UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM            TO

INTERMOUNTAIN COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

Idaho		82-0499463
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

231 N. Third Avenue, Sandpoint, Idaho		83864
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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  þ     No  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

o  Large Accelerated filer     o  Accelerated filer     þ  Non Accelerated filer

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o     No  þ

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 8, 2006
		Common Stock (no par value)		7,311,919

 

 

 

Intermountain Community Bancorp

FORM 10-Q
For the Quarter Ended June 30, 2006

TABLE OF CONTENTS

PART I - Financial Information
		Item 1 -		Financial Statements (Unaudited)
				Consolidated Balance Sheets for June 30, 2006 and December 31, 2005
				Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005
				Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005
				Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2006 and 2005
				Notes to Consolidated Financial Statements
		Item 2 -		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Item 3 -		Quantitative and Qualitative Disclosures About Market Risk
		Item 4 -		Controls and Procedures
PART II - Other Information
		Item 1 -		Legal Proceedings
		Item 1A		Risk Factors
		Item 2 -		Unregistered Sales of Equity Securities and Use of Proceeds
		Item 3 -		Defaults Upon Senior Securities
		Item 4 -		Submission of Matters to a Vote of Security Holders
		Item 5 -		Other Information
		Item 6 -		Exhibits
Signatures
EXHIBIT 3.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I — Financial Information

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

The accompanying notes are an integral part of the consolidated financial statements.

Intermountain Community Bancorp

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

The accompanying notes are an integral part of the consolidated financial statements.

Intermountain Community Bancorp

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

Intermountain Community Bancorp
Consolidated Statements of Cash Flows (continued)
(Unaudited)

		Six Months Ended
		June 30,
		2006				2005
		(Dollars in thousands)
Cash flows from financing activities:
Net increase in demand, money market and savings deposits		$	35,216			$	28,141
Net increase in certificates of deposit			8,127				10,834
Net change in repurchase agreements			1,287				19,009
Net change in federal funds purchased			—				4,750
Excess tax benefit related to stock based compensation			36				—
Proceeds from exercise of stock options			181				570
Payments for fractional shares			—				(2	)
Proceeds from credit line			375				—
Principal payments on Note Payable			(98	)			—
Repayments of FHLB borrowings			—				(7,000	)
Proceeds from FHLB borrowings			—				17,000
Net cash provided by financing activities			45,124				73,302
Net change in cash and cash equivalents			(151	)			2,710
Cash and cash equivalents, beginning of period			23,875				14,202
Cash and cash equivalents, end of period		$	23,724			$	16,912
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	6,744			$	4,151
Income taxes			3,550				1,998
Noncash investing and financing activities:
Restricted stock issued			435				338
10% Stock Dividend			13,637				—
Purchase of land			1,130				—
Loans converted to Other Real Estate Owned			398				—

The accompanying notes are an integral part of the consolidated financial statements.

Intermountain Community Bancorp

		Three Months Ended								Six Months Ended
		March 31,								June 30,
		2006				2005				2006				2005
		(Dollars in thousands)								(Dollars in thousands)
Net income		$	1,839			$	1,574			$	4,401			$	3,069
Other comprehensive income (loss):
Change in unrealized losses on investments, net of reclassification adjustments			572				778				126				(454	)
Less deferred income tax provision			(237	)			(306	)			(43	)			178
Net other comprehensive income (loss)			335				472				83				(276	)
Comprehensive income		$	2,174			$	2,046			$	4,484			$	2,793

The accompanying notes are an integral part of the consolidated financial statements.

Intermountain Community Bancorp

1.		Basis of Presentation:
		The foregoing unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.
		The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Intermountain Community Bancorp’s (“Intermountain’s” or “ the Company’s” ) consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Intermountain’s consolidated financial position and results of operations.
2.		Advances from the Federal Home Loan Bank of Seattle:
		The Company had an advance from the Federal Home Loan Bank of Seattle totaling $5.0 million at June 30, 2006. The advance bears a fixed interest rate of 2.71% and matures on June 18, 2008.
3.		Other Borrowings:
		The components of other borrowings are as follows (in thousands):

		June 30,				December 31,
		2006				2005
Term note payable (1)		$	8,279			$	8,279
Term note payable (2)			8,248				8,248
Term note payable (3)			1,032				—
Line of credit (4)			375				—
Total other borrowings		$	17,934			$	16,527

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 June 30,
		(Dollars in thousands, except per share amounts)
		2006												2005
						Weighted												Weighted
		Net				Avg.				Per Share				Net				Avg.				Per Share
		Income				Shares(1)				Amount				Income				Shares(1)				Amount
Basic computations		$	1,839				7,293,887			$	0.25			$	1,574				6,351,178			$	0.25
Effect of dilutive securities:
Common stock options							386,832				(0.01	)							509,179				(0.02	)
Diluted computations		$	1,839				7,680,719			$	0.24			$	1,574				6,860,357			$	0.23
Antidilutive options not included in diluted earnings per share							—												—

