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, 2007

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)

(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 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       þ Accelerated filer       o 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 3, 2007
Common Stock (no par value)		8,221,911

 

 

Intermountain Community Bancorp

FORM 10-Q
For the Quarter Ended June 30, 2007

TABLE OF CONTENTS

PART I — Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets for June 30, 2007 and December 31, 2006			3
Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006			4
Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006			5
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2007 and 2006			7
Notes to Consolidated Financial Statements			8
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk			25
Item 4 - Controls and Procedures			25
PART II - Other Information
Item 1 - Legal Proceedings			26
Item 1A - Risk Factors			26
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3 - Defaults Upon Senior Securities			26
Item 4 - Submission of Matters to a Vote of Security Holders			26
Item 5 - Other Information			27
Item 6 - Exhibits			27
Signatures			28
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I — Financial Information

		June 30,				December 31,
		2007				2006
		(Dollars in thousands)
ASSETS:
Cash and cash equivalents:
Interest bearing		$	85			$	72
Non-interest bearing and vault			21,742				24,305
Restricted cash			595				888
Federal funds sold			12,910				35,385
Available-for-sale securities, at fair value			115,108				118,490
Held-to-maturity securities, at amortized cost			6,949				6,719
Federal Home Loan Bank of Seattle (FHLB) stock, at cost			1,779				1,779
Loans held for sale			4,821				8,945
Loans receivable, net			741,025				664,403
Accrued interest receivable			7,813				7,329
Office properties and equipment, net			34,755				25,444
Bank-owned life insurance			7,558				7,400
Goodwill			11,662				11,662
Other intangible assets			801				881
Prepaid expenses and other assets, net			9,351				6,164
Total assets		$	976,954			$	919,866
LIABILITIES:
Deposits		$	734,398			$	693,686
Securities sold subject to repurchase agreements			110,568				106,250
Advances from Federal Home Loan Bank of Seattle			5,000				5,000
Cashiers checks issued and payable			6,116				6,501
Accrued interest payable			2,956				1,909
Other borrowings			29,403				22,602
Accrued expenses and other liabilities			5,575				5,838
Total liabilities			894,016				841,786
Commitments and contingent liabilities
Common stock, no par value; 29,040,000 shares authorized; 8,282,514 and 7,423,904 shares issued and 8,217,636 and 7,382,912 shares outstanding			76,419				60,395
Accumulated other comprehensive loss			(359	)			(111	)
Retained earnings			6,878				17,796
Total stockholders’ equity			82,938				78,080
Total liabilities and stockholders’ equity		$	976,954			$	919,866

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,
		2007				2006				2007				2006
		(Dollars in thousands, except per								(Dollars in thousands, except per
		share data)								share data)
Interest income:
Loans		$	16,310			$	12,970			$	31,371			$	24,577
Investments			1,642				943				3,638				1,964
Total interest income			17,952				13,913				35,009				26,541
Interest expense:
Deposits			4,630				2,955				9,064				5,607
Other borrowings			1,852				715				3,626				1,400
Total interest expense			6,482				3,670				12,690				7,007
Net interest income			11,470				10,243				22,319				19,534
Provision for losses on loans			(1,172	)			(762	)			(2,006	)			(666	)
Net interest income after provision for losses on loans			10,298				9,481				20,313				18,868
Other income:
Fees and service charges			2,756				2,813				5,272				4,867
Bank-owned life insurance			81				77				158				152
Gain/(loss) on sale of securities			—				(983	)			—				(983	)
Other			360				457				808				769
Total other income			3,197				2,364				6,238				4,805
Operating expenses			9,957				8,889				19,635				16,594
Income before income taxes			3,538				2,956				6,916				7,079
Income tax provision			(1,354	)			(1,117	)			(2,639	)			(2,678	)
Net income		$	2,184			$	1,839			$	4,277			$	4,401
Earnings per share – basic		$	0.27			$	0.23			$	0.52			$	0.55
Earnings per share – diluted		$	0.25			$	0.22			$	0.50			$	0.52
Weighted average shares outstanding - basic			8,194,522				8,023,276				8,178,025				7,997,847
Weighted average shares outstanding - diluted			8,605,032				8,448,791				8,610,927				8,433,640

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

Intermountain Community Bancorp

		Six Months Ended
		June 30,
		2007				2006
		(Dollars in thousands)
Cash flows from operating activities:
Net income		$	4,277			$	4,401
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			1,189				992
Stock-based compensation expense			195				145
Net amortization of premiums on securities			(243	)			31
Excess tax benefit related to stock-based compensation			(346	)			(36	)
Provisions for losses on loans			2,006				666
Amortization of core deposit intangibles			80				87
Gain on sale of loans, investments, property and equipment			(220	)			—
Loss on sale of loans, investments, property and equipment			—				983
Accretion of deferred gain on sale of branch property			(8	)			—
Net accretion of loan and deposit discounts and premiums			(33	)			(54	)
Deferred income tax benefit			321				137
Increase in cash surrender value of bank-owned life insurance			(158	)			(152	)
Change in:
Loans held for sale			4,124				(1,857	)
Accrued interest receivable			(484	)			(232	)
Prepaid expenses and other assets			(3,294	)			(3,079	)
Accrued interest payable			1,047				251
Accrued expenses and other liabilities			(863	)			(72	)
Net cash provided by operating activities			7,590				2,211
Cash flows from investing activities:
Purchases of available-for-sale securities			(56,849	)			(26,500	)
Proceeds from calls or maturities of available-for-sale securities			56,281				29,165
Principal payments on mortgage-backed securities			3,811				3,833
Purchases of held-to-maturity securities			(300	)			(649	)
Proceeds from calls or maturities of held-to-maturity securities			42				—
Origination of loans, net of principal payments			(81,606	)			(59,279	)
Proceeds from sale of loans			3,215				3,425
Purchase of office properties and equipment			(12,421	)			(3,900	)
Proceeds from sale of office properties and equipment			2,242				—
Net change in federal funds sold			22,475				5,880
Improvements and other changes in other real estate owned			271				795
Net change in restricted cash			293				(256	)
Net cash used in investing activities			(62,546	)			(47,486	)

