##### 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 September 30, 2006
 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 o þ
 o þ
  Class
    
    Outstanding as of November 7, 2006Common Stock (no par value)
    
    7,347,905
   1




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##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended September 30, 2006
 TABLE OF CONTENTS
 PART I - Financial InformationItem 1 - Financial Statements (Unaudited)Consolidated Balance Sheets for September 30, 2006 and December 31, 2005Consolidated Statements of Income for the three and nine months ended September 30, 2006 and 2005Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2006 and 2005Notes 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 1A Risk FactorsItem 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 31.1EXHIBIT 31.2EXHIBIT 32
  2




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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 31,2006
    
    
    2005(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    196
    
    
    $
    250Non-interest bearing and vault
    
    
    20,588
    
    
    
    23,625Restricted
    
    
    722
    
    
    
    774Federal funds sold
    
    
    38,110
    
    
    
    11,080Available for sale securities, at fair value
    
    
    106,513
    
    
    
    83,847Held to maturity securities, at amortized cost
    
    
    6,837
    
    
    
    6,749Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,779
    
    
    
    1,774Loans held for sale
    
    
    6,856
    
    
    
    5,889Loans receivable, net
    
    
    647,240
    
    
    
    555,036Accrued interest receivable
    
    
    6,436
    
    
    
    4,992Office properties and equipment, net
    
    
    21,433
    
    
    
    15,545Bank-owned life insurance
    
    
    7,323
    
    
    
    7,095Goodwill
    
    
    11,662
    
    
    
    11,399Other intangible assets
    
    
    922
    
    
    
    1,051Prepaid expenses and other assets, net
    
    
    5,602
    
    
    
    4,576Total assets
    
    $
    882,219
    
    
    $
    733,682LIABILITIES:Deposits
    
    $
    688,644
    
    
    $
    597,519Securities sold subject to repurchase agreements
    
    
    82,208
    
    
    
    37,799Advances from Federal Home Loan Bank of Seattle
    
    
    5,000
    
    
    
    5,000Cashiers checks issued and payable
    
    
    6,180
    
    
    
    6,104Accrued interest payable
    
    
    1,932
    
    
    
    1,074Other borrowings
    
    
    19,201
    
    
    
    16,527Accrued expenses and other liabilities
    
    
    3,835
    
    
    
    5,386Total liabilities
    
    
    807,000
    
    
    
    669,409Commitments and contingent liabilitiesSTOCKHOLDERS EQUITY:Common stock, no par value; 26,400,000 shares authorized;
7,390,185 and 6,598,810 shares issued and 7,347,905 and
6,577,290 shares outstanding
    
    
    59,774
    
    
    
    43,370Accumulated other comprehensive income (loss)
    
    
    (75
    )
    
    
    (1,337
    )Retained earnings
    
    
    15,520
    
    
    
    22,240Total stockholders equity
    
    
    75,219
    
    
    
    64,273Total liabilities and stockholders equity
    
    $
    882,219
    
    
    $
    733,682
  3




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands, except per share data)
    
    
    (Dollars in thousands, except per share data)Interest income:Loans
    
    $
    14,539
    
    
    $
    10,325
    
    
    $
    39,116
    
    
    $
    26,651Investments
    
    
    1,491
    
    
    
    955
    
    
    
    3,455
    
    
    
    2,848Total interest income
    
    
    16,030
    
    
    
    11,280
    
    
    
    42,571
    
    
    
    29,499Interest expense:Deposits
    
    
    3,949
    
    
    
    2,195
    
    
    
    9,557
    
    
    
    5,767Other borrowings
    
    
    975
    
    
    
    768
    
    
    
    2,374
    
    
    
    1,828Total interest expense
    
    
    4,924
    
    
    
    2,963
    
    
    
    11,931
    
    
    
    7,595Net interest income
    
    
    11,106
    
    
    
    8,317
    
    
    
