UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

OR

o		Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

COMMISSION FILE NUMBER 000-49733

First Interstate BancSystem, Inc.

(Exact name of registrant as specified in its charter)

Montana		81-0331430
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

401 North 31st Street, Billings, MT 59116-0918

Registrant’s telephone number, including area code: 406/255-5390

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 filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer   þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

The Registrant had 7,834,206 shares of common stock outstanding on June 30, 2008.

 

 

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

Index		Page
Part I. Financial Information
Item 1 — Financial Statements (unaudited)
Consolidated Balance Sheets June 30, 2008 and December 31, 2007			3
Consolidated Statements of Income Three and six months ended June 30, 2008 and 2007			4
Consolidated Statements of Changes in Stockholders’ Equity Six months ended June 30, 2008 and 2007			5
Consolidated Statements of Cash Flows Six months ended June 30, 2008 and 2007			6
Notes to Unaudited Consolidated Financial Statements			8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3 — Quantitative and Qualitative Disclosures about Market Risk			31
Item 4T — Controls and Procedures			31
Part II. Other Information
Item 1 — Legal Proceedings			32
Item 1A — Risk Factors			32
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3 — Defaults Upon Senior Securities			32
Item 4 — Submission of Matters to a Vote of Security Holders			32
Item 5 — Other Information			33
Item 6 — Exhibits			33
Signatures			35
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
Section 906 Certification

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

(Unaudited)

		June 30,				December 31,
		2008				2007
Assets
Cash and due from banks		$	213,855				181,743
Federal funds sold			49,101				60,635
Interest bearing deposits in banks			1,510				6,868
Total cash and cash equivalents			264,466				249,246
Investment securities:
Available-for-sale			920,156				1,014,280
Held-to-maturity (estimated fair values of $111,287 as of June 30, 2008 and $114,613 as of December 31, 2007)			112,786				114,377
Total investment securities			1,032,942				1,128,657
Loans			4,570,655				3,558,980
Less allowance for loan losses			72,650				52,355
Net loans			4,498,005				3,506,625
Goodwill			187,297				37,380
Premises and equipment, net			168,511				124,041
Company-owned life insurance			68,261				67,076
Accrued interest receivable			42,231				32,215
Mortgage servicing rights, net of accumulated amortization and impairment reserve			23,626				21,715
Core deposit intangible assets, net of accumulated amortization			13,963				257
Net deferred tax asset			8,294				6,741
Other assets			56,368				42,844
Total assets		$	6,363,964				5,216,797
Liabilities and Stockholders’ Equity
Deposits:
Noninterest bearing		$	991,272				836,753
Interest bearing			3,892,217				3,162,648
Total deposits			4,883,489				3,999,401
Federal funds purchased			108,410				—
Securities sold under repurchase agreements			472,371				604,762
Accrued interest payable			21,898				21,104
Accounts payable and accrued expenses			32,859				30,117
Other borrowed funds			130,288				8,730
Long-term debt			88,845				5,145
Subordinated debentures held by subsidiary trusts			123,715				103,095
Total liabilities			5,861,875				4,772,354
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; issued and outstanding 5,000 shares as of June 30, 2008, no shares issued and outstanding as of December 31, 2007			50,000				—
Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,834,206 shares as of June 30, 2008 and 8,006,041 shares as of December 31, 2007			114,177				29,773
Retained earnings			340,502				416,425
Accumulated other comprehensive loss, net			(2,590	)			(1,755	)
Total stockholders’ equity			502,089				444,443
Total liabilities and stockholders’ equity		$	6,363,964				5,216,797

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

(Unaudited)

		For the three months								For the six months
		ended June 30,								ended June 30,
		2008				2007				2008				2007
Interest income:
Interest and fees on loans		$	75,197				67,641				152,763				132,901
Interest and dividends on investment securities:
Taxable			11,065				9,810				22,458				21,067
Exempt from Federal taxes			1,508				1,186				3,004				2,340
Interest on deposits in banks			37				396				165				502
Interest on Federal funds sold			261				1,801				787				2,660
Total interest income			88,068				80,834				179,177				159,470
Interest expense:
Interest on deposits			24,003				25,289				51,138				47,884
Interest on Federal funds purchased			491				21				772				64
Interest on securities sold under repurchase agreements			1,791				5,329				5,102				12,074
Interest on other borrowed funds			354				38				426				76
Interest on long-term debt			1,145				84				2,352				269
Interest on subordinated debentures held by subsidiary trusts			1,913				895				4,213				1,781
Total interest expense			29,697				31,656				64,003				62,148
Net interest income			58,371				49,178				115,174				97,322
Provision for loan losses			5,321				1,875				7,684				3,750
Net interest income after provision for loan losses			53,050				47,303				107,490				93,572
Noninterest income:
Other service charges, commissions and fees			7,162				5,924				14,026				11,559
Service charges on deposit accounts			4,972				4,549				9,845				8,888
Technology services revenues			4,363				4,271				8,713				8,619
Income from origination and sale of loans			3,323				2,993				6,702				5,151
Wealth managment revenues			3,304				2,890				6,533				5,626
Investment securities gains, net			13				—				74				—
Other income			2,088				1,537				5,701				4,160
Total noninterest income			25,225				22,164				51,594				44,003
Noninterest expense:
Salaries, wages and employee benefits			29,720				24,110				58,065				48,171
Furniture and equipment			4,886				3,961				9,513				8,032
Occupancy, net			3,979				3,723				8,243				7,156
Mortgage servicing rights impairment			(4,297	)			(677	)			(745	)			116
Mortgage servicing rights amortization			1,431				1,114				2,796				2,282
Professional fees			1,270				677				2,163				1,367
Core deposit intangible amortization			641				44				1,221				88
Outsourced technology services			841				888				1,853				1,643
Other expenses			11,190				8,604				19,707				16,501
Total noninterest expense			49,661				42,444				102,816				85,356
Income before income taxes			28,614				27,023				56,268				52,219
Income tax expense			9,988				9,398				19,566				18,098
Net income			18,626				17,625				36,702				34,121
Preferred stock dividends			853				—				1,622				—
Net income available to common stockholders		$	17,773				17,625				35,080				34,121
Basic earnings per common share		$	2.27				2.16				4.45				4.17
Diluted earnings per common share		$	2.22				2.11				4.36				4.08

