##### 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, 2008
 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.)
 414 Church Street, Sandpoint, Idaho 83864
 (208) 263-0505
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
  Class
    
    Outstanding as of November 4, 2008Common Stock (no par value)
    
    8,315,239




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##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended September 30, 2008   TABLE OF CONTENTS
 PART I  Financial InformationItem 1 - Financial Statements (Unaudited)Consolidated Balance Sheets for September 30, 2008 and December 31, 2007Consolidated Statements of Income for the three and nine months ended September 30,
2008 and 2007Consolidated Statements of Cash Flows for the nine months ended September 30, 2008
and 2007Consolidated Statements of Comprehensive Income for the three and nine months ended
September 30, 2008 and 2007Notes 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 - Other InformationItem 5 - ExhibitsSignaturesEX-31.1EX-31.2EX-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 31,2008
    
    
    2007(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    861
    
    
    $
    149Non-interest bearing and vault
    
    
    22,151
    
    
    
    26,851Restricted cash
    
    
    2,746
    
    
    
    4,527Federal funds sold
    
    
    20,315
    
    
    
    6,565Interest Bearing Certificates of Deposits
    
    
    192
    
    
    
    Available-for-sale securities, at fair value
    
    
    132,011
    
    
    
    158,791Held-to-maturity securities, at amortized cost
    
    
    16,110
    
    
    
    11,324Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    2,310
    
    
    
    1,779Loans held for sale
    
    
    1,500
    
    
    
    4,201Loans receivable, net
    
    
    766,625
    
    
    
    756,549Accrued interest receivable
    
    
    6,776
    
    
    
    8,207Office properties and equipment, net
    
    
    44,843
    
    
    
    42,090Bank-owned life insurance
    
    
    7,952
    
    
    
    7,713Goodwill
    
    
    11,662
    
    
    
    11,662Other intangible assets
    
    
    612
    
    
    
    723Prepaid expenses and other assets, net
    
    
    12,579
    
    
    
    7,528Total assets
    
    $
    1,049,245
    
    
    $
    1,048,659LIABILITIES:Deposits
    
    $
    770,367
    
    
    $
    757,838Securities sold subject to repurchase agreements
    
    
    87,213
    
    
    
    124,127Advances from Federal Home Loan Bank of Seattle
    
    
    54,000
    
    
    
    29,000Cashiers checks issued and payable
    
    
    989
    
    
    
    1,509Accrued interest payable
    
    
    2,057
    
    
    
    3,027Other borrowings
    
    
    40,623
    
    
    
    36,998Accrued expenses and other liabilities
    
    
    5,036
    
    
    
    6,041Total liabilities
    
    
    960,285
    
    
    
    958,540Commitments and contingent liabilitiesCommon stock, no par value; 29,040,000 shares
authorized; 8,403,137 and 8,313,005 shares issued and
8,305,769 and 8,248,710 shares outstanding
    
    
    76,349
    
    
    
    76,746Accumulated other comprehensive income (loss)
    
    
    (3,350
    )
    
    
    1,327Retained earnings
    
    
    15,961
    
    
    
    12,046Total stockholders equity
    
    
    88,960
    
    
    
    90,119Total liabilities and stockholders equity
    
    $
    1,049,245
    
    
    $
    1,048,659
  3




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Income
(Unaudited)
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands, except per
    
    
    (Dollars in thousands, except pershare data)
    
    
    share data)Interest income:Loans
    
    $
    14,098
    
    
    $
    17,383
    
    
    $
    43,058
    
    
    $
    48,754Investments
    
    
    1,991
    
    
    
    1,701
    
    
    
    6,073
    
    
    
    5,339Total interest income
    
    
    16,089
    
    
    
    19,084
    
    
    
    49,131
    
    
    
    54,093Interest expense:Deposits
    
    
    3,627
    
    
    
    4,909
    
    
    
    10,932
    
    
    
    13,974Other borrowings
    
    
    1,352
    
    
    
    1,812
    
    
    
    4,588
    
    
    
    5,437Total interest expense
    
    
    4,979
    
    
    
    6,721
    
    
    
    15,520
    
    
    
    19,411Net interest income
    
    
    11,110
    
    
    
    12,363
    
    
    
    33,611
    
    
    
    34,682Provision for losses on loans
    
    
    (2,474
    )
    
    
    (1,221
    )
    
    
    (4,872
    )
    
    
    (3,228
    )Net interest income after provision for
losses on loans
    
    
    8,636
    
    
    
    11,142
    
    
    
    28,739
    
    
    
    31,454Other income:Fees and service charges
    
    
    2,325
    
    
    
    2,353
    
    
    
    6,671
    
    
    
    6,285Mortgage Banking Operations
    
    
    413
    
    
    
    846
    
    
    
    1,205
    
    
    
    2,186Bank-owned life insurance
    
    
    83
    
    
    
    80
    
    
    
    238
    
    
    
    239Gain (loss) on sale of securities
    
    
    
    
    
    
    (38
    )
    
    
    2,182
    
    
    
    (38
    )Other
    
    
    193
    
    
    
    343
    
    
    
    728
    
    
    
    1,150Total other income
    
    
    3,014
    
    
    
    3,584
    
    
    
    11,024
    
    
    
    9,822Operating expenses
    
    
    11,422
    
    
    
    10,718
    
    
    
    33,316
    
    
    
    30,352Income before income taxes
    
    
    228
    
    
    
    4,008
    
    
    
    6,447
    
    
    