    30,640
    
    
    
    21,904Provision for losses on loans
    
    
    (910
    )
    
    
    (937
    )
    
    
    (1,576
    )
    
    
    (2,229
    )Net interest income after provision for
losses on loans
    
    
    10,196
    
    
    
    7,380
    
    
    
    29,064
    
    
    
    19,675Other income:Fees and service charges
    
    
    2,540
    
    
    
    2,148
    
    
    
    7,406
    
    
    
    6,017Bank owned life insurance
    
    
    76
    
    
    
    77
    
    
    
    228
    
    
    
    223Loss on sale of securities
    
    
    0
    
    
    
    (2
    )
    
    
    (983
    )
    
    
    (43
    )Other
    
    
    357
    
    
    
    278
    
    
    
    1,126
    
    
    
    814Total other income
    
    
    2,973
    
    
    
    2,501
    
    
    
    7,777
    
    
    
    7,011Operating expenses
    
    
    9,221
    
    
    
    6,657
    
    
    
    25,814
    
    
    
    18,660Income before income taxes
    
    
    3,948
    
    
    
    3,224
    
    
    
    11,027
    
    
    
    8,026Income tax provision
    
    
    (1,423
    )
    
    
    (1,176
    )
    
    
    (4,101
    )
    
    
    (2,909
    )Net income
    
    $
    2,525
    
    
    $
    2,048
    
    
    $
    6,926
    
    
    $
    5,117Earnings per share  basic
    
    $
    0.34
    
    
    $
    0.32
    
    
    $
    0.95
    
    
    $
    0.81Earnings per share  diluted
    
    $
    0.32
    
    
    $
    0.30
    
    
    $
    0.89
    
    
    $
    0.75Weighted average shares outstanding  basic
    
    
    7,322,297
    
    
    
    6,404,833
    
    
    
    7,288,135
    
    
    
    6,343,917Weighted average shares outstanding  diluted
    
    
    7,780,482
    
    
    
    6,883,958
    
    
    
    7,742,258
    
    
    
    6,860,929
  4




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Intermountain Community Bancorp
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    6,926
    
    
    $
    5,117Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,542
    
    
    
    1,227Stock based compensation
    
    
    140
    
    
    
    35Amortization of unearned compensation
    
    
    94
    
    
    
    20Net amortization of premiums on securities
    
    
    147
    
    
    
    132Excess tax benefit related to stock based compensation
    
    
    (196
    )
    
    
    Tax benefit related to stock option exercises
    
    
    260
    
    
    
    Provisions for losses on loans
    
    
    1,576
    
    
    
    2,229Amortization of core deposit intangibles
    
    
    130
    
    
    
    142Loss on sale of securities
    
    
    983
    
    
    
    43Loss (gain) on sale of loans
    
    
    (738
    )
    
    
    26Gain on sale of other real estate owned
    
    
    
    
    
    
    (133
    )Net accretion of loan and deposit discounts and premiums
    
    
    (69
    )
    
    
    (118
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (228
    )
    
    
    (223
    )Change inLoans held for sale
    
    
    (967
    )
    
    
    (321
    )Accrued interest receivable
    
    
    (1,444
    )
    
    
    (1,178
    )Prepaid expenses and other assets
    
    
    (3,067
    )
    
    
    (1,502
    )Accrued interest payable
    
    
    858
    
    
    
    280Accrued expenses and other liabilities
    
    
    219
    
    
    
    3,679Net cash provided by operating activities
    
    
    6,166
    
    
    
    9,455Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (58,500
    )
    
    
    (36,477
    )Proceeds from calls, maturities or sales of available-for-sale securities
    
    
    31,667
    
    
    
    22,939Principal payments on mortgage-backed securities
    
    
    5,675
    
    
    
    10,631Purchases of held-to-maturity securities
    
    
    (649
    )
    
    
    (1,929
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    
    
    
    
