##### 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 1934FOR THE QUARTERLY PERIOD ENDED March 31, 2005ORo
    
    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
incorporation or organization)
    
    (I.R.S. Employer
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 þ 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 þ Indicate the number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date: Class
    
    Outstanding as of May 10, 2005Common Stock (no par value)
    
    5,763,886
   1




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Intermountain Community Bancorp FORM 10-Q
For the Quarter Ended March 31, 2005 TABLE OF CONTENTS PART I - Financial InformationItem 1 - Financial Statements (Unaudited)Consolidated Balance Sheets for March 31, 2005 and December 31, 2004Consolidated Statements of Income for the three months ended March 31, 2005 and 2004Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004Consolidated Statements of Comprehensive Income for the three months ended March 31, 2005 and 2004Notes 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 3.1EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 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)
 March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    18
    
    
    $
    104Non-interest bearing and vault
    
    
    20,841
    
    
    
    14,098Restricted
    
    
    482
    
    
    
    1,634Federal funds sold
    
    
    775
    
    
    
    8,330Interest bearing certificates of deposit
    
    
    100
    
    
    
    100Available for sale securities, at fair value
    
    
    96,346
    
    
    
    102,758Held to maturity securities, at amortized cost
    
    
    7,307
    
    
    
    5,409Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,457
    
    
    
    1,210Loans held for sale
    
    
    4,821
    
    
    
    5,686Loans receivable, net
    
    
    442,844
    
    
    
    418,660Accrued interest receivable
    
    
    3,875
    
    
    
    3,722Office properties and equipment, net
    
    
    14,176
    
    
    
    12,941Bank-owned life insurance
    
    
    6,868
    
    
    
    6,795Goodwill
    
    
    11,399
    
    
    
    11,399Other intangible assets
    
    
    1,190
    
    
    
    1,238Prepaid expenses and other assets, net
    
    
    4,425
    
    
    
    3,596Total assets
    
    $
    616,924
    
    
    $
    597,680LIABILITIES:Deposits
    
    $
    508,698
    
    
    $
    500,923Securities sold subject to repurchase agreements
    
    
    16,587
    
    
    
    20,901Advances from Federal Home Loan Bank of Seattle
    
    
    12,000
    
    
    
    5,000Cashiers checks issued and payable
    
    
    5,805
    
    
    
    5,478Accrued interest payable
    
    
    889
    
    
    
    753Other borrowings
    
    
    23,927
    
    
    
    16,527Accrued expenses and other liabilities
    
    
    3,343
    
    
    
    3,534Total liabilities
    
    
    571,249
    
    
    
    553,116Commitments and contingent liabilitiesSTOCKHOLDERS EQUITY:Common stock, no par value; 7,084,000 shares authorized;
5,749,360 and 3,784,180 shares issued and outstanding
    
    
    30,680
    
    
    
    30,314Accumulated other comprehensive income
    
    
    (1,257
    )
    
    
    (509
    )Retained earnings
    
    
    16,252
    
    
    
    14,759Total stockholders equity
    
    
    45,675
    
    
    
    44,564Total liabilities and stockholders equity
    
    $
    616,924
    
    
    $
    597,680
 The accompanying notes are an integral part of the consolidated financial statements. 3




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Intermountain Community Bancorp 
 Consolidated Statements of Income
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands, except per share data)Interest income:Loans
    
    $
    7,541
    
    
    $
    4,811Investments
    
    
    933
    
    
    
    742Total interest income
    
    
    8,474
    
    
    
    5,553Interest expense:Deposits
    
    
    1,613
    
    
    
    992Other borrowings
    
    
    449
    
    
    
    195Total interest expense
    
    
    2,062
    
    
    
    1,187Net interest income
    
    
    6,412
    
    
    
    4,366Provision for losses on loans
    
    
    (298
    )
    
    
    (136
    )Net interest income after provision for losses on loans
    
    
    6,114
    
    
    
    4,230Other income:Fees and service charges
    
    
    1,724
    
    
    
    1,180Bank owned life insurance
    
    
    74
    
    
    
    64Loss on sale of securities
    
    
    (39
    )
    
    
    (21
    )Other
    
    
    282
    
    
    
    150Total other income
    
    
    2,041
    
    
    
    1,373Operating expenses
    
    
    5,806
    
    
    
    3,901Income before income taxes
    
    
    2,349
    
    
    
