FIRST INTERSTATE BANCSYSTEM INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2002


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

For the transition period from _________ to _________

COMMISSION FILE NUMBER 333-3250

First Interstate BancSystem, Inc.

(Exact name of registrant as specified in its charter)


Montana		81-0331430

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

PO Box 30918, 401 North 31st Street, Billings, MT		59116-0918

(Address of principal executive offices)		(Zip Code)


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes x No o

The Registrant had 7,799,263 shares of common stock outstanding on July 31, 2002.

TABLE OF CONTENTS


Part I. Financial Information
	Item 1 — Financial Statements
		Consolidated Balance Sheets June 30, 2002 and December 31, 2001 (unaudited)
		Consolidated Statements of Income Three and six months ended June 30, 2002 and 2001 (unaudited)
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income Six months ended June 30, 2002 and 2001 (unaudited)
		Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001 (unaudited)
		Notes to Unaudited Consolidated Financial Statements
	Item 2 — Management’s Discussion and Analysis of Financial Condition And Results of Operations
	Item 3 — Quantitative and Qualitative Disclosures about Market Risk
	Part II. Other Information
		Item 1 — Legal Proceedings
		Item 2 — Changes in Securities
		Item 3 — Defaults Upon Senior Securities
		Item 4 — Submission of Matters to a Vote of Security Holders
		Item 5 — Other Information
		Item 6 — Exhibits and Reports on Form 8-K
Signatures
Certification of Quarterly Report on Form 10-Q

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q


		Index	Page

Part I. Financial Information
	Item 1 –	Financial Statements
		Consolidated Balance Sheets June 30, 2002 and December 31, 2001 (unaudited)		3
		Consolidated Statements of Income Three and six months ended June 30, 2002 and 2001 (unaudited)		4
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income Six months ended June 30, 2002 and 2001 (unaudited)		5
		Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001 (unaudited)		6
		Notes to Unaudited Consolidated Financial Statements		7
	Item 2 –	Management’s Discussion and Analysis of Financial Condition And Results of Operations		12
	Item 3 –	Quantitative and Qualitative Disclosures about Market Risk		17
Part II. Other Information
	Item 1 –	Legal Proceedings		18
	Item 2 –	Changes in Securities		18
	Item 3 –	Defaults Upon Senior Securities		18
	Item 4 –	Submission of Matters to a Vote of Security Holders		18
	Item 5 –	Other Information		18
	Item 6 –	Exhibits and Reports on Form 8-K		18
Signatures				19
Certification of Quarterly Report on Form 10-Q				20

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
(Unaudited)


				June 30,		December 31,
				2002		2001

Assets
Cash and due from banks				$	214,505	$	152,609
Federal funds sold					42,195		82,185
Interest bearing deposits in banks					4,863		58,242
Investment securities:
	Available-for-sale				580,146		593,104
	Held-to-maturity				88,578		100,074

		Total investment securities			668,724		693,178
Loans					2,212,310		2,122,102
Less allowance for loan losses					36,362		34,091

	Net loans				2,175,948		2,088,011
Premises and equipment, net					92,895		91,346
Accrued interest receivable					23,504		24,804
Goodwill					33,171		33,171
Core deposit intangibles, net of accumulated amortization					5,038		5,679
Loan servicing rights, net of accumulated amortization and impairment reserve					9,466		6,322
Other real estate owned, net					1,388		414
Other assets					38,614		42,889

			Total assets	$	3,310,311	$	3,278,850

Liabilities and Stockholders’ Equity
Deposits:
	Non-interest bearing			$	494,842	$	536,022
	Interest bearing				2,232,558		2,136,725

		Total deposits			2,727,400		2,672,747
Federal funds purchased					—		625
Securities sold under repurchase agreements					240,347		271,952
Accrued interest payable					13,564		16,209
Accounts payable and accrued expenses					22,679		12,822
Other borrowed funds					8,318		8,095
Long-term debt					24,454		34,331
Trust preferred securities					40,000		40,000

		Total liabilities			3,076,762		3,056,781
Stockholders’ equity:
	Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued or outstanding as of June 30, 2002 or December 31, 2001				—		—
	Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,805,988 shares as of June 30, 2002 and 7,848,704 shares as of December 31, 2001				3,357		5,184
	Retained earnings				224,842		212,314
	Accumulated other comprehensive income				5,350		4,571

		Total stockholders’ equity			233,549		222,069

			Total liabilities and stockholders’ equity	$	3,310,311	$	3,278,850

See accompanying notes to unaudited consolidated financial statements.

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


				For the three months					For the six months
				ended June 30,					ended June 30,

				2002		2001			2002		2001

Interest income:
	Interest and fees on loans			$	41,469	$	45,757		$	82,361	$	91,533
	Interest and dividends on investment securities:
		Taxable			8,295		7,318			16,594		15,068
		Exempt from Federal taxes			957		910			1,907		1,806
	Interest on deposits in banks				49		56			111		68
	Interest on Federal funds sold				278		945			437		1,399

			Total interest income		51,048		54,986			101,410		109,874

Interest expense:
	Interest on deposits				14,108		21,146			28,612		43,435
	Interest on Federal funds purchased				1		22			3		55
	Interest on securities sold under repurchase agreements				893		1,949			1,774		4,466
	Interest on other borrowed funds				18		84			47		220
	Interest on long-term debt				535		712			1,097		1,495
	Interest on trust preferred securities				882		882			1,764		1,764