    450Origination of loans, net of principal payments
    
    
    (107,420
    )
    
    
    (122,579
    )Proceeds from sale of loans
    
    
    14,895
    
    
    
    1,278Proceeds from sale of office properties and equipment
    
    
    13
    
    
    
    Purchase of office properties and equipment
    
    
    (6,306
    )
    
    
    (3,853
    )Net change in federal funds sold
    
    
    (27,030
    )
    
    
    5,905Purchase of FHLB stock
    
    
    (5
    )
    
    
    (565
    )Proceeds used for business acquisition
    
    
    (41
    )
    
    
    Proceeds from maturities of certificates of deposit
    
    
    
    
    
    
    100Improvements and other changes in other real estate owned
    
    
    805
    
    
    
    Proceeds from sales of other real estate owned
    
    
    19
    
    
    
    1,142Net decrease in restricted cash
    
    
    52
    
    
    
    987Net cash used in investing activities
    
    
    (146,825
    )
    
    
    (121,971
    )
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##### Table of Contents



Intermountain Community Bancorp
 Consolidated Statements of Cash Flows (continued)
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005(Dollars in thousands)Cash flows from financing activities:Net increase in demand, money market and savings deposits
    
    $
    74,158
    
    
    $
    77,963Net increase in certificates of deposit
    
    
    16,947
    
    
    
    14,428Net change in repurchase agreements
    
    
    44,410
    
    
    
    26,292Net change in federal funds purchased
    
    
    
    
    
    
    Excess tax benefit related to stock based compensation
    
    
    196
    
    
    
    Proceeds from exercise of stock options
    
    
    322
    
    
    
    786Payments for fractional shares
    
    
    (9
    )
    
    
    (2
    )Proceeds from credit line
    
    
    1,650
    
    
    
    Principal payments on Note Payable
    
    
    (106
    )
    
    
    Repayments of FHLB borrowings
    
    
    
    
    
    
    (31,000
    )Proceeds from FHLB borrowings
    
    
    
    
    
    
    36,000Net cash provided by financing activities
    
    
    137,568
    
    
    
    124,467Net change in cash and cash equivalents
    
    
    (3,092
    )
    
    
    11,951Cash and cash equivalents, beginning of period
    
    
    23,875
    
    
    
    14,202Cash and cash equivalents, end of period
    
    $
    20,783
    
    
    $
    26,153Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    12,055
    
    
    $
    7,256Income taxes
    
    
    4,850
    
    
    
    3,343Noncash investing and financing activities:Restricted stock issued
    
    
    483
    
    
    
    34510% Stock Dividend
    
    
    13,637
    
    
    
    Purchase of land
    
    
    1,130
    
    
    
    Loans converted to Other Real Estate Owned
    
    
    398
    
    
    
    
  6




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Net income
    
    $
    2,525
    
    
    $
    2,048
    
    
    $
    6,926
    
    
    $
    5,117Other comprehensive income (loss):Change in unrealized losses on
investments, net of reclassification
adjustments
    
    
    1,952
    
    
    
    (450
    )
    
    
    2,078
    
    
    
    (904
    )Less deferred income tax provision
    
    
    (773
    )
    
    
    172
    
    
    
    (816
    )
    
    
    350Net other comprehensive income (loss)
    
    
    1,179
    
    
    
    (278
    )
    
    
    1,262
    
    
    
    (554
    )Comprehensive income
    
    $
    3,704
    
    
    $
    1,770
    
    
    $
    8,188
    
    
    $
    4,563
  7




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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, 2005. 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 September 30, 2006. 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):
 September 30,
    
    
    December 31,2006
    
    
    2005Term note payable (1)
    
    $
    8,279
    
    
    $
    8,279Term note payable (2)
    
    
    8,248
    
    
    
    8,248Term note payable (3)
    
    
    1,024
    
    
    
    Line of credit (4)
    
    
    1,650
    
    
    