		Six Months Ended June 30,
		(Dollars in thousands, except per share amounts)
		2006												2005
						Weighted												Weighted
		Net				Avg.				Per Share				Net				Avg.				Per Share
		Income				Shares(1)				Amount				Income				Shares(1)				Amount
Basic computations		$	4,401				7,270,770			$	0.61			$	3,069				6,312,954			$	0.49
Effect of dilutive securities:
Common stock options							396,175				(0.04	)							536,725				(0.04	)
Diluted computations		$	4,401				7,666,945			$	0.57			$	3,069				6,849,679			$	0.45
Antidilutive options not included in diluted earnings per share							—												—

5.		Operating Expenses:
		The following table details Intermountain’s components of total operating expenses:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
						(Dollars in thousands)
Salaries and employee benefits		$	5,563			$	3,472			$	10,180			$	6,653
Occupancy expense			1,201				915				2,316				1,857
Advertising			274				172				432				303
Fees and service charges			231				205				450				509
Printing, postage and supplies			402				261				754				554
Legal and accounting			320				317				611				609
Other expense			898				855				1,851				1,518
Total operating expenses		$	8,889			$	6,197			$	16,594			$	12,003

6.		Equity Compensation Plans:
		Effective January 1, 2006, the Company adopted FASB Statement No. 123 (R), “Share-Based Payment”. Statement 123 (R) requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued. Statement 123 (R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123 (R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting For Stock Issued to Employees”. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. The impact of Statement 123 (R), if it had been in effect, on the net earnings and related per share amounts for the years ended December 31, 2005, 2004 and 2003 was disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2005.
		As the Company adopted Statement 123 (R) using the modified prospective transition method, prior periods have not been restated. Under this method, the Company is required to record stock-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of adoption. The Company measures stock-based compensation cost using the Black-Scholes option pricing model (assumptions noted in the following table) for unvested stock option grants and anticipates using this pricing model for future grants. The Company did not grant options to purchase Intermountain common stock during either the six months ended June 30, 2006 or 2005.Forfeitures did not affect the calculated expense based upon historical activities of option grantees.

Dividend yield			0.0	%
Expected volatility			17.0% - 46.6	%
Risk free interest rates			4.0% - 7.1	%
Expected option lives		5 - 10 years

Under the 1999 Director Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together, the “Stock Option Plans”), options to purchase Intermountain common stock have been granted to employees and directors at prices equal to the fair market value of the underlying stock on the dates the options were granted. The options vest 20% per year, over a five-year period, and expire in 10 years. At June 30, 2006, there were 242,059 shares available for grant.

For the six months ended June 30, 2006 and 2005, stock option compensation expense recognized related to the vesting of these options totaled and $71 thousand and $0, respectively. The Company has approximately $335 thousand remaining to expense related to the non-vested stock options outstanding at June 30, 2006. This expense recognized under the provisions of FAS 123 (R) will be recorded over a weighted average period of 20.3 months and was based on the fair calculated using the Black-Scholes valuation model (assumptions noted in above table).

A summary of the changes in stock options outstanding for the six months ended June 30, 2006 is presented below (dollars in thousand, except per share amounts)

						Weighted				Weighted
		Number				Average				Average				Aggregate
		of				Exercise				Remaining				Intrinsic
		Shares(1)				Price(1)				life(Years)				Value
Outstanding at January 1, 2006			634,645			$	5.69
Granted			—				—
Exercises			(36,845	)			4.90							$	539
Forfeited			(396	)			14.24
Outstanding at June 30, 2006			597,404				5.73				4.78				9,929
Exercisable at June 30, 2006			513,555			$	5.13				3.97			$	8,111

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 23,402 and 23,125 restricted shares with an intrinsic value of $486 thousand and $342 thousand and a weighted-average grant date fair value of $345 thousand and $451 thousand, during the six months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, restricted stock compensation expense totaled $52 thousand and $3 thousand, respectively.

Total stock based compensation expense related to stock options and restricted stock grants recorded in the six months ended June 30, 2006 and 2005 totaled $123 thousand and $3 thousand, respectively. Other expense related to stock options issued below market price at issue date totaled $22 thousand for both the six months ended June 30, 2006 and 2005.

