##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED June 30, 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(Address of principal executive offices)
    
    (Zip Code)
 (208) 263-0505
  þ o
  o o þ
 o þ
  Class
    
    Outstanding as of August 8, 2006Common Stock (no par value)
    
    7,311,919




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##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended June 30, 2006
 TABLE OF CONTENTS
 PART I - Financial InformationItem 1 -
    
    Financial Statements (Unaudited)Consolidated Balance Sheets for June 30, 2006 and December 31, 2005Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005Consolidated Statements of Comprehensive Income for the three and six months ended June 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 3.1EXHIBIT 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)
 June 30,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    28
    
    
    $
    250Non-interest bearing and vault
    
    
    23,696
    
    
    
    23,625Restricted
    
    
    1,030
    
    
    
    774Federal funds sold
    
    
    5,200
    
    
    
    11,080Available for sale securities, at fair value
    
    
    76,508
    
    
    
    83,847Held to maturity securities, at amortized cost
    
    
    7,350
    
    
    
    6,749Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,774
    
    
    
    1,774Loans held for sale
    
    
    7,746
    
    
    
    5,889Loans receivable, net
    
    
    610,690
    
    
    
    555,036Accrued interest receivable
    
    
    5,224
    
    
    
    4,992Office properties and equipment, net
    
    
    19,581
    
    
    
    15,545Bank-owned life insurance
    
    
    7,245
    
    
    
    7,095Goodwill
    
    
    11,399
    
    
    
    11,399Other intangible assets
    
    
    965
    
    
    
    1,051Prepaid expenses and other assets, net
    
    
    6,421
    
    
    
    4,576Total assets
    
    $
    784,857
    
    
    $
    733,682LIABILITIES:Deposits
    
    $
    640,876
    
    
    $
    597,519Securities sold subject to repurchase agreements
    
    
    39,086
    
    
    
    37,799Advances from Federal Home Loan Bank of Seattle
    
    
    5,000
    
    
    
    5,000Cashiers checks issued and payable
    
    
    4,973
    
    
    
    6,104Accrued interest payable
    
    
    1,325
    
    
    
    1,074Other borrowings
    
    
    17,934
    
    
    
    16,527Accrued expenses and other liabilities
    
    
    5,110
    
    
    
    5,386Total liabilities
    
    
    714,304
    
    
    
    669,409Commitments and contingent liabilitiesSTOCKHOLDERS EQUITY:Common stock, no par value; 24,000,000 shares authorized; 7,345,929 and 6,598,810 shares issued and 7,304,452 and 6,577,290 shares outstanding
    
    
    58,803
    
    
    
    43,370Accumulated other comprehensive income (loss)
    
    
    (1,254
    )
    
    
    (1,337
    )Retained earnings
    
    
    13,004
    
    
    
    22,240Total stockholders equity
    
    
    70,553
    
    
    
    64,273Total liabilities and stockholders equity
    
    $
    784,857
    
    
    $
    733,682
  3




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands, except per share data)
    
    
    (Dollars in thousands, except per share data)Interest income:Loans
    
    $
    12,970
    
    
    $
    8,785
    
    
    $
    24,577
    
    
    $
    16,327Investments
    
    
    943
    
    
    
    959
    
    
    
    1,964
    
    
    
    1,892Total interest income
    
    
    13,913
    
    
    
    9,744
    
    
    
    26,541
    
    
    
    18,219Interest expense:Deposits
    
    
    2,955
    
    
    
    1,959
    
    
    
    5,607
    
    
    
    3,572Other borrowings
    
    
    715
    
    
    
    610
    
    
    
    1,400
    
    
    
    1,060Total interest expense
    
    
    3,670
    
    
    
    2,569
    
    
    
    7,007
    
    
    
    4,632Net interest income
    
    
    10,243
    
    
    
    7,175
    
    
    
    19,534
    
    
    
    13,587Provision for losses on loans
    
    
    (762
    )
    
    
    (994
    )
    
    
    (666
    )
    
    
    (1,292
    )Net interest income after provision for losses on loans
    
    
    9,481
    
    
    
    6,181
    
    
    
    18,868
    
    
    
    12,295Other income:Fees and service charges
    
    
    2,813
    
    
    
    2,145
    
    
    
    4,867
    
    
    
    3,869Bank owned life insurance
    
    
    77
    
    
    
