##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM           TO
 Commission File Number 000-50667
 INTERMOUNTAIN COMMUNITY BANCORP
  Idaho
    
    82-0499463(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 231 N. Third Avenue, Sandpoint, Idaho 83864
 (208) 263-0505
 þ o
  o þ o
 o þ
  Class
Common Stock (no par value)
    
    Outstanding as of November 2, 2007
8,244,075




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##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended September 30, 2007
 TABLE OF CONTENTS
 PART I  Financial InformationItem 1  Financial Statements (Unaudited)Consolidated Balance Sheets for September 30, 2007 and December 31, 2006Consolidated Statements of Income for the three and nine months ended September 30, 2007
and 2006Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and
2006Consolidated Statements of Comprehensive Income for the three and nine months ended
September 30, 2007 and 2006Notes 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)
 September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    338
    
    
    $
    72Non-interest bearing and vault
    
    
    21,407
    
    
    
    24,305Restricted cash
    
    
    1,029
    
    
    
    888Federal funds sold
    
    
    15,830
    
    
    
    35,385Available-for-sale securities, at fair value
    
    
    148,245
    
    
    
    118,490Held-to-maturity securities, at amortized cost
    
    
    11,553
    
    
    
    6,719Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,779
    
    
    
    1,779Loans held for sale
    
    
    5,381
    
    
    
    8,945Loans receivable, net
    
    
    760,225
    
    
    
    664,403Accrued interest receivable
    
    
    8,337
    
    
    
    7,329Office properties and equipment, net
    
    
    39,941
    
    
    
    25,444Bank-owned life insurance
    
    
    7,638
    
    
    
    7,400Goodwill
    
    
    11,662
    
    
    
    11,662Other intangible assets
    
    
    761
    
    
    
    881Prepaid expenses and other assets, net
    
    
    7,685
    
    
    
    6,164Total assets
    
    $
    1,041,811
    
    
    $
    919,866LIABILITIES:Deposits
    
    $
    778,296
    
    
    $
    693,686Securities sold subject to repurchase agreements
    
    
    104,551
    
    
    
    106,250Advances from Federal Home Loan Bank of Seattle
    
    
    29,000
    
    
    
    5,000Cashiers checks issued and payable
    
    
    1,869
    
    
    
    6,501Accrued interest payable
    
    
    2,842
    
    
    
    1,909Other borrowings
    
    
    33,824
    
    
    
    22,602Accrued expenses and other liabilities
    
    
    5,379
    
    
    
    5,838Total liabilities
    
    
    955,761
    
    
    
    841,786Commitments and contingent liabilitiesCommon stock, no par value; 29,040,000 shares
authorized; 8,307,836 and 7,423,904 shares issued and
8,243,447 and 7,382,912 shares outstanding
    
    
    76,754
    
    
    
    60,395Accumulated other comprehensive loss
    
    
    
    
    
    
    (111
    )Retained earnings
    
    
    9,296
    
    
    
    17,796Total stockholders equity
    
    
    86,050
    
    
    
    78,080Total liabilities and stockholders equity
    
    $
    1,041,811
    
    
    $
    919,866
  3




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands, except per
    
    
    (Dollars in thousands, except pershare data)
    
    
    share data)Interest income:Loans
    
    $
    17,383
    
    
    $
    14,539
    
    
    $
    48,754
    
    
    $
    39,116Investments
    
    
    1,701
    
    
    
    1,491
    
    
    
    5,339
    
    
    
    3,455Total interest income
    
    
    19,084
    
    
    
    16,030
    
    
    
    54,093
    
    
    
    42,571Interest expense:Deposits
    
    
    4,909
    
    
    
    3,949
    
    
    
    13,974
    
    
    
    9,557Other borrowings
    
    
    1,812
    
    
    
    975
    
    
    
    5,437
    
    
    
    2,374Total interest expense
    
    
    6,721
    
    
    
    4,924
    
    
    
    19,411
    
    
    
    11,931Net interest income
    
    
    12,363
    
    
    
    11,106
    
    
    
    34,682
    
    
    
    30,640Provision for losses on loans
    
    
    (1,221
    )
    
    
    (910
    )
    