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

(In thousands, except share and per share data)

(Unaudited)

		For the six months
		ended June 30,
		2008				2007
Balance at December 31, 2007 and 2006		$	444,443				410,375
Cumulative effect of adoption of new accounting principle (see Note 2)			(633	)			—
Comprehensive income:
Net income			36,702				34,121
Post-retirement liability adjustment, net of income tax benefit of $14 in 2008			(22	)			—
Unrealized losses on available-for-sale investment securities, net of income tax benefit of $498 in 2008 and $1,307 in 2007			(768	)			(2,014	)
Less reclassfication adjustments for gains included in net income, net of income tax expense of $29 in 2008			(45	)			—
Other comprehensive income			(835	)			(2,014	)
Total comprehensive income			35,867				32,107
Preferred stock transactions:
Preferred shares issued, 5,000 in 2008			50,000				—
Preferred stock issuance costs			(38	)			—
Common stock transactions:
Common shares issued, 626 in 2008 and 411 in 2007			52				37
Common shares retired, 213,381 in 2008 and 107,752 in 2007			(18,312	)			(9,507	)
Stock options exercised net of shares tendered in payment of option price and income tax withholding amounts, 40,920 in 2008 and 118,604 in 2007			1,264				4,422
Tax benefits of stock options			826				2,134
Stock-based compensation expense			574				745
Cash dividends declared:
Common, $1.30 per share in 2008 and $1.67 per share in 2007			(10,332	)			(13,690	)
Preferred (6.75% stated annual rate)			(1,622	)			—
Balance at June 30, 2008 and 2007		$	502,089				426,623

     See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

(Unaudited)

		For the six months
		ended June 30,
		2008				2007
Cash flows from operating activities:
Net income		$	36,702				34,121
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principle			(633	)			—
Equity in undistributed earnings of unconsolidated subsidiaries and joint ventures			(232	)			70
Provision for loan losses			7,684				3,750
Depreciation expense			7,758				6,786
Amortization of mortgage servicing rights			2,796				2,282
Net premium amortization (discount accretion) on investment securities			441				(2,345	)
Net gain on sale of available-for-sale investment securities			(74	)			—
Net gain on sale of mortgage servicing rights			—				(1,147	)
Amortization of core deposit intangibles			1,221				88
Net impairment charges (reversals) on mortgage servicing rights			(745	)			116
Net increase in cash surrender value of company-owned life insurance			(1,185	)			(1,106	)
Stock-based compensation expense			574				745
Excess tax benefits from stock-based compensation			(801	)			(2,134	)
Deferred income taxes			(951	)			(1,078	)
Changes in operating assets and liabilities:
Increase in loans held for sale			(2,796	)			(16,468	)
Increase in interest receivable			(2,035	)			(3,733	)
Decrease (increase) in other assets			(8,588	)			5,325
Increase (decrease) in accrued interest payable			(1,840	)			417
Decrease in accounts payable and accrued expenses			(3,258	)			(9,794	)
Net cash provided by operating activities			34,038				15,895
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity			(9,579	)			(8,337	)
Available-for-sale			(153,426	)			(1,573,165	)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity			11,087				7,077
Available-for-sale			341,872				1,726,116
Purchases and originations of mortgage servicing rights			(3,962	)			(3,142	)
Proceeds from sale of mortgage servicing rights			—				2,811
Extensions of credit to customers, net of repayments			(292,759	)			(169,878	)
Recoveries of loans charged-off			1,072				1,242
Proceeds from sales of other real estate			211				345
Net capital expenditures			(13,925	)			(7,481	)
Capital contributions to unconsolidated subsidiaires			(620	)			—
Acquistion of banks & data services company, net of cash and cash equivalents received			(135,706	)			—
Net cash used in investing activities			(255,735	)			(24,412	)

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands)
(Unaudited)

		For the six months
		ended June 30,
		2008				2007
Cash flows from financing activities:
Net increase in deposits		$	72,161				210,877
Net increase in Federal funds purchased			108,410				2,735
Net decrease in repurchase agreements			(137,423	)			(243,065	)
Net increase (decrease) in other borrowed funds			117,319				(998	)
Borrowings of long-term debt			112,500				—
Repayments of long-term debt			(28,800	)			(15,728	)
Proceeds from issuance of subordinated debentures held by subsidiary trusts			20,620				—
Net decrease (increase) in debt issuance costs			(471	)			17
Preferred stock issuance costs			(38	)			—
Proceeds from issuance of common stock			2,104				6,593
Excess tax benefits from stock-based compensation			801				2,134
Purchase and retirement of common stock			(18,312	)			(9,507	)
Dividends paid on common stock			(10,332	)			(13,690	)
Dividends paid on preferred stock			(1,622	)			—
Net cash provided by (used in) financing activities			236,917				(60,632	)
Net increase (decrease) in cash and cash equivalents			15,220				(69,149	)
Cash and cash equivalents at beginning of period			249,246				255,791
Cash and cash equivalents at end of period		$	264,466				186,642

