UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

(Mark One)

þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2008, or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

FIRST INTERSTATE BANCSYSTEM, INC.

(Exact name of registrant as specified in its charter)

Montana (State or other jurisdiction of incorporation or organization)		81-0331430 (IRS Employer Identification No.)
401 North 31st Street
Billings, Montana		59116
(Address of principal executive offices)		(Zip Code)

(406) 255-5390
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common stock without par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

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. þ Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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):

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

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

The registrant’s common stock is not publicly traded, and there is no established trading market for its stock. Therefore, the aggregate market value of voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was $0.

The number of shares outstanding of the registrant’s common stock as of February 28, 2009 was 7,881,259.

The registrant intends to file a definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 8, 2009. The information required by Part III of this Form 10-K is incorporated by reference from such Proxy Statement.

 

 

PART I

     The disclosures set forth in this report are qualified by Item 1A. Risk Factors included herein and the section captioned “Cautionary Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results” included in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Company

     We are a financial and bank holding company incorporated in 1971 and headquartered in Billings, Montana. As of February 28, 2009, we had consolidated assets of $6.6 billion, deposits of $5.3 billion and total stockholders’ equity of $544 million. Our wholly-owned bank subsidiaries, First Interstate Bank, First Western Bank and The First Western Bank Sturgis, have 70 banking offices in 42 Montana, Wyoming and South Dakota communities. Through these banks, we deliver a comprehensive range of banking products and services, including demand and savings deposits; commercial, consumer, agricultural and real estate loans; mortgage loan servicing; and, trust, employee benefit, investment and insurance services. We serve individuals, businesses, municipalities and other entities throughout our market areas.

     We derive our income principally from interest charged on loans, and to a lesser extent, from interest and dividends earned on investments. We also derive income from non-interest sources such as fees received in connection with various banking and financial related services. Our principal expenses include interest expense on deposits and borrowings, operating expenses, provisions for loan losses and income tax expense. We serve a wide variety of industries, including agriculture, energy, mining, timber processing, tourism, government services, education, retail, and professional and medical services.

     We are the licensee under a perpetual trademark license agreement granting us an exclusive, nontransferable license to use the “First Interstate” name and logo in Montana, Wyoming and surrounding states. References to “we,” “our,” and “us” in this report, 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. When we refer to “South Dakota Banks” in this report, we mean First Western Bank and The First Western Bank Sturgis.

Strategic Vision and Operating Objectives

     Our strategic vision is to maintain and enhance our leadership in the financial and social fabrics of the communities we serve through a commitment to customer satisfaction, innovative management, employee development and community involvement. Our operating objectives include maintaining prudent internal growth and expanding into new and complementary markets when appropriate opportunities arise. In January 2008, we expanded our market into western South Dakota through the acquisition of the First Western banks. Details of the acquisition are presented in “Notes to Consolidated Financial Statements — Acquisitions” included in Part IV, Item 15 of this report. Prior to 2008, our profitability, market share and asset size had been enhanced principally through organic loan and deposit growth in the market areas served by our then existing banking offices.

Disposal of Nonbank Subsidiary

     On December 31, 2008, we completed the sale of our data technology subsidiary, i_Tech Corporation, or i_Tech, to Fiserv Solutions Inc., or Fiserv. i_Tech represented our technology services operating segment. Through i_Tech, we provided data technology support services to affiliated and non-affiliated customers in Montana, Wyoming, South Dakota and nine additional states. As of the date of the sale, i_Tech had net assets of $9.4 million and net income for 2008 of $2.9 million. Our decision to sell i_Tech was strategic. We are now a customer rather than a competitor of Fiserv and can focus more fully on our principal strength, community banking. For additional information regarding the sale of i_Tech, see “Notes to Consolidated Financial Statements — Disposals” included in Part IV, Item 15.

Operating Segments

     Due to the sale of our technology services operating segment on December 31, 2008 as discussed above, we have one reportable operating segment, community banking. Financial information and analysis of our community banking operating segment, as well as our disposed technology services operating segment, are included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Operating Segment Results” included in Part II, Item 7 of this report and in “Notes to Consolidated Financial Statements — Segment Reporting” included in Part IV, Item 15.

Community Banking

     Community banking encompasses commercial and consumer banking services provided through our Banks, primarily the acceptance of deposits; extensions of credit; mortgage loan origination and servicing; and, trust, employee benefit, investment and insurance services. We believe the communities we serve provide a stable core deposit and funding base, and are economically diversified across a number of industries, including agriculture, energy, mining, timber processing, tourism, government services, education, retail, and professional and medical services. Our community banking philosophy emphasizes providing customers with commercial and consumer banking products and services locally using a personalized service approach while strengthening the communities in our market areas through community service activities. We grant our banking offices significant autonomy in delivering and pricing products in response to local market considerations and customer needs. This autonomy enables our banking offices to remain competitive and enhances their relationships with the customers they serve. We also emphasize accountability, however, by establishing performance and incentive standards that are tied to net income and other success measures at the individual banking office and market levels. We believe this combination of autonomy and accountability allows our banking offices to provide personalized customer service while remaining attentive to financial performance.

Lending Activities

     We offer short and long-term real estate, consumer, commercial, agricultural and other loans to individuals and businesses in our market areas. We have comprehensive credit policies establishing company-wide underwriting and documentation standards to assist management in the lending process and to limit our risk. These credit policies establish lending guidelines based on the experience and authority levels of the personnel located in each banking office and market. The policies also establish thresholds at which loan requests must be recommended by our credit committee and/or approved by the Banks’ boards of directors. While each loan must meet minimum underwriting standards established in our credit policies, lending officers are granted certain levels of autonomy in approving and pricing loans to assure that the banking offices are responsive to competitive issues and community needs in each market area.

Deposit Products

     We offer traditional depository products including checking, savings and time deposits. Deposits at the Banks are insured by the Federal Deposit Insurance Corporation, or FDIC, up to statutory limits. We also offer repurchase agreements primarily to commercial and municipal depositors. Under repurchase agreements, we sell investment securities held by the Banks to our customers under an agreement to repurchase the investment securities at a specified time or on demand. The Banks do not, however, physically transfer the investment securities. All outstanding repurchase agreements are due in one business day.

Wealth Management

     We provide a wide range of trust, employee benefit, investment management, insurance, agency and custodial services to individuals, businesses and nonprofit organizations. These services include the administration of estates and personal trusts; management of investment accounts for individuals, employee benefit plans and charitable foundations; and, insurance planning. As of February 28, 2009, the estimated fair value of trust assets held in a fiduciary or agent capacity was in excess of $2.0 billion.

Centralized Services

     We have centralized certain operational activities to provide consistent service levels to our customers company-wide, to gain efficiency in management of those activities and to ensure regulatory compliance. Centralized operational activities generally support our banking offices in the delivery of products and services to customers and include marketing; credit review; credit cards; mortgage loan sales and servicing; indirect consumer loan purchasing and processing; loan collections; and, other operational activities. Additionally, policy and management direction and specialized staff support services have been centralized to enable the Banks to serve their markets more effectively. These services include credit administration, finance, accounting, human resource management, internal audit and other support services.

Competition

     Commercial banking is highly competitive. We compete with other financial institutions located in Montana, Wyoming, South Dakota and adjoining states for deposits, loans and trust, employee benefit, investment and insurance accounts. We also compete with savings and loan associations, savings banks and credit unions for deposits and loans. In addition, we compete with large banks in major financial centers and other financial intermediaries, such as consumer finance companies, brokerage firms, mortgage banking companies, insurance companies, securities firms, mutual funds and certain government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. We generally compete on the basis of customer service and responsiveness to customer needs, available loan and deposit products, rates of interest charged on loans, rates of interest paid for deposits and the availability and pricing of trust, employee benefit, investment and insurance services.

Employees

     At February 28, 2008, we employed 1,771 full-time equivalent employees, none of whom are represented by a collective bargaining agreement. We strive to be the employer of choice in the markets we serve and consider our employee relations to be good.

Regulation and Supervision

Regulatory Authorities

     We are subject to extensive regulation under federal and state laws. A description of the significant elements of the laws and regulations applicable to us is summarized below. This summary is not intended to include a summary of all laws applicable to us, and the description is qualified in its entirety by reference to the full text of the applicable statutes, regulations and policies. In addition to laws and regulations, state and federal banking regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to us. Those issuances may affect the conduct of our business or impose additional regulatory obligations.

     As a financial and bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956 and to supervision, regulation and regular examination by the Federal Reserve. Because we are a public company, we are also subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 as administered by the Securities and Exchange Commission, or SEC.

     First Interstate Bank is subject to supervision and regular examination by its primary banking regulators, the Federal Reserve and the State of Montana, Department of Administration, Division of Banking and Financial Institutions, and, with respect to its activities in Wyoming, the State of Wyoming, Department of Audit. The South Dakota Banks are subject to supervision and regular examination by their primary banking regulators, the Federal Reserve and the State of South Dakota, Department of Revenue & Regulation, Division of Banking. Each of the South Dakota Banks became members of the Federal Reserve System in February 2008. Prior to becoming members, the South Dakota Banks’ primary federal regulator was the FDIC and the State of South Dakota.

     Each of the Banks’ deposits are insured by the deposit insurance fund of the FDIC in the manner and to the extent provided by law. The Banks are subject to the Federal Deposit Insurance Act, or FDIA, and FDIC regulations relating to deposit insurance and may also be subject to supervision and examination by the FDIC.

     The extensive regulation of the Banks limits both the activities in which the Banks may engage and the conduct of their permitted activities. Further, the laws and regulations impose reporting and information collection obligations on the Banks. The Banks each incur significant costs relating to compliance with the various laws and regulations and the collection and retention of information.

Financial Holding Company

     As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to its subsidiary banks and to commit resources to support its subsidiary banks. Under this source of strength doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. The Federal Reserve may also claim that the bank holding company is engaging in unsafe and unsound practices if it fails to commit resources to such a subsidiary bank. A capital injection may be required at times when the bank holding company does not have the resources to provide it.

     We are required by the Bank Holding Company Act to obtain Federal Reserve approval prior to acquiring, directly or indirectly, ownership or control of voting shares of any bank, if, after such acquisition, we would own or control more than 5% of its voting stock.

     Under the Gramm-Leach-Bliley Act of 1999, or GLB Act, we may engage in certain business activities that are determined by the Federal Reserve to be financial in nature or incidental to financial activities as well as all activities authorized to bank holding companies generally. In most circumstances, we must notify the Federal Reserve of our financial activities within a specified time period following our initial engagement in each business or activity. If the type of proposed business or activity has not been previously determined by the Federal Reserve to be financially related or incidental to financial activities, we must receive the prior approval of the Federal Reserve before engaging in the activity.

     We may engage in authorized financial activities, such as providing investment services, provided that we remain a financial holding company and meet certain regulatory standards of being “well-capitalized” and “well-managed.” If we fail to meet the “well-capitalized” or “well-managed” regulatory standards, we may be required to cease our financial holding company activities or, in certain circumstances, to divest of the Banks. We do not currently engage in significant financial holding company businesses or activities not otherwise permitted to bank holding companies generally. Should we engage in certain financial activities currently authorized to financial holding companies, we may become subject to additional laws, regulations, supervision and examination by regulatory agencies.

Restrictions on Transfers of Funds to Us and the Banks

     Dividends from the Banks are the primary source of funds for the payment of our expenses of operating and for the payment of dividends to and the repurchase of shares from our shareholders. The Banks are limited, under both state and federal law, in the amount of dividends that may be paid from time to time. In general, the Banks are limited, without the prior consent of their primary state and federal banking regulators, to paying dividends that do not exceed the current year net profits together with retained earnings from the two preceding calendar years. In addition, the South Dakota Banks are limited under South Dakota law to declaring dividends not more frequently than once each calendar quarter.

     A state or federal banking regulator may impose, by regulatory order or agreement of a Bank, specific dividend limitations or prohibitions in certain circumstances. The Banks are not currently subject to a specific regulatory dividend limitation other than generally applicable limitations. In addition to regulatory dividend limitations, First Interstate Bank dividends are limited by covenants in our debt instruments.

     In addition, the Banks may not lend funds to, or otherwise extend credit to or for our benefit or the benefit of our affiliates, except on specified types and amounts of collateral and other terms required by state and federal law. The Federal Reserve also has authority to define and limit the transactions between banks and their affiliates. Federal Reserve Regulation W and relevant federal statutes, among other things, impose significant additional limitations on transactions in which the Banks may engage with us, with each other, or with other affiliates.

Capital Standards and Prompt Corrective Action

     Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

     The Federal Reserve Board and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the guidelines, banking organizations are required to maintain minimum ratios for tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. Generally, under the applicable guidelines, a financial institution’s capital is divided into two tiers. These tiers are:

•

Core Capital (tier 1). Tier 1 capital includes common equity, noncumulative perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries, less both goodwill and, with certain limited exceptions, all other intangible assets. Bank holding companies, however, may include up to a limit of 25% of cumulative preferred stock in their tier 1 capital.

•

Supplementary Capital (tier 2). Tier 2 capital includes, among other things, cumulative and limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations.

     Institutions that must incorporate market risk exposure into their risk-based capital requirements may also have a third tier of capital in the form of restricted short-term subordinated debt.

     We, like other bank holding companies, currently are required to maintain tier 1 capital and total capital (the sum of tier 1 and tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of our total risk-weighted assets. The Banks, like other depository institutions, are required to maintain similar capital levels under capital adequacy guidelines. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action its tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively.

     Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3.0% for financial holding companies and banks that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other financial holding companies and banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us or the Banks.

     The FDIA requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the tier 1 capital ratio and the leverage ratio.

     Under the regulations adopted by the federal regulatory authorities, a bank will be: (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater (3.0% in certain circumstances ) and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0% (3.0% in certain circumstances); (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. Our regulatory capital ratios and those of the Banks are in excess of the levels established for “well-capitalized” institutions. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

     The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

     “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

Safety and Soundness Standards and Other Enforcement Mechanisms

     The federal banking agencies have adopted guidelines establishing standards for safety and soundness, asset quality and earnings, as required by the Federal Deposit Insurance Corporation Improvement Act, or FDICIA. These standards are designed to identify potential concerns and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance fund, or DIF. If a federal banking agency determines that an institution fails to meet any of these standards, the agency may require the institution to submit an acceptable plan to achieve compliance with the standard. If the institution fails to submit an acceptable plan within the time allowed by the agency or fails in any material respect to implement an accepted plan, the agency must, by order, require the institution to correct the deficiency.