    10,924Income tax provision
    
    
    (2
    )
    
    
    (1,590
    )
    
    
    (2,298
    )
    
    
    (4,229
    )Net income
    
    $
    226
    
    
    $
    2,418
    
    
    $
    4,149
    
    
    $
    6,695Earnings per share  basic
    
    $
    0.03
    
    
    $
    0.29
    
    
    $
    0.50
    
    
    $
    0.82Earnings per share  diluted
    
    $
    0.03
    
    
    $
    0.28
    
    
    $
    0.49
    
    
    $
    0.78Weighted average shares outstanding  basic
    
    
    8,305,236
    
    
    
    8,223,257
    
    
    
    8,287,541
    
    
    
    8,193,268Weighted average shares outstanding  diluted
    
    
    8,461,591
    
    
    
    8,592,975
    
    
    
    8,531,037
    
    
    
    8,608,796
  4




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Nine months EndedSeptember 30,2008
    
    
    2007(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    4,149
    
    
    $
    6,695Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    2,615
    
    
    
    1,863Stock-based compensation expense
    
    
    (244
    )
    
    
    305Net amortization of premiums on securities
    
    
    (143
    )
    
    
    (425
    )Excess tax benefit related to stock-based compensation
    
    
    
    
    
    
    (361
    )Provisions for losses on loans
    
    
    4,872
    
    
    
    3,228Amortization of core deposit intangibles
    
    
    111
    
    
    
    120(Gain) loss on sale of loans, investments, property and equipment
    
    
    (2,681
    )
    
    
    (304
    )(Gain) loss on sale of other real estate owned
    
    
    5
    
    
    
    Accretion of deferred gain on sale of branch property
    
    
    (9
    )
    
    
    (12
    )Net accretion of loan and deposit discounts and premiums
    
    
    (17
    )
    
    
    (58
    )Deferred income tax benefit
    
    
    
    
    
    
    329Increase in cash surrender value of bank-owned life insurance
    
    
    (238
    )
    
    
    (239
    )Change in:Loans held for sale
    
    
    2,701
    
    
    
    3,564Accrued interest receivable
    
    
    1,431
    
    
    
    (1,007
    )Prepaid expenses and other assets
    
    
    (4,130
    )
    
    
    (1,864
    )Accrued interest payable
    
    
    (970
    )
    
    
    932Accrued expenses and other liabilities
    
    
    (2,222
    )
    
    
    (5,209
    )Net cash provided by operating activities
    
    
    5,230
    
    
    
    7,557Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (47,374
    )
    
    
    (156,935
    )Purchases of FHLB Stock
    
    
    (705
    )
    
    
    Proceeds from redemption of FHLB Stock
    
    
    175
    
    
    
    Proceeds from calls or maturities of available-for-sale securities
    
    
    59,022
    
    
    
    121,627Principal payments on mortgage-backed securities
    
    
    10,272
    
    
    
    6,166Purchases of held-to-maturity securities
    
    
    (6,127
    )
    
    
    (5,070
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    1,305
    
    
    
    194Origination of loans, net of principal payments
    
    
    (41,668
    )
    
    
    (103,430
    )Proceeds from sale of loans
    
    
    28,972
    
    
    
    4,763Purchase of office properties and equipment
    
    
    (5,554
    )
    
    
    (18,281
    )Proceeds from sale of office properties and equipment
    
    
    8
    
    
    
    2,243Net change in federal funds sold
    
    
    (13,750
    )
    
    
    19,555Proceeds from sale of other real estate owned
    
    
    471
    
    
    
    Improvements and other changes in other real estate owned
    
    
    
    
    
    
    271Net change in Certificates of Deposit with other institutions
    
    
    (192
    )
    
    
    Net change in restricted cash
    
    
    1,781
    
    
    
    (141
    )Net cash used in investing activities
    
    
    (13,364
    )
    
    
    (129,038
    )
 5




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##### Table of Contents



Intermountain Community Bancorp
Consolidated Statements of Cash Flows (continued)
(Unaudited)
 Nine months EndedSeptember 30,2008
    
    
    2007(Dollars in thousands)Cash flows from financing activities:Net change in demand, money market and savings deposits
    
    $
    (3,484
    )
    
    $
    59,340Net change in certificates of deposit
    
    
    16,008
    
    
    
    25,277Net change in repurchase agreements
    
    
    (36,913
    )
    
    
    (1,699
    )Principal reduction of note payable
    
    
    (31
    )
    
    
    (27
    )Excess tax benefit related to stock-based compensation
    
    
    
    
    
    
    361Proceeds from exercise of stock options
    
    
    102
    
    
    
    348Repayments of FHLB borrowings
    
    
    (5,000
    )
    
    
    (10,000
    )Proceeds from FHLB borrowings
    
    
    30,000
    
    
    
    34,000Retirement of Treasury Stock
    
    
    (193
    )
    
    
    Proceeds from other borrowings
    
    
    3,657
    
    
    
    11,249Net cash provided by financing activities
    
    
    4,146
    
    
    
    118,849Net change in cash and cash equivalents
    
    
    (3,988
    )
    
    
    (2,632
    )Cash and cash equivalents, beginning of period
    
    
    27,000
    
    
    
    24,377Cash and cash equivalents, end of period
    
    $
    23,012
    
    
    $
    21,745Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    15,974
    
    
    $
    20,111Income taxes
    
    
    3,585
    
    
    
    4,100Noncash investing and financing activities:Restricted stock issued
    
    
    647
    
    
    
