##### 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 March 31, 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
(State or other jurisdiction of 
incorporation or organization)
    
    82-0499463
(I.R.S. Employer
Identification No.)
 414 Church Street, Sandpoint, Idaho 83864    (208) 263-0505
 231 North Third Avenue, Sandpoint, Idaho 83864
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding as of May 5, 2008Common Stock (no par value)
    
    8,283,613




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##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended March 31, 2008
TABLE OF CONTENTS
 PagePART I  Financial InformationItem 1  Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets for March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Income for the three months ended March 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and
2007
    
    
    5Consolidated Statements of Comprehensive Income for the three months ended March 31,
2008 and 2007
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4  Controls and Procedures
    
    
    27PART II  Other InformationItem 1  Legal Proceedings
    
    
    28Item 1A  Risk Factor
    
    
    28Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3  Defaults Upon Senior Securities
    
    
    28Item 4  Submission of Matters to a Vote of Security Holders
    
    
    28Item 5  Other Information
    
    
    28Item 6  Exhibits
    
    
    29Signatures
    
    
    30EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32EXHIBIT 99.1
  2




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##### Table of Contents



PART
I  Financial Information
 
 Item 1  Financial Statements
 Intermountain Community Bancorp
 
 Consolidated Balance Sheets
(Unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    1,134
    
    
    $
    149Non-interest bearing and vault
    
    
    25,392
    
    
    
    26,851Restricted cash
    
    
    406
    
    
    
    4,527Federal funds sold
    
    
    3,125
    
    
    
    6,565Available-for-sale securities, at fair value
    
    
    143,518
    
    
    
    158,791Held-to-maturity securities, at amortized cost
    
    
    11,293
    
    
    
    11,324Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,779
    
    
    
    1,779Loans held for sale
    
    
    3,143
    
    
    
    4,201Loans receivable, net
    
    
    748,349
    
    
    
    756,549Accrued interest receivable
    
    
    6,899
    
    
    
    8,207Office properties and equipment, net
    
    
    44,701
    
    
    
    42,090Bank-owned life insurance
    
    
    7,788
    
    
    
    7,713Goodwill
    
    
    11,662
    
    
    
    11,662Other intangible assets
    
    
    686
    
    
    
    723Prepaid expenses and other assets, net
    
    
    7,826
    
    
    
    7,528Total assets
    
    $
    1,017,701
    
    
    $
    1,048,659LIABILITIES:Deposits
    
    $
    727,148
    
    
    $
    757,838Securities sold subject to repurchase agreements
    
    
    105,006
    
    
    
    124,127Advances from Federal Home Loan Bank of Seattle
    
    
    29,000
    
    
    
    29,000Cashier checks issued and payable
    
    
    1,058
    
    
    
    1,509Accrued interest payable
    
    
    2,155
    
    
    
    3,027Other borrowings
    
    
    55,402
    
    
    
    36,998Accrued expenses and other liabilities
    
    
    5,650
    
    
    
    6,041Total liabilities
    
    
    925,419
    
    
    
    958,540Commitments and contingent liabilitiesSTOCKHOLDERS EQUITY:Common stock, no par value; 29,040,000 shares
authorized; 8,371,979 and 8,313,005 shares issued and
8,283,176 and 8,248,710 shares outstanding
    
    
    76,746
    
    
    
    76,746Accumulated other comprehensive income
    
    
    2,070
    
    
    
    1,327Retained earnings
    
    
    13,466
    
    
    
    12,046Total stockholders equity
    
    
    92,282
    
    
    
    90,119Total liabilities and stockholders equity
    
    $
    1,017,701
    
    
    $
    1,048,659
  3




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands, exceptper share data)Interest income:Loans
    
    $
    15,017
    
    
    $
    15,061Investments
    
    
    2,184
    
    
    
    1,995Total interest income
    
    
    17,201
    
    
    
    17,056Interest expense:Deposits
    
    
    4,029
    
    
    
    4,434Other borrowings
    
    
    1,846
    
    
    
    1,774Total interest expense
    
    
    5,875
    
    
    
    6,208Net interest income
    
    
    11,326
    
    
    
    10,848(Provision for) recovery of losses on loans
    
    
    (258
    )
    
    
    (834
    )Net interest income after provision for and
recovery of losses on loans
    
    
    11,068
    
    
    
    10,014Other income:Fees and service charges
    
    
    2,004
    
    
    
    1,787Mortgage banking operations
    
    
    406
    
    
    
