borrowing agreement was a revolving line of credit with a variable rate of interest
tied to LIBOR. This line of credit was paid off in March 2007. 8




---



##### Table of Contents



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. 4.
    
    Earnings Per Share:The following table presents the basic and diluted earnings per share computations:
 Three Months Ended June 30,(Dollars in thousands, except per share amounts)2007
    
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Avg.
    
    
    Per Share
    
    
    Net
    
    
    Avg.
    
    
    Per ShareIncome
    
    
    Shares(1)
    
    
    Amount
    
    
    Income
    
    
    Shares(1)
    
    
    AmountBasic computations
    
    $
    2,184
    
    
    
    8,194,522
    
    
    $
    0.27
    
    
    $
    1,839
    
    
    
    8,023,276
    
    
    $
    0.23Effect of dilutive
securities:Common stock
options and stock
grants
    
    
    
    
    
    
    410,510
    
    
    
    (0.02
    )
    
    
    
    
    
    
    425,515
    
    
    
    (0.01
    )Diluted computations
    
    $
    2,184
    
    
    
    8,605,032
    
    
    $
    0.25
    
    
    $
    1,839
    
    
    
    8,448,791
    
    
    $
    0.22
 Six Months Ended June 30,(Dollars in thousands, except per share amounts)2007
    
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Avg.
    
    
    Per Share
    
    
    Net
    
    
    Avg.
    
    
    Per ShareIncome
    
    
    Shares(1)
    
    
    Amount
    
    
    Income
    
    
    Shares(1)
    
    
    AmountBasic computations
    
    $
    4,277
    
    
    
    8,178,025
    
    
    $
    0.52
    
    
    $
    4,401
    
    
    
    7,997,847
    
    
    $
    0.55Effect of dilutive
securities:Common stock
options and stock
grants
    
    
    
    
    
    
    432,902
    
    
    
    (0.02
    )
    
    
    
    
    
    
    435,793
    
    
    
    (0.03
    )Diluted computations
    
    $
    4,277
    
    
    
    8,610,927
    
    
    $
    0.50
    
    
    $
    4,401
    
    
    
    8,433,640
    
    
    $
    0.52
 
 (1)
    
    Weighted average shares outstanding have been adjusted for the
10% common stock dividend paid May 31, 2007 to shareholders of record on May 15, 2007. 9




---



##### Table of Contents



5.
    
    Operating Expenses:The following table details Intermountains components of total operating expenses:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    $
    6,322
    
    
    $
    5,563
    
    
    $
    12,442
    
    
    $
    10,180Occupancy expense
    
    
    1,445
    
    
    
    1,201
    
    
    
    2,837
    
    
    
    2,316Advertising
    
    
    353
    
    
    
    274
    
    
    
    571
    
    
    
    432Fees and service charges
    
    
    392
    
    
    
    231
    
    
    
    672
    
    
    
    450Printing, postage and supplies
    
    
    402
    
    
    
    402
    
    
    
    747
    
    
    
    754Legal and accounting
    
    
    334
    
    
    
    320
    
    
    
    606
    
    
    
    611Other expense
    
    
    709
    
    
    
    898
    
    
    
    1,760
    
    
    
    1,851Total operating expenses
    
    $
    9,957
    
    
    $
    8,889
    
    
    $
    19,635
    
    
    $
    16,594
 6.
    
    Equity Compensation Plans:Effective January 1, 2006, the Company adopted FASB Statement No. 123 (R), Share-Based
Payment. Statement 123 (R) requires that compensation cost relating to share-based payment
transactions be recognized in financial statements. The cost is measured based on the fair
value of the equity or liability instruments issued. Statement 123 (R) covers a wide range
of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans.The Company adopted Statement 123 (R) using the modified prospective transition method.
Under this method, the Company is required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously granted awards
that remain outstanding as of the beginning of the period of adoption. The Company measured
share-based compensation cost using the Black-Scholes option pricing model for stock option
grants prior to January 1, 2006 and anticipates using this pricing mode for future grants.
Forfeitures did not affect the calculated expense based upon historical activities of option
grantees.The Company utilizes its stock to compensate employees and Directors under the 1999 Director
Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together the Stock
Option Plans). Options to purchase Intermountain common stock have been granted to
employees and directors under the Stock Option Plans at prices equal to the fair market
value of the underlying stock on the dates the options were granted. The options vest 20%
per year, over a five-year period, and expire in 10 years. At June 30, 2007, there were
247,657 shares available for grant. The Company did not grant options to purchase
Intermountain common stock during either the six months ended June 30, 2007 or 2006.For the six months ended June 30, 2007 and 2006, stock option expense totaled $65,000 and
$71,000, respectively. The Company has approximately $200,000 remaining to expense related
to the non-vested stock options outstanding at June 30, 2007. This expense will be recorded
over a weighted average period of 14 months. The expense for the stock option expense was
based on the fair value of options granted calculated using the Black-Scholes valuation
model per FAS 123R. Assumptions used in the Black-Scholes option-pricing model for options
issued in years prior to 2005 are as follows:
 Dividend yield
    
