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

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

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
(Address of principal executive offices)		(Zip Code)

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):

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 7,936,527 shares of common stock outstanding on September 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 September 30, 2008 and December 31, 2007			3
		Consolidated Statements of Income Three and nine months ended September 30, 2008 and 2007			4
		Consolidated Statements of Changes in Stockholders’ Equity Nine months ended September 30, 2008 and 2007			5
		Consolidated Statements of Cash Flows Nine months ended September 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			17
		Item 3 — Quantitative and Qualitative Disclosures about Market Risk			34
		Item 4T — Controls and Procedures			34
Part II.		Other Information
		Item 1 — Legal Proceedings			35
		Item 1A — Risk Factors			35
		Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			35
		Item 3 — Defaults Upon Senior Securities			35
		Item 4 — Submission of Matters to a Vote of Security Holders			35
		Item 5 — Other Information			35
		Item 6 — Exhibits			36
Signatures					38
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)

		September 30,				December 31,
		2008				2007
Assets
Cash and due from banks		$	203,114				181,743
Federal funds sold			37,317				60,635
Interest bearing deposits in banks			1,296				6,868
Total cash and cash equivalents			241,727				249,246
Investment securities:
Available-for-sale			918,786				1,014,280
Held-to-maturity (estimated fair values of $109,910 as of September 30, 2008 and $114,613 as of December 31, 2007)			111,784				114,377
Total investment securities			1,030,570				1,128,657
Loans			4,744,675				3,558,980
Less allowance for loan losses			77,094				52,355
Net loans			4,667,581				3,506,625
Goodwill			187,297				37,380
Premises and equipment, net			171,990				124,041
Company-owned life insurance			68,790				67,076
Accrued interest receivable			42,571				32,215
Mortgage servicing rights, net of accumulated amortization and impairment reserve			21,870				21,715
Core deposit intangible assets, net of accumulated amortization			13,322				257
Net deferred tax asset			4,291				6,741
Other assets			60,004				42,844
Total assets		$	6,510,013				5,216,797
Liabilities and Stockholders’ Equity
Deposits:
Noninterest bearing		$	984,704				836,753
Interest bearing			4,050,640				3,162,648
Total deposits			5,035,344				3,999,401
Federal funds purchased			69,420				—
Securities sold under repurchase agreements			510,457				604,762
Accrued interest payable			19,704				21,104
Accounts payable and accrued expenses			39,423				30,117
Other borrowed funds			102,257				8,730
Long-term debt			84,695				5,145
Subordinated debentures held by subsidiary trusts			123,715				103,095
Total liabilities			5,985,015				4,772,354
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; issued and outstanding 5,000 shares as of September 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 7,936,527 shares as of September 30, 2008 and 8,006,041 shares as of December 31, 2007			121,910				29,773
Retained earnings			350,445				416,425
Accumulated other comprehensive loss, net			2,643				(1,755	)
Total stockholders’ equity			524,998				444,443
Total liabilities and stockholders’ equity		$	6,510,013				5,216,797

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2008				2007				2008				2007
Interest income:
Interest and fees on loans		$	77,798				70,798				230,561				203,699
Interest and dividends on investment securities:
Taxable			10,475				10,653				32,933				31,720
Exempt from Federal taxes			1,464				1,164				4,468				3,504
Interest on Federal funds sold			177				541				964				3,201
Interest on deposits in banks			14				158				179				660
Total interest income			89,928				83,314				269,105				242,784
Interest expense:
Interest on deposits			23,207				26,458				74,345				74,342
Interest on Federal funds purchased			554				199				1,326				263
Interest on securities sold under repurchase agreements			1,751				4,502				6,853				16,576
Interest on other borrowed funds			669				42				1,095				118
Interest on long-term debt			1,084				79				3,436				348
Interest on subordinated debentures held by subsidiary trusts			1,969				1,191				6,182				2,972
Total interest expense			29,234				32,471				93,237				94,619
Net interest income			60,694				50,843				175,868				148,165
Provision for loan losses			5,636				1,875				13,320				5,625
Net interest income after provision for loan losses			55,058				48,968				162,548				142,540
Noninterest income:
Other service charges, commissions and fees			7,293				6,350				21,319				17,909
Service charges on deposit accounts			5,464				4,530				15,309				13,418
Technology services revenues			4,589				6,196				13,302				14,815
Income from origination and sale of loans			2,761				2,984				9,463				8,135
Wealth managment revenues			3,035				3,098				9,568				8,724
Investment securities gains, net			12				6				86				6
Other income			1,156				2,226				6,857				6,386
Total noninterest income			24,310				25,390				75,904				69,393
Noninterest expense:
Salaries, wages and employee benefits			27,671				24,366				85,736				72,537
Furniture and equipment			4,588				4,162				14,101				12,194
Occupancy, net			4,000				3,935				12,243				11,091
Mortgage servicing rights impairment			1,640				95				895				211
Professional fees			1,298				1,052				3,659				2,419
Mortgage servicing rights amortization			1,209				1,059				4,005				3,341
Core deposit intangible amortization			641				43				1,862				131
Other expenses			14,063				9,869				35,425				28,013
Total noninterest expense			55,110				44,581				157,926				129,937
Income before income taxes			24,258				29,777				80,526				81,996
Income tax expense			8,362				10,528				27,928				28,626
Net income			15,896				19,249				52,598				53,370
Preferred stock dividends			863				—				2,484				—
Net income available to common stockholders		$	15,033				19,249				50,114				53,370
Basic earnings per common share		$	1.93				2.37				6.38				6.54
Diluted earnings per common share		$	1.89				2.32				6.25				6.39

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders’ Equity
(In thousands, except share and per share data)
(Unaudited)

		For the nine months
		ended September 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			52,598				53,370
Post-retirement liability adjustment, net of income tax benefit of $10 in 2008			(15	)			—
Unrealized gains on available-for-sale investment securities, net of income tax expense of $2,896 in 2008 and $2,235 in 2007			4,465				3,446
Less reclassfication adjustments for gains included in net income, net of income tax expense of $34 in 2008 and $2 in 2007			(52	)			(4	)
Other comprehensive income			4,398				3,442
Total comprehensive income			56,996				56,812
Preferred stock transactions:
Preferred shares issued, 5,000 in 2008			50,000				—
Preferred stock issuance costs			(38	)			—
Common stock transactions:
Common shares issued, 154,288 in 2008 and 17,248 in 2007			11,884				1,497
Common shares retired, 267,622 in 2008 and 188,052 in 2007			(22,729	)			(16,582	)
Stock options exercised net of shares tendered in payment of option price and income tax withholding amounts, 43,820 in 2008 and 128,343 in 2007			1,371				4,735
Tax benefits of stock options			868				2,342
Stock-based compensation expense			743				926
Cash dividends declared:
Common, $1.95 per share in 2008 and $2.32 per share in 2007			(15,423	)			(18,990	)
Preferred (6.75% stated annual rate)			(2,484	)			—
Balance at September 30, 2008 and 2007		$	524,998				441,115

See accompanying notes to unaudited consolidated financial statements.

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

		For the nine months
		ended September 30,
		2008				2007
Cash flows from operating activities:
Net income		$	52,598				53,370
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			20				(26	)
Provision for loan losses			13,320				5,625
Depreciation expense			11,406				10,488
Amortization of mortgage servicing rights			4,005				3,341
Net premium amortization (discount accretion) on investment securities			604				(2,426	)
Net gain on disposal of available-for-sale investment securities			(86	)			(6	)
Net gain (loss) on sale of property and equipment			(1	)			203
Net gain on sale of mortgage servicing rights			—				(996	)
Amortization of core deposit intangibles			1,862				131
Net impairment charges on mortgage servicing rights			895				211
Net increase in cash surrender value of company-owned life insurance			(1,714	)			(1,627	)
Write-down of property pending sale/disposal			17				16
Other than temporary impairment on investment securities			1,286				—
Stock-based compensation expense			743				926
Excess tax benefits from stock-based compensation			(840	)			(2,272	)
Deferred income taxes			(353	)			(1,805	)
Changes in operating assets and liabilities:
Increase in loans held for sale			(3,324	)			(882	)
Increase in interest receivable			(2,375	)			(7,820	)
Decrease (increase) in other assets			(11,802	)			2,628
Increase (decrease) in accrued interest payable			(4,034	)			1,121
Increase (decrease) in accounts payable and accrued expenses			3,313				(4,804	)
Net cash provided by operating activities			64,907				55,396
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity			(12,778	)			(12,154	)
Available-for-sale			(234,200	)			(1,656,246	)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity			15,248				11,561
Available-for-sale			431,250				1,796,795
Purchases and originations of mortgage servicing rights			(5,055	)			(4,914	)
Proceeds from sale of mortgage servicing rights			—				2,603
Extensions of credit to customers, net of repayments			(468,468	)			(220,785	)
Recoveries of loans charged-off			1,533				1,726
Proceeds from sales of other real estate			310				576
Net capital expenditures			(21,304	)			(13,810	)
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			(429,790	)			(94,648	)

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

		For the nine months
		ended September 30,
		2008				2007
Cash flows from financing activities:
Net increase in deposits		$	224,016				296,799
Net increase in Federal funds purchased			69,420				—
Net decrease in repurchase agreements			(99,337	)			(272,761	)
Net increase in other borrowed funds			89,288				2,470
Borrowings of long-term debt			113,500				—
Repayments of long-term debt			(33,950	)			(16,092	)
Proceeds from issuance of subordinated debentures held by subsidiary trusts			20,620				—
Net decrease (increase) in debt issuance costs			(444	)			26
Preferred stock issuance costs			(38	)			—
Proceeds from issuance of common stock			14,085				8,574
Excess tax benefits from stock-based compensation			840				2,272
Purchase and retirement of common stock			(22,729	)			(16,582	)
Dividends paid on common stock			(15,423	)			(18,990	)
Dividends paid on preferred stock			(2,484	)			—
Net cash provided by (used in) financing activities			357,364				(14,284	)
Net decrease in cash and cash equivalents			(7,519	)			(53,536	)
Cash and cash equivalents at beginning of period			249,246				255,791
Cash and cash equivalents at end of period		$	241,727				202,255

See accompanying notes to unaudited consolidated financial statements.

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

(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 September 30, 2008 and December 31, 2007 and the results of operations and cash flows for each of the three and nine month periods ended September 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 September 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 nine months ended September 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. The Company does not expect adoption of SFAS No. 157 for nonfinancial assets and liabilities to have material impact on its consolidated financial statements, results of operations or liquidity.
		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. 141(revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, contingencies, noncontrolling interests and goodwill acquired in a business combination. SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141R is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS No. 141R on January 1, 2009 to impact 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)

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 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires 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 impact its consolidated financial statements, results of operations or liquidity.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the approval by the Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect adoption of SFAS No. 162 to impact its consolidated financial statements, results of operations or liquidity.

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 $52 for the three and nine months ended September 30, 2008, respectively, is included in salaries wages and employee 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.

In September 2008, the FASB ratified EITF Issue No. 08-5 (“EITF 08-5”), “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement.” EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement such as a guarantee and clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the Company on January 1, 2009. The Company does not expect adoption of EITF 08-5 to have a significant 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)

		FASB Staff Positions. In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets.” FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for the Company on January 1, 2009. The Company does not expect adoption of FSP 142-3 to have a material impact on its consolidated financial statements, results of operations or liquidity.
		In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 clarified that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for the Company on January 1, 2009. The Company does not expect adoption of FSP EITF 03-6-1 to have a material impact on its consolidated financial statements, results of operations or liquidity.
		In October 2008, the FASB issued FSP 157-3, “Determining Fair Value of a Financial Asset in a Market That Is Not Active.” FSP 157-3 clarifies the application of SFAS No. 157 in an inactive market and demonstrates how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of FSP 157-3 did not have a material 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 nine months ended September 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 $50,521 and $6.35, respectively, for the nine months ended September 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 $13,322 as of September 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 September 30, 2008 is expected to total $641 for the remainder of 2008, $2,131 in 2009, $1,748 in 2010, $1,446 in 2011 and $1,421 in 2012.
(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 September 30, 2008, commitments to extend credit to existing and new borrowers approximated $1,223, which includes $332 on unused credit card lines and $333 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 September 30, 2008, the Company had outstanding standby letters of credit of $66. 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 nine month periods ended September 30, 2008 and 2007.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net income available to common stockholders		$	15,033				19,249				50,114				53,370
Average outstanding comon shares-basic			7,805,118				8,107,893				7,856,406				8,156,254
Add: effect of dilutive stock options			149,933				197,152				162,358				196,175
Average outstanding common shares-diluted			7,955,051				8,305,045				8,018,764				8,352,429
Basic earnings per common share		$	1.93				2.37				6.38				6.54
Diluted earnings per common share		$	1.89				2.32				6.25				6.39

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 $94,637 and $93,498 for interest during the nine months ended September 30, 2008 and 2007, respectively. The Company paid cash for income taxes of $25,174 and $33,556 during the nine months ended September 30, 2008 and 2007, respectively.
		During the nine months ended September 30, 2008, 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 September 30, 2008, the Company had loans held for sale of $29,404. Management obtains quotes or bids on all or part of these loans directly from the purchasing institution. All loans held for sale as of September 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 September 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

9/30/2008

(Level 1)

(Level 2)

(Level 3)

Investment securities available-for-sale

$

918,786

—

918,786

—

Mortgage servicing rights

22,383

22,383

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 nonrecurring basis were not significant at September 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.
		The Company had commitments under construction contracts of $18,376 as of September 30, 2008.

(10)		Subsequent Events — Long Term Debt
		On October 3, 2008, the Company entered into the first amendment to its syndicated credit agreement (“Credit Agreement”). The amendment reduced the maximum amount that may be advanced under the Credit Agreement’s revolving credit facility (“Revolving Notes”) from $25,000 to $15,000, increased the interest rate charged on the Revolving Notes by 0.50% and increased the annual commitment fee by 0.10%. The total outstanding balance under the Credit Agreement as of September 30, 2008 was $45,643, which included $44,643 outstanding on variable rate term notes bearing interest at weighted average rate of 4.69% and $1,000 outstanding on a Revolving Note bearing interest at 5.00%.
		The amendment also included revisions to certain debt covenants related to nonperforming assets and waived all debt covenant defaults resulting from breaches existing as of June 30, 2008. The Company paid amendment and waiver fees of $85. The Company was in compliance with all existing and amended debt covenants as of September 30, 2008.
(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, and the operational results of non-bank subsidiaries (except the Company’s technology services subsidiary). The operational results of non-bank subsidiaries (except the Company’s technology services subsidiary) are not significant.

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

Intersegment revenues primarily represents interest income on intercompany borrowings, earnings on the Parent Company’s investment in subsidiaries, management fees paid to the Parent Company and technology services fees paid to the Company’s technology services subsidiary. Intersegment revenues, expenses and assets are eliminated in accordance with accounting principles generally accepted in the United States of America.

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

		Three Months Ended September 30, 2008
		Community				Technology								Intersegment
		Banking				Services				Other				Eliminations				Total
Net interest income		$	63,490				17				16,257				(19,070	)			60,694
Provision for loan losses			5,636				—				—				—				5,636
Noninterest income:
External			20,066				4,589				(345	)			—				24,310
Intersegment			—				3,084				2,789				(5,873	)			—
Noninterest expense			59,548				6,899				2,898				(5,873	)			63,472
Net income		$	18,372				791				15,803				(19,070	)			15,896
Depreciation and core deposit intangibles amortization		$	4,249				—				40				—				4,289

		Three Months Ended September 30, 2007
		Community				Technology								Intersegment
		Banking				Services				Other				Eliminations				Total
Net interest income		$	52,025				46				19,773				(21,001	)			50,843
Provision for loan losses			1,875				—				—				—				1,875
Noninterest income:
External			19,001				6,196				193				—				25,390
Intersegment			—				3,236				2,043				(5,279	)			—
Noninterest expense			49,818				7,718				2,852				(5,279	)			55,109
Net income		$	19,333				1,760				19,157				(21,001	)			19,249
Depreciation and core deposit intangibles amortization		$	3,690				—				56				—				3,746

		Nine Months Ended September 30, 2008
		Community				Technology								Intersegment
		Banking				Services				Other				Eliminations				Total
Net interest income		$	184,688				65				52,874				(61,759	)			175,868
Provision for loan losses			13,320				—				—				—				13,320
Noninterest income:
External			60,932				14,195				777				—				75,904
Intersegment			—				9,380				8,500				(17,880	)			—
Noninterest expense			172,732				21,280				9,722				(17,880	)			185,854
Net income		$	59,568				2,360				52,429				(61,759	)			52,598
Depreciation and core deposit intangibles amortization		$	13,083				—				185				—				13,268

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

		Nine Months Ended September 30, 2007
		Community				Technology								Intersegment
		Banking				Services				Other				Eliminations				Total
Net interest income		$	151,114				133				55,294				(58,376	)			148,165
Provision for loan losses			5,625				—				—				—				5,625
Noninterest income:
External			53,566				14,815				1,012				—				69,393
Intersegment			1				9,724				6,157				(15,882	)			—
Noninterest expense			143,756				21,324				9,365				(15,882	)			158,563
Net income		$	55,300				3,348				53,098				(58,376	)			53,370
Depreciation and core deposit intangibles amortization		$	10,438				—				181				—				10,619

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 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.

RECENT MARKET DEVELOPMENTS

     The global and U.S. economies are experiencing significantly reduced business activity as a result of, among other factors, disruptions in the financial system during the past year. Dramatic declines in the national housing market during the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.

     Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions. The availability of credit, confidence in the financial sector, and level of volatility in the financial markets have been significantly adversely affected as a result. In recent weeks, volatility and disruption in the capital and credit markets has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength.

     In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008, or EESA, was signed into law. Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

     On October 14, 2008, it was announced that the Department of the Treasury will purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program, or TARP, from the $700 billion authorized by the EESA, the Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, participating financial institutions will be required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP.

     Also on October 14, 2008, the systemic risk exception to the FDIC Act was signed enabling the FDIC to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in noninterest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program. Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for noninterest bearing transaction deposits. We are currently assessing the benefit of participation in both the TARP and the Temporary Liquidity Guarantee Program but have not yet made a definitive decision as to whether we will participate.

     It is not clear at this time what impact the EESA, the TARP, the Temporary Liquidity Guarantee Program, other liquidity and funding initiatives of the Federal Reserve and other agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the other difficulties described above, including the extreme levels of volatility and limited credit availability currently being experienced, or on the U.S. banking and financial industries and the broader U.S. and global economies. Further adverse effects could have an adverse effect on our consolidated financial statements, results of operations and liquidity.

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 of these areas are particularly important. We did not engage in sub-prime lending practices and our local economies have not been as severely impacted by the national economic and real estate downturn, sub-prime mortgage crisis and ongoing financial market turmoil as many areas of the United States. As of September 30, 2008, our investments in corporate securities, non-agency mortgage-backed securities and Federal National Mortgage Association, or Fannie Mae, common stock totaled $5.1 million, or less than 1% of our total investment portfolio. We did not invest in Federal Home Loan Mortgage Corporation, or Freddie Mac, preferred stock. The relatively stable economies of Montana, Wyoming and South Dakota and the conservative management philosophies employed in our daily operations have kept us from experiencing the magnitude of financial instability challenging many financial institutions today.

     Our financial performance 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 nine months ended September 30, 2008 include the results of the acquired entities since the date of acquisition.

     Net income available to common shareholders was $15.0 million, or $1.89 per diluted common share, for the quarter ended September 30, 2008. This is a decrease of $4.2 million, or 21.9%, as compared to $19.2 million, or $2.32 per diluted common share, for the same period in 2007. For the nine months ended September 30, 2008, net income available to common shareholders was $50.1 million, or $6.25 per diluted common share, a decrease of $3.3 million, or 6.1%, compared to $53.4 million, or $6.39 per diluted share, for the same period in 2007.