     Federal banking agencies possess broad enforcement powers to take corrective and other supervisory action on an insured bank and its holding company. Moreover, federal laws require each federal banking agency to take prompt corrective action to resolve the problems of insured banks. Bank holding companies and insured banks are subject to a wide range of potential enforcement actions by federal regulators for violation of any law, rule, regulation, standard, condition imposed in writing by the regulator, or term of a written agreement with the regulator.

Emergency Economic Stabilization Act of 2008

     In response to the financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act of 2008, or EESA, was enacted on October 3, 2008. The EESA authorizes the U.S. Treasury, or Treasury, to provide up to $700 billion in funding to stabilize and provide liquidity to the financial markets. Pursuant to the EESA, the Treasury was initially authorized to use $350 billion for the Troubled Asset Relief Program, or TARP. Of this amount, the Treasury allocated $250 billion to the TARP Capital Purchase Program described below. On January 15, 2009, the second $350 billion of TARP monies was released to the Treasury. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 was enacted which amended, in certain respects, the EESA and provided an additional $787 billion in economic stimulus funding.

     Under the TARP Capital Purchase Program the Treasury will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. In conjunction with the issuance of the senior preferred stock, participating institutions must issue to the Treasury immediately exercisable 10-year warrants to purchase common stock with an aggregate market price equal to 5% of the amount of senior preferred stock. Participating financial institutions are 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 Capital Purchase Program.

     We submitted an application for participation in the TARP Capital Purchase Program. In connection with the application, we requested certain exceptions to the Treasury’s standard terms and conditions applicable to the program. As of the date of this report, we have not been notified whether our application has been accepted nor have we determined whether we will participate in the program if we are accepted.

Deposit Insurance

     The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the DIF up to prescribed limits for each depositor. Pursuant to the EESA, the maximum deposit insurance amount has been increased from $100,000 to $250,000 until December 31, 2009. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.50% of estimated insured deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. In an effort to restore capitalization levels and to ensure the DIF will adequately cover projected losses from future bank failures, the FDIC, in October 2008, proposed a rule to alter the way in which it differentiates for risk in the risk-based assessment system and to revise deposit insurance assessment rates, including base assessment rates. First quarter 2009 assessment rates were increased to between 12 and 50 cents for every $100 of domestic deposits, with most banks paying between 12 and 14 cents. On February 27, 2009, the FDIC approved an increase in regular premium rates for the second quarter of 2009. For most banks, the second quarter 2009 assessment rate will be between 12 and 16 cents per $100 in domestic deposits. Premiums for the rest of 2009 have not yet been set.

     On February 27, 2009, the FDIC approved an interim rule proposing a special assessment of 20 cents per $100 in domestic deposits to restore the DIF reserves depleted by recent bank failures. The interim rule also proposes to permit the FDIC to impose an additional special assessment after June 30, 2009 of up to10 basis points if necessary to maintain public confidence in federal deposit insurance. Recent action by the FDIC indicates there may be reductions or other modifications to the special assessment proposed by the interim rule.

     If the DIF’s reserves exceed the designated reserve ratio, the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%, a portion of the excess as a dividend to insured depository institutions based on the percentage of insured deposits held on December 31, 1996 adjusted for subsequently paid premiums. Insured depository institutions that were in existence on December 31, 1996 and paid assessments prior to that date (or their successors) were entitled to a one-time credit against future assessments based on their past contributions to the predecessor to the DIF. The Banks each utilized their special assessment credits to offset a portion of their deposit insurance premiums through the second quarter of 2008.

     On November 21, 2008, the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program, or TLG Program. Under the TLG Program, the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before June 30, 2009, and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal, or NOW, accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts, or IOLTA, held at participating FDIC-insured institutions through December 31, 2009. On March 17, 2009, the FDIC extended the debt guarantee program through October 31, 2009. Each of the Banks elected to participate in the deposit insurance coverage guarantee program. The Banks have not elected to participate in the unsecured debt guarantee program because more cost-effective liquidity sources are available to us. Coverage under the TLG Program was available for the first 30 days without charge. The fee assessment for deposit insurance coverage is 10 basis points per annum on amounts in covered accounts exceeding $250,000.

     All FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, or FICO, an agency of the Federal government established to recapitalize the predecessor to the DIF. The FICO assessment rates, which are determined quarterly, averaged 0.01% of insured deposits in fiscal 2008. These assessments will continue until the FICO bonds mature in 2017.

     
Depositor Preference

     The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Liability of Commonly Controlled Institutions

     FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same bank holding company, or for any assistance provided by the FDIC to an FDIC-insured depository institution controlled by the same bank holding company that is in danger of default. “Default” means generally the appointment of a conservator or receiver. “In danger of default” means generally the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance.

Customer Privacy and Other Consumer Protections

     The GLB Act imposes customer privacy requirements on any company engaged in financial activities, including the Banks and our holding company. Under these requirements, a financial company is required to protect the security and confidentiality of customer nonpublic personal information. In addition, for customers who obtain a financial product such as a loan for personal, family or household purposes, a financial holding company is required to disclose its privacy policy to the customer at the time the relationship is established and annually thereafter. The financial company must also disclose its policies concerning the sharing of the customer’s nonpublic personal information with affiliates and third parties. Finally, a financial company is prohibited from disclosing an account number or similar item to a third party for use in telemarketing, direct mail marketing or marketing through electronic mail.

     The Banks are subject to a variety of federal and state laws and reporting obligations aimed at protecting consumers including the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Credit Reporting Act and the Community Reinvestment Act, or CRA. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising our other activities or in authorizing expansion activities.

     In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” First Interstate Bank received an “outstanding” rating and the South Dakota Banks each received a “satisfactory” rating on their most recent published examinations. Although each Banks’ policies and procedures are designed to achieve compliance with all fair lending and CRA laws, instances of non-compliance are occasionally identified through normal operational activities. Management responds proactively to correct all instances of non-compliance and implement procedures to prevent further violations from occurring.

USA Patriot Act

     The USA Patriot Act of 2001 amended the Bank Secrecy Act and adopted additional measures requiring insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. These acts and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition or merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. The USA Patriot Improvement and Reauthorization Act of 2005, among other things, made permanent or otherwise generally extended the effectiveness of provisions applicable to financial institutions.

Effect of Economic Conditions, Government Policies and Legislation

     Banking depends on interest rate differentials. In general, the difference between the interest rate paid by each Bank on deposits and borrowings and the interest rate received by the Bank on loans extended to customers and on investment securities comprises a major portion of the Bank’s earnings. These rates are highly sensitive to many factors that are beyond the control of the Banks. Accordingly, the earnings and potential growth of the Banks are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment.

     The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States government securities, by adjusting the required level of reserves for financial institutions subject to the Federal Reserve’s reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted.

     From time to time, legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of financial and bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislations could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks and other financial services providers. We cannot predict whether such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial condition, results of operations or cash flows.

Unconsolidated Subsidiaries

     Our unconsolidated subsidiaries include First Interstate Statutory Trust or FIST; FI Statutory Trust I, or Trust I; FI Capital Trust II, or Trust II; FI Statutory Trust III, or Trust III; FI Capital Trust IV, or Trust IV; FI Statutory Trust V, or Trust V; and, FI Statutory Trust VI, or Trust VI. These wholly-owned business trusts were created for the exclusive purpose of issuing trust preferred securities and using the proceeds to purchase junior subordinated debentures issued by us. Trust I, Trust II, Trust III and Trust IV were formed in 2007, and Trust V and Trust VI were formed in 2008 to partially fund the First Western acquisition.

Website Access to SEC Filings

     All of our reports filed electronically with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements, as well as amendments to these reports and statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are accessible at no cost through our website at www.firstinterstatebank.com as soon as reasonably practicable after they have been filed with the SEC. These reports are also accessible on the SEC’s website at www.sec.gov. The public may read and copy materials we file with the SEC at the public reference facilities maintained by the SEC at Room 1580, 100 F Street N.E., Washington, DC 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Our website and the information contained therein or connected thereto is not intended to be incorporated into this report and should not be considered a part of this report.

Item 1A. Risk Factors

     Like other financial and bank holding companies, we are subject to a number of risks, many of which are outside of our control, including: (1) credit risks; (2) market risks; (3) liquidity risks; and, (4) operational risks. In addition, investors who purchase our securities are subject to (5) investment risks. If any of the events or circumstances described in the following risk factors actually occur, our business, financial condition, results of operations and prospects could be harmed. Readers should consider carefully the following important factors in evaluating us, our business and an investment in our securities.

(1) Credit Risks:

     We may incur significant credit losses, particularly in light of recent market developments.

     We take credit risk by virtue of making loans and extending loan commitments and letters of credit. Our exposure to credit risk is managed through the use of consistent underwriting standards that emphasize “in-market” lending. Our credit administration function employs risk management techniques designed to ensure that loans adhere to corporate policy and problem loans are promptly identified. We have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for loan losses, which we believe are appropriate to mitigate the risk of loss by assessing the likelihood of nonperformance and the value of available collateral, monitoring loan performance and diversifying our credit portfolio. These procedures provide us with the information to implement policy adjustments where necessary and to take proactive corrective actions. Our credit standards, procedures and policies may not prevent us from incurring substantial credit losses, particularly in light of recent market developments. During 2008, we experienced deterioration in credit quality, particularly in certain real estate development loans, due in part to the impact resulting from the downturn in the prevailing economic, real estate and credit markets. This deterioration resulted in higher levels of non-performing assets, including other real estate owned, and internally risk classified loans, thereby increasing our provision for loan losses and decreasing our operating income in 2008. Given the current economic conditions and trends, management believes we will continue to experience credit deterioration and higher levels of non-performing loans in the near-term, which will likely have an adverse impact on our financial condition, results of operations and prospects.

     Our concentrations of real estate loans could subject us to increased risks in the event real estate values continue to decline due to the economic recession, a further deterioration in the real estate markets or other causes.

     At February 28, 2009, we had approximately $3.1 billion of commercial, agricultural, construction, residential and other real estate loans representing approximately 65% of our total loan portfolio. The current economic recession and deterioration in the real estate markets have had an adverse effect on the collateral value for many of our loans and on the repayment ability of many of our borrowers. The continuation or further deterioration of these factors, including increasing foreclosures and unemployment, will continue to have the same or similar adverse effects. In addition, these factors could reduce the amount of loans we make to businesses in the construction and real estate industry, which could negatively impact our interest income and results of operations. A continued decline in real estate values could also lead to higher charge-offs in the event of defaults in our real estate loan portfolio. Similarly, the occurrence of a natural or manmade disaster in our market areas could impair the value of the collateral we hold for real estate secured loans. Any one or a combination of the factors identified above could negatively impact our business, financial condition, results of operations and prospects.

     Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.

     Commercial loans, including commercial real estate loans, are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation or development of the property or business involved, repayment of such loans is more sensitive than other types of loans to adverse conditions in the real estate market or the general economy. Accordingly, the recent downturn in the real estate market and economy has heightened our risk related to commercial loans, particularly commercial real estate loans. Unlike residential mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the commercial venture. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. At February 28, 2009, we had approximately $2.4 billion of commercial loans, including commercial real estate loans, representing approximately 49% of our total loan portfolio.

     Adverse economic conditions affecting Montana, Wyoming and South Dakota could harm our business.

     Our customers with loan and/or deposit balances are located predominantly in Montana, Wyoming and South Dakota. Because of the concentration of loans and deposits in these states, existing or future adverse economic conditions in Montana, Wyoming or South Dakota could cause us to experience higher rates of loss and delinquency on our loans than if the loans were more geographically diversified. Adverse economic conditions, including inflation, recession and unemployment, and other factors, such as political or business developments, natural disasters, wide-spread disease, terrorist activity, environmental contamination and other unfavorable conditions and events that affect these states, could reduce demand for credit or fee-based products and may delay or prevent borrowers from repaying their loans. Adverse conditions and other factors identified above could also negatively affect real estate and other collateral values, interest rate levels, and the availability of credit to refinance loans at or prior to maturity. These results could adversely impact our business, financial condition, results of operations and prospects.

     If we experience loan losses in excess of estimated amounts, our earnings will be adversely affected.

     The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. We maintain an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of loan portfolio quality. Based upon such factors, our management makes various assumptions and judgments about the ultimate collectibility of our loan portfolio and provides an allowance for loan losses. These assumptions and judgments are even more complex and difficult to determine given recent market developments, the potential for continued market turmoil and the significant uncertainty of future conditions in the general economy and banking industry. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the banking authorities or regulations require us to increase the allowance for loan losses, our earnings and financial condition could be significantly and adversely affected.

     As of February 28, 2009, our allowance for loan losses was $90 million, which represented 1.88% of total outstanding loans. Our allowance for loan losses may not be sufficient to cover future loan losses. Future adjustments to the allowance for loan losses may be necessary if economic conditions differ substantially from the assumptions used or further adverse developments arise with respect to our non-performing or performing loans. Material additions to our allowance for loan losses could have a material adverse effect on our financial condition, results of operations and prospects.

     We may be adversely affected by the soundness of other financial institutions.

     The financial services industry as a whole, as well as the securities markets generally, have been materially and adversely affected by significant declines in the values of nearly all asset classes and a serious lack of liquidity. Our credit risk is exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit exposure due to us. Any such losses could harm our financial condition, results of operations and prospects.

     Financial institutions in particular have been subject to increased volatility and an overall loss of investor confidence. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing and counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to increased credit risk in the event of default of a counterparty or client.

(2) Market Risks:

     Recent market developments have affected our business and will continue to have an effect in ways that are not predictable or that we may fail to anticipate.

     The recent market developments and turmoil and the potential for increased and continuing disruptions present considerable risks and challenges to us. These risks and challenges have reached unprecedented levels and have significantly diminished overall confidence in the national economy, the financial markets and many financial institutions. This reduced confidence could further compound the overall market disruptions and risks to banks and bank holding companies, including us. Our business is affected by economic conditions, political uncertainties, volatility, illiquidity and other developments impacting the financial markets. Such factors have affected, and may further adversely affect, both credit and financial markets and future economic growth, resulting in adverse effects on us and other financial institutions in ways that are not predictable or that we may fail to anticipate.

     The effects of recent legislative and regulatory efforts to provide financial market stability are uncertain.