    703Deferred gain on sale/leaseback
    
    
    
    
    
    
    31210% stock dividend
    
    
    
    
    
    
    15,186Accrual of liability for split dollar life insurance
    
    
    389
    
    
    
    Loans converted to Other Real Estate Owned
    
    
    1,743
    
    
    
    
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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Comprehensive Income
(Unaudited)
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Net income
    
    $
    226
    
    
    $
    2,418
    
    
    $
    4,149
    
    
    $
    6,695Other comprehensive income (loss):Change in unrealized gains (losses) on
investments and MBS available for sale
    
    
    (2,660
    )
    
    
    595
    
    
    
    (7,221
    )
    
    
    184Qualifying cash flow hedge
    
    
    (315
    )
    
    
    
    
    
    
    (315
    )
    
    
    Less deferred income tax provision (benefit)
    
    
    1,053
    
    
    
    (235
    )
    
    
    2,859
    
    
    
    (73
    )Net other comprehensive income (loss)
    
    
    (1,922
    )
    
    
    360
    
    
    
    (4,677
    )
    
    
    111Comprehensive income (loss)
    
    $
    (1,696
    )
    
    $
    2,778
    
    
    $
    (528
    )
    
    $
    6,806
  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, 2007. 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:During June of 2003, the Bank obtained an advance from the Federal Home Loan Bank of Seattle
(FHLB Seattle) in the amount of $5,000,000. The note matured in May 2008. During September
2007, the Bank obtained two advances from the FHLB Seattle in the amounts of $10.0 million
and $14.0 million with interest only payable at 4.96% and 4.90% and maturities in September
2010 and September 2009, respectively. During April 2008, the Bank obtained two advances
from the FHLB Seattle in the amounts of $5.0 million and $5.0 million with interest only
payable at 2.89% and 2.95% and maturities in April 2009. During May 2008, the Bank obtained
two advances from the FHLB Seattle in the amounts of $12.0 million and $8.0 million with
interest only payable at 2.88% and 2.51% and maturities in August 2009 and December 2008,
respectively.Advances from FHLB Seattle are collateralized by certain qualifying loans. At September 30,
2008, Intermountain had the ability to borrow $118.7 million from FHLB Seattle, of which
approximately $54.0 million was utilized. The Banks credit line with FHLB Seattle is
limited to a percentage of its total regulatory assets subject to collateralization
requirements. Intermountain would be able to borrow amounts in excess of this total from the
FHLB Seattle with the placement of additional available collateral.3.
    
    Other Borrowings:The components of other borrowings are as follows (in thousands):
 September 30,
    
    
    December 31,2008
    
    
    2007Term note payable (1)
    
    $
    8,279
    
    
    $
    8,279Term note payable (2)
    
    
    8,248
    
    
    
    8,248Term note payable (3)
    
    
    951
    
    
    
    982Term note payable (4)
    
    
    23,145
    
    
    
    19,489Total other borrowings
    
    $
    40,623
    
    
    $
    36,998
 
 (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 bore a fixed interest rate for a period of five years from issue date
and now bears interest on a variable basis tied to the 90-day LIBOR (London Inter-Bank
Offering Rate) index plus 3.25%, with interest only paid quarterly. The rate on this
borrowing was 6.73% at September 30, 2008. The debt is callable by the Company
quarterly and matures in March 2033. During the third quarter of 2008, the Company
entered into an interest rate swap contract with Pacific Coast Bankers Bank. The
purpose of the $8.2 million notional value swap is to convert
the variable rate payments made on our Trust Preferred I obligation to a series of fixed rate payments
for five years, as a hedging strategy to help manage the Companys interest-rate risk.
See Note A.
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##### Table of Contents



(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 index plus
2.8%, with interest only paid quarterly. The rate on this borrowing was 5.59% at
September 30, 2008. The debt is callable by the Company in March 2009 and matures in
April 2034. See Note A.(3)
    
    In January 2006, the Company purchased land to build its new headquarters, the
Sandpoint 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%, payable in
equal installments. The note matures in February 2026.(4)
    
    In December 2007, the Company renewed a borrowing agreement with Pacific Coast
Bankers Bank in the amount of $25.0 million. The borrowing agreement is a revolving
line of credit with a variable rate of interest tied to LIBOR with a maturity date of
January 18, 2009. It is anticipated that this line will either be paid down with the
sale of the building or refinanced with a longer term instrument. The collateral for
the credit line is all of Panhandle State Banks stock and the Sandpoint Center. Under
the restrictive covenants of the borrowing agreement, Intermountain cannot incur
additional debt outside of its normal course of business over $5.0 million without
Pacific Coast Bankers Banks consent, and Intermountain is obligated to provide
information regarding its financial position and loan portfolio on a regular basis.
At September 30, 2008, the balance outstanding was $23.1 million at a rate of 5.67%. A)
    
    Intermountains obligations under the above debentures issued by its
subsidiaries constitute a full and unconditional guarantee by Intermountain of the
Statutory Trusts obligations under the Trust Preferred Securities. In accordance
with Financial Interpretation No. 46 (Revised), Consolidation of Variable Interest
Entities (FIN No. 46R), the trusts are not consolidated and the debentures and
related amounts are treated as debt of Intermountain.
 4.
    