    73
    
    
    
    152
    
    
    
    147Loss on sale of securities
    
    
    (983
    )
    
    
    (2
    )
    
    
    (983
    )
    
    
    (41
    )Other
    
    
    457
    
    
    
    253
    
    
    
    769
    
    
    
    535Total other income
    
    
    2,364
    
    
    
    2,469
    
    
    
    4,805
    
    
    
    4,510Operating expenses
    
    
    8,889
    
    
    
    6,197
    
    
    
    16,594
    
    
    
    12,003Income before income taxes
    
    
    2,956
    
    
    
    2,453
    
    
    
    7,079
    
    
    
    4,802Income tax provision
    
    
    (1,117
    )
    
    
    (879
    )
    
    
    (2,678
    )
    
    
    (1,733
    )Net income
    
    $
    1,839
    
    
    $
    1,574
    
    
    $
    4,401
    
    
    $
    3,069Earnings per share  basic
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.61
    
    
    $
    0.49Earnings per share  diluted
    
    $
    0.24
    
    
    $
    0.23
    
    
    $
    0.57
    
    
    $
    0.45Weighted average shares outstanding  basic
    
    
    7,293,887
    
    
    
    6,351,178
    
    
    
    7,270,770
    
    
    
    6,312,954Weighted average shares outstanding  diluted
    
    
    7,680,719
    
    
    
    6,860,357
    
    
    
    7,666,945
    
    
    
    6,849,679
  4




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    4,401
    
    
    $
    3,069Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    992
    
    
    
    791Stock based compensation
    
    
    145
    
    
    
    26Net amortization of premiums on securities
    
    
    31
    
    
    
    152Excess tax benefit related to stock based compensation
    
    
    (36
    )
    
    
    Tax benefit related to stock option exercises
    
    
    137
    
    
    
    Provisions for losses on loans
    
    
    666
    
    
    
    1,292Amortization of core deposit intangibles
    
    
    87
    
    
    
    94Loss on sale of securities
    
    
    983
    
    
    
    41Loss on sale of loans
    
    
    
    
    
    
    26Gain on sale of other real estate owned
    
    
    
    
    
    
    (88
    )Net accretion of loan and deposit discounts and premiums
    
    
    (54
    )
    
    
    (75
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (152
    )
    
    
    (147
    )Change inLoans held for sale
    
    
    (1,857
    )
    
    
    (692
    )Accrued interest receivable
    
    
    (232
    )
    
    
    (573
    )Prepaid expenses and other assets
    
    
    (3,079
    )
    
    
    (920
    )Accrued interest payable
    
    
    251
    
    
    
    444Accrued expenses and other liabilities
    
    
    (72
    )
    
    
    3,268Net cash provided by operating activities
    
    
    2,211
    
    
    
    6,708Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (26,500
    )
    
    
    (18,891
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    29,165
    
    
    
    9,303Principal payments on mortgage-backed securities
    
    
    3,833
    
    
    
    6,807Purchases of held-to-maturity securities
    
    
    (649
    )
    
    
    (1,929
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    
    
    
    
    25Origination of loans, net of principal payments
    
    
    (55,854
    )
    
    
    (80,158
    )Proceeds from sale of loans
    
    
    
    
    
    
    1,278Purchase of office properties and equipment
    
    
    (3,900
    )
    
    
    (3,031
    )Net change in federal funds sold
    
    
    5,880
    
    
    
    8,330Purchase of FHLB stock
    
    
    
    
    
    
    (565
    )Improvements and other changes in other real estate owned
    
    
    795
    
    
    
    Proceeds from sales of other real estate owned
    
    
    
    
    
    
    526Net decrease in restricted cash
    
    
    (256
    )
    
    
    1,005Net cash used in investing activities
    
    
    (47,486
    )
    
    
    (77,300
    )
 5




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##### Table of Contents



Intermountain Community Bancorp
Consolidated Statements of Cash Flows (continued)
(Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005(Dollars in thousands)Cash flows from financing activities:Net increase in demand, money market and savings deposits
    
    $
    35,216
    
    
    $
    28,141Net increase in certificates of deposit
    
    
    8,127
    
    
    
    10,834Net change in repurchase agreements
    
    
    1,287
    
    
    
    19,009Net change in federal funds purchased
    
    
    