    Total other borrowings
    
    $
    19,201
    
    
    $
    16,527
 
 (1)
    
    In January 2003, Intermountain issued $8.0 million of debentures through its
subsidiary Intermountain Statutory Trust I. The debt associated with these securities
bears interest at 6.75%. Interest only payments have been made on a quarterly basis
starting in June 2004. 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
bears interest based on the London Interbank Offering Rate (LIBOR) plus 2.80% (8.31% at
September 30, 2006). The rate is adjusted and paid quarterly. The debt is callable by
Intermountain in March 2009 and matures in March 2034.(3)
    
    In February 2006, Intermountain entered into a note payable agreement to
purchase land in Sandpoint, Idaho. The debt associated with the land purchase bears
interest at a fixed rate of 6.65% and matures in February 2026. The land was purchased
for the construction of the Sandpoint Financial and Technical Center.(4)
    
    In January 2006, Intermountain entered into a line of credit agreement with US
Bank. The line of credit has a limit of $5.0 million and a variable interest rate of
one-month LIBOR plus 1.50% (6.83% at September 30, 2006). 8




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##### Table of Contents



4.
    
    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)2006
    
    
    2005Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Avg.
    
    
    Per Share
    
    
    Net
    
    
    Avg.
    
    
    Per ShareIncome
    
    
    Shares(1)
    
    
    Amount
    
    
    Income
    
    
    Shares(1)
    
    
    AmountBasic computations
    
    $
    2,525
    
    
    
    7,322,297
    
    
    $
    0.34
    
    
    $
    2,048
    
    
    
    6,404,833
    
    
    $
    0.32Effect of dilutive
securities:Common stock
options
    
    
    
    
    
    
    458,185
    
    
    
    (0.02
    )
    
    
    
    
    
    
    479,125
    
    
    
    (0.02
    )Diluted computations
    
    $
    2,525
    
    
    
    7,780,482
    
    
    $
    0.32
    
    
    $
    2,048
    
    
    
    6,883,958
    
    
    $
    0.30Antidilutive
options not included in
diluted earnings per
share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Nine Months Ended September 30,(Dollars in thousands, except per share amounts)2006
    
    
    2005Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Avg.
    
    
    Per Share
    
    
    Net
    
    
    Avg.
    
    
    Per ShareIncome
    
    
    Shares(1)
    
    
    Amount
    
    
    Income
    
    
    Shares(1)
    
    
    AmountBasic computations
    
    $
    6,926
    
    
    
    7,288,135
    
    
    $
    0.95
    
    
    $
    5,117
    
    
    
    6,343,917
    
    
    $
    0.81Effect of dilutive
securities:Common stock
options
    
    
    
    
    
    
    454,123
    
    
    
    (0.06
    )
    
    
    
    
    
    
    517,012
    
    
    
    (0.06
    )Diluted computations
    
    $
    6,926
    
    
    
    7,742,258
    
    
    $
    0.89
    
    
    $
    5,117
    
    
    
    6,860,929
    
    
    $
    0.75Antidilutive
options not included in
diluted earnings per
share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Weighted average shares outstanding have been adjusted for the 10% common stock
dividend effective May 31, 2006 to shareholders of record as of May 15, 2006. 9




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##### Table of Contents



5.
    
    Operating Expenses:The following table details Intermountains components of total operating expenses:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Salaries and employee benefits
    
    $
    5,590
    
    
    $
    3,941
    
    
    $
    15,770
    
    
    $
    10,594Occupancy expense
    
    
    1,244
    
    
    
    967
    
    
    
    3,560
    
    
    
    2,825Advertising
    
    
    427
    
    
    
    227
    
    
    
    858
    
    
    
    530Fees and service charges
    
    
    350
    
    
    
    220
    
    
    
    800
    
    
    
    728Printing, postage and supplies
    
    
    325
    
    
    
    321
    
    
    
    1,079
    
    
    
