##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED June 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM      TO
 Commission File Number 000-50667 INTERMOUNTAIN COMMUNITY BANCORP  Idaho
    
    82-0499463(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 231 N. Third Avenue, Sandpoint, Idaho 83864
(Address of principal executive offices) (Zip Code) (208) 263-0505
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x Indicate the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date: Class
    
    Outstanding as of August 11, 2004Common Stock (no par value)
    
    3,226,295




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InterMountain Community Bancorp FORM 10-Q
For the Quarter Ended June 30, 2004 TABLE OF CONTENTS PART I  Financial InformationItem 1 - Financial Statements (Unaudited)Consolidated Balance Sheets for June 30, 2004 and December 31, 2003Consolidated Statements of Income for the three months ended June 30, 2004 and 2003, and the six months ended June 30, 2004 and 2003Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003Consolidated Statements of Comprehensive Income for the three months ended June 30, 2004 and 2003 and the six months ended June 30, 2004 and 2003Notes to Consolidated Financial StatementsItem 2 - Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3 - Quantitative and Qualitative Disclosures About Market RiskItem 4 - Controls and ProceduresPART II  Other InformationItem 1 - Legal ProceedingsItem 2 - Changes in Securities, Use of Proceeds and Issuer Purchase of Equity SecuritiesItem 3 - Defaults Upon Senior SecuritiesItem 4 - Submission of Matters to a Vote of Security HoldersItem 5 - Other InformationItem 6 - Exhibits and Reports on Form 8-KSignaturesEXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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##### Table of Contents



PART I  Financial Information
 
 Item 1  Financial Statements
InterMountain Community Bancorp
 
 Consolidated Balance Sheets
(Unaudited)
 June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    24
    
    
    $
    14Non-interest bearing and vault
    
    
    14,519
    
    
    
    10,226Restricted
    
    
    1,474
    
    
    
    995Federal funds sold
    
    
    10,665
    
    
    
    5,710Interest bearing certificates of deposit
    
    
    
    
    
    
    298Available for sale securities, at fair value
    
    
    87,664
    
    
    
    76,601Held to maturity securities, at amortized cost
    
    
    3,264
    
    
    
    3,336Federal Home Loan Bank of Seattle (FHLB) stock, at cost
    
    
    1,091
    
    
    
    642Loans held for sale
    
    
    3,493
    
    
    
    3,287Loans receivable, net
    
    
    316,333
    
    
    
    287,256Accrued interest receivable
    
    
    2,960
    
    
    
    2,694Office properties and equipment, net
    
    
    9,874
    
    
    
    9,442Bank-owned life insurance
    
    
    5,509
    
    
    
    5,381Goodwill
    
    
    1,150
    
    
    
    1,150Other intangible assets
    
    
    607
    
    
    
    642Prepaid expenses and other assets, net
    
    
    3,206
    
    
    
    2,085Total assets
    
    $
    461,833
    
    
    $
    409,759LIABILITIES:Deposits
    
    $
    393,344
    
    
    $
    344,866Securities sold subject to repurchase agreements
    
    
    12,349
    
    
    
    17,155Advances from Federal Home Loan Bank
    
    
    5,000
    
    
    
    5,000Cashiers checks issued and payable
    
    
    4,710
    
    
    
    4,814Accrued interest payable
    
    
    541
    
    
    
    332Other borrowings
    
    
    16,527
    
    
    
    8,279Accrued expenses and other liabilities
    
    
    1,221
    
    
    
    2,235Total liabilities
    
    
    433,692
    
    
    
    382,681Commitments and contingent liabilitiesSTOCKHOLDERS EQUITY:Common stock, no par value; 7,084,000 shares
authorized; 3,219,141 and 3,164,973 shares issued and
outstanding
    
    
    16,718
    
    
    
    16,390Treasury stock, at cost (2,093 shares)
    
    
    (47
    )
    
    
    0Accumulated
other comprehensive income (loss)
    
    
    (944
    )
    
    
    275Retained earnings
    
    
    12,414
    
    
    
    10,413Total stockholders equity
    
    
    28,141
    
    
    
    27,078Total liabilities and stockholders equity
    
    $
    461,833
    
    
    $
    409,759
 The accompanying notes are an integral part of the consolidated financial
statements. 1




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##### Table of Contents



InterMountain Community Bancorp 
 Consolidated Statements of Income
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands, except per share data)Interest income:Loans
    
    $
    5,598
    
    
    $
    4,976
    
    
    $
    10,823
    
    
    $
    9,357Investments
    
    
    803
    
    
    
    651
    
    
    
    1,545
    
    
    
    1,339Total interest income
    
    
    6,401
    
    
    
    5,627
    
    
    
    12,368
    
    
    
    10,696Interest expense:Deposits
    
    
    1,063
    
    
    
    1,109
    
    
    
    2,055
    
    
    
    2,203Short-term borrowings
    
    
    274
    
    
    
    221
    
    
    
    469
    
    
    
    366Total interest expense
    
    
    1,337
    
    
    
    1,330
    
    
    
    2,524
    
    
    
    2,569Net interest income
    
    
    5,064
    
    
    
    4,297
    
    
    
    9,844
    
    
    
    8,127Provision for losses on loans
    
    
    (693
    )
    
    
    (570
    )
    
    
    (829
    )
    
    
    (644
    )Net interest income after provision for
losses on loans
    
    
    4,371
    
    
    
    3,727
    
    
    
    9,015
    
    
    
    7,483Other income:Fees and service charges
    
    
    1,558
    
    
    
    1,454
    
    
    
    2,738
    
    
    
    2,550Bank owned life insurance
    
    
    63
    
    
    
    45
    
    
    
    127
    
    
    
    114Other
income, net
    
    
    239
    
    
    
    119
    
    
    
    369
    
    
    
    161Total other income
    
    
    1,860
    
    
    
    1,618
    
    
    
    3,234
    
    
    
    2,825Operating expenses
    
    
    4,831
    
    
    
    4,030
    
    
    
    9,147
    
    
    
    7,594Income before income taxes
    
    
    1,400
    
    
    
    1,315
    
    
    
    3,102
    
    
    
    2,714Income tax provision
    
    
    (474
    )
    
    
    (427
    )
    
    
    (1,101
    )
    
    
    (960
    )Net income
    
    $
    926
    
    
    $
    888
    
    
    $
    2,001
    
    
    $
    1,754Earnings per share  basic
    
    $
    0.29
    
    
    $
    0.28
    
    
    $
    0.63
    
    
    $
    0.56Earnings per share  diluted
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.56
    
    
    $
    0.52Weighted average shares outstanding  basic
    
    
    3,214,232
    
    
    
    3,145,914
    
    
    
    3,197,507
    
    
    
    3,145,960Weighted average shares outstanding -
diluted
    
    
    3,585,291
    
    
    
    3,406,862
    
    
    
    3,572,674
    
    
    
    3,374,218
 The accompanying notes are an integral part of the consolidated financial
statements. 2




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##### Table of Contents



InterMountain Community Bancorp 
 Consolidated Statements of Cash Flows
(Unaudited)
 Six Months EndedJune 30,2004
    
    2003(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    2,001
    
    
    $
    1,754Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    532
    
    
    
    450Stock issued as compensation
    
    
    
    
    
    
    157Net amortization of premiums on securities
    
    
    266
    
    
    
    541Stock dividends on FHLB stock
    
    
    (16
    )
    
    
    (132
    )Provisions for losses on loans
    
    
    829
    
    
    
    644Amortization of core deposit intangibles
    
    
    33
    
    
    
    29Loss (Gain) on sale of investments
    
    
    13
    
    
    
    (23
    )Gain on sale of loans
    
    
    (12
    )
    