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

(1)		Basis of Presentation
		In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. (the “Parent Company” or “FIBS”) and subsidiaries (the “Company”) contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position of the Company at June 30, 2008 and December 31, 2007 and the results of operations and cash flows for each of the three and six month periods ended June 30, 2008 and 2007, in conformity with U.S. generally accepted accounting principles (“GAAP”). The balance sheet information at December 31, 2007 is derived from audited consolidated financial statements. Certain reclassifications, none of which were material, have been made to conform prior year financial statements to the June 30, 2008 presentation.
		These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.
(2)		Recent Accounting Pronouncements
		Statement of Financial Accounting Standards. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements,” establishing a framework for measuring fair value and expanding fair value measurement disclosures. SFAS No. 157 also establishes a fair value hierarchy that distinguishes between independent observable inputs and unobservable inputs based on the best information available. When issued, SFAS No. 157 was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157” to allow entities to electively defer the effective date of SFAS No, 157 for nonfinancial assets and liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. Nonfinancial assets measured at fair value on a nonrecurring basis include nonfinancial assets and liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment. The Company adopted SFAS No. 157 effective January 1, 2008 for financial assets and liabilities and elected to defer adoption of SFAS No. 157 for nonfinancial assets and liabilities until January 1, 2009.
		In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities—including an amendment of FASB Statement No. 115,” which permits entities to choose to measure financial instruments and certain warranty and insurance contracts at fair value. SFAS No. 159 was effective for the Company on January 1, 2008. The Company did not elect to apply the provisions of SFAS No. 159 to eligible items as of date of adoption. As such, the adoption of SFAS No. 159 did not impact the Company’s consolidated financial statements, results of operations or liquidity.
		In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB 51,” establishing accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. Under the provisions of SFAS No. 160, a noncontrolling interest in a subsidiary is reported as equity in the consolidated financial statements and income attributable to both the parent company and the noncontrolling interest is included in the consolidated statement of income. SFAS No. 160 also established a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and required expanded disclosures in the consolidated financial statements. SFAS No. 160 is effective for the Company on January 1, 2009 with earlier adoption prohibited. The provisions of SFAS No. 160 are to be applied prospectively, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. The Company does not expect the adoption of SFAS No. 160 to have a material impact on its consolidated financial statements, results of operations or liquidity.
		In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The Company does not use derivative instruments or engage in hedging activities and does not expect the adoption of SFAS No. 161 to have a material impact on its consolidated financial statements, results of operations or liquidity.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(In thousands, except share and per share data)

Emerging Issues Task Force. In September 2006, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue No. 06-4 (“EITF 06-4”), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 requires the recognition of a liability and related compensation expense for endorsement split dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. The Company adopted EITF 06-4 effective January 1, 2008 as a change in accounting principle through a cumulative-effect adjustment to retained earnings of $633. Compensation expense for the postretirement aspects of the Company’s endorsement split dollar life insurance policies of $17 and $35 for the three and six months ended June 30, 2008, respectively, is included in salaries wages and benefits expense on the accompanying consolidated statements of income.

In June 2007, the EITF reached a final consensus on Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires realized income tax benefits from dividends paid to employees for equity classified nonvested equity shares to be recognized as an increase in additional paid in capital and be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. The provisions of EITF 06-11 are effective for income tax benefits resulting from dividends declared subsequent to January 1, 2008. The adoption of EITF 06-11 did not have a significant impact on the Company’s consolidated financial statements, results of operations or liquidity.

SEC Staff Accounting Bulletins. In November 2007, the SEC issued Staff Accounting Bulletin No. 109 (“SAB 109”), “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB 109 supersedes SAB 105, “Application of Accounting Principles to Loan Commitments,” and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The guidance in SAB 109 was effective for derivative loan commitments issued or modified by the Company subsequent to January 1, 2008. The adoption of SAB 109 did not have a significant impact on the Company’s consolidated financial statements, results of operations or liquidity.

(3)

Acquisitions

On January 10, 2008, the Company completed the acquisition of all of the outstanding stock of The First Western Bank Sturgis, Sturgis, South Dakota (“Sturgis”), First Western Bank, Wall, South Dakota (“Wall”), and First Western Data, Inc., a South Dakota corporation (“Data”), from Christen Group, Inc., formerly known as First Western Bancorp, Inc. Consideration for the acquisition of $248,081 consisted of cash of $198,081 and 5,000 shares of newly issued 6.75% Series A noncumulative redeemable preferred stock (“Series A Preferred Stock”) with an aggregate value of $50,000. The acquisition allowed the Company to gain a significant market presence in South Dakota.