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

		Six Months Ended
		June 30,
		2007				2006
		(Dollars in thousands)
Cash flows from financing activities:
Net change in demand, money market and savings deposits		$	48,416			$	35,216
Net change in certificates of deposit			(7,699	)			8,127
Net change in repurchase agreements			4,318				1,287
Principal reduction of note payable			(18	)			(98	)
Excess tax benefit related to stock-based compensation			346				36
Proceeds from exercise of stock options			224				181
Proceeds from other borrowings			6,819				375
Net cash provided by financing activities			52,406				45,124
Net change in cash and cash equivalents			(2,550	)			(151	)
Cash and cash equivalents, beginning of period			24,377				23,875
Cash and cash equivalents, end of period		$	21,827			$	23,724
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	13,459			$	6,744
Income taxes			3,090				3,550
Noncash investing and financing activities:
Restricted stock issued			698				435
Deferred gain on sale/leaseback			312				—
Purchase of land			—				1,130
10% stock dividend			15,186				13,637
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
		June 30,								June 30,
		2007				2006				2007				2006
		(Dollars in thousands)
Net income		$	2,184			$	1,839			$	4,277			$	4,401
Other comprehensive income (loss):
Change in unrealized gains (losses) on investments, net of reclassification adjustments			(941	)			572				(412	)			126
Less deferred income tax (expense) benefit			372				(237	)			163				(43	)
Net other comprehensive income (loss)			(569	)			335				(249	)			83
Comprehensive income		$	1,615			$	2,174			$	4,028			$	4,484

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, 2006. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.
		The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Intermountain Community Bancorp’s (“Intermountain’s” or “ the Company’s” ) consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Intermountain’s consolidated financial position and results of operations.
2.		Advances from the Federal Home Loan Bank of Seattle:
		The Company had an advance from the Federal Home Loan Bank of Seattle totaling $5.0 million at June 30, 2007. 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,
		2007				2006
Term note payable (1)		$	8,279			$	8,279
Term note payable (2)			8,248				8,248
Term note payable (3)			997				1,015
Term note payable (4)			11,879				—
Term note payable (5)			—				5,060
Total other borrowings		$	29,403			$	22,602

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)
		2007												2006
						Weighted												Weighted
		Net				Avg.				Per Share				Net				Avg.				Per Share
		Income				Shares(1)				Amount				Income				Shares(1)				Amount
Basic computations		$	2,184				8,194,522			$	0.27			$	1,839				8,023,276			$	0.23
Effect of dilutive securities:
Common stock options and stock grants							410,510				(0.02	)							425,515				(0.01	)
Diluted computations		$	2,184				8,605,032			$	0.25			$	1,839				8,448,791			$	0.22

		Six Months Ended June 30,
		(Dollars in thousands, except per share amounts)
		2007												2006
						Weighted												Weighted
		Net				Avg.				Per Share				Net				Avg.				Per Share
		Income				Shares(1)				Amount				Income				Shares(1)				Amount
Basic computations		$	4,277				8,178,025			$	0.52			$	4,401				7,997,847			$	0.55
Effect of dilutive securities:
Common stock options and stock grants							432,902				(0.02	)							435,793				(0.03	)
Diluted computations		$	4,277				8,610,927			$	0.50			$	4,401				8,433,640			$	0.52

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
						(Dollars in thousands)
Salaries and employee benefits		$	6,322			$	5,563			$	12,442			$	10,180
Occupancy expense			1,445				1,201				2,837				2,316
Advertising			353				274				571				432
Fees and service charges			392				231				672				450
Printing, postage and supplies			402				402				747				754
Legal and accounting			334				320				606				611
Other expense			709				898				1,760				1,851
Total operating expenses		$	9,957			$	8,889			$	19,635			$	16,594

6.		Equity Compensation Plans:
		Effective January 1, 2006, the Company adopted FASB Statement No. 123 (R), “Share-Based Payment”. Statement 123 (R) requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued. Statement 123 (R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
		The Company adopted Statement 123 (R) using the modified prospective transition method. Under this method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of adoption. The Company measured share-based compensation cost using the Black-Scholes option pricing model for stock option grants prior to January 1, 2006 and anticipates using this pricing mode for future grants. Forfeitures did not affect the calculated expense based upon historical activities of option grantees.
		The Company utilizes its stock to compensate employees and Directors under the 1999 Director Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together the “Stock Option Plans”). Options to purchase Intermountain common stock have been granted to employees and directors under the Stock Option Plans at prices equal to the fair market value of the underlying stock on the dates the options were granted. The options vest 20% per year, over a five-year period, and expire in 10 years. At June 30, 2007, there were 247,657 shares available for grant. The Company did not grant options to purchase Intermountain common stock during either the six months ended June 30, 2007 or 2006.
		For the six months ended June 30, 2007 and 2006, stock option expense totaled $65,000 and $71,000, respectively. The Company has approximately $200,000 remaining to expense related to the non-vested stock options outstanding at June 30, 2007. This expense will be recorded over a weighted average period of 14 months. The expense for the stock option expense was based on the fair value of options granted calculated using the Black-Scholes valuation model per FAS 123R. Assumptions used in the Black-Scholes option-pricing model for options issued in years prior to 2005 are as follows:

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

In 2003, shareholders approved a change to the 1999 Employee Option Plan to provide for the granting of restricted stock awards. The Company has granted restricted stock to directors and employees beginning in 2005. The restricted stock vests 20% per year, over a five-year period. The Company granted 32,174 and 25,743 restricted shares with a grant date fair value of $698,000 and $451,000 during the six months ended June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, restricted stock expense totaled

		$107,000 and $52,000, respectively. Total expense related to stock-based compensation recorded in the six months ended June 30, 2007 and 2006 was $195,000 and $145,000, respectively.
		A summary of the changes in stock options outstanding for the six months ended June 30, 2007 is presented below:

		Six months ended June 30, 2007
		(dollars in thousands, except per share amounts)
						Weighted-
						Average
		Number of				Exercise
		Shares (1)				Price (1)
Beginning Options Outstanding			575,945			$	5.35
Options Granted			—				—
Exercises			55,652				4.18
Forfeitures			944				9.13
Ending options outstanding			519,349				5.48
Exercisable at June 30			469,497			$	5.07

		The total intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 were $854,000 and $539,000, respectively.
		A summary of the Company’s nonvested restricted shares as of June 30, 2007 and changes during the six months ended June 30, 2007 is presented below:

						Weighted-
						Average
		Number of				Grant-Date
Nonvested Shares		Shares (1)				Fair Value (1)
Nonvested at January 1, 2007			45,091			$	17.23
Granted			32,174				21.72
Vested			(9,718	)			17.15
Forfeited			(2,669	)			13.91
Nonvested at June 30, 2007			64,878			$	19.63

		As of June 30, 2007, there was $1.2 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under this plan. This cost is expected to be recognized over a weighted-average period of 4.0 years.
7.		New Accounting Pronouncements:
		In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”. SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 also amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued by the Company after January 1, 2007. This Statement did not have a material impact on the Company’s consolidated financial statements.

		In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140.” SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value. In addition, entities are permitted to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment. Beginning with the fiscal year in which an entity adopts SFAS No. 156, it may elect to subsequently measure a class of servicing assets and liabilities at fair value. Post adoption, an entity may make this election as of the beginning of any fiscal year. An entity that elects to subsequently measure a class of servicing assets and liabilities at fair value should apply that election to all new and existing recognized servicing assets and liabilities within that class. The effect of remeasuring an existing class of servicing assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The statement also requires additional disclosures. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. This Statement did not have a material impact on the Company’s consolidated financial statements.
		In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109” (FIN 48). FIN 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second is measurement. For recognition, an enterprise judgmentally determines whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the “more-likely-than-not” recognition threshold it is measured and recognized in the financial statements. If a tax position does not meet the “more-likely-than-not” recognition threshold, the benefit of that position is not recognized in the financial statements. Tax positions that meet the “more-likely-than-not” recognition threshold at the effective date of FIN 48 may be recognized, or continue to be recognized, upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. This Statement was effective January 1, 2007 and did not have a material effect on the Company’s consolidated financial statements.
		In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 does not require any new fair value measurements; rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company is evaluating the impact of the adoption of SFAS No. 157 on its consolidated financial statements.
		On September 20, 2006, the FASB ratified Emerging Issue Task Force (EITF) Issue 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (FTB 85-4), Accounting for Purchases of Life Insurance” (EITF 06-5). EITF 06-5 addresses the methods by which an entity should determine the amounts that could be realized under an insurance contract at the consolidated balance sheet date when applying FTB 85-4, and whether the determination should be on an individual or group policy basis. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. This Statement did not have a material impact on the Company’s consolidated financial statements.
		In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value – with changes in fair value reported in earnings – and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that SFAS No. 159 may have on its future consolidated financial statements.

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

     This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see “Forward-Looking Statements.” Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in Intermountain’s Form 10-K for the year ended December 31, 2006.

General

     Intermountain Community Bancorp (“Intermountain” or “the Company”) is a financial 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 focuses its banking and other services on individuals, professionals, and small to medium-sized businesses throughout its market area.

     Intermountain conducts its primary business through its bank subsidiary, Panhandle State Bank. Panhandle maintains its main office in Sandpoint, Idaho and has 18 other branches. In addition to the main office, seven branch offices operate under the name Panhandle State Bank, eight branches operate under the name Intermountain Community Bank, a division of Panhandle State Bank and three operate under the name 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 Magic Valley Bank name.

     In March 2007, the Company opened a loan production office in Nampa, Idaho to capitalize on the rapidly growing Ada and Canyon County markets. The Company is also constructing a new building, the Sandpoint Financial and Technical Center, with completion expected in early 2008. Intermountain will occupy approximately 60% of the building as it relocates its Sandpoint branch, executive offices and administrative offices from several other buildings nearby. Additionally, the Company is building a new branch in Spokane Valley, Washington to replace the current Spokane Valley branch. The new branch is scheduled to open in late August 2007. These expansions will allow the Company to better serve its existing and prospective customer base in those markets and consolidate administrative staff into fewer locations.

     Panhandle State Bank, the Company’s banking subsidiary, acquired Premier Financial Services in late 2006 for a combination of Intermountain stock and cash. Premier Financial Services was a private investment firm that had partnered with Panhandle for many years in offering investment advisory services to bank clients. The new Panhandle division operates under the name Intermountain Community Investment Services (“ICI”). It provides advisory services and offers non FDIC-insured investment and insurance products to bank customers.

     Based on asset size at June 30, 2007, Intermountain is the largest independent commercial bank headquartered in the state of Idaho, with consolidated assets of $977.0 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.

     Intermountain offers banking and financial services that fit the needs of the communities it serves. Lending activities include consumer, commercial, commercial real estate, residential construction, mortgage and agricultural loans. A full range of deposit services are available including checking, savings and money market accounts as well as various types of certificates of deposit. Trust and wealth management services, investment services, and business cash management solutions round out the Company’s financial offerings.

     Intermountain operates a multi-branch banking system with branches operating in a decentralized community bank structure. Intermountain plans to strategically grow its geographical footprint through expansion in promising growth markets in the Pacific Northwest. The Company is pursuing a balance of asset and earnings growth by targeting profitable customer groups in its existing markets, opening offices with experienced, local staff in new markets, and acquiring other companies that present strategic opportunities and a close cultural fit with Intermountain. 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 Principles (“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 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. 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 as well as other environmental and qualitative factors. 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, 2007. 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, a sharp increase in inflation or rapidly rising interest rates 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 portfolio 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 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, 2007. 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 each December. No impairment was considered necessary during the six months ended June 30, 2007. 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, 2007 and 2006

Results of Operations

     Overview. Intermountain recorded net income of $2.2 million, or $0.25 per diluted share, for the three months ended June 30, 2007, compared with net income of $1.8 million, or $0.22 per diluted share, for the three months ended June 30, 2006. Intermountain recorded net income of $4.3 million, or $0.50 per diluted share, for the six months ended June 30, 2007, compared with net income of $4.4 million, or $0.52 per diluted share, for the six months ended June 30, 2006. The decline in earnings over the six-month period reflected an increase in the Company’s loan loss provision and the negative effects of an inverted yield curve on the Company’s net interest margin.

     The annualized return on average assets (“ROA”) was 0.92% and 0.96% for the three months ended June 30, 2007 and 2006, respectively, and 0.91% and 1.18% for the six months ended June 30, 2007 and 2006, respectively. The annualized return on average equity (“ROE”) was 10.7% and 10.6% for the three months ended June 30, 2007 and 2006, respectively, and 10.7% and 13.1% for the six months ended June 30, 2007 and 2006, respectively. Over these periods of time, the Company has continued to expand its customer base and asset balances, contributing to strong increases in both interest and non-interest income. However, these increases have been offset by increasing interest expenses as deposit pricing adjusted higher, increasing operating expenses related to continued growth and additional regulatory compliance requirements, and an increase in the loan loss provision for 2007 due to growth in the loan portfolio and losses on two larger loan relationships.

     The Company continues to adjust to a changing market environment. Although Intermountain operates in some of the strongest growth markets in the nation, it, along with most of its peer group, is currently facing strong challenges,

including: (1) a slowing housing market, which is weakening real estate and consumer loan demand; (2) a volatile, but still inverted yield curve, limiting the opportunity for expansion of the Company’s net interest margin; (3) a slower economy, signaling a return to loan loss provision and credit charge-off levels that are more consistent with longer-term historical averages; and (4) expanding regulatory compliance expectations. Intermountain management is addressing the current challenges proactively with a view toward building long-term shareholder value. It continues to refine its marketing strategy to focus on targeted profitable customer segments, the growth of lower cost core deposits and growth in commercial, agricultural and industrial loans. Management is also evaluating and implementing initiatives to limit future growth in non-interest expense. These initiatives include both technology projects, such as the installation of branch check image capture technology, which will eliminate check processing work that is currently conducted manually, and process initiatives, including centralizing certain operational and loan processes, in order to improve productivity and decrease costs.

     Net Interest Income. The most significant component of earnings for the Company is net interest income, which is the difference between interest income from the Company’s loan and investment portfolios, and interest expense from deposits, repurchase agreements and other borrowings. During the three months ended June 30, 2007 and 2006, net interest income was $11.5 million and $10.2 million, respectively, an increase of 12.0%. During the six months ended June 30, 2007 and 2006, net interest income was $22.3 million and $19.5 million, respectively, an increase of 14.3%. The increase resulted primarily from growth in interest-earning asset totals. This increase was partially offset by increases in both the balance of and cost of interest-bearing liabilities. During both periods, the cost of interest-bearing liabilities rose more quickly than the yield on interest-earning assets.

     Average interest-earning assets increased by 24.4% to $865.2 million for the three months ended June 30, 2007, compared to $695.6 million for the three months ended June 30, 2006. Average loans increased by 21.7% or $130.2 million, while average investments and cash increased by 41.5% or $39.4 million over the same period in 2006. Loan growth was driven by both increases in existing markets and strong contributions from the branches added over the last couple years. Increases in average deposits and other borrowings primarily reflected growth in the bank’s existing markets. Average net interest spread during the three months ended June 30, 2007 and 2006 was 5.24% and 5.84%, respectively.

     Average interest-earning assets increased by 28.5% to $857.6 million for the six months ended June 30, 2007, compared to $667.3 million for the six months ended June 30, 2006. Average loans increased by 25.7% or $144.6 million, while average investments increased by 44.2% or $45.7 million over the same period in 2006. The increase in the components of average interest-earning assets largely mirrored the quarter-over-quarter results, with significant loan growth from both existing and new markets and an increase in the investment portfolio due to additional purchases of investments for risk management and pledging purposes. Average interest-bearing liabilities increased by 25.1% or $167.6 million, including $96.4 million (15.9%) growth in average deposits and $71.2 million (118.3%) growth in other borrowings. Much of the growth in other borrowings over this period was in the form of repurchase agreements made with municipal customers in our local markets as part of the Company’s community marketing strategy. Average net interest spread during the six months ended June 30, 2007 and 2006 was 5.17% and 5.90%, respectively.

     Similar to the declines in net interest spread, net interest margin decreased 59 basis points during the three months ended June 30, 2007 to 5.32%, compared to the same period in 2006 and decreased 65 basis points to 5.25% during the six months ended June 30, 2007, compared to the same period last year. This was due to the increased cost of interest-bearing liabilities outpacing increases in the yields on earning assets. After growing in recent years in response to rising short-term market rates, the yield on earning assets flattened during the latter half of 2006 and the first six months of 2007, while the cost of interest-bearing liabilities continued to increase. The Company’s assets and liabilities both reprice relatively quickly in response to changing market rates, but the cost of its liabilities tends to lag its earning asset yield when market rates trend upward. The decrease in the margin over the past year reflects this lag effect. However, the Company’s net interest margin grew slightly in the second quarter of 2007 over the first quarter of 2007, from 5.24% to 5.32% potentially reflecting a stabilization of this ratio.

     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 $1.2 million and $0.8 million for the three months ended June 30, 2007 and 2006, respectively. Intermountain recorded provisions for losses on loans of $2.0 million and $0.7 million for the six months ended June 30, 2007 and 2006, respectively. The provision reflects the analysis and assessment of the relevant factors mentioned in the preceding paragraph. The increases are due to growth in the loan portfolio and credit losses on two larger loan relationships. Management believes that provision and charge-off activity in 2007 reflect a slowing economy and a more normal historical credit environment that the unusually low numbers posted in the first six

months of 2006. The loan loss allowance to total loans ratio was 1.44% at June 30, 2007, compared to 1.47% at June 30, 2006. The loan portfolio increased by 21.3% during this period,

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

		Six Months Ended June 30,
		2007				2006
		(Dollars in thousands)
Balance at January 1		$	9,837			$	8,100
Provision (recovery) for losses on loans			2,006				666
Amounts written off, net of recoveries			(1,039	)			(59	)
Transfers			(2	)			(7	)
Allowance – loans, June 30			10,802				8,700
Allowance – unfunded commitments, January 1			482				417
Adjustment			(384	)			—
Transfers			2				7
Allowance – unfunded commitments, June 30			100				424
Total credit allowance including unfunded commitments		$	10,902			$	9,124

     The allowance calculation for the six months ended June 30, 2007 reflects the removal of the allowance for unfunded credit commitments from the allowance for loan losses as required by new guidance from the Company’s federal banking regulators. In re-analyzing the allowance for unfunded commitments, the Company decreased the allowance in response to its review of historical loss rates and perceived potential risk.

     At June 30, 2007, Intermountain’s total classified assets were $10.6 million, compared with $7.2 million at June 30, 2006. Total nonperforming loans were $0.6 million at June 30, 2007, compared with $1.2 million at June 30, 2006. The increase in classified assets was due to growth in the overall loan portfolio, plus the addition of one larger commercial loan relationship, which management feels is adequately collateralized and provided for in the allowance for loan loss. At June 30, 2007, Intermountain’s loan delinquency ratio (30 days and over) as a percentage of total loans was 0.37%, compared with 0.17% at June 30, 2006. The Company’s credit quality remains strong, but reflects slight deterioration, which management believes is in line with changing market conditions. Management remains confident in its credit management system, but also believes that the credit markets are weaker this year than they have been over the past several years.

     Other Income. Total other income was $3.2 million and $2.4 million for the three months ended June 30, 2007 and 2006, respectively. Total other income was $6.2 million and $4.8 million for the six months ended June 30, 2007 and 2006, respectively. Fees and service charge income increased to $5.3 million for the six months ended June 30, 2007 from $4.9 million for the same period last year. Deposit service charges increased, reflecting fee increases on products and continued account and customer growth. Increased debit card activity, contract income from the bank’s secured deposit program and improved trust and investment income also contributed to the increase in other income. These increases were offset slightly by a small reduction in fee income derived from mortgage banking activities. Comparative results were also impacted by a restructuring of the investment portfolio in the second quarter of 2006 which created a $1.0 million pre-tax loss in the 2006 period. This restructuring improved both the long-term return of the investment portfolio and its risk characteristics. Expanding the depth and breadth of the Company’s non-interest revenue is a high priority for management. It is actively targeting profitable customer groups with new products, ranging from trust services to business cash management solutions.

     Operating Expenses. Operating expenses were $10.0 million for the three months ended June 30, 2007, a 12.0% increase compared to $8.9 million for the three months ended June 30, 2006. Operating expenses were $19.6 million for the six months ended June 30, 2007, an 18.3% increase compared to $16.6 million for the six months ended June 30, 2006. Continued staffing and fixed asset increases to support growth and increasing regulatory compliance expectations were the primary contributors to the growth in operating expenses. The rates of increase in operating expenses are slowing, however, as the Company focuses more attention on improving efficiency.