    875Legal and accounting
    
    
    324
    
    
    
    265
    
    
    
    935
    
    
    
    873Other expense
    
    
    961
    
    
    
    716
    
    
    
    2,812
    
    
    
    2,235Total operating expenses
    
    $
    9,221
    
    
    $
    6,657
    
    
    $
    25,814
    
    
    $
    18,660
 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.
Statement 123 (R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation
and supersedes APB Opinion No. 25, Accounting For Stock Issued to Employees. Statement
123, as originally issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25, as long as
the footnotes to financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. The impact of Statement 123 (R), if it had
been in effect, on the net earnings and related per share amounts for the years ended
December 31, 2005, 2004 and 2003 was disclosed in the Companys Form 10-K for the fiscal
year ended December 31, 2005.As the Company adopted Statement 123 (R) using the modified prospective transition method,
prior periods have not been restated. Under this method, the Company is required to record
stock-based 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 measures stock-based compensation cost
using the Black-Scholes option pricing model (assumptions noted in the following table) for
unvested stock option grants and anticipates using this pricing model for future grants. The
Company did not grant options to purchase Intermountain common stock during either the nine
months ended September 30, 2006 or 2005. Forfeitures did not materially affect the
calculated expense based upon historical activities of option grantees.
 Dividend yield
    
    
    0.0%Expected volatility
    
    
    17.0% - 46.6%Risk free interest rates
    
    
    4.0% - 7.1%Expected option lives
    
    
    5 - 10 years
  10




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##### Table of Contents



Weighted
    
    
    WeightedNumber
    
    
    Average
    
    
    Averageof
    
    
    Exercise
    
    
    Remaining
    
    
    AggregateShares(1)
    
    
    Price(1)
    
    
    life(Years)
    
    
    Intrinsic ValueOutstanding at January 1, 2006
    
    
    634,643
    
    
    $
    5.69Granted
    
    
    
    
    
    
    Exercises
    
    
    (68,949
    )
    
    
    4.68
    
    
    
    
    
    
    $
    1,127Forfeited
    
    
    (6,391
    )
    
    
    7.08Outstanding at September 30, 2006
    
    
    559,303
    
    
    
    5.80
    
    
    
    4.24
    
    
    
    9,062Exercisable at September 30, 2006
    
    
    479,743
    
    
    $
    5.17
    
    
    
    3.77
    
    
    $
    8,073
 
 1)
    
    Shares and Weighted-Average Exercise Price have been adjusted for the 10%
common stock dividend payable May 31, 2006 to shareholders of record on May 15, 2006.    Weighted-AverageGrant-DateNonvested Shares
    
    Shares (2)
    
    
    Fair ValueNonvested at January 1, 2006
    
    
    22,919
    
    
    $
    15.06Granted
    
    
    24,838
    
    
    
    19.43Vested
    
    
    (4,579
    )
    
    
    16.05Forfeited
    
    
    (898
    )
    
    
    17.57Nonvested at September 30, 2006
    
    
    42,280
    
    
    $
    17.24
 2)
    
    Shares and Weighted-Average Grant-Date Fair Value have been adjusted for the
10% common stock dividend, payable May 31, 2006 to shareholders of record on May 15,
2006.
 11




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##### Table of Contents



Nine Months EndedSeptember 30,2006
    
    2005(Dollars in thousands)Number of options exercised
    
    
    68,949
    
    
    
    192,364Cash Received
    
    $
    323
    
    
    $
    786Tax Benefit-Based on Black-Scholes fair value
    
    
    24
    
    
    
    23-Benefit in excess of Black-Scholes fair value
    
    
    196
    
    
    
    152Intrinsic Value
    
    
    1,127
    
    
    
    2,223
 7.
    
    Subsequent Events:Not Applicable8.
    
