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		(IRS Employer
incorporation or organization)		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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

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 8,114,891 shares of common stock outstanding on April 30, 2006.

 

 

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 March 31, 2006 and December 31, 2005			3
				Consolidated Statements of Income Three months ended March 31, 2006 and 2005			4
				Consolidated Statements of Stockholders’ Equity and Comprehensive Income Three months ended March 31, 2006 and 2005			5
				Consolidated Statements of Cash Flows Three months ended March 31, 2006 and 2005			6
				Notes to Unaudited Consolidated Financial Statements			7
		Item 2 –		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
		Item 3 –		Quantitative and Qualitative Disclosures about Market Risk			21
		Item 4 –		Controls and Procedures			21
Part II.		Other Information
		Item 1 –		Legal Proceedings			21
		Item 1A –		Risk Factors			21
		Item 2 –		Unregistered Sales of Equity Securities and Use of Proceeds			21
		Item 3 –		Defaults Upon Senior Securities			22
		Item 4 –		Submission of Matters to a Vote of Security Holders			22
		Item 5 –		Other Information			22
		Item 6 –		Exhibits			22
Signatures							24
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)

		March 31,				December 31,
		2006				2005
Assets
Cash and due from banks		$	197,400			$	207,877
Federal funds sold			37,713				27,607
Interest bearing deposits in banks			11,916				5,493
Total cash and cash equivalents			247,029				240,977
Investment securities:
Available-for-sale			889,092				916,450
Held-to-maturity (estimated fair values of $107,409 as of March 31, 2006 and $104,305 as of December 31, 2005)			106,769				103,451
Total investment securities			995,861				1,019,901
Loans			3,116,927				3,034,354
Less allowance for loan losses			43,633				42,450
Net loans			3,073,294				2,991,904
Premises and equipment, net			120,086				120,438
Accrued interest receivable			27,686				26,104
Company-owned life insurance			63,058				62,547
Mortgage servicing rights, net of accumulated amortization and impairment reserve			22,721				22,116
Goodwill			37,380				37,390
Core deposit intangibles, net of accumulated amortization			960				1,204
Net deferred tax asset			5,823				3,285
Other assets			38,749				36,447
Total assets		$	4,632,647			$	4,562,313
Liabilities and Stockholders’ Equity
Deposits:
Noninterest bearing		$	834,955			$	864,128
Interest bearing			2,677,626				2,683,462
Total deposits			3,512,581				3,547,590
Fed Funds Purchased			—				1,500
Securities sold under repurchase agreements			618,307				518,718
Accrued interest payable			12,670				13,185
Accounts payable and accrued expenses			33,271				28,086
Other borrowed funds			642				7,495
Long-term debt			54,291				54,654
Subordinated debenture held by subsidiary trust			41,238				41,238
Total liabilities			4,273,000				4,212,466
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued or outstanding as of March 31, 2006 or December 31, 2005			—				—
Common stock without par value; authorized 20,000,000 shares; issued and outstanding 8,107,994 shares as of March 31, 2006 and 8,098,933 shares as of December 31, 2005			42,944				43,569
Retained earnings			326,926				314,843
Unearned compensation – restricted stock			—				(330	)
Accumulated other comprehensive loss, net			(10,223	)			(8,235	)
Total stockholders’ equity			359,647				349,847
Total liabilities and stockholders’ equity		$	4,632,647			$	4,562,313

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)

		For the three months
		ended March 31,
		2006				2005
Interest income:
Interest and fees on loans		$	55,762			$	43,412
Interest and dividends on investment securities:
Taxable			9,168				6,828
Exempt from federal taxes			1,073				1,073
Interest on deposits in banks			96				165
Interest on federal funds sold			870				489
Total interest income			66,969				51,967
Interest expense:
Interest on deposits			14,984				9,213
Interest on federal funds purchased			7				—
Interest on securities sold under repurchase agreements			5,000				2,159
Interest on other borrowed funds			46				18
Interest on long-term debt			515				644
Interest on subordinated debenture held by subsidiary trust			802				600
Total interest expense			21,354				12,634
Net interest income			45,615				39,333
Provision for loan losses			1,753				1,625
Net interest income after provision for loan losses			43,862				37,708
Noninterest income:
Other service charges, commissions and fees			5,233				4,806
Service charges on deposit accounts			4,100				4,059
Technology services revenues			3,667				3,342
Income from origination and sale of loans			1,861				1,779
Financial services revenues			2,488				2,319
Investment securities losses, net			—				(692	)
Other income			1,771				1,336
Total noninterest income			19,120				16,949
Noninterest expense:
Salaries, wages and employee benefits			21,342				19,678
Furniture and equipment			3,977				3,987
Occupancy, net			3,443				3,311
Mortgage servicing rights amortization			943				1,171
Mortgage servicing rights impairment			(170	)			(463	)
Professional fees			781				624
Outsourced technology services			621				431
Core deposit intangibles amortization			244				253
Other expenses			7,013				7,404
Total noninterest expense			38,194				36,396
Income before income taxes			24,788				18,261
Income tax expense			8,654				6,302
Net income		$	16,134			$	11,959
Basic earnings per common share		$	1.99			$	1.50
Diluted earnings per common share		$	1.95			$	1.48