    
    (3,228
    )
    
    
    (1,576
    )Net interest income after provision for
losses on loans
    
    
    11,142
    
    
    
    10,196
    
    
    
    31,454
    
    
    
    29,064Other income:Fees and service charges
    
    
    3,199
    
    
    
    2,540
    
    
    
    8,471
    
    
    
    7,406Bank-owned life insurance
    
    
    80
    
    
    
    76
    
    
    
    239
    
    
    
    228Loss on sale of securities
    
    
    (38
    )
    
    
    
    
    
    
    (38
    )
    
    
    (983
    )Other
    
    
    343
    
    
    
    357
    
    
    
    1,150
    
    
    
    1,126Total other income
    
    
    3,584
    
    
    
    2,973
    
    
    
    9,822
    
    
    
    7,777Operating expenses
    
    
    10,718
    
    
    
    9,221
    
    
    
    30,352
    
    
    
    25,814Income before income taxes
    
    
    4,008
    
    
    
    3,948
    
    
    
    10,924
    
    
    
    11,027Income tax provision
    
    
    (1,590
    )
    
    
    (1,423
    )
    
    
    (4,229
    )
    
    
    (4,101
    )Net income
    
    $
    2,418
    
    
    $
    2,525
    
    
    $
    6,695
    
    
    $
    6,926Earnings per share  basic
    
    $
    0.29
    
    
    $
    0.31
    
    
    $
    0.82
    
    
    $
    0.86Earnings per share  diluted
    
    $
    0.28
    
    
    $
    0.30
    
    
    $
    0.78
    
    
    $
    0.81Weighted average shares outstanding  basic
    
    
    8,223,257
    
    
    
    8,054,527
    
    
    
    8,193,268
    
    
    
    8,016,949Weighted average shares outstanding  diluted
    
    
    8,592,975
    
    
    
    8,558,530
    
    
    
    8,608,796
    
    
    
    8,516,484
  4




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Intermountain Community Bancorp
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    6,695
    
    
    $
    6,926Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,863
    
    
    
    1,542Stock-based compensation expense
    
    
    305
    
    
    
    234Net amortization of premiums on securities
    
    
    (425
    )
    
    
    147Excess tax benefit related to stock-based compensation
    
    
    (361
    )
    
    
    (196
    )Provisions for losses on loans
    
    
    3,228
    
    
    
    1,576Amortization of core deposit intangibles
    
    
    120
    
    
    
    130(Gain) loss on sale of loans, investments, property and equipment
    
    
    (304
    )
    
    
    245Accretion of deferred gain on sale of branch property
    
    
    (12
    )
    
    
    Net accretion of loan and deposit discounts and premiums
    
    
    (58
    )
    
    
    (69
    )Deferred income tax benefit
    
    
    329
    
    
    
    260Increase in cash surrender value of bank-owned life insurance
    
    
    (239
    )
    
    
    (228
    )Change in:Loans held for sale
    
    
    3,564
    
    
    
    (967
    )Accrued interest receivable
    
    
    (1,007
    )
    
    
    (1,444
    )Prepaid expenses and other assets
    
    
    (1,864
    )
    
    
    (3,067
    )Accrued interest payable
    
    
    932
    
    
    
    858Accrued expenses and other liabilities
    
    
    (5,209
    )
    
    
    219Net cash provided by operating activities
    
    
    7,557
    
    
    
    6,166Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (156,935
    )
    
    
    (58,500
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    121,627
    
    
    
    31,667Principal payments on mortgage-backed securities
    
    
    6,166
    
    
    
    5,675Purchases of held-to-maturity securities
    
    
    (5,070
    )
    
    
    (649
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    194
    
    
    
    Origination of loans, net of principal payments
    
    
    (103,430
    )
    
    
    (107,420
    )Proceeds from sale of loans
    
    
    4,763
    
    
    
    14,895Purchase of office properties and equipment
    
    
    (18,281
    )
    
    
    (6,306
    )Proceeds from sale of office properties and equipment
    
    
    2,243
    
    
    
    13Net change in federal funds sold
    
    
    19,555
    
    
    
    (27,030
    )Purchase of FHLB stock
    
    
    