    
    Net accretion of loan discounts and premiums
    
    
    (122
    )
    
    
    (167
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (127
    )
    
    
    (137
    )Change in (net of acquisition of business):Loans held for sale
    
    
    (206
    )
    
    
    570Accrued interest receivable
    
    
    (266
    )
    
    
    (167
    )Prepaid expenses and other assets
    
    
    (88
    )
    
    
    (594
    )Accrued interest payable
    
    
    209
    
    
    
    26Accrued expenses and other liabilities
    
    
    (1,118
    )
    
    
    573Net cash provided by operating activities
    
    
    1,928
    
    
    
    3,524Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (39,602
    )
    
    
    (36,704
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    18,475
    
    
    
    23,376Principal payments on mortgage-backed securities
    
    
    7,814
    
    
    
    8,088Purchases of held-to-maturity securities
    
    
    (161
    )
    
    
    (540
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    199
    
    
    
    5Proceeds from sale of FHLB stock
    
    
    
    
    
    
    8Origination of loans, net of principal payments
    
    
    (31,313
    )
    
    
    (29,052
    )Proceeds from sale of loans
    
    
    1,543
    
    
    
    Net cash and cash equivalents acquired as part of acquisition
    
    
    
    
    
    
    14,710Proceeds from sale of properties and equipment
    
    
    
    
    
    
    111Purchase of office properties and equipment
    
    
    (964
    )
    
    
    (1,497
    )Net change in federal funds sold
    
    
    (4,955
    )
    
    
    (13,640
    )Purchase of FHLB stock
    
    
    (433
    )
    
    
    Proceeds
from maturities of certificates of deposit
    
    
    298
    
    
    
    396Net (increase) decrease in restricted cash
    
    
    (479
    )
    
    
    1,890Investment in affiliate
    
    
    (248
    )
    
    
    (249
    )Net cash used in investing activities
    
    
    (49,826
    )
    
    
    (33,098
    )
 3




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##### Table of Contents



InterMountain Community Bancorp
Consolidated Statements of Cash Flows (continued)
(Unaudited) Six Months EndedJune 30,2004
    
    2003(Dollars in thousands)Cash flows from financing activities:Net increase in demand, money market and savings deposits
    
    $
    32,741
    
    
    $
    12,837Net increase in certificates of deposit
    
    
    15,737
    
    
    
    8,066Net change in repurchase agreements
    
    
    (4,806
    )
    
    
    (366
    )Proceeds from exercise of stock options
    
    
    328
    
    
    
    124Repurchase of stock
    
    
    (47
    )
    
    
    (399
    )Proceeds from debenture issuance
    
    
    8,248
    
    
    
    8,279Proceeds from FHLB borrowings
    
    
    
    
    
    
    5,000Net cash provided by financing activities
    
    
    52,201
    
    
    
    33,541Net change in cash and cash equivalents
    
    
    4,303
    
    
    
    3,967Cash and cash equivalents, beginning of period
    
    
    10,240
    
    
    
    8,691Cash and cash equivalents, end of period
    
    $
    14,543
    
    
    $
    12,658Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    2,315
    
    
    $
    2,409Income taxes
    
    
    1,431
    
    
    
    1,054Noncash investment and financing activities:Cancellation of treasury stock
    
    $
    
    
    
    $
    399Net liabilities assumed from business combination
    
    
    
    
    
    
    16,567
 The accompanying notes are an integral part of the consolidated financial
statements. 4




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##### Table of Contents



InterMountain Community Bancorp 
 Consolidated Statements of Comprehensive Income
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Net income
    
    $
    926
    
    
    $
    888
    
    
    $
    2,001
    
    
    $
    1,754Other comprehensive income (loss):Change in unrealized gains (losses)
on investments, net of
reclassification adjustments
    
    
    (2,406
    )
    
    
    134
    
    
    
    (2,005
    )
    
    
    (80
    )Less deferred income tax benefit
(provision)
    
    
    944
    
    
    
    (52
    )
    
    
    786
    
    
    
    18Net other comprehensive income (loss)
    
    
    (1,462
    )
    
    
    82
    
    
    
    (1,219
    )
    
    
    (62
    )Comprehensive income (loss)
    
    $
    (536
    )
    
    $
    970
    
    
    $
    782
    
    
    $
    1,692
 The accompanying notes are an integral part of the consolidated financial
statements. 5




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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,
2003. In the opinion of management, the unaudited interim consolidated
financial statements furnished herein include all adjustments, all of
which are of a normal recurring nature, necessary for a fair statement of
the results for the interim periods presented.  The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
the use of estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities
known to exist as of the date the financial statements are published, and
the reported amounts of revenues and expenses during the reporting
period. Uncertainties with respect to such estimates and assumptions are
inherent in the preparation of InterMountain Community Bancorps
(InterMountains) consolidated financial statements; accordingly, it is
possible that the actual results could differ from these estimates and
assumptions, which could have a material effect on the reported amounts
of InterMountains consolidated financial position and results of
operations.  2.
    
    Other Borrowings:The components of other borrowings are as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Term note payable(1)
    
    $
    8,279
    
    
    $
    8,279Term note payable(2)
    
    
    8,248
    
    
    
    Total other borrowings
    
    $
    16,527
    
    
    $
    8,279
    (1)
    
    In January 2003, InterMountain issued $8.0 million of
debentures through its subsidiary InterMountain Statutory Trust I.
The debt associated with these securities bear interest at 6.75%,
interest only, is paid quarterly starting in June 2003, the debt is
callable by InterMountain in March 2008 and matures in March 2033.(2)
    
    In March, 2004 InterMountain issued an additional $8.0
million of debentures through its subsidiary InterMountain Statutory
Trust II. The debt associated with these securities bear interest
based on LIBOR, adjusted and paid
quarterly (rate at June 30, 2004, 3.91%). These debentures are
callable by InterMountain in March 2009 and mature in March 2034.InterMountains obligations under the above debentures issued by
its subsidiaries constitute a full and unconditional guarantee by
InterMountain of the Statutory Trusts obligations under the Trust
Preferred Securities. In accordance with Financial Interpretation
No. 46 (Revised), Consolidation of Variable Interest Entities (FIN
No. 46R), the trusts are not consolidated and the debentures and
related amounts are treated as debt of InterMountain. 6




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##### Table of Contents



3.
    
    Earnings Per Share:The following table presents the basic and diluted earnings per share
computations: Three Months Ended June 30,(Dollars in thousands, except per share amounts)2004
    
    2003Net
    
    Weighted
    
    Per Share
    
    Net
    
    Weighted
    
    Per ShareIncome
    
    Avg. Shares
    
    Amount
    
    Income
    
    Avg. Shares
    
    AmountBasic computations
    
    $
    926
    
    
    
    3,214,232
    
    
    $
    0.29
    
    
    $
    888
    
    
    
    3,145,914
    
    
    $
    0.28Effect of dilutive
securities:Common stock options
    
    
    
    
    
    
    371,059
    
    
    
    (0.03
    )
    
    
    
    
    
    
    260,948
    
    
    
    (0.02
    )Diluted computations
    
    $
    926
    
    
    
    3,585,291
    
    
    $
    0.26
    
    
    $
    888
    
    
    
    3,406,862
    
    
    $
    0.26Antidilutive
options not
included in diluted
earnings per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Six Months Ended June 30,(Dollars in thousands, except per share amounts)2004
    
    2003Net
    
    Weighted
    
    Per Share
    
    Net
    
    Weighted
    
    Per ShareIncome
    
    Avg. Shares
    
    Amount
    
    Income
    
    Avg. Shares
    
    AmountBasic computations
    
    $
    2,001
    
    
    
    3,197,507
    
    
    $
    0.63
    
    
    $
    1,754
    
    
    
    3,145,960
    
    
    $
    0.56Effect of dilutive
securities:Common stock options
    
    
    
    
    
    
    375,167
    
    
    
    (0.07
    )
    
    
    
    
    
    
    228,258
    
    
    
    (0.04
    )Diluted computations
    
    $
    2,001
    
    
    
    3,572,674
    
    
    $
    0.56
    
    
    $
    1,754
    
    
    
    3,374,218
    
    
    $
    0.52Antidilutive
options not
included in diluted
earnings per share
    
    
    
    
    
    
    15,297
    
    
    
    
    
    
    
    
    
    
    
    
 7




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##### Table of Contents



4.
    