    730Bank-owned life insurance
    
    
    74
    
    
    
    77Other
    
    
    294
    
    
    
    447Total other income
    
    
    2,778
    
    
    
    3,041Operating expenses
    
    
    11,259
    
    
    
    9,677Income before income taxes
    
    
    2,587
    
    
    
    3,378Income tax provision
    
    
    (933
    )
    
    
    (1,285
    )Net income
    
    $
    1,654
    
    
    $
    2,093Earnings per share  basic
    
    $
    0.20
    
    
    $
    0.26Earnings per share  diluted
    
    $
    0.19
    
    
    $
    0.24Weighted average shares outstanding  basic
    
    
    8,271,104
    
    
    
    8,161,310Weighted average shares outstanding  diluted
    
    
    8,564,618
    
    
    
    8,615,307
  4




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Intermountain Community Bancorp
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    1,654
    
    
    $
    2,093Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation
    
    
    759
    
    
    
    576Stock-based compensation expense
    
    
    166
    
    
    
    76Net accretion of premiums on securities
    
    
    (107
    )
    
    
    (155
    )Excess tax benefit related to stock-based compensation
    
    
    
    
    
    
    (188
    )Provisions for and (recoveries of) losses on loans
    
    
    258
    
    
    
    834Accretion of core deposit intangibles
    
    
    37
    
    
    
    40Gain on sale of loans, investments, property and equipment
    
    
    (152
    )
    
    
    (141
    )Gain on sale of other real estate owned
    
    
    (21
    )
    
    
    Accretion of deferred gain on sale of branch property
    
    
    (4
    )
    
    
    (4
    )Net accretion of loan and deposit discounts and premiums
    
    
    (6
    )
    
    
    (11
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (75
    )
    
    
    (77
    )Change in:Loans held for sale
    
    
    1,058
    
    
    
    4,197Accrued interest receivable
    
    
    1,308
    
    
    
    821Prepaid expenses and other assets
    
    
    (1,174
    )
    
    
    (1,426
    )Accrued interest payable
    
    
    (872
    )
    
    
    300Accrued expenses and other liabilities
    
    
    (1,227
    )
    
    
    (1,467
    )Net cash provided by operating activities
    
    
    1,602
    
    
    
    5,468Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    
    
    
    
    (23,929
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    13,590
    
    
    
    41,224Principal payments on mortgage-backed securities
    
    
    3,033
    
    
    
    1,759Proceeds from calls or maturities of held-to-maturity securities
    
    
    18
    
    
    
    42Origination of loans, net of principal payments
    
    
    2,406
    
    
    
    (22,292
    )Proceeds from sale of loans
    
    
    6,198
    
    
    
    935Proceeds from sale of other real estate owned
    
    
    62
    
    
    
    Purchase of office properties and equipment
    
    
    (3,369
    )
    
    
    (4,425
    )Proceeds from sale of office properties and equipment
    
    
    
    
    
    
    2,244Net change in federal funds sold
    
    
    3,440
    
    
    
    (18,865
    )Improvements and other changes in other real estate owned
    
    
    
    
    
    
    280Net decrease in restricted cash
    
    
    4,121
    
    
    
    356Net cash (used in) provided by investing activities
    
    
    29,499
    
    
    
    (22,671
    )
 5




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Intermountain Community Bancorp
Consolidated Statements of Cash Flows (continued)
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Cash flows from financing activities:Net change in demand, money market and savings deposits
    
    $
    (22,079
    )
    
    $
    35,010Net change in certificates of deposit
    
    
    (8,613
    )
    
    
    (13,411
    )Net change in repurchase agreements
    
    
    (19,121
    )
    
    
    (14,018
    )Principal reduction of note payable
    
    
    (13
    )
    
    
    (9
    )Excess tax benefit related to stock-based compensation
    
    
    
    
    
    
    188Acquisition of treasury stock
    
    
    (190
    )
    
    
    Proceeds from exercise of stock options
    
    
    24
    
    
    
    152Proceeds from other borrowings
    
    
    18,417
    
    
    
    2,446Net cash (used in) provided by financing activities
    
    
    (31,575
    )
    
    
    10,358Net change in cash and cash equivalents
    
    
    (474
    )
    
    
    (6,845
    )Cash and cash equivalents, beginning of period
    
    
    27,000
    
    
    
    24,377Cash and cash equivalents, end of period
    
    $
    26,526
    
    
    $
    17,532Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    6,080
    
    
    $
    7,099Income taxes
    
    
    375
    
    
    