     In response to recent market disruptions, legislators and financial regulators have implemented a number of mechanisms designed to address the financial market turmoil, including the provision of direct and indirect assistance to distressed financial institutions, assistance by the banking authorities in arranging acquisitions of weakened banks and broker-dealers, and implementation of programs by the Federal Reserve to provide liquidity to the commercial paper markets. On October 3, 2008, the EESA was enacted which, among other things, empowers the Treasury to provide up to $700 billion of funding to stabilize and provide liquidity to the financial markets. On October 14, 2008, the Secretary of the Treasury announced the TARP Capital Purchase Program, a program in which $250 billion of the funds under EESA are made available for the purchase of preferred equity interests in qualifying financial institutions. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 was enacted which amended, in certain respects, EESA and provided an additional $787 billion in economic stimulus funding.

     The overall effects of these and other legislative and regulatory efforts on the financial markets are uncertain, and they may not have the intended stabilization results. These efforts may even have unintended harmful consequences on the U.S. financial system and our business. Should these or other legislative or regulatory initiatives fail to stabilize and add sufficient liquidity to the financial markets, our business, financial condition, results of operations and prospects could be materially and adversely affected.

     Even if legislative or regulatory efforts successfully stabilize and add liquidity to the financial markets, we may need to modify our strategies and business operations. We may also incur increased capital requirements and constraints or additional costs in order to satisfy new regulatory requirements. Given the volatile nature of the current market disruption and the uncertainties underlying efforts to mitigate or reverse the disruption, we may not timely anticipate or manage existing, new or additional risks, contingencies or developments in the current or future environment. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.

     Changes in interest rates could negatively impact our net interest income, may weaken demand for our products and services and harm our results of operations and cash flows.

     Our earnings and cash flows are largely dependent upon net interest income, which is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and

borrowings, but such changes could also adversely affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, including mortgage servicing rights, (iii) our ability to realize gains on the sale of assets and (iv) the average duration of our mortgage-backed investment securities portfolio. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in non-performing assets and a reduction of income recognized, which could harm our results of operations and cash flows. In contrast, decreasing interest rates have the effect of causing customers to refinance mortgage loans faster than anticipated. This causes the value of assets related to the servicing rights on mortgage loans sold to be lower than originally recognized. If this happens, we may need to write down our mortgage servicing rights asset faster, which would accelerate expense and lower our earnings. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our results of operations, cash flows and financial condition.

(3) Liquidity Risks:

     We may not be able to meet the cash flow requirements of our depositors and borrowers unless we maintain sufficient liquidity.

     Liquidity is the ability to meet current and future cash flow needs on a timely basis at a reasonable cost. Our liquidity is used to make loans and to repay deposit liabilities as they become due or are demanded by customers. Potential alternative sources of liquidity include Federal funds purchased and securities sold under repurchase agreements. We maintain a portfolio of investment securities that may be used as a secondary source of liquidity to the extent the securities are not pledged for collateral. We believe there are other potential sources of liquidity available to us should they be needed. These sources may include the drawing of additional funds on our revolving term loan, the sale of loans, the utilization of available government and regulatory assistance programs, the ability to acquire national market, non-core deposits, the issuance of additional collateralized borrowings such as Federal Home Loan Bank, or FHLB, advances, the issuance of debt securities, issuance of equity securities and borrowings through the Federal Reserve’s discount window. Without sufficient liquidity from these potential sources, we may not be able to meet the cash flow requirements of our depositors and borrowers.

     Recent market disruptions have caused increased liquidity risks.

     The recent disruption and illiquidity in the credit markets are continuing challenges that have generally made potential funding sources more difficult to access, less reliable and more expensive. In addition, liquidity in the inter-bank market, as well as the markets for commercial paper and other short-term instruments, have significantly contracted. 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. These market conditions have made the management of our own and our customers’ liquidity significantly more challenging. A further deterioration in the credit markets or a prolonged period without improvement of market liquidity could adversely affect our liquidity and financial position, including our regulatory capital ratios, and could adversely affect our business, results of operations and prospects.

     The inability of our bank subsidiaries to pay dividends due to legal or regulatory limitations could adversely affect our liquidity and operations and our ability to service debt, redeem stock and pay dividends.

     We, as a holding company, are a separate and distinct legal entity from our subsidiaries. We receive all of our revenue from management fees and dividends paid by our bank subsidiaries. These dividends are our principal source of funds to pay dividends on our stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank subsidiaries may pay. Limitations on our ability to receive dividends from our subsidiaries could have a material adverse effect on our liquidity and operations and our ability to service debt, redeem stock and pay dividends.

     The Federal Reserve, the State of Montana, Division of Banking and Financial Institutions, and the State of South Dakota, Department of Revenue & Regulation, Division of Banking, are the primary regulatory agencies that examine us and our activities. Under certain circumstances, including any determination that the activities of our bank subsidiaries constitute an unsafe and unsound banking practice, the regulatory agencies have the authority by statute to restrict our subsidiaries’ ability to transfer assets and make distributions to us as the holding company. Under applicable statutes and regulations, dividends may be paid out of current or retained net profits, but prior approval of the regulatory agencies is generally required for the payment of a dividend if the total of all dividends declared by a bank subsidiary in any calendar year would exceed the total of its net profits for the year combined with its undistributed net profits for the two preceding years.

     Payment of dividends could also be subject to regulatory limitations if a bank subsidiary became “under-capitalized” for purposes of regulatory guidelines. “Under-capitalized” is currently defined as having a total risk-based capital ratio of less than 8.0%, a tier 1 risk-based capital ratio of less than 4.0%, or a core capital, or leverage, ratio of less than 4.0%. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors.

     Failure to meet our debt covenants could result in our debt becoming immediately due and payable, which could adversely impact our results from operations, cash flows and financial condition.

     In conjunction with the First Western acquisition in January 2008, we incurred debt of $159 million payable to various lenders under various debt agreements. The debt agreements contain covenants that, among other things, establish minimum capital and financial performance ratios, and place restrictions on indebtedness, non-performing assets, the allowance for loan losses, the redemption and issuance of common stock and the amount of dividends payable to shareholders. Failure to comply with the debt covenants could result in, among other remedies, the debt becoming immediately due and payable and the subsequent liquidation of our assets in satisfaction of the debt.

     As discussed above, we experienced deterioration in credit quality during 2008 which resulted in higher levels of non-performing loans and caused us to be in default under our syndicated credit agreement as of June 30, 2008. Although we entered into an amendment to our syndicated credit agreement that waived such default, the amendment reduced the maximum amount that can be advanced on revolving notes under the syndicated credit agreement, increased the interest rate and commitment fee with respect to the revolving notes, and revised certain debt covenants related to non-performing assets. Although we have been in compliance with all existing and amended debt covenants since the amendment, we cannot predict the full impact market developments will have on our business. Given the current economic conditions and trends, management believes we will continue to experience credit deterioration and higher levels of non-performing loans in the near-term, which could cause us to be in default under some of the financial covenants contained in our syndicated credit agreement. Consequently, it is possible we will be required to pursue waivers or amendments with respect to such covenants, which waivers or amendments, if available, will likely contain terms that are unfavorable to us.

(4) Operational Risks:

     We face significant competition.

     We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within the various markets we serve. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Additionally, we expect competition to intensify among financial services companies due to the recent consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic funds transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may offer a broader range of products and services as well as better pricing for those products and services than we can.

     Our ability to compete successfully depends on a number of factors, including, among other things, the ability to develop, maintain and build upon long-term customer relationships based on quality service, high ethical standards and safe, sound assets; the ability to expand our market position; the scope, relevance and pricing of products and services offered to meet customer needs and demands; the rate at which we introduce new products and services relative to our competitors; customer satisfaction with our level of service; and, industry and general economic trends. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could harm our financial condition, results of operations and prospects.

     We may not be able to manage risks inherent in our business, particularly given the recent turbulent and dynamic market conditions.

     A comprehensive and well-integrated risk management function is essential for our business. We have adopted various policies, procedures and systems to monitor and manage risk. These policies, procedures and systems may be inadequate to identify and mitigate all risks inherent in our business. In addition, our business and the markets and industry in which we operate are continuously evolving. We may fail to understand fully the implications of changes in our business or the financial markets and fail to adequately or timely enhance our risk framework to address those changes, particularly given the recent turbulent and dynamic market conditions. If our risk framework is ineffective, either because it fails to keep pace with changes in the financial markets or in our business or for other reasons, we could incur losses and otherwise experience harm to our business.

     We may not be able to continue growing our business.

     Our total assets have grown from $4.2 billion as of December 31, 2004 to $6.6 billion as of December 31, 2008. Our ability to grow depends, in part, upon our ability to successfully attract deposits, identify favorable loan and investment opportunities, open new branch banking offices and expand into new and complementary markets when appropriate opportunities arise. In the event we do not continue to grow, our results of operations could be adversely impacted.

     Our ability to grow successfully depends on our capital resources and whether we can continue to fund growth while maintaining cost controls and asset quality, as well as on other factors beyond our control, such as national and regional economic conditions and interest rate trends. If we are not able to make loans, attract deposits and maintain asset quality due to constrained capital resources or other reasons, we may not be able to continue growing our business, which could adversely impact our earnings, financial condition and prospects.

     We may become liable for environmental remediation and other costs on repossessed properties, which could adversely impact our results of operations, cash flows and financial condition.

     A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. If hazardous or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure actions on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our results of operations, cash flows and financial condition.

     Our information systems may experience a breach in security.

     We rely heavily on communications and information systems to conduct our business. A breach in the security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, investment, credit card and other information systems. A breach of the security of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability.

     A failure of the technology we use could harm our business.

     We depend heavily upon data processing, software, communication and information exchange on a variety of computing platforms and networks and over the internet. Despite instituted safeguards, we cannot be certain that all of our systems are entirely free from vulnerability to breaches of security or other technological difficulties or failures. . We rely on the services of a variety of vendors to meet our data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted, and we could be exposed to claims from customers and related legal actions. Any of these results could harm our business.

     We may not effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

     The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to use technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, on our financial condition, results of operations and prospects.

     Our systems of internal operating controls may not be effective.

     We establish and maintain systems of internal operational controls that provide us with critical information used to manage our business. These systems are not foolproof, and are subject to various inherent limitations, including cost, judgments used in decision-making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, any system of internal operating controls may not be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. From time to time, losses from operational malfunctions or fraud may occur. These losses are recorded as non-interest expense. Any future losses related to internal operating control systems could have an adverse effect on our business.

     We are dependent upon the services of our management team.

     Our future success and profitability is substantially dependent upon the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The loss or unavailability of key executives, including Lyle R. Knight, President and Chief Executive Officer, Terrill R. Moore, Executive Vice President and Chief Financial Officer, Edward Garding, Executive Vice President and Chief Credit Officer, Gregory A. Duncan, Executive Vice President and Chief Banking Officer, or Julie A. Castle, President — First Interstate Bank Wealth Management, could harm our ability to operate our business or execute our business strategy.

     Our goodwill may become impaired.

     The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually, and on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred. In testing for impairment, the fair value of a reporting unit is estimated based on an analysis of market-based trading and transaction multiples of selected peer banks; and, if required, the estimated fair value is allocated to the assets and liabilities of the reporting unit. Consequently, the determination of goodwill is sensitive to market-based trading and transaction multiples. As such, variability in the market conditions could result in impairment of goodwill, which is recorded as a noncash adjustment to income. As of February 28, 2009, we had goodwill of $184 million. An impairment of goodwill could have a material adverse effect on our business, results of operations and financial condition.

     We may not be able to attract and retain qualified employees to operate our business effectively.

     There is substantial competition for qualified personnel in our markets. Although unemployment rates have been migrating upward in Montana, Wyoming, South Dakota and the surrounding region, it may still be difficult to attract and retain qualified employees at all management and staffing levels. Failure to attract and retain employees and maintain adequate staffing of qualified personnel could adversely impact our operations and our ability to execute our business strategy. Furthermore, relatively low unemployment rates in our markets may lead to significant increases in salaries, wages and employee benefits expenses as we compete for qualified, skilled employees.

     An extended disruption of vital infrastructure and other business interruptions could negatively impact our business.

     Our operations depend upon vital infrastructure components including, among other things, transportation systems, power grids and telecommunication systems. A disruption in our operations resulting from failure of transportation and telecommunication systems, loss of power, interruption of other utilities, natural disaster, fire, global climate changes, computer hacking or viruses, failure of technology, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have an adverse impact on the financial services industry as a whole and/or on our business. Our business recovery plan may not be adequate and may not prevent significant interruptions of our operations or substantial losses.

     We are subject to claims and litigation pertaining to our fiduciary responsibilities.

     Some of the services we provide, such as trust and investment services, require us to act as fiduciaries for our customers and others. From time to time, third parties make claims and take legal action against us pertaining to the performance of our fiduciary responsibilities. If these claims and legal actions are not resolved in a manner favorable to us, we may be exposed to significant financial liability and/or our reputation could be damaged. Either of these results may adversely impact demand for our products and services or otherwise have a harmful effect on our business.

     New or changes in existing tax, accounting, and regulatory rules and interpretations could significantly harm our business.

     The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a financial company’s shareholders. These regulations may impose significant limitations on operations. The significant federal and state banking regulations that affect us are described in this report under the heading “Business — Regulation and Supervision” above. These regulations, along with the currently existing tax, accounting, securities, insurance and monetary laws, and regulations, rules, standards, policies, and interpretations control the methods by which we conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are undergoing significant review, are constantly evolving and may change significantly, particularly given the recent market developments in the banking and financial services industries.

     Recent events have resulted in legislators, regulators and authoritative bodies, such as the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and various taxing authorities responding by adopting and/or proposing substantive revisions to laws, regulations, rules, standards, policies and interpretations. Further, federal monetary policy as implemented through the Federal Reserve System can significantly affect credit conditions in our markets.

     The nature, extent, and timing of the adoption of significant new laws, regulations, rules, standards, policies and interpretations, or changes in or repeal of these items or specific actions of regulators, may increase our costs of compliance and harm our business. For example, potential increases in or other modifications affecting regulatory capital thresholds could impact our status as “well capitalized.” It is impossible for us to predict accurately at this time the extent of any impact from changes in existing laws, regulations, rules, standards, policies and interpretations.

     Non-compliance with laws and regulations could result in fines, sanctions and other enforcement actions.

     Federal and state regulators have broad enforcement powers. If we fail to comply with any laws, regulations, rules, standards, policies or interpretations applicable to us, we could face various sanctions and enforcement actions, which include the appointment of a conservator or receiver for us; the issuance of a cease and desist order that can be judicially enforced; the termination of our deposit insurance; the imposition of civil monetary fines and penalties; the issuance of directives to increase capital; the issuance of formal and informal agreements; the issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; and the enforcement of such actions through injunctions or restraining orders.

     The Federal Reserve may require us to commit capital resources to support our bank subsidiaries.