A summary of the Company’s nonvested restricted shares as of June 30, 2006 and changes during the six months ended June 30, 2006, is presented below:

						Weighted-
						Average
						Grant-Date
Nonvested Shares		Shares (2)				Fair Value
Nonvested at January 1, 2006			22,919			$	15.06
Granted			23,402				19.29
Vested			(4,392	)			15.05
Forfeited			(220	)			15.05
Nonvested at June 30, 2006			41,709			$	17.43

The following table provides additional details regarding exercises of stock option for the six months ended June 30, 2006 and 2005:

		Six Months Ended
		June 30,
		2006				2005
		(Dollars in thousands)
Number of options exercised			36,845				134,421
Cash Received		$	181			$	570
Tax Benefit
-Based on Black-Scholes fair value			128				122
-Benefit in excess of Black-Scholes fair value			36				37
Intrinsic Value			539				1,563

7.		Subsequent Events:
		At the July 20, 2006 Board of Directors meeting, the Board approved a revision to Intermountain’s Articles of Incorporation to increase the number of authorized shares to 26,400,000 from 24,000,000. This amendment was adopted in connection with Intermoutain’s recent 10% stock dividend, and did not require shareholder approval.
		On July 11, 2006, the Company entered into a $30.0 million structured repurchase agreement with JP Morgan. The purpose of the structured repurchase agreement was to provide net interest margin protection in the event of a declining interest rate cycle.
8.		New Accounting Policies:
		On June 1, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS No.154”). SFAS No. 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting and reporting a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 requires retrospective application for voluntary changes in accounting principle, unless it is impracticable to determine either the cumulative effect or the period-specific effects of the change. The requirements became effective for the Company for accounting changes beginning January 1, 2006. The Company has adopted SFAS No. 154.
		In March 2006, the FASB issued SFAS 156 “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140 (“SFAS No. 156”). SFAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. It requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value. SFAS No. 156 permits an entity to choose either an amortization or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. It also permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights. Lastly, it requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and servicing liabilities. Adoption of the initial measurement provision of this statement is required immediately. The adoption of this provision had no significant effect on the Company’s Consolidated Financial Statements. The Company is required to adopt all other provisions of this statement beginning in 2007 although earlier adoption was permitted in 2006. As of June 30, 2006, the Company had not adopted the remaining provisions of SFAS No. 156. Management is currently evaluating the impact that the adoption of the remaining provisions of SFAS No. 156 will have on its consolidated financial statements.
		In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN No. 48”). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. Intermountain is currently assessing the impact, if any, that the adoption of this Interpretation will have on its consolidated financial statements.

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see “Forward-Looking Statements.” Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in Intermountain’s Form 10-K for the year ended December 31, 2005.

General

     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, Washington and Oregon.

     Intermountain conducts its primary business through its bank subsidiary, Panhandle State Bank. Panhandle maintains its main office in Sandpoint, Idaho and has 17 other branches. In addition to the main office, seven branch offices operate under the name of Panhandle State Bank, eight of the branches operate under the name of Intermountain Community Bank, a division of Panhandle State Bank and two operate under the name of Magic Valley Bank, a division of Panhandle State Bank. Effective November 2, 2004, Panhandle acquired Snake River Bancorp, Inc. (“Snake River”), which included two branches now operating under the name of Magic Valley Bank, a division of Panhandle State Bank. In April 2006, Intermountain opened a branch in Spokane, Washington. Intermountain focuses its banking and other services on individuals, professionals, and small to medium-sized businesses throughout its market area.

     In April 2006, the company announced plans to build a second branch in Twin Falls, Idaho, which is scheduled to open in September 2006. In addition, the Company announced plans to build a branch in Spokane Valley, Washington to replace the current Spokane Valley branch. This branch is schedule to open in spring 2007. In April 2006, the company also announced plans to construct a 90,000 square foot Financial and Technical Center in Sandpoint, Idaho. Groundbreaking ceremonies were held on July 19, 2006, with completion expected in October 2007. Intermountain will occupy approximately 60% of the building as it relocates its Sandpoint branch and administrative offices. These expansions will allow the company to better serve its existing customer base and expand its banking focus into future targeted market areas.

     At June 30, 2006, Intermountain had total consolidated assets of $784.9 million. Intermountain’s subsidiary, Panhandle State Bank is regulated by the Idaho Department of Finance, the State of Washington Department of Financial Institutions, the Oregon Division of Finance and Corporate Securities, and 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 banking organizations, local community banks, savings banks, savings and loans, and credit unions throughout its market area. Based on asset size at June 30, 2006, Intermountain is the largest independent commercial bank headquartered in the state of Idaho.

     Intermountain offers many different banking and financial services to its communities including lending activities, deposit services, investment and other services. Intermountain offers a variety of loans tailored to meet the credit needs of the communities it serves. Types of loans offered include consumer, real estate, business and agricultural. A full range of deposit services are available including checking, savings and money market as well as 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 with branches operating in a decentralized community bank structure, and plans expansion in markets that are within 150 miles of its existing branches. The Company is pursuing a balance of asset and earnings growth by focusing on increasing market share in its present locations, the opening of new branches, and merging with or acquiring community banks. There can be no assurance that Intermountain will be successful in executing these plans.