    1,702Income tax provision
    
    
    (854
    )
    
    
    (627
    )Net income
    
    $
    1,495
    
    
    $
    1,075Earnings per share  basic
    
    $
    0.26
    
    
    $
    0.23Earnings per share  diluted
    
    $
    0.24
    
    
    $
    0.20Weighted average shares outstanding  basic
    
    
    5,703,914
    
    
    
    4,771,173Weighted average shares outstanding  diluted
    
    
    6,217,487
    
    
    
    5,398,919
 The accompanying notes are an integral part of the consolidated financial statements. 4




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Intermountain Community Bancorp 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    1,495
    
    
    $
    1,075Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation
    
    
    415
    
    
    
    276Stock issued as compensation
    
    
    11
    
    
    
    Net amortization of premiums on securities
    
    
    114
    
    
    
    122Stock dividends on FHLB stock
    
    
    
    
    
    
    (6
    )Provisions for losses on loans
    
    
    298
    
    
    
    136Amortization of core deposit intangibles
    
    
    48
    
    
    
    18Loss on sale of securities
    
    
    39
    
    
    
    21Loss on sale of loans
    
    
    26
    
    
    
    Gain on sale of other real estate owned
    
    
    (60
    )
    
    
    Net accretion of loan and deposit discounts and premiums
    
    
    (50
    )
    
    
    (47
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (73
    )
    
    
    (64
    )Change inLoans held for sale
    
    
    865
    
    
    
    (61
    )Accrued interest receivable
    
    
    (153
    )
    
    
    68Prepaid expenses and other assets
    
    
    (580
    )
    
    
    (32
    )Accrued interest payable
    
    
    136
    
    
    
    73Accrued expenses and other liabilities
    
    
    137
    
    
    
    (880
    )Net cash provided by operating activities
    
    
    2,668
    
    
    
    699Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (4,557
    )
    
    
    (31,602
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    6,517
    
    
    
    13,468Principal payments on mortgage-backed securities
    
    
    3,078
    
    
    
    2,601Purchases of held-to-maturity securities
    
    
    (1,929
    )
    
    
    (161
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    20
    
    
    
    199Origination of loans, net of principal payments
    
    
    (25,722
    )
    
    
    (4,960
    )Proceeds from sale of loans
    
    
    1,278
    
    
    
    Purchase of office properties and equipment
    
    
    (1,649
    )
    
    
    (400
    )Net change in federal funds sold
    
    
    7,555
    
    
    
    (1,675
    )Purchase of FHLB stock
    
    
    (247
    )
    
    
    Proceeds from sales of other real estate owned
    
    
    294
    
    
    
    Net decrease in restricted cash
    
    
    1,152
    
    
    
    13Investment in affiliate
    
    
    
    
    
    
    (248
    )Net cash used in investing activities
    
    
    (14,210
    )
    
    
    (22,765
    )
 5




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Intermountain Community Bancorp
Consolidated Statements of Cash Flows (continued)
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Cash flows from financing activities:Net increase in demand, money market and savings deposits
    
    $
    5,667
    
    
    $
    5,189Net increase in certificates of deposit
    
    
    2,093
    
    
    
    13,190Net change in repurchase agreements
    
    
    (4,314
    )
    
    
    (4,221
    )Net change in federal funds purchased
    
    
    7,400
    
    
    
    Proceeds from exercise of stock options
    
    
    355
    
    
    
    205Payments for fractional shares
    
    
    (2
    )
    
    
    Repurchase of stock
    
    
    
    
    
    
    (47
    )Proceeds from debenture issuance
    
    
    
    
    
    
    8,248Proceeds from FHLB borrowings
    
    
    7,000
    
    
    
    Net cash provided by financing activities
    
    
    18,199
    
    
    
    22,564Net change in cash and cash equivalents
    
    
    6,657
    
    
    
    498Cash and cash equivalents, beginning of period
    
    
    14,202
    
    
    
    10,240Cash and cash equivalents, end of period
    
    $
    20,859
    
    
    $
    10,738Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    1,912
    
    
    $
    1,115Income taxes
    
    
    213
    
    
    
    196
 The accompanying notes are an integral part of the consolidated financial statements. 6




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Intermountain Community Bancorp 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Net income
    
    $
    1,495
    
    
    $
    1,075Other comprehensive income (loss):Change in unrealized gains (losses) on
investments, net of reclassification
adjustments
    