     Net interest income, on a fully taxable equivalent, or FTE, basis, increased $10.2 million, or 19.6%, to $62.0 million for the three months ended September 30, 2008 as compared to $51.8 million for the same period in 2007, and $28.6 million, or 18.9%, to $179.8 million for the nine months ended September 30, 2008 as compared to $151.2 million for the same period in 2007. Improvements in FTE net interest income were primarily due to increases in average earning assets.

     Our net FTE interest margin remained stable at 4.30% for the three months ended September 30, 2008, as compared to 4.27% during second quarter 2008 and 4.29% during first quarter 2008. Despite growth in average interest earning assets, our net FTE interest margin decreased 20 basis points to 4.30% for the three months ended September 30, 2008 and 18 basis points to 4.29% for the nine months ended September 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 nine months ended September 30, 2008, which further compressed our FTE net interest margin.

     We experienced deterioration in credit quality during the second and third quarters of 2008, 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 $3.8 million, or 200.6%, to $5.6 million for the three months ended September 30, 2008, and $7.7 million, or 136.8%, to $13.2 million for the nine months ended September 30, 2008, as compared to the same periods in 2007.

     Exclusive of the results of the acquired First Western entities, noninterest income decreased $2.6 million, or 10.4%, during the three months ended September 30, 2008, as compared to the same period in 2007. During third quarter 2007, we recorded a $2.0 million nonrecurring contract termination fee and a $737 thousand nonrecurring gain from the conversion and subsequent sale of MasterCard stock. Exclusive of the results of the acquired First Western entities, noninterest income increased $1.2 million, or 1.8%, during the nine months ended September 30, 2008, as compared to the same period in 2007. During the nine months ended September 30, 2008, we recorded a $1.6 million nonrecurring gain on the mandatory redemption of our class B shares of Visa, Inc. and a nonrecurring 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. The effect of nonrecurring gains recorded in 2008 were offset by nonrecurring income recorded in 2007, including the $2.0 million contract termination fee and the $737 thousand gain on the conversion and sale of MasterCard stock.

     Exclusive of the results of the acquired First Western entities, noninterest expense increased $3.2 million, or 7.2%, for the three months ended September 30, 2008, and $9.9 million, or 7.66%, for the nine months ended September 30, 2008, as compared to the same periods in 2007. Significant components of the three and nine 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.

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 September 30,
		2008												2007
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
Interest earning assets:
Loans (1)		$	4,672,200				78,257				6.66	%			3,523,170				71,166				8.01	%
Investment securities (1)			1,031,446				12,783				4.93				985,381				12,444				5.01
Federal funds sold			29,374				177				2.40				44,503				541				4.82
Interest bearing deposits in banks			1,547				14				3.60				13,228				158				4.74
Total interest earning assets			5,734,567				91,231				6.33	%			4,566,282				84,309				7.33	%
Noninterest earning assets			689,862												422,553
Total assets		$	6,424,429												4,988,835
Interest bearing liabilities:
Demand deposits		$	1,139,816				2,987				1.04	%			1,018,391				6,320				2.46	%
Savings deposits			1,156,578				4,597				1.58				987,703				6,765				2.72
Time deposits			1,685,811				15,623				3.69				1,116,935				13,373				4.75
Federal funds purchased			101,264				554				2.18				15,365				199				5.14
Borrowings (2)			607,640				2,420				1.58				470,277				4,544				3.83
Long-term debt			86,408				1,084				4.99				5,636				79				5.56
Subordinated debentures			123,715				1,969				6.33				41,238				1,191				11.46
Total interest bearing liabilities			4,901,232				29,234				2.37	%			3,655,545				32,471				3.52	%
Noninterest bearing deposits			962,787												858,292
Other noninterest bearing liabilities			56,543												49,522
Stockholders’ equity			503,867												425,476
Total liabilities and stockholders’ equity		$	6,424,429												4,988,835
Net FTE interest						$	61,997												51,838
Less FTE adjustments							(1,303	)											(995	)
Net interest income from consolidated statements of income						$	60,694												50,843
Interest rate spread											3.96	%											3.81	%
Net FTE yield on interest earning assets (3)											4.30	%											4.50	%