Critical Accounting Policies

     The accounting and reporting policies of Intermountain conform to Generally Accepted Accounting Principals (“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 of Financial Condition and Results of Operations.

     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 reverses any previously accrued interest recognized in income deemed uncollectible. 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 less than 90 days delinquent, has performed in accordance with contractual terms for a reasonable period of time, and when the collectibility of the total contractual principal and interest is no longer in doubt.

     Allowance For Loan Losses., 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 and other factors for each loan type. The allowance for loan losses related to impaired loans which are collateralized is based on the fair value of the collateral as determined by management evaluation. 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, 2006. 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, which could cause Intermountain to experience increases in nonperforming assets, delinquencies and losses on loans.

     Investments. Assets in the investment portfolios are initially recorded at cost, including 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 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 were to fall below their amortized cost and the decline is deemed to be other than temporary, the securities would be written down to current market value and the write down would 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, 2006. 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, and is dependent upon Intermountain’s ability to provide quality, cost effective services in a competitive market place. As such, goodwill is supported ultimately by the 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 would 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, 2006. However, future events could cause management to conclude that Intermountain’s goodwill is impaired, which would result in the recording of 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.

     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.

Intermountain Community Bancorp
Comparison of the Three and Six Month Periods Ended June 30, 2006 and 2005

Results of Operations

     Overview. Intermountain recorded net income of $1.8 million, or $0.24 per diluted share, for the three months ended June 30, 2006, compared with net income of $1.6 million, or $0.23 per diluted share, for the three months ended June 30, 2005. Intermountain recorded net income of $4.4 million, or $0.57 per diluted share, for the six months ended June 30, 2006, compared with net income of $3.1 million, or $0.45 per diluted share, for the six months ended June 30, 2005. The increases primarily reflect steady balance sheet growth, an improving net interest margin and strong gains in other income, excluding a loss on the sale of securities. Net income for the quarter ended June 30, 2006 was reduced by a loss on the sale of investment securities of $983,000 as the company restructured its investment portfolio. The company undertook the restructuring to improve both its expected future investment yield and reduce long-term portfolio risk, and expects to recoup the pre-tax loss within 9 months from higher portfolio earnings.

     Impacted by the securities losses and costs associated with the start-up of several new branches, the annualized return on average assets (“ROA”) was 0.96% and 0.98% for the three months ended June 30, 2006 and 2005, respectively, and 1.18% and 0.98% for the six months ended June 30, 2006 and 2005, respectively. The annualized return on average equity (“ROE”) was 10.6% and 13.5% for the three months ended June 30, 2006 and 2005, respectively, and 13.1% and 13.4% for the six months ended June 30, 2006 and 2005, respectively.

     Net Interest Income. The most significant component of earnings for the Company is net interest income, which is the difference between interest income, primarily from the Company’s loan and investment portfolios, and interest expense, primarily on deposits and other borrowings. During the three months ended June 30, 2006 and 2005, net interest income was $10.2 million and $7.2 million, respectively, an increase of 42.8%. During the six months ended June 30, 2006 and 2005, net interest income was $19.5 million and $13.6 million, respectively, an increase of 43.8%. The increase resulted primarily from increases in the balance of interest-earning assets and a growing net interest margin as yields on assets increased at a faster pace than the increase in the cost of deposits and borrowings.

     Average interest-earning assets increased by 12.6% to $695.6 million for the three months ended June 30, 2006, compared to $617.6 million for the three months ended June 30, 2005. Average loans increased by 24.3% or $117.3 million, while average investments decreased by 29.3% or $39.4 million over the same period in 2005. The changes in the components of average interest-earning assets are due to a combination of strong loan growth in the company’s existing markets, partially offset by the principal paydowns and maturities in securities portfolio during the year. During the three months ending June 30, 2006, the company restructured its securities portfolio, selling approximately $24.2 million in lower yielding securities and purchasing approximately $26.3 million of high yielding securities. Average interest-bearing liabilities increased by 13.7% or $81.3 million over June 30, 2005, driven by increases in average deposits and other borrowings of 17.2% or $90.4 million and 4.7% or $2.4 million, respectively. The average balance of advances decreased by $11.5 million or 69.7% during this same period. Deposit increases reflected growth in the bank’s existing markets. The decrease in average investments helped fund loan growth both during the three and six months ended June 30, 2006, resulting in a decrease in the average balance of advances during the three months ended June 30, 2006. Average net interest spread during the three months ended June 30, 2006 and 2005 was 5.84% and 4.59%, respectively. Higher yields on loans and securities combined to produce this increase, which was partially offset by an increase in the cost of interest- bearing liabilities and other funding costs.