    
    
    
    4,750Excess tax benefit related to stock based compensation
    
    
    36
    
    
    
    Proceeds from exercise of stock options
    
    
    181
    
    
    
    570Payments for fractional shares
    
    
    
    
    
    
    (2
    )Proceeds from credit line
    
    
    375
    
    
    
    Principal payments on Note Payable
    
    
    (98
    )
    
    
    Repayments of FHLB borrowings
    
    
    
    
    
    
    (7,000
    )Proceeds from FHLB borrowings
    
    
    
    
    
    
    17,000Net cash provided by financing activities
    
    
    45,124
    
    
    
    73,302Net change in cash and cash equivalents
    
    
    (151
    )
    
    
    2,710Cash and cash equivalents, beginning of period
    
    
    23,875
    
    
    
    14,202Cash and cash equivalents, end of period
    
    $
    23,724
    
    
    $
    16,912Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    6,744
    
    
    $
    4,151Income taxes
    
    
    3,550
    
    
    
    1,998Noncash investing and financing activities:Restricted stock issued
    
    
    435
    
    
    
    33810% 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
    
    
    Six Months EndedMarch 31,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Net income
    
    $
    1,839
    
    
    $
    1,574
    
    
    $
    4,401
    
    
    $
    3,069Other comprehensive income (loss):Change in unrealized losses on investments, net of reclassification adjustments
    
    
    572
    
    
    
    778
    
    
    
    126
    
    
    
    (454
    )Less deferred income tax provision
    
    
    (237
    )
    
    
    (306
    )
    
    
    (43
    )
    
    
    178Net other comprehensive income (loss)
    
    
    335
    
    
    
    472
    
    
    
    83
    
    
    
    (276
    )Comprehensive income
    
    $
    2,174
    
    
    $
    2,046
    
    
    $
    4,484
    
    
    $
    2,793
  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 June 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):
 June 30,
    
    
    December 31,2006
    
    
    2005Term note payable (1)
    
    $
    8,279
    
    
    $
    8,279Term note payable (2)
    
    
    8,248
    
    
    
    8,248Term note payable (3)
    
    
    1,032
    
    
    
    Line of credit (4)
    
    
    375
    
    
    
    Total other borrowings
    
    $
    17,934
    
    
    $
    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% (7.87% at
June 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 construcion 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% (6.61% at June 30, 2006). 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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##### Table of Contents



4.
    
    Earnings Per Share:The following table presents the basic and diluted earnings per share computations:
 Three Months Ended June 30,(Dollars in thousands, except per share amounts)2006
    
    
    2005Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Avg.
    
    
    Per Share
    
    
    Net
    
    
    Avg.
    
    
    Per ShareIncome
    
    
    Shares(1)
    
    
    Amount
    
    
    Income
    
    
    Shares(1)
    
    
    AmountBasic computations
    
    $
    1,839
    
    
    
    7,293,887
    
    
    $
    0.25
    
    
    $
    1,574
    
    
    
    6,351,178
    
    
    $
    0.25Effect of dilutive securities:Common stock options
    
    
    
    
    
    
    386,832
    
    
    
    (0.01
    )
    
    
    
    
    
    
    509,179
    
    
    
    (0.02
    )Diluted computations
    
    $
    1,839
    
    
    
    7,680,719
    
    
    $
    0.24
    
    
    $
    1,574
    
    
    
    6,860,357
    
    
    $
    0.23Antidilutive options not included in diluted earnings per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Six Months Ended June 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
    
    $
    4,401
    
    
    
    7,270,770
    
    
    $
    0.61
    
    
    $
    3,069
    
    
    
    6,312,954
    
    
    $
    0.49Effect of dilutive securities:Common stock options
    
    
    
    
    
    
    396,175
    
    
    
    (0.04
    )
    
    
    
    
    
    
    536,725
    
    
    
    (0.04
    )Diluted computations
    
    $
    4,401
    
    
    
    7,666,945
    
    
    $
    0.57
    
    
    $
    3,069
    
    
    
    6,849,679
    
    
    $
    0.45Antidilutive options not included in diluted earnings per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Weighted average shares outstanding have been adjusted for the 10% common stock
dividend declared April 28, 2006, payable May 31, 2006 to shareholders of record on 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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Salaries and employee benefits
    