    New Accounting Policies:On June 1, 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3 (SFAS No.154).SFAS No. 154 applies to all voluntary changes in
accounting principle and changes the requirements for accounting and reporting a change in
accounting principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition provisions.
SFAS No. 154 requires retrospective application for voluntary changes in accounting
principle, unless it is impracticable to determine either the cumulative effect or the
period-specific effects of the change. The requirements became effective for the Company for
accounting changes beginning January 1, 2006. The Company has adopted SFAS No. 154.In March 2006, the FASB issued SFAS 156 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140(SFAS No. 156). SFAS No. 156 requires an entity to
recognize a servicing asset or liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract. It requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair value. SFAS No.
156 permits an entity to choose either an amortization or fair value measurement method for
each class of separately recognized servicing assets and servicing liabilities. It also
permits a one-time reclassification of available-for-sale securities to trading securities
by entities with recognized servicing rights. Lastly, it requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value and
additional disclosures for all separately recognized servicing assets and servicing
liabilities. Adoption of the initial measurement provision of this statement is required
immediately. The adoption of this provision had no significant effect on the Companys
Consolidated Financial Statements. The Company is required to adopt all other provisions of
this statement beginning in 2007 although earlier adoption was permitted in 2006. As of
September 30, 2006, the Company had not adopted the remaining provisions of SFAS No. 156.
Management is currently evaluating the impact that the adoption of the remaining provisions
of SFAS No. 156 will have on its consolidated financial statements.In October 2006, the FASB issued SFAS 157 Fair Value Measurement(SFAS 157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS
157 is effective for fiscal years beginning after November 15, 2007. Intermountain is
currently evaluating the impact of FAS. No. 157 on its financial condition, results of
operations and disclosures.In September 2006, the FASB issued FASB No. 158 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB No. 87, 88, 106, and 132R
(SFAS 158). SFAS No, 158 significantly changes the rules for reporting the obligations
and expenses of pension plans, nonqualified deferred compensation plans and other post
retirement benefits. FASB No. 158 is effective for fiscal years ending after December 15,
2006. Intermountain is reviewing the interpretation; however, it is anticipated that it will
not have a material impact on its consolidated financial statements.In June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109(FIN No. 48). This Interpretation
prescribes a recognition threshold
 12




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##### Table of Contents



Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements (EITF 06-5).
 Accounting for Purchases of Life
Insurance  Determining the Amount That Could Be Realized in Accordance with FASB Technical
Bulletin No. 85-4, Accounting for Purchases of Life Insurance (EITF 06-5). Accounting for Contingencies"
 Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statement (SAB 108).
 
 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, 2005.
 General
    13




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##### Table of Contents



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




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##### Table of Contents



Investments .
   Goodwill and Other Intangible Assets .
  Real Estate Owned.
 15




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##### Table of Contents



Intermountain Community Bancorp
Comparison of the Three and Nine Month Periods Ended September 30, 2006 and 2005
 Results of Operations
 Overview
  Net Interest Income
   16




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##### Table of Contents



Provision for Losses on Loans.
   Nine Months Ended September 30,2006
    
    
    2005(Dollars in thousands)Balance at January 1
    
    $
    8,517
    
    
    $
    6,902Allowance associated with the sale of loans
    
    
    
    
    
    
    (96
    )Provision for losses on loans
    
    
    1,576
    
    
    
    2,229Amounts written off net of recoveries
    
    
    (128
    )
    
    
    (331
    )Balance at September 30
    
    $
    9,965
    
    
    $
    8,704
  Other Income.
 Operating Expenses
  17




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##### Table of Contents



Income Tax Provision
 Financial Position
 Assets
 Investments.
 Loans Receivable
 18




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##### Table of Contents



September 30, 2006
    
    
    December 31, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial (includes commercial real estate)
    
    $
    505,500
    
    
    
    76.78
    
    
    $
    425,005
    
    
    
    75.28Residential real estate
    
    
    118,496
    
    
    