			Total interest expense		16,437		24,795			33,297		51,435

			Net interest income		34,611		30,191			68,113		58,439
	Provision for loan losses				1,985		1,328			4,607		2,531

			Net interest income after provision for loan losses		32,626		28,863			63,506		55,908
Non-interest income:
	Income from fiduciary activities				1,103		1,161			2,253		2,328
	Service charges on deposit accounts				3,941		3,700			7,641		7,155
	Technology services				2,710		2,629			5,321		4,974
	Other service charges, commissions and fees				4,757		4,048			9,564		7,257
	Investment securities gains, net				188		71			189		126
	Other real estate income (expense)				216		(76	)		205		(123	)
	Other income				1,026		1,038			1,925		2,088

			Total non-interest income		13,941		12,571			27,098		23,805

Non-interest expense:
	Salaries, wages and employee benefits				17,176		14,678			34,225		29,918
	Occupancy, net				2,679		2,291			5,225		4,619
	Furniture and equipment				3,437		3,040			6,572		5,888
	FDIC insurance				114		109			229		219
	Core deposit intangibles amortization				321		359			641		718
	Goodwill amortization				—		542			—		1,112
	Other expenses				9,268		7,547			16,222		14,470

			Total non-interest expense		32,995		28,566			63,114		56,944

Income before income taxes					13,572		12,868			27,490		22,769
Income tax expense					4,905		4,678			9,951		8,167

			Net income	$	8,667	$	8,190		$	17,539	$	14,602

			Net income, as adjusted (see note 2)	$	8,667	$	8,657		$	17,539	$	15,565

Basic earnings per common share				$	1.11	$	1.04		$	2.24	$	1.86

Basic earnings per common share, as adjusted (see note 2)				$	1.11	$	1.10		$	2.24	$	1.98

Diluted earnings per common share				$	1.11	$	1.03		$	2.24	$	1.83

Diluted earnings per common share, as adjusted (see note 2)				$	1.11	$	1.09		$	2.24	$	1.95

Dividends per common share				$	0.34	$	0.25		$	0.64	$	0.53

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
(Dollars in thousands, except share and per share data)
(Unaudited)


										Accumulated
										other			Total
				Common			Retained			comprehensive			stockholders'
				stock			earnings			income			equity

Balance at December 31, 2001				$	5,184		$	212,314		$	4,571		$	222,069
Comprehensive income:
	Net income				—			17,539			—			17,539
	Unrealized gains on available-for-sale investment securities, net of income tax expense of $572				—			—			894			894
	Less reclassification adjustment for gains included in net income, net of income tax expense of $74				—			—			(115	)		(115	)

		Other comprehensive income												779

			Total comprehensive income											18,318

Common stock transactions:
	54,174 shares retired				(2,323	)		—			—			(2,323	)
	11,458 shares issued				496			—			—			496
Cash dividends declared:
	Common ($0.64 per share)				—			(5,011	)		—			(5,011	)

Balance at June 30, 2002 $3,357							$	224,842		$	5,350		$	233,549

Balance at December 31, 2000				$	7,101		$	190,410		$	475		$	197,986
Comprehensive income:
	Net income				—			14,602			—			14,602
	Unrealized gains on available-for-sale investment securities, net of income tax expense of $2,670				—			—			4,081			4,081
	Less reclassification adjustment for gains included in net income, net of income tax expense of $21				—			—			(43	)		(43	)
	Cummulative effect of adoption of SFAS No. 133, transfer of held-to-maturity securities to available- for-sale, net of income tax benefit of $364				—			—			(569	)		(569	)

		Other comprehensive income												3,469

			Total comprehensive income											18,071

Common stock transactions 69,600 shares retired					(2,685	)		—			—			(2,685	)
	3,900 shares issued				149			—			—			149
Cash dividends declared:
	Common ($0.53 per share)				—			(4,176	)		—			(4,176	)

Balance at June 30, 2001				$	4,565		$	200,836		$	3,944		$	209,345

See accompanying notes to unaudited consolidated financial statements.

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


					For the six months
					ended June 30,

					2002			2001

Cash flows from operating activities:
	Net income				$	17,539		$	14,602
	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in undistributed losses of joint venture				71			156
		Provision for loan and other real estate losses				4,607			2,586
		Depreciation and amortization				6,661			7,284
		Net premium amortization (discount accretion) on investment securities				406			(107	)
		Gain on disposition of investment securities				(189	)		(126	)
		Gain on sale of loans				(1,336	)		(1,059	)
		Loss (gain) on sale of other real estate owned				(238	)		27
		Loss on sale of property and equipment				54			63
		Decrease in valuation reserve for loan servicing rights				(157	)		—
		Write-down of bank premise				—			85
		Deferred income taxes				(1,735	)		(196	)
		Changes in operating assets and liabilities:
			Decrease in interest receivable			1,300			1,153
			Decrease (increase) in other assets			5,367			(3,524	)
			Decrease in accrued interest payable			(2,645	)		(145	)
			Increase (decrease) in accounts payable and accrued expenses			9,892			(1,903	)