    $
    5,563
    
    
    $
    3,472
    
    
    $
    10,180
    
    
    $
    6,653Occupancy expense
    
    
    1,201
    
    
    
    915
    
    
    
    2,316
    
    
    
    1,857Advertising
    
    
    274
    
    
    
    172
    
    
    
    432
    
    
    
    303Fees and service charges
    
    
    231
    
    
    
    205
    
    
    
    450
    
    
    
    509Printing, postage and supplies
    
    
    402
    
    
    
    261
    
    
    
    754
    
    
    
    554Legal and accounting
    
    
    320
    
    
    
    317
    
    
    
    611
    
    
    
    609Other expense
    
    
    898
    
    
    
    855
    
    
    
    1,851
    
    
    
    1,518Total operating expenses
    
    $
    8,889
    
    
    $
    6,197
    
    
    $
    16,594
    
    
    $
    12,003
 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 six
months ended June 30, 2006 or 2005.Forfeitures did not 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
 Under the 1999 Director Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan
(together, the Stock Option Plans), options to purchase Intermountain common stock have
been granted to employees and directors at prices equal to the fair market value of the
underlying stock on the dates the options were granted. The options vest 20% per year, over
a five-year period, and expire in 10 years. At June 30, 2006, there were 242,059 shares
available for grant.
 10




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##### Table of Contents



Weighted
    
    WeightedNumber
    
    Average
    
    Average
    
    Aggregateof
    
    Exercise
    
    Remaining
    
    IntrinsicShares(1)
    
    Price(1)
    
    life(Years)
    
    ValueOutstanding at January 1, 2006
    
    
    634,645
    
    
    $
    5.69Granted
    
    
    
    
    
    
    Exercises
    
    
    (36,845
    )
    
    
    4.90
    
    
    
    
    
    
    $
    539Forfeited
    
    
    (396
    )
    
    
    14.24Outstanding at June 30, 2006
    
    
    597,404
    
    
    
    5.73
    
    
    
    4.78
    
    
    
    9,929Exercisable at June 30, 2006
    
    
    513,555
    
    
    $
    5.13
    
    
    
    3.97
    
    
    $
    8,111
 
 1)
    
    Shares and Weighted-Average Exercise Price have been adjusted for the 10%
common stock dividend declared April 28, 2006, 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
    
    
    23,402
    
    
    
    19.29Vested
    
    
    (4,392
    )
    
    
    15.05Forfeited
    
    
    (220
    )
    
    
    15.05Nonvested at June 30, 2006
    
    
    41,709
    
    
    $
    17.43
 
 2)
    
    Shares and Weighted-Average Grant-Date Fair Value have been adjusted for the 10%
common stock dividend declared April 28, 2006, payable May 31, 2006 to shareholders of
record on May 15, 2006. 11




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##### Table of Contents



The following table provides additional details regarding exercises of stock option for the
six months ended June 30, 2006 and 2005:
 Six Months EndedJune 30,2006
    
    2005(Dollars in thousands)Number of options exercised
    
    
    36,845
    
    
    
    134,421Cash Received
    
    $
    181
    
    
    $
    570Tax Benefit-Based on Black-Scholes fair value
    
    
    128
    
    
    
    122-Benefit in excess of Black-Scholes fair value
    
    
    36
    
    
    
    37Intrinsic Value
    
    
    539
    
    
    
    1,563
 7.
    
    Subsequent Events:At the July 20, 2006 Board of Directors meeting, the Board approved a revision to
Intermountains Articles of Incorporation to increase the number of authorized shares to
26,400,000 from 24,000,000. This amendment was adopted in connection with Intermoutains
recent 10% stock dividend, and did not require shareholder approval.On July 11, 2006, the Company entered into a $30.0 million structured repurchase agreement
with JP Morgan. The purpose of the structured repurchase agreement was to provide net
interest margin protection in the event of a declining interest rate cycle.8.
    