     The Federal Reserve, which examines us and our subsidiaries, has a policy stating that a bank holding company is expected to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the source of strength doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A capital injection may be required at

times when the holding company may not have the resources to provide it, and therefore may be required to borrow the funds. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s financial condition, results of operations and cash flows.

     Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our future earnings.

     The FDIC insures deposits at FDIC insured financial institutions, including the Banks. The FDIC charges insured financial institutions premiums to maintain the DIF at a certain level. Recent bank failures and expectations for further failures in 2009 have reduced insurance reserve funds to their lowest level since 1993. On October 16, 2008, the FDIC published a restoration plan designed to replenish the DIF over a period of five years and to increase the deposit insurance reserve ratio to 1.15% of insured deposits by December 31, 2013. In order to implement the restoration plan, the FDIC proposes to change both its risk-based assessment system and its base assessment rates. For the first quarter of 2009 only, the FDIC increased all FDIC deposit assessment rates by 7 basis points. On February 27, 2009, the FDIC amended the restoration plan to extend the restoration plan horizon to seven years. The amended restoration plan was accompanied by a final rule setting assessment rates and making adjustments to improve how the assessment system differentiates for risk. Under the final rule, the base assessment rates would range from 12-16 basis points for Risk Category I institutions, such as our bank subsidiaries, beginning April 1, 2009. Changes to the risk-based assessment system include increasing premiums for institutions that rely on excessive amounts of brokered deposits, including CDARS, increasing premiums for excessive use of secured liabilities, including FHLB advances, lowering premiums for smaller institutions with high capital levels, and reductions in assessment rates for institutions holding long-term unsecured debt.

     In addition, on February 27, 2009, the FDIC adopted an interim rule proposing a 20 basis point special assessment for all FDIC insured financial institutions. This proposed assessment, to be collected on September 30, 2009, is based on deposits as of June 30, 2009. Based on our current level and mix of deposit accounts, we estimate that a 20 basis point special assessment, should it occur, would result in an increase our deposit insurance premiums of approximately $10.4 million. The interim rule also proposes to permit the FDIC to impose an additional special assessment after June 30, 2009 of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance. This interim rule is subject to modification by the FDIC.

     A change in the risk categories assigned to our bank subsidiaries, adjustments to base assessment rates and special assessments could have a material adverse effect on our earnings and financial condition.

(5) Investment Risks:

     Our common stock is not publicly traded.

     Shares of our common stock are not publicly traded. Our common stock is not listed, quoted or traded on any securities exchange, market, bulletin board, quotation system or listing service. Because there is no established market for our common stock, there are limited opportunities for shareholders to resell their shares. In the event shareholders desire to sell or otherwise dispose of their shares, they may not be able to do so.

     Shares of our common stock are subject to contractual transfer restrictions.

     With respect to our outstanding common stock, approximately 91% of the shares are subject to contractual transfer restrictions set forth in shareholder agreements. Except as described below, purchasers of our common stock are required to enter into shareholder agreements. We have a right of first refusal to repurchase the restricted stock at fair market value currently determined as the minority appraised value per share based upon the most recent quarterly appraisal. Additionally, restricted stock held by our officers, directors and employees may be called by us under certain conditions. All stock not subject to such restrictions may be sold at a price per share that is negotiated between the shareholder and a prospective buyer, which may vary substantially from our appraised minority value.

     Shares of our stock held by participants in the savings and profit sharing plan, or Savings Plan, established for our employees are not subject to contractual transfer restrictions set forth in shareholder agreements. Since the Savings Plan does not allow distributions “in kind,” distributions from participants’ Savings Plan accounts require First Interstate Bank, as trustee for the Savings Plan, to sell our stock. In the event we do not elect to purchase the unrestricted stock, First Interstate Bank will be obligated to seek alternative purchasers.

     We have no obligation to repurchase outstanding shares of common stock and we are subject to limitations on the amount of common stock we may repurchase.

     We have no obligation, by contract, policy or otherwise, to purchase restricted or unrestricted shares of our outstanding common stock held by shareholders. Our debt covenants limit the repurchase of common shares, net of proceeds from the sale of capital securities, to a percentage of our consolidated net worth as of the end of the immediately preceding fiscal year. These covenants, unless amended or waived, restrict us in the number of shares we may repurchase from existing shareholders, thereby limiting the future liquidity for such shares. Moreover, during any period in which we may be in default under such covenants, we will be precluded from repurchasing any shares. Furthermore, we have made and adopted, and will continue to make and adopt, capital management decisions and policies that could limit the repurchase of outstanding common stock held by shareholders given regulatory limitations, strategic plans, growth initiatives, capital availability, projected liquidity needs and other factors. We have recently announced we will only receive requests for the repurchase of common shares during a two-week period commencing two days following the quarterly announcement of the minority appraised value of our common stock and that the number of shares repurchased during any window period may be limited at the discretion of our board of directors. Any limitations on the number of shares repurchased could cause a decrease in the value of our stock.

     Shares we may repurchase will be priced at fair market value determined in good faith by our board of directors. The board of directors may, in their sole discretion, utilize an independent party to assist with the determination of fair value of the shares. Historically, shares repurchased have been priced at the most recent minority appraised value at the repurchase date. The appraised minority value of our common stock represents the estimated fair market valuation of a minority ownership interest, taking into account adjustments for the lack of marketability of the stock and other factors. This value does not represent an actual trading price between a willing buyer and seller of our shares in an informed, arm’s-length transaction. As such, the appraised minority value is only an estimate as of a specific date, and such appraisal may not be an indication of the actual value owners may realize with respect to shares they hold. Moreover, the estimated fair market value of our common stock may be materially different at any date other than the valuation dates.

     We are subject to limitations on the amount of dividends we may pay to our shareholders.

     Although we have historically paid dividends to our shareholders, we have no obligation to do so. Our debt covenants limit the payment of dividends to our shareholders to a percentage of our consolidated net income for the immediately preceding fiscal year. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs and other factors, we have made and adopted, and will continue to make and adopt, capital management decisions and policies that could adversely impact the amount of dividends paid to our shareholders.

     Both participation and nonparticipation in recently announced assistance programs and initiatives for financial institutions have the potential to result in an adverse effect on our common stock.

     Various assistance programs and initiatives for financial institutions have been recently announced, including the Treasury’s TARP Capital Purchase Program and Public-Private Investment Fund, the Federal Reserve Board of Governors Commercial Paper Funding Facility and Money Market Investor Funding Facility, the FDIC Temporary Liquidity Guarantee Program and various other initiatives. To date, we have only made application for participation in one of these programs, the Capital Purchase Program. In connection with the application, we have requested certain exceptions to the Treasury’s standard terms and conditions applicable to the program. We cannot predict whether our requested exceptions will be considered or whether our application will be accepted. If we are accepted and decide to participate in the Capital Purchase Program, we will issue shares of preferred stock mandatorily convertible into common stock that will have rights and preferences over our common stock and that are expected to rank on a parity with our existing series A preferred stock as to dividends and liquidation rights. Any shares of preferred stock issued pursuant to the Capital Purchase Program could cause a decrease in the value of our outstanding common stock and in the amount of cash dividends per common share.

     We are evaluating participation in the various government and regulatory assistance programs. While each of these programs is intended to assist financial institutions, there may be potential disadvantages to participating institutions. Conversely, financial institutions that do not participate in a particular program may fail to realize the intended benefits and be at a competitive disadvantage. It is impossible for us to predict accurately at this time the extent of our participation or nonparticipation in recently announced government and regulatory programs and initiatives. Consequences and effects associated with our participation or lack thereof have the potential to result in an adverse effect on our common stock.

     Existing shareholders will be diluted by future issuances of common or preferred stock, and the valuation of our common stock could decrease.

     In addition to the possible issuance of preferred stock under the Treasury’s Capital Purchase Program, future issuances of stock, including issuances pursuant to our equity incentive plans or in connection with other future financings or acquisitions, such as with the issuance of our series A preferred stock in the First Western acquisition, could cause dilution to our existing shareholders. This dilution could cause the valuation of our common stock to decline and also decrease the per share amount of any cash dividends. Furthermore, a variety of other factors discussed in this report could have a negative impact on our business, thereby resulting in a decrease in the value of our common stock.

     Affiliates of our company own a controlling interest and are able to control the election of directors and future direction of our business.

     The directors and executive officers beneficially own approximately 51% of our outstanding common stock. Many of these directors and executive officers are members of the Scott family, which collectively owns approximately 78% of our common stock. By virtue of such ownership, these affiliates are able to control the election of directors and the determination of our business, including transactions involving dividends, stock repurchases, and any potential acquisition, merger or other business combination.

Item 1B. Unresolved Staff Comments

     We are not an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the Exchange Act, or a well-known seasoned issuer as defined in Rule 405 of the Securities Act. We have not received any written comments from the SEC staff regarding our periodic or current reports filed under the Exchange Act.

Item 2. Properties

     Our principal executive offices and a banking office are anchor tenants in an eighteen story commercial building located in Billings, Montana. The building is owned by a joint venture partnership in which First Interstate Bank is one of two partners, owning a 50% interest in the partnership. We lease approximately 104,632 square feet of office space in the building. We also lease approximately 45,554 square feet of office space for our operations center, located in two buildings in Billings, Montana. We are currently constructing a new operations center in Billings, Montana. The facility, scheduled for completion in 2009, will provide 65,226 square feet of office space and will replace our existing space leased for operations. We provide banking services at 69 additional locations in Montana, Wyoming and South Dakota, of which 18 properties are leased from independent third parties and 51 properties are owned by us. We believe each of our facilities is suitable and adequate to meet our current operational needs.

Item 3. Legal Proceedings

     In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of these matters to have a material adverse effect on our business.

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

     No matters were submitted to a vote of security holders during the fourth quarter of 2008.

     Our authorized capital stock consists of 20,000,000 shares of common stock without par value, of which 7,881,259 shares were outstanding as of February 28, 2009, and 100,000 shares of preferred stock without par value, of which 5,000 shares have been designated as 6.75% Series A noncumulative redeemable preferred stock, or Series A Preferred Stock. As of February 28, 2009, all 5,000 shares of authorized Series A Preferred Stock were outstanding.

Preferred Stock

     Our board of directors is authorized, without approval of the holders of common stock, to provide for the issuance of preferred stock from time to time in one or more series in such number and with such designations, preferences, powers and other special rights as may be stated in the resolution or resolutions providing for such preferred stock. Our board of directors may cause us to issue preferred stock with voting, conversion and other rights that could adversely affect the holders of the common stock or make it more difficult to effect a change in control.

     In connection with the First Western acquisition in January 2008, our board of directors authorized the issuance of the Series A Preferred Stock, which ranks senior to our common stock and to all equity securities issued by us with respect to dividend and liquidation rights. The Series A Preferred Stock has no voting rights. Holders of the Series A Preferred Stock are entitled to receive, when and if declared by the board of directors, noncumulative cash dividends at an annual rate of $675 per share (based on a 360 day year). In the event dividends are not paid for three consecutive quarters, the Series A Preferred Stock holders are entitled to elect two members to our board of directors. The Series A Preferred Stock is subject to indemnification obligations and set-off rights pursuant to the purchase agreement entered into at the time of the First Western acquisition. We may, at our option, redeem all or any part of the outstanding Series A Preferred Stock at any time after January 10, 2013, subject to certain conditions, at a price of $10 thousand per share plus accrued but unpaid dividends at the date fixed for redemption. The Series A Preferred Stock may be redeemed prior to January 10, 2013 only in the event we are entitled to exercise our set-off rights pursuant to the First Western purchase agreement. After January 10, 2018, the Series A Preferred Stock may be converted, at the option of the holder, into shares of our common stock at a ratio of 80 shares of common stock for every one share of Series A Preferred Stock. Prior to conversion of the Series A Preferred Stock, holders are required to enter into shareholder agreements that contain transfer restrictions with respect to the common stock.

Common Stock

     Each share of the common stock is entitled to one vote in the election of directors and in all other matters submitted to a vote of shareholders. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election if they choose to do so, subject to the rights, if any, of the holders of the preferred stock. Voting for directors is noncumulative.

     Subject to the preferential rights of the Series A Preferred Stock and any other preferred stock that may at the time be outstanding, each share of common stock has an equal and ratable right to receive dividends when, if and as declared by the board of directors out of assets legally available. In the event of our liquidation, dissolution or winding up, the holders of common stock will be entitled to share equally and ratably in the assets available for distribution after payments to creditors and to the holders of the Series A Preferred Stock and any other preferred stock that may at the time be outstanding. Holders of common stock have no conversion rights or preemptive or other rights to subscribe for any additional shares of common stock or for other securities. All outstanding common stock is fully paid and non-assessable.

     Our common stock is not actively traded, and there is no established trading market for the stock. There is only one class of common stock. As of February 28, 2009, 91% of our shares of common stock were subject to contractual transfer restrictions set forth in shareholder agreements and approximately 9% were held by 17 shareholders without such restrictions, including our 401(k) plan, or Savings Plan, which holds 78% of the unrestricted shares. See also Part I, Item 1, “Risk Factors — Liquidity Risks.”

     Minority appraisal values as of each calendar quarter end for the past two years, determined by an independent valuation expert, follow:

Valuation Based on				Appraised
Financial Data As of		Valuation Effective Date		Minority Value
December 31, 2006		February 15, 2007		$	89.00
March 31, 2007		May 10, 2007			89.00
June 30, 2007		August 13, 2007			86.75
September 30, 2007		November 13, 2007			87.75
December 31, 2007		February 15, 2008			83.50
March 31, 2008		May 15, 2008			84.75
June 30, 2008		August 13, 2008			77.00
September 30, 2008		November 14, 2008			79.75
December 31, 2008		March 2, 2009			74.50

     Resale of our stock may be restricted pursuant to the Securities Act and applicable state securities laws. In addition, most shares of our stock are subject to shareholder’s agreements:

•

Members of the Scott family, as majority shareholders, are subject to a shareholder’s agreement. Under this agreement, the Scott family has agreed to limit the transfer of shares owned by members of the Scott family to family members or charities, or with our approval, to our officers, directors, advisory directors or to our Savings Plan.

•

Shareholders who are not Scott family members, with the exception of 17 shareholders who own an aggregate of 706,472 shares of unrestricted stock, are subject to shareholder’s agreements. Stock subject to these agreements may not be sold or transferred without triggering our option to acquire the stock in accordance with the terms of these agreements. In addition, the agreements grant us the right to repurchase all or some of the stock under certain conditions.