    
    (1,232
    )
    
    
    401Less deferred income tax benefit (provision)
    
    
    484
    
    
    
    (158
    )Net other comprehensive income (loss)
    
    
    (748
    )
    
    
    243Comprehensive income
    
    $
    747
    
    
    $
    1,318
 The accompanying notes are an integral part of the consolidated financial statements. 7




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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, 2004. 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.
    Advances from the Federal Home Loan Bank of Seattle:The Company had advances from the Federal Home Loan Bank of Seattle totaling $12.0 million
at March 31, 2005. The first advance totals $5.0 million, bears a fixed interest rate of
2.71% and matures on June 18, 2008. The second advance totals $7.0 million, bears a fixed
interest rate of 3.0% and matures on May 27, 2005.3.
    Other Borrowings:The components of other borrowings are as follows (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Federal funds purchased
    
    $
    7,400
    
    
    $
    Term note payable(1)
    
    
    8,279
    
    
    
    8,279Term note payable(2)
    
    
    8,248
    
    
    
    8,248Total other borrowings
    
    $
    23,927
    
    
    $
    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
bear interest at 6.75%. Interest only payments are made quarterly 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
bear interest based on the London Interbank Offering Rate (LIBOR) with a beginning rate
of 3.91%, adjusted and paid quarterly (the rate at March 31, 2005 was 5.46%). The debt
is callable by Intermountain in March 2009 and matures 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. 8




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4.
    Earnings Per Share:The following table presents the basic and diluted earnings per share computations: Three Months Ended March 31,(Dollars in thousands, except per share amounts)2005
    
    
    
    
    
    
    
    
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    WeightedNetIncome
    
    
    Avg. Shares(1)
    
    
    Per ShareAmount
    
    
    NetIncome
    
    
    Avg. Shares(1)
    
    
    Per ShareAmountBasic computations
    
    $
    1,495
    
    
    
    5,703,914
    
    
    $
    0.26
    
    
    $
    1,075
    
    
    
    4,771,173
    
    
    $
    0.23Effect of dilutive
securities:Common stock
options
    
    
    
    
    
    
    513,573
    
    
    
    (0.02
    )
    
    
    
    
    
    
    627,746
    
    
    
    (0.03
    )Diluted computations
    
    $
    1,495
    
    
    
    6,217,487
    
    
    $
    0.24
    
    
    $
    1,075
    
    
    
    5,398,919
    
    
    $
    0.20Antidilutive
options not included in
diluted earnings per
share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,667
   (1)
    
    Weighted average shares outstanding have been adjusted for the
3-for-2 stock split effective March 10, 2005.  5.
    Operating Expenses:The following table details Intermountains components of total operating expenses: Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Salaries and employee benefits
    
    $
    3,182
    
    
    $
    2,129Occupancy expense
    
    
    942
    
    
    
    623Advertising
    
    
    131
    
    
    
    95Fees and service charges
    
    
    303
    
    
    
    283Printing, postage and supplies
    
    
    292
    
    
    
    179Legal and accounting
    
    
    292
    
    
    
    150Other expense
    
    
    664
    
    
    
    442Total operating expenses
    
    $
    5,806
    
    
    $
    3,901
  6.
    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. 9




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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: Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands, except per share amounts)Reported net income
    
    $
    1,495
    
    
    $
    1,075Add back: Stock-based employee compensation
expense, net of related tax effects
    
    
    7
    
    
    
    Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects
    
    
    (35
    )
    
    
    (40
    )Pro forma
    
    $
    1,467
    
    
    $
    1,035Basic earnings per share:Reported earnings per share (1)
    
    $
    0.26
    
    
    $
    0.23Stock-based employee compensation, fair value
    
    
    (0.00
    )
    
    
    (0.01
    )Pro forma earnings per share
    
    $
    0.26
    
    
    $
    0.22Diluted earnings per share:Reported earnings per share (1)
    
    $
    0.24
    
    
    $
    0.20Stock-based employee compensation, fair value
    
    
    (0.00
    )
    
    
    (0.01
    )Pro forma earnings per share
    
    $
    0.24
    
    
    $
    0.19
   (1)
    