     Average interest-earning assets increased by 12.8% to $667.3 million for the six months ended June 30, 2006, compared to $591.6 million for the six months ended June 30, 2005. Average loans increased by 22.4% or $103.2 million, while average investments decreased by 21.0% or $27.6 million over the same period in 2005. The increase in the components of average interest-earning assets largely mirrored the quarter-over-quarter results, with significant loan growth from existing markets and a decrease in the investment portfolio due to principal paydowns and maturities. Average interest-bearing liabilities increased by 17.1% or $97.5 million, while average deposits and other borrowings increased by 18.9% or $96.4 million and 11.5% or $5.7 million, respectively. The average balance of advances decreased by $4.6 million or 47.8%. The same factors from the quarterly results also influenced year to date results, with the decrease in average investments and deposit growth funding loan growth.. Average net interest spread during the six months ended June 30, 2006 and 2005 was 5.90% and 4.57%, respectively. Asset-side yield and mix improvements generated the increase, partially offset by increases in the cost of interest bearing liabilities, resulting from increased deposit costs and additional use of non-deposit borrowings.

     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 anticipated 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 $762 thousand and $994 thousand for the three months ended June 30, 2006 and 2005, respectively. Intermountain recorded provisions for losses on loans of $666 thousand and $1.3 million for the six months ended June 30, 2006 and 2005, respectively. The provision reflects the analysis and assessment of the relevant factors mentioned in the preceding paragraph. The decrease in the loss provision from the prior period resulted from improvement in loan portfolio credit quality and a refinement in the calculation of the loan loss reserve for the loan portfolio.

     The following table summarizes loan loss allowance activity for the periods indicated.

		Six Months Ended June 30,
		2006				2005
		(Dollars in thousands)
Balance at January 1		$	8,517			$	6,902
Allowance associated with the sale of loans			—				(96	)
Provision for losses on loans			666				1,292
Amounts written off net of recoveries			(59	)			(11	)
Balance at June 30		$	9,124			$	8,087

     At June 30, 2006, Intermountain’s total classified assets were $7.2 million, compared with $5.4 million at June 30, 2005. Total nonperforming loans were $1.2 million at June 30, 2006, compared with $1.3 million at June 30, 2005. The increase in classified assets was primarily attributable to the increase in the loan portfolio and the addition of three loan relationships, all of which management feels are adequately collateralized and provided for in the allowance for loan loss. At June 30, 2006, Intermountain’s loan delinquency rate (30 days to 60 days) as a percentage of total loans was 0.17%, compared with 0.24% at June 30, 2005.

     Other Income. Total other income was $2.4 million and $2.5 million for the three months ended June 30, 2006 and 2005, respectively. Loss on sale of securities was $983 thousand and $2 thousand for the three months ended June 30, 2006 and 2005, respectively. During the three months ended June 30, 2006, Intermountain restructured its investment portfolio, selling approximately $24.2 million of lower yielding securities and purchasing approximately $26.3 million of higher yielding securities. This transaction resulted in a $983,000 loss on the sale of the securities. The company anticipates recouping the loss within 9 months of the transaction through higher yields on the new securities. Fees and service charge income increased by 31.1% to $2.8 million for the three months ended June 30, 2006 from $2.1 million for the same period last year. Total other income was $4.8 million and $4.5 million for the six months ended June 30, 2006 and 2005, respectively. Fees and service charge income increased by 25.8% to $4.9 million for the six months ended June 30, 2006 from $3.9 million for the same period last year, driven by continued strong mortgage activity, resulting in income from the sale of these loans.. For both the three and six months ended June 30, 2006, deposit service fees also increased, reflecting continued account and customer growth and increases in the deposit fee structure. Contract income from the bank’s secured deposit program also contributed to the increase in other income for the three and six months ended June 30, 2006.

     Operating Expenses. Operating expenses were $8.9 million for the three months ended June 30, 2006, a 43.4% increase compared to $6.2 million for the three months ended June 30, 2005. Operating expenses were $16.6 million for the six months ended June 30, 2006, a 38.2% increase compared to $12.0 million for the six months ended June 30, 2005. Recruitment expenses, building expenses and expanded staffing from the addition of the three new branches in Fruitland, Kellogg and downtown Spokane contributed to the increase in operating expenses over the three and six months ended June 30, 2005.

     Salaries and employee benefits were $5.6 million for the three months ended June 30, 2006, a 60.3% increase compared to $3.5 million for the three months ended June 30, 2005. Salaries and employee benefits were $10.2 million for the six months ended June 30, 2006, a 53.0% increase compared to $6.7 million for the six months ended June 30, 2005. The employee costs reflected increased recruitment costs and increased branch staffing as noted above, increased mortgage banking staff and additional administrative staff as a result of continued branch growth and expansion. At June 30, 2006, full-time-equivalent employees totaled 385, compared with 290 at June 30, 2005.