    0.0%Expected volatility
    
    17.0% - 46.6%Risk free interest rates
    
    4.0% - 7.1%Expected option lives
    
    5 - 10 yearsForfeiture rate
    
    0.0%
 In 2003, shareholders approved a change to the 1999 Employee Option Plan to provide for the
granting of restricted stock awards. The Company has granted restricted stock to directors
and employees beginning in 2005. The restricted stock vests 20% per year, over a five-year
period. The Company granted 32,174 and 25,743 restricted shares with a grant date fair
value of $698,000 and $451,000 during the six months ended June 30, 2007 and 2006,
respectively. For the six months ended June 30, 2007 and 2006, restricted stock expense
totaled
 10




---



##### Table of Contents



$107,000 and $52,000, respectively. Total expense related to stock-based compensation
recorded in the six months ended June 30, 2007 and 2006 was $195,000 and $145,000,
respectively.A summary of the changes in stock options outstanding for the six months ended June 30, 2007
is presented below:
 Six months ended June 30, 2007(dollars in thousands, except per share amounts)Weighted-AverageNumber of
    
    
    ExerciseShares (1)
    
    
    Price (1)Beginning Options Outstanding
    
    
    575,945
    
    
    $
    5.35Options Granted
    
    
    
    
    
    
    Exercises
    
    
    55,652
    
    
    
    4.18Forfeitures
    
    
    944
    
    
    
    9.13Ending options outstanding
    
    
    519,349
    
    
    
    5.48Exercisable at June 30
    
    
    469,497
    
    
    $
    5.07
 
 (1)
    
    Number of Shares and Weighted-Average Exercise Price have been adjusted for the 10%
common stock dividend paid May 31, 2007 to shareholders of record on May 15, 2007. The total intrinsic value of options exercised during the six months ended June 30, 2007 and
2006 were $854,000 and $539,000, respectively.A summary of the Companys nonvested restricted shares as of June 30, 2007 and changes
during the six months ended June 30, 2007 is presented below:
 Weighted-AverageNumber of
    
    
    Grant-DateNonvested
Shares
    
    Shares (1)
    
    
    Fair Value (1)Nonvested at January 1, 2007
    
    
    45,091
    
    
    $
    17.23Granted
    
    
    32,174
    
    
    
    21.72Vested
    
    
    (9,718
    )
    
    
    17.15Forfeited
    
    
    (2,669
    )
    
    
    13.91Nonvested at June 30, 2007
    
    
    64,878
    
    
    $
    19.63
 
 (1)
    
    Number of Shares and Weighted-Average Grant-Date Fair Value have been adjusted for the
10% common stock dividend paid May 31, 2007 to shareholders of record on May 15, 2007. As of June 30, 2007, there was $1.2 million of unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under this plan. This cost is
expected to be recognized over a weighted-average period of 4.0 years.7.
    