    Earnings per share amounts have been have been adjusted for the
3-for-2 stock split effective March 10, 2005.  7.
    Stock Split:On February 24, 2005, the Board of Directors approved a 3-for-2 stock split which was
effective March 10, 2005. The Company issued 1,914,809 shares of common stock related to
the stock split. All shares outstanding and earnings per share amounts have been adjusted
to reflect the stock split.8.
    Subsequent Events:Intermountain has announced that effective July 15, 2005, the Jerome, Idaho branch will be
closed. All deposits, loans and employees will be transferred to the Twin Falls Branch of
Magic Valley Bank, which is located approximately 12 miles from the Jerome branch.At the Annual Meeting held on April 30 2005, shareholders approved a proposal which
increased the number of authorized common shares from 7,084,000 to 24,000,000.9.
    New Accounting Policies:SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment.In December 2004, the
FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004).
SFAS 123R replaces SFAS No. 123 Accounting for Stock-Based Compensation and supersedes
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. SFAS 123R will require that the compensation cost relating to share-based
payment transactions be recognized in the Companys financial statements, eliminating pro
forma disclosure as an alternative. That cost will be measured based on the grant-date fair
value of the equity or liability instruments issued. SFAS 123R is effective for
Intermountain as of January 1, 2006. The Company believes the adoption of SFAS 123R will
result in a pre-tax gross compensation expense of $141,000 for the twelve months ending
December 31, 2006. 10




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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sForm 10-Kfor the year ended December 31, 2004. 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 14 other branches. In
addition to the main office, six branch offices operate under the name of Panhandle State Bank,
five of the branches operate under the name of Intermountain Community Bank, a division of
Panhandle State Bank and three operate under the name of Magic Valley Bank, a division of Panhandle
State Bank. Effective November 2, 2004, Panhandle acquired Snake River Bancorp, Inc. (Snake
River), which included three branches operating under the name of Magic Valley 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. In March 2005,
Intermountain announced that it plans to open a branch in Spokane Valley, Washington. This
expansion into Washington State will allow the company to better serve its existing customer base
and expand its business banking focus into the Eastern Washington market. At March 31, 2005, Intermountain had total consolidated assets of $616.9 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. 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 asset size at March 31, 2005, Intermountain is the largest independent commercial bank
headquartered in the state of Idaho. Intermountain offers a variety of services to its communities 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. There can be no assurance that
Intermountain will be successful in executing plans for the formation, acquisition or merger of
community banks. 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 11




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an
understanding of Intermountains Consolidated Financial Statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations. Income Recognition.Intermountain recognizes interest income by methods that conform to
general accounting practices within the banking industry. In the event management believes
collection of all or a portion of contractual interest on a loan has become doubtful, which
generally occurs after the loan is 90 days past due, Intermountain discontinues the accrual of
interest and reverses any previously accrued interest recognized in income deemed uncollectible.
Interest received on nonperforming loans is included in income only if recovery of the principal is
reasonably assured. A nonperforming loan is restored to accrual status when it is brought current
or when brought to 90 days or less delinquent, has performed in accordance with contractual terms
for a reasonable period of time, and the 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 March 31, 2005. 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, which
could cause Intermountain to experience increases in nonperforming assets, delinquencies and losses
on loans. 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 three months
ended March 31, 2005. 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. 12




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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
three months ended March 31, 2005. 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. Intermountain Community Bancorp
Comparison of the Three Month Period Ended March 31, 2005 and 2004 Results of Operations Overview. Intermountain recorded net income of $1.5 million, or $0.24 per diluted share,
for the three months ended March 31, 2005, compared with net income of $1.1 million, or $0.20 per
diluted share, for the three months ended March 31, 2004. The increase in net income for both
periods reflected increases in both net interest income and other income, which were partially
offset by increases in operating expenses. The annualized return on average assets was 1.00% and 1.03% for the three months ended
March 31, 2005 and 2004, respectively. The annualized return on average equity was 13.4% and
15.5% for the three months ended March 31, 2005 and 2004, respectively. The decreases in both
return on assets and return on average equity were largely related to the acquisition of Snake
River at the end of 2004. The Snake River acquisition contributed approximately $87.9 million in
assets, $65.5 million in loans receivable and $69.6 million in deposits. This transaction resulted
in large immediate increases in assets and equity, without a corresponding immediate increase in
earnings. While the transaction has had a positive impact thus far on overall earnings, it has
been proportionately smaller than the impacts on assets and equity because of the relatively short
period of time since the acquisition closed. Net Interest Income. The most significant component of earnings for the Company is net
interest income, which is the difference between interest income, primarily from the Companys loan
and investment portfolios, and interest expense, primarily on deposits and other borrowings.
During the three months ended March 31, 2005 and 2004, net interest income was $6.4 million and
$4.4 million, respectively, an increase of 46.9%. The positive increase resulted primarily from
higher loan balances and slight improvement in the net interest spread. 13