The premiums paid over the historical carrying value of net assts at the acquisition date are as follows:

		Sturgis				Wall				Data				Total
Consideration paid		$	110,838				136,827				416				248,081
Estimated acquisition costs			62				62				—				124
Total consideration paid for acquistion			110,900				136,889				416				248,205
Historical net assets carrying value			36,804				45,852				416				83,072
Premium paid over historical carrying value		$	74,096				91,037				—				165,133

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(In thousands, except share and per share data)

The increase (decrease) in net asset values as a result of estimated fair value adjustments are as follows:

		Sturgis				Wall				Data				Total
Intangible assets:
Goodwill		$	65,195				84,722				—				149,917
Core deposit intangible			6,262				8,665								14,927
Total intangible assets			71,457				93,387				—				164,844
Premises and equipment			6,181				5,334				—				11,515
Investments			191				652				—				843
Loans			(1,349	)			(5,021	)			—				(6,370	)
Deposits			(745	)			(1,191	)			—				(1,936	)
Other liabilities			(1,475	)			(1,484	)			—				(2,959	)
Other assets			(164	)			(640	)			—				(804	)
		$	74,096				91,037				—				165,133

The premium paid and estimated fair value adjustments have been “pushed down” to the acquired entities. The preliminary allocation of purchase price is subject to change as fair value estimates are finalized. The estimated fair value of net assets at the acquisition date are summarized as follows:

		Sturgis				Wall				Data				Total
Cash and due from banks		$	8,925				11,004				70				19,999
Federal funds sold			29,500				13,000				—				42,500
Investment securities available-for-sale			44,786				51,227				—				96,013
Loans			315,828				405,052				—				720,880
Allowance for loan losses			(6,065	)			(8,398	)			—				(14,463	)
Premises and equipment			15,121				22,740				—				37,861
Accrued interest receivable			3,499				4,482				224				8,205
Goodwill			65,195				84,722				—				149,917
Core deposit intangible			6,262				8,665								14,927
Other assets			636				1,385				178				2,199
			483,687				593,879				472				1,078,038
Deposits:
Noninterest bearing			57,595				74,906				—				132,501
Interest bearing			309,137				370,288				—				679,425
Total deposits			366,732				445,194				—				811,926
Securities sold under repurchase agreements			1,340				3,693				—				5,033
Accrued interest payable			1,178				1,456				—				2,634
Accounts payable and accrued expenses			2,627				3,318				56				6,001
Other borrowed funds			910				3,329								4,239
			372,787				456,990				56				829,833
Consideration paid		$	110,900				136,889				416				248,205

Goodwill recognized in the transaction totaled $149,917, of which approximately $136,758 is expected to be deductible for income tax purposes. All goodwill was assigned to the Community Banking operating segment.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(In thousands, except share and per share data)

		The accompanying consolidated statements of income for the three and six months ended June 30, 2008 include the results of operations of the acquired entities since the date of acquisition. Had the acquisition been completed as of January 1, 2008, the Company’s consolidated net income to common stockholders and diluted earnings per common share, on a pro forma basis, would have been $37,109 and $4.41, respectively, for the six months ended June 30, 2008.
(4)		Core Deposit Intangible Assets
		Core deposit intangible assets represent the intangible value of depositor relationships resulting from deposit liabilities assumed. Core deposit intangible assets of $13,963 as of June 30, 2008, are being amortized using an accelerated method over the weighted average useful lives of the related deposits of 9.2 years. Amortization expense related to core deposit intangibles recorded as of June 30, 2008 is expected to total $1,281 for the remainder of 2008, $2,131 in 2009, $1,748 in 2010, $1,446 in 2011 and $1,421 in 2010.
(5)		Financial Instruments with Off-Balance Sheet Risk
		The Company is a 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. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At June 30, 2008, commitments to extend credit to existing and new borrowers approximated $1,244, which includes $323 on unused credit card lines and $279 with commitment maturities beyond one year.
		Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. At June 30, 2008, the Company had outstanding standby letters of credit of $115. The estimated fair value of the obligation undertaken by the Company in issuing the standby letters of credit is included in other liabilities in the Company’s consolidated balance sheet.
(6)		Computation of Earnings per Common Share
		Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period presented. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares and potential common shares outstanding during the period.
		The following table sets forth the computation of basic and diluted earnings per share for the three and six month periods ended June 30, 2008 and 2007.

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Net income available to common stockholders		$	17,773				17,625				35,080				34,121
Average outstanding comon shares-basic			7,845,801				8,173,718				7,882,820				8,180,835
Add: effect of dilutive stock options			163,227				196,250				168,702				188,549
Average outstanding common shares-diluted			8,009,028				8,369,968				8,051,522				8,369,384
Basic earnings per common share		$	2.27				2.16				4.45				4.17
Diluted earnings per common share		$	2.22				2.11				4.36				4.08

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(In thousands, except share and per share data)

(7)		Supplemental Disclosures to Consolidated Statement of Cash Flows
		The Company paid cash of $63,209 and $61,731 for interest during the six months ended June 30, 2008 and 2007, respectively. The Company paid cash for income taxes of $20,894 and $23,189 during the six months ended June 30, 2008 and 2007, respectively.
		The Company transferred accrued liabilities of $38 to common stock in conjunction with the exercise of stock options.
		On January 8, 2008, the Company issued 5,000 shares of Series A Preferred Stock with an aggregate value of $50,000. The Series A Preferred stock was issued in partial consideration for the First Western acquisition (See Note 3).
		On March 27, 2008, the Company transferred $100,000 from retained earnings to common stock.
(8)		Fair Value Measurements
		SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 also establishes fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

	•		Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
	•		Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
	•		Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

		A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
		Investment Securities Available for Sale. Investment securities available for sale are classified within level 2 of the valuation hierarchy. The Company obtains fair value measurements for investment securities from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. In certain cases, where the pricing service cannot obtain fair values and/or there is limited activity or less transparency around inputs to the valuation, investment securities are classified within level 3 of the valuation hierarchy.
		Mortgage Loans Held For Sale. Mortgage loans held for sale are required to be measured at the lower of cost or fair value. As of June 30, 2008, the Company had loans held for sale of $28,876. Management obtains quotes or bids on all or part of these loans directly from the purchasing institution. All loans held for sale as of June 30, 2008 were recorded at cost.
		Mortgage Servicing Rights. Mortgage servicing rights are initially recorded at fair value based on comparable market quotes and are amortized in proportion to and over the period of estimated net servicing income. Mortgage servicing rights are evaluated quarterly for impairment using an independent valuation service. The valuation service utilizes discounted cash flow modeling techniques, which consider observable data that includes consensus prepayment speeds and the predominant risk characteristics of the underlying loans including loan type, note rate and loan term.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(In thousands, except share and per share data)

Financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008 are as follows:

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

6/30/2008

(Level 1)

(Level 2)

(Level 3)

Investment securities available-for-sale

$

920,156

—

920,156

—

Mortgage servicing rights

24,145

24,145

		Certain other financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2008.
(9)		Commitments
		In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.
		As of June 30, 2008, the Company had commitments to issue certificates of deposits aggregating $50,000 in brokered transactions. The certificates, issued July 9, 2008, mature October 9, 2008 and bear interest at fixed rates ranging from 2.90% to 2.95%. Placement fees for these transactions are equal to 0.4% to 0.5% of the amount issued.
		The Company had commitments under construction contracts of $16,986 as of June 30, 2008.
(10)		Long-Term Debt
		In January 2008, the Company entered into a credit agreement (“Credit Agreement”) with four syndicated banks. As of June 30, 2008, the Company was in violation of two financial performance covenants related to nonperforming assets included in the Credit Agreement. The Company has requested and expects to obtain a waiver of these covenants in the near term. If a waiver is not obtained, the syndicated banks will be entitled to pursue the remedies available under the Credit Agreement including an acceleration of the full amount due thereunder. As of June 30, 2008, the Company had $46 million outstanding under the Credit Agreement. The Company expects similar waivers will be required in future periods.
(11)		Segment Reporting
		The Company has two operating segments, Community Banking and Technology Services. Community Banking encompasses commercial and consumer banking services offered to individuals, businesses and municipalities. Entities acquired in 2008 are included in the Community Banking operating segment. Technology Services encompasses technology services provided to affiliated and non-affiliated financial institutions.
		The Other category includes the net funding cost and other expenses of the Parent Company, the operational results of non-bank subsidiaries (except the Company’s technology services subsidiary) and intercompany eliminations.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(In thousands, except share and per share data)

Selected segment information for the three and six month periods ended June 30, 2008 and 2007 follows:

		Three Months Ended June 30, 2008
		Community				Technology
		Banking				Services				Other				Total
Net interest income (expense)		$	61,156				17				(2,802	)			58,371
Provision for loan losses			5,321				—				—				5,321
Net interest income (expense) after provision			55,835				17				(2,802	)			53,050
Noninterest income:
External sources			20,345				4,363				517				25,225
Internal sources			—				3,066				(3,066	)			—
Total noninterest income			20,345				7,429				(2,549	)			25,225
Noninterest expense			42,898				6,736				27				49,661
Income (loss) before income taxes			33,282				710				(5,378	)			28,614
Income tax expense (benefit)			11,699				287				(1,998	)			9,988
Net income (loss)		$	21,583				423				(3,380	)			18,626
Depreciation and core deposit intangibles amortization		$	4,441				—				54				4,495

		Three Months Ended June 30, 2007
		Community				Technology
		Banking				Services				Other				Total
Net interest income (expense)		$	49,858				41				(721	)			49,178
Provision for loan losses			1,875				—				—				1,875
Net interest income (expense) after provision			47,983				41				(721	)			47,303
Noninterest income:
External sources			17,490				4,271				403				22,164
Internal sources			1				3,258				(3,259	)			—
Total noninterest income			17,491				7,529				(2,856	)			22,164
Noninterest expense			36,844				6,381				(781	)			42,444
Income (loss) before income taxes			28,630				1,189				(2,796	)			27,023
Income tax expense (benefit)			10,131				472				(1,205	)			9,398
Net income (loss)		$	18,499				717				(1,591	)			17,625
Depreciation and core deposit intangibles amortization		$	3,549				—				62				3,611

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(In thousands, except share and per share data)

		Six Months Ended June 30, 2008
		Community				Technology
		Banking				Services				Other				Total
Net interest income (expense)		$	121,198				48				(6,072	)			115,174
Provision for loan losses			7,684				—				—				7,684
Net interest income (expense) after provision			113,514				48				(6,072	)			107,490
Noninterest income:
External sources			40,866				9,606				1,122				51,594
Internal sources			1				6,296				(6,297	)			—
Total noninterest income			40,867				15,902				(5,175	)			51,594
Noninterest expense			91,011				13,346				(1,541	)			102,816
Income (loss) before income taxes			63,370				2,604				(9,706	)			56,268
Income tax expense (benefit)			22,173				1,036				(3,643	)			19,566
Net income (loss)		$	41,197				1,568				(6,063	)			36,702
Depreciation and core deposit intangibles amortization		$	8,834				—				145				8,979

		Six Months Ended June 30, 2007
		Community				Technology
		Banking				Services				Other				Total
Net interest income (expense)		$	98,658				87				(1,423	)			97,322
Provision for loan losses			3,750				—				—				3,750
Net interest income (expense) after provision			94,908				87				(1,423	)			93,572
Noninterest income:
External sources			34,565				8,619				819				44,003
Internal sources			1				6,488				(6,489	)			—
Total noninterest income			34,566				15,107				(5,670	)			44,003
Noninterest expense			74,560				12,565				(1,769	)			85,356
Income (loss) before income taxes			54,914				2,629				(5,324	)			52,219
Income tax expense (benefit)			19,379				1,042				(2,323	)			18,098
Net income (loss)		$	35,535				1,587				(3,001	)			34,121
Depreciation and core deposit intangibles amortization		$	6,749				—				125				6,874

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007, including the audited financial statements contained therein, filed with the Securities and Exchange Commission.