    Operating Expenses:The following table details InterMountains components of total operating
expenses: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    2,821
    
    
    $
    2,457
    
    
    $
    5,365
    
    
    $
    4,664Occupancy expense
    
    
    611
    
    
    
    558
    
    
    
    1,234
    
    
    
    1,037Other expense
    
    
    513
    
    
    
    344
    
    
    
    955
    
    
    
    684Fees and service charges
    
    
    297
    
    
    
    222
    
    
    
    580
    
    
    
    395Printing, postage and supplies
    
    
    216
    
    
    
    197
    
    
    
    395
    
    
    
    404Legal and accounting
    
    
    243
    
    
    
    135
    
    
    
    393
    
    
    
    218Advertising
    
    
    130
    
    
    
    117
    
    
    
    225
    
    
    
    192Total operating expenses
    
    $
    4,831
    
    
    $
    4,030
    
    
    $
    9,147
    
    
    $
    7,594
  5.
    
    Stock Options:As allowed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), InterMountain
has elected to retain the compensation measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25), and its related interpretations, for stock
options. Under APB No. 25, compensation cost is recognized at the
measurement date of the amount, if any, that the quoted market price of
InterMountains common stock exceeds the option exercise price. The
measurement date is the date at which both the number of options and the
exercise price for each option are known.  Had compensation cost for InterMountains plans been determined based on
the fair value at the grant dates for awards under the plans,
InterMountains reported net income and earnings per share would have
been changed to the pro forma amounts indicated below: 8




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands, except per share amounts)Reported net income
    
    $
    926
    
    
    $
    888
    
    
    $
    2,001
    
    
    $
    1,754Add back: Stock-based employee
compensation expense, net of
related tax effects
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    96Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    34
    
    
    
    137
    
    
    
    74
    
    
    
    166Pro forma
    
    $
    892
    
    
    $
    847
    
    
    $
    1,927
    
    
    $
    1,684Basic earnings per share:Reported earnings per share
    
    $
    0.29
    
    
    $
    0.28
    
    
    $
    0.63
    
    
    $
    0.56Stock-based employee
compensation, fair value
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.03
    )
    
    
    (0.02
    )Pro forma earnings per share
    
    $
    0.28
    
    
    $
    0.27
    
    
    $
    0.60
    
    
    $
    0.54Diluted earnings per share:Reported earnings per share
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.56
    
    
    $
    0.52Stock-based employee
compensation, fair value
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    (0.02
    )Pro forma earnings per share
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.54
    
    
    $
    0.50
  6.
    
    Subsequent EventsThe Company announced the signing of a definitive merger agreement under
which Intermountain Community Bancorp will merge with Snake River
Bancorp, Inc., with InterMountain as the resulting entity in a cash and
stock deal valued at $17.1 million, based on InterMountains closing
price of $25 as of July 23, 2004. Terms of the agreement call for
Intermountain Community Bancorp to pay, in the aggregate, $4.5 million in
cash and issue 504,305 shares of common stock. The transaction is
expected to be accretive to Intermountain Community Bancorps 2005
earnings. Completion of the transaction is expected to occur in the
fourth quarter of 2004, subject to regulatory approval and approval by
the shareholders of Snake River Bancorp, Inc.  7.
    
    New Accounting Policies:In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (FIN No. 46). In December 2003, the FASB issued a
revision to this interpretation (FIN No. 46(r)). FIN No. 46(r)
clarifies the application of Accounting Research Bulletin No. 51 to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
InterMountain adopted FIN 46(r) effective January 1, 2004. As a result of
the issuance of FIN No. 46(r) and the accounting professions application
of the guidance provided by the FASB, issuer trusts, like InterMountain
Statutory Trust I and InterMountain Statutory Trust II (collectively
referred to as the trusts), are generally variable interest entities. We
have determined that we are not the primary beneficiaries under the
trusts, and accordingly InterMountain will not consolidate the financial
statements of the Trusts into its consolidated financial statements. The
amounts payable to these trusts continue to be treated as other
borrowings.  In December 2003, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer. SOP No. 03-3 addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investors initial investment in loans
acquired in a transfer if those differences are attributable, at least in
part, to credit quality. SOP No. 03-3 is effective for loans acquired in
fiscal years beginning after December 15, 2004. InterMountain believes
the implementation of SOP No. 03-3 will not have a material effect on
InterMountains consolidated financial statements. 9




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations InterMountain Community Bancorp
Comparison of the Three and Six Months Ended June 30, 2004 and 2003 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. General InterMountain Community Bancorp (InterMountain) is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
Panhandle State Bank (Panhandle), a wholly owned subsidiary of InterMountain,
was first opened in 1981 to serve the local banking needs of Bonner County,
Idaho. Since then, Panhandle has continued to grow by opening additional
branch offices throughout Idaho and Oregon. InterMountain conducts its primary business through its bank subsidiary,
Panhandle State Bank. Panhandle maintains its main office in Sandpoint, Idaho
and has 11 other branches. In addition to the main office, six branch offices
operate under the name of Panhandle State Bank and five of the branches are
operated under the name of InterMountain Community Bank, a division of
Panhandle State Bank. InterMountain focuses its banking and other services on
individuals, professionals, and small to medium-sized businesses throughout its
market area. At June 30, 2004, InterMountain had total consolidated assets of
$461.8 million. Panhandle is regulated by the Idaho Department of Finance, the
Oregon Division of Finance and Corporate Securities, and by the Federal Deposit
Insurance Corporation (FDIC), its primary federal regulator and the insurer
of its deposits. InterMountain competes with a number of international banking groups,
out-of-state banking companies, state-wide banking organizations, several local
community banks, savings banks, savings and loans, and credit unions throughout
its market area. Based on total deposit market share as of December 31, 2003,
InterMountain ranked fourteenth of financial institutions in Idaho and is the
states third largest independent community bank. InterMountain offers a variety of services to the community including
lending activities, deposit services, investment and other services.
InterMountain offers a variety of loans to meet the credit needs of the
communities it serves. InterMountain offers and encourages applications for a
variety of secured and unsecured loans to help meet the needs of its
communities, dependent upon InterMountains financial condition and size, legal
impediments, local economic conditions and consistency with safe and sound
operating practices. Types of loans offered include consumer loans, real
estate loans, business loans, and agricultural loans. A full range of deposit
services are available including checking accounts, savings accounts, money
market accounts and various types of certificates of deposit. Investment
services are provided through third-party vendors, including annuities,
securities, mutual funds and brokerage services. InterMountain operates a multi-branch banking system and is executing
plans for the formation and acquisition of banks and bank branches that can
operate under a decentralized community bank structure. InterMountain plans
expansion in markets that are contiguous, within 100 miles of its existing
branches in Idaho, Oregon, Washington, and Montana. InterMountain is pursuing
an aggressive balance of asset and earnings growth by focusing on increasing
its market share in its present locations, building new branches and merging
and/or acquiring community banks. 10