    New Accounting Pronouncements:In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, to permit fair value
remeasurement for any hybrid financial instrument with an embedded derivative that otherwise
would require bifurcation, provided that the whole instrument is accounted for on a fair
value basis. SFAS No. 155 also amends SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS No. 155 is
effective for all financial instruments acquired or issued by the Company after January 1,
2007. This Statement did not have a material impact on the Companys consolidated financial
statements.
 11




---



##### Table of Contents



In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets -
an amendment of FASB Statement No. 140. SFAS No. 156 requires all separately recognized
servicing assets and liabilities to be initially measured at fair value. In addition,
entities are permitted to choose to either subsequently measure servicing rights at fair
value and report changes in fair value in earnings, or amortize servicing rights in
proportion to and over the estimated net servicing income or loss and assess the rights for
impairment. Beginning with the fiscal year in which an entity adopts SFAS No. 156, it may
elect to subsequently measure a class of servicing assets and liabilities at fair value.
Post adoption, an entity may make this election as of the beginning of any fiscal year. An
entity that elects to subsequently measure a class of servicing assets and liabilities at
fair value should apply that election to all new and existing recognized servicing assets
and liabilities within that class. The effect of remeasuring an existing class of servicing
assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to
retained earnings as of the beginning of the period of adoption. The statement also requires
additional disclosures. SFAS No. 156 is effective as of the beginning of an entitys first
fiscal year that begins after September 15, 2006. This Statement did not have a material
impact on the Companys consolidated financial statements.In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No 109 (FIN 48). FIN 48 establishes a
recognition threshold and measurement for income tax positions recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a two-step evaluation process for tax positions. The first
step is recognition and the second is measurement. For recognition, an enterprise
judgmentally determines whether it is more-likely-than-not that a tax position will be
sustained upon examination, including resolution of related appeals or litigation processes,
based on the technical merits of the position. If the tax position meets the
more-likely-than-not recognition threshold it is measured and recognized in the financial
statements. If a tax position does not meet the more-likely-than-not recognition
threshold, the benefit of that position is not recognized in the financial statements. Tax
positions that meet the more-likely-than-not recognition threshold at the effective date
of FIN 48 may be recognized, or continue to be recognized, upon adoption of FIN 48. The
cumulative effect of applying the provisions of FIN 48 shall be reported as an adjustment to
the opening balance of retained earnings for that fiscal year. This Statement was effective
January 1, 2007 and did not have a material effect on the Companys consolidated financial
statements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. It clarifies that fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants in the market in which the reporting entity transacts. SFAS No. 157 does
not require any new fair value measurements; rather, it provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at fair value.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier
adoption permitted. The Company is evaluating the impact of the adoption of SFAS No. 157 on
its consolidated financial statements.On September 20, 2006, the FASB ratified Emerging Issue Task Force (EITF) Issue 06-5,
Accounting for Purchases of Life Insurance  Determining the Amount That Could Be Realized
in Accordance with FASB Technical Bulletin No. 85-4 (FTB 85-4), Accounting for Purchases of
Life Insurance (EITF 06-5). EITF 06-5 addresses the methods by which an entity should
determine the amounts that could be realized under an insurance contract at the consolidated
balance sheet date when applying FTB 85-4, and whether the determination should be on an
individual or group policy basis. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. This Statement did not have a material impact on the Companys
consolidated financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 provides entities with an option to report certain
financial assets and liabilities at fair value  with changes in fair value reported in
earnings  and requires additional disclosures related to an entitys election to use fair
value reporting. It also requires entities to display the fair value of those assets and
liabilities for which the entity has elected to use fair value on the face of the balance
sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact that SFAS No. 159 may have on its future
consolidated financial statements.
 12




---



##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations
 This report contains forward-looking statements. For a discussion about such statements,
including the risks and uncertainties inherent therein, see Forward-Looking Statements.
Managements Discussion and Analysis of Financial Condition and Results of Operations should be
read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in
this report and in Intermountains Form 10-K for the year ended December 31, 2006.
 General
        13




---



##### Table of Contents



Critical Accounting Policies
  Income Recognition .
 Allowance For Loan Losses.
    Investments .
  14




---



##### Table of Contents



Goodwill and Other Intangible Assets .
  Real Estate Owned.
  Intermountain Community Bancorp
Comparison of the Three and Six Month Periods Ended June 30, 2007 and 2006
 Results of Operations
 Overview
   15




---



##### Table of Contents



Net Interest Income
    Provision for Losses on Loans.
  16




---



##### Table of Contents



Six Months Ended June 30,2007
    
    
    2006(Dollars in thousands)Balance at January 1
    
    $
    9,837
    
    
    $
    8,100Provision (recovery) for losses on loans
    
    
    2,006
    
    
    
    666Amounts written off, net of recoveries
    
    
    (1,039
    )
    