    Earnings Per Share:The following table presents the basic and diluted earnings per share computations:
 Three Months Ended September 30,(Dollars in thousands, except per share amounts)2008
    
    
    2007Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    AmountBasic computations
    
    $
    226
    
    
    
    8,305,236
    
    
    $
    0.03
    
    
    $
    2,418
    
    
    
    8,223,257
    
    
    $
    0.29Effect of dilutive
securities:Common stock
options and
stock grants
    
    
    
    
    
    
    156,355
    
    
    
    (0.00
    )
    
    
    
    
    
    
    369,718
    
    
    
    (0.01
    )Diluted computations
    
    $
    226
    
    
    
    8,461,591
    
    
    $
    0.03
    
    
    $
    2,418
    
    
    
    8,592,975
    
    
    $
    0.28
 Nine months Ended September 30,(Dollars in thousands, except per share amounts)2008
    
    
    2007Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    AmountBasic computations
    
    $
    4,149
    
    
    
    8,287,541
    
    
    $
    0.50
    
    
    $
    6,695
    
    
    
    8,193,268
    
    
    $
    0.82Effect of dilutive
securities:Common stock
options and
stock grants
    
    
    
    
    
    
    243,496
    
    
    
    (0.01
    )
    
    
    
    
    
    
    415,528
    
    
    
    (0.04
    )Diluted computations
    
    $
    4,149
    
    
    
    8,531,037
    
    
    $
    0.49
    
    
    $
    6,695
    
    
    
    8,608,796
    
    
    $
    0.78
 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Salaries and employee benefits
    
    $
    6,446
    
    
    $
    6,646
    
    
    $
    18,922
    
    
    $
    19,088Occupancy expense
    
    
    2,005
    
    
    
    1,544
    
    
    
    5,596
    
    
    
    4,381Advertising
    
    
    378
    
    
    
    437
    
    
    
    1,069
    
    
    
    1,008Fees and service charges
    
    
    452
    
    
    
    398
    
    
    
    1,421
    
    
    
    1,069Printing, postage and supplies
    
    
    396
    
    
    
    349
    
    
    
    1,105
    
    
    
    1,096Legal and accounting
    
    
    407
    
    
    
    354
    
    
    
    1,342
    
    
    
    960Other expense
    
    
    1,338
    
    
    
    990
    
    
    
    3,861
    
    
    
    2,750Total operating expenses
    
    $
    11,422
    
    
    $
    10,718
    
    
    $
    33,316
    
    
    $
    30,352
 Salaries and employee benefits expense decreased $166,000, or 0.9%, over the nine-month
period last year as a result of decreased staffing levels and lower incentive expense,
including the reversal of $640,000 in accrued pre-tax expense related to a long-term bonus
plan for executives that will likely not be paid out at year end.Occupancy expenses increased $1.2 million, or 27.7%, for the nine-month period ended
September 30, 2008 compared to the same period one year ago. These increases reflected
additional building expense from new facilities opened in 2007 and 2008 and additional
computer hardware and software purchased to enhance security, compliance and business
continuity.Increases in computer service fees, debit card expenses and credit card acceptance fees
resulted in a $352,000, or 32.9% increase in fees and service charges over the same
nine-month period last year. Higher volumes of activity by the Companys customers
generated these increases.Legal and accounting fees were $382,000, or 39.8% higher than the same nine-month period in
2007 as a result of payments made to a consultant engaged to assist the Company in
streamlining business processes. The fees for this engagement ended in September 2008.Other expenses increased $1.1 million, or 40.4%, for the nine-month period over the same
period last year. The increase in other expenses can be attributed to the reinstatement of
FDIC insurance fees industry-wide and increases in collection and other real-estate owned
expenses caused by the weakening credit environment. In addition, the 2008 comparative
numbers are negatively impacted by the reversal in 2007 of $384,000 in expenses as a result
of lowering the allowance for unfunded loan commitments in conjunction with new federal
guidance issued last year.6.
    
    Stock-Based Compensation Plans: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, 2008, there
were 200,229 shares available for grant. The Company did not grant options to purchase
Intermountain common stock during either the nine months ended September 30, 2008 or 2007.For the nine months ended September 30, 2008 and 2007, stock option expense totaled $101,000
and $97,000, respectively. The Company has approximately $34,000 remaining to expense
related to the non-vested stock options outstanding at September 30, 2008. This expense will
be recorded over a weighted average period of 3.0 months. The expense for the stock options was calculated using the Black-Scholes valuation
model per Statement 123 (R). Assumptions used in the Black-Scholes option-pricing model for
options issued in years prior to 2005 are as follows:
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Dividend yield
    
    0.0%Expected volatility
    
    17.0% - 46.6%Risk free interest rates
    
    4.0% - 7.1%Expected option lives
    
    5 - 10 years
 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 51,633 and 32,524 restricted shares with a grant date fair
value of $647,000 and $704,000 during the nine months ended September 30, 2008 and 2007,
respectively. For the nine months ended September 30, 2008 and 2007, restricted stock
expense totaled $247,000 and $174,000, respectively. Total expense related to stock-based
compensation is comprised of restricted stock expense, stock option expense and expense
related to the 2006-2008 Long-Term Incentive Plan (LTIP). The LTIP expense is based on
anticipated company performance over a 3-year period and has a 5-year vesting period.
During the nine months ended September 30, 2008, the Company reversed $640,000 in accrued
incentives related to the LTIP as it appeared that asset growth and ROE targets required by
the plan would not be met by the end of this year. Total expense related to stock-based
compensation recorded in the nine months ended September 30, 2008 and 2007 was ($245,000)
and $305,000, respectively.A summary of the changes in stock options outstanding for the nine months ended September
30, 2008 is presented below:
 Nine months ended September 30, 2008(dollars in thousands, except per share amounts)Weighted
    