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

		Nine Months Ended September 30,
		2008												2007
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
Interest earning assets:
Loans (1)		$	4,459,060				231,916				6.95	%			3,421,432				204,832				8.00	%
Investment securities (1)			1,085,625				40,002				4.92				1,000,762				37,111				4.93
Federal funds sold			48,324				964				2.66				80,701				3,201				5.30
Interest bearing deposits in banks			6,221				179				3.84				15,918				660				5.54
Total interest earning assets			5,599,230				273,061				6.51	%			4,518,813				245,804				7.27	%
Noninterest earning assets			661,447												422,120
Total assets		$	6,260,677												4,940,933
Interest bearing liabilities:
Demand deposits		$	1,145,546				10,865				1.27	%			998,903				18,288				2.45	%
Savings deposits			1,121,449				14,584				1.74				920,855				17,941				2.60
Time deposits			1,624,220				48,896				4.02				1,091,044				38,113				4.67
Federal funds purchased			77,499				1,326				2.29				6,791				263				5.18
Borrowings (2)			589,078				7,948				1.80				559,132				16,694				3.99
Long-term debt			87,975				3,436				5.22				10,550				348				4.41
Subordinated debentures			123,198				6,182				6.70				41,238				2,972				9.64
Total interest bearing liabilities			4,768,965				93,237				2.61	%			3,628,513				94,619				3.49	%
Noninterest bearing deposits			935,416												840,968
Other noninterest bearing liabilities			57,812												50,839
Stockholders’ equity			498,484												420,613
Total liabilities and stockholders’ equity		$	6,260,677												4,940,933
Net FTE interest						$	179,824												151,185
Less FTE adjustments							(3,956	)											(3,020	)
Net interest income from consolidated statements of income						$	175,868												148,165
Interest rate spread											3.90	%											3.78	%
Net FTE yield on interest earning assets (3)											4.29	%											4.47	%

     Net interest income, on a fully taxable equivalent, or FTE, basis, increased $10.2 million, or 19.6%, to $62.0 million for the three months ended September 30, 2008 as compared to $51.8 million for the same period in 2007, and $28.6 million, or 18.9%, to $179.8 million for the nine months ended September 30, 2008 as compared to $151.2 million for the same period in 2007. Improvements in FTE net interest income are primarily due to increases in average earning assets. Growth in average earning assets and average interest bearing liabilities was primarily due to the First Western acquisition, and to a lesser extent, internal growth.

     Despite growth in average interest earning assets and an increase in the interest rate spread, our net FTE interest margin decreased 20 basis points to 4.30% for the three months ended September 30, 2008, from 4.50% during the same period in the prior year, and 18 basis points to 4.29% for the nine months ended September 30, 2008, from 4.47% 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 nine months of 2008 further compressing 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 September 30,												Nine Months Ended September 30,
		2008 Compared with 2007												2008 Compared with 2007
		Volume				Rate				Net				Volume				Rate				Net
Interest earning assets:
Loans (1)		$	23,210				(16,119	)			7,091				62,120				(35,036	)			27,084
Investment securities (1)			582				(243	)			339				3,147				(256	)			2,891
Interest bearing deposits in banks			(140	)			(4	)			(144	)			(402	)			(79	)			(481	)
Federal funds sold			(184	)			(180	)			(364	)			(1,284	)			(953	)			(2,237	)
Total change			23,468				(16,546	)			6,922				63,581				(36,324	)			27,257
Interest bearing liabilites:
Demand deposits			754				(4,087	)			(3,333	)			2,685				(10,108	)			(7,423	)
Savings deposits			1,157				(3,325	)			(2,168	)			3,908				(7,265	)			(3,357	)
Time deposits			6,811				(4,561	)			2,250				18,625				(7,842	)			10,783
Federal funds purchased			1,113				(758	)			355				2,738				(1,675	)			1,063
Borrowings (2)			1,327				(3,451	)			(2,124	)			894				(9,640	)			(8,746	)
Long-term debt			1,132				(127	)			1,005				2,554				534				3,088
Subordinated debentures			2,382				(1,604	)			778				5,907				(2,697	)			3,210
Total change			14,676				(17,913	)			(3,237	)			37,311				(38,693	)			(1,382	)
Increase in FTE net interest income		$	8,792				1,367				10,159				26,270				2,369				28,639