    475Noncash investing and financing activities:Restricted stock issued
    
    
    521
    
    
    
    684Deferred gain on sale/leaseback
    
    
    
    
    
    
    312Loans converted to other real estate owned
    
    
    502
    
    
    
    
  6




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Intermountain Community Bancorp
 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Net income
    
    $
    1,654
    
    
    $
    2,093Other comprehensive income:Change in unrealized gains on
investments, net of
reclassification adjustments
    
    
    1,231
    
    
    
    529Less deferred income tax benefit
    
    
    (488
    )
    
    
    (209
    )Net other comprehensive income
    
    
    743
    
    
    
    320Comprehensive income
    
    $
    2,397
    
    
    $
    2,413
  7




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Intermountain Community Bancorp
 
 Notes to Consolidated Financial Statements
 1.
    
    Basis of Presentation:The foregoing unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these
financial statements do not include all of the disclosures required by accounting principles
generally accepted in the United States of America for complete financial statements. These
unaudited interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 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 or the Company) 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 is due in May 2008 with interest only
payable monthly at 2.71%. 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. The Bank
also had a $4.0 million cash management advance from the FHLB Seattle with a maturity of
April 1, 2008 and an interest rate of 3.35%. This advance is classified as federal funds
purchased with other borrowings on the balance sheet.Advances from FHLB Seattle are collateralized by certain qualifying loans with a carrying
value of approximately $29.0 million at March 31, 2008. The Banks credit line with FHLB
Seattle is limited to a percentage of its total regulatory assets subject to
collateralization requirements. At March 31, 2008, Intermountain had the ability to borrow
an additional $52.9 million from FHLB Seattle. 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):
 March 31,
    
    
    December 31,2008
    
    
    2007Term note payable (1)
    
    $
    8,279
    
    
    $
    8,279Term note payable (2)
    
    
    8,248
    
    
    
    8,248Term note payable (3)
    
    
    970
    
    
    
    982Term note payable (4)
    
    
    21,795
    
    
    
    19,489Federal funds purchased (5)
    
    
    16,110
    
    
    
    Total other borrowings
    
    $
    55,402
    
    
    $
    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 8




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borrowing was 5.86% at March 31, 2008. The debt is callable by the Company in March 2008
and matures in March 2033. See Note A.(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 7.10% at March
31, 2008. The debt is callable by the Company after five years 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%. The note
matures in February 2026.(4)
    
    In December 2007, the Company renewed a borrowing agreement with Pacific Coast
Bankers 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. The collateral for the credit line is all of Panhandle State Banks
stock and the Sandpoint Center, which is currently under construction. 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 the loan portfolio on a regular basis. At March 31, 2008, the balance
outstanding was $21,795,000 at a rate of 4.57%.(5)
    
    The Company had overnight borrowings in the amount of $16,110,000 with a
weighted average interest rate of 2.90% and a maturity of April 1, 2008. Included in
overnight borrowings was a $4.0 million cash management advance from the FHLB Seattle. 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 March 31,(Dollars in thousands, except per share amounts)2008





    
    



    


2007Net
    
    

    Weighted
    
    
    Per Share
    
    
    Net
    
    

    Weighted
    
    
    Per ShareIncome
    
    

    Avg. Shares
    
    
    Amount
    
    
    Income
    
    

    Avg. Shares
    
    
    AmountBasic computations
    
    $
    1,654
    
    
    
    8,271,104
    
    
    $
    0.20
    
    
    $
    2,093
    
    
    
    8,161,310
    
    
    $
    0.26Effect of dilutive securities:Common stock options and
stock grants
    
    
    
    
    
    
    293,514
    
    
    
    (0.01
    )
    
    
    
    
    
    
    453,997
    
    
    
    (0.02
    )Diluted computations
    
    $
    1,654
    
    
    
    8,564,618
    
    
    $
    0.19
    
    
    $
    2,093
    
    
    
    8,615,307
    
    
    $
    0.24
 5.
    