				Net cash provided by operating activities		39,597			18,896

Cash flows from investing activities:
	Purchases of investment securities:
			Held-to-maturity			(3,278	)		(2,275	)
			Available-for-sale			(258,089	)		(214,002	)
	Proceeds from maturities and paydowns of investment securities:
			Held-to-maturity			14,725			30,211
			Available-for-sale			271,443			207,834
	Proceeds from sales of available-for-sale securities					721			17,632
	Purchases and originations of loan servicing rights					(3,831	)		(1,229	)
	Extensions of credit to customers, net of repayments					(93,548	)		(110,391	)
	Recoveries of loans charged-off					1,156			1,021
	Proceeds from sales of other real estate					448			1,626
	Net capital expenditures					(6,760	)		(6,340	)
	Capital contributions to joint ventures					—			(700	)

				Net cash used in investing activities		(77,013	)		(76,613	)

Cash flows from financing activities:
	Net increase in deposits					54,653			143,049
	Net increase (decrease) in Federal funds and repurchase agreements					(32,230	)		4,667
	Net increase in other borrowed funds					223			1,810
	Borrowings of long-term debt					18,958			18,850
	Repayments of long-term debt					(28,835	)		(18,002	)
	Net decrease in debt issuance costs					47			47
	Proceeds from issuance of common stock					461			140
	Payments to retire common stock					(2,323	)		(2,685	)
	Dividends paid on common stock					(5,011	)		(4,176	)

				Net cash provided by financing activities		5,943			143,700

Net increase (decrease) in cash and cash equivalents						(31,473	)		85,983
Cash and cash equivalents at beginning of period						293,036			169,245

Cash and cash equivalents at end of period					$	261,563		$	255,228

Supplemental disclosure of cash flow information:
	Cash paid during the period for interest				$	35,942		$	51,662
	Cash paid during the period for income taxes				$	4,007		$	8,640

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except share and per share data)

(1) Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries (the “Company”) contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position of the Company at June 30, 2002 and December 31, 2001, and the results of operations and cash flows for each of the three and six month periods ended June 30, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. The balance sheet information at December 31, 2001 is derived from audited consolidated financial statements; however, certain reclassifications have been made to conform to the June 30, 2002 presentation.

(2) Goodwill and Other Intangible Assets — Adoption of SFAS 142

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” addressing financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually using a fair value approach for impairment, or more frequently if impairment indicators arise. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. The provisions of SFAS No. 142 are applied to all goodwill and other intangible assets recognized in the financial statements at the date of adoption. The Company adopted the provisions of SFAS No. 142 on January 1, 2002.

A reconciliation of reported net income to net income adjusted to exclude goodwill amortization, net of tax effect, follows:


		Three months ended				Six months ended
		6/30/02		6/30/01		6/30/02		6/30/01

Income statement:
	Reported net income	$	8,667	$	8,190	$	17,539	$	14,602
	Add back goodwill amortization, net of tax effect		—		467		—		963

	Adjusted net income	$	8,667		8,657	$	17,539	$	15,565

Basic earnings per share:
	Reported basic earnings per share	$	1.11	$	1.04	$	2.24	$	1.86
	Add back goodwill amortization, net of tax effect		—		0.06		—		0.12

	Adjusted basic earnings per share	$	1.11	$	1.10	$	2.24	$	1.98

Diluted earnings per share:
	Reported basic earnings per share	$	1.11	$	1.03	$	2.24	$	1.83
	Add back goodwill amortization, net of tax effect		—		0.06		—		0.12

	Adjusted diluted earnings per share	$	1.11	$	1.09	$	2.24	$	1.95

All goodwill has been allocated to the community banking line of business. The results of the Company’s transitional goodwill impairment test indicate the fair value of goodwill exceeds its carrying value; therefore, no impairment losses have been recorded.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except share and per share data)

(3) Other Recent Accounting Pronouncements

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” addressing accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of;” however, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. The Company adopted the provisions of SFAS No. 144 on January 1, 2002. The adoption did not impact the consolidated financial statements, results of operations or liquidity of the Company.

(4) Computation of Earnings Per Share

Basic earnings per common share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period.

The following table sets forth the computation of basic and diluted earnings per share for the three and six month periods ended June 30, 2002 and 2001.


	Three months ended				Six months ended
	6/30/02		6/30/01		6/30/02		6/30/01

Net income, as adjusted (see note 2)	$	8,667	$	8,657	$	17,539	$	15,565

Average outstanding shares — basic		7,814,072		7,845,814		7,826,796		7,861,999
Add: effect of dilutive stock options		14,273		101,250		10,033		103,252

Average outstanding shares — diluted		7,828,345		7,947,064		7,836,829		7,965,251

Basic earnings per share, as adjusted	$	1.11	$	1.10	$	2.24	$	1.98

Diluted earnings per share, as adjusted	$	1.11	$	1.09	$	2.24	$	1.95

(5) Cash Dividends

On July 15, 2002, the Company declared and paid a cash dividend on first quarter earnings of $0.33 per share to stockholders of record on July 12, 2002. It has been the Company’s practice to pay quarterly dividends based upon earnings. The July 2002 dividend represents 30% of the Company’s net income for the quarter ended June 30, 2002 exclusive of compensation expense related to outstanding stock options.

(6) Commitments and Contingencies

In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except share and per share data)

First Interstate BancSystem, Inc. (the “Parent Company”) and the Billings office of First Interstate Bank (“FIB”) are the anchor tenants in a building owned by a partnership in which FIB is one of the two partners and has a 50% partnership interest. The investment in the partnership is accounted for using the equity method. At June 30, 2002 the partnership had indebtedness of $7,968, which is full recourse to the partners.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, in varying degrees, elements of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheet.

Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Most commitments extend for no more than two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Generally, all standby letters of credit and commitments to extend credit are subject to annual renewal. At June 30, 2002, stand-by letters of credit in the amount of $51,323 were outstanding. Commitments to extend credit to existing and new borrowers approximated $426,938 at June 30, 2002, which includes $96,627 on unused credit card lines and $70,384 with commitment maturities beyond one year.

(7) Business Line Reporting

The Company is managed along two primary business lines, community banking and technology services. The community banking line encompasses consumer and commercial banking services provided to individual customers, businesses and municipalities. These services primarily include the acceptance of deposits, extensions of credit and fee-based investment services and loan servicing. The technology services line encompasses technology services provided to affiliated and non-affiliated financial institutions including core application data processing, ATM processing support, item proof and capture services, wide area network services and system support.

Other includes the net funding cost and other expenses of the Parent Company, compensation expense or benefit related to outstanding stock options, the operation results of non-bank subsidiaries (except the technology services business line) and intercompany eliminations.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except share and per share data)

Selected business line information for the three and six month periods ended June 30, 2002 and 2001 follows:


		Three Months Ended June 30, 2002

		Community		Technology
		Banking		Services		Other			Total

Net interest income (expense)		$	35,990	$	8	$	(1,387	)	$	34,611
Provision for loan losses			1,985		—		—			1,985

Net interest income (expense) after provision			34,005		8		(1,387	)		32,626
Non-interest income:
	External sources		11,163		2,711		67			13,941
	Other operating segments		3		2,886		(2,889	)		—
Non-interest expense			29,361		4,425		(791	)		32,995

Income (loss) before income taxes			15,810		1,180		(3,418	)		13,572
Income tax expense (benefit)			5,639		469		(1,203	)		4,905

Net income (loss)		$	10,171	$	711	$	(2,215	)	$	8,667

Depreciation and amortization expense		$	3,398	$	—	$	33		$	3,431


		Six Months Ended June 30, 2002

		Community		Technology
		Banking		Services		Other			Total

Net interest income (expense)		$	70,892	$	17	$	(2,796	)	$	68,113
Provision for loan losses			4,607		—		—			4,607

Net interest income (expense) after provision			66,285		17		(2,796	)		63,506
Non-interest income:
	External sources		21,580		5,321		197			27,098
	Other operating segments		3		5,793		(5,796	)		—
Non-interest expense			56,361		8,543		(1,790	)		63,114

Income (loss) before income taxes			31,507		2,588		(6,605	)		27,490
Income tax expense (benefit)			11,292		1,027		(2,368	)		9,951

Net income (loss)		$	20,215	$	1,561	$	(4,237	)	$	17,539

Depreciation and amortization expense		$	6,594	$	—	$	67		$	6,661

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except share and per share data)


		Three Months Ended June 30, 2001

		Community		Technology
		Banking		Services		Other			Total

Net interest income (expense)		$	31,728	$	29	$	(1,566	)	$	30,191
Provision for loan losses			1,268		—		60			1,328

Net interest income (expense) after provision			30,460		29		(1,626	)		28,863
Non-interest income:
	External sources		9,909		2,632		30			12,571
	Other operating segments		—		2,445		(2,445	)		—
Non-interest expense			24,767		3,883		(84	)		28,566

Income (loss) before income taxes			15,602		1,223		(3,957	)		12,868
Income tax expense (benefit)			5,607		486		(1,415	)		4,678

Net income (loss)		$	9,995	$	737	$	(2,542	)	$	8,190

Net income (loss), as adjusted (see note 2)		$	10,462	$	737	$	(2,542	)	$	8,657

Depreciation and amortization expense		$	3,568	$	4	$	40		$	3,642


		Six Months Ended June 30, 2001

		Community		Technology
		Banking		Services		Other			Total

Net interest income (expense)		$	61,581	$	67	$	(3,209	)	$	58,439
Provision for loan losses			2,471		—		60			2,531

Net interest income (expense) after provision			59,110		67		(3,269	)		55,908
Non-interest income:
	External sources		18,786		4,978		41			23,805
	Other operating segments		—		5,687		(5,687	)		—
Non-interest expense			49,737		8,167		(960	)		56,944

Income (loss) before income taxes			28,159		2,565		(7,955	)		22,769
Income tax expense (benefit)			9,995		1,018		(2,846	)		8,167

Net income (loss)		$	18,164	$	1,547	$	(5,109	)	$	14,602

Net income (loss), as adjusted (see note 2)		$	19,127	$	1,547	$	(5,109	)	$	15,565

Depreciation and amortization expense		$	7,107	$	7	$	170		$	7,284

Item 2.

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

The following discussion focuses on significant factors affecting the financial condition and results of operations of the Company during the three and six month periods ended June 30, 2002, with comparisons to 2001 as applicable. All earnings per share figures are presented on a diluted basis.