     The Company’s efficiency ratio improved to 67.9% for the three months ended June 30, 2007 from 70.5% in the corresponding period in 2006. The Company’s efficiency ratio increased to 68.8% for the six months ended June 30, 2007 compared to 68.2% in the corresponding period in 2006.

     Salaries and employee benefits were $6.3 million for the three months ended June 30, 2007, a 13.6% increase compared to $5.6 million for the three months ended June 30, 2006. Salaries and employee benefits were $12.4 million for the six months ended June 30, 2007, a 22.2% increase compared to $10.2 million for the six months ended June 30, 2006. The employee costs reflect increased staffing due to the addition of several new branches during 2006, and additional administrative staff as a result of continued growth and heightened regulatory compliance requirements. At June 30, 2007, full-time-equivalent employees totaled 438, compared with 385 at June 30, 2006.

     Occupancy expenses were $1.4 million for the three months ended June 30, 2007, a 20.3% increase compared to $1.2 million for the same period one year ago. Occupancy expenses were $2.8 million for the six months ended June 30, 2007, a 22.5% increase compared to $2.3 million for the six months ended June 30, 2006. The increase was primarily due to costs associated with branches added during 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.

     Growth in other non-interest expenses moderated during the comparative three- and six-month reporting periods, as increases in advertising and bank service charges were offset by declines in legal and accounting fees, printing, postage and supply costs, and training, travel, insurance and other operational expenses. Management continues to focus on managing costs in these areas.

     Company management has invested heavily in human capital, buildings and technology over the past several years, as it has sought to grow rapidly while building the infrastructure necessary to maintain high service standards, operational integrity and compliance with expanded regulatory requirements. While adjusting to a changing market, management believes it can leverage these investments made to continue growing over the next several years, and operate more efficiently in the future. The Company is currently slowing the pace of new branch openings while it pursues a number of efficiency improvement initiatives, including the implementation of branch imaging technology, automating and streamlining the loan processing function, and centralizing and standardizing certain operational functions. Management is also conducting detailed reviews of all major business processes to identify additional opportunities for improvement.

     Income Tax Provision. Intermountain recorded federal and state income tax provisions of $1.4 million and $1.1 million for the three months ended June 30, 2007 and 2006, respectively. Intermountain recorded federal and state income tax provisions of $2.6 million and $2.7 million for the six months ended June 30, 2007 and 2006, respectively. The effective tax rates were 38.3% and 37.8% for the three month ended June 30, 2007 and 2006, respectively. The effective tax rates were 38.2% and 37.8% for the six months ended June 30, 2007 and 2006, respectively.

Financial Position

     Assets. At June 30, 2007, Intermountain’s assets were $977.0 million, up $57.1 million from $919.9 million at December 31, 2006. The growth in assets primarily reflected an increase in loans receivable and office properties and equipment, partially offset by a small decrease in cash and equivalents. 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, 2007 was $123.8 million, a decrease of $3.2 million from the December 31, 2006 balance of $127.0 million. The decrease was primarily due to the maturity of short-term U. S. Government obligations and paydowns on mortgage-backed securities. Funds from these payments were used to help fund the expansion of the loan portfolio. As of June 30, 2007, the balance of the unrealized loss on investment securities, net of federal income taxes, was $0.4 million, compared to an unrealized loss at December 31, 2006 of $0.1 million. Increasing long-term market rates decreased the market value of the securities, resulting in a larger unrealized loss.

     Loans Receivable. At June 30, 2007 net loans receivable totaled $741.0 million, up $76.6 million or 11.5% from $664.4 million at December 31, 2006. During the six months ended June 30, 2007, total loan originations were $367.2 million compared with $341.0 million for the prior year’s comparable period. The increases were primarily due to stronger lending performance in existing markets and new lending personnel developing additional business in the Company’s markets.

     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, 2007								December 31, 2006
		Amount				%				Amount				%
		(Dollars in thousands)
Commercial (includes commercial real estate)		$	605,626				80.44			$	527,345				78.03
Residential real estate			114,418				15.20				112,569				16.66
Consumer			26,419				3.51				31,800				4.71
Municipal			6,446				0.85				4,082				0.60
Total loans receivable			752,909				100.00				675,796				100.00
Net deferred origination fees			(1,082	)							(1,074	)
Allowance for losses on loans			(10,802	)							(10,319	)
Loans receivable, net		$	741,025							$	664,403
Weighted average yield at end of period			8.67	%							8.65	%

     The following table sets forth Intermountain’s loan originations for the periods indicated.

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2007				2006				% Change				2007				2006				% Change
		(Dollars in thousands)
Commercial		$	171,482			$	169,783				1.0			$	308,438			$	273,202				12.9
Residential real estate			24,666				32,386				(23.8	)			45,976				54,470				(15.6	)
Consumer			4,444				7,347				(39.5	)			9,896				13,000				(23.9	)
Municipal			2,703				243				1,012.3				2,903				322				801.6
Total loans originated		$	203,295			$	209,759				(3.1	)		$	367,213			$	340,994				7.7

     Office Properties and Equipment. Office properties and equipment increased 36.6% to $34.8 million over $25.4 million at December 31, 2006, due primarily to the building of the Sandpoint Financial and Technical Center and the new Spokane Valley branch.

     BOLI and All Other Assets. Bank-owned life insurance (“BOLI”) and other assets increased to $24.7 million at June 30, 2007 from $20.9 million at December 31, 2006. The increase was primarily due to increases in the net deferred tax asset, prepaid expenses and accrued interest receivable.