    Operating Expenses:The following table details Intermountains components of total operating expenses:
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Salaries and employee benefits
    
    $
    6,946
    
    
    $
    6,120Occupancy expense
    
    
    1,652
    
    
    
    1,392
 9




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Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Advertising
    
    
    266
    
    
    
    219Fees and service charges
    
    
    434
    
    
    
    278Printing, postage and supplies
    
    
    349
    
    
    
    346Legal and accounting
    
    
    448
    
    
    
    273Other expense
    
    
    1,164
    
    
    
    1,049Total operating expenses
    
    $
    11,259
    
    
    $
    9,677
 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 March 31, 2008, there were
212,687 shares available for grant. The Company did not grant options to purchase
Intermountain common stock during either the three months ended March 31, 2008 or 2007.For the periods ended March 31, 2008 and 2007, stock option expense totaled $34,000 and
$32,000, respectively. The Company has approximately $101,000 remaining to expense related
to the non-vested stock options outstanding at March 31, 2008. This expense will be recorded
over a weighted average period of 9.0 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:
 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 35,949 and 28,497 restricted shares with a grant date fair
value of $521,000 and $684,000 during the three months ended March 31, 2008 and 2007,
respectively. For the periods ended March 31, 2008 and 2007, restricted stock expense
totaled $78,000 and $32,000, 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 had a 5-year vesting period. As
anticipated company performance changes, the expense related to the LTIP can fluctuate.
Total expense related to stock-based compensation recorded in the three months ended March
31, 2008 and 2007 was $166,000 and $32,000, respectively.A summary of the changes in stock options outstanding for the three months ended March 31,
2008 is presented below:
 Three months ended March 31, 2008(dollars in thousands, except per share amounts)Weighted
    
    
    WeightedNumber
    
    
    Average
    
    
    Averageof
    
    
    Exercise
    
    
    RemainingShares
    
    
    Price
    
    

life (Years)Beginning Options Outstanding
    
    
    487,329
    
    
    $
    5.48Options Granted
    
    
    
    
    
    
    Exercises
    
    
    4,945
    
    
    
    4.86Ending options outstanding
    
    
    482,384
    
    
    
    5.48
    
    
    
    2.9Exercisable at March 31
    
    
    457,006
    
    
    $
    5.22
    
    
    
    2.70
 10




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##### Table of Contents



The total intrinsic value of options exercised during the periods ended March 31, 2008 and
2007 was $43,000 and $468,000, respectively.A summary of the Companys nonvested restricted shares for the three months ended March 31,
2008 is presented below:
 Weighted-AverageGrant-DateNonvested Shares
    
    Shares
    
    
    Fair ValueNonvested at January 1, 2008
    
    
    64,295
    
    
    $
    19.53Granted
    
    
    35,949
    
    
    
    14.50Vested
    
    
    (10,863
    )
    
    
    20.01Forfeited
    
    
    (578
    )
    
    
    18.67Nonvested at March 31, 2008
    
    
    88,803
    
    
    $
    17.44
 As of March 31, 2008, there was $1.5 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 3.7 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.Available-for-sale securities is the only balance sheet category the Company is required by
generally accepted accounting principles to account for at fair value. The following table
presents information about the Companys assets measured at fair value on a recurring basis
as of March 31, 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 March 31, 2008, UsingQuoted PricesIn Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableFair Value
    

    Identical Assets
    
    Inputs
    
    InputsDescription
    
    Mar. 31, 2008
    

    (Level 1)
    
    (Level 2)
    
    (Level 3)Available-for-Sale Securities
    
    $
    143,518
    
    
    $                  
    
    $
    143,518
    
    
    $                  Total Assets Measured at Fair Value
    
    $
    143,518
    
    
    $                  
    
    $
    143,518
    
    
    $                  
 11




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##### Table of Contents



Available for Sale Securities. Securities classified as available for sale are reported at
fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value
measurements from an independent pricing service. 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.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. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company has not elected the fair value option for any
financial assets or liabilities at March 31, 2008.8.
    
    Subsequent Events:Subsequent to the end of the first quarter, as part of its interest rate and investment
management program, the Company sold $32.0 million in the available for sale investment
securities and reinvested the proceeds in other available-for-sale investment securities.
The transaction resulted in an after-tax gain on sale of investments of approximately $1.4
million. This will be reflected in second quarter 2008 income.9.
    