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##### Table of Contents



Critical Accounting Policies The accounting and reporting policies of InterMountain conform to GAAP and
to general practices within the banking industry. The preparation of the
financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. InterMountains management has
identified the accounting policies described below as those that, due to the
judgments, estimates and assumptions inherent in those policies, are critical
to an understanding of InterMountains Consolidated Financial Statements and
Managements Discussion and Analysis. Income Recognition.InterMountain recognizes interest income by methods
that conform to general accounting practices within the banking industry. In
the event management believes collection of all or a portion of contractual
interest on a loan has become doubtful, which generally occurs after the loan
is 90 days past due, InterMountain discontinues the accrual of interest and any
previously accrued interest recognized in income deemed uncollectible is
reversed. Interest received on nonperforming loans is included in income only
if recovery of the principal is reasonably assured. A nonperforming loan is
restored to accrual status when it is brought current or when brought to 90
days or less delinquent, has performed in accordance with contractual terms for
a reasonable period of time, and the collectibility of the total contractual
principal and interest is no longer in doubt. Allowance For Loan Losses.In general, determining the amount of the
allowance for loan losses requires significant judgment and the use of
estimates by management. InterMountain maintains an allowance for loan losses
to absorb probable losses in the loan portfolio based on a periodic analysis of
the portfolio and expected future losses. This analysis is designed to
determine an appropriate level and allocation of the allowance for losses among
loan types by considering factors affecting loan losses, including: specific
losses; levels and trends in impaired and nonperforming loans; historical loan
loss experience; current national and local economic conditions; volume, growth
and composition of the portfolio; regulatory guidance; and other relevant
factors. Management monitors the loan portfolio to evaluate the adequacy of the
allowance. The allowance can increase or decrease based upon the results of
managements analysis. The amount of the allowance for the various loan types represents
managements estimate of probable incurred losses inherent in the existing loan
portfolio based upon historical loss experience for each loan type. The
allowance for loan losses related to impaired loans usually is based on the
fair value of the collateral for certain collateral dependent loans. This
evaluation requires management to make estimates of the value of the collateral
and any associated holding and selling costs. Individual loan reviews are based upon specific quantitative and
qualitative criteria, including the size of the loan, loan quality
classifications, value of collateral, repayment ability of borrowers, and
historical experience factors. The historical experience factors utilized are
based upon past loss experience, trends in losses and delinquencies, the growth
of loans in particular markets and industries, and known changes in economic
conditions in the particular lending markets. Allowances for homogeneous loans
(such as residential mortgage loans, personal loans, etc.) are collectively
evaluated based upon historical loss experience, trends in losses and
delinquencies, growth of loans in particular markets, and known changes in
economic conditions in each particular lending market. Management believes the allowance for loan losses was adequate at June 30,
2004. While management uses available information to provide for loan losses,
the ultimate collectibility of a substantial portion of the loan portfolio and
the need for future additions to the allowance will be based on changes in
economic conditions and other relevant factors. A slowdown in economic
activity could adversely affect cash flows for both commercial and individual
borrowers, as a result of which InterMountain could experience increases in
nonperforming assets, delinquencies and losses on loans. 11




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##### Table of Contents



Investments.Assets in the investment portfolios are initially recorded
at cost, which includes any premiums and discounts. InterMountain amortizes
premiums and discounts as an adjustment to interest
income using the interest yield method over the life of the security. The
cost of investment securities sold, and any resulting gain or loss, is based on
the specific identification method. Management determines the appropriate classification of investment
securities at the time of purchase. Held-to-maturity securities are those
securities that InterMountain has the positive intent and ability to hold to
maturity, and are recorded at amortized cost. Available-for-sale securities are
those securities that would be available to be sold in the future in response
to liquidity needs, changes in market interest rates, and asset-liability
management strategies, among others. Available-for-sale securities are reported
at fair value, with unrealized holding gains and losses reported in
stockholders equity as a separate component of other comprehensive income, net
of applicable deferred income taxes. Management evaluates investment securities for other than temporary
declines in fair value on a periodic basis. If the fair value of investment
securities falls below their amortized cost and the decline is deemed to be
other than temporary, the securities will be written down to current market
value and the write down will be deducted from earnings. There were no
investment securities which management identified to be other-than-temporarily
impaired for the six months ended June 30, 2004. Charges to income could occur
in future periods due to a change in managements intent to hold the
investments to maturity, a change in managements assessment of credit risk, or
a change in regulatory or accounting requirements. Goodwill and Other Intangible Assets.Goodwill arising from business
combinations represents the value attributable to unidentifiable intangible
elements in the business acquired. InterMountains goodwill relates to value
inherent in the banking business and the value is dependent upon
InterMountains ability to provide quality, cost effective services in a
competitive market place. As such, goodwill value is supported ultimately by
revenue that is driven by the volume of business transacted. A decline in
earnings as a result of a lack of growth or the inability to deliver cost
effective services over sustained periods can lead to impairment of goodwill
that could adversely impact earnings in future periods. Goodwill is not
amortized, but is subjected to impairment analysis periodically. No impairment
was considered necessary during the six months ended June 30, 2004. However,
future events could cause management to conclude that InterMountains goodwill
is impaired, which would result in InterMountain recording an impairment loss.
Any resulting impairment loss could have a material adverse impact on
InterMountains financial condition and results of operations. Other intangible assets consisting of core-deposit intangibles with
definite lives are amortized over the estimated life of the acquired depositor
relationships (ten years). Real Estate Owned.Property acquired through foreclosure of defaulted
mortgage loans is carried at the lower of cost or fair value less estimated
costs to sell. Development and improvement costs relating to the property are
capitalized to the extent they are deemed to be recoverable. An allowance for losses on real estate owned is designed to include
amounts for estimated losses as a result of impairment in value of the real
property after repossession. InterMountain reviews its real estate owned for
impairment in value whenever events or circumstances indicate that the carrying
value of the property may not be recoverable. In performing the review, if
expected future undiscounted cash flow from the use of the property or the fair
value, less selling costs, from the disposition of the property is less than
its carrying value, an allowance for loss is recognized. As a result of
changes in the real estate markets in which these properties are located, it is
reasonably possible that the carrying values could be reduced in the near term. 12