    
    
    
    (5
    )Business acquisition
    
    
    
    
    
    
    (41
    )Improvements and other changes in other real estate owned
    
    
    271
    
    
    
    805Proceeds from sales of other real estate owned
    
    
    
    
    
    
    19Net change in restricted cash
    
    
    (141
    )
    
    
    52Net cash used in investing activities
    
    
    (129,038
    )
    
    
    (146,825
    )
 5




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##### Table of Contents



Intermountain Community Bancorp
 Consolidated Statements of Cash Flows (continued)
 (Unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006(Dollars in thousands)Cash flows from financing activities:Net change in demand, money market and savings deposits
    
    $
    59,340
    
    
    $
    74,158Net change in certificates of deposit
    
    
    25,277
    
    
    
    16,947Net change in repurchase agreements
    
    
    (1,699
    )
    
    
    44,410Principal reduction of note payable
    
    
    (27
    )
    
    
    (106
    )Excess tax benefit related to stock-based compensation
    
    
    361
    
    
    
    196Proceeds from exercise of stock options
    
    
    348
    
    
    
    313Repayments of FHLB borrowings
    
    
    (10,000
    )
    
    
    Proceeds from FHLB borrowings
    
    
    34,000
    
    
    
    Proceeds from other borrowings
    
    
    11,249
    
    
    
    1,650Net cash provided by financing activities
    
    
    118,849
    
    
    
    137,568Net change in cash and cash equivalents
    
    
    (2,632
    )
    
    
    (3,091
    )Cash and cash equivalents, beginning of period
    
    
    24,377
    
    
    
    23,875Cash and cash equivalents, end of period
    
    $
    21,745
    
    
    $
    20,784Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    20,111
    
    
    $
    12,055Income taxes
    
    
    4,100
    
    
    
    4,850Noncash investing and financing activities:Restricted stock issued
    
    
    703
    
    
    
    483Deferred gain on sale/leaseback
    
    
    312
    
    
    
    Purchase of land
    
    
    
    
    
    
    1,13010% stock dividend
    
    
    15,186
    
    
    
    13,637Loans converted to Other Real Estate Owned
    
    
    
    
    
    
    398
 
 6




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net income
    
    $
    2,418
    
    
    $
    2,525
    
    
    $
    6,695
    
    
    $
    6,926Other comprehensive income:Change in unrealized gains on
investments, net of
reclassification adjustments
    
    
    595
    
    
    
    1,952
    
    
    
    184
    
    
    
    2,078Less deferred income tax expense
    
    
    (235
    )
    
    
    (773
    )
    
    
    (73
    )
    
    
    (816
    )Net other comprehensive income
    
    
    360
    
    
    
    1,179
    
    
    
    111
    
    
    
    1,262Comprehensive income
    
    $
    2,778
    
    
    $
    3,704
    
    
    $
    6,806
    
    
    $
    8,188
  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, 2006.  In the
opinion of management, the unaudited interim consolidated financial statements furnished
herein include adjustments, all of which are of a normal recurring nature, necessary for a
fair statement of the results for the interim periods presented.The preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities known to exist as of the date the financial statements are published, and the
reported amounts of revenues and expenses during the reporting period.  Uncertainties with
respect to such estimates and assumptions are inherent in the preparation of Intermountain
Community Bancorps (Intermountains or  the Companys ) consolidated financial
statements; accordingly, it is possible that the actual results could differ from these
estimates and assumptions, which could have a material effect on the reported amounts of
Intermountains consolidated financial position and results of operations.2.
    
    Advances from the Federal Home Loan Bank of Seattle:The Company had advances from the Federal Home Loan Bank of Seattle totaling $29.0 million
at September 30, 2007. A $5.0 million advance bears a fixed interest rate of 2.71% and
matures on June 18, 2008. A $14.0 million advance bears a fixed interest rate of 4.90% and
matures on September 14, 2009. A $10.0 million advance bears a fixed interest rate of 4.96%
and matures on September 17, 2010.3.
    
    Other Borrowings:The components of other borrowings are as follows (in thousands):
 September 30,
    
    
    December 31,2007
    
    
    2006Term note payable (1)
    
    $
    8,279
    
    
    $
    8,279Term note payable (2)
    
    
    8,248
    
    
    
    8,248Term note payable (3)
    
    
    988
    
    
    
    1,015Term note payable (4)
    
    
    16,309
    
    
    
    Term note payable (5)
    
    
    
    
    
    
    5,060Total other borrowings
    
    $
    33,824
    
    
    $
    22,602
 
 (1)
    
    In January 2003, the Company issued $8.0 million of Trust Preferred securities
through its subsidiary, Intermountain Statutory Trust I. The debt associated with
these securities bears interest at 6.75%, with interest only paid quarterly starting in
June 2003. The debt is callable by the Company in March 2008 and matures in March
2033.(2)
    
    In March 2004, the Company issued $8.0 million of Trust Preferred securities
through its subsidiary, Intermountain Statutory Trust II. The debt associated with
these securities bears interest on a variable basis tied to the 90-day LIBOR (London
Inter-Bank Offering Rate) index plus 2.8%, with interest only paid quarterly. The rate
on this borrowing was 8.16% at September 30, 2007. The debt is callable by the Company
in April 2009 and matures in April 2034.(3)
    
    In January 2006, the Company purchased land to build the Financial and
Technical Center in Sandpoint, Idaho. It entered into a Note Payable with the sellers
of the property in the amount of $1.13 million, with a fixed rate of 6.65%. The note
matures in February 2026.(4)
    
    In March 2007, the Company entered into a borrowing agreement with Pacific
Coast Bankers Bank in the amount of $18.0 million. The borrowing agreement is a
revolving line of credit with a variable rate of interest of Prime less 1.00%. At
September 30, 2007, the balance outstanding was $16.3 million at 6.75%. 8




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##### Table of Contents



(5)
    
    In January 2006, the Company entered into a borrowing agreement with US Bank in
the amount of $5.0 million which was raised to $10.0 million in September 2006. The
borrowing agreement was a revolving line of credit with a variable rate of interest
tied to LIBOR. This line of credit was paid off and closed in March 2007.  4.
    
    Earnings Per Share:The following table presents the basic and diluted earnings per share computations:
 Three Months Ended September 30,(Dollars in thousands, except per share amounts)2007
    
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Avg.
    
    
    Per Share
    
    
    Net
    
    
    Avg.
    
    
    Per ShareIncome
    
    
    Shares(1)
    
    
    Amount
    
    
    Income
    
    
    Shares(1)
    
    
    AmountBasic computations
    
    $
    2,418
    
    
    
    8,223,257
    
    
    $
    0.29
    
    
    $
    2,525
    
    
    
    8,054,527
    
    
    $
    0.31Effect of dilutive
securities:Common stock
options and
stock grants
    
    
    
    
    
    
    369,718
    
    
    
    (0.01
    )
    
    
    
    
    
    
    504,003
    
    
    
    (0.01
    )Diluted computations
    
    $
    2,418
    
    
    
    8,592,975
    
    
    $
    0.28
    
    
    $
    2,525
    
    
    
    8,558,530
    
    
    $
    0.30
 Nine Months Ended September 30,(Dollars in thousands, except per share amounts)2007
    
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Avg.
    
    
    Per Share
    
    
    Net
    
    
    Avg.
    
    
    Per ShareIncome
    
    
    Shares(1)
    
    
    Amount
    
    
    Income
    
    
    Shares(1)
    
    
    AmountBasic computations
    
    $
    6,695
    
    
    
    8,193,268
    
    
    $
    0.82
    
    
    $
    6,926
    
    
    
    8,016,949
    
    
    $
    0.86Effect of dilutive
securities:Common stock
options and
stock grants
    
    
    
    
    
    
    415,528
    
    
    
    (0.04
    )
    
    
    
    
    
    
    499,535
    
    
    
    (0.05
    )Diluted computations
    
    $
    6,695
    
    
    
    8,608,796
    
    
    $
    0.78
    
    
    $
    6,926
    
    
    
    8,516,484
    
    
    $
    0.81
 
 (1)
    
    Weighted average shares outstanding have been adjusted for the 10% common
stock dividend paid May 31, 2007 to shareholders of record on May 15, 2007. 9




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##### Table of Contents



5.
    
    Operating Expenses:The following table details Intermountains components of total operating expenses:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    $
    6,646
    
    
    $
    5,590
    
    
    $
    19,088
    
    
    $
    15,770Occupancy expense
    
    
    1,544
    
    
    
    1,244
    
    
    
    4,381
    
    
    
    3,560Advertising
    
    
    437
    
    
    
    427
    
    
    
    1,008
    
    
    
    858Fees and service charges
    
    
    398
    
    
    
    350
    
    
    
    1,069
    
    
    
    800Printing, postage and supplies
    
    
    349
    
    
    
    325
    
    
    
    1,096
    
    
    
    1,079Legal and accounting
    
    
    354
    
    
    
    324
    
    
    
    960
    
    
    
    935Other expense
    
    
    990
    
    
    
    961
    
    
    
    2,750
    
    
    
    2,812Total operating expenses
    
    $
    10,718
    
    
    $
    9,221
    
    
    $
    30,352
    
    
    $
    25,814
 6.
    
    Equity Compensation Plans:Effective January 1, 2006, the Company adopted FASB Statement No. 123 (R), Share-Based
Payment. Statement 123 (R) requires that compensation cost relating to share-based payment
transactions be recognized in financial statements. The cost is measured based on the fair
value of the equity or liability instruments issued. Statement 123 (R) covers a wide range
of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans.The Company adopted Statement 123 (R) using the modified prospective transition method.
Under this method, the Company is required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously granted awards
that remain outstanding as of the beginning of the period of adoption. The Company measured
share-based compensation cost using the Black-Scholes option pricing model for stock option
grants prior to January 1, 2006 and anticipates using this pricing model for future grants.
Forfeitures did not affect the calculated expense based upon historical activities of option
grantees.The Company utilizes its stock to compensate employees and Directors under the 1999 Director
Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together the Stock
Option Plans). Options to purchase Intermountain common stock have been granted to
employees and directors under the Stock Option Plans at prices equal to the fair market
value of the underlying stock on the dates the options were granted. The options vest 20%
per year, over a five-year period, and expire in 10 years. At September 30, 2007, there
were 245,140 shares available for grant. The Company did not grant options to purchase
Intermountain common stock during either the nine months ended September 30, 2007 or 2006.For the nine months ended September 30, 2007 and 2006, stock option expense totaled $97,000
and $106,000, respectively. The Company has approximately $167,000 remaining to expense
related to the non-vested stock options outstanding at September 30, 2007. This expense will
be recorded over a weighted average period of 13 months. The expense for the stock option
expense was based on the fair value of options granted calculated using the Black-Scholes
valuation model per FAS 123R. Assumptions used in the Black-Scholes option-pricing model
for options issued in years prior to 2005 are as follows:
 Dividend yield
    
    0.0%Expected volatility
    
    17.0% - 46.6%Risk free interest rates
    
    4.0% - 7.1%Expected option lives
    
    5 - 10 yearsForfeiture rate
    
    0.0%
 In 2003, shareholders approved a change to the 1999 Employee Option Plan to provide for the
granting of restricted stock awards. The Company has granted restricted stock to directors
and employees beginning in 2005. The restricted stock vests 20% per year, over a five-year
period. The Company granted 32,524 and 27,321 restricted shares with a grant date fair
value of $704,000 and $483,000 during the nine months ended September 30, 2007 and 2006,
respectively. For the nine months ended September 30, 2007 and 2006, restricted stock
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expense totaled $174,000 and $94,000, respectively. Total expense related to stock-based
compensation recorded in the nine months ended September 30, 2007 and 2006 was $305,000 and
$235,000, respectively.A summary of the changes in stock options outstanding for the nine months ended September
30, 2007 is presented below:
 Nine months ended September 30, 2007(dollars in thousands, except per share amounts)Weighted-AverageNumber of
    
    
    ExerciseShares (1)
    
    
    Price (1)Beginning Options Outstanding
    
    
    575,945
    
    
    $
    5.35Options Granted
    
    
    
    
    
    
    Exercises
    
    
    81,463
    
    
    
    4.37Forfeitures
    
    
    944
    
    
    
    9.13Ending options outstanding
    
    
    493,538
    
    
    
    5.51Exercisable at September 30
    
    
    444,049
    
    
    $
    5.08
 
 (1)
    
    Number of Shares and Weighted-Average Exercise Price have been adjusted for the 10%
common stock dividend paid May 31, 2007 to shareholders of record on May 15, 2007. The total intrinsic value of options exercised during the nine months ended September 30,
2007 and 2006 were $1,157,000 and $1,127,000, respectively.A summary of the Companys nonvested restricted shares as of September 30, 2007 and changes
during the nine months ended September 30, 2007 is presented below:
 Weighted-AverageNumber of
    
    
    Grant-DateNonvested Shares
    
    Shares (1)
    
    
    Fair Value (1)Nonvested at January 1, 2007
    
    
    45,091
    
    
    $
    17.23Granted
    
    
    32,524
    
    
    
    21.65Vested
    
    
    (9,718
    )
    
    
    17.15Forfeited
    
    
    (3,508
    )
    
    
    20.33Nonvested at September 30, 2007
    
    
    64,389
    
    
    $
    19.60
 
 (1)
    
    Number of Shares and Weighted-Average Grant-Date Fair Value have been adjusted for the
10% common stock dividend paid May 31, 2007 to shareholders of record on May 15, 2007. As of September 30, 2007, there was $1.1 million of unrecognized compensation cost related
to nonvested share-based compensation arrangements granted under this plan. This cost is
expected to be recognized over a weighted-average period of 3.2 years.7.
    
    New Accounting Pronouncements:In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No 109 (FIN 48). FIN 48 establishes a
recognition threshold and measurement for income tax positions recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a two-step evaluation process for tax positions. The first
step is recognition and the second is measurement. For recognition, an enterprise
judgmentally determines whether it is more-likely-than-not that a tax position will be
sustained upon examination, including resolution of related appeals or litigation processes,
based on the technical merits of the position. If the tax position meets the
more-likely-than-not recognition threshold it is measured and recognized in the financial
statements. If a tax position does not meet the more-likely-than-not recognition
threshold, the benefit of that position is not recognized in the financial statements. Tax
positions that meet the more-likely-than-not recognition threshold at the effective date
of FIN 48 may be recognized, or continue to be recognized, upon adoption of FIN 48. The
cumulative effect of applying the provisions of FIN 48 shall be reported as an adjustment
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to the opening balance of retained earnings for that fiscal year. This Statement was
effective January 1, 2007 and did not have a material effect on the Companys consolidated
financial statements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. It clarifies that fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants in the market in which the reporting entity transacts. SFAS No. 157 does
not require any new fair value measurements; rather, it provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at fair value.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier
adoption permitted. The Company is evaluating the impact of the adoption of SFAS No. 157 on
its consolidated financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 provides entities with an option to report certain
financial assets and liabilities at fair value  with changes in fair value reported in
earnings  and requires additional disclosures related to an entitys election to use fair
value reporting. It also requires entities to display the fair value of those assets and
liabilities for which the entity has elected to use fair value on the face of the balance
sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact that SFAS No. 159 may have on its future
consolidated financial statements.
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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, 2006.
 General
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Critical Accounting Policies
  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 Nine Month Periods Ended September 30, 2007 and 2006
 Results of Operations
 Overview
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##### Table of Contents



Net Interest Income
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Provision for Losses on Loans.
   Nine Months Ended September 30,2007
    
    
    
    
    
    
    2006(Dollars in thousands)Balance at January 1
    
    $
    9,837
    
    
    
    
    
    
    $
    8,100Provision for losses on loans
    
    
    3,228
    
    
    
    
    
    
    
    1,576Amounts written off, net of recoveries
    
    
    (1,650
    )
    
    
    
    
    
    
    (128
    )Transfers
    
    
    (3
    )
    
    
    
    
    
    
    (53
    )Allowance  loans, September 30
    
    
    11,412
    
    
    
    
    
    
    
    9,495Allowance  unfunded commitments, January 1
    
    
    482
    
    
    
    
    
    
    