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income
(Dollars in thousands, except share and per share data)
(Unaudited)

														Unearned				Accumulated other				Total
		Common shares				Common				Retained				compensation -				comprehensive				stockholders’
		outstanding				stock				earnings				restricted stock				loss				equity
Balance at December 31, 2005			8,098,933			$	43,569				314,843				(330	)			(8,235	)			349,847
Comprehensive income:
Net income			—				—				16,134				—				—				16,134
Unrealized losses on investment securities, net of income tax benefit of $1,290			—				—				—				—				(1,988	)			(1,988	)
Other comprehensive loss																							(1,988	)
Total comprehensive income																							14,146
Common stock transactions:
Common shares retired			(45,804	)			(3,228	)			—				—				—				(3,228	)
Common shares issued			5,115				347				—				—				—				347
Stock options exercised, net of 13,366 shares tendered for payment			49,750				1,675				—				—				—				1,675
Stock option tax benefit			—				661				—				—				—				661
Stock-based compensation:
Stock-based compensation expense			—				250				—				—				—				250
Reclassification of unearned compensation - upon adoption of SFAS No. 123R			—				(330	)			—				330				—				—
Cash dividends declared:
Common ($0.50 per share)			—				—				(4,051	)			—				—				(4,051	)
Balance at March 31, 2006			8,107,994			$	42,944				326,926				—				(10,223	)			359,647
Balance at December 31, 2004			7,980,300			$	36,803				275,172				(425	)			(3,224	)			308,326
Comprehensive income:
Net income			—				—				11,959				—				—				11,959
Unrealized losses on investment securities, net of income tax benefit of $3,982			—				—				—				—				(6,138	)			(6,138	)
Less reclassification adjustment for losses included in net income, net of income tax benefit of $272			—				—				—				—				420				420
Other comprehensive loss																							(5,718	)
Total comprehensive income																							6,241
Common stock transactions:
Common shares retired			(16,975	)			(1,016	)			—				—				—				(1,016	)
Common shares issued			6,082				338				—				—				—				338
Restricted shares issued			1,000				56				—				(56	)			—				—
Stock options exercised, net of 8,540 shares tendered for payment			9,679				200				—				—				—				200
Stock option tax benefit			—				153				—				—				—				153
Restricted stock remeasurement			—				75				—				—				—				75
Stock-based compensation expense:
Deferred compensation — restricted stock			—				—				—				(19	)			—				(19	)
Cash dividends declared:
Common ($0.42 per share)			—				—				(3,347	)			—				—				(3,347	)
Balance at March 31, 2005			7,980,086			$	36,609				283,784				(500	)			(8,942	)			310,951

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

		For the three months
		ended March 31,
		2006				2005
Cash flows from operating activities:
Net income		$	16,134				11,959
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of joint ventures			(198	)			(145	)
Provision for loan losses			1,753				1,625
Depreciation			3,302				3,527
Amortization of core deposit intangibles			244				253
Amortization of mortgage servicing rights			943				1,171
Net premium amortization (discount accretion) on investment securities			(938	)			438
Net loss on sale of investment securities			—				692
Net loss on sale of property, equipment and other real estate			17				32
Net impairment reversals on mortgage servicing rights			(170	)			(463	)
Net increase in cash surrender value of company-owned life insurance			(511	)			(421	)
Stock-based compensation expense related to stock options & restricted stock			250				56
Remeasurement of restricted stock awards			—				(75	)
Excess tax benefits from stock-based compensation			5				—
Deferred income taxes			(1,247	)			(854	)
Changes in operating assets and liabilities:
Decrease (increase) in loans held for sale			(4,836	)			3,900
Increase in accrued interest receivable			(1,584	)			(1,540	)
Increase in other assets			(2,572	)			(443	)
Increase (decrease) in accrued interest payable			(503	)			1,052
Increase in accounts payable and accrued expenses			5,185				6,662
Net cash provided by operating activities			15,274				27,426
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity			(5,348	)			(5,501	)
Available-for-sale			(667,704	)			(57,525	)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity			1,970				101
Available-for-sale			692,781				39,517
Proceeds from sales of available-for-sale investment securities			—				45,057
Net decrease (increase) in cash equivalent mutual funds classified as available-for-sale investment securities			—				162
Purchases and originations of mortgage servicing rights			(1,382	)			(1,359	)
Extensions of credit to customers, net of repayments			(79,484	)			(35,709	)
Recoveries of loans charged-off			531				592
Proceeds from sales of other real estate			389				400
Net capital expenditures			(2,778	)			(1,454	)
Sale of banking offices, net of cash			(2,547	)			—
Net cash used in investing activities			(63,572	)			(15,719	)
Cash flows from financing activities:
Net decrease in deposits			(31,932	)			(49,293	)
Net increase in repurchase agreements			99,589				28,749
Net decrease in other borrowed funds			(8,353	)			(3,994	)
Borrowings of long-term debt			600				3,500
Repayments of long-term debt			(963	)			(5,383	)
Net decrease in debt issuance costs			10				10
Proceeds from issuance of common stock			2,022				766
Excess tax benefits from stock-based compensation			656				—
Payments to retire common stock			(3,228	)			(1,016	)
Dividends paid on common stock			(4,051	)			(3,347	)
Net cash provided by (used in) financing activities			54,350				(30,008	)
Net increase (decrease) in cash and cash equivalents			6,052				(18,301	)
Cash and cash equivalents at beginning of period			240,977				355,908
Cash and cash equivalents at end of period		$	247,029			$	337,607