FORWARD LOOKING STATEMENTS
Certain statements contained in this document including, without limitation, statements containing the words “believes,” “anticipates,” “expects,” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, general economic and business conditions in those areas in which the Company operates; demographic changes; competition; fluctuations in interest rates; changes in business strategy or development plans; changes in governmental regulation; credit quality and the availability of capital to fund the expected expansion of the Company’s business. Given these uncertainties, stockholders, trust preferred security holders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

ASSET LIABILITY MANAGEMENT
Interest Rate Sensitivity. The primary objective of the Company’s asset liability management process is to optimize net interest income while prudently managing balance sheet risks by understanding the levels of risk accompanying its decisions and monitoring and managing these risks. The ability to optimize net interest margin is largely dependent on the achievement of an interest rate spread that can be managed during periods of fluctuating interest rates. Interest sensitivity is a measure of the extent to which net interest income will be affected by market interest rates over a period of time. Interest rate sensitivity is related to the difference between amounts of interest earning assets and interest bearing liabilities which either reprice or mature within a given period of time. Management monitors the sensitivity of net interest margin by utilizing income simulation models and traditional interest rate gap analysis. The Company’s balance sheet structure is primarily short-term in nature with most assets and liabilities repricing or maturing in less than five years. The Company attempts to maintain a mix of interest earning assets and deposits such that no more than 5% of the net interest margin will be at risk over a one-year period should interest rates vary one percent. However, there can be no assurance as to the actual effect changes in interest rates will have on the Company’s net interest margin.

Liquidity. The objective of liquidity management is to maintain the Company’s ability to meet the day-to-day cash flow requirements of its customers who either wish to withdraw funds or require funds to meet their credit needs. The Company manages its liquidity position to meet the needs of its customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of its stockholders. The Company monitors sources and uses of funds on a daily basis to maintain an acceptable liquidity position, principally through deposit receipts and check payments; loan originations, extensions, and repayments; and management of investment securities.

The Company’s current liquidity position is also supported by the management of its investment portfolio, which provides a structured flow of maturing and reinvestable funds that could be converted to cash, should the need arise. Maturing balances in the Company’s loan portfolio also provide options for cash flow management. The ability to redeploy these funds is an important source of immediate to long-term liquidity. Additional sources of liquidity include Federal funds lines, borrowings and access to capital markets. The Company does not presently rely on off-balance sheet arrangements to provide financing, liquidity or market or credit risk support nor does it engage in derivatives and related hedging activities.

Net cash provided by operating activities, primarily net income, totaled $40 million for the six months ended June 30, 2002 as compared to $19 million for the same period in the prior year. Investing activities principally include investment security transactions and net extensions of credit to customers. Net cash used in investing activities totaled $77 million for the six months ended June 30, 2002 and 2001. Net cash used in or provided by financing activities is primarily generated through changes in customer deposits, borrowings or the issuance of securities or stock. Net cash provided by financing activities totaled $6 million for the six months ended June 30, 2002 as compared to $144 million for the same period in the prior year primarily due to slower deposit growth.

As a holding company, the Parent Company is a corporation separate and apart from its subsidiaries, and therefore, provides for its own liquidity. Substantially all of the Parent Company’s revenues are obtained from management fees and dividends declared and paid by its banking subsidiary. There are statutory and regulatory provisions that could limit the ability of the banking subsidiary to pay dividends to the Parent Company. In general, the banking subsidiary is limited, without the prior consent of its 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. As of June 30, 2002, the banking subsidiary had approximately $30.3 million available to be paid as dividends to the Parent Company.

Capital Resources. The Company maintains adequate capitalization to assure depositor, investor and regulatory confidence. Management’s intent is to provide sufficient capital funds to support growth and to absorb fluctuations in income so that operations can continue in periods of uncertainty while at the same time ensuring investable funds are available to foster expansion. At June 30, 2002 the Company and its bank subsidiary each exceeded the “well-capitalized” requirements issued by the Federal Reserve Board.

OVERVIEW
The Company reported net income of $8.7 million, or $1.11 per share, during the three months ended June 30, 2002, as compared to $8.2 million, or $1.03 per share, for the same period in 2001. Net income for the six months ended June 30, 2002 of $17.5 million, or $2.24 per share, increased $2.9 million, or 20.1%, from $14.6 million, or $1.83 per share, for the same period in 2001. Net income adjusted for the exclusion of goodwill amortization, net of tax effect, was $8.7 million, or $1.09 per share, and $15.6 million, or $1.95 per share, for the three and six month periods ended June 30, 2001.

Results of Operations
Net Interest Income. Net interest income, the Company’s largest source of operating income, is derived from interest and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. The most significant impact on the Company’s net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities (“spread”). The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the spread, produces changes in the net interest income between periods. On a fully-taxable equivalent (“FTE”) basis, net interest income increased $4.4 million, or 14.2%, to $35.4 million for the three months ended June 30, 2002 compared to $31.0 million for the same period in the prior year. For the six months ended June 30, 2002, FTE net interest income of $69.6 million increased $9.7 million, or 16.1%, from $59.9 million for the same period in 2001. These increases are primarily the result of higher loan volumes combined with an increase in the spread between rates earned on interest earning assets and rates paid on interest bearing liabilities. The FTE net interest margin ratio increased 24 basis points to 4.82% for the six months ended June 30, 2002 as compared to 4.58% for the same period in the prior year.

Non-interest Income. The Company’s principal sources of non-interest income include service charges on deposit accounts; technology services revenues; other service charges, commissions and fees; and, income from fiduciary activities, comprised principally of fees earned on trust assets. Non-interest income increased $1.3 million, or 10.9%, to $13.9 million for the three months ended June 30, 2002 from $12.6 million for the same period in 2001. Non-interest income increased $3.3 million, or 13.8%, to $27.1 million for the six months ended June 30, 2002 from $23.8 million for the same period in 2001. Significant components of the quarter-to-date and year-to-date increases are discussed below.