     Purchases of our common stock made through our Savings Plan are not restricted by shareholder agreements. Since the Savings Plan does not allow distributions “in kind,” however, any distribution from an employee’s account in the Savings Plan will require the Savings Plan administrator to authorize a sale of the stock.

     As of February 28, 2009, we had 740 record shareholders, including the Wealth Management division of First Interstate Bank as trustee for 554,080 shares held on behalf of 1,268 individual participants in the Savings Plan. Of such participants, 352 individuals also own shares of our stock outside of the Savings Plan. The Savings Plan Trustee votes the shares based on the instructions of each participant. In the event the participant does not provide the Savings Plan Trustee with instructions, the Savings Plan Trustee votes those shares in accordance with voting instructions received from a majority of the participants in the plan.

     It is our policy to pay a dividend to all common shareholders quarterly. Dividends are declared and paid in the month following the calendar quarter. The board may change or eliminate the payment of future dividends.

     Recent quarterly and special dividends follow:

		Amount				Total Cash
Month Declared and Paid		Per Share				Dividend
January 2007			0.61			$	5,007,153
January 2007 special dividend			0.41				3,363,708
April 2007			0.65				5,319,599
July 2007			0.65				5,299,394
October 2007			0.65				5,265,375
January 2008			0.65				5,207,192
April 2008			0.65				5,124,399
July 2008			0.65				5,090,168
October 2008			0.65				5,157,034
January 2009			0.65				5,127,714

Dividend Restrictions

     For a description of restrictions on the payment of dividends, see Part I, Item 1, “Business — Regulation and Supervision — Restrictions on Transfers of Funds to Us and the Bank,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity Management” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Long-Term Debt” included in Item 7 herein.

Sales of Unregistered Securities

     There were no issuances of unregistered securities during the fourth quarter of 2008.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     The following table provides information with respect to purchases made by or on behalf of us or any “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the three months ended December 31, 2008.

Purchases of Equity Securities by Issuer

Total Number

Maximum Number

of Shares Purchased

of Shares That

Total Number

as Part of Publicly

May Yet Be

of Shares

Average Price

Announced

Purchased Under the

Period

Purchased (1)

Paid Per Share

Plans or Programs

Plans or Programs

October 2008

17,551

$

77.00

Not Applicable

Not Applicable

November 2008

17,117

79.46

Not Applicable

Not Applicable

December 2008

31,103

79.46

Not Applicable

Not Applicable

Total

65,771

$

78.80

Not Applicable

Not Applicable

(1)

Our common stock is not publicly traded, and there is no established trading market for the stock. There is only one class of common stock. As of December 31, 2008, approximately 91% of our common stock was subject to contractual transfer restrictions set forth in shareholder agreements. We have a right of first refusal to repurchase the restricted stock. Additionally, under certain conditions we may call restricted stock held by our officers, directors and employees. We have no obligation to purchase restricted or unrestricted stock, but have historically purchased such stock. All purchases indicated in the table above were effected pursuant to private transactions.

Performance Graph

     The performance graph below compares the cumulative total shareholder return of our common stock with the cumulative total return on equity securities of companies included in the Nasdaq Composite Index and the Nasdaq Bank Index. The Nasdaq Bank Index is a comparative peer index comprised of financial companies, including banks, savings institutions and related holding companies that perform banking-related functions, listed on the Nasdaq Stock Market. The Nasdaq Composite Index is a comparative broad market index comprised of all domestic and international common stocks listed on the Nasdaq Stock Market. The graph assumes an investment of $100 on December 31, 2003 and reinvestment of dividends on the date of payment without commissions. The plot points on the graph were provided by SNL Financial LC, Charlottesville, VA.

     Our common stock is not publicly traded, and there is no established trading market for our stock. The cumulative total shareholder return for our common stock is based on the minority appraised value of the common stock, which represents the estimated fair market valuation of a minority interest, taking into account adjustments for the lack of marketability and other factors, as of December 31^st of each year. The performance graph represents past performance, which may not be indicative of the future performance of our common stock.

			Period Ending
Index			12/31/03					12/31/04					12/31/05					12/31/06					12/31/07					12/31/08
First Interstate BancSystems, Inc.			$	100.00				$	127.18				$	147.51				$	190.68				$	185.00				$	170.42
NASDAQ Composite				100.00					108.59					110.08					120.56					132.39					78.72
NASDAQ Bank				100.00					110.99					106.18					117.87					91.85					69.88

Item 6. Selected Consolidated Financial Data

     The following selected consolidated financial data with respect to our consolidated financial position as of December 31, 2008 and 2007, and the results of our operations for the fiscal years ended December 31, 2008, 2007 and 2006, has been derived from our audited consolidated financial statements included in Part IV, Item 15. This data should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and such consolidated financial statements, including the notes thereto. The selected consolidated financial data with respect to our consolidated financial position as of December 31, 2006, 2005 and 2004, and the results of our operations for the fiscal years ended December 31, 2005 and 2004, has been derived from our audited consolidated financial statements not included herein.

(Dollars in thousands except share and per share data)

Year ended December 31,		2008				2007				2006				2005				2004
Operating Data:
Interest income		$	355,919			$	325,557			$	293,423			$	233,857			$	192,840
Interest expense			120,542				125,954				105,960				63,549				42,421
Net interest income			235,377				199,603				187,463				170,308				150,419
Provision for loan losses			33,356				7,750				7,761				5,847				8,733
Net interest income after provision for loan losses			202,021				191,853				179,702				164,461				141,686
Non-interest income			128,382				92,448				102,119				70,882				70,644
Non-interest expense			222,326				178,867				164,713				151,318				142,980
Income before income taxes			108,077				105,434				117,108				84,025				69,350
Income tax expense			37,429				36,793				41,499				29,310				23,929
Net income			70,648				68,641				75,609				54,715				45,421
Preferred stock dividends			3,347				—				—				—				—
Net income available to common shareholders		$	67,301			$	68,641			$	75,609			$	54,715			$	45,421
Basic earnings per common share		$	8.55			$	8.45			$	9.32			$	6.84			$	5.74
Diluted earnings per common share			8.38				8.25				9.11				6.71				5.68
Dividends per common share			2.60				2.97				2.27				1.88				1.56
Weighted average common shares outstanding — diluted			8,028,168				8,322,480				8,303,990				8,149,337				7,997,579
Ratios:
Return on average assets			1.12	%			1.37	%			1.60	%			1.26	%			1.14	%
Return on average common stockholders’ equity			14.73				16.14				20.38				16.79				15.75
Average stockholders’ equity to average assets			7.98				8.52				7.85				7.52				7.22
Net interest margin			4.25				4.46				4.47				4.48				4.34
Net interest spread			3.87				3.78				3.89				4.13				4.12
Common stock dividend payout ratio (1)			30.41				35.15				24.36				27.49				27.18
Balance Sheet Data at Year End:
Total assets		$	6,628,347			$	5,216,797			$	4,974,134			$	4,562,313			$	4,217,293
Loans			4,772,813				3,558,980				3,310,363				3,034,354				2,739,509
Allowance for loan losses			87,316				52,355				47,452				42,450				42,141
Investment securities			1,072,276				1,128,657				1,124,598				1,019,901				867,315
Deposits			5,174,259				3,999,401				3,708,511				3,547,590				3,321,681
Other borrowed funds			79,216				8,730				5,694				7,495				7,995
Long-term debt			84,148				5,145				21,601				54,654				61,926
Subordinated debentures held by subsidiary trusts			123,715				103,095				41,238				41,238				41,238
Stockholders’ equity			539,062				444,443				410,375				349,847				308,326

Five Year Summary (continued)
(Dollars in thousands except share and per share data)

Year ended December 31,		2008				2007				2006				2005				2004
Asset Quality Ratios at Year End:
Non-performing assets to total loans and other real estate owned (OREO) (2)			2.03	%			1.00	%			0.55	%			0.67	%			0.79	%
Allowance for loan losses to total loans			1.83				1.47				1.43				1.40				1.54
Allowance for loan losses to non-performing loans (3)			96.03				150.66				269.72				236.17				212.04
Net charge-offs to average loans			0.28				0.08				0.09				0.19				0.21
Regulatory Capital Ratios at Year End:
Tier 1 risk-based capital			8.57	%			12.39	%			10.71	%			10.07	%			9.67	%
Total risk-based capital			10.49				13.64				11.93				11.27				10.95
Leverage ratio			7.13				9.92				8.61				7.91				7.49

(1)		Dividends per common share divided by basic earnings per common share.
(2)		For purposes of computing the ratio of non-performing assets to total loans and OREO, non-performing assets include nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans and OREO.
(3)		For purposes of computing the ratio of allowance for loan losses to non-performing loans, non-performing loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and restructured loans.

     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 including, among others, the following risk factors discussed more fully in Item 1A hereof:

	•		credit losses
	•		concentrations of real estate loans
	•		commercial loan risk
	•		adverse economic conditions affecting Montana, Wyoming and South Dakota
	•		adequacy of the allowance for loan losses
	•		soundness of other financial institutions
	•		recent market developments
	•		effects of recent legislative and regulatory efforts to stabilize financial markets
	•		changes in interest rates
	•		inability to meet liquidity requirements
	•		disruptions and illiquidity in credit markets
	•		inability of our bank subsidiaries to pay dividends
	•		failure to meet debt covenants
	•		competition
	•		inability to manage risks in turbulent and dynamic market conditions
	•		inability to grow our business
	•		environmental remediation and other costs

	•		breach in information system security
	•		failure of technology
	•		failure to effectively implement technology-driven products and services
	•		ineffective internal operational controls
	•		dependence on our management team
	•		impairment of goodwill
	•		the ability to attract and retain qualified employees
	•		disruption of vital infrastructure and other business interruptions
	•		litigation pertaining to fiduciary responsibilities
	•		changes in or noncompliance with governmental regulations
	•		capital required to support our bank subsidiaries
	•		increases in deposit insurance premiums
	•		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.

Recent Developments

     In response to the financial crises affecting the banking system and financial markets, the EESA was signed into law on October 3, 2008. Pursuant to the EESA, the Treasury was given the authority, among other things, to 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 financial markets. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 was enacted which amended, in certain respects, the EESA and provided an additional $787 billion in economic stimulus funding.

     On October 14, 2008, the Secretary of the Treasury announced that the Treasury will purchase equity stakes in a wide variety of banks and thrifts. Under the program, known as the TARP Capital Purchase Program, from the $700 billion authorized by the EESA, the Treasury made $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the Treasury received, from participating financial institutions, warrants to purchase common stock with an aggregate market price equal to 5% of the preferred investment. Participating financial institutions are 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 Capital Purchase Program. On December 4, 2008, we submitted an application for participation in the TARP Capital Purchase Program. In connection with the application, we requested certain exceptions to the Treasury’s standard terms and conditions applicable to the program. As of the date of this report, we have not been notified whether our application has been accepted nor have we determined whether we will participate in the program if we are accepted.

     On November 21, 2008, the FDIC adopted a final rule related to the TLG Program. The TLG Program was initiated to counter the system-wide crisis in the nation’s financial sector. Under the TLG Program, the FDIC will (i) guarantee certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before June 30, 2009, and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, NOW accounts paying less than 0.5% per annum and IOLTA accounts held at participating FDIC-insured institutions through December 31, 2009. On March 17, 2009, the FDIC extended the debt guarantee program through October 31, 2009. We elected to participate in the deposit insurance coverage guarantee program. We have not elected to participate in the debt guarantee program because more cost-effective liquidity sources are available to us.

     On February 27, 2009, the FDIC adopted an interim rule proposing a 20 basis point emergency special assessment for all FDIC insured financial institutions. This proposed assessment, to be collected on September 30, 2009, is based on deposits as of June 30, 2009. The interim rule also proposes to permit the FDIC to impose an additional emergency special assessment after June 30, 2009 of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance.

Executive Overview

     We are a financial and bank holding company with 70 banking offices in 42 communities throughout Montana, Wyoming and South Dakota. We offer a wide range of banking products and services through our bank subsidiaries. We differentiate ourselves from competitors by providing superior service to our customers and emphasizing community involvement to improve the communities we serve.

     Our principal business activity is lending to and accepting deposits from individuals, businesses, municipalities and other entities. We derive our income principally from interest charged on loans, and to a lesser extent, from interest and dividends earned on investments. We also derive income from non-interest sources such as fees received in connection with various lending and deposit services; trust, employee benefit, investment and insurance services; mortgage loan originations, sales and servicing; merchant and electronic banking services; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, provisions for loan losses and income tax expense.

     Our business strategy is to profitably grow our business through measured organic growth and through expansion into new and complementary markets through selective acquisitions. In January 2008, we completed the First Western acquisition by purchasing two banks and a data center located in western South Dakota. The acquired entities operate eighteen banking offices in twelve South Dakota communities and had combined total assets as of the acquisition date of approximately $913 million. In recent years, we have focused on improving efficiency through control of operating expenses, implementation of new technologies, consolidation of like operational and administrative functions where appropriate, and identification and implementation of strategies to increase non-interest income. As we address current economic and banking challenges in the near-term, our focus is on building capital, improving liquidity, improving earnings, managing loan quality, completing the integration of the acquired First Western entities and addressing short-term and long-term succession issues.

     Our success is highly dependent on economic conditions and market interest rates. Because we operate in Montana, Wyoming and South Dakota, the local economic conditions in each of these areas are particularly important. 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. The overall economic outlook for Montana, Wyoming and South Dakota predicts little or no growth in 2009 as the effects of the national recession spread into sectors that are likely to impact our local economies. Although the continuing impact of the national recession and financial market turmoil is uncertain, these factors affect our business and could have a harmful effect on our results of operations, cash flows and financial condition.

     During 2008, we reported net income to common shareholders of $67.3 million, or $8.38 per diluted share, as compared to $68.6 million, or $8.25 per diluted share, in 2007. During fourth quarter 2008, we recorded a one-time, after-tax gain of $17.0 million, or $2.11 per diluted share, from the sale of i_Tech, our technology services subsidiary. Exclusive of this one-time gain, net income for 2008 decreased 26.7%, or $1.98 per diluted share, from 2007.

     Net interest income, on a fully taxable-equivalent, or FTE, basis, increased 18.2% to $240.6 million in 2008, from $203.7 million in 2007, primarily due to the net interest income of the acquired First Western entities. Our net FTE interest margin ratio decreased 21 basis points to 4.25% in 2008, from 4.46% in 2007. This decline was largely due to indebtedness incurred in late 2007 and early 2008 to finance the acquisition of nonearning assets, principally goodwill, recorded in conjunction with the First Western acquisition. Additionally, interest free funding sources, including non-interest bearing deposits and common equity, comprised a smaller percentage of our funding base during 2008, as compared to 2007, and reductions in target federal funds rates further compressed our net FTE interest margin ratio.