    New Accounting Policies: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. The
impact of adoption was not material.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 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.
Because SFAS 161 impacts the Companys disclosure and not its accounting treatment for
derivative instruments and related hedged items, the Companys adoption of SFAS 161 will not
impact the Consolidated Financial Statements.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
 12




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##### Table of Contents



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.
 13




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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, 2007.
 General
        14




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##### Table of Contents



Current Economic Challenges and Future Economic Outlook
  
    
    A slowdown in loan demand, as both the Bank and its borrowers respond to current
conditions with increasing caution;
    
    Slowing deposit demand, as customers have less cash to save with rising
inflation and are responding negatively to lowered deposit interest rates;
    
    Decreasing net interest margin, as the Companys assets, and particularly its
loans, have repriced down more quickly in response to a 3.0% drop in the Federal
Funds rate over the past eight months than its deposits and other liabilities;
    
    Higher non-performing loans and credit losses, as existing borrowers,
particularly those in the real estate industry, struggle to make payments and sell
assets; and
    
    Slowing fee income growth, particularly fees derived from mortgage banking
activity
   Critical Accounting Policies
  Income Recognition .
 Allowance For Loan Losses.
 15




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##### Table of Contents



Investments .
   Goodwill and Other Intangible Assets .
 16




---



##### Table of Contents



Real Estate Owned.
  Intermountain Community Bancorp
Comparison of the Three Month Periods Ended March 31, 2008 and 2007
 Results of Operations
 Overview
   Idaho
Business Journal
  Net Interest Income
 17




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##### Table of Contents



Provision for Losses on Loans.
    Three Months Ended March 31,2008
    
    
    2007(Dollars in thousands)Balance at January 1
    
    $
    11,761
    
    
    $
    9,837Provision (recovery) for losses on loans
    
    
    258
    
    
    
    834Amounts written off, net of recoveries
    
    
    (77
    )
    
    
    (101
    )Transfers
    
    
    
    
    
    
    (2
    )Allowance  loans, March 31
    
    $
    11,942
    
    
    $
    10,568Allowance  unfunded commitments,
January 1
    
    
    18
    
    
    
    482Transfers
    
    
    
    
    
    
    2Adjustments
    
    
    (3
    )
    
    
    Allowance  unfunded commitments,
March 31
    
    
    15
    
    
    
    484Total credit allowance
    
    $
    11,957
    
    
    $
    11,052
  18




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##### Table of Contents



Other Income.
 Operating Expenses
     Income Tax Provision
 Financial Position
 Assets
 19




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##### Table of Contents



Investments.
 Loans Receivable
  March 31, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial
    
    $
    229,119
    
    
    
    30.12
    
    
    $
    240,421
    
    
    
    31.27Commercial real estate
    
    
    388,898
    
    
    
    51.12
    
    
    
    383,018
    
    
    
    49.80Residential real estate
    
    
    112,653
    
    
    
    14.81
    
    
    
    114,010
    
    
    
    14.83Consumer
    
    
    24,748
    
    
    
    3.25
    
    
    
    26,285
    
    
    
    3.42Municipal
    
    
    5,341
    
    
    
    0.70
    
    
    
    5,222
    
    
    
    0.68Total loans receivable
    
    
    760,759
    
    
    
    100.00
    
    
    
    768,956
    
    
    
    100.00Net deferred origination fees
    
    
    (468
    )
    
    
    
    
    
    
    (646
    )Allowance for losses on loans
    
    
    (11,942
    )
    
    
    
    
    
    
    (11,761
    )Loans receivable, net
    
    $
    748,349
    
    
    
    
    
    
    $
    756,549Weighted average yield at end of period
    
    
    7.46
    %
    
    
    
    
    
    
    8.16
    %
  Three Months EndedMarch 31,2008
    
    
    2007
    
    
    % Change(Dollars in thousands)Commercial
    
    $
    57,899
    
    
    $
    72,592
    
    
    
    (20.2
    )Commercial real estate
    
    
    59,759
    
    
    
    64,364
    
    
    
    (7.2
    )Residential real estate
    
    
    18,373
    
    
    
    21,310
    
    
    
    (13.8
    )Consumer
    
    
    3,104
    
    
    
    5,453
    
    
    
    (43.1
    )Municipal
    
    
    314
    
    
    
    200
    
    
    
    57.0Total loans
originated
    
    $
    139,449
    
    
    $
    163,919
    
    
    
    (14.9
    )
 20




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##### Table of Contents



Commercial
    
    
    30.12
    %Commercial real estate
    
    
    51.12
    %Residential real estate
    
    
    14.81
    %Consumer
    
    
    3.25
    %Municipal
    
    
    0.70
    %
    BOLI and All Other Assets
 Deposits
  March 31, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    151,585
    
    
    
    20.8
    
    
    $
    159,069
    
    
    
    21.0NOW and money market 0.0% to 5.5%
    
    
    295,090
    
    
    
    40.6
    
    
    
    308,857
    
    
    