Service charges on deposit accounts increased $241 thousand, or 6.5%, to $3.9 million for the quarter ended June 30, 2002 from $3.7 million for the same period in 2001. For the six months ended June 30, 2002, service charges on deposits accounts of $7.6 million increased $486 thousand, or 6.8%, from $7.2 million for the same period in 2001. These increases are primarily due to increases in the number of deposit accounts subject to service charges.

Technology services revenues increased $81 thousand, or 3.1%, to $2.7 million for the quarter ended June 30, 2002 from $2.6 million for the same period in the prior year. For the six months ended June 30, 2002, technology services revenues of $5.3 million increased $347 thousand, or 7.0%, from $5.0 million for the same period in 2001. These increases are primarily due to increases in the number of customers using the Company’s item processing services and higher ATM transaction volumes.

Other service charges, commissions and fees primarily include origination and processing fees on residential real estate loans held for sale, loan servicing fee income, credit card fee income, brokerage revenues, debit card interchange fee income and ATM service charge revenues. Other service charges, commissions and fees increased $709 thousand, or 17.5%, to $4.8 million for the quarter ended June 30, 2002 as compared to $4.0 million for the same period in the prior year. For the six months ended June 30, 2002, other service changes, commissions and fees of $9.6 million increased $2.3 million, or 31.8%, from $7.3 million for the same period in 2001. Origination and processing fees on residential real estate loans sold increased $1.7 million during the first half of 2002 as compared to the same period in the prior year principally due to the high volume of refinancing activity spurred by decreases in residential lending rates. The remaining quarter-to-date and year-to-date increases are primarily attributable to fee income resulting from higher volumes of credit and debit card transactions and increases in loan servicing income.

The Company recorded net income from other real estate owned (“OREO”) of $216 thousand and $205 thousand, respectively, during the three and six months period ended June 30, 2002 as compared to net OREO expense of $76 thousand and $123 thousand, respectively, during the same periods in the prior year. Variations in net OREO income or expense during the periods is primarily the result of realized gains or losses on sales of OREO. OREO income or expense is directly related to prevailing economic conditions and such income could decrease significantly should an unfavorable shift occur in the economic conditions of the Company’s markets.

Non-Interest Expense. Non-interest expense increased $4.4 million, or 15.5%, to $33.0 million for the quarter ended June 30, 2002 from $28.6 million for the same period in 2001. Non-interest expense increased $6.2 million, or 10.8%, to $63.1 million for the six months ended June 30, 2002 from $56.9 million for the same period in 2001. Significant components of the quarter-to-date and year-to-date increases are discussed below:

Salaries, wages and employee benefits expenses increased $2.5 million, or 17.0%, to $17.2 million for the quarter ended June 30, 2002 as compared to $14.7 million for the same period in the prior year. For the six months ended June 30, 2002, salaries, wages and employee benefits expense of $34.2 million increased $4.3 million, or 14.4%, from $29.9 million for the same period in 2001. These increases are primarily due to inflationary wage increases, higher staffing levels and rising group health insurance costs. Approximately 13% of the quarter-to-date and 15% of the year-to-date increases are attributable to new branches opened since first quarter 2001. The year-to-date increase was partially offset by a $361 thousand decrease in compensation expense related to outstanding stock options.

Occupancy expense increased $388 thousand, or 16.9%, to $2.7 million for the quarter ended June 30, 2002 compared to $2.3 million for the same period in 2001 and $606 thousand, or 13.1%, to $5.2 million for the six months ended June 30, 2002 from $4.6 million for the same period in 2001. These increases are primarily due to increases in rent, property tax and maintenance expenses. Approximately 17% and 27%, respectively, of the quarter-to-date and year-to-date increases are attributable to new branches opened since first quarter 2001. The remaining increase is primarily inflationary in nature.

Furniture and equipment expenses increased $397 thousand, or 13.1%, to $3.4 million for the quarter ended June 30, 2002 from $3.0 million for the same period in 2001. For the six months ended June 30, 2002, furniture and equipment expenses of $6.6 million increased $684 thousand, or 11.6%, from $5.9 million for the same period in 2001. These increases are primarily due to depreciation and maintenance expenses associated with upgrades of existing facilities, the addition of new facilities and technology upgrades. Approximately 15% of the quarter-to-date increase and 18% of the year-to-date increase is attributable to new branches opened since first quarter 2001.

Other expenses include advertising and public relations costs; legal, audit and other professional fees; office supply, postage, freight, telephone and travel expenses; other losses; and, amortization and impairment charges or reversals on capitalized loan servicing rights. Other expenses increased $1.7 million, or 22.8%, to $9.3 million for the quarter ended June 30, 2002 from $7.5 million for the same period in 2001. For the six months ended June 30, 2002, other expenses of $16.2 million increased $1.8 million, or 12.1%, from $14.5 million for the same period in 2001. During second quarter 2002, the Company recorded impairment charges on capitalized loan servicing rights of $473 thousand and increased amortization expense by $273 thousand to reflect changes in the estimated prepayment levels of the underlying loans. Approximately 4% of the quarter-to-date increase and 10% of the year-to-date increase is attributable to new branches opened since first quarter 2001. The remaining quarter-to-date and year-to-date increases are primarily attributable to higher donation expense and normal inflationary expense increases.