     During 2008, we experienced deterioration in credit quality, particularly in real estate development loans. This deterioration resulted in higher levels of non-performing and internally risk classified loans. Our non-performing loans increased $56.2 million, or 161.6%, to $90.9 million, or 1.9% of total loans, as of December 31, 2008, compared to $34.8 million, or 1.0% of total loans, as of December 31, 2007. Based on our assessment of the adequacy of our allowance for loan losses, we recorded provisions for loan losses of $33.4 million in 2008, as compared to $7.8 million in 2007.

     We continue to experience adverse effects and earning pressure due to the recession and market turbulence. We believe the trends of deteriorating credit quality and increasing non-performing loans will continue in 2009. Higher levels of non-performing loans adversely impact our financial condition and operating results and may cause us to be in non-compliance with certain financial covenants contained in our senior debt instruments.

     Exclusive of the one-time gain on the sale of i_Tech and the results of the acquired First Western entities, non-interest income was flat and non-interest expense increased $16.4 million, or 9.2%, in 2008 as compared to 2007. During 2008, we recorded impairment of mortgage servicing rights of $10.9 million, as compared to $1.7 million in 2007. The remaining increase in non-interest expense in 2008, exclusive of the acquired First Western entities, was primarily due to increases in salaries, wages and benefits expense combined with one-time employee recruitment and relocation costs and higher group insurance costs.

     The following discussion and analysis is intended to provide greater details of the results of our operations and financial condition. It should be read in conjunction with the information under Part II, Item 6, “Selected Consolidated Financial Data” and the consolidated financial statements, including the notes thereto, and other financial data appearing elsewhere in this document.

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. Our significant accounting policies are summarized in “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies” included in Part IV, Item 15.

     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 non-performing loans. As a result, our historical experience has provided for an adequate allowance for loan losses. For additional information regarding the allowance for loan losses, its relation to the provision for loan losses and risk related to asset quality, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Provision for Loan Losses” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Allowance for Loan Losses” below, and “Notes to Consolidated Financial Statements — Allowance for Loan Losses” included in Part IV, Item 15. See also Part I, Item 1A, “Risk Factors — Credit Risks.”

Goodwill

     The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at the reporting unit level at least annually, or on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred. In testing for impairment, the fair value of each reporting unit is estimated based on an analysis of market-based trading and transaction multiples of selected banks in the western and central regions of the United States; and, if required, the estimated fair value is allocated to the assets and liabilities of each reporting unit. Determining the fair value of goodwill is considered a critical accounting estimate because of its sensitivity to market-based trading and transaction multiples. In addition, any allocation of the fair value of goodwill to assets and liabilities requires significant management judgment and the use of subjective measurements. Variability in the market and changes in assumptions or subjective measurements used to allocated fair value are reasonably possible and may have a material impact on our consolidated financial statements, results of operations or liquidity. For additional information regarding goodwill, see “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies,” included in Part IV, Item 15. See also Part I, Item 1A, “Risk Factors — Operational Risks.”

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.

     At December 31, 2008, the consultant’s valuation model indicated that an immediate 25 basis point decrease in mortgage interest rates would result in a reduction in fair value of mortgage servicing rights of $3.3 million and an immediate 50 basis point decrease in mortgage interest rates would result in a reduction in fair value of $4.9 million.

     For additional information regarding mortgage servicing rights, see “Notes to Consolidated Financial Statements — Mortgage Servicing Rights,” included in Part IV, Item 15. See also Part I, Item 1A, “Risk Factors — Market Risks.”

Results of Operations

Net Interest Income

     Net interest income, the largest source of our operating income, is derived from interest, dividends and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. Interest earning assets primarily include loans and investment securities. Interest bearing liabilities include deposits and various forms of indebtedness. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the composition of interest earning assets and 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. The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the interest rate spread, produces changes in the net interest income between periods.

     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)

		Year Ended December 31,
		2008												2007												2006
		Average								Average				Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
Interest earning assets:
Loans (1)(2)		$	4,527,987			$	306,976				6.78	%		$	3,449,809			$	274,020				7.94	%		$	3,208,102			$	246,861				7.69	%
U.S. government agency and mortgage-backed securities			923,912				43,336				4.69				892,850				42,650				4.78				915,844				40,985				4.48
Federal funds sold			55,205				1,080				1.96				87,460				4,422				5.06				43,726				2,196				5.02
Other securities			5,020				214				4.26				857				3				0.35				1,059				6				0.57
Tax exempt securities (2)			147,812				9,382				6.35				111,732				7,216				6.46				105,209				6,832				6.49
Interest bearing deposits in banks			5,946				191				3.21				26,165				1,307				5.00				8,190				360				4.40
Total interest earnings assets			5,665,882				361,179				6.37				4,568,873				329,618				7.21				4,282,130				297,240				6.94
Non-earning assets			667,206												423,893												444,702
Total assets		$	6,333,088											$	4,992,766											$	4,726,832
Interest bearing liabilities:
Demand deposits			1,120,807				12,966				1.16	%			1,004,019				23,631				2.35	%			850,925				15,852				1.86	%
Savings deposits			1,144,553				18,454				1.61				940,521				24,103				2.56				845,967				17,424				2.06
Time deposits			1,688,859				65,443				3.87				1,105,959				51,815				4.69				1,010,820				39,991				3.96
Borrowings (3)			663,957				10,823				1.63				566,984				21,640				3.82				683,776				27,636				4.04
Long-term debt			86,909				4,579				5.27				9,230				467				5.06				40,320				1,576				3.91
Subordinated debentures held by by subsidiary trusts			123,327				8,277				6.71				47,099				4,298				9.13				41,238				3,481				8.44
Total interest bearing liabilities			4,828,412				120,542				2.50				3,673,812				125,954				3.43				3,473,046				105,960				3.05
Non-interest bearing deposits			940,968												842,239												837,909
Other liabilities			58,173												51,529												44,860
Stockholders’ equity			505,535												425,186												371,017
Total liabilities and stockholders’ equity		$	6,333,088											$	4,992,766											$	4,726,832
Net FTE interest income						$	240,637											$	203,664											$	191,280
Less FTE adjustments (2)							(5,260	)											(4,061	)											(3,817	)
Net interest income from consolidated statements of income						$	235,377											$	199,603											$	187,463
Interest rate spread											3.87	%											3.78	%											3.89	%
Net FTE interest margin (4)											4.25	%											4.46	%											4.47	%

(1)

Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred loan costs.

(2)

Interest income and average rates for tax exempt loans and securities are presented on a FTE basis.

(3)

Includes interest on federal funds purchased, securities sold under repurchase agreements and other borrowed funds. Excludes long-term debt.

(4)

Net FTE interest margin during the period equals (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

     Net FTE interest income increased $37.0 million, or 18.2%, to $240.6 million in 2008, from $203.7 million in 2007, due to the net interest income of the acquired First Western entities. Average earning assets grew 24.0% in 2008, with approximately 78.0% of this growth attributable to the acquired First Western entities. Despite growth in earning assets and an increase in the interest rate spread, our net FTE interest margin decreased 21 basis points to 4.25% in 2008, as compared to 4.46% for 2007, largely due to the First Western acquisition. In conjunction with the acquisition, we incurred indebtedness to acquire nonearning assets, including goodwill, core deposit intangibles and premises and equipment. In addition, interest free funding sources, including non-interest bearing deposits and common equity comprised a smaller percentage of our funding base during 2008 as compared to 2007, and reductions in federal funds rates in 2008 further compressed our net FTE interest margin ratio.

     Our fourth quarter 2008 net FTE interest margin ratio declined to 4.13%, compared to 4.30% for third quarter 2008 and 4.41% for fourth quarter 2007, primarily due to reductions in federal funds rates. During fourth quarter 2008, the federal funds rate fell 125 to 150 basis points, with the last decrease taking the rate to between 0 and 25 basis points.

     Net FTE interest income increased $12.4 million, or 6.5%, to $203.7 million in 2007 from $191.3 million in 2006, due to organic growth in earning assets, primarily loans. During 2007, the migration of customer deposits from traditional repurchase agreements, which are secured by pledged investment securities, into a new money market sweep deposit product increased funds available to support growth in earning assets. Further contributing to improvements in net FTE interest income in 2007 and 2006 were increases in earning assets as a percentage of total assets.

     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)

		Year Ended December 31, 2008												Year Ended December 31, 2007												Year Ended December 31, 2006
		compared with												compared with												compared with
		December 31, 2007												December 31, 2006												December 31, 2005
		Volume				Rate				Net				Volume				Rate				Net				Volume				Rate				Net
Interest earning assets:
Loans (1)		$	85,640			$	(52,684	)		$	32,956			$	18,599			$	8,560			$	27,159			$	22,782			$	27,626			$	50,408
U.S. government agency and mortgage-backed securities			1,484				(798	)			686				(1,029	)			2,694				1,665				5,263				5,668				10,931
Federal funds sold			(1,631	)			(1,711	)			(3,342	)			2,196				30				2,226				(1,312	)			742				(570	)
Other securities (2)			15				196				211				(1	)			(2	)			(3	)			(173	)			(22	)			(195	)
Tax exempt securities (1)(2)			2,330				(164	)			2,166				424				(40	)			384				120				(32	)			88
Interest bearing deposits in banks			(1,010	)			(106	)			(1,116	)			790				157				947				(754	)			93				(661	)
Total change			86,828				(55,267	)			31,561				20,979				11,399				32,378				25,926				34,075				60,001
Interest bearing liabilities:
Demand deposits			2,749				(13,414	)			(10,665	)			2,852				4,927				7,779				1,316				9,741				11,057
Savings deposits			5,229				(10,878	)			(5,649	)			1,947				4,732				6,679				(701	)			6,974				6,273
Time deposits			27,309				(13,681	)			13,628				3,764				8,060				11,824				(68	)			10,418				10,350
Borrowings (3)			3,701				(14,518	)			(10,817	)			(4,720	)			(1,276	)			(5,996	)			4,441				10,445				14,886
Long-term debt			3,930				182				4,112				(1,215	)			106				(1,109	)			(842	)			(62	)			(904	)
Subordinated debentures held by subsidiary trusts			6,956				(2,977	)			3,979				495				322				817				—				749				749
Total change			49,874				(55,286	)			(5,412	)			3,123				16,871				19,994				4,146				38,265				42,411
Increase (decrease) in FTE net interest income (1)		$	36,954			$	19			$	36,973			$	17,856			$	(5,472	)		$	12,384			$	21,780			$	(4,190	)		$	17,590

(1)

Interest income and average rates for tax exempt loans and securities are presented on a FTE basis.

(2)

Held-to-maturity investment securities are presented at amortized cost.

(3)

Includes interest on federal funds purchased, securities sold under repurchase agreements and other borrowed funds.

Provision for Loan Losses

     The provision for loan losses creates an allowance for loan losses known and inherent in the loan portfolio at each balance sheet date. We perform a quarterly assessment of the risks inherent in our loan portfolio, as well as a detailed review of each significant asset with identified weaknesses. Based on this analysis, we record a provision for loan losses in order to maintain the allowance for loan losses at appropriate levels. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses. Ultimate loan losses may vary from current estimates. For additional information concerning the provision for loan losses, see “Critical Accounting Estimates and Significant Accounting Policies” above.

     The provision for loan losses increased $25.6 million, or 330.4%, to $33.4 million in 2008, as compared to $7.8 million in 2007. During fourth quarter 2008, we recorded provisions of $20.0 million, as compared to $5.6 million recorded in third quarter 2008 and $2.1 million recorded in fourth quarter 2007. Significant increases in provisions for loan losses, particularly during fourth quarter 2008, reflect our assessment of the estimated effect of current economic conditions on our loan portfolio. Effects of the broad recession impacted our market areas in 2008 resulting in higher levels of non-performing assets, particularly real estate development loans. We determined that the provisions for loan losses made during 2008 were necessary to maintain our allowance for loan losses at a level, which in our estimate, is necessary to absorb probable loan losses within our existing loan portfolio. For additional information concerning non-performing assets, see “Non-Performing Assets” herein.

     The provision for loan losses decreased less than 1% to $7.8 million in 2007, as compared to 2006; however, during fourth quarter 2007, the provision for loan losses increased $724 thousand, or 51.7%, to $2.1 million, as compared to $1.4 million for the same period in 2006. The fourth quarter 2007 increase was primarily due to higher levels of non-performing loans.

Non-interest Income

     Principal sources of non-interest income include other service charges, commissions and fees; technology services revenues; service charges on deposit accounts; wealth management revenues; and, income from the origination and sale of loans. Non-interest income increased $35.9 million, or 38.9%, to $128.4 million in 2008 from $92.4 million in 2007. Non-interest income decreased $9.7 million, or 9.5%, to $92.4 million in 2007 from $102.1 million in 2006. Fluctuations in non-interest income are a function of changes in each of the principal categories 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 $4.0 million, or 16.4%, to $28.2 million in 2008 from $24.2 million in 2007. Other service charges, commissions and fees increased 10.6% to $24.2 million in 2007, from $21.9 million in 2006. Approximately $1.8 million of the 2008 increase was attributable to the acquired First Western entities. The remaining increase in 2008 and 2007 was primarily due to additional fee income from higher volumes of credit and debit card transactions and increases in insurance commissions.

     Service charges on deposit accounts increased $2.9 million, or 16.4%, to $20.7 million in 2008, from $17.8 million in 2007. Service charges on deposit accounts increased $206 thousand, or 1.2%, to $17.8 million in 2007, from $17.6 million in 2006. Substantially all of the 2008 increase was attributable to the acquired First Western entities.

     Technology services revenues decreased $1.4 million, or 7.2%, to $17.7 million in 2008, from $19.1 million in 2007. This decrease was primarily due to a $2.0 million contract termination fee recorded during third quarter 2007. In addition, item processing income decreased $718 thousand in 2008, as compared to 2007, primarily due to the introduction of imaging technology that permits items to be captured electronically rather than through physical processing and transporting of the items. These decreases were offset by an increase of $1.8 million in core data processing revenues resulting from increases in the number of core data processing customers and the volume of core data transactions processed. Technology services revenues increased 20.4% to $19.1 million in 2007, from $15.8 million in 2006, primarily due to a $2.0 million nonrecurring contract termination fee recorded during third quarter 2007 and an increase in the volume of core data and debit card transactions processed.