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements
(Dollars 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 March 31, 2006 and December 31, 2005 and the results of operations and cash flows for each of the three month periods ended March 31, 2006 and 2005, in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2005 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 March 31, 2006 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, 2005. Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
(2)		Stock-Based Compensation
		The Company has two stock-based employee compensation plans, the 2001 Stock Option Plan and the 2004 Restricted Stock Award Plan. Under these plans, stock options and restricted stock are awarded to certain officers and directors of the Company at the discretion of the Company’s Board of Directors or the Compensation Committee of the Company’s Board of Directors subject to terms and conditions determined by the Board or Committee at the date of issuance. Readers should refer to Notes 1 and 13 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, for additional information related to these stock-based employee compensation plans.
		Effective January 1, 2006, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised), “Share-Based Payment” (“SFAS 123R”) using a modified version of prospective application. Prior to the adoption of SFAS 123R, the Company accounted for share-based payments to employees using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”). Under the provisions of APB 25, restricted stock awards were accounted for using variable plan accounting whereby compensation expense or benefit was recorded each period from the date of grant to the measurement date based on the fair value of the Company’s common stock at the end of each period. Stock option awards were accounted for using fixed plan accounting whereby the Company recognized no compensation expense for stock option awards because the exercise price of options granted was equal to the fair value of the common stock at the date of grant.
		Under the modified prospective application, the provisions of SFAS 123R apply to new awards and to awards outstanding on January 1, 2006 and subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation expense recognized in the first quarter of 2006 includes compensation costs for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.
		As a result of adopting SFAS 123R on January 1, 2006, the Company’s income before taxes, net income and basic and diluted earnings per share for the three months ended March 31, 2006, were $183, $113, $0.01 and $0.01 lower, respectively, than if the Company had continued to account for stock-based compensation under the provisions of APB 25.

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

The following table illustrates the effect on operating results and per share information had the Company accounted for stock-based compensation in accordance with SFAS 123R for the three months ended March 31, 2005:

Net income as reported		$	11,959
Deduct: Stock-based employee compensation expense determined under a fair value method for all awards, net of taxes			(103	)
Pro forma net income		$	11,856
Basic earnings per share, as reported		$	1.50
Pro forma earnings per share			1.49
Diluted earnings per share, as reported		$	1.48
Pro forma earnings per share			1.47

At March 31, 2006, the Company had $1,730 of unrecognized compensation cost related to stock options and restricted stock awards which is expected to be recognized over a weighted-average period of 1.0 year. Compensation expense associated with stock options and restricted stock awards of $154, net of related tax benefits of $96, was recognized in the Company’s consolidated income statement for the three months ended March 31, 2006 and 2005, respectively. The total weighted average fair value of stock options and restricted stock awards vested during the three months ended March 31, 2006 and 2005 was $437 and $404, respectively.

Stock Options

All options granted under the 2001 Stock Option Plan have an exercise price equal to fair value at the date of grant, may be subject to vesting as determined by the Company’s Board of Directors or Compensation Committee and can be exercised for periods of up to ten years from the date of grant. Stock issued upon exercise of options is subject to a shareholder agreement prohibiting transfer of the stock for a period of six months following the exercise. In addition, the shareholder agreement grants the Company a right of first refusal to repurchase the stock and provides the Company a right to call some or all of the stock under certain conditions.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following weighted-average assumptions for the indicated periods.

		Three months ended March 31,
		2006				2005
Dividend yield			3.01	%			3.05	%
Expected volatility			9.80	%			8.04	%
Risk-free interest rate			4.46	%			4.18	%
Expected life of options (in years)			6.20				8.50
Weighted-average grant-date fair value		$	7.73			$	5.96

The assumptions above are based on historical exercise and post-vesting employment termination behaviors and expected future exercising patterns of employees; and, historical volatility of the Company’s common stock calculated using the quarterly appraised value of a minority interest over the expected life of options in 2006 and the contractual option term in 2005. Risk-free interest rates are based on U.S. treasury constant maturity yields in effect as of each grant date for treasury securities with maturities approximating the expected life of options granted.