    New Accounting Policies:On June 1, 2005, the 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 June
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 June 2006, the Financial Accounting Standards Board (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 and measurement
attribute for the financial statement recognition and measurement of a tax position taken,
or expected to be taken in a tax return, and provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and
transition. This Interpretation is effective for fiscal years beginning after December 15,
2006. Intermountain is currently assessing the impact, if any, that the adoption of this
Interpretation will have on its consolidated financial statements.
 12




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 This report contains forward-looking statements. For a discussion about such statements,
including the risks and uncertainties inherent therein, see Forward-Looking Statements.
Managements Discussion and Analysis of Financial Condition and Results of Operations should be
read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in
this report and in Intermountains Form 10-K for the year ended December 31, 2005.
 General
       Critical Accounting Policies
  13




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##### Table of Contents



Income Recognition .
 Allowance For Loan Losses.
    Investments .
   14




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##### Table of Contents



Goodwill and Other Intangible Assets .
  Real Estate Owned.
  Intermountain Community Bancorp
Comparison of the Three and Six Month Periods Ended June 30, 2006 and 2005
 Results of Operations
 Overview
  Net Interest Income
 15




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##### Table of Contents



Provision for Losses on Loans.
   Six Months Ended June 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
    
    
    666
    
    
    
    1,292Amounts written off net of recoveries
    
    
    (59
    )
    
    
    (11
    )Balance at June 30
    
    $
    9,124
    
    
    $
    8,087
  16




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##### Table of Contents



Other Income.
 Operating Expenses
   Income Tax Provision
 Financial Position
 Assets
 Investments.
 17




---



##### Table of Contents



Loans Receivable
  June 30, 2006
    
    
    December 31, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial (includes commercial real estate)
    
    $
    475,164
    
    
    
    76.51
    
    
    $
    425,005
    
    
    
    75.28Residential real estate
    
    
    111,648
    
    
    
    17.98
    
    
    
    107,554
    
    
    
    19.05Consumer
    
    
    31,351
    
    
    
    5.05
    
    
    
    29,109
    
    
    
    5.16Municipal
    
    
    2,870
    
    
    
    0.46
    
    
    
    2,856
    
    
    
    0.51Total loans receivable
    
    
    621,033
    
    
    
    100.00
    
    
    
    564,524
    
    
    
    100.00Net deferred origination fees
    
    
    (1,219
    )
    
    
    
    
    
    
    (971
    )Allowance for losses on loans
    
    
    (9,124
    )
    
    
    
    
    
    
    (8,517
    )Loans receivable, net
    
    $
    610,690
    
    
    
    
    
    
    $
    555,036Weighted average yield at end of period
    
    
    7.25
    %
    
    
    
    
    
    
    7.90
    %
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(Dollars in thousands)Commercial (includes
commercial real estate)
    
    $
    169,783
    
    
    $
    132,671
    
    
    
    28.0
    
    
    $
    273,202
    
    
    $
    223,500
    
    
    
    22.2Residential real estate
    
    
    32,386
    
    
    
    27,973
    
    
    
    15.8
    
    
    
    54,470
    
    
    
    46,956
    
    
    
    16.0Consumer
    
    
    7,347
    
    
    
    10,903
    
    
    
    (32.6
    )
    
    
    13,000
    
    
    
    17,938
    
    
    
    (27.5
    )Municipal
    
    
    243
    
    
    
    
    
    
    
    
    
    
    
    322
    
    
    
    50
    
    
    
    544.9Total loans originated
    
    $
    209,759
    
    
    $
    171,547
    
    
    
    22.3
    
    
    $
    340,994
    
    
    $
    288,444
    
    
    
    18.2
 Office Properties and Equipment.
 BOLI and All Other Assets
 Deposits
 18




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##### Table of Contents



June 30, 2006
    
    
    December 31, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    147,166
    
    
    
    23.0
    
    
    $
    132,440
    
    
    
    22.2NOW and money market 0.0% to 5.80%
    
    
    229,798
    
    
    
    35.9
    
    
    
    216,034
    
    
    
    36.2Savings and IRA 0.0% to 6.35%
    
    
    80,490
    
    
    
    12.5
    
    
    
    73,763
    
    
    
    12.3Certificate of deposit accounts
    
    
    183,422
    
    
    
    28.6
    
    
    
    175,282
    
    
    
    29.3Total deposits
    
    $
    640,876
    
    
    
    100.0
    
    
    $
    597,519
    
    
    
    100.0Weighted average interest rate on
certificates of deposit
    
    
    
    
    
    
    4.00
    %
    
    
    
    
    
    
    3.45
    %
 Borrowings
 Interest Rate Risk
      19




---



##### Table of Contents



Net Interest Income
 Liquidity and Sources of Funds
     Capital Resources
  20




---



##### Table of Contents



Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to
risk-weighted assets):The Company
    