    18.00
    
    
    
    107,554
    
    
    
    19.05Consumer
    
    
    31,675
    
    
    
    4.81
    
    
    
    29,109
    
    
    
    5.16Municipal
    
    
    2,710
    
    
    
    0.41
    
    
    
    2,856
    
    
    
    0.51Total loans receivable
    
    
    658,381
    
    
    
    100.00
    
    
    
    564,524
    
    
    
    100.00Net deferred origination fees
    
    
    (1,177
    )
    
    
    
    
    
    
    (971
    )Allowance for losses on loans
    
    
    (9,965
    )
    
    
    
    
    
    
    (8,517
    )Loans receivable, net
    
    $
    647,239
    
    
    
    
    
    
    $
    555,036Weighted average yield at end of period
    
    
    8.64
    %
    
    
    
    
    
    
    7.90
    %
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(Dollars in thousands)Commercial (includes
commercial real estate)
    
    $
    105,017
    
    
    $
    92,279
    
    
    
    13.8
    
    
    $
    378,219
    
    
    $
    315,780
    
    
    
    19.8Residential real estate
    
    
    32,384
    
    
    
    36,214
    
    
    
    (10.6
    )
    
    
    86,854
    
    
    
    83,169
    
    
    
    4.3Consumer
    
    
    6,933
    
    
    
    6,789
    
    
    
    2.1
    
    
    
    19,933
    
    
    
    24,728
    
    
    
    (19.4
    )Municipal
    
    
    3,421
    
    
    
    4,748
    
    
    
    (27.9
    )
    
    
    3,744
    
    
    
    4,798
    
    
    
    (22.0
    )Total loans originated
    
    $
    147,755
    
    
    $
    140,030
    
    
    
    5.5
    
    
    $
    488,750
    
    
    $
    428,475
    
    
    
    14.1
 Office Properties and Equipment.
 BOLI and All Other Assets
 Deposits
 19




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##### Table of Contents



September 30, 2006
    
    
    December 31, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    147,726
    
    
    
    21.4
    
    
    $
    132,440
    
    
    
    22.2NOW and money market 0.0% to 5.90%
    
    
    266,473
    
    
    
    38.7
    
    
    
    216,034
    
    
    
    36.2Savings and IRA 0.0% to 6.15%
    
    
    82,196
    
    
    
    12.0
    
    
    
    73,763
    
    
    
    12.3Certificate of deposit accounts
    
    
    192,249
    
    
    
    27.9
    
    
    
    175,282
    
    
    
    29.3Total deposits
    
    $
    688,644
    
    
    
    100.0
    
    
    $
    597,519
    
    
    
    100.0Weighted average interest rate on
certificates of deposit
    
    
    
    
    
    
    4.24
    %
    
    
    
    
    
    
    3.45
    %
 Borrowings
 Interest Rate Risk
      20




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##### Table of Contents



Net Interest Income
 Liquidity and Sources of Funds
     21




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##### Table of Contents



Capital Resources
      Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to
risk-weighted assets):The Company
    
    $
    87,994
    
    
    
    11.44
    %
    
    $
    61,510
    
    
    
    8
    %
    
    $
    76,888
    
    
    
    10
    %Panhandle State Bank
    
    
    86,892
    
    
    
    11.30
    %
    
    
    61,510
    
    
    
    8
    %
    
    
    76,888
    
    
    
    10
    %Tier I capital (to risk-weighted
assets):The Company
    
    
    78,379
    
    
    
    10.19
    %
    
    
    30,755
    
    
    
    4
    %
    
    
    46,133
    
    
    
    6
    %Panhandle State Bank
    
    
    77,277
    
    
    
    10.05
    %
    
    
    30,755
    
    
    
    4
    %
    
    
    46,133
    
    
    
    6
    %Tier I capital (to average assets)The Company
    
    
    78,379
    
    
    
    9.55
    %
    
    
    32,838
    
    
    