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

The following table represents stock option activity for the three months ended March 31, 2006:

										Weighted-Average
		Number of				Weighted-Average				Remaining
		Shares				Exercise Price				Contract Life
Outstanding options, beginning of period			837,145			$	45.95
Granted			129,155				68.00
Exercised			(66,862	)			42.74
Forfeited			(3,625	)			59.09
Outstanding options, end of period			895,813			$	49.32			6.45 years
Outstanding options exercisable, end of period			699,630			$	46.06			5.69 years

At March 31, 2006, the Company had 407,725 shares available for future stock option grants to employees and directors under the 2001 Stock Option Plan. The aggregate intrinsic value of options outstanding and options exercisable were $19,421 and $17,450, respectively, as of March 31, 2006 and $15,057 and $13,607, respectively, as of March 31, 2005. The total intrinsic value of stock options exercised during the three months ended March 31, 2006 and 2005 was $1,729 and $405, respectively.

Net cash proceeds from the exercise of stock options were $1,675 for the three months ended March 31, 2006. The Company receives a tax deduction generally equal to the excess of the fair value of common stock received pursuant to an option exercise over the exercise price of the option. Under SFAS 123R, tax benefits from the exercise of stock options are reported as financing cash flows in the consolidated statements of cash flows rather than as operating cash flows as was required under APB 25. For the three months ended March 31, 2006, the Company recorded financing cash flows of $656 related to tax benefits from the exercise of stock options. The actual income tax benefit realized for the tax deductions from share option exercises totaled $661 for the same period.

The following table summarizes the Company’s nonvested stock option activity for the three months ended March 31, 2006:

		Number of Shares				Weighted-Average
		Shares				Grant-Date Fair Value
Nonvested stock options, beginning of period			186,141			$	5.50
Granted			96,866				7.35
Vested			(83,199	)			5.26
Forfeited			(3,625	)			6.20
Nonvested stock options, end of period			196,183			$	6.50

Compensation expense related to stock options awards of $250 was included in salaries, wages and benefits expense on the Company’s consolidated income statements for the three months ended March 31, 2006. No compensation expense related to stock option awards was recorded in 2005.

Restricted Stock

Common stock issued under the 2004 Restricted Stock Plan may not be sold or otherwise transferred until restrictions have lapsed or performance objectives have been obtained. During the vesting period, participants have voting rights and receive dividends on the restricted shares. Upon termination of employment, common shares upon which restrictions have not lapsed must be returned to the Company. The unearned stock-based compensation related to these awards is amortized to compensation expense over the period the restrictions lapse (generally three years). As of March 31, 2006, unearned stock-based compensation of $267 associated with these awards was included in common stock on the Company’s consolidated financial statements. Compensation expense related to restricted stock awards of $63 and $56 was included in salaries, wages and benefits expense on the Company’s consolidated income statements for the three month periods ended March 31, 2006 and 2005, respectively.

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

The following table represents the shares that were granted and outstanding as of March 31, 2006 and December 31, 2005:

		March 31,				December 31,
		2006				2005
Restricted stock, beginning of period			10,500				11,000
Granted during the period ended			—				500
Forfeited during the period ended			—				(1,000	)
Outstanding, end of period			10,500				10,500

(3)		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 March 31, 2006, commitments to extend credit to existing and new borrowers approximated $850,486, which includes $181,013 on unused credit card lines and $288,104 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 March 31, 2006, the Company had outstanding standby letters of credit of $83,107. 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.
(4)		Computation of Earnings per Share
		Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per common share is calculated by dividing net income 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 month periods ended March 31, 2006 and 2005.

		Three months ended March 31,
		2006				2005
Net income basic and diluted		$	16,134			$	11,959
Average outstanding shares – basic			8,108,490				7,969,864
Add: effect of dilutive stock options			164,723				126,060
Average outstanding shares – diluted			8,273,213				8,095,924
Basic earnings per share		$	1.99			$	1.50
Diluted earnings per share		$	1.95			$	1.48

(5)		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. 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.

Selected segment information for the three month periods ended March 31, 2006 and 2005 follows:

		Three months ended March 31, 2006
		Community				Technology
		Banking				Services				Other				Total
Net interest income (expense)		$	46,486			$	31			$	(902	)		$	45,615
Provision for loan losses			1,753				—				—				1,753
Net interest income (expense) after provision			44,733				31				(902	)			43,862
Noninterest income:
External sources			15,201				3,628				291				19,120
Internal sources			—				3,537				(3,537	)			—
Total noninterest income			15,201				7,165				(3,246	)			19,120
Noninterest expense			34,655				5,187				(1,648	)			38,194
Income (loss) before income taxes			25,279				2,009				(2,500	)			24,788
Income tax expense (benefit)			8,896				793				(1,035	)			8,654
Net income (loss)		$	16,383			$	1,216			$	(1,465	)		$	16,134
Depreciation and core deposit intangibles amortization		$	3,485			$	—			$	61			$	3,546