    $
    84,382
    
    
    
    11.84
    %
    
    $
    56,997
    
    
    
    8
    %
    
    $
    71,247
    
    
    
    10
    %Panhandle State Bank
    
    
    83,109
    
    
    
    11.66
    %
    
    
    56,997
    
    
    
    8
    %
    
    
    71,247
    
    
    
    10
    %Tier I capital (to risk-weighted
assets):The Company
    
    
    75,473
    
    
    
    10.59
    %
    
    
    28,499
    
    
    
    4
    %
    
    
    42,748
    
    
    
    6
    %Panhandle State Bank
    
    
    74,200
    
    
    
    10.41
    %
    
    
    28,499
    
    
    
    4
    %
    
    
    42,748
    
    
    
    6
    %Tier I capital (to average assets)The Company
    
    
    75,743
    
    
    
    10.17
    %
    
    
    29,680
    
    
    
    4
    %
    
    
    37,100
    
    
    
    5
    %Panhandle State Bank
    
    
    74,200
    
    
    
    9.95
    %
    
    
    29,828
    
    
    
    4
    %
    
    
    37,285
    
    
    
    5
    %
 Off Balance Sheet Arrangements and Contractual Obligations
  21




---



##### 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)
    
    $
    49,688
    
    
    $
    1,339
    
    
    $
    7,674
    
    
    $
    2,543
    
    
    $
    38,132Short-term debt (1)
    
    
    39,480
    
    
    
    39,480
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    8,617
    
    
    
    846
    
    
    
    1,353
    
    
    
    844
    
    
    
    5,574Purchase obligations(2)
    
    
    1,804
    
    
    
    1,359
    
    
    
    445
    
    
    
    
    
    
    
    Other long-term
liabilities reflected on the
registrants balance sheet
under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    99,589
    
    
    $
    43,024
    
    
    $
    9,472
    
    
    $
    3,387
    
    
    $
    43,706
 
 (1)
    
    Includes interest payments.(2)
    
    Excludes recurring accounts payable, accrued expenses and other liabilities, repurchase
agreements and customer deposits, all of which are recorded on the Companys balance sheet. 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 ).
 22




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##### Table of Contents



Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 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;
    
    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.
 
 23




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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
  
 Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
 (a)
    
    The annual meeting of Shareholders of Intermountain Community Bancorp was held on
April 28, 2006.(b)
    
    Not Applicable(c)
    
    A brief description of each matter voted upon at the Annual Meeting and the
number of votes cast for, against or withheld, including a separate tabulation with
respect to each nominee to serve on the Board is presented below:1.
    
    Election of 4 directors for terms expiring in 2009 and of 1 director for term
expiring in 2007 or until their successors have been elected and qualified.
 24




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##### Table of Contents



Ford ElsaesserVotes cast for:
    
    
    3,321,968Votes Withheld:
    
    
    68,642Curt HeckerVotes cast for:
    
    
    3,384,227Votes Withheld:
    
    
    6,383Michael J. RomineVotes cast for:
    
    
    3,384,290Votes Withheld:
    
    
    6,320Jerry SmithVotes cast for:
    
    
    3,384,965Votes Withheld:
    
    
    5,645
  Jim PatrickVotes cast for:
    
    
    3,387,608Votes Withheld:
    
    
    3,002
 2.
    
    To ratify the appointment of BDO Seidman, LLP as the independent public
accountants for Intermountain Community Bancorp for 2006.
 Votes cast for:
    
    
    3,578,514Votes Withheld:
    
    
    12,885Votes Abstained:
    
    
    20,127
 
 Item 5  Other Information
  
 Item 6  Exhibits
 Exhibit No.
    
    Exhibit3.1
    
    Articles of Incorporation, incorporating all amendments31.1
    
    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.
 25




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##### Table of Contents



Signatures
  INTERMOUNTAIN
COMMUNITY BANCORP(Registrant)August 11, 2006
    
    By:
    
    /s/ Curt HeckerDate
    
    
    
    Curt HeckerPresidentand Chief Executive OfficerAugust 11, 2006
    
    By:
    
    /s/ Doug WrightDate
    
    
    
    Doug WrightExecutive Vice Presidentand Chief Financial Officer
 30