    4
    %
    
    
    41,048
    
    
    
    5
    %Panhandle State Bank
    
    
    77,277
    
    
    
    9.36
    %
    
    
    33,040
    
    
    
    4
    %
    
    
    41,300
    
    
    
    5
    %
 Off Balance Sheet Arrangements and Contractual Obligations
  22




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##### Table of Contents



Payments Due by PeriodLess than
    
    
    
    
    
    
    Over
    
    
    More thanTotal
    
    
    1 year
    
    
    1 to 3 years
    
    
    3 to 5 years
    
    
    5 years(Dollars in thousands)Long-term debt(1)
    
    $
    96,467
    
    
    $
    3,531
    
    
    $
    11,888
    
    
    $
    36,341
    
    
    $
    44,707Short-term debt (1)
    
    
    53,902
    
    
    
    53,902
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    8,792
    
    
    
    826
    
    
    
    1,324
    
    
    
    795
    
    
    
    5,847Purchase obligations(2)
    
    
    1,507
    
    
    
    1,507
    
    
    
    
    
    
    
    
    
    
    
    Other long-term
liabilities reflected on the
registrants balance sheet
under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    160,668
    
    
    $
    59,766
    
    
    $
    13,212
    
    
    $
    37,136
    
    
    $
    50,554
 
 (1)
    
    Includes interest payments and customer repurchase agreements, excludes
customer deposits.(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. New Accounting Policies
 SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3 ( SFAS No.154 ) . Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3 ( ).
 SFAS No. 156 Accounting for Servicing of Financial Assets  an amendment of FASB Statement
No. 140 (SFAS No. 156 ). Accounting for
Servicing of Financial Assets  an amendment of FASB Statement No. 140 (SFAS No. 156).
SFAS No. 156
 Fair Value Measurements (SFAS No. 157)
 23




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##### Table of Contents



Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB No. 87, 88, 106, and 132(R
 Accounting for Uncertainty in Income Taxes
 an interpretation of FASB Statement No. 109
 Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements (EITF 06-04).
 Accounting for Purchases of Life
Insurance  Determining the Amount That Could Be Realized in Accordance with FASB Technical
Bulletin No. 85-4, Accounting for Purchases of Life Insurance (EITF 06-5) . Accounting for Contingencies
 Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements (SAB 108).
 Forward-Looking Statements
   
    
    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;
 24




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##### Table of Contents




    
    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 or have been acquired;
    
    changes in consumer spending and saving habits; and
    
    Intermountains success at managing the risks involved in the
foregoing.
 25




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##### Table of Contents



Item 3  Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Controls
 
 PART II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1A Risk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    On September 12, 2006, Intermountain issued 11,162 shares of its common stock
in connection with the acquisition of Premier Financial Services by Panhandle State
Bank. The shares of stock were issued in reliance on and in accordance with an
exemption from registration under Rule 506 of Regulation D. The basis for relying upon
the Rule 506 exemption is that all of the shares were issued to one accredited
investor, the owner of Premier Financial Services.The parties mutually agreed upon a combination of cash and stock as the
consideration for the acquisition of Premier Financial Services. The aggregate
value of the stock consideration to be received was $255,000. The agreement
between the parties set forth a mechanism for determining the number of shares to
be issued, based on the average closing price for Intermountain stock over a
prescribed time period, which average price was $22.845.(b)
    
    not applicable(c)
    
    not applicable
 26




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##### Table of Contents



Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 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




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##### Table of Contents



Signatures
  INTERMOUNTAIN COMMUNITY BANCORP(Registrant)November 9, 2006
    
    By:
    
    /s/ Curt HeckerDate
    
    
    
    Curt HeckerPresident
and Chief Executive OfficerNovember 9, 2006
    
    By:
    
    /s/ Doug WrightDate
    
    
    
    Doug WrightExecutive Vice President
and Chief Financial Officer
 29