		Three months ended March 31, 2005
		Community				Technology
		Banking				Services				Other				Total
Net interest income (expense)		$	40,150			$	17			$	(834	)		$	39,333
Provision for loan losses			1,625				—				—				1,625
Net interest income (expense) after provision			38,525				17				(834	)			37,708
Noninterest income:
External sources			13,416				3,342				191				16,949
Internal sources			1				3,405				(3,406	)			—
Total noninterest income			13,417				6,747				(3,215	)			16,949
Noninterest expense			33,113				4,862				(1,579	)			36,396
Income (loss) before income taxes			18,829				1,902				(2,470	)			18,261
Income tax expense (benefit)			6,583				753				(1,034	)			6,302
Net income (loss)		$	12,246			$	1,149			$	(1,436	)		$	11,959
Depreciation and core deposit intangibles amortization		$	3,719			$	—			$	61			$	3,780

(6)		Supplemental Disclosures to Consolidated Statement of Cash Flows
		The Company paid cash of $21,869 and $11,582 for interest during the three months ended March 31, 2006 and 2005, respectively. The Company paid cash for income taxes of $2,000 during the three months ended March 31, 2006. The Company paid no cash for income taxes during the three months ended March 31, 2005.
(7)		Recent Accounting Pronouncements
		In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 156 requires recognition of servicing assets or servicing liabilities each time an entity undertakes an obligation to service a financial asset; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; and, permits an entity to choose either to (1) amortize servicing assets or servicing liabilities in proportion to and over the

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

period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date; or, (2) measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. At its initial adoption, SFAS No. 156 permits a one-time reclassification of available-for-sale securities to trading securities provided that the available-for-sale securities are identified in some manner as offsetting exposure to changes in fair value of servicing assets or servicing liabilities subsequently being measured at fair value. SFAS No. 156 requires separate financial statement presentation of servicing assets and servicing liabilities subsequently measured at fair value and requires additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for the Company on January 1, 2007. The Company does not expect adoption to have a significant impact on the consolidated financial statements, results of operations or liquidity of the Company.

During February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after December 31, 2006. As of March 31, 2006, the Company did not hold any derivative instruments nor was it engaged in hedging activities subject to SFAS Nos. 155, 140 or 133. As such, the adoption of SFAS No. 155 is not expected to have a material impact on the consolidated financial statements, results of operations or liquidity of the Company.

Item 2.

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

     The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, including the audited financial statements contained therein, filed with the Securities and Exchange Commission.

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 the Company’s 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 risk factors discussed in Item 1A of the Company’s Annual Report of Form 10-K for the year ended December 31, 2005, including, among others: (i) credit risk; (ii) credit concentration and economic conditions in Montana and Wyoming; (iii) declines in real estate values; (iv) changes in interest rates; (v) inability to meet liquidity requirements; (vi) availability of capital; (vii) competition; (viii) dependence on technology; (ix) ineffective internal operational controls; (x) difficulties in execution of business strategy; (xi) disruption of vital infrastructure; (xii) changes in or noncompliance with governmental regulations; (xiii) restrictions on dividends and stock redemptions; (xiv) capital required to support the Company’s bank subsidiary (the “Bank”); and (xv) 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 the Company undertakes 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

     The Company’s 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 the Company operates. 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.

     The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The most significant accounting policies followed by the Company are presented in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     The Company’s 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 the Company’s 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.

The allowance for loan losses is maintained at an amount the Company believes is sufficient to provide for estimated losses inherent in its loan portfolio at each balance sheet date. Management believes the process for determining the allowance for loan losses takes into account all of the significant potential factors that could result in credit losses. However, the process includes judgmental and quantitative elements that may be subject to significant change. To the extent actual outcomes differ from the Company’s estimates, additional provision for loan losses could be required, which could adversely affect earnings or financial performance in future periods. Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 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, Provision/Allowance for Loan Losses.”

Valuation of Mortgage Servicing Rights

     The Company recognizes 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. The Company utilizes the expertise of a third-party consultant to estimate the fair value of its 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. Imprecision in estimating these factors can impact the amount of revenue or loss recorded in the Company’s financial statements. Notes 1 and 7 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 describe the methodology used to determine fair value of mortgage servicing rights.

EXECUTIVE OVERVIEW

     During the first quarter of 2006, the Company remained focused on improving operating efficiency and identifying new opportunities to generate additional noninterest income. This strategy resulted in increased earnings during the first quarter of 2006. Net income increased $4.2 million, or 34.9%, to $16.1 million, or $1.95 per diluted share, for the quarter ended March 31, 2006 as compared to $12.0 million, or $1.48 per diluted share, for the same period in 2005. First quarter 2006 net interest income, on a fully taxable-equivalent basis, of $46.5 million increased $6.4 million partly due to growth in average earning assets. Average earning assets grew 11.0% and comprised a larger percentage of total assets during the three months ended March 31, 2006, as compared to the same period in 2005. In addition, noninterest-bearing deposits and common equity comprised a larger share of the funding base during first quarter 2006, as compared to the same period in 2005, allowing the Company to be less reliant on higher costing funding sources, such as time deposits, in 2006. Net income during first quarter 2006 was also positively impacted by lower expenses associated with discontinuation of operations at Wal-Mart in-store banking offices as described below; decreases in losses on sales of investment securities; increases in fee income resulting from debit card transaction volumes; and, increases in revenues from technology and financial services. Partially offsetting these improvements in net income were increases in salaries, wages and employee benefit expenses.

     On January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payments,” which requires all share-based payments to be recognized in the financial statements based on the fair value of the award at the date of grant. Adoption of SFAS No. 123R resulted in the recognition of compensation expense related to stock option and restricted stock awards, net of related income tax benefits, of $113 thousand during the first quarter of 2006.

     In January 2005, the Company made a strategic decision to discontinue the operation of nine banking offices located inside Wal-Mart stores. During 2005, operations at five of the nine Wal-Mart in-store banking offices were discontinued and customer loan and deposit accounts were transferred to existing banking offices located in the same communities. During January 2006, operations were discontinued and customers’ accounts were transferred at three of the four remaining Wal-Mart in-store banking offices and the final Wal-Mart in-store banking office was sold. Expenses directly related to the discontinuation of operations totaled $23 and $533 during the three months ended March 31, 2006 and 2005, respectively.

RESULTS OF OPERATIONS

     Net Interest Income. Net interest income, the Company’s 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 the Company’s 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 for the Company, 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

		Three months ended March 31,
		2006												2005
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
Interest earning assets:
Loans (1)		$	3,059,385				56,099				7.44	%		$	2,740,492				43,649				6.46	%
Investment securities (1)			966,262				10,819				4.54				859,152				8,480				4.00
Federal funds sold			77,863				870				4.53				77,950				489				2.54
Interest bearing deposits in banks			9,793				96				3.98				29,402				165				2.28
Total interest earning assets			4,113,303				67,884				6.69	%			3,706,996				52,783				5.77	%
Noninterest earning assets			435,660												453,029
Total assets		$	4,548,963											$	4,160,025
Interest bearing liabilities:
Demand deposits		$	805,622				2,778				1.40	%		$	608,526				611				0.41	%
Savings deposits			880,474				3,780				1.74				919,448				2,084				0.92
Time deposits			987,118				8,426				3.46				1,005,350				6,518				2.63
Federal funds purchased			602				7				4.72				11				—				—
Borrowings (2)			572,332				5,046				3.58				463,396				2,177				1.91
Long-term debt			54,473				515				3.83				63,927				644				4.09
Subordinated debenture			41,238				802				7.89				41,238				600				5.90
Total interest bearing liabilities			3,341,859				21,354				2.59	%			3,101,896				12,634				1.65	%
Noninterest bearing deposits			809,122												717,183
Other noninterest bearing liabilities			42,655												28,719
Stockholders’ equity			355,327												312,227
Total liabilities & stockholders’ equity		$	4,548,963											$	4,160,025
Net FTE interest income						$	46,530											$	40,149
Less FTE adjustments							(915	)											(816	)
Net interest income from consolidated statements of income						$	45,615											$	39,333
Interest rate spread											4.10	%											4.12	%
Net FTE yield on interest earning assets (3)											4.59	%											4.39	%

     Although faced with a continuing yield-rate environment in which short-term interest rates are increasing faster than long-term interest rates, which typically constrains a bank’s ability to maintain its net interest margin, the Company’s net interest income, on a fully taxable equivalent (“FTE”) basis, increased $6.4 million, or 15.9%, to $46.5 million for the three months ended March 31, 2006 as compared to $40.1 million for the same period in 2005. The net FTE yield on interest earning assets increased 20 basis points to 4.59% for the three months ended March 31, 2006 as compared to 4.39% for the same period in 2005. Improvements in net FTE interest income and net FTE yield for the three months ended March 31, 2006, as compared to the same period in 2005, are partly attributable to growth in average earning assets and higher yields on investment securities. Average earning assets grew 11.0% and comprised a larger percentage of total assets during the three months ended March 31, 2006, as compared to the same period in 2005. A partial restructure of the Company’s investment security portfolio in 2005 contributed to the increase in yield for the three months ended March 31, 2006 as compared to the same period in 2005. In addition, free funding sources comprised a larger share of the funding base during first quarter 2006, as compared to the same period in 2005, allowing the Company to be less reliant on higher costing funding sources, such as time deposits, in 2006.

     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

		Three months ended March 31,
		2006 compared with 2005
		Volume				Rate				Net
Interest earning assets:
Loans (1)		$	5,079				7,371				12,450
Investment securities (1)			1,057				1,282				2,339
Federal funds sold			(110	)			41				(69	)
Interest bearing deposits in banks			(1	)			382				381
Total change			6,025				9,076				15,101
Interest bearing liabilities:
Demand deposits			198				1,969				2,167
Savings deposits			(88	)			1,784				1,696
Time deposits			(118	)			2,026				1,908
Federal funds purchased			—				7				7
Borrowings (2)			512				2,357				2,869
Long-term debt			(95	)			(34	)			(129	)
Subordinated debenture			—				202				202
Total change			409				8,311				8,720
Increase (decrease) in FTE net interest income		$	5,616				765				6,381

     Noninterest Income. The Company’s principal sources of noninterest income include other service charges, commissions and fees; service charges on deposit accounts; technology services revenues; income from the origination and sale of loans; and, revenues from financial services. Noninterest income increased $2.2 million, or 12.8%, to $19.1 million for the three months ended March 31, 2006 as compared to $16.9 million for the same period in 2005. Significant components of the increase are discussed below.

     Other service charges, commissions and fees primarily include debit and credit card interchange income, mortgage servicing fees, investment services revenues and ATM service charge revenues. Other service charges, commissions and fees increased $427 thousand, or 8.9%, to $5.2 million for the three months ended March 31, 2006 as compared to $4.8 million for the same period in 2005 primarily due to additional fee income from higher volumes of debit card transactions and increases in mortgage servicing revenues, the result of increases in the principal balance of loans serviced.

     Technology services revenues increased $325 thousand, or 9.7%, to $3.7 million for the three months ended March 31, 2006 as compared to $3.3 million for the same period in 2005 primarily due to increases in the number of customers using core data processing services and the volume of core data and debit card transactions processed.

     Financial services revenues, comprised principally of brokerage revenues and fees earned for management of trust assets, increased $169 thousand, or 7.3%, to $2.5 million for the three months ended March 31, 2006 as compared to $2.3 million for the same period in 2005, primarily due to higher asset management fees resulting from the improved market performance of underlying trust account assets and the addition of new trust customers.

     The Company recorded no gains or losses on the sale of investment securities during the three months ended March 31, 2006 as compared to net losses on sales of $692 thousand for the same period in 2005. During 2005, lower yielding U.S. government agency securities were sold and the proceeds were reinvested in higher yielding mortgage-backed and U.S. government agency securities.

     Other income primarily includes increases in the cash surrender value of and death benefits from company-owned life insurance, check printing income, agency stock dividends and gains of sales of assets other than investment securities. Other income increased $435 thousand, or 32.6%, to $1.8 million during the three months ended March 31, 2006 as compared to $1.3 million for the same period in 2005 primarily due to higher earnings on securities held in trust under deferred compensation plans, increases in earnings of unconsolidated joint ventures and higher check printing income. Additionally, the Company recorded an $85 gain on the sale of a branch banking office in February 2006.

     Noninterest Expense. Noninterest expense increased $1.8 million, or 4.9%, to $38.2 million for the three months ended March 31, 2006 as compared to $36.4 million for the same period in 2005. Significant components of the increase are discussed below.

     Salaries, wages and employee benefits expense increased $1.7 million, or 8.5%, to $21.3 million for the three months ended March 31, 2006 as compared to $19.7 million for the same period in 2005 primarily due to inflationary wage increases and higher incentive bonus accruals. Also contributing to the increase in salaries, wages and employee benefits expense in the current year was the adoption of SFAS 123R on January 1, 2006. Under the provisions of SFAS No. 123R, the Company recognized compensation expense for stock option and restricted stock awards of $250 thousand during the three months ended March 31, 2006 as compared to $56 thousand during the same period in 2005.

     Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. Changes in estimated servicing period and growth in the serviced loan portfolio cause amortization expense to vary between periods. Mortgage servicing rights amortization decreased $228 thousand, or 19.5%, to $943 thousand for the three months ended March 31, 2006 as compared to $1.2 million for the same period in 2005.

     Mortgage servicing rights are evaluated quarterly for impairment by discounting the expected future cash flows, taking into consideration the estimated level of prepayments based on current industry expectations and the predominant risk characteristics of the underlying loans. Impairment adjustments are recorded through a valuation allowance. The valuation allowance is adjusted for changes in impairment through a charge to current period earnings. The Company reversed previously recorded impairment of $170 thousand and $463 thousand during the three month periods ended March 31, 2006 and 2005, respectively.

     Other expenses primarily include advertising and public relations costs; office supply, postage, freight, telephone and travel expenses; donations expense; board of director fees; and, other losses. Other expenses decreased $391 thousand, or 5.3%, to $7.0 million for the three months ended March 31, 2006 as compared to $7.4 million for the same period in the prior year primarily due to expenses related to the discontinuation of operations at Wal-Mart in-store banking offices recorded during first quarter 2005.

     Income Tax Expense. The Company’s effective federal income tax rate was 30.8% and 30.6% for the three months ended March 31, 2006 and 2005, respectively. State income tax applies primarily to pretax earnings generated within Montana, Colorado, Idaho and Oregon. The Company’s effective state tax rate was 4.1% and 3.9% for the three months ended March 31, 2006 and 2005, respectively.