     Occupancy expenses were $1.2 million for the three months ended June 30, 2006, a 31.2% increase compared to $915 thousand for the same period one year ago. Occupancy expenses were $2.3 million for the six months ended June 30, 2006, a 24.7% increase compared to $1.9 million for the six months ended June 30, 2005. The increase was primarily due to costs associated with the three branches added in the first six months of 2006, additional square footage associated with administrative staff needed to support bank growth, and additional software and hardware costs related to the addition of new branch and administrative support staff.

     Income Tax Provision. Intermountain recorded federal and state income tax provisions of $1.1 million and $879 thousand for the three months ended June 30, 2006 and 2005, respectively. Intermountain recorded federal and state income tax provisions of $2.7 million and $1.7 million for the six months ended June 30, 2006 and 2005, respectively. The increased tax provision in 2006 over 2005 is due to the increase in pre-tax income. The effective tax rates were 37.8% and 35.8% for the three month ended June 30, 2006 and 2005, respectively. The effective tax rates were 37.8% and 36.1% for the six months ended June 30, 2006 and 2005, respectively. The increase in the effective tax rate reflects the company’s movement into a higher tax bracket and the expiration of several federal tax breaks at the end of 2005.

Financial Position

     Assets. At June 30, 2006, Intermountain’s assets were $784.9 million, up $51.2 million or 7.0% from $733.7 million at December 31, 2005. The growth in assets primarily reflected an increase in loans receivable offset by a small decrease in investments. The increase in loans receivable was funded by increases in customer deposits, decreases in investments and increased levels of repurchase agreements.

     Investments. Intermountain’s investment portfolio at June 30, 2006 was $83.9 million, a decrease of $6.7 million or 7.4% from the December 31, 2005 balance of $90.6 million. The decrease was primarily due to principal paydowns on the mortgage-backed securities portfolio and investment maturities. Funds from the net decrease were used to help fund the expansion of the loan portfolio. In May 2006, Intermountain sold approximately $24.2 million in lower yielding securities and replaced them with approximately $26.3 million of higher yielding securities. Intermountain realized a $983 thousand loss on the sale, which it anticipates recouping within the next 9 months through the higher yields on the purchases securities. As of June 30, 2006, the balance of the unrealized loss was $2.1 million, compared to an unrealized loss at December 31, 2005 of $2.2 million. Fluctuations in prevailing interest rates continue to cause volatility in this component of accumulated comprehensive loss in stockholders’ equity and may continue to do so in future periods.

     Loans Receivable. At June 30, 2006 net loans receivable totaled $610.7 million, up $55.7 million or 10.0% from $555.0 million at December 31, 2005. The increase reflects net increases in business and agricultural loans. During the six months ended June 30, 2006, total loan originations were $341.0 million compared with $288.4 million for the prior year’s comparable period, reflecting growing loan demand in the company’s markets. Continued increases in loan demand are anticipated over the next six months as a result of strong local economies, build-out in the bank’s new markets, and increases in the bank’s market share.

     The following table sets forth the composition of Intermountain’s loan portfolio. Loan balances exclude deferred loan origination costs and fees and allowances for loan losses.

		June 30, 2006								December 31, 2005
		Amount				%				Amount				%
		(Dollars in thousands)
Commercial (includes commercial real estate)		$	475,164				76.51			$	425,005				75.28
Residential real estate			111,648				17.98				107,554				19.05
Consumer			31,351				5.05				29,109				5.16
Municipal			2,870				0.46				2,856				0.51
Total loans receivable			621,033				100.00				564,524				100.00
Net deferred origination fees			(1,219	)							(971	)
Allowance for losses on loans			(9,124	)							(8,517	)
Loans receivable, net		$	610,690							$	555,036
Weighted average yield at end of period			7.25	%							7.90	%

The following table sets forth Intermountain’s loan originations.

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2006				2005				% Change				2006				2005				% Change
		(Dollars in thousands)
Commercial (includes commercial real estate)		$	169,783			$	132,671				28.0			$	273,202			$	223,500				22.2
Residential real estate			32,386				27,973				15.8				54,470				46,956				16.0
Consumer			7,347				10,903				(32.6	)			13,000				17,938				(27.5	)
Municipal			243				—				—				322				50				544.9
Total loans originated		$	209,759			$	171,547				22.3			$	340,994			$	288,444				18.2

     Office Properties and Equipment. Office properties and equipment increased 26.0% to $19.6 million from $15.5 million at December 31, 2005, due primarily to the construction of the new Twin Falls branch, the acquisition of land for Fruitland future expansion and the building of the Sandpoint Financial and Technical Center.

     BOLI and All Other Assets. Bank-owned life insurance (“BOLI”) and other assets increased to $18.9 million at June 30, 2006 from $16.7 million at December 31, 2005, due primarily to an increase in the net deferred tax asset, an increase in prepaid expenses, and an increase in accrued interest receivable.