    WeightedNumber
    
    Average
    
    Averageof
    
    Exercise
    
    RemainingShares
    
    Price
    
    Life (Years)Beginning Options Outstanding, Jan 1, 2008
    
    
    487,329
    
    
    $
    5.48Options Granted
    
    
    
    
    
    
    Exercises
    
    
    (23,452
    )
    
    
    4.38Forfeitures
    
    
    (510
    )
    
    
    13.12Ending options outstanding, September 30,
2008
    
    
    463,367
    
    
    
    5.52
    
    
    
    2.4Exercisable at September 30, 2008
    
    
    443,669
    
    
    $
    5.30
    
    
    
    2.3
 The total intrinsic value of options exercised during the nine months ended September 30,
2008 and 2007 was $104,000 and $1,157,000, respectively.A summary of the Companys nonvested restricted shares for the nine months ended September
30, 2008 is presented below:
 Weighted-AverageGrant-DateNonvested Shares
    
    Shares
    
    
    Fair ValueNonvested at January 1, 2008
    
    
    64,295
    
    
    $
    19.53Granted
    
    
    51,633
    
    
    
    12.54Vested
    
    
    (15,256
    )
    
    
    18.10Forfeited
    
    
    (3,304
    )
    
    
    18.05Nonvested at September 30, 2008
    
    
    97,368
    
    
    $
    16.09
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As of September 30, 2008, there was $1.4 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 3.6 years.7.
    
    Fair Value MeasurementsEffective January 1, 2008, the Company adopted SFAS No. 157 (SFAS 157), Fair Value
Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about fair value
measurements. SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the use of fair value in any
new circumstances. In this standard, the FASB clarifies the principle that fair value should
be based on the assumptions market participants would use when pricing the asset or
liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. The fair value hierarchy is
as follows:Level 1 inputs  Unadjusted quoted process in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.Level 2 inputs Inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These might include quoted prices for
similar assets and liabilities in active markets, and inputs other than quoted prices that
are observable for the asset or liability, such as interest rates and yield curves that are
observable at commonly quoted intervals.Level 3 inputs Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities.The available-for-sale securities category and interest rate swap category are the only
balance sheet categories the Company is required by generally accepted accounting principles
to account for at fair value for the period ended September 30, 2008. The following table
presents information about the Companys assets measured at fair value on a recurring basis
as of September 30, 2008, and indicates the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value (dollars in thousands).
 Fair Value MeasurementsAt September 30, 2008, UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    Sept 30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-Sale Securities
    
    $
    $132,011
    
    
    $
    
    
    
    $
    98,230
    
    
    $
    33,781Interest Rate Swap
    
    
    315
    
    
    
    
    
    
    
    315Total Assets Measured at
Fair Value
    
    $
    132,326
    
    
    $
    
    
    
    $
    98,545
    
    
    $
    33,781
 Fair Value Measurement Transfers
 Level 1
    
    Level 2
    
    Level 3June 30, 2008 Balance
    
    $
    
    
    
    $
    131,319Transfers from Level 2 to Level 3
    
    
    
    
    
    
    (33,781
    )
    
    $
    33,781Other Adjustments, including fair value adjustments,
principal payments, maturities and new purchases
    
    
    
    
    
    
    1,007
    
    
    
    September 30, 2008 Balance
    
    
    
    
    
    $
    98,545
    
    
    $
    33,781
 Available for Sale Securities. Securities totaling $98.2 million classified as available for
sale are reported at fair value utilizing Level 2 inputs, because active markets existed for
these securities as of September 30, 2008. For these securities, the Company obtained fair
value measurements from an independent pricing service and internally validated these
measurements. The fair value measurements consider observable data that may include dealer
quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels,
trade execution data, market consensus, prepayment speeds, credit information and the bonds
terms and conditions, among other things.
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The available for sale portfolio also includes $33.8 million in super senior or senior
tranche collateralized mortgage obligations not backed by a government or other agency
guarantee for which an active market did not exist as of September 30, 2008. These
securities continue to hold A or above ratings by at least two independent rating agencies,
but because of disruptions in the current market for mortgage-backed securities and
collateralized mortgage obligations, an active market does not exist. This is evidenced by
a significant widening in the bid-ask spread for these types of securities and the limited
volume of actual trades made. As a result, less reliance can be placed on easily observable
market data, such as pricing on transactions involving similar types of securities, in
determining their current fair value. As such, while the Company appropriately considered
the observable market-based inputs for these securities, it has classified them within Level
3 of the fair value hierarchy because significant adjustments were required to determine the
fair value at the September 30 measurement date.In valuing these securities, the Company utilized the same independent pricing service as
for its level 2 securities and internally validated these measurements. In addition to the
observable market-based input including dealer quotes, market spreads, live trading levels
and execution data, the service also employed a present-value income model that considered
the nature and timing of the cash flows and the relative risk of receiving the anticipated
cash flows as agreed. The discount rates used were based on a risk-free rate, adjusted by a
risk premium for each security. In accordance with the requirements of Statement 157, the
Company has determined that the risk-adjusted discount rates utilized appropriately reflect
the Companys best estimate of the assumptions that market participants would use in pricing
the assets in a current transaction to sell the asset at the measurement date. Risks include
nonperformance risk (that is, default risk and collateral value risk) and liquidity risk
(that is, the compensation that a market participant receives for buying an asset that is
difficult to sell under current market conditions). To the extent possible, the pricing
service and the Company validated the results from these models with independently
observable data.Using joint guidance from the SEC Office of the Chief Accountant and FASB staff issued Oct
10, 2008 as FSP FAS 157-3, which provided further clarification on fair value accounting,
the Company also evaluated these and other securities in the investment portfolio for Other
than Temporary Impairment. In conducting this evaluation, the Company evaluated the
following factors:
 