    
    (59
    )Transfers
    
    
    (2
    )
    
    
    (7
    )Allowance  loans, June 30
    
    
    10,802
    
    
    
    8,700Allowance  unfunded commitments, January 1
    
    
    482
    
    
    
    417Adjustment
    
    
    (384
    )
    
    
    Transfers
    
    
    2
    
    
    
    7Allowance  unfunded commitments, June 30
    
    
    100
    
    
    
    424Total credit allowance including unfunded commitments
    
    $
    10,902
    
    
    $
    9,124
   Other Income.
 Operating Expenses
  17




---



##### Table of Contents



Income Tax Provision
 Financial Position
 Assets
 Investments.
 Loans Receivable
 18




---



##### Table of Contents



June 30, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial (includes commercial real estate)
    
    $
    605,626
    
    
    
    80.44
    
    
    $
    527,345
    
    
    
    78.03Residential real estate
    
    
    114,418
    
    
    
    15.20
    
    
    
    112,569
    
    
    
    16.66Consumer
    
    
    26,419
    
    
    
    3.51
    
    
    
    31,800
    
    
    
    4.71Municipal
    
    
    6,446
    
    
    
    0.85
    
    
    
    4,082
    
    
    
    0.60Total loans receivable
    
    
    752,909
    
    
    
    100.00
    
    
    
    675,796
    
    
    
    100.00Net deferred origination fees
    
    
    (1,082
    )
    
    
    
    
    
    
    (1,074
    )Allowance for losses on loans
    
    
    (10,802
    )
    
    
    
    
    
    
    (10,319
    )Loans receivable, net
    
    $
    741,025
    
    
    
    
    
    
    $
    664,403Weighted average yield at end of period
    
    
    8.67
    %
    
    
    
    
    
    
    8.65
    %
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % Change(Dollars in thousands)Commercial
    
    $
    171,482
    
    
    $
    169,783
    
    
    
    1.0
    
    
    $
    308,438
    
    
    $
    273,202
    
    
    
    12.9Residential real estate
    
    
    24,666
    
    
    
    32,386
    
    
    
    (23.8
    )
    
    
    45,976
    
    
    
    54,470
    
    
    
    (15.6
    )Consumer
    
    
    4,444
    
    
    
    7,347
    
    
    
    (39.5
    )
    
    
    9,896
    
    
    
    13,000
    
    
    
    (23.9
    )Municipal
    
    
    2,703
    
    
    
    243
    
    
    
    1,012.3
    
    
    
    2,903
    
    
    
    322
    
    
    
    801.6Total loans originated
    
    $
    203,295
    
    
    $
    209,759
    
    
    
    (3.1
    )
    
    $
    367,213
    
    
    $
    340,994
    
    
    
    7.7
 Office Properties and Equipment.
 BOLI and All Other Assets
 Deposits
 19




---



##### Table of Contents



June 30, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    163,419
    
    
    
    22.3
    
    
    $
    141,601
    
    
    
    20.4NOW and money market 0.0% to 5.8%
    
    
    313,044
    
    
    
    42.6
    
    
    
    291,412
    
    
    
    42.0Savings and IRA 0.0% to 4.6%
    
    
    86,921
    
    
    
    11.8
    
    
    
    81,955
    
    
    
    11.8Certificate of deposit accounts
    
    
    171,014
    
    
    
    23.3
    
    
    
    178,718
    
    
    
    25.8Total deposits
    
    $
    734,398
    
    
    
    100.0
    
    
    $
    693,686
    
    
    
    100.0Weighted average interest rate
on certificates of deposit
    
    
    
    
    
    
    4.68
    %
    
    
    
    
    
    
    4.47
    %
 Borrowings
 Interest Rate Risk
      20




---



##### Table of Contents



Net Interest
Income
 Liquidity and Sources of Funds
     21




---



##### Table of Contents



Capital Resources
      Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to
risk-weighted assets):The Company
    
    $
    96,953
    
    
    
    11.32
    %
    
    $
    68,522
    
    
    
    8
    %
    
    $
    85,653
    
    
    
    10
    %Panhandle State Bank
    
    
    96,347
    
    
    
    11.25
    %
    
    
    68,530
    
    
    