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##### Table of Contents



Results of Operations Overview. InterMountain recorded net income of $926 thousand, or $0.26
per diluted share, for the three months ended June 30, 2004, compared with net
income of $888 thousand, or $0.26 per diluted share, for the three months ended
June 30, 2003. InterMountain recorded net income of $2.0 million, or $0.56 per
diluted share for the six months ended June 30, 2004, compared with $1.8
million, or $0.52 per diluted share, for the six months ended June 30, 2003.
The increase in net income for both periods reflected an increase in net
interest income and other income. The annualized return on average assets was 0.83% and 0.95% for the three
months ended June 30, 2004 and 2003, respectively. For the six months ended
June 30, 2004 and 2003, the annualized return on average assets was 0.92% and
1.02%, respectively. Decreases in return on average assets were due primarily
to and increases in operating expenses and the provision for loan loss. The
annualized return on average equity was 13.1% and 14.2% for the three months
ended June 30, 2004 and 2003, respectively. The annualized return on average
equity was 14.3% and 14.2% for the six months ended June 30, 2004 and 2003,
respectively. Although the return on average equity was down for the quarter as
a result of lower real estate service fee income, higher operating expenses and
a higher loan loss provision, the ratio was up slightly for the six months as
net interest income and other non-interest expense kept pace with the growth in
assets. Net Interest Income. The most significant component of earnings for a
financial institution typically is net interest income, which is the difference
between interest income, primarily from loan and investment portfolios, and
interest expense, primarily on deposits and other borrowings. During the three
months ended June 30, 2004 and 2003, net interest income was $5.1 million and
$4.3 million, respectively, an increase of 17.8%. For the six months ended
June 30, 2004 and 2003, net interest income was $9.8 million and $8.1 million,
an increase of 21.1%. The increase in net interest income during the three and
six months ended June 30, 2004, compared to the same periods in 2003, was
primarily due to an increase in loan volumes and relative stability in the net
interest spread. Changes in net interest income result from changes in volume and in the
net interest spread. Volume refers to the dollar level of interest-earning
assets and interest-bearing liabilities. Net interest spread refers to the
difference between the yield on interest-earning assets and the rate paid on
interest-bearing liabilities. Net interest margin, a similar measure to net
interest spread, refers to net interest income divided by total
interest-earning assets and is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities. Average interest-earning assets for the three months ended June 30, 2004
and 2003 were $410.5 million and $335.3 million, respectively. Average loans
increased by $54.1 million, while average investments increased by $21.1
million over the same period in 2003. Average net interest spread during the
three months ended June 30, 2004 and 2003 was 4.33% and 4.51%, respectively.
The average net interest margin for the three months ended June 30, 2004 and
2003 was 4.83% and 4.98%, respectively. Net interest margin decreased
primarily due to lower yields on earning assets as declining market rates
continued to put pressure on rates earned on the investment and loan
portfolios. Net interest spread decreased primarily because the yield on loans
and investments declined slightly more than the cost of deposits. Average interest-earning assets for the six months ended June 30, 2004 and
2003 were $391.6 million and $318.9 million, respectively. Average loans
increased by $56.7 million, while average investments increased by $18.2
million over the same period in 2003. Net interest spread during the six
months ended June 30, 2004 and 2003 was 4.41% and 4.51%, respectively. The net
interest margin for the six months ended June 30, 2004 and 2003 was 4.87% and
4.99%, respectively. As with the three-month results, the net interest margin
decreased primarily due to lower yields on earning assets. Net interest spread
decreased primarily because the yield on loans declined slightly more than the
cost of deposits. While net interest spread and margin were down for both
periods, the decline was relatively small in relation to the decline in market
interest rates. 13




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##### Table of Contents



Provision for Losses on Loans.Managements policy is to establish
valuation allowances for estimated losses by charging corresponding provisions
against income. This evaluation is based upon managements assessment of
various factors including, but not limited to, current and future economic
trends, historical loan losses, delinquencies, underlying collateral values, as
well as current and potential risks identified in the portfolio. InterMountain recorded provisions for losses on loans of $829 thousand and
$644 thousand for the six months ended June 30, 2004 and 2003, respectively.
The current provision reflects the analysis and assessment of the relevant
factors mentioned in the preceding paragraph. The increase in the loss
provision from the prior period resulted from growth in the loan portfolio and
the need to reserve more for several specific credits that had deteriorated
during the second quarter. The following table summarizes loan loss allowance activity for the
periods indicated. Six Months Ended June 30,2004
    
    2003(Dollars in thousands)Balance at January 1
    
    $
    5,118
    
    
    $
    3,259Acquired allowance for loan losses
    
    
    
    
    
    
    1,624Allowance associated with the sale of loans
    
    
    (140
    )
    
    
    Provision for losses on loans
    
    
    829
    
    
    
    644Amounts written off net of recoveries
    
    
    1
    
    
    
    (88
    )Balance at June 30
    
    $
    5,808
    
    
    $
    5,439
 At June 30, 2004, Intermountains total classified assets were $4.2
million, compared with $3.3 million at June 30, 2003. Total nonperforming loans
were $140 thousand at June 30, 2004, compared with
$420 thousand at June 30,
2003. The increase in classified assets was primarily attributable to the
addition of 4 loan relationships, all of which management feels are adequately
provided for in allowance for loan loss. The decrease in nonperforming loans
was primarily attributable to the sale or liquidation of assets securing the
loans. At June 30,2004, Intermountains loan delinquency rate (30 days or more)
as a percentage of total loans was 1.40%, compared with 1.95% at June 30,
2003. Other Income.Total other income was $1.9 million and $1.6 million for
the three months ended June 30, 2004 and 2003, respectively and $3.2 million
and $2.8 million for the six months ended June 30, 2004 and 2003. Fees and
service charge income increased by 7.2% to $1.6 million for the three months
ended June 30, 2004 from $1.5 million for the same period last year. Fees and
service charge income increased by 7.4% to $2.7 million for the six months
ended June 30, 2004 from $2.6 million for the same period last year. Deposit
service fees increased, reflecting continued account and customer growth, and
price increases enacted in April 2004. Deferred fee income on commercial, real
estate and consumer loans also improved, offsetting decreases in fees generated
by mortgage banking activity. Increases in other income for both the three-month and six-month periods
ending June 30, 2004 also reflected improvement in investment referrals and
merchant credit card acceptance fees, and increases in fees from the servicing
of bank deposits securing credit cards. This line of business was included as
part of the acquisition of Orchard Bank in January 2003. 14




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##### Table of Contents



Operating Expenses. Operating expenses were $4.8 million and $4.0 million
for the three months ended June 30, 2004 and 2003, respectively. Operating
expenses were $9.1 million and $7.6 million for the
six months ended June 30, 2004 and 2003, respectively. The higher level
of operating expenses was primarily a result of expanded staffing and fixed
asset depreciation created by the opening of two additional bank branches and
the acquisition of the Ontario office in 2003. InterMountain also incurred
additional expenses in the second quarter of 2004 related to upgrading its core
data and item processing technology. In doing so, the company purchased
substantial new hardware and software, terminated some existing technology
contracts and incurred significant training and overtime expenses. In
addition, the company incurred legal and professional fees related to its
filing as a public reporting company with the Securities and Exchange
Commission. Salaries and employee benefits were $2.9 million and $2.5 million for the
three months ended June 30, 2004 and 2003, respectively. Salaries and employee
benefits were $5.4 million and $4.7 million for the six months ended June 30,
2004 and 2003, respectively. The employee costs reflected increased branch
staffing, increased mortgage banking staff and additional administrative staff
as a result of continued new branch growth and expansion. At June 30, 2004,
full-time-equivalent employees were 221, compared with 195 at June 30, 2003. Occupancy expenses were $611 thousand and $558 thousand for the three
months ended June 30, 2004 and 2003, respectively. Occupancy expenses were
$1.2 million and $1.0 million for the six months ended June 30, 2004 and 2003,
respectively. The increase was primarily due to costs associated with the
Ontario acquisition, the Post Falls and Caldwell offices and additional
administrative facilities. Income Tax Provision. InterMountain recorded federal and state income tax
provisions of $474 thousand and $427 thousand for the three months ended June
30, 2004 and 2003, respectively. For the six months ended June 30, 2004 and
2003, InterMountain recorded federal and state income tax provisions of $1.1
million and $960 thousand, respectively. The increased tax provision in 2004
over 2003 is due to the increase in pre-tax net income. The effective tax
rates for these periods were 33.9%, 32.5%, 35.5% and 35.4%, respectively. Financial Position Assets. At June 30, 2004, InterMountains assets were $461.8 million, up
$52.0 million or 12.7% from $409.8 million at December 31, 2003. Growth in
assets reflected increases in both investments and loans receivable, and were
supported by increases in customer deposits. Investments. InterMountains investment portfolio at June 30, 2004 was
$90.9 million, an increase of $11.0 million or 13.8% from the December 31, 2003
balance of $79.9 million. The increase was primarily due to net purchases of
government agencies and mortgage-backed securities utilizing excess liquidity
created from increases in customer deposits and the proceeds of the debentures
issued in March 2004. Loans Receivable. At June 30, 2004, net loans receivable were $316.3
million, up $29.0 million or 10.1% from $287.3 million at December 31, 2003.
The increase was primarily due to net increases in business and agricultural
loans. During the six months ended June 30, 2004, total loan originations were
$188.3 million compared with $137.3 million for the prior years comparable
period, reflecting growing loan demand in the companys markets. 15