    
    The length of time and the extent to which the market value of the securities
have been less than their cost;
    
    The financial condition and near-term prospects of the issuer or obligation,
including any specific events, which may influence the operations of the issuer or
obligation such as changes in technology that impair the earnings potential of the
investment or the discontinuation of a segment of the business that may affect the
future earnings potential; and The intent and ability of the holder to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in market value.
 Based on the factors above, the Company has determined that none of its securities were
subject to Other than Temporary Impairment, (OTTI) as of September 30, 2008. Because of
current disruptions in the market for non-agency guaranteed securities, the Company focused
particular attention on the collateralized mortgage obligations discussed above. Based on
the very high probability of receiving the cash flows contractually committed even under
various stress-testing scenarios, and the ability of the Company to hold the securities
until the sooner of recovery in market value or maturity, the Company has determined that no
OTTI exists at this time.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  Including an Amendment of FASB Statement No. 115.This
Statement permits entities to choose to measure many financial instruments and certain other
items at fair value. Unrealized gains and losses on items for which the fair value option
has been elected will be reported in earnings. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. This Statement is expected to expand the use of
fair value measurement, which is consistent with the FASBs long-term measurement objectives
for accounting for financial instruments. The company did not elect the fair value option
for financial assets as of January 1, 2008, the effective date of this standard.Interest Rate Swaps.During the third quarter, the Company entered into an interest rate
swap contract with Pacific Coast Bankers Bank. The purpose of the $8.2 million notional
value swap is to convert the variable rate payments
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made on our Trust Preferred I obligation
(see Footnote 3  Other Borrowings) to a series of fixed rate payments for five years, as a
hedging strategy to help manage the Companys interest-rate risk. This contract is carried
as an asset or liability at fair value, and as of September 30, 2008, it was a liability
with a fair value of $315,000.8.
    
    New Accounting Pronouncements:In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk and the
effect of a restriction on the sale or use of an asset. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position
(FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of
FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years.On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the
application of FASB Statement No. 157, Fair Value Measurements, in a market that is not
active and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not active. The FSP
is effective immediately, and includes prior period financial statements that have not yet
been issued, and therefore the Company is subject to the provision of the FSP effective
September 30, 2008. See Notes to Financial Statements, Note 7, Fair Value Measurements for
further discussion of the impact of SFAS No. 157 and the
additional guidance issued.In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 provides companies with an option to
report selected financial assets and liabilities at fair value and establishes presentation
and disclosure requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities. The Company
did not elect the fair value option for any financial assets or financial liabilities as of
January 1, 2008, the effective date of the standard.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated
Financial Statements (SFAS 160). SFAS 160 re-characterizes minority interests in
consolidated subsidiaries as non-controlling interests and requires the classification of
minority interests as a component of equity. Under SFAS 160, a change in control will be
measured at fair value, with any gain or loss recognized in earnings. The effective date for
SFAS 160 is for annual periods beginning on or after December 15, 2008. Early adoption and
retroactive application of SFAS 160 to fiscal years preceding the effective date are not
permitted. The Company is evaluating the impact of adoption on its
Consolidated Financial
Statements.In December 2007, the FASB issued Statement No. 141(R)  Business Combinations. This
statement replaces FASB Statement No. 141  Business Combinations. SFAS No. 141(R)
establishes principles and requirements for how an acquiring company (1) recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities
assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase, and
(3) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The new standard is
effective for the Company on January 1, 2009. The Company is currently evaluating the impact
of adopting SFAS No. 141(R) on the Consolidated Financial Statements, but does not expect
any material impact unless the Company engages in new business combinations.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS 161). SFAS 161 requires specific disclosures regarding the
location and amounts of derivative instruments in the Companys financial statements, how
derivative instruments and related hedged items are accounted for, and how derivative
instruments and related hedged items affect the Companys financial position, financial
performance, and cash flows. SFAS 161 is effective for financial statements issued and for
fiscal years and interim periods after November 15, 2008. Early application is permitted.
SFAS 161 impacts the Companys disclosure, but not its accounting treatment for derivative
instruments and related hedged items. The Companys adoption of SFAS 161 will impact the
disclosures in the Consolidated Financial Statements.In May 2008, FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). This statement identifies the sources of accounting principles
and the framework for selecting the
principles to be used in the preparation of financial statements of nongovernmental entities
that are presented in
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conformity with GAAP in the Unites States (the GAAP hierarchy). SFAS
No. 162 divides the body of GAAP into four categories by level of authority. This statement
is effective in the fourth quarter of 2008.In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4 (EITF
06-4), Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires that a liability be
recorded during the service period when a split-dollar life insurance agreement continues
after participants employment or retirement. The required accrued liability will be based
on either the post-employment benefit cost for the continuing life insurance or based on the
future death benefit depending on the contractual terms of the underlying agreement. EITF
06-4 is effective for fiscal years beginning after December 15, 2007. Effective January 1,
2008, the Company recorded a liability in the amount of $389,000 and a reduction in equity
in the amount of $235,000 to record the liability as of January 1, 2008.On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings (SAB 109). Previously, SAB 105,
Application of Accounting Principles to Loan Commitments, stated that in measuring the fair
value of a derivative loan commitment, a company should not incorporate the expected net
future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB
105 and indicates that the expected net future cash flows related to the associated
servicing of the loan should be included in measuring fair value for all written loan
commitments that are accounted for at fair value through earnings. SAB 105 also indicated
that internally-developed intangible assets should not be recorded as part of the fair value
of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for
derivative loan commitments issued or modified in fiscal quarters beginning after
December 15, 2007. The Company believes the impact of this standard to be immaterial.
 