     When we refer to “we,” “our,” and “us” in this report, we mean First Interstate BancSystem, Inc. and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, First Interstate BancSystem, Inc. When we refer to “Banks” in this report, we mean First Interstate Bank, First Western Bank and The First Western Bank Sturgis, our bank subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. Any statements about our plans, objectives, expectations, strategies, beliefs, or future performance or events constitute forward-looking statements. Such statements are identified as those that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “may” or similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other important factors that could cause actual results to differ materially from any results, performance or events expressed or implied by such forward-looking statements. All forward-looking statements are qualified in their entirety by reference to the factors discussed in this report and the following risk factors discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007: (i) credit risk; (ii) concentrations of real estate loans; (iii) commercial loan risk; (iv) economic conditions in Montana, Wyoming and South Dakota; (v) adequacy of the allowance for loan losses; (vi) changes in interest rates; (vii) inability to meet liquidity requirements; (viii) inability of our subsidiaries to pay dividends; (ix) failure to meet debt covenants; (x) competition; (xi) environmental remediation and other costs; (xii) breach in information system security; (xiii) failure of technology; (xiv) failure to effectively implement technology-driven products and services; (xv) ineffective internal operational controls; (xvi) difficulties in integrating operations of First Western; (xvii) dependence on our management team; (xviii) the ability to attract and retain qualified employees; (xix) disruption of vital infrastructure and other business interruptions; (xx) Visa indemnification obligations; (xxi) litigation pertaining to fiduciary responsibilities; (xxii) changes in or noncompliance with governmental regulations; (xxiii) capital required to support our bank subsidiaries; and, (xxiv) investment risks affecting holders of common stock.

     Because the foregoing factors could cause actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements, undue reliance should not be placed on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of future events or developments.

CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT ACCOUNTING POLICIES

     Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which we operate. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

     Our accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The most significant accounting policies we follow are presented in Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

     Our critical accounting estimates are summarized below. Management considers an accounting estimate to be critical if: (1) the accounting estimate requires management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain, and (2) changes in the estimate that are reasonably likely to occur from period to period, or the use of different estimates that management could have reasonably used in the current period, would have a material impact on our consolidated financial statements, results of operations or liquidity.

Allowance for Loan Losses

     The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of subjective measurements, including management’s assessment of the internal risk classifications of loans, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on our consolidated financial statements, results of operations or liquidity. The allowance for loan losses is maintained at an amount we believe is sufficient to provide for estimated losses inherent in our loan portfolio at each balance sheet date. Management continuously monitors qualitative and quantitative trends in the loan portfolio, including changes in the levels of past due, internally classified and nonperforming loans. As a result, our historical experience has provided for an adequate allowance for loan losses. Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2007 describes the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses is included herein under the heading “Asset Quality.”

Valuation of Mortgage Servicing Rights

     We recognize as assets the rights to service mortgage loans for others, whether acquired or internally originated. Mortgage servicing rights are initially recorded at fair value and are amortized over the period of estimated servicing income. Mortgage servicing rights are carried on the consolidated balance sheet at the lower of amortized cost or fair value. We utilize the expertise of a third-party consultant to estimate the fair value of our mortgage servicing rights quarterly. In evaluating the mortgage servicing rights, the consultant uses discounted cash flow modeling techniques, which require estimates regarding the amount and timing of expected future cash flows, including assumptions about loan repayment rates, costs to service, as well as interest rate assumptions that contemplate the risk involved. Management believes the valuation techniques and assumptions used by the consultant are reasonable.

     Determining the fair value of mortgage servicing rights is considered a critical accounting estimate because of the assets’ sensitivity to changes in estimates and assumptions used, particularly loan prepayment speeds and discount rates. Changes in these estimates and assumptions are reasonably possible and may have a material impact on our consolidated financial statements, results of operations or liquidity. Notes 1 and 7 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007 describe the methodology we use to determine fair value of mortgage servicing rights.

Goodwill

     The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at the reporting unit level at least annually, or on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred. In testing for impairment, the fair value of each reporting unit is estimated based on an analysis of market-based trading and transaction multiples of selected banks in the western and central regions of the United States; and, if required, the estimated fair value is allocated to the assets and liabilities of each reporting unit. Determining the fair value of goodwill is considered a critical accounting estimate because of its sensitivity to market-based trading and transaction multiples. In addition, any allocation of the fair value of goodwill to assets and liabilities requires significant management judgment and the use of subjective measurements. Variability in the market and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on our consolidated financial statements, results of operations or liquidity. Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007 describes our accounting policy with regard to goodwill.

EXECUTIVE OVERVIEW

     Our success is highly dependent on economic conditions and market interest rates. Because we operate in Montana, Wyoming and South Dakota, the local economic conditions in each of these areas are particularly important. We did not engage in subprime lending practices and our local economies have not been as severely impacted by the national economic and real estate downturn, subprime mortgage crisis and credit market turmoil as many areas of the United States. As a result, we are not experiencing the financial instability that is challenging other financial institutions around the country.