    417Adjustment
    
    
    (389
    )
    
    
    
    
    
    
    Transfers
    
    
    3
    
    
    
    
    
    
    
    53Allowance  unfunded commitments, September 30
    
    
    96
    
    
    
    
    
    
    
    470Total credit allowance including unfunded commitments
    
    $
    11,508
    
    
    
    
    
    
    $
    9,965
   Other Income.
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Operating Expenses
      Income Tax Provision
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Financial Position
 Assets
 Investments.
 Loans Receivable
  September 30, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial (includes commercial real estate)
    
    $
    625,904
    
    
    
    81.02
    
    
    $
    527,345
    
    
    
    78.03Residential real estate
    
    
    112,825
    
    
    
    14.60
    
    
    
    112,569
    
    
    
    16.66Consumer
    
    
    27,335
    
    
    
    3.54
    
    
    
    31,800
    
    
    
    4.71Municipal
    
    
    6,455
    
    
    
    0.84
    
    
    
    4,082
    
    
    
    0.60Total loans receivable
    
    
    772,519
    
    
    
    100.00
    
    
    
    675,796
    
    
    
    100.00Net deferred origination fees
    
    
    (882
    )
    
    
    
    
    
    
    (1,074
    )Allowance for losses on loans
    
    
    (11,412
    )
    
    
    
    
    
    
    (10,319
    )Loans receivable, net
    
    $
    760,225
    
    
    
    
    
    
    $
    664,403Weighted average yield at end of period
    
    
    8.48
    %
    
    
    
    
    
    
    8.65
    %
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % Change(Dollars in thousands)Commercial
    
    $
    91,777
    
    
    $
    105,017
    
    
    
    (12.6
    )
    
    $
    400,215
    
    
    $
    378,219
    
    
    
    5.8Residential real estate
    
    
    29,079
    
    
    
    32,384
    
    
    
    (10.2
    )
    
    
    75,055
    
    
    
    86,854
    
    
    
    (13.6
    )Consumer
    
    
    6,587
    
    
    
    6,933
    
    
    
    (5.0
    )
    
    
    16,483
    
    
    
    19,933
    
    
    
    (17.3
    )Municipal
    
    
    3,365
    
    
    
    3,421
    
    
    
    (1.6
    )
    
    
    6,268
    
    
    
    3,744
    
    
    
    67.4Total loans originated
    
    $
    130,808
    
    
    $
    147,755
    
    
    
    (11.5
    )
    
    $
    498,021
    
    
    $
    488,750
    
    
    
    1.9
 Office Properties and Equipment.
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##### Table of Contents



BOLI and All Other Assets
 Deposits
  September 30, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    168,955
    
    
    
    21.7
    
    
    $
    141,601
    
    
    
    20.4NOW and money market 0.0% to 5.6%
    
    
    317,459
    
    
    
    40.8
    
    
    
    291,412
    
    
    
    42.0Savings and IRA 0.0% to 4.4%
    
    
    87,894
    
    
    
    11.3
    
    
    
    81,955
    
    
    
    11.8Certificate of deposit accounts
    
    
    203,988
    
    
    
    26.2
    
    
    
    178,718
    
    
    
    25.8Total deposits
    
    $
    778,296
    
    
    
    100.0
    
    
    $
    693,686
    
    
    
    100.0Weighted-average interest rate
on certificates of deposit
    
    
    
    
    
    
    4.73
    %
    
    
    
    
    
    
    4.47
    %
 Borrowings
 Interest Rate Risk
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Liquidity and Sources of Funds
  21




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##### Table of Contents



Capital Resources
      Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted
assets):The Company
    
    $
    100,162
    
    
    
    11.16
    %
    
    $
    71,771
    
    
    
    8
    %
    
    $
    89,714
    
    
    
    10
    %Panhandle State Bank
    
    
    99,622
    
    
    
    11.10
    %
    
    
    71,779
    
    
    
    8
    %
    
    
    89,723
    
    
    
    10
    %Tier I capital (to risk-weighted
assets):The Company
    
    
    88,944
    
    
    
    9.91
    %
    
    
    35,885
    
    
    
    4
    %
    
    
    53,828
    
    
    