 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, 2007.
 General
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##### Table of Contents



Current Economic Challenges and Future Outlook
     
    
    Slowing loan demand, particularly from higher quality borrowers, as businesses
and consumers retrenched.
    
    Continued margin pressures, as the Federal Reserve lowered its target Fed Funds
rate, which negatively impacted the Banks prime lending rate, at the same time that
other market rates spiked and competition for deposit dollars increased.
    
    Higher non-performing loans and credit losses, as general credit conditions
worsened, and the decline in real estate values accelerated in the Companys
markets.
    
    Continuing pressure on fee income, particularly fees derived from mortgage
banking activity.
  16




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##### Table of Contents



Critical Accounting Policies
  Income Recognition .
 Allowance For Loan Losses.
  17




---



##### Table of Contents



Investments .
  Fair Value Measurements
 Goodwill and Other Intangible Assets .
 18




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Real Estate Owned.
  Intermountain Community Bancorp
Comparison of the Three and Nine month Periods Ended September 30, 2008 and 2007
 Results of Operations
 Overview
   Net Interest Income
 19




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Provision for Losses on Loans.
  20




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Nine months Ended September 30,2008
    
    
    2007(Dollars in thousands)Balance at January 1
    
    $
    11,761
    
    
    $
    9,837Provision for losses on loans
    
    
    4,872
    
    
    
    3,228Amounts written off, net of recoveries
    
    
    (3,600
    )
    
    
    (1,650
    )Transfers
    
    
    
    
    
    
    (3
    )Allowance  loans, September 30
    
    
    13,033
    
    
    
    11,412Allowance  unfunded commitments, January 1
    
    
    18
    
    
    
    482Adjustment
    
    
    (10
    )
    
    
    (389
    )Transfers
    
    
    
    
    
    
    3Allowance  unfunded commitments, September 30
    
    
    8
    
    
    
    96Total credit allowance including unfunded commitments
    
    $
    13,041
    
    
    $
    11,508
    Other Income.
 21




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Operating Expenses
      22




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Income Tax Provision
 Financial Position
 Assets
 Investments.
 Loans Receivable
  September 30, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial
    
    $
    231,364
    
    
    
    29.66
    
    
    $
    240,421
    
    
    
    31.27Commercial real estate
    
    
    412,099
    
    
    
    52.84
    
    
    
    383,018
    
    
    
    49.80Residential real estate
    
    
    107,175
    
    
    
    13.74
    
    
    
    114,010
    
    
    
    14.83Consumer
    
    
    24,123
    
    
    
    3.09
    
    
    
    26,285
    
    
    
    3.42Municipal
    
    
    5,182
    
    
    
    0.67
    
    
    
    5,222
    
    
    
    0.68Total loans receivable
    
    
    779,943
    
    
    
    100.00
    
    
    
    768,956
    
    
    
    100.00Net deferred origination fees
    
    
    (285
    )
    
    
    
    
    
    
    (646
    )Allowance for losses on loans
    
    
    (13,033
    )
    
    
    
    
    
    
    (11,761
    )Loans receivable, net
    
    $
    766,625
    
    
    
    
    
    
    $
    756,549Weighted average yield at end of period
    
    
    7.01
    %
    
    
    
    
    
    
    8.16
    %
  23




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Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % Change(Dollars in thousands)Commercial
    
    $
    48,544
    
    
    $
    43,857
    
    
    
    10.7
    
    
    $
    173,189
    
    
    $
    205,925
    
    
    
    (15.9
    )Commercial real estate
    
    
    64,898
    
    
    
    47,920
    
    
    
    35.4
    
    
    
    198,337
    
    
    
    194,289
    
    
    
    2.1Residential real estate
    
    
    20,078
    
    
    
    29,079
    
    
    
    (31.0
    )
    
    
    59,745
    
    
    
    75,055
    
    
    
    (20.4
    )Consumer
    
    
    2,695
    
    
    
    6,587
    
    
    
    (59.1
    )
    
    
    8,943
    
    
    
    16,484
    
    
    
    (45.7
    )Municipal
    
    
    165
    
    
    
    3,365
    
    
    
    (95.1
    )
    
    
    640
    
    
    
    6,268
    
    
    
    (89.8
    )Total loans originated
    
    $
    136,380
    
    
    $
    130,808
    
    
    
    4.3
    
    
    $
    440,854
    
    
    $
    498,021
    
    
    
    (11.5
    )
  Office Properties and Equipment.
 BOLI and All Other Assets
 Deposits
  September 30, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    147,816
    
    
    
    19.2
    
    
    $
    159,069
    
    
    
    21.0NOW and money market 0.0% to 6.07%
    
    
    323,484
    
    
    
    42.0
    
    
    
    308,857
    
    
    
    40.8Savings and IRA 0.0% to 4.2%
    
    
    80,290
    
    
    
    10.4
    
    
    