     Net income available to common shareholders was $17.8 million, or $2.22 per diluted common share, for the quarter ended June 30, 2008. This is an increase of $148 thousand, or less than 1.0%, as compared to $17.6 million, or $2.11 per diluted common share, for the same period in 2007. For the six months ended June 30, 2008, net income available to common shareholders was $35.1 million, or $4.36 per diluted common share, an increase of $959 thousand, or 2.8%, compared to $34.1 million, or $4.08 per diluted share, for the same period in 2007. Our financial performance for the first six months of 2008 includes our acquisition of The First Western Bank Sturgis, Sturgis, South Dakota, First Western Bank, Wall, South Dakota, and First Western Data, Inc. on January 10, 2008. The acquired entities operate eighteen banking offices in twelve western South Dakota communities. As of the date of acquisition, the acquired entities had combined total assets of $918 million, combined total loans of $725 million and combined total deposits of $812 million. Our financial condition and results of operations for the three and six months ended June 30, 2008 include the results of the acquired entities since the date of acquisition.

     Net interest income, on a fully taxable equivalent, or FTE, basis, increased $9.5 million, or 18.9%, to $59.7 million for the three months ended June 30, 2008 as compared to $50.2 million for the same period in 2007, and $18.5 million, or 18.6%, to $117.8 million for the six months ended June 30, 2008 as compared to $99.3 million for the same period in 2007. Improvements in FTE net interest income were primarily due to increases in average earning assets combined with a larger spread between rates earned on interest earning assets and rate paid on interest bearing liabilities.

     Despite growth in average interest earning assets and an increase in the interest rate spread, our net FTE interest margin decreased 18 basis points to 4.27% for the three months ended June 30, 2008, and 17 basis points to 4.28% for the six months ended June 30, 2008, as compared to the same periods in 2007. These decreases are due, in part, to the deployment of available funding into non-earning assets including premises and equipment, goodwill and core deposit intangible assets recorded as part of the First Western acquisition. In addition, free funding sources comprised a smaller percentage of our total funding base during the three and six months ended June 30, 2008, which further eroded our FTE net interest margin.

     During the first half of 2008, we experienced deterioration in credit quality, particularly in real estate development loans to borrowers in two Montana counties. This deterioration resulted in higher levels of nonperforming and internally risk classified loans. Based on our assessment of the adequacy of our allowance for loan losses, we increased our provisions for loan losses by $3.4 million, or 183.8%, to $5.3 million for the three months ended June 30, 2008, and $3.9 million, or 104.9%, to $7.7 million for the six months ended June 30, 2008, as compared to the same periods in 2007.

     Exclusive of the results of the acquired First Western entities, noninterest income increased 5.4% for the three months ended June 30, 2008, and 9.6% for the six months ended June 30, 2008, as compared to the same periods in 2007. These increases are primarily due to a $1.6 million non-recurring gain on the mandatory redemption of our class B shares of Visa, Inc. recorded during first quarter 2008; a non-recurring gain of $1.1 million resulting from the release of funds escrowed in conjunction with the December 2006 sale of our interest in iPay Technologies, LLC recorded during first quarter 2008; and, increases in income from (i) the origination and sale of loans; (ii) higher volumes of credit and debit card transactions; (iii) asset management fees; and, (iv) insurance commissions.

     Increases in noninterest income were more than offset by increases in noninterest expense. Exclusive of the results of the acquired First Western entities, noninterest expense increased 1.4% for the three months ended June 30, 2008, and 6.2% for the six months ended June 30, 2008, as compared to the same periods in 2007. Significant components of the three and six month period increases include inflationary increases in salaries, wages and benefits expense and group health insurance costs; increases in deposit insurance premiums resulting from the expiration of our one-time premium credit; one-time expenses related to employee recruitment and relocation; and, higher depreciation and maintenance expenses resulting from the addition, replacement and repair of equipment in the ordinary course of business. These increases in other expenses were partially offset by the first quarter 2008 reversal of $625 thousand of previously recorded contingency accruals related to our agreement to indemnify Visa USA for certain litigation losses and the second quarter 2008 reversal of impairment on mortgage servicing rights of $4.3 million.

RESULTS OF OPERATIONS

     Net Interest Income. Net interest income, our largest source of operating income, is derived from interest, dividends and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. The most significant impact on our net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities (spread). The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the spread, produces changes in the net interest income between periods. Noninterest bearing sources of funds, such as demand deposits and stockholders’ equity, also support earning assets. The impact of free funding sources is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Given the interest free nature of free funding sources, the net interest margin is generally higher than the spread.

     The following table presents, for the periods indicated, condensed average balance sheet information, together with interest income and yields earned on average interest earning assets and interest expense and rates paid on average interest bearing liabilities.

Average Balance Sheets, Yields and Rates
(Dollars in thousands)

		Three Months Ended June 30,
		2008												2007
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
Interest earning assets:
Loans (1)		$	4,458,678				75,632				6.82	%			3,418,976				68,015				7.98	%
Investment securities (1)			1,108,133				13,444				4.88				941,462				11,635				4.96
Federal funds sold			44,253				261				2.37				134,183				1,801				5.38
Interest bearing deposits in banks			4,944				37				3.01				31,230				396				5.09
Total interest earning assets			5,616,008				89,374				6.40	%			4,525,851				81,847				7.25	%
Noninterest earning assets			676,388												423,784
Total assets		$	6,292,396												4,949,635
Interest bearing liabilities:
Demand deposits		$	1,163,838				3,414				1.18	%			1,012,485				6,257				2.48	%
Savings deposits			1,121,819				4,455				1.60				949,859				6,318				2.67
Time deposits			1,623,799				16,134				4.00				1,088,858				12,714				4.68
Federal funds purchased			92,893				491				2.13				1,560				21				5.40
Borrowings (2)			585,596				2,145				1.47				538,971				5,367				3.99
Long-term debt			90,712				1,145				5.08				6,051				84				5.57
Subordinated debentures			123,715				1,913				6.22				41,238				895				8.71
Total interest bearing liabilities			4,802,372				29,697				2.49	%			3,639,022				31,656				3.49	%
Noninterest bearing deposits			924,519												840,968
Other noninterest bearing liabilities			59,186												47,785
Stockholders’ equity			506,319												421,860
Total liabilities and stockholders’ equity		$	6,292,396												4,949,635
Net FTE interest						$	59,677												50,191
Less FTE adjustments							(1,306	)											(1,013	)
Net interest income from consolidated statements of income						$	58,371												49,178
Interest rate spread											3.91	%											3.76	%
Net FTE yield on interest earning assets (3)											4.27	%											4.45	%