Income Tax Expense. The Company’s effective combined federal and state income tax rate was 36.2% and 35.9% for the six months ended June 30, 2002 and 2001, respectively.

Business Line Results
The following paragraphs contain a discussion of the financial performance of each of the Company’s reportable segments for the three and six month periods ended June 30, 2002 and 2001.

Community Banking. Community banking net income increased $2.0 million, or 11.3%, to $20.2 million for the six months ended June 30, 2002 as compared to $18.2 million for the same period in the prior year primarily due to increases in net interest income; the result of higher volumes of loans and deposits combined with increases in the spread between rates earned on interest earning assets and rates paid on interest bearing liabilities; and, increases in processing and origination fees on residential real estate loans sold. Increases in income were partially offset by inflationary increases in salary and benefits expenses, increases in provisions for loan losses and the additional expenses of new branch offices opened since first quarter 2001. Community banking net income adjusted for the exclusion of goodwill amortization, net of tax effect, was $10.5 million and $19.1 million for the three and six month periods ended June 30, 2002, respectively.

Technology Services. Technology services net income increased $14 thousand, or less than 1%, to $1.6 million for the six months ended June 30, 2002 as compared to $1.5 million for the same period in the prior year. Increases in external revenues were largely offset by decreases in interest income, additional expenses associated with technology upgrades, the addition of two item processing centers since first quarter 2001 and normal inflationary increases.

Other. Other net losses decreased $872 thousand, or 17.1%, to $4.2 million for the six months ended June 30, 2002 as compared to $5.1 million for the same period in the prior year primarily due to decreases in interest expense on long-term debt and compensation expense related to outstanding stock options.

Financial Condition
Loans. Exclusive of residential real estate loans held for sale, total loans increased $105 million, or 5.1%, to $2,172 million as of June 30, 2002 from $2,067 million as of December 31, 2001 due to internal growth. All major categories of loans increased from December 31, 2001 with the most significant increases occurring in commercial and real estate loans.

Investment Securities. The Company’s investment portfolio is managed to attempt to obtain the highest yield while meeting the Company’s risk tolerance and liquidity needs and to satisfy pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. Investment securities decreased $24 million, or 3.5%, to $669 million as of June 30, 2002 from $693 million as of December 31, 2001. Proceeds from maturities and paydowns of investment securities during the period were used to fund loan growth.

Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, Federal funds sold for one day periods and interest bearing deposits in banks with original maturities of less than three months. Cash and cash equivalents decreased $31 million, or 10.7%, to $262 million as of June 30, 2002 from $293 million as of December 31, 2001. Available funds were used to fund loan growth and reduce long-term debt.

Loan Servicing Rights. Loan servicing rights increased $3 million, or 49.7%, to $9 million as of June 30, 2002 compared to $6 million as of December 31, 2001. The Company purchased loan servicing rights of $883 thousand and reversed impairment reserves of $157 thousand during the first half of 2002. The remaining increase is the result of internal originations of loan servicing rights.

Deposits. Total deposits increased $55 million, or 2%, to $2,727 million as of June 30, 2002 from $2,673 million as of December 31, 2001 due to internal growth, principally in savings and time deposits.

Other Funding Sources. Other funding sources include short-term borrowings from the Federal Home Loan Bank of Seattle, repurchase agreements with primarily commercial depositors and, on a seasonal basis, Federal funds purchased. Other funding sources decreased $32 million, or 11.4%, to $249 million as of June 30, 2002 from $281 million as of December 31, 2001 primarily due to decreases in repurchase agreements. The average balance of repurchase agreements at June 30, 2002 was $230 million as compared to $240 million at December 31, 2001.

Long Term Debt. Long-term debt is comprised principally of an unsecured revolving term loan and unsecured subordinated notes. Long-term debt decreased $10 million, or 28.8% to $24 million as of June 30, 2002 from $34 million as of December 31, 2001 primarily due to repayment of advances on the unsecured revolving term loan.

Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $10 million, or 76.9%, to $23 million as of June 30, 2002 as compared to $13 million as of December 31, 2001 primarily due to the timing of corporate income tax payments.

Asset Quality
Non-Performing Loans. Non-performing loans include loans past due 90 days or more and still accruing interest, non-accrual loans and restructured loans. Non-performing loans increased $7 million, or 26.0%, to $33 million as of June 30, 2002 as compared to $26 million as of December 31, 2001 primarily due to one commercial loan placed on nonaccrual during first quarter 2002.

Provision/Allowance for Loan Losses. The Company performs a quarterly assessment of the risks inherent in its loan portfolio, as well as a detailed review of each significant asset with identified weaknesses. Based on this analysis, the Company records a provision for loan losses in order to maintain the allowance for loan losses at a level considered sufficient to provide for known and inherent losses within the loan portfolio at each balance sheet date. Fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses. The provision for loan losses increased $657 thousand, or 49.5%, to $2.0 million for the three months ended June 30, 2002 from $1.3 million for the same period in 2001 and $2.1 million, or 82.0%, to $4.6 million for the six months ended June 30, 2002 from $2.5 million for the same period in 2001. Increases from the prior year primarily result from increases in non-performing and potential problem loans; softening economic conditions in the Company’s market areas, particularly in agriculture and hotel/motel market sectors; and, slowing regional and national economies. The allowance for loan losses was $36 million, or 1.64% of total loans, at June 30, 2002 as compared to $34 million, or 1.61% of total loans, at December 31, 2001.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

As of June 30, 2002, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation S-K as presented in the Company’s December 31, 2001 Form 10-K.