     Wealth management revenues, comprised principally of fees earned for management of trust assets and investment services, increased 5.3% to $12.4 million in 2008, from $11.7 million in 2007, due to the addition of new trust and investment services customers in 2008. Wealth management revenues increased 5.0% to $11.7 million in 2007, from $11.2 million in 2006, primarily due to higher asset management fees resulting from the improved market performance of underlying trust account assets and the addition of new trust and investment services customers.

     Income from the origination and sale of loans includes origination and processing fees on residential real estate loans held for sale and gains on residential real estate loans sold to third parties. Fluctuations in market interest rates have a significant impact on the level of income generated from the origination and sale of loans. Higher interest rates can substantially reduce the demand for home loans and loans to refinance existing mortgages. Conversely, lower interest rates generally stimulate refinancing and home loan origination. Income from the origination and sale of loans increased 9.3% to $12.3 million in 2008, from $11.2 million in 2007, and 17.0% to $11.2 million in 2007, from $9.6 million in 2006. Approximately $224 thousand of the 2008 increase is attributable to the acquired First Western entities.

     During fourth quarter 2008, we recorded a one-time gain of $27.1 million on the sale of i_Tech, our technology services subsidiary. i_Tech represented all of our technology services operating segment. Due to the sale, no technology services revenues will be recorded in 2009 or future periods. For additional information concerning this sale and the resulting gain, see “Notes to Consolidated Financial Statements — Disposals” included in Part IV, Item 15.

     Other income primarily includes company-owned life insurance revenues, check printing income, agency stock dividends and gains on sales of assets other than investment securities. Other income increased $1.6 million, or 19.4%, to $9.9 million in 2008, from $8.3 million in 2007. Exclusive of the acquired First Western entities, non-interest income decreased $1.7 million, or 20.2%, in 2008, as compared to 2007. During first quarter 2008, we recorded a gain of $1.6 million resulting from the mandatory redemption of our class B shares of Visa, Inc. The net gain was split between our community banking and technology services operating segments. In addition, during first quarter 2008, we recorded a nonrecurring gain of $1.1 million due to the release of funds escrowed in conjunction with the December 2006 sale of our interest in iPay Technologies, LLC. These gains were offset by decreases in earnings of securities held under deferred compensation plans and one-time gains recorded in 2007 of $986 thousand on the sale of mortgage servicing rights and $737 thousand from the conversion and subsequent sale of our MasterCard stock.

     Other income increased 20.2% to $8.3 million in 2007, from $6.9 million in 2006, primarily due to nonrecurring gains of $737 thousand from the conversion and subsequent sale of MasterCard stock and $986 thousand on the sale of mortgage servicing rights recorded during 2007.

Non-interest Expense

     Non-interest expense increased $43.5 million, or 24.3%, to $222.3 million in 2008, from $178.9 million in 2007, and 8.6% to $178.9 million in 2007, from $164.7 million in 2006. Significant components of these increases are discussed below.

     Salaries, wages and employee benefits expense increased $15.9 million, or 16.2%, to $114.0 million in 2008, from $98.1 million in 2007. Approximately $12.2 million of the 2008 increase was attributable to the acquired First Western entities. The remaining increase was primarily due to higher group health insurance costs and wage increases. These increases were partially offset by decreases in incentive bonus and profit sharing accruals to reflect 2008 performance results.

     Salaries, wages and employee benefits expense increased 10.4% to $98.1 million in 2007, from $88.9 million in 2006, primarily due to the combined effects of wage increases, higher staffing levels, higher incentive compensation accruals and increased group medical insurance costs.

     Furniture and equipment expense increased $2.7 million, or 16.3%, to $18.9 million in 2008, from $16.2 million in 2007. Approximately $1.2 million of the increase was attributable to the acquired First Western entities. The remaining increase was primarily due to higher depreciation and maintenance expenses resulting from the addition, replacement and repair of equipment in the ordinary course of business. Furniture and equipment expense decreased slightly to $16.2 million in 2007, as compared to $16.3 million in 2006.

     Occupancy expense increased $1.6 million, or 11.0%, to $16.3 million in 2008, from $14.7 million in 2007, due to the acquired First Western entities. Occupancy expense increased 10.8% to $14.7 million in 2007, from $13.3 million in 2006, primarily due to increases in rental expense and higher depreciation expense resulting from adjustment of the useful lives of two buildings and related leasehold improvements.

     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. We recorded impairment charges of $10.9 million in 2008 and $1.7 million in each of 2007 and 2006.

     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 increased $1.5 million, or 33.3%, to $5.9 million in 2008, from $4.4 million in 2007, and $417 thousand, or 10.4%, to $4.4 million in 2007, from $4.0 million in 2006.

     FDIC insurance premiums increased $2.5 million, or 555.9%, to $2.9 million in 2008, from $444 thousand in 2007. During the first half of 2008, we fully utilized a one-time credit provided by the FDIC to offset the cost of FDIC insurance premiums for “well-managed” banks. In addition, we elected to participate in the deposit insurance coverage guarantee program during fourth quarter 2008. The fee assessment for deposit insurance coverage on deposits insured under this program is 10 basis points per annum. For the first quarter of 2009 only, the FDIC increased all FDIC deposit assessment rates by 7 basis points and on February 27, 2009 the FDIC issued a final rule setting base assessment rates for Risk Category I institutions at 12 to16 basis points, beginning April 1, 2009. While we cannot provide any assurance as to the actual amount of any increase in our FDIC insurance premiums, as such changes are dependent upon a variety of factors, some of which are beyond our control, we expect our base premiums will increase to approximately $7.0 million in 2009.

     In addition, on February 27, 2009, the FDIC adopted an interim rule proposing a 20 basis point special assessment for all FDIC insured financial institutions. This proposed assessment, which would be collected on September 30, 2009, is based on deposits as of June 30, 2009. Based on our current level and mix of deposit accounts, we estimate that a 20 basis point special assessment in 2009, should it occur, would increase our deposit insurance premiums by approximately $10.4 million. A final rule related to the special assessment is expected in the near term.

     Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed and are amortized based on the estimated useful lives of the related deposits. We recorded core deposit intangibles of $14.9 million in conjunction with the acquisition of the First Western entities. These intangibles are being amortized using an accelerated method over their weighted average expected useful lives of 9.2 years. Core deposit intangible amortization expense was $2.5 million in 2008, as compared to $174 thousand in 2007 and $772 thousand in 2006. Core deposit intangible amortization expense is expected to decrease 14.9% to $2.1 million in 2009. For additional information regarding core deposit intangibles, see “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies,” included in Part IV, Item 15.

     Other expenses primarily include professional fees, outsource technology service costs, advertising and public relations costs; office supply, postage, freight, telephone and travel expenses; donations expense; board of director fees; and, other losses. Other expenses increased $7.8 million, or 18.1%, to $50.8 million in 2008, from $43.0 million in 2007. Exclusive of other expenses of the acquired First Western entities, which included a $1.3 million “other than temporary” impairment charge on one investment security, other expenses decreased $1.1 million, or 2.3%, in 2008, as compared to 2007. During fourth quarter 2007, we recorded loss contingency accruals of $1.5 million related to an indemnification agreement with Visa USA and two potential operational losses incurred in the ordinary course of business. During first quarter 2008, we reversed $625 thousand of the loss contingency accrual related to our indemnification agreement with Visa USA. In addition, during 2008 we recorded expenses of $450 thousand related to employee recruitment and relocation and $708 thousand related to nonrecurring fraud losses.

     Other expenses increased 9.5% to $43.0 million in 2007, from $39.3 million in 2006, primarily due to fourth quarter 2007 loss contingency accruals of $1.5 million related to an indemnification agreement with Visa USA and two potential operational losses incurred in the ordinary course of business and increases in consulting fees related to the evaluation of a company-wide data warehousing system.

Income Tax Expense

     Our effective federal tax rate was 30.3% for the year ended December 31, 2008; 31.0% for the year ended December 31, 2007; and 31.6% for the year ended December 31, 2006. Fluctuations in federal income tax rates are primarily due to fluctuations in tax exempt interest income as a percentage of total income. State income tax applies primarily to pretax earnings generated within Montana, South Dakota, Colorado, Idaho and Oregon. Our effective state tax rate was 4.4% for the year ended December 31, 2008; 3.9% for the year ended December 31, 2007; and 3.8% for the year ended December 31, 2006.

Operating Segment Results

     The following table summarizes net income (loss) for each of our operating segments for the years indicated.

Operating Segment Results
(Dollars in thousands)

		Net Income (Loss)
Year ended December 31,		2008				2007				2006
Community Banking		$	63,364			$	71,244			$	66,691
Technology Services			2,911				3,706				3,761
Other			70,312				68,400				75,642
Intersegment eliminations			(65,939	)			(74,709	)			(70,485	)
Consolidated		$	70,648			$	68,641			$	75,609

     Our principal operating segment is community banking, which encompasses commercial and consumer banking services offered to individuals, businesses, municipalities and other entities. The community banking segment represented over 87% of our combined revenues and income during 2008, 2007 and 2006, and over 97% of our consolidated assets as of December 31, 2008 and 2007. Components of the changes in community banking net income in 2008 as compared to 2007, and in 2007 as compared to 2006, are discussed above.

     The technology services operating segment encompasses services provided through i_Tech to affiliated and non-affiliated customers including core application data processing; ATM and debit card processing; item proof, capture and imaging; wide area network services; and, system support. On December 31, 2008, we sold all of the outstanding stock of i_Tech to Fiserv. For additional information regarding the sale of i_Tech, see “Notes to Consolidated Financial Statements - Disposals” included in Part IV, Item 15.

     Technology services net income decreased $795 thousand, or 21.5%, to $2.9 million in 2008, from $3.7 million in 2007. This decrease was primarily due to a $2.0 million nonrecurring contract termination fee recorded in 2007. In addition, item processing income decreased $718 thousand in 2008, as compared to 2007, primarily due to the introduction of imaging technology that permits items to be captured electronically rather than through physical processing and transporting of the items. These decreases were partially offset by a one-time gain of $894 thousand from the mandatory redemption of our class B shares of Visa, Inc. recorded during first quarter 2008 and increases in core data processing revenues due to higher transaction volumes.

     Technology services net income decreased 1.5% to $3.7 million in 2007, from $3.8 million in 2006. Increases in net income resulting from a $2.0 million contract termination fee and higher revenues from increases in the number of customers using core data processing services and the volume of core data and debit card transactions processed in 2007 were offset by increases in salary and benefits expenses due to higher staffing levels and increases in equipment maintenance and repair expense.

     The Other category includes the net funding cost and other expenses of the parent holding company and the operational results of consolidated nonbank subsidiaries (except i_Tech). Other net income increased 2.8% to $70.3 million in 2008, as compared to $68.4 million in 2007. Improvements in net income were primarily the result of increases of $1.7 million in intercompany management fees; and, nonrecurring gains, including a $1.1 million gain resulting from the release of funds escrowed in conjunction with the December 2006 sale of our equity interest in iPay, an unconsolidated joint venture also recorded during first quarter 2008, and a $27.1 million gain on the sale of i_Tech recorded during fourth quarter 2008. These contributions to net income were partially offset by increases in interest expense of $7.5 million due to additional indebtedness incurred in conjunction with the First Western acquisition and decreases in earnings of subsidiaries.

     During fourth quarter 2006, the parent holding company recorded a one-time after tax gain of $12.3 million on the sale of its equity interest in an unconsolidated joint venture. Exclusive of this one-time gain, Other net income increased 8.1% to $68.4 million in 2007, from $63.3 million in 2006. The increase in net income in 2007, as compared to 2006, was principally due to investment of proceeds received from the sale of the unconsolidated joint venture in 2006.

     For additional information regarding the our operating segments, see “Business — Operating Segments” included in Part I, Item 1, and “Notes to Consolidated Financial Statements — Segment Reporting” included in Part IV, Item 15.

     The following table presents unaudited quarterly results of operations for the fiscal years ended December 31, 2008 and 2007.

Quarterly Results
(Dollars in thousands except per share data)

		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter				Total
Year Ended December 31, 2008:
Interest income		$	91,109			$	88,068			$	89,928			$	86,814			$	355,919
Interest expense			34,306				29,697				29,234				27,305				120,542
Net interest income			56,803				58,371				60,694				59,509				235,377
Provision for loan losses			2,363				5,321				5,636				20,036				33,356
Net interest income after provision for loan losses			54,440				53,050				55,058				39,473				202,021
Non-interest income			26,369				25,225				24,310				52,478				128,382
Non-interest expense			53,155				49,662				55,111				64,398				222,326
Income before income taxes			27,654				28,613				24,257				27,553				108,077
Income tax expense			9,578				9,988				8,362				9,501				37,429
Net income		$	18,076			$	18,625			$	15,895			$	18,052			$	70,648
Preferred stock dividends			768				853				863				863				3,347
Net income available to common shareholders		$	17,308			$	17,772			$	15,032			$	17,189			$	67,301
Basic earnings per common share		$	2.19			$	2.27			$	1.93			$	2.17			$	8.55
Diluted earnings per common share			2.14				2.22				1.89				2.13				8.38
Dividends per common share			0.65				0.65				0.65				0.65				2.60
Year Ended December 31, 2007:
Interest income		$	78,636			$	80,834			$	83,314			$	82,773			$	325,557
Interest expense			30,492				31,656				32,471				31,335				125,954
Net interest income			48,144				49,178				50,843				51,438				199,603
Provision for loan losses			1,875				1,875				1,875				2,125				7,750
Net interest income after provision for loan losses			46,269				47,303				48,968				49,313				191,853
Non-interest income			21,697				22,306				25,390				23,055				92,448
Non-interest expense			42,770				42,586				44,581				48,930				178,867
Income before income taxes			25,196				27,023				29,777				23,438				105,434
Income tax expense			8,700				9,398				10,528				8,167				36,793
Net income		$	16,496			$	17,625			$	19,249			$	15,271			$	68,641
Basic earnings per common share		$	2.01			$	2.16			$	2.37			$	1.91			$	8.45
Diluted earnings per common share			1.97				2.11				2.32				1.86				8.25
Dividends per common share			1.02				0.65				0.65				0.65				2.97

Financial Condition

     Total assets increased $1,412 million, or 27.1%, to $6,628 million as of December 31, 2008, from $5,217 million as of December 31, 2007, primarily due to the First Western acquisition in January 2008. As of the date of acquisition, the acquired entities had combined total assets of $913 million, combined total loans of $727 million, combined premises and equipment of $27 million and combined total deposits of $814 million. In connection with the acquisition, we recorded goodwill of $146 million and core deposit intangibles of $15 million. For additional information regarding the First Western acquisition, see “Notes to Consolidated Financial Statements - Acquisitions” included in Part IV, Item 15.