     Deposits. Total deposits increased $43.4 million or 7.3% to $640.9 million at June 30, 2006, from $597.5 million at December 31, 2005, primarily due to increases in interest bearing demand accounts and savings and certificates of deposit accounts. The deposit market remains very competitive, with leveraged competitors offering high interest rates on various deposit products, particularly certificates of deposit. In response, Intermountain is refocusing its sales efforts on expanding deposit sales in its existing markets by targeting market segments with high levels of excess funds and concentrating on strengthening existing depositor relationships.

     The following table sets forth the composition of Intermountain’s deposit accounts at the dates indicated.

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

     Borrowings. Deposit accounts are Intermountain’s primary source of funds. Intermountain does, however, rely upon advances from the Federal Home Loan Bank of Seattle, repurchase agreements and other borrowings to supplement its funding and to meet deposit withdrawal requirements. These borrowings totaled $62.0 million and $59.3 million at June 30, 2006 and December 31, 2005, respectively. The increase is due primarily to additional borrowings to fund loan portfolio growth. See “Liquidity and Sources of Funds” for additional information.

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. Intermountain utilizes various tools to assess and manage interest rate risk, including an internal income simulation model that seeks to estimate the impact of various rate changes on the net interest income and net income of the bank. This model is validated by comparing results against various third-party estimations. Currently, the model and third-party estimates indicate that Intermountain is slightly asset-sensitive. An asset-sensitive bank generally sees improved net interest income in a rising rate environment, as its assets reprice more rapidly and/or to a greater degree than its liabilities. The opposite is true in a falling interest rate environment. When market rates fall, an asset-sensitive bank tends to see declining income.

     To minimize the long-term 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 and to the nationally recognized prime lending rate. 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 income by controlling its exposure to changing interest rates.

     On the liability side, Intermountain seeks to manage its interest rate risk exposure by maintaining a relatively high percentage of non-interest bearing demand deposits, interest-bearing demand deposits and money market accounts. These instruments tend to lag changes in market rates and may afford the bank more protection in changing interest rate environments. The Bank also utilizes various deposit pricing strategies and other borrowing sources to manage its rate risk.

     As discussed above, Intermountain uses a simulation model designed to measure the sensitivity of net interest income and net income to changes in interest rates. This simulation model is designed to enable Intermountain to generate a forecast of net interest income and net income 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. The results of the current modeling are within guidelines established by the company and reflect marginal performance improvement in the case of a rising rate environment, and a slight negative impact in a falling rate

environment. Given its current asset-sensitivity, Intermountain has implemented certain actions to protect the company’s financial performance in a period of falling market interest rates, including extending its investment portfolio duration and promoting more fixed-rate loans.

     Intermountain is continuing to pursue three strategies to manage the long-term level of its interest rate risk while increasing its net interest income and net income; 1) 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; 2) by the origination of certain long-term fixed-rate loans and investments that may provide protection should market rates begin to decline; and 3) 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 interest rate risk 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 negative 28% and a negative 26% at June 30, 2006 and December 31, 2005, respectively. Management attempts to maintain Intermountain’s gap position between positive 20% and negative 35%. At June 30, 2006 and December 31, 2005, Intermountain’s gap positions were within guidelines 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.”

Liquidity and Sources of Funds

     Intermountain’s primary sources of funds from assets include the collection of loan principal and interest payments, cash flows from various securities it invests in, and occasional sales of loans, investments or other assets. Liability financing sources consist primarily of customer deposits, advances from FHLB Seattle and other borrowings. Deposits increased to $640.9 million at June 30, 2006 from $597.5 million at December 31, 2005, primarily due to increases in interest bearing demand accounts, non-interest demand accounts and certificates of deposit. The net increase in deposits and borrowings was used to fund the increase in loan volume. At June 30, 2006 and December 31, 2005, securities sold subject to repurchase agreements were $39.1 million and $37.8 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, 2006, cash used in investing activities consisted primarily of the funding of new loan volumes. During the same period, cash provided by financing activities consisted primarily of increases in demand deposits, money market accounts and savings deposits.

     Intermountain’s credit line with FHLB Seattle provides for borrowings up to a percentage of its total assets subject to general collateralization requirements. At June 30, 2006, the Company’s credit line represented a total borrowing capacity of approximately $71.2 million, of which $5.0 million was being utilized. Intermountain also borrows on an unsecured basis from correspondent banks and other financial entities. Correspondent banks and other financial entities provided additional borrowing capacity of $30.0 million at June 30, 2006. As of June 30, 2006 there was $375,000 in unsecured funds borrowed.

     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 alternate investments. The liquidity ratios may vary from time to time, depending on economic conditions, savings flows and loan funding needs.

Capital Resources

     Intermountain’s total stockholders’ equity was $70.6 million at June 30, 2006 compared with $64.3 million at December 31, 2005. The increase in total stockholders’ equity was primarily due to the increase in net income. Stockholders’ equity was 9.0% of total assets at June 30, 2006 compared with 8.8% at December 31, 2005. The increase in this ratio is due to the increase in total equity from net income at June 30, 2006 as compared to December 31, 2005 which was proportionately larger than the increase in assets. On May 31, 2006, Intermountain distributed a Board of Directors approved 10% stock dividend to shareholders of record on May 15, 2006.