     Deposits. Total deposits increased $40.7 million to $734.4 million at June 30, 2007 from $693.7 million at December 31, 2006, primarily due to increases in money market accounts, savings accounts and non-interest bearing deposits. Company management continues to focus heavily on core deposit growth, particularly on lower-costing demand, savings and money market deposits. The results for the first six months of 2007 reflect this emphasis, as the Company increased deposits in these areas, while allowing some higher rate retail and brokered certificates of deposit to run off. Management continues to implement compensation plans, promotional strategies and new products to spur local deposit growth.

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

		June 30, 2007								December 31, 2006
		Amount				%				Amount				%
		(Dollars in thousands)
Demand		$	163,419				22.3			$	141,601				20.4
NOW and money market 0.0% to 5.8%			313,044				42.6				291,412				42.0
Savings and IRA 0.0% to 4.6%			86,921				11.8				81,955				11.8
Certificate of deposit accounts			171,014				23.3				178,718				25.8
Total deposits		$	734,398				100.0			$	693,686				100.0
Weighted average interest rate on certificates of deposit							4.68	%							4.47	%

     Borrowings. Deposit accounts are Intermountain’s primary source of funds. The Company also relies 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 $145.0 million and $133.9 million at June 30, 2007 and December 31, 2006, respectively. The increase is due primarily to additional repurchase obligation balances with the Company’s municipal customers and the expansion of the holding company credit line to cover the construction cost of the new headquarters building. 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 and net income in a rising rate environment, as its assets re-price 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, when combined with the liability-side strategies discussed below, has contributed historically to a consistent interest rate spread over the long-term 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 increases in market rates and may afford the bank more protection in increasing interest rate environments, but can also be changed relatively quickly in a declining rate environment. The Bank 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 current modeling are within guidelines established by the Company, except that net income falls slightly below the guideline in a 300 basis point downward adjustment in market rates. In general, model results reflect marginal performance improvement in the case of a rising rate environment, and a marginal negative impact in a falling rate environment. Given its current asset-sensitivity, Intermountain has implemented certain hedging actions to protect the Company’s financial performance in a period of falling market interest rates and is evaluating additional protective measures.

     Intermountain is continuing to pursue strategies to manage the 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, 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 re-price in a given period. Intermountain calculated its one-year cumulative re-pricing gap position to be negative 30% and a negative 35% at June 30, 2007 and December 31, 2006, respectively. Management attempts to maintain Intermountain’s gap position between positive 20% and negative 35%. At June 30, 2007 and December 31, 2006, 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

     As a financial institution, Intermountain’s primary sources of funds from assets include the collection of loan principal and interest payments, cash flows from various investment securities, and occasional sales of loans, investments or other assets. Liability financing sources consist primarily of customer deposits, repurchase obligations with local customers, advances from FHLB Seattle and correspondent bank borrowings. Deposits increased to $734.4 million at June 30, 2007 from $693.7 million at December 31, 2006, primarily due to increases in interest bearing demand accounts, money market accounts and savings accounts. The net increase in deposits was used to fund the increase in loans. At June 30, 2007 and December 31, 2006, securities sold subject to repurchase agreements were $110.6 million and $106.3 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 three months ended June 30, 2007, 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, and a reduction in the Company’s available cash position.

     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, 2007, the Company’s credit line represented a total borrowing capacity of approximately $82.7 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 $50.0 million at June 30, 2007. As of June 30, 2007 there were no 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 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 $82.9 million at June 30, 2007 compared with $78.1 million at December 31, 2006. The increase in total stockholders’ equity was primarily due to the increase in net income, partially offset by an increase in the net unrealized losses of the available-for-sale investment portfolio and the increase in unearned compensation related to the issuance of restricted stock. Stockholders’ equity was 8.5% of total assets at both June 30, 2007 and December 31, 2006. On April 25, 2007, the Board of Directors approved a 10% stock dividend to shareholders. The stock dividend was payable May 31, 2007 to shareholders of record as of May 15, 2007.

     At June 30, 2007, Intermountain had an unrealized loss of $359,000, net of related income taxes, on investments classified as available-for-sale, as compared to an unrealized loss of $111,000, net of related income taxes, on investments classified as available-for-sale at December 31, 2006. 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 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 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 maintain 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, 2007, Intermountain 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 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, 2007.

																		Well-Capitalized
		Actual								Capital Requirements								Requirements
		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total capital (to risk-weighted assets):
The Company		$	96,953				11.32	%		$	68,522				8	%		$	85,653				10	%
Panhandle State Bank			96,347				11.25	%			68,530				8	%			85,663				10	%
Tier I capital (to risk-weighted assets):
The Company			86,244				10.07	%			34,261				4	%			51,392				6	%
Panhandle State Bank			85,638				10.00	%			34,265				4	%			51,398				6	%
Tier I capital (to average assets):
The Company			86,244				9.16	%			37,674				4	%			47,092				5	%
Panhandle State Bank			85,638				9.33	%			36,698				4	%			45,873				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, 2007.