		Six Months Ended June 30,
		2008												2007
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
Interest earning assets:
Loans (1)		$	4,352,490				153,660				7.10	%			3,370,563				133,667				8.00	%
Investment securities (1)			1,112,715				27,219				4.92				1,008,453				24,667				4.93
Federal funds sold			57,799				787				2.74				98,801				2,660				5.43
Interest bearing deposits in banks			8,558				165				3.88				19,780				502				5.12
Total interest earning assets			5,531,562				181,831				6.61	%			4,497,597				161,496				7.24	%
Noninterest earning assets			647,240												419,386
Total assets		$	6,178,802												4,916,983
Interest bearing liabilities:
Demand deposits		$	1,148,412				7,878				1.38	%			989,159				11,969				2.44	%
Savings deposits			1,103,884				9,988				1.82				887,430				11,176				2.54
Time deposits			1,593,425				33,272				4.20				1,078,098				24,739				4.63
Federal funds purchased			65,617				772				2.37				2,505				64				5.15
Borrowings (2)			579,667				5,528				1.92				603,559				12,150				4.06
Long-term debt			88,758				2,352				5.33				13,007				269				4.17
Subordinated debentures			122,939				4,213				6.89				41,238				1,781				8.71
Total interest bearing liabilities			4,702,702				64,003				2.74	%			3,614,996				62,148				3.47	%
Noninterest bearing deposits			921,731												832,306
Other noninterest bearing liabilities			58,576												51,500
Stockholders’ equity			495,793												418,181
Total liabilities and stockholders’ equity		$	6,178,802												4,916,983
Net FTE interest						$	117,828												99,348
Less FTE adjustments							(2,654	)											(2,026	)
Net interest income from consolidated statements of income						$	115,174												97,322
Interest rate spread											3.87	%											3.77	%
Net FTE yield on interest earning assets (3)											4.28	%											4.45	%

     Net interest income, on a fully taxable equivalent, or FTE, basis, increased $9.5 million, or 18.9%, to $59.7 million for the three months ended June 30, 2008 as compared to $50.2 million for the same period in 2007, and $18.5 million, or 18.6%, to $117.8 million for the six months ended June 30, 2008 as compared to $99.3 million for the same period in 2007. Improvements in FTE net interest income are primarily due to increases in average earning assets combined with an increase in the spread between rates earned on interest earning assets and rate paid on interest bearing liabilities. Growth in average earning assets and average interest bearing liabilities is primarily due to the First Western acquisition.

     Despite growth in average interest earning assets and an increase in the interest rate spread, our net FTE interest margin decreased 18 basis points to 4.27% for the three months ended June 30, 2008, from 4.45% during the same period in the prior year, and 17 basis points to 4.28% for the six months ended June 30, 2008, from 4.45% during the same period in 2007. These decreases are due, in part, to the deployment of available funding into nonearning assets including premises and equipment, goodwill and core deposit intangible assets recorded as part of the First Western acquisition. In addition, free funding sources comprised a smaller percentage of our total funding base during the first six months of 2008, which further eroded our FTE net interest margin.

     The table below sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from estimated changes in average asset and liability balances (volume) and estimated changes in average interest rates (rate). Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other.

Analysis of Interest Changes Due To Volume and Rates

(Dollars in thousands)

		Three Months Ended June 30,												Six Months Ended June 30,
		2008 Compared with 2007												2008 Compared with 2007
		Volume				Rate				Net				Volume				Rate				Net
Interest earning assets:
Loans (1)		$	20,683				(13,066	)			7,617				38,941				(18,948	)			19,993
Investment securities (1)			2,060				(251	)			1,809				2,550				2				2,552
Interest bearing deposits in banks			(333	)			(26	)			(359	)			(285	)			(52	)			(337	)
Federal funds sold			(1,207	)			(333	)			(1,540	)			(1,105	)			(768	)			(1,873	)
Total change			21,203				(13,676	)			7,527				40,101				(19,766	)			20,335
Interest bearing liabilites:
Demand deposits			935				(3,778	)			(2,843	)			1,927				(6,018	)			(4,091	)
Savings deposits			1,144				(3,007	)			(1,863	)			2,726				(3,914	)			(1,188	)
Time deposits			6,246				(2,826	)			3,420				11,825				(3,292	)			8,533
Federal funds purchased			1,229				(759	)			470				1,612				(904	)			708
Borrowings (2)			464				(3,686	)			(3,222	)			(481	)			(6,141	)			(6,622	)
Long-term debt			1,175				(114	)			1,061				1,567				516				2,083
Subordinated debentures			1,790				(772	)			1,018				1,755				677				2,432
Total change			12,983				(14,942	)			(1,959	)			20,931				(19,076	)			1,855
Increase in FTE net interest income		$	8,220				1,266				9,486				19,170				(690	)			18,480