    6
    %Panhandle State Bank
    
    
    88,404
    
    
    
    9.85
    %
    
    
    35,889
    
    
    
    4
    %
    
    
    53,834
    
    
    
    6
    %Tier I capital (to average assets):The Company
    
    
    88,944
    
    
    
    8.92
    %
    
    
    39,878
    
    
    
    4
    %
    
    
    49,848
    
    
    
    5
    %Panhandle State Bank
    
    
    88,404
    
    
    
    9.13
    %
    
    
    38,747
    
    
    
    4
    %
    
    
    48,434
    
    
    
    5
    %
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Off Balance Sheet Arrangements and Contractual Obligations
   Payments Due by PeriodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(Dollars in thousands)Long-term debt (1)
    
    $
    114,010
    
    
    $
    4,310
    
    
    $
    31,894
    
    
    $
    34,069
    
    
    $
    43,737Short-term debt (1)
    
    
    96,421
    
    
    
    96,421
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations (2)
    
    
    13,688
    
    
    
    1,051
    
    
    
    1,545
    
    
    
    1,303
    
    
    
    9,789Purchase obligations (3)
    
    
    5,208
    
    
    
    5,208
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
reflected on the registrants
balance sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    229,327
    
    
    $
    106,990
    
    
    $
    33,439
    
    
    $
    35,372
    
    
    $
    53,526
 
 (1)
    
    Includes interest payments.(2)
    
    Excludes recurring accounts payable, accrued expenses and other liabilities, repurchase
agreements and customer deposits, all of which are recorded on the Companys balance sheet.(3)
    
    The Company is constructing a 94,000 square foot Sandpoint Financial and Technical
Center. New Accounting Pronouncements
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Forward-Looking Statements
   
    
    the strength of the United States economy in general and the strength of
the local economies and real estate markets in which Intermountain conducts its operations;
    
    a deep decline in the housing market or a significant tightening in available credit for
businesses and consumers;
    
    significantly increased defaults and delinquencies in the Companys loan portfolio as a
result of worsening economic conditions;
    
    the effects of inflation, interest rate levels and market and monetary
fluctuations;
    
    trade, monetary and fiscal policies and laws, including interest rate
policies of the federal government;
    
    applicable laws and regulations and legislative or regulatory changes;
    
    the timely development and acceptance of new products and services of
Intermountain;
    
    the willingness of customers to substitute competitors products and
services for Intermountains products and services;
    
    Intermountains success in gaining regulatory approvals, when required;
    
    technological and management changes;
    
    announcement and successful and timely implementation of growth,
acquisition and efficiency strategies;
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##### Table of Contents




    
    Intermountains ability to successfully integrate entities that may
be or have been acquired;
    
    changes in consumer spending and saving habits; and
    
    Intermountains success at managing the risks involved in the foregoing.
 
 Item 3  Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control over Financial Reporting
 
 PART II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1A Risk Factors
 Except as noted below, there have been no other material changes from the risk factors
discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2006.
 
    
    the potential impact of a prolonged housing slump, substantial tightening of credit to
businesses and consumers, and continued subprime and prime mortgage market volatility on
the Companys lending operations
 Weakness in the housing sector and subprime mortgage markets is spreading into other credit
markets and is impacting the lending operations of many financial institutions. The Company
is not significantly involved in subprime mortgage activities, so its current direct
exposure is limited. However, to the extent this market volatility affects the
marketability of all mortgage loans, the real estate market, and consumer spending in
general, it may have an indirect adverse impact on the Companys lending operations, loan
balances and non-interest income, and ultimately its net income.
 
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
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Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  
 Item 6  Exhibits
 Exhibit No.
    
    Exhibit3.1
    
    Amended and Restated Articles of Incorporation31.1
    
    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.
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Signatures
  INTERMOUNTAIN COMMUNITY BANCORP(Registrant)November 9, 2007
    
    By:
    
    /s/ Curt HeckerDate
    
    
    
    Curt HeckerPresidentand Chief Executive OfficerNovember 9, 2007
    
    By:
    
    /s/ Doug WrightDate
    
    
    
    Doug WrightExecutive Vice Presidentand Chief Financial Officer
 27