		Payments Due by Period
						Less than				1 to 3				3 to 5				More than
		Total				1 year				years				years				5 years
		(Dollars in thousands)
Long-term debt (1)		$	93,324			$	3,256			$	11,250			$	34,514			$	44,304
Short-term debt (1)			93,030				93,030				—				—				—
Capital lease obligations			—				—				—				—				—
Operating lease obligations (2)			13,944				1,084				1,601				1,319				9,940
Purchase obligations (3)			3,747				3,747				—				—				—
Other long-term liabilities reflected on the registrant’s balance sheet under GAAP			—				—				—				—				—
Total		$	204,045			$	101,117			$	12,851			$	35,833			$	54,244

New Accounting Pronouncements

     In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”. SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 also amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued by the Company after January 1, 2007. This Statement did not have a material impact on the Company’s consolidated financial statements.

     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140.” SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value. In addition, entities are permitted to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment. Beginning with the fiscal year in which an entity adopts SFAS No. 156, it may elect to subsequently measure a class of servicing assets and liabilities at fair value. Post adoption, an entity may make this election as of the beginning of any fiscal year. An entity that elects to subsequently measure a class of servicing assets and liabilities at fair value should apply that election to all new and existing recognized servicing assets and liabilities within that class. The effect of remeasuring an existing class of servicing assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The statement also requires additional disclosures. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. This Statement did not have a material impact on the Company’s consolidated financial statements.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109” (FIN 48). FIN 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second is measurement. For recognition, an enterprise judgmentally determines whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the “more-likely-than-not” recognition

threshold it is measured and recognized in the financial statements. If a tax position does not meet the “more-likely-than-not” recognition threshold, the benefit of that position is not recognized in the financial statements. Tax positions that meet the “more-likely-than-not” recognition threshold at the effective date of FIN 48 may be recognized, or continue to be recognized, upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. This Statement was effective January 1, 2007 and did not have a material effect on the Company’s consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 does not require any new fair value measurements; rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company is evaluating the impact of the adoption of SFAS No. 157 on its consolidated financial statements.

     In September 2006, the Securities and Exchange Commission (SEC) announced “Staff Accounting Bulletin No. 108” (SAB 108). SAB 108 addresses how to quantify financial statement errors that arose in prior periods for purposes of assessing their materiality in the current period. It requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality. It clarifies that immaterial financial statement errors in a prior SEC filing can be corrected in subsequent filings without the need to amend the prior filing. In addition, SAB 108 provides transitional relief for correcting errors that would have been considered immaterial before its issuance. The adoption of SAB 108 did not have an impact on the Company’s accompanying consolidated financial statements.

     On September 20, 2006, the FASB ratified Emerging Issue Task Force (EITF) Issue 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (FTB 85-4), Accounting for Purchases of Life Insurance” (EITF 06-5). EITF 06-5 addresses the methods by which an entity should determine the amounts that could be realized under an insurance contract at the consolidated balance sheet date when applying FTB 85-4, and whether the determination should be on an individual or group policy basis. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. This Statement did not have a material impact on the Company’s consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value – with changes in fair value reported in earnings – and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that SFAS No. 159 may have on its future consolidated financial statements.

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 and real estate markets in which Intermountain conducts its operations;
	•		the effects of inflation, interest rate levels and market and monetary fluctuations;
	•		trade, monetary and fiscal policies and laws, including interest rate policies of the federal government;
	•		applicable laws and regulations and legislative or regulatory changes;
	•		the timely development and acceptance of new products and services of Intermountain;
	•		the willingness of customers to substitute competitors’ products and services for Intermountain’s products and services;
	•		Intermountain’s success in gaining regulatory approvals, when required;
	•		technological and management changes;
	•		announcement and successful and timely implementation of growth, acquisition and efficiency strategies;
	•		Intermountain’s ability to successfully integrate entities that may be or have been acquired;
	•		changes in consumer spending and saving habits; and
	•		Intermountain’s success at managing the risks involved in the foregoing.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

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, 2006, 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 June 30, 2007, 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 Control over Financial Reporting: In the six months ended June 30, 2007, there were no changes in Intermountain’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, Intermountain’s internal control over financial reporting.

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

          Except as noted below, there have been no material changes from the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006.

•

the potential industry effect of subprime and prime mortgage market volatility on the Company’s lending operations

          Current weakness in the subprime mortgage market is spreading into all mortgage markets and generally impacting lending operations of many financial institutions. The Company is not significantly involved in subprime mortgage activities, so its current direct exposure is limited. However, to the extent the subprime market volatility affects the marketability of all mortgage loans, the real estate market, and consumer spending in general, it may have an indirect adverse impact on the Company’s lending operations, loan balances and non-interest income, and ultimately its net income.

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

          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 25, 2007.
	(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 2007.

James T. Diehl
Votes cast for:			5,698,921
Votes withheld:			2,397
Terry L. Merwin
Votes cast for:			5,683,182
Votes withheld:			18,136
John B. Parker
Votes cast for:			5,695,858
Votes withheld:			5,460
Jim Patrick
Votes cast for:			5,687,389
Votes withheld:			13,929

2.

Approval of the 2006 – 2008 Long-Term Incentive Plan.

Votes cast for:			4,295,718
Votes cast against:			103,062
Votes abstained:			37,635

3.

Ratification of the appointment of BDO Seidman, LLP as the independent registered public accounting firm for Intermountain for 2007.

Votes cast for:			5,668,556
Votes cast against:			10,333
Votes abstained:			14,100

Item 5 — Other Information

Not Applicable

Item 6 — Exhibits

Exhibit No.		Exhibit
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 8, 2007 Date				By:		/s/ Curt Hecker   Curt Hecker
						President and Chief Executive Officer
August 8, 2007 Date				By:		/s/ Doug Wright   Doug Wright
						Executive Vice President and Chief Financial Officer