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Average interest-earning assets for the three months ended March 31, 2005 and 2004 were
$558.2 million and $385.0 million, respectively. Average loans increased by $145.6 million, while
average investments increased by $27.6 million over the same period in 2004. The increases in the
components of average interest-earning assets are
primarily due to the Snake River acquisition in late 2004. Average net interest spread during
the three months ended March 31, 2005 and 2004 was 4.62% and 4.52%, respectively. Net interest
margin increased slightly due to higher yields on earning assets as increasing market rates caused
loan yields to increase, particularly on the Companys variable rate loans. This was partially
offset by an increase in the cost of interest bearing liabilities, resulting from increased deposit
costs and additional use of non-deposit borrowings. 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 $298 thousand and $136 thousand
for the three months ended March 31, 2005 and 2004, respectively. The 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 the need to adequately reserve for the
growth in the loan portfolio. The following table summarizes loan loss allowance activity for the periods indicated. Three Months Ended March 31,2005
    
    
    2004(Dollars in thousands)Balance at January 1
    
    $
    6,902
    
    
    $
    5,118Allowance associated with the sale of loans
    
    
    (96
    )
    
    
    Provision for losses on loans
    
    
    298
    
    
    
    136Amounts written off net of recoveries
    
    
    19
    
    
    
    28Balance at March 31
    
    $
    7,123
    
    
    $
    5,282
 At March 31, 2005, Intermountains total classified assets were $4.0 million, compared
with $2.6 million at March 31, 2004. Total nonperforming loans were $734 thousand at March 31,
2005, compared with $135 thousand at March 31, 2004. The increase in classified assets was
primarily attributable to the increase in the loan portfolio and the addition of 3 loan
relationships, all of which management feels are adequately collateralized and provided for in the
allowance for loan loss. The increase in nonperforming loans was primarily attributable to the
addition of 1 loan totaling approximately $493,000. At March 31, 2005, Intermountains loan
delinquency rate (30 days or more) as a percentage of total
loans was 0.30%, compared with 1.07% at
March 31, 2004. The loan delinquency rate (30 days or more) has decreased due to sales of
delinquent real estate loans during 2004 and early 2005. These loans were acquired in January 2003
through the acquisition of assets of Household Bank. Other Income.Total other income was $2.0 million and $1.4 million for the three months
ended March 31, 2005 and 2004, respectively. Fees and service charge income increased by 46.1% to
$1.7 million for the three months ended March 31, 2005 from $1.2 million for the same period last
year. Deposit service fees increased, reflecting continued account and customer growth and the
addition of the Snake River accounts. Expanded mortgage banking income and contract income from
the banks secured deposit program also contributed to the increase in other income. Operating Expenses. Operating expenses were $5.8 million and $3.9 million for the three
months ended March 31, 2005 and 2004, respectively. Expanded staffing, the addition of the three
Magic Valley branches and recent upgrades of core data and item processing systems all contributed
to the increase in operating expenses over first quarter 2004. The Company also incurred
additional legal, accounting and professional fees incurred in 2005 related to its first annual
public filing as a registered company with the Securities and Exchange Commission and obtaining
approval for the new branch in Washington State. Salaries and employee benefits were $3.2 million and $2.1 million for the three months
ended March 31, 2005 and 2004, respectively. The employee costs reflected increased branch
staffing due to the addition of branches in the fourth quarter of 2004 as noted above, increased
mortgage banking staff and additional administrative staff as a result 14