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##### Table of Contents



The following table sets forth the composition of InterMountains loan
portfolio at the dates indicated. Loan balances exclude deferred loan
origination costs and fees and allowances for loan losses. June 30, 2004
    
    December 31, 2003Amount
    
    %
    
    Amount
    
    %(Dollars in thousands)Commercial
    
    $
    225,817
    
    
    
    70.10
    
    
    $
    215,396
    
    
    
    73.65Residential real estate
    
    
    78,688
    
    
    
    24.43
    
    
    
    58,728
    
    
    
    20.08Consumer
    
    
    16,627
    
    
    
    5.16
    
    
    
    16,552
    
    
    
    5.66Municipal
    
    
    1,015
    
    
    
    .31
    
    
    
    1,751
    
    
    
    0.61Total loans receivable
    
    
    322,147
    
    
    
    100.00
    
    
    
    292,427
    
    
    
    100.00Net deferred origination fees
    
    
    (6
    )
    
    
    
    
    
    
    (53
    )Allowance for losses on loans
    
    
    (5,808
    )
    
    
    
    
    
    
    (5,118
    )Loans receivable, net
    
    $
    316,333
    
    
    
    
    
    
    $
    287,256Weighted average yield at end of period
    
    
    6.42
    %
    
    
    
    
    
    
    6.60
    %
 The following table sets forth InterMountains loan originations for the
periods indicated. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % Change(Dollars in thousands)Commercial
    
    $
    66,371
    
    
    $
    52,211
    
    
    
    42.0
    
    
    $
    142,364
    
    
    $
    103,289
    
    
    
    62.4Residential real estate
    
    
    23,688
    
    
    
    16,163
    
    
    
    46.6
    
    
    
    38,782
    
    
    
    27,812
    
    
    
    39.4Consumer
    
    
    3,322
    
    
    
    3,554
    
    
    
    (6.5
    )
    
    
    7,096
    
    
    
    5,934
    
    
    
    19.6Municipal
    
    
    00
    
    
    
    00
    
    
    
    00.0
    
    
    
    15
    
    
    
    224
    
    
    
    (93.3
    )Total loans originated
    
    $
    93,381
    
    
    $
    71,928
    
    
    
    29.8
    
    
    $
    188,257
    
    
    $
    137,259
    
    
    
    37.2
 BOLI and All Other Assets. Bank-owned life insurance (BOLI) and other
assets increased to $8.7 million at June 30, 2004 from $7.5 million at December
31, 2003. The increase was primarily due to an increase in net deferred tax
assets related to the fair market valuation of available for sale securities as
of June 30, 2004. 16




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##### Table of Contents



Deposits.
Total deposits increased $48.4 million or 14.1% to $393.3
million at June 30, 2004 from $344.9 million at December 31, 2003, primarily
due to increases in non-interest bearing demand accounts, savings and
certificates of deposit accounts. Ongoing business development efforts in the
Companys existing markets, along with development of the relatively new
Kootenai County and Caldwell markets were primary contributors to the increase
in deposits over the time period measured. The following table sets forth the composition of InterMountains
deposits at the dates indicated. June 30, 2004
    
    December 31, 2003Amount
    
    %
    
    Amount
    
    %(Dollars in thousands)Demand
    
    $
    86,818
    
    
    
    22.1
    
    
    $
    76,439
    
    
    
    22.2NOW and money market 0.0% to 2.3%
    
    
    129,261
    
    
    
    32.9
    
    
    
    114,322
    
    
    
    33.1Savings and IRA 0.0% to 6.5%
    
    
    53,230
    
    
    
    13.5
    
    
    
    45,807
    
    
    
    13.3Certificate of deposit accounts
    
    
    124,035
    
    
    
    31.5
    
    
    
    108,298
    
    
    
    31.4Total deposits
    
    $
    393,344
    
    
    
    100.0
    
    
    $
    344,866
    
    
    
    100.0Weighted average interest rate
on certificates of deposit
    
    
    
    
    
    
    2.66
    %
    
    
    
    
    
    
    2.57
    %
 The shift in the mix of deposits since December 2003 reflects a slight
shift from saving accounts to certificates of deposit and money market accounts
as depositors seek to increase their return. Borrowings. Deposit accounts are InterMountains primary source of funds.
InterMountain does, however, rely upon advances from the Federal Home Loan
Bank of Seattle (FHLB Seattle), reverse repurchase agreements and other
borrowings to supplement its funding and to meet deposit withdrawal
requirements. The total of such borrowings were $33.9 million and $30.4
million at June 30, 2004 and December 31, 2003, respectively. The primary
reason for this increase was the issuance of $8 million of debentures by
Intermountains wholly owned subsidiary, InterMountain Statutory Trust II
somewhat offset by a decrease in securities sold under repurchase agreements.
The proceeds of these debentures were used to purchase investments and fund
loan growth. See Liquidity and Sources of Funds. Interest Rate Risk The results of operations for financial institutions may be materially and
adversely affected by changes in prevailing economic conditions, including
rapid changes in interest rates, declines in real estate market values and the
monetary and fiscal policies of the federal government. Like all financial
institutions, InterMountains net interest income and its NPV (the net present
value of financial assets, liabilities and off-balance sheet contracts), are
subject to fluctuations in interest rates. Currently, InterMountains
interest-bearing liabilities, consisting primarily of deposits, mature or
reprice more rapidly, or on different terms, than do its interest-earning
assets, consisting primarily of loans receivable and investments. The fact that
liabilities mature or reprice more frequently on average than assets may be
beneficial in times of declining interest rates; however, such an
asset/liability structure may result in declining net interest income during
periods of rising interest rates. The nature of InterMountains short-term
deposits and the use of pricing strategies on the liability side, combined with
variable rate loan products tied to an internal cost of funds and the prime
lending rate index typically mitigates the negative impact in a rising interest
rate environment. 17




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##### Table of Contents



To minimize the impact of fluctuating interest rates on net interest
income, InterMountain promotes a loan pricing policy of utilizing variable
interest rate structures that associates loan rates to Intermountains internal
cost of funds, i.e. deposits and borrowings. This approach historically has
contributed to a consistent interest rate spread and reduces pressure from
borrowers to renegotiate loan terms during periods of falling interest rates.
InterMountain currently maintains over fifty percent of its loan portfolio in
variable interest rate assets. Additionally, the extent to which borrowers prepay loans is affected by
prevailing interest rates. When interest rates increase, borrowers are less
likely to prepay loans. When interest rates decrease, borrowers are more
likely to prepay loans. Prepayments may affect the levels of loans retained in
an institutions portfolio, as well as its net interest income. InterMountain
maintains an asset and liability management program intended to manage net
interest income through interest rate cycles and to protect its NPV by
controlling its exposure to changing interest rates. InterMountain uses a simulation model designed to measure the sensitivity
of net interest income and NPV to changes in interest rates. This simulation
model is designed to enable InterMountain to generate a forecast of net
interest income and NPV given various interest rate forecasts and alternative
strategies. The model is also designed to measure the anticipated impact that
prepayment risk, basis risk, customer maturity preferences, volumes of new
business and changes in the relationship between long-term and short-term
interest rates have on the performance of InterMountain. InterMountain is continuing to pursue strategies to manage the level of
its interest rate risk while increasing its net interest income and NPV through
the origination and retention of variable-rate consumer, business banking,
construction and commercial real estate loans, which generally have higher
yields than residential permanent loans, by the sale of certain long-term
fixed-rate loans and investments, and by increasing the level of its core
deposits, which are generally a lower-cost, less rate-sensitive funding source
than wholesale borrowings. There can be no assurance that InterMountain will
be successful implementing any of these strategies or that, if these strategies
are implemented, they will have the intended effect of reducing IRR or
increasing net interest income. InterMountain also uses gap analysis, a traditional analytical tool
designed to measure the difference between the amount of interest-earning
assets and the amount of interest-bearing liabilities expected to reprice in a
given period. InterMountain calculated its one-year cumulative repricing gap
position to be a negative 18.5% and a negative 11.4% at June 30, 2004 and
December 31, 2003, respectively. Management attempts to maintain
InterMountains gap position between positive 20% and negative 20%. At June
30, 2004, InterMountains gap positions were within limits established by its
Board of Directors. Management is pursuing strategies to increase its net
interest income without significantly increasing its cumulative gap positions
in future periods. There can be no assurance that InterMountain will be
successful implementing these strategies or that, if these strategies are
implemented, they will have the intended effect of increasing its net interest
income. See Results of Operations  Net Interest Income and Capital
Resources. 18