OPERATING SEGMENT RESULTS

     The Company’s primary operating segment is Community Banking. The Community Banking segment represented over 90% of the combined revenues and income of the Company during the three months ended March 31, 2006 and 2005, and the consolidated assets of the Company as of March 31, 2006 and December 31, 2005.

     The following table summarizes net income (loss) for each of the Company’s operating segments.

Operating Segment Results

		Net Income (Loss)
		For the three months ended March 31,
		2006				2005
Community Banking		$	16,383				12,246
Technology Services			1,216				1,149
Other			(1,465	)			(1,436	)
Total		$	16,134				11,959

     Net income from the Community Banking operating segment increased $4.1 million, or 33.8%, to $16.4 million for the three months ended March 31, 2006 as compared to $12.2 million for the same period in 2005. Significant components of this increase are discussed in “Results of Operations” included herein.

FINANCIAL CONDITION

     Loans. Total loans increased $83 million, or 2.7%, to $3,117 million as of March 31, 2006 from $3,034 million as of December 31, 2005. All significant loan categories demonstrated organic growth during the first quarter of 2006, except consumer loans which decreased less than 1%. The most significant growth occurred in real estate loans, which, in aggregate, constituted 62.2% of the total loan portfolio as of March 31, 2006 and 61.7% of the total loan portfolio as of December 31, 2005. Real estate loans increased $65 million, or 3.4%, to $1,939 million as of March 31, 2006 from $1,874 as of December 31, 2005, primarily due to increases in construction loans, the result of continued strong demand for housing in the Company’s market areas.

     Investment Securities. The Company’s investment portfolio is managed to attempt to obtain the highest yield possible, while meeting the Company’s risk tolerance and liquidity guidelines and satisfying the pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. Investment securities decreased $24 million, or 2.4%, to $996 million as of March 31, 2006 from $1,020 million as of December 31, 2005.

     The Company evaluates its investment portfolio quarterly for other-than-temporary declines in the market value of individual investment securities. This evaluation includes monitoring credit ratings; market, industry and corporate news; volatility in market prices; and, determining whether the market value of a security has been below its cost for an extended period of time. As of March 31, 2006, the Company had investment securities with fair values of $358 million that had been in a continuous loss position more than twelve months. Gross unrealized losses on these securities totaled $12 million as of March 31, 2006, and were primarily attributable to changes in interest rates. The Company recorded no impairment losses during the three months ended March 31, 2006 or 2005.

     Deferred Tax Asset. Deferred tax asset of $6 million as of March 31, 2006 increased $3 million from $3 million as of December 31, 2005 primarily due to fluctuations in net unrealized losses on available-for-sale investment securities.

     Deposits. Total deposits decreased $35 million, or 1.0%, to $ 3,513 million as of March 31, 2006 from $3,548 million as of December 31, 2005. The Company has historically experienced seasonal declines in overall deposit growth during the first six months of the year. During the first quarter of 2006, the Company experienced a shift in the mix of deposits from time deposits and noninterest-bearing demand deposits to interest-bearing demand deposits. As of March 31, 2006, noninterest-bearing demand deposits, interest-bearing demand deposits and time deposits comprised 23.8%, 23.9% and 27.5%, respectively, of total deposits as compared to 24.4%, 22.3% and 28.5%, respectively, as of December 31, 2005.

     Repurchase Agreements. In addition to deposits, repurchase agreements with commercial depositors provide an additional source of funds for the Company. Under repurchase agreements, deposit balances are invested in short-term U.S. government agency securities overnight and are then repurchased the following day. All outstanding repurchase agreements are due in one day. Repurchase agreements increased $100 million, or 19.2%, to $618 million as of March 31, 2006 from $519 million as of December 31, 2005, primarily due to fluctuations in customer funds available for overnight investment.

     Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $5 million, or 18.5%, to $33 million as of March 31, 2006 from $28 million as of December 31, 2005 primarily due to timing of corporate income tax payments.

ASSET QUALITY

     Non-performing Assets. Non-performing assets include loans past due 90 days or more and still accruing interest, nonaccrual loans, loans renegotiated in troubled debt restructurings and other real estate owned (“OREO”). The following table sets forth information regarding non-performing assets as of the dates indicated:

Non-Performing Assets

		Mar 31,				Dec 31,				Sep 30,				Jun 30,				Mar 31,
		2006				2005				2005				2005				2005
Non-performing loans:
Nonaccrual loans		$	15,949				17,142				16,767				19,457				16,189
Accruing loans past due 90 days or more			4,375				1,001				2,716				2,668				3,490
Restructured loans			1,089				1,089				1,358				1,381				1,383
Total non-performing loans			21,413				19,232				20,841				23,506				21,062
OREO			806				1,091				728				1,290				2,701
Total non-performing assets		$	22,219				20,323				21,569				24,796				23,763
Non-performing assets to total loans and OREO			0.71	%			0.67	%			0.72	%			0.86	%			0.86	%