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##### Table of Contents



of continued new branch
growth and expansion. At March 31, 2005, full-time-equivalent employees were 279, compared with
214 at March 31, 2004. Occupancy expenses were $942 thousand and $623 thousand for the three months ended March
31, 2005 and 2004, respectively. The increase was primarily due to costs associated the three
branches added in November 2004 following the Snake River acquisition and additional square footage
associated with administrative staff needed to support bank growth. Income Tax Provision. Intermountain recorded federal and state income tax provisions of
$854 thousand and $627 thousand for the three months ended March 31, 2005 and 2004, respectively.
The increased tax provision in 2005 over 2004 is due to the increase in pre-tax net income. The
effective tax rates for both the three month periods were 36.4% and 36.8%, respectively. Financial Position Assets. At March 31, 2005, Intermountains assets were $616.9 million, up $19.2 million
or 3.2% from $597.7 million at December 31, 2004. Growth in assets primarily reflected an increase
in loans receivable, which was offset by a slight decrease in investments. The increase in loans
receivable was supported by increases in customer deposits and advances from the Federal Home Loan
Bank of Seattle. Investments.Intermountains investment portfolio at March 31, 2005 was $105.1 million,
a decrease of $4.3 million or 3.9% from the December 31, 2004 balance of $109.4 million. The
decrease was primarily due to the principal paydown on the mortgage-backed securities portion of
the investment portfolio. Funds from these payments were used to help fund the expansion of the
loan portfolio. As of March 31, 2005, the balance of the unrealized loss, net of federal income
taxes, was $1,257,000, compared to an unrealized loss at year-end 2004 of $509,000. Generally,
falling interest rates will increase the amount recorded as unrealized gain, and rising rates will
decrease any unrealized gains, as the market value of securities inversely adjusts to the change in
interest rates. Loans Receivable. At March 31, 2005, net loans receivable were $442.8 million, up $24.1
million or 5.8% from $418.7 million at December 31, 2004. The increase was primarily due to net
increases in business and agricultural loans. During the three months ended March 31, 2005, total
loan originations were $116.9 million compared with $94.9 million for the prior years comparable
period, reflecting growing loan demand in the companys markets. 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. March 31, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial (includes commercial real
estate)
    
    $
    336,022
    
    
    
    74.61
    
    
    $
    304,783
    
    
    
    71.58Residential real estate
    
    
    86,716
    
    
    
    19.26
    
    
    
    94,170
    
    
    
    22.12Consumer
    
    
    26,109
    
    
    
    5.80
    
    
    
    24,245
    
    
    
    5.69Municipal
    
    
    1,470
    
    
    
    0.33
    
    
    
    2,598
    
    
    
    0.61Total loans receivable
    
    
    450,317
    
    
    
    100.00
    
    
    
    425,796
    
    
    
    100.00Net deferred origination fees
    
    
    (350
    )
    
    
    
    
    
    
    (234
    )Allowance for losses on loans
    
    
    (7,123
    )
    
    
    
    
    
    
    (6,902
    )Loans receivable, net
    
    $
    442,844
    
    
    
    
    
    
    $
    418,660Weighted average yield at end of period
    
    
    7.07
    %
    
    
    
    
    
    
    6.81
    %
 15




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##### Table of Contents



The following table sets forth Intermountains loan originations for the periods
indicated. Three Months EndedMarch 31,2005
    
    
    2004
    
    
    % Change(Dollars in thousands)Commercial
(includes commercial real estate)
    
    $
    90,830
    
    
    $
    75,993
    
    
    
    19.5Residential real estate
    
    
    18,982
    
    
    
    15,094
    
    
    
    25.8Consumer
    
    
    7,035
    
    
    
    3,774
    
    
    
    86.4Municipal
    
    
    50
    
    
    
    15
    
    
    
    233.3Total loans originated
    
    $
    116,897
    
    
    $
    94,876
    
    
    
    23.2
 BOLI and All Other Assets. Bank-owned life insurance (BOLI) and other assets increased
to $15.2 million at March 31, 2005 from $14.1 million at December 31, 2004. The increase was
primarily due to an increase in the net deferred tax asset, an increase in prepaid expenses, and an
increase in accrued interest receivable. Deposits. Total deposits increased $7.8 million or 1.6% to $508.7 million at March 31, 2005
from $500.9 million at December 31, 2004, primarily due to increases in interest bearing demand
accounts, savings and certificates of deposit accounts. The deposit market was very competitive
during the recently ended quarter, with leveraged competitors offering high interest rates on
various deposit products, particularly certificates of deposit. In response, Intermountain is
refocusing its sales efforts on expanding deposit sales in its existing markets by targeting market
segments with high levels of excess funds. The following table sets forth the composition of Intermountains deposits at the dates
indicated. March 31, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    106,242
    
    
    
    20.9
    
    
    $
    109,627
    
    
    