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##### Table of Contents



Liquidity and Sources of Funds As a financial institution, InterMountains primary sources of funds are
investing and financing activities, including the collection of loan principal
and interest payments. Financing activities consist primarily of customer
deposits, advances from FHLB Seattle and other borrowings. Deposits increased
to $393.3 million at June 30, 2004 from $344.9 million at December 31, 2003,
primarily due to increases in interest bearing demand accounts, non-interest
demand accounts and certificates of deposit. The net increase in deposits was
primarily used to fund loans and pay down other borrowings. At June 30, 2004
and December 31, 2003, securities sold subject to repurchase agreements were
$12.3 million and $17.2 million, respectively. These borrowings are required
to be collateralized by investments with a market value exceeding the face
value of the borrowings. Under certain circumstances, InterMountain could be
required to pledge additional securities or reduce the borrowings. During the six months ended June 30, 2004, cash used in investing
activities consisted primarily of the purchase of available-for-sale securities
in the investment portfolio and new loan volume net of calls, maturities and
prepayments. The levels of these prepayments increase or decrease depending on
the size of the loan and the general trend and level of interest rates, which
influences the level of refinancing and mortgage prepayments. During the same
period, cash provided by financing activities consisted primarily of increases
in certificates of deposit, demand deposits and the issuance of debentures. InterMountains credit line with FHLB Seattle provides for borrowings up
to a percentage of its total assets subject to collateralization requirements.
At June 30, 2004, this credit line represented a total borrowing capacity of
approximately $21.4 million, of which $16.4 million was available.
InterMountain also borrows on an unsecured basis from correspondent banks and
other financial entities. As of June 30, 2004 there were no outstanding
amounts. InterMountain actively manages its liquidity to maintain an adequate
margin over the level necessary to support expected and potential loan fundings
and deposit withdrawals. This is balanced with the need to maximize yield on
alternative investments. The liquidity ratio may vary from time to time,
depending on economic conditions, savings flows and loan funding needs. Capital Resources InterMountains total stockholders equity was $28.1 million at June 30,
2004 compared with $27.1 million at December 31, 2003. The increase in total
stockholders equity was primarily due to the increase in net income net the
change to unrealized gains and losses on securities. Stockholders equity was
6.1% of total assets at June 30, 2004 compared with 6.6% at December 31, 2003. At June 30, 2004, InterMountain had an unrealized loss of $944 thousand,
net of related income taxes, on investments classified as available for sale.
At December 31, 2003, InterMountain had an unrealized gain of $275 thousand,
net of related income taxes, on investments classified as available for sale.
Fluctuations in prevailing interest rates continue to cause volatility in this
component of accumulated comprehensive income or loss in stockholders equity
and may continue to do so in future periods. InterMountain issued and has outstanding $16.5 million of Trust Preferred
Securities. The indenture governing the Trust Preferred Securities limits the
ability of InterMountain under certain circumstances to pay dividends or to
make other capital distributions. The Trust Preferred Securities are treated
as debt of InterMountain. These Trust Preferred Securities were sold
in two separate issuances and can be called for
redemption in March 2008 and March 2009 by the Company at 100% of the aggregate
principal plus accrued and unpaid interest. See Note 2 of Notes to
Consolidated Financial Statements. 19




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##### Table of Contents



InterMountain and Panhandle are required by applicable regulations to
maintain certain minimum capital levels and ratios of total and Tier 1 capital
to risk-weighted assets, and of Tier I capital to average assets.
InterMountain and Panhandle will endeavor to enhance its capital resources and
regulatory capital ratios through the retention of earnings and the management
of the level and mix of assets, although there can be no assurance in this
regard. At June 30, 2004, Panhandle exceeded all such regulatory capital
requirements and was well-capitalized pursuant to FFIEC regulations. The following tables set forth the amounts and ratios regarding actual and
minimum core Tier I risk-based and total risk-based capital requirements,
together with the amountsand ratios required in order to meet the definition of
a well-capitalized institution as reported on the quarterly FFIEC call report
at June 30, 2004. Capital
    
    Well-CapitalizedActual
    
    Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total capital (to
risk-weighted
assets)
    
    $
    47,881
    
    
    
    13.28
    %
    
    $
    28,840
    
    
    
    8
    %
    
    $
    36,051
    
    
    
    10
    %Tier 1 capital to
(to risk-weighted
assets)
    
    
    37,023
    
    
    
    10.27
    
    
    
    14,420
    
    
    
    4
    
    
    
    21,630
    
    
    
    6Tier 1 capital (to
average assets)
    
    
    37,023
    
    
    
    8.24
    
    
    
    18,047
    
    
    
    4
    
    
    
    27,070
    
    
    
    6
 Off Balance Sheet Arrangements and Contractual Obligations InterMountain, in the conduct of ordinary business operations routinely
enters into contracts for services. These contracts may require payment for
services to be provided in the future and may also contain penalty clauses for
the early termination of the contracts. Intermountain is also party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
Management does not believe that these off-balance sheet arrangements have a
material current effect on InterMountains financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources but there is no assurance that such
arrangements will not have a future effect. The following table represents InterMountains on-and-off balance sheet
aggregate contractual obligations to make future payments as of June 30, 2004. Payments Due by PeriodLess than
    
    
    
    
    
    Over
    
    More thanTotal
    
    1 year
    
    1 to 3 years
    
    3 to 5 years
    
    5 years(Dollars in thousands)Long-term debt(1)
    
    $
    21,527
    
    
    $
    
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    16,527Capital lease obligations(2)Operating lease obligations
    
    
    3,509
    
    
    
    378
    
    
    
    527
    
    
    
    518
    
    
    
    2,086Purchase obligations(2)Other long-term liabilities
reflected on the
registrants balance sheet
under GAAPTotal
    
    $
    25,036
    
    
    $
    378
    
    
    $
    527
    
    
    $
    5,518
    
    
    $
    18,613
    (1)
    
    Excludes interest payments.  (2)
    
    Excludes recurring accounts payable, accrued expenses and other
liabilities, repurchase agreements and customer deposits, all of which
are recorded on the Companys balance sheet. 20