    87,149
    
    
    
    11.5Certificate of deposit accounts
    
    
    218,777
    
    
    
    28.4
    
    
    
    202,763
    
    
    
    26.7Total deposits
    
    $
    770,367
    
    
    
    100.0
    
    
    $
    757,838
    
    
    
    100.0Weighted average interest rate on
certificates of deposit
    
    
    
    
    
    
    3.23
    %
    
    
    
    
    
    
    4.57
    %
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Borrowings
 Interest Rate Risk
      25




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Liquidity and Sources of Funds
      Capital Resources
  26




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Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted
assets):The Company
    
    $
    107,394
    
    
    
    11.87
    %
    
    $
    72,366
    
    
    
    8
    %
    
    $
    90,458
    
    
    
    10
    %Panhandle State Bank
    
    
    108,603
    
    
    
    12.01
    %
    
    
    72,367
    
    
    
    8
    %
    
    
    90,459
    
    
    
    10
    %Tier I capital (to risk-weighted
assets):The Company
    
    
    96,065
    
    
    
    10.62
    %
    
    
    36,183
    
    
    
    4
    %
    
    
    54,275
    
    
    
    6
    %Panhandle State Bank
    
    
    97,274
    
    
    
    10.75
    %
    
    
    36,184
    
    
    
    4
    %
    
    
    54,275
    
    
    
    6
    %Tier I capital (to average assets):The Company
    
    
    96,065
    
    
    
    9.28
    %
    
    
    41,405
    
    
    
    4
    %
    
    
    51,757
    
    
    
    5
    %Panhandle State Bank
    
    
    97,274
    
    
    
    9.46
    %
    
    
    41,131
    
    
    
    4
    %
    
    
    51,414
    
    
    
    5
    %
 Off Balance Sheet Arrangements and Contractual Obligations
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##### Table of Contents



Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1 to 3 years
    
    
    3 to 5 years
    
    
    5 years(Dollars in thousands)Long-term debt (1)
    
    $
    84,596
    
    
    $
    1,616
    
    
    $
    12,721
    
    
    $
    32,241
    
    
    $
    38,018Short-term debt (1)
    
    
    125,922
    
    
    
    125,922
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations (2)
    
    
    14,190
    
    
    
    1,054
    
    
    
    1,501
    
    
    
    1,323
    
    
    
    10,312Purchase obligations (3)
    
    
    488
    
    
    
    488
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
reflected on the registrants
balance sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    225,196
    
    
    $
    129,080
    
    
    $
    14,222
    
    
    $
    33,564
    
    
    $
    48,330
 
 (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 completing construction of the 94,000 square foot Sandpoint Center. The
Sandpoint branch and administrative staff were relocated to the Sandpoint Center during the
second quarter of 2008. New Accounting Pronouncements
     Business Combinations Business Combinations
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Forward-Looking Statements
   29




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##### Table of Contents




    
    the strength of the United States economy in general and the strength of
the local economies and real estate markets in which Intermountain conducts its operations;
    
    the effects of inflation, interest rate levels and market and monetary
fluctuations;
    
    trade, monetary and fiscal policies and laws, including interest rate
policies of the federal government;
    
    applicable laws and regulations and legislative or regulatory changes;
    
    the timely development and acceptance of new products and services of
Intermountain;
    
    the willingness of customers to substitute competitors products and
services for Intermountains products and services;
    
    Intermountains success in gaining regulatory approvals, when required;
    
    technological and management changes;
    
    announcement and successful and timely implementation of growth,
acquisition and efficiency strategies;
    
    Intermountains ability to successfully integrate entities that may
be or have been acquired;
    
    changes in consumer spending and saving habits; and
    
    Intermountains success at managing the risks involved in the foregoing.
 
 Item 3
Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control over Financial Reporting
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PART II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1A Risk Factors
 As a financial holding company, our earnings are dependent upon the performance of our bank as well
as business, economic and political conditions.
    A further downturn in the local economies or real estate markets could negatively impact our banking business.
   We cannot predict the effect of the recently enacted federal rescue plan.
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Changes in market interest rates could adversely affect our earnings.
       Competition may adversely affect our ability to attract and retain customers at current levels.
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Additional market concern over investment securities backed by mortgage loans could create losses
in the Companys investment portfolio
  We may not be able to successfully implement our internal growth strategy.
  There are risks associated with potential acquisitions.
  We may not be able to replace key members of management or attract and retain qualified
relationship managers in the future.
  The allowance for loan losses may be inadequate.
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We are expanding our lending activities into potentially riskier areas.
  Our stock price can be volatile.
   Current subprime and prime mortgage market volatility could have a negative impact on the Companys
lending operations.
  The FDIC has increased insurance premiums to rebuild and maintain the federal deposit insurance
fund.
  Negative publicity regarding the liquidity of financial institutions may have a negative impact on
Company operations
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
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Item 3  Defaults Upon Senior Securities
  
 Item 4
 Other Information
  
 Item 5  Exhibits
 Exhibit No.
    
    Exhibit31.1
    
    
    Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes Oxley Act of 2002.32
    
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
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Signatures
  INTERMOUNTAIN COMMUNITY BANCORP(Registrant)November 6,
2008
           Date
    
    
    
    By:
    
    /s/ Curt Hecker

Curt HeckerPresidentand Chief Executive OfficerNovember 6,
2008
           Date
    
    
    
    By:
    
    /s/ Doug Wright

Doug WrightExecutive Vice Presidentand Chief Financial Officer
 36