    21.9NOW and money market 0.0% to 3.0%
    
    
    174,561
    
    
    
    34.3
    
    
    
    171,474
    
    
    
    34.2Savings and IRA 0.0% to 6.65%
    
    
    67,077
    
    
    
    13.2
    
    
    
    61,112
    
    
    
    12.2Certificate of deposit accounts
    
    
    160,818
    
    
    
    31.6
    
    
    
    158,710
    
    
    
    31.7Total deposits
    
    $
    508,698
    
    
    
    100.0
    
    
    $
    500,923
    
    
    
    100.0Weighted average interest rate
on certificates of deposit
    
    
    
    
    
    
    3.07
    %
    
    
    
    
    
    
    2.85
    %
 Borrowings. Deposit accounts are Intermountains primary source of funds. Intermountain
does, however, rely upon advances from the Federal Home Loan Bank of Seattle, repurchase agreements
and other borrowings to supplement its funding and to meet deposit withdrawal requirements. These
borrowings totaled $52.5 million and $42.4 million at March 31, 2005 and December 31, 2004,
respectively. See Liquidity and Sources of Funds for additional information. Interest Rate Risk The results of operations for financial institutions may be materially and adversely
affected by changes in prevailing economic conditions, including rapid changes in interest rates,
declines in real estate market values and the monetary and fiscal policies of the federal
government. Like all financial institutions, Intermountains net interest income and its NPV (the
net present value of financial assets, liabilities and off-balance sheet contracts), are subject to
fluctuations in interest rates. 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 16




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##### Table of Contents



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 level of
non-interest bearing deposits, 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. 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 and to the nationally recognized
prime lending rate. 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; 1) 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; 2) by the sale of certain long-term
fixed-rate loans and investments; and 3) by increasing the level of its core deposits, which are
generally a lower-cost, less rate-sensitive funding source than wholesale borrowings. There can be
no assurance that Intermountain will be successful implementing any of these strategies or that, if
these strategies are implemented, they will have the intended effect of reducing interest rate risk
or increasing net interest income. 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 35.7% and a negative 16.5% at March 31, 2005 and December
31, 2004, respectively. Management attempts to maintain Intermountains gap position between
positive 20% and negative 20%. At March 31, 2005, 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. Liquidity and Sources of Funds As a financial institution, Intermountains primary sources of funds from assets include
the collection of loan principal and interest payments, cash flows from various securities it
invests in, and occasional sales of loans, investments or other assets. Financing activities from
liabilities consist primarily of customer deposits, advances from FHLB Seattle and other
borrowings. Deposits increased to $508.7 million at March 31, 2005 from $500.9 million at December
31, 2004, primarily due to increases in interest bearing demand accounts, non-interest demand
accounts and certificates of deposit. The net increase in deposits was used to fund the increase
in loan volume. At March 31, 2005 and December 31, 2004, securities sold subject to repurchase
agreements were $16.6 million and $20.9 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. 17




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##### Table of Contents



During the three months ended March 31, 2005, cash used in investing activities consisted
primarily of the funding of new loan volumes. During the same period, cash provided by financing
activities consisted primarily of increases in demand deposits, money market accounts and savings
deposits and the issuance of additional FHLB of Seattle advances and federal funds purchased. Intermountains credit line with FHLB Seattle provides for borrowings up to a percentage
of its total assets subject to general collateralization requirements. At March 31, 2005, the
Companys credit line represented a total borrowing capacity of approximately $19.4 million, all of
which was being utilized. In March 2005, Intermountain borrowed $7.0 million through an advance
from the Federal Home Loan Bank of Seattle. This fixed rate advance matures in May 2005 and was at
an interest rate of 3.00% as of March 31, 2005. Intermountain also borrows on an unsecured basis
from correspondent banks and other financial entities and has additional borrowing capacity using
specific securities as collateral at the FHLB of Seattle. As of March 31, 2005 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 $45.7 million at March 31, 2005 compared
with $44.6 million at December 31, 2004. The increase in total stockholders equity was primarily
due to the increase in net income partially offset by the increase in unrealized losses on
securities. Stockholders equity was 7.4% of total assets at March 31, 2005 compared with 7.5% at
December 31, 2004. The slight decrease in this ratio is due to the increase in total assets at
March 31, 2005 as compared to December 31, 2004 which was proportionately larger than the increase
in equity due to net income. On February 24, 2005, the Board of Directors approved a 3-for-2 stock
split to shareholders, effective March 10, 2005. Intermountain issued 1,914,809 shares of common
stock related to the stock split. At March 31, 2005, Intermountain had an unrealized loss of $1.3 million, net of related
income taxes, on investments classified as available for sale. At December 31, 2004, Intermountain
had an unrealized loss of $509 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 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 3 of Notes to Consolidated Financial Statements. 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 March 31, 2005,
Intermountain exceeded all such regulatory capital requirements and was well-capitalized pursuant
to FFIEC regulations. 18




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##### Table of Contents



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 March 31, 2005. Capital
    
    
    Well-CapitalizedActual
    
    
    Requirements
    
    
    RequirementsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Total capital
(to risk-weighted
assets)
    
    
    56,860
    
    
    
    10.97
    %
    
    
    41,469
    
    
    
    8.00
    %
    
    
    51,836
    
    
    
    10.00
    %Tier 1 capital to
(to risk-weighted
assets)
    
    
    49,987
    
    
    
    9.64
    
    
    
    20,734
    
    
    
    4.00
    
    
    
    31,102
    
    
    
    6.00Tier 1 capital (to
average assets)
    
    
    49,987
    
    
    
    8.45
    
    
    
    23,671
    
    
    
    4.00
    
    
    
    29,589
    
    
    
    5.00
 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. The following table represents Intermountains on-and-off balance sheet aggregate contractual
obligations to make future payments as of March 31, 2005. 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)
    
    $
    21,527
    
    
    $
    
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    16,527Short-term debt (1)
    
    
    14,400
    
    
    
    14,400
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    5,792
    
    
    
    552
    
    
    
    957
    
    
    
    850
    
    
    
    3,433Purchase obligations(2)
    
    
    1,128
    
    
    
    1,128
    
    
    
    
    
    
    
    
    
    
    
    Other long-term
liabilities reflected on the
registrants balance sheet
under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    42,847
    
    
    $
    16,080
    
    
    $
    957
    
    
    $
    5,850
    
    
    $
    19,960
   (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. 19




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##### Table of Contents



New Accounting Policies SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment.In December 2004, the
FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004). SFAS 123R
replaces SFAS No. 123 Accounting for Stock-Based Compensation and supersedes Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. SFAS 123R
will require that the compensation cost relating to share-based payment transactions be recognized
in the Companys financial statements, eliminating pro forma disclosure as an alternative. That
cost will be measured based on the grant-date fair value of the equity or liability instruments
issued. SFAS 123R is effective for Intermountain as of January 1, 2006. The Company believes the
adoption of SFAS 123R will result in a pre-tax gross compensation expense of $141,000 for the
twelve months ended December 31, 2006. 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 20




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##### Table of Contents




    Intermountains success at managing the risks involved in
the foregoing. 
 Item 3 -Quantitative and Qualitative Disclosures About Market Risk The information set forth under the caption Item 7A. Quantitative and Qualitative
Disclosures about Market Risk included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2004, is hereby incorporated herein by reference. 
 Item 4 -Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures: An evaluation of
Intermountains disclosure controls and procedures (as required by section 13a  15(b) of
the Securities Exchange Act of 1934 (the Act)) was carried out under the supervision and
with the participation of Intermountains management, including the Chief Executive Officer
and the Chief Financial Officer. Our Chief Executive Officer and Chief Financial Officer
concluded that based on that evaluation, our disclosure controls and procedures as currently
in effect are effective, as of 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 March 31, 2005, Intermountain
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 21




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##### Table of Contents



Item 5 Other Information Not Applicable 
 Item 6 Exhibits Exhibit No.
    
    Exhibit3.1
    
    Amended and Restated Articles of Incorporation10.1
    
    Amended and Restated Director Stock Plan10.2
    
    Form of Director Restricted Stock Purchase Agreement31.1
    
    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.
 
 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERMOUNTAIN COMMUNITY BANCORP(Registrant)May 12, 2005
    
    
    
    By:
    
    /s/ Curt HeckerDate
    
    
    
    
    
    Curt HeckerPresidentand Chief Executive OfficerMay 12, 2005
    
    
    
    By:
    
    /s/ Doug WrightDate
    
    
    
    
    
    Doug WrightExecutive Vice Presidentand Chief Financial Officer
 22