     At June 30, 2006, Intermountain had an unrealized loss of $2.1 million on investments classified as available for sale compared with an unrealized loss of $2.2 million on investments classified as available for sale at December 31, 2005. Fluctuations in prevailing interest rates continue to cause volatility in this component of accumulated comprehensive 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 indentures 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 can be called for redemption beginning in March 2008 by the Company at 100% of the aggregate principal plus accrued and unpaid interest. See Note 3 of “Notes to Consolidated Financial Statements.”

     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 plan to enhance their 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, 2006, Intermountain and its subsidiary, Panhandle State Bank exceeded all such regulatory capital requirements and was “well-capitalized” pursuant to Federal Finance Institution Examination Council (“FFIEC”) regulations.

     The following tables set forth the amounts and ratios regarding actual and minimum core Tier 1 risk-based and total risk-based capital requirements, together with the amounts and ratios required in order to meet the definition of a “well-capitalized” institution as reported on the quarterly FFIEC call report at June 30, 2006.

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

Off Balance Sheet Arrangements and Contractual Obligations

     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, 2006.

		Payments Due by Period
						Less than								Over				More than
		Total				1 year				1 to 3 years				3 to 5 years				5 years
		(Dollars in thousands)
Long-term debt(1)		$	49,688			$	1,339			$	7,674			$	2,543			$	38,132
Short-term debt (1)			39,480				39,480				—				—				—
Capital lease obligations			—				—				—				—				—
Operating lease obligations			8,617				846				1,353				844				5,574
Purchase obligations(2)			1,804				1,359				445				—				—
Other long-term liabilities reflected on the registrant’s balance sheet under GAAP			—				—				—				—				—
Total		$	99,589			$	43,024			$	9,472			$	3,387			$	43,706

New Accounting Policies

SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS No.154”). On June 1, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS No.154”). SFAS No. 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 requires retrospective application for voluntary changes in accounting principle, unless it is impracticable to determine either the cumulative effect or the period-specific effects of the change. The requirements became effective for the Company for accounting changes beginning January 1, 2006. The Company has adopted SFAS No. 154.

SFAS No. 156 Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140 (SFAS No. 156”). In March 2006, the FASB issued SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” which requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. It requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value. SFAS No. 156 permits an entity to choose either an amortization or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. It also permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights. Lastly, it requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and servicing liabilities. Adoption of the initial measurement provision of this statement is required immediately. The adoption of this provision had no significant effect on the Company’s Consolidated Financial Statements. The Company is required to adopt all other provisions of this statement beginning in 2007 although earlier adoption was permitted in 2006. As of June 30, 2006, the Company had not adopted the remaining provisions of SFAS No. 156. Management is currently evaluating the impact that the adoption of the remaining provisions of SFAS No. 156 will have on its consolidated financial statements.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN No. 48”). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. Intermountain is currently assessing the impact, if any, that the adoption of this Interpretation will have on its consolidated financial statements.

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;
•		Intermountain’s ability to successfully integrate entities that or have been acquired;
•		changes in consumer spending and saving habits; and
•		Intermountain’s success at managing the risks involved in the foregoing.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

The information set forth under the caption Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, is hereby incorporated herein by reference.

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, 2006, Intermountain 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 1A Risk Factors

There have been no material changes from the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3 — Defaults Upon Senior Securities

Not applicable.

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

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

Directors with terms expiring in 2009:

Ford Elsaesser
Votes cast for:			3,321,968
Votes Withheld:			68,642
Curt Hecker
Votes cast for:			3,384,227
Votes Withheld:			6,383
Michael J. Romine
Votes cast for:			3,384,290
Votes Withheld:			6,320
Jerry Smith
Votes cast for:			3,384,965
Votes Withheld:			5,645

Directors with terms expiring in 2007:

Jim Patrick
Votes cast for:			3,387,608
Votes Withheld:			3,002

2.

To ratify the appointment of BDO Seidman, LLP as the independent public accountants for Intermountain Community Bancorp for 2006.

Votes cast for:			3,578,514
Votes Withheld:			12,885
Votes Abstained:			20,127

Item 5 — Other Information

Not Applicable

Item 6 — Exhibits

Exhibit No.		Exhibit
3.1		Articles of Incorporation, incorporating all amendments
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.

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
		(Registrant)
August 11, 2006		By:		/s/ Curt Hecker
Date				Curt Hecker
				President
				and Chief Executive Officer
August 11, 2006		By:		/s/ Doug Wright
Date				Doug Wright
				Executive Vice President
				and Chief Financial Officer