PART II.

OTHER INFORMATION


Item 1.		Legal Proceedings
		There have been no material changes in legal proceedings from December 31, 2001.

Item 2.		Changes in Securities
		None.

Item 3.		Defaults upon Senior Indebtedness
		None.

Item 4.		Submission of Matters to a Vote of Security Holders
		The following matter was submitted to a vote of security holders at the Annual Meeting of Shareholders of First Interstate BancSystem, Inc. on May 17, 2002:


Matter			For		Against		Not Voted

Election of Directors
	Directors Continuing in Office:
		James W. Haugh		6,960,095		60,246		823,715
		C. Gary Jennings		6,960,095		60,246		823,715
		Robert L. Nance		6,960,095		60,246		823,715
		Thomas W. Scott		6,960,409		59,932		823,715


Item 5.		Other Information
		Not applicable or required.

Item 6.		Exhibits and Reports on Form 8-K

	(a)		Exhibits. None

	(b)		A report on Form 8-K dated April 25, 2002 was filed by the Company providing first quarter 2002 performance results and comments on same from Company management.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

FIRST INTERSTATE BANCSYSTEM, INC.


Date	August 5, 2002	/s/ THOMAS W. SCOTT Thomas W. Scott Chief Executive Officer

Date	August 5, 2002	/s/ TERRILL R. MOORE Terrill R. Moore Senior Vice President and Chief Financial Officer

CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q
OF
FIRST INTERSTATE BANCSYSTEM, INC.

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

The undersigned are the Chief Executive Officer and the Chief Financial Officer of First Interstate BancSystem, Inc. (the “Registrant”). This Certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies the Quarterly Report on Form 10-Q of the Registrant for the quarterly period ended June 30, 2002.

We certify that such Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

This Certification is executed as of August 5, 2002.

/s/ THOMAS W. SCOTT

Thomas W. Scott
Chief Executive Officer

/s/ TERRILL R. MOORE

Terrill R. Moore
Senior Vice President and
Chief Financial Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

(1)		Basis of Presentation

		In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries (the “Company”) contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position of the Company at June 30, 2002 and December 31, 2001, and the results of operations and cash flows for each of the three and six month periods ended June 30, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. The balance sheet information at December 31, 2001 is derived from audited consolidated financial statements; however, certain reclassifications have been made to conform to the June 30, 2002 presentation.

(2)		Goodwill and Other Intangible Assets — Adoption of SFAS 142

		In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” addressing financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually using a fair value approach for impairment, or more frequently if impairment indicators arise. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. The provisions of SFAS No. 142 are applied to all goodwill and other intangible assets recognized in the financial statements at the date of adoption. The Company adopted the provisions of SFAS No. 142 on January 1, 2002.

		A reconciliation of reported net income to net income adjusted to exclude goodwill amortization, net of tax effect, follows:

(3)		Other Recent Accounting Pronouncements

		In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” addressing accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of;” however, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. The Company adopted the provisions of SFAS No. 144 on January 1, 2002. The adoption did not impact the consolidated financial statements, results of operations or liquidity of the Company.

(4)		Computation of Earnings Per Share

		Basic earnings per common share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period.

		The following table sets forth the computation of basic and diluted earnings per share for the three and six month periods ended June 30, 2002 and 2001.

(5)		Cash Dividends

		On July 15, 2002, the Company declared and paid a cash dividend on first quarter earnings of $0.33 per share to stockholders of record on July 12, 2002. It has been the Company’s practice to pay quarterly dividends based upon earnings. The July 2002 dividend represents 30% of the Company’s net income for the quarter ended June 30, 2002 exclusive of compensation expense related to outstanding stock options.

(6)		Commitments and Contingencies

		In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

		First Interstate BancSystem, Inc. (the “Parent Company”) and the Billings office of First Interstate Bank (“FIB”) are the anchor tenants in a building owned by a partnership in which FIB is one of the two partners and has a 50% partnership interest. The investment in the partnership is accounted for using the equity method. At June 30, 2002 the partnership had indebtedness of $7,968, which is full recourse to the partners.

		The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, in varying degrees, elements of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheet.

		Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Most commitments extend for no more than two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary.

		Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

		The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Generally, all standby letters of credit and commitments to extend credit are subject to annual renewal. At June 30, 2002, stand-by letters of credit in the amount of $51,323 were outstanding. Commitments to extend credit to existing and new borrowers approximated $426,938 at June 30, 2002, which includes $96,627 on unused credit card lines and $70,384 with commitment maturities beyond one year.

(7)		Business Line Reporting

		The Company is managed along two primary business lines, community banking and technology services. The community banking line encompasses consumer and commercial banking services provided to individual customers, businesses and municipalities. These services primarily include the acceptance of deposits, extensions of credit and fee-based investment services and loan servicing. The technology services line encompasses technology services provided to affiliated and non-affiliated financial institutions including core application data processing, ATM processing support, item proof and capture services, wide area network services and system support.

		Other includes the net funding cost and other expenses of the Parent Company, compensation expense or benefit related to outstanding stock options, the operation results of non-bank subsidiaries (except the technology services business line) and intercompany eliminations.