    8
    %
    
    
    85,663
    
    
    
    10
    %Tier I capital (to risk-weighted
assets):The Company
    
    
    86,244
    
    
    
    10.07
    %
    
    
    34,261
    
    
    
    4
    %
    
    
    51,392
    
    
    
    6
    %Panhandle State Bank
    
    
    85,638
    
    
    
    10.00
    %
    
    
    34,265
    
    
    
    4
    %
    
    
    51,398
    
    
    
    6
    %Tier I capital (to average assets):The Company
    
    
    86,244
    
    
    
    9.16
    %
    
    
    37,674
    
    
    
    4
    %
    
    
    47,092
    
    
    
    5
    %Panhandle State Bank
    
    
    85,638
    
    
    
    9.33
    %
    
    
    36,698
    
    
    
    4
    %
    
    
    45,873
    
    
    
    5
    %
 Off Balance Sheet Arrangements and Contractual Obligations
  22




---



##### Table of Contents



Payments Due by PeriodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(Dollars in thousands)Long-term debt (1)
    
    $
    93,324
    
    
    $
    3,256
    
    
    $
    11,250
    
    
    $
    34,514
    
    
    $
    44,304Short-term debt (1)
    
    
    93,030
    
    
    
    93,030
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations (2)
    
    
    13,944
    
    
    
    1,084
    
    
    
    1,601
    
    
    
    1,319
    
    
    
    9,940Purchase obligations (3)
    
    
    3,747
    
    
    
    3,747
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
reflected on the registrants
balance sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    204,045
    
    
    $
    101,117
    
    
    $
    12,851
    
    
    $
    35,833
    
    
    $
    54,244
 
 (1)
    
    Includes 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.(3)
    
    The Company is constructing a 94,000 square foot Sandpoint Financial and Technical
Center and a 16,000 square foot facility in Spokane Valley, Washington. New Accounting Pronouncements
    23




---



##### Table of Contents



Forward-Looking Statements
   24




---



##### Table of Contents




    
    the strength of the United States economy in general and the
strength of the local economies and real estate markets 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;
    
    announcement and successful and timely implementation of growth,
acquisition and efficiency 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.
 
 Item 3 - Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control over Financial Reporting
 25




---



##### Table of Contents



PART II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1A  Risk Factors
  
    
    the potential industry effect of subprime and prime mortgage market volatility on the
Companys lending operations
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
 (a)
    
    The annual meeting of Shareholders of Intermountain Community Bancorp was held on
April 25, 2007.(b)
    
    Not Applicable(c)
    
    A brief description of each matter voted upon at the Annual Meeting and the
number of votes cast for, against or withheld, including a separate tabulation with
respect to each nominee to serve on the Board is presented below:1.
    
    Election of 4 directors for terms expiring in 2007.
 James T. DiehlVotes cast for:
    
    
    5,698,921Votes withheld:
    
    
    2,397Terry L. MerwinVotes cast for:
    
    
    5,683,182Votes withheld:
    
    
    18,136John B. ParkerVotes cast for:
    
    
    5,695,858Votes withheld:
    
    
    5,460Jim PatrickVotes cast for:
    
    
    5,687,389Votes withheld:
    
    
    13,929
 26




---



##### Table of Contents



2.
    
    Approval of the 2006  2008 Long-Term Incentive Plan.
 Votes cast for:
    
    
    4,295,718Votes cast against:
    
    
    103,062Votes abstained:
    
    
    37,635
 3.
    
    Ratification of the appointment of BDO Seidman, LLP as the independent
registered public accounting firm for Intermountain for 2007.
 Votes cast for:
    
    
    5,668,556Votes cast against:
    
    
    10,333Votes abstained:
    
    
    14,100
 
 Item 5  Other Information
  
 Item 6  Exhibits
 Exhibit No.
    
    Exhibit31.1
    
    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.
 27




---



##### Table of Contents



Signatures
  INTERMOUNTAIN COMMUNITY BANCORP(Registrant)August 8,
2007
Date
    
    
    
    By:
    
    /s/ Curt Hecker

Curt HeckerPresident and Chief Executive OfficerAugust 8, 2007
Date
    
    
    
    By:
    
    /s/ Doug Wright

Doug WrightExecutive Vice President
and Chief Financial Officer
 28