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##### Table of Contents



New Accounting Policies In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46). In December 2003, the FASB issued
a revision to this interpretation (FIN No. 46(r)). FIN No. 46(r) clarifies
the application of Accounting Research Bulletin No. 51 to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. InterMountain adopted FIN No. 46(r) effective January 1, 2004.
As a result of the issuance of FIN No. 46(r) and the accounting professions
application of the guidance provided by the FASB, issuer trusts, like
InterMountain Statutory Trust I and InterMountain Statutory Trust II
(collectively referred to as the trusts), are generally variable interest
entities. We have determined that we are not the primary beneficiaries under
the trusts, and accordingly InterMountain will not consolidate the financial
statements of the Trusts into its consolidated financial statements. The
amounts payable to these trusts continues to be treated as other borrowings. In December 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. SOP No. 03-3
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investors initial investment in loans
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. SOP No. 03-3 is effective for loans acquired in fiscal
years beginning after December 15, 2004. InterMountain believes the
implementation of SOP No. 03-3 will not have a material effect on
InterMountains consolidated financial statements. Regulation and Compliance InterMountain is subject to many laws and regulations applicable to
banking activities. As a bank holding company, InterMountain is subject to
regulation, supervision and examination by the Federal Reserve. Panhandle is
an Idaho commercial bank operating in Idaho, with one branch in Oregon, and
deposits are insured by the FDIC. As a result, Panhandle is subject to
supervision and regulation by the Idaho Department of Finance, the FDIC, and
with respect to the State of Oregon, the Division of Finance and Corporate
Securities. These agencies have the authority to prohibit banks from engaging
in what they believe constitute unsafe or unsound banking practices. In July 2002, the Sarbanes-Oxley Act of 2002 (the SOA) was enacted with
the intent of protecting investors by improving the accuracy and reliability of
corporate disclosures. The SOA, among other things: requires enhanced
financial disclosures; requires greater accountability from management,
including the principal executive officer and principal financial officer;
demands greater independence of audit functions and provides for enhanced
penalties for accounting and auditing improprieties at publicly traded
companies. The SOA directs the Securities and Exchange Commission (SEC) and
securities exchanges to adopt rules that implement these and other
requirements. A number of rules have been adopted and continue to be proposed
and implemented pursuant to the SOA. 21




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##### Table of Contents



Forward-Looking Statements From time to time, InterMountain and its senior managers have made and
will make forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are contained in
this report and may be contained in other documents that InterMountain files
with the Securities and Exchange Commission. Such statements may also be made
by InterMountain and its senior managers in oral or written presentations to
analysts, investors, the media and others. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or
current facts. Also, forward-looking statements can generally be identified by
words such as may, could, should, would, believe, anticipate,
estimate, seek, expect, intend, plan and similar expressions. Forward-looking statements provide our expectations or predictions of
future conditions, events or results. They are not guarantees of future
performance. By their nature, forward-looking statements are subject to risks
and uncertainties. These statements speak only as of the date they are made.
We do not undertake to update forward-looking statements to reflect the impact
of circumstances or events that arise after the date the forward-looking
statements were made. There are a number of factors, many of which are beyond
our control, which could cause actual conditions, events or results to differ
significantly from those described in the forward-looking statements. These
factors, some of which are discussed elsewhere in this report, include:  
    
    the strength of the United States economy in
general and the strength of the local economies in which InterMountain
conducts its operations;  
    
    the effects of inflation, interest rate levels
and market and monetary fluctuations;  
    
    trade, monetary and fiscal policies and laws,
including interest rate policies of the federal government;  
    
    applicable laws and regulations and legislative
or regulatory changes;  
    
    the timely development and acceptance of new
products and services of InterMountain;  
    
    the willingness of customers to substitute
competitors products and services for InterMountains products and
services;  
    
    InterMountains success in gaining regulatory
approvals, when required;  
    
    technological and management changes;  
    
    growth and acquisition strategies;  
    
    changes in consumer spending and saving habits;
and  
    
    InterMountains success at managing the risks
involved in the foregoing. 22




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##### Table of Contents












Item 3  Quantitative and Qualitative Disclosures About Market Risk

For a discussion of InterMountains market risks, see Managements
Discussion and Analysis  Asset and Liability Management.




Item 4  Controls and Procedures



| |  | (a)  Evaluation of Disclosure Controls and Procedures: An evaluation of
InterMountains disclosure controls and procedures (as required by
section 13a  15(b) of the Securities Exchange Act of 1934 (the Act))
was carried out under the supervision and with the participation of
InterMountains management, including the Chief Executive Officer and the
Chief Financial Officer. Our Chief Executive Officer and Chief Financial
Officer concluded that based on that evaluation, our disclosure controls
and procedures as currently in effect are effective, as of the end of the
period covered by this report, in ensuring that the information required
to be disclosed by us in the reports we file or submit under the Act is
(i) accumulated and communicated to InterMountains management (including
the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (b)  Changes in Internal Controls: In the quarter ended June 30, 2004, the
Bank did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




PART II  Other Information




Item 1   Legal Proceedings

InterMountain and Panhandle are parties to various claims, legal actions
and complaints in the ordinary course of business. In InterMountains opinion,
all such matters are adequately covered by insurance, are without merit or are
of such kind, or involve such amounts, that unfavorable disposition would not
have a material adverse effect on the consolidated financial position or
results of operations of InterMountain.




Item 2   Changes in Securities, Use of Proceeds and Issuer Purchase of Equity
Securities

Not applicable.




Item 3   Defaults Upon Senior Securities

Not applicable.




Item 4  Submission of Matters to a Vote of Security Holders



| | (a) |  | InterMountains Annual Shareholders Meeting was held on May 1,
2004                                                                                                                                                         
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Not Applicable                                                                                                                                                                                                               
|
| | (c) |  | A brief description of each matter voted upon at the Annual Meeting
and number of votes cast for, against or withheld, including a separate
tabulation with respect to each nominee to serve on the Board is
presented below:



| | (1) |  | Election of four Directors for terms expiring in 2007
and of one director for term expiring in 2005, or until their
successors have been elected and qualified.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Directors with terms expiring in 2007:
| |  |  | --------------------------------------

James T. Diehl Votes Cast For:
    
    2,878,901Votes Withheld:
    
    0Votes Abstained:
    
    1Terry L. Merwin Votes Cast For:
    
    2,878,901Votes Withheld:
    
    0Votes Abstained:
    
    1John B. Parker Votes Cast For:
    
    2,878,901Votes Withheld:
    
    0Votes Abstained:
    
    1Dennis Pence Votes Cast For:
    
    2,877,139Votes Withheld
    
    1,762Votes Abstained:
    
    1




| |  |  | Directors with terms expiring in 2005:
| |  |  | --------------------------------------

Barbara Strickfaden Votes Cast For:
    
    2,877,139Votes Withheld:
    
    1,762Votes Abstained
    
    1


(2) Ratification
of the selection of BDO Seidman, LLP as independent
auditors for the fiscal year 2004

Votes Cast For
    
    2,865,051Votes Against
    
    1Votes Abstained
    
    13,850


(d) None




Item 5   Other Information

Not applicable.




Item 6   Exhibits and Reports on Form 8-K

(a)
    
    Exhibit No.
    
    Exhibit10.1
    
    
    Executive Retirement Payment Agreement between
Panhandle State Bank and David Smith dated March 31,
2004.31.1
    
    
    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(b)
    
    Reports on Form 8-K. During the quarter ended June 30, 2004, there
were no reports filed on Form 8-K.
 23




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Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. INTERMOUNTAIN COMMUNITY BANCORP, INC.(Registrant)August 13, 2004
    
    By:
    
    /s/ Curt HeckerDateCurt HeckerPresidentand Chief Executive OfficerAugust 13, 2004
    
    By:
    
    /s/ David W. SmithDateDavid W. SmithSenior Vice Presidentand Chief Financial Officer
 24