    40.8Savings and IRA 0.0% to 4.2%
    
    
    86,321
    
    
    
    11.9
    
    
    
    87,149
    
    
    
    11.5Certificate of deposit accounts
    
    
    194,152
    
    
    
    26.7
    
    
    
    202,763
    
    
    
    26.7Total deposits
    
    $
    727,148
    
    
    
    100.0
    
    
    $
    757,838
    
    
    
    100.0Weighted average interest rate
on certificates of deposit
    
    
    
    
    
    
    3.91
    %
    
    
    
    
    
    
    4.57
    %
 21




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##### Table of Contents



Borrowings
 Interest Rate Risk
       22




---



##### Table of Contents



Net Interest
Income
 Liquidity and Sources of Funds
     Capital Resources
    23




---



##### Table of Contents



Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted
assets):The Company
    
    $
    104,287
    
    
    
    11.90
    %
    
    $
    70,130
    
    
    
    8
    %
    
    $
    87,662
    
    
    
    10
    %Panhandle State Bank
    
    
    104,767
    
    
    
    11.95
    %
    
    
    70,131
    
    
    
    8
    %
    
    
    87,664
    
    
    
    10
    %Tier I capital (to risk-weighted
assets):The Company
    
    
    93,317
    
    
    
    10.65
    %
    
    
    35,065
    
    
    
    4
    %
    
    
    52,597
    
    
    
    6
    %Panhandle State Bank
    
    
    93,797
    
    
    
    10.70
    %
    
    
    35,065
    
    
    
    4
    %
    
    
    52,598
    
    
    
    6
    %Tier I capital (to average assets)The Company
    
    
    93,317
    
    
    
    9.14
    %
    
    
    40,833
    
    
    
    4
    %
    
    
    51,042
    
    
    
    5
    %Panhandle State Bank
    
    
    93,797
    
    
    
    9.45
    %
    
    
    39,713
    
    
    
    4
    %
    
    
    49,641
    
    
    
    5
    %
 Off Balance Sheet Arrangements and Contractual Obligations
   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)
    
    $
    105,592
    
    
    $
    3,540
    
    
    $
    29,638
    
    
    $
    32,642
    
    
    $
    39,772Short-term debt (1)
    
    
    118,878
    
    
    
    118,878
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations (2)
    
    
    14,732
    
    
    
    1,124
    
    
    
    1,603
    
    
    
    1,404
    
    
    
    10,601Purchase obligations (3)
    
    
    609
    
    
    
    609
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
reflected on the registrants
balance sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    239,811
    
    
    $
    124,151
    
    
    $
    31,241
    
    
    $
    34,046
    
    
    $
    50,373
 24




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##### Table of Contents



(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 the Sandpoint Center in Sandpoint, Idaho. It is
anticipated that the Bank will occupy approximately 50% of the building with occupancy by
branch and administrative staff to be completed by June 2008. The Company will continue to
complete the building for non-Bank tenants. New Accounting Policies
       25




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##### Table of Contents



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 deeper 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;
    
    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.
 
 26




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##### Table of Contents



Item 3  Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control over Financial Reporting
 27




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##### Table of Contents



PART II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1A Risk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
 ISSUER PURCHASES OF EQUITY SECURITIES
  Total Number of
    
    Maximum Number ofShares Purchase as
    
    Shares that May YetPart of Publicly
    
    Be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    the Plans orPeriod
    
    Shares Purchased(1)
    
    Per Share
    
    Programs
    
    Programs(2)January 1  March
31, 2008
    
    
    12,805
    
    
    $
    13.72
    
    
    
    0
    
    
    
    0
 
 (1)
    
    Represents the aggregate shares that were withheld by the Company as payment of the requisite
tax payable upon the vesting of restricted stock awards. 
 Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  28




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##### Table of Contents



Item 6  Exhibits
 Exhibit No.
    
    Exhibit10.2
    
    Amended 2006-2008 Long Term Incentive Plan.31.1
    
    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 2002.99.1
    
    Year end earnings release for year ended December 31, 2007.
 29




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##### Table of Contents



Signatures
  
 INTERMOUNTAIN COMMUNITY BANCORP(Registrant)May 12, 2008
    
    By:
    
    /s/ Curt HeckerDate
    
    
    
    Curt HeckerPresidentand Chief Executive OfficerMay 12, 2008
    
    By:
    
    /s/ Doug WrightDate
    
    
    
    Doug WrightExecutive Vice Presidentand Chief Financial Officer
 30