Loans

     Our loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and other loans, including fixed and variable rate loans. Fluctuations in the loan portfolio are directly related to the economies of the communities we serve. While each loan originated generally must meet minimum underwriting standards established in our credit policies, lending officers are granted certain levels of autonomy in approving and pricing loans to assure that the banking offices are responsive to competitive issues and community needs in each market area.

     Real Estate Loans. We provide interim construction and permanent financing for both single-family and multi-unit properties, medium-term loans for commercial, agricultural and industrial property and/or buildings and equity lines of credit secured by real estate. Residential real estate loans are typically sold in the secondary market. Those residential real estate loans not sold are typically secured by first liens on the financed property and generally mature in less than 10 years. Commercial, agricultural and industrial loans are generally secured by first liens on income-producing real estate and generally mature in less than five years. Approximately 53% of our commercial real estate loans as of December 31, 2008, were owner occupied, which typically involves less risk than loans on investment property.

     Consumer Loans. Our consumer loans include direct personal loans, credit card loans and lines of credit; and, indirect loans created when we purchase consumer loan contracts advanced for the purchase of automobiles, boats and other consumer goods from consumer product dealers. Personal loans and indirect dealer loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis. Credit cards are offered to individual and business customers in our market areas. Lines of credit are generally floating rate loans that are unsecured or secured by personal property. Approximately 61% of our consumer loans as of December 31, 2008, were indirect dealer loans.

     Commercial Loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs and business expansions. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees.

     Agricultural Loans. Our agricultural loans generally consist of short and medium-term loans and lines of credit that are primarily used for crops, livestock, equipment and general operations. Agricultural loans are ordinarily secured by assets such as livestock or equipment and are repaid from the operations of the farm or ranch. Agricultural loans generally have maturities of five years or less, with operating lines for one production season.

     Total loans increased 34.1% to $4,773 million as of December 31, 2008, from $3,559 million as of December 31, 2007, and 7.5% to $3,559 million as of December 31, 2007, from $3,310 as of December 31, 2006. Approximately $723 million of the 2008 increase was attributable to the acquired First Western entities. Excluding loans of the acquired entities, total loans increased $491 million, or 13.8%, in 2008, with the most significant growth occurring in commercial, commercial real estate, construction and residential real estate loans.

     The following table presents the composition of our loan portfolio as of the dates indicated:

Loans Outstanding
(Dollars in thousands)

		As of December 31,
		2008				Percent				2007				Percent				2006				Percent				2005				Percent				2004				Percent
Loans
Real estate:
Commercial		$	1,483,967				31.1	%		$	1,018,831				28.6	%		$	937,695				28.3	%		$	926,190				30.5	%		$	855,711				31.2	%
Construction			790,177				16.5				664,272				18.7				579,603				17.5				403,751				13.3				296,773				10.8
Residential			587,464				12.3				419,001				11.8				402,468				12.2				408,659				13.4				363,145				13.3
Agricultural			191,831				4.0				142,256				4.0				137,659				4.1				116,402				3.9				108,345				4.0
Other			47,076				1.0				26,080				0.7				25,360				0.8				19,067				0.6				21,255				0.7
Consumer			689,635				14.4				608,002				17.1				605,858				18.3				587,895				19.4				514,045				18.8
Commercial			833,894				17.5				593,669				16.7				542,325				16.4				494,848				16.3				500,611				18.3
Agricultural			145,876				3.1				81,890				2.3				76,644				2.3				74,561				2.5				74,303				2.7
Other loans			2,893				0.1				4,979				0.1				2,751				0.1				2,981				0.1				5,321				0.2
Total loans			4,772,813				100.0	%			3,558,980				100.0	%			3,310,363				100.0	%			3,034,354				100.0	%			2,739,509				100.0	%
Less allowance for loan losses			87,316								52,355								47,452								42,450								42,141
Net loans		$	4,685,497							$	3,506,625							$	3,262,911							$	2,991,904							$	2,697,368
Ratio of allowance to total loans			1.83	%							1.47	%							1.43	%							1.40	%							1.54	%

     Commercial real estate loans increased 45.7% to $1,484 million as of December 31, 2008, from $1,019 million as of December 31, 2007 and 8.7% to $1,019 million as of December 31, 2007, from $938 million as of December 31, 2006. Excluding increases attributable to the acquired First Western entities, commercial real estate loans increased 15.3% as of December 31, 2008, as compared to December 31, 2007, primarily due to real estate development loans. Demand for improved lots declined in 2008 reducing the cash flow of real estate developers, which resulted in increases in outstanding loan balances. As of December 31, 2008, we had no interest reserves related to real estate development loans. The increase in commercial real estate loans in 2007 was primarily due to strong demand for housing and overall growth in our market areas.

     Construction loans increased 19.0% to $790 million as of December 31, 2008, from $664 million as of December 31, 2007 and 14.6% to $664 million as of December 31, 2007, from $580 million as of December 31, 2006. Excluding increases attributable to the acquired First Western entities, construction loans increased 2.9% as of December 31, 2008, as compared to December 31, 2007. Construction loans are primarily to commercial builders for residential lot development and the construction of single-family residences and commercial real estate properties. Construction loans are generally underwritten pursuant to the same guidelines used for originating permanent commercial and residential mortgage loans. Terms and rates typically match those of permanent commercial and residential mortgage loans, except that during the construction phase the borrower pays interest only. Growth in construction loans in 2008 and 2007 was primarily the result of demand for housing and overall growth in our market areas.

     Residential real estate loans increased 40.2% to $587 million as of December 31, 2008, from $419 million as of December 31, 2007. Excluding increases attributable to the acquired First Western entities, residential real estate loans increased 25.4% as of December 31, 2008, as compared to December 31, 2007. Increase in residential real estate loans primarily occurred in equity loans and lines of credit. Equity loans and lines of credit are typically secured by first or second liens on residential real estate and generally do not exceed a loan to value ratio of 90%. As of December 31, 2008, equity loans and lines of credit totaled $381 million. We do not engage in sub-prime lending practices.

     Commercial loans increased 40.5% to $834 million as of December 31, 2008, from $594 million as of December 31, 2007 and 9.5% to $594 million as of December 31, 2007, from $542 million as of December 31, 2006. Excluding increases attributable to the acquired First Western entities, commercial loans increased 15.3% as of December 31, 2008, as compared to December 31, 2007. Management attributes 2008 growth to an overall increase in borrowing activity during most of 2008 due to retail business expansion in our market areas. This expansion began to decline in late 2008 as retail businesses in our market areas were impacted by the effects the recession. The increase in 2007, as compared to 2006 was primarily due to a favorable economy, growth in our existing market areas and an increase in overall borrowing activity.

     The following table presents the maturity distribution of our loan portfolio and the sensitivity of the loans to changes in interest rates as of December 31, 2008:

Maturities and Interest Rate Sensitivities
(Dollars in thousands)

		Within				One Year to				After
		One Year				Five Years				Five Years				Total
Real estate		$	2,026,031			$	937,027			$	137,457			$	3,100,515
Consumer			369,911				299,034				20,690				689,635
Commercial			659,026				166,080				8,788				833,894
Agricultural			132,402				13,367				107				145,876
Other loans			2,893				—				—				2,893
Total loans		$	3,190,263			$	1,415,508			$	167,042			$	4,772,813
Loans at fixed interest rates		$	946,036			$	1,401,612			$	153,125			$	2,500,773
Loans at variable interest rates			2,158,595				13,896				13,917				2,186,408
Nonaccrual loans			85,632				—				—				85,632
Total loans		$	3,190,263			$	1,415,508			$	167,042			$	4,772,813

Investment Securities

     We manage our investment portfolio to obtain the highest yield possible, while meeting our risk tolerance and liquidity guidelines and satisfying the pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. The portfolio is comprised of mortgage-backed securities, U.S. government agency securities, tax exempt securities, corporate securities and mutual funds. Federal funds sold are additional investments that are classified as cash equivalents rather than as investment securities. Investment securities classified as available-for-sale are recorded at fair value, while investment securities classified as held-to-maturity are recorded at amortized cost. Unrealized gains or losses, net of the deferred tax effect, on available-for-sale securities are reported as increases or decreases in accumulated other comprehensive income or loss, a component of stockholders’ equity.

     Investment securities decreased 5.0% to $1,072 million as of December 31, 2008, from $1,129 million as of December 31, 2007. Excluding investment securities of the acquired First Western entities, our investment securities decreased 11.5% as of December 31, 2008, compared to December 31, 2007. During 2008, proceeds from maturities, calls and principal paydowns of investment securities were used to fund loan growth. Investment securities increased less than 1.0% to $1,129 million as of December 31, 2007, from $1,125 million as of December 31, 2006. During first quarter 2007, we introduced a money market sweep deposit product that does not require the pledging of investment securities as collateral. The migration of customers from traditional repurchase agreements, which typically require the pledging of investment securities as collateral, to the new money market sweep deposit product allowed us to deploy available funds into earning assets other than short-term investment securities.

     As of December 31, 2008, our investments in corporate securities, non-agency mortgage-backed securities and Federal National Mortgage Association, or Fannie Mae, common stock totaled $5.4 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. As of December 31, 2008, investment securities with amortized costs and fair values of $894 million and $907 million, respectively, were pledged to secure public deposits and securities sold under repurchase agreements, as compared to $909 million and $907 million, respectively, as of December 31, 2007. The weighted average yield on investment securities decreased 4 basis points to 4.92% in 2008, from 4.96% in 2007, and increased 28 basis points to 4.96% in 2007, from 4.68% in 2006. For additional information concerning securities sold under repurchase agreements, see “Federal Funds Purchased and Securities Sold Under Repurchase Agreements” included herein.

     The following table sets forth the book value, percentage of total investment securities and average yield on investment securities as of December 31, 2008:

Securities Maturities and Yield
(Dollars in thousands)

						% of Total				Weighted
		Book				Investment				Average
		Value				Securities				Yield (1)
U.S. Government agency securities
Maturing within one year		$	84,165				7.9	%			3.73	%
Maturing in one to five years			179,843				16.8				4.40
Mark-to-market adjustments on securities available-for-sale			6,371
Total			270,379				25.2				4.19
Mortgage-backed securities
Maturing within one year			226,270				21.1				4.93
Maturing in one to five years			271,519				25.3				4.81
Maturing in five to ten years			84,029				7.8				5.00
Maturing after ten years			64,638				6.0				5.19
Mark-to-market adjustments on securities available-for-sale			8,803
Total			655,259				61.1				4.92
Tax exempt securities
Maturing within one year			13,873				1.3				6.04
Maturing in one to five years			41,122				3.8				6.24
Maturing in five to ten years			37,085				3.5				6.19
Maturing after ten years			50,951				4.8				6.30
Mark-to-market adjustments on securities available-for-sale			99
Total			143,130				13.4				6.23
Other securities (2)
No stated maturity			618				0.1				—
Maturing within one year			2,891				0.3				5.27
Mark-to-market adjustments on securities available-for-sale			(5	)
Total			3,504				0.3				4.34
Mutual funds with no stated maturity			4								1.15
Total			4								1.15
Total		$	1,072,276				100.0	%			4.92	%

(1)		Average yields have been calculated on a FTE basis.
(2)		Investment in community development entities. Investment income is in the form of credits that reduce income tax expense.

     The maturities noted above reflect $97 million of investment securities at their final maturities although they have call provisions within the next year. Mortgage-backed securities, and to a limited extent other securities, have uncertain cash flow characteristics that present additional interest rate risk in the form of prepayment or extension risk primarily caused by changes in market interest rates. This additional risk is generally rewarded in the form of higher yields. Maturities of mortgage-backed securities presented above are based on prepayment assumptions at December 31, 2008.

     There were no significant concentrations of investments at December 31, 2008 (greater than 10% of stockholders’ equity) in any individual security issuer, except for U.S. government or agency-backed securities.

     As of December 31, 2007, we had U.S. government agency securities with carrying values of $453 million and a weighted average yield of 4.54%; mortgage-backed securities with carrying values of $562 million and a weighted average yield of 4.87%; tax exempt securities with carrying values of $114 million and a weighted average yield of 6.44%; other securities with carrying values of $767 thousand and a weighted average yield of 0.00%; and, mutual funds with carrying values of $3 thousand and a weighted average yield of 3.62%.

     As of December 31, 2006, we had U.S. government agency securities with carrying values of $564 million and a weighted average yield of 4.81%; mortgage-backed securities with carrying values of $448 million and a weighted average yield of 4.63%; tax exempt securities with carrying values of $111 million and a weighted average yield of 6.49%; other securities with carrying values of $918 thousand and a weighted average yield of 0.00%; and, mutual funds with carrying values of $40 thousand and a weighted average yield of 4.77%.

     We evaluate our 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 December 31, 2008, we had investment securities with fair values of $73 million that had been in a continuous loss position more than twelve months. Gross unrealized losses on these securities totaled $796 thousand as of December 31, 2008, and were primarily attributable to changes in interest rates. We recorded impairment losses of $1.3 million in 2008, all of which was related to one corporate bond. Subsequent to the impairment loss, the carrying value of this bond was zero. No impairment losses were recorded during 2007 or 2006.

     For additional information concerning investment securities, see “Notes to Consolidated Financial Statements — Investment Securities” included in Part IV, Item 15.

Mortgage Servicing Rights

     We recognize the rights to service mortgage loans for others whether acquired or originated internally. Net mortgage servicing rights decreased 49.3% to $11 million as of December 31, 2008, from $22 million as of December 31, 2007, primarily due to increases in impairment reserves. Impairment reserves increased $11 million, or 187.1%, to $17 million as of December 31, 2008, compared to $6 million as of December 31, 2007, primarily due to increases in the estimated level of expected prepayments. For additional information regarding mortgage servicing rights, see “Notes to Consolidated Financial Statements — Mortgage Servicing Rights” included in Part IV, Item 15.

Other Assets

     Other assets increased 30.2% to $56 million as of December 31, 2008, from $43 million as of December 31, 2007, primarily due to increases in other real estate owned and the acquisition of $7 million of Federal Reserve Bank stock in conjunction with obtaining Federal Reserve membership for the acquired First Western entities. Other assets decreased 7.2% to $43 million as of December 31, 2007, from $46 million as of December 31, 2006.

Deposits

     We emphasize developing total client relationships with our customers in order to increase our core deposit base, which is our primary funding source. Our deposits consist of non-interest bearing and interest bearing demand, savings, individual retirement and time deposit accounts.

     The following table summarizes our deposits as of the dates indicated: