FIRST INTERSTATE BANCSYSTEM INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2004


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 000-49733

First Interstate BancSystem, Inc.

(Exact name of registrant as specified in its charter)


Montana		81-0331430

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

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 7,990,030 shares of common stock outstanding on September 30, 2004.

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


	September 30,			December 31,
	2004			2003
Assets
Cash and due from banks	$	233,071		$	214,529
Federal funds sold		56,415			66,455
Interest bearing deposits in banks		6,816			458
Trading assets		2,385			1,722
Investment securities:
Available-for-sale		743,826			707,444
Held-to-maturity		97,203			92,143

Total investment securities		841,029			799,587
Loans		2,674,963			2,554,899
Less allowance for loan losses		42,396			38,940

Net loans		2,632,567			2,515,959
Premises and equipment, net		120,015			112,441
Accrued interest receivable		22,015			19,411
Goodwill		37,390			37,626
Core deposit intangible, net of accumulated amortization		2,488			3,438
Mortgage servicing assets, net of accumulated amortization and impairment reserve		16,871			14,405
Other real estate owned, net		1,647			1,999
Deferred tax asset, net		3,458			3,438
Other assets		86,995			88,276

Total assets	$	4,063,162		$	3,879,744

Liabilities and Stockholders’ Equity
Deposits:
Noninterest bearing	$	726,097		$	688,712
Interest bearing		2,510,421			2,468,009

Total deposits		3,236,518			3,156,721
Securities sold under repurchase agreements		401,078			323,406
Accrued interest payable		9,925			10,206
Accounts payable and accrued expenses		21,518			19,220
Other borrowed funds		8,051			7,137
Long-term debt		42,535			47,590
Subordinated debenture held by deconsolidated subsidiary trust		41,238			41,238

Total liabilities		3,760,863			3,605,518
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued or outstanding as of September 30, 2004 or December 31, 2003		—			—
Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,990,030 shares as of September 30, 2004 and 7,912,699 shares as of December 31, 2003		37,342			33,187
Unearned compensation — restricted stock		(462	)		—
Retained earnings		266,478			242,105
Accumulated other comprehensive income, net		(1,059	)		(1,066	)

Total stockholders’ equity		302,299			274,226

Total liabilities and stockholders’ equity	$	4,063,162		$	3,879,744

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 nine months
	ended September 30,						ended September 30,
	2004			2003			2004			2003
Interest income:
Interest and fees on loans	$	40,586		$	39,976		$	119,171		$	118,864
Interest and dividends on investment securities and trading assets:
Taxable		6,221			5,765			18,991			19,518
Exempt from Federal taxes		1,031			992			3,063			2,951
Interest on deposits in banks		26			1			33			19
Interest on Federal funds sold		279			105			498			346

Total interest income		48,143			46,839			141,756			141,698

Interest expense:
Interest on deposits		8,513			9,809			25,361			32,144
Interest on Federal funds purchased		—			6			33			47
Interest on securities sold under repurchase agreements		1,018			502			2,143			1,727
Interest on other borrowed funds		6			10			37			41
Interest on long-term debt		539			633			1,668			1,799
Interest on subordinated debenture held by deconsolidated subsidiary trust		513			—			1,424			—
Interest on trust preferred securities		—			429			—			2,034

Total interest expense		10,589			11,389			30,666			37,792

Net interest income		37,554			35,450			111,090			103,906
Provision for loan losses		2,387			2,422			7,346			7,422

Net interest income after provision for loan losses		35,167			33,028			103,744			96,484
Noninterest income:
Income from fiduciary activities		1,434			1,271			4,251			3,760
Service charges on deposit accounts		4,838			4,776			14,498			12,926
Technology services		3,497			3,006			9,736			8,611
Other service charges, commissions and fees		7,215			8,543			20,762			24,839
Investment securities gains (losses), net		(52	)		(1,594	)		(762	)		(86	)
Other real estate income (expense)		(23	)		(10	)		4			(64	)
Other income		2,813			1,315			5,129			3,558

Total noninterest income		19,722			17,307			53,618			53,544

Noninterest expense:
Salaries, wages and employee benefits		19,124			17,831			55,124			51,924
Occupancy, net		2,979			2,521			8,580			8,037
Furniture and equipment		3,848			3,316			11,121			9,756
FDIC insurance		114			116			351			355
Core deposit intangible amortization expense		275			305			841			915
Other expenses		11,521			7,681			29,860			30,839

Total noninterest expense		37,861			31,770			105,877			101,826

Income before income taxes		17,028			18,565			51,485			48,202
Income tax expense		5,942			6,735			18,109			17,300

Net income	$	11,086		$	11,830		$	33,376		$	30,902

Basic earnings per common share	$	1.41		$	1.51		$	4.23		$	3.93

Diluted earnings per common share	$	1.39		$	1.50		$	4.19		$	3.92

See accompanying notes to unaudited consolidated financial statements.

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


							Unearned			Accumulated
							compensation			other			Total
	Common			Retained			on restricted			comprehensive			stockholders'
	stock			earnings			stock			income			equity
Balance at December 31, 2003	$	33,187		$	242,105		$	—		$	(1,066	)	$	274,226
Comprehensive income:
Net income		—			33,376			—			—			33,376
Unrealized losses on available-for-sale investment securities, net of income tax benefit of $293		—			—			—			(458	)		(458	)
Less reclassification adjustment for losses included in net income, net of income tax benefit of $297		—			—			—			465			465

Other comprehensive income														7

Total comprehensive income														33,383

Common stock transactions:
84,237 shares retired		(4,463	)		—			—			—			(4,463	)
151,568 shares issued		8,106			—			—			—			8,106
10,000 shares issued pursuant to restricted stock plan		512			—			(512	)		—			—
Remeasurement and amortization of restricted stock awards		—			—			50			—			50
Cash dividends declared:
Common ($1.14 per share)		—			(9,003	)		—			—			(9,003	)

Balance at September 30, 2004	$	37,342		$	266,478		$	(462	)	$	(1,059	)	$	302,299

Balance at December 31, 2002	$	3,085		$	236,724		$	—		$	4,045		$	243,854
Comprehensive income:
Net income		—			30,902			—			—			30,902
Unrealized losses on available-for-sale investment securities, net of income tax benefit of $3,683		—			—			—			(5,759	)		(5,759	)
Less reclassification adjustment for losses included in net income, net of income tax expense of $34		—			—			—			52			52

Other comprehensive income														(5,707	)

Total comprehensive income														25,195

Common stock transactions:
48,326 shares retired		(2,219	)		—			—			—			(2,219	)
157,789 shares issued		7,233			—			—			—			7,233
Recapitalization of common stock from retained earnings		25,000			(25,000	)		—			—			—
Cash dividends declared:
Common ($0.98 per share)		—			(7,681	)		—			—			(7,681	)

Balance at September 30, 2003	$	33,099		$	234,945		$	—		$	(1,662	)	$	266,382

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 nine months
	ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	33,376		$	30,902
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of joint ventures		(485	)		(264	)
Provision for loan losses		7,346			7,422
Depreciation and core deposit amortization		10,034			8,895
Amortization and remeasurement of unearned compensation on restricted stock		50			—
Net premium amortization on investment securities		1,681			3,428
Net loss on sale of investment securities		762			86
Net gain on sale of loans		(3,556	)		(6,958	)
Net gain on sale of other real estate owned		(74	)		(43	)
Net loss on sale of property and equipment		18			29
Increase in valuation reserve for mortgage servicing assets		104			131
Write-down of property and equipment pending disposition		—			507
Deferred income taxes		(28	)		815
Changes in operating assets and liabilities:
Increase in trading investment securities		(663	)		(741	)
Increase in interest receivable		(2,827	)		(644	)
Decrease in other assets		3,931			578
Decrease in accrued interest payable		(138	)		(2,385	)
Increase in accounts payable and accrued expenses		2,305			3,483

Net cash provided by operating activities		51,836			45,241

Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity		(10,219	)		(11,351	)
Available-for-sale		(350,224	)		(719,384	)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity		5,074			5,234
Available-for-sale		286,115			619,565
Proceeds from sales of available-for-sale investment securities		25,384			88,228
Net decrease in cash equivalent mutual funds classified as available-for-sale investment securities		—			40,081
Purchases and originations of mortgage servicing assets		(5,104	)		(8,459	)
Extensions of credit to customers, net of repayments		(136,225	)		(296,776	)
Recoveries of loans charged-off		1,536			1,791
Proceeds from sales of other real estate		1,535			952
Net capital expenditures		(17,428	)		(21,642	)
Acquisition (disposition) of banking office, net of cash and cash equivalents		(19,537	)		2,842
Capital distributions from joint ventures		251			200

Net cash used in investing activities		(218,842	)		(298,719	)

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


	For the nine months
	ended September 30,
	2004			2003
Cash flows from financing activities:
Net increase in deposits	$	112,483		$	170,728
Net increase in repurchase agreements		78,849			34,778
Net increase in other borrowed funds		914			1,220
Borrowings of long-term debt		24,975			59,600
Repayments of long-term debt		(30,030	)		(38,844	)
Net decrease in debt issuance costs		35			949
Proceeds from issuance of subordinated debenture held by deconsolidated subsidiary trust		—			40,000
Redemption of capital trust preferred securities		—			(40,000	)
Proceeds from issuance of common stock		8,106			3,404
Payments to retire common stock		(4,463	)		(2,219	)
Dividends paid on common stock		(9,003	)		(7,681	)

Net cash provided by financing activities		181,866			221,935

Net increase (decrease) in cash and cash equivalents		14,860			(31,543	)
Cash and cash equivalents at beginning of period		281,442			310,892

Cash and cash equivalents at end of period	$	296,302		$	279,349

Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	30,947		$	40,008

Cash paid during the year for taxes	$	16,133		$	15,498

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 September 30, 2004, the results of operations for each of the three and nine-month periods ended September 30, 2004 and 2003 and cash flows for each of the nine-month periods ended September 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America. The balance sheet information at December 31, 2003 is derived from audited consolidated financial statements, however, certain reclassifications, none of which were material, have been made to conform to the September 30, 2004 presentation.

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

(2) Stock-Based Compensation

Restricted Stock Award Plan. On March 25, 2004, the Company’s Board of Directors approved the 2004 Restricted Stock Award Plan (the “Restricted Stock Plan”). Under the Restricted Stock Plan, Company common stock may be issued at the discretion of the Company’s Board of Directors to certain officers and directors of the Company for no consideration as compensation for services. Shares issued under the Restricted Stock Plan are subject to terms and conditions determined by the Board at the date of issuance. During 2004, the Company issued 10,000 shares of nonvested restricted stock (“Restricted Shares”). The Restricted Shares become fully vested if the Company achieves defined performance goals for the year ending December 31, 2006 and the recipient is employed by the Company on April 1, 2007. During the vesting period, the participants have voting rights and receive dividends.

Stock issued under the Restricted Stock Plan is subject to a shareholder’s agreement granting the Company the right of first refusal to repurchase vested shares and providing the Company a right to call some or all of the vested shares under certain circumstances. As of September 30, 2004, the Company had 15,000 additional shares available for issuance under the Restricted Stock Plan.

Stock Option Plans. The Company has two nonqualified stock option plans, the 2001 Stock Option Plan (the “New Stock Option Plan”) and the Stock Option and Stock Appreciation Rights Plan (the “Old Option Plan”). Stock options and stock appreciation rights (“SARs”) awards are granted to certain officers and directors of the Company at the discretion of the Company’s Board of Directors. During 2004, all awards outstanding under the Old Option Plan were exercised or cancelled.

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

Accounting for Stock-Based Compensation Plans. The Company accounts for its stock-based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees.” Under APB No. 25, the Company measures compensation cost for stock-based employee compensation plans based on the intrinsic value of the award at the date of grant. Intrinsic value is the excess of the fair value of the underlying stock over the amount an employee must pay to acquire the stock. Options awarded prior to September 2001 and all restricted stock awards are accounted for under variable plan accounting whereby compensation expense or benefit is recorded each period from the date of grant to the measurement date based on the fair value of the Company’s common stock at the end of the period. Option awards subsequent to August 2001 are accounted for under fixed plan accounting. Under fixed plan accounting, the Company does not recognize compensation expense if the exercise price of the option is equal to the fair value of the common stock at date of grant.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

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

The following table illustrates the effect on net income and earnings per share if compensation expense had been determined for fixed plan stock option awards based on an estimate of fair value of the option at the date of grant consistent with SFAS No. 123, “Accounting for Stock Based Compensation,” as amended.


	Three months ended						Nine months ended
	9/30/04			9/30/03			9/30/04			9/30/03
Net income as reported	$	11,086		$	11,830		$	33,376		$	30,902
Deduct: total stock-based employee compensation expense determined using a fair value based method for fixed plan awards, net of tax effect		(98	)		(68	)		(280	)		(190	)

Pro forma net income	$	10,988		$	11,762		$	33,096		$	30,712

Basic earnings per share	$	1.41		$	1.51		$	4.23		$	3.93
Pro forma basic earnings per share	$	1.39		$	1.50		$	4.19		$	3.91

Diluted earnings per share	$	1.39		$	1.50		$	4.19		$	3.92
Pro forma diluted earnings per share	$	1.38		$	1.49		$	4.15		$	3.89

The fair value of options was estimated at the grant date using a Black-Scholes option pricing model, which requires the input of subjective assumptions. Because the Company’s common stock and stock options have characteristics significantly different from listed securities and traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock options. The weighted average fair values of options granted during the nine months ended September 30, 2004 and 2003 were $6.44 and $5.05, respectively. Weighted average assumptions used in the valuation model include risk-free interest rates of 4.74% and 4.01%; dividend yields of 3.05% and 2.95%; expected stock price volatility of 7.8% and 9.1% for the nine months ended September 30, 2004 and 2003, respectively; and, expected lives of options of 8.5 years in 2004 and 2003.

(3) 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 nine-month periods ended September 30, 2004 and 2003.


	Three months ended				Nine months ended
	9/30/04		9/30/03		9/30/04		9/30/03
Net income basic and diluted	$	11,086	$	11,830	$	33,376	$	30,902

Average outstanding shares — basic		7,887,163		7,848,124		7,895,303		7,859,376
Add: effect of dilutive stock options		87,166		37,592		76,203		32,522

Average outstanding shares — diluted		7,974,329		7,885,716		7,971,506		7,891,898

Basic earnings per share	$	1.41	$	1.51	$	4.23	$	3.93

Diluted earnings per share	$	1.39	$	1.50	$	4.19	$	3.92

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

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

(4) 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 is not expected to have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

The Company had commitments to sell loans of $14,079 as of September 30, 2004.

The Company had commitments under construction contracts of $1,458 as of September 30, 2004.

(5) Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheet. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit or issuance of standby letters 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.

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. Generally, commitments to extend credit are subject to annual renewal. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At September 30, 2004, commitments to extend credit to existing and new borrowers approximated $757,116, which included $145,754 on unused credit card lines and $196,994 with commitment maturities beyond one year.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Most commitments extend for no more than two years and are generally subject to annual renewal. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30, 2004, the Company had outstanding standby letters of credit of $66,074. The estimated fair value of the obligation undertaken by the Company in issuing the standby letters of credit is included in accrued expenses in the Company’s consolidated balance sheet.

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 September 30, 2004, the partnership had indebtedness of $6,405, which is full recourse to the partners.

(6) 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, fee-based investment services and mortgage 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.

Included in the other category is the net funding cost and other expenses of the Parent Company, the operational results of non-bank subsidiaries (except the technology services business line), compensation expense or benefit related to certain stock-based employee compensation plans 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 nine-month periods ended September 30, 2004 and 2003 follows:


	Three Months Ended September 30, 2004
	Community		Technology
	Banking		Services		Other			Total
Net interest income (expense)	$	38,373	$	8	$	(827	)	$	37,554
Provision for loan losses		2,387		—					2,387

Net interest income (expense) after provision		35,986		8		(827	)		35,167
Noninterest income:
External sources		16,128		3,496		98			19,722
Other operating segments		—		3,430		(3,430	)		—
Noninterest expense		34,389		5,267		(1,795	)		37,861

Income (loss) before income taxes		17,725		1,667		(2,364	)		17,028
Income tax expense (benefit)		6,195		663		(916	)		5,942

Net income (loss)	$	11,530	$	1,004	$	(1,448	)	$	11,086

Depreciation and core deposit amortization expense	$	3,379	$	—	$	49		$	3,428


	Three Months Ended September 30, 2003
	Community		Technology
	Banking		Services		Other			Total
Net interest income (expense)	$	36,261	$	6	$	(817	)	$	35,450
Provision for loan losses		2,430		—		(8	)		2,422

Net interest income (expense) after provision		33,831		6		(809	)		33,028
Noninterest income:
External sources		14,263		3,006		38			17,307
Other operating segments		2		3,326		(3,328	)		—
Noninterest expense		29,034		4,256		(1,520	)		31,770

Income (loss) before income taxes		19,062		2,082		(2,579	)		18,565
Income tax expense (benefit)		6,847		823		(935	)		6,735

Net income (loss)	$	12,215	$	1,259	$	(1,644	)	$	11,830

Depreciation and core deposit amortization expense	$	3,055	$	—	$	47		$	3,102

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

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


	Nine Months Ended September 30, 2004
	Community		Technology
	Banking		Services		Other			Total
Net interest income (expense)	$	113,457	$	16	$	(2,383	)	$	111,090
Provision for loan losses		7,346		—					7,346

Net interest income (expense) after provision		106,111		16		(2,383	)		103,744
Noninterest income:
External sources		43,652		9,736		230			53,618
Other operating segments		3		10,071		(10,074	)		—
Noninterest expense		95,919		15,082		(5,124	)		105,877

Income (loss) before income taxes		53,847		4,741		(7,103	)		51,485
Income tax expense (benefit)		18,876		1,883		(2,650	)		18,109

Net income (loss)	$	34,971	$	2,858	$	(4,453	)	$	33,376

Depreciation and core deposit amortization expense	$	9,890	$	—	$	144		$	10,034


	Nine Months Ended September 30, 2003
	Community		Technology
	Banking		Services		Other			Total
Net interest income (expense)	$	107,103	$	20	$	(3,217	)	$	103,906
Provision for loan losses		7,430		—		(8	)		7,422

Net interest income (expense) after provision		99,673		20		(3,209	)		96,484
Noninterest income:
External sources		44,787		8,611		146			53,544
Other operating segments		6		10,009		(10,015	)		—
Noninterest expense		92,036		12,612		(2,822	)		101,826

Income (loss) before income taxes		52,430		6,028		(10,256	)		48,202
Income tax expense (benefit)		18,626		2,385		(3,711	)		17,300

Net income (loss)	$	33,804	$	3,643	$	(6,545	)	$	30,902

Depreciation and core deposit amortization expense	$	8,798	$	—	$	97		$	8,895

(7) Supplemental Disclosures to the Consolidated Statements of Cash Flows

The Company transferred loans of $1,109 and $2,078 to other real estate owned during the nine months ended September 30, 2004 and 2003, respectively.

In conjunction with the sale of the net assets of a branch banking office in July 2004, the Company divested assets and liabilities with book values of $14,587 and $34,005, respectively. In conjunction with acquisitions during January 2003, the Company issued common stock with an aggregate value of $3,829, received assets with fair values of $56,100 and assumed liabilities of $47,042.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

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

(8) Recent Accounting Pronouncements

In March 2004, the Security Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan Commitments.” SAB 105 summarizes the views of the staff of the SEC regarding the application of generally accepted accounting principles to commitments accounted for as derivative instruments. The provisions of SAB 105 are effective for commitments accounted for as derivatives entered into after March 31, 2004. The Company adopted the provisions of SAB 105 on March 31, 2004. The adoption did not have a material impact on the consolidated financial statements, results of operations or liquidity of the Company.

In March 2004, the Financial Accounting Standards Board (“FASB”) reached consensus on the guidance provided by Emerging Issues Task Force Issue 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” The guidance is applicable to debt and equity securities that are within the scope of FASB Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain Investments In Debt and Equity Securities” and certain other investments. EITF 03-1 specifies that an impairment would be considered other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. EITF 03-1 cost method investment and disclosure provisions were effective for reporting periods ending after June 15, 2004. The measurement and recognition provisions relating to debt and equity securities have been delayed until the FASB issues additional guidance. The Company adopted cost method investment and disclosure provisions of EITF 03-1 on June 30, 2004. The adoption did not have a material impact on the consolidated financial statements, results of operations or liquidity of the Company.

Item 2.

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

The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, including the audited financial statements contained therein, filed with the Securities and Exchange Commission.

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 expansion of the Company’s business, and other factors identified under the caption “Risk Factors” in Part I, Item 1, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Given these uncertainties, holders of the Company’s securities 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.

OVERVIEW

The Company reported net income of $11.1 million, or $1.39 per diluted share, for the three months ended September 30, 2004 as compared to $11.8 million, or $1.50 per diluted share, for the same period in 2003. Net income for the nine months ended September 30, 2004 of $33.4 million, or $4.19 per diluted share, increased $2.5 million, or 8.0%, from $30.9 million, or $3.92 per diluted share, for the same period in 2003.

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. Net interest income, on a fully taxable equivalent (“FTE”) basis, increased $2.1 million, or 5.9%, to $38.3 million for the three months ended September 30, 2004, as compared to $36.2 million for the same period in 2003. For the nine-month period ended September 30, 2004, FTE net interest income of $113.4 million increased $7.3 million, or 6.9%, as compared to $106.1 million for the same period in 2003. Quarter-to-date and year-to-date increases are primarily the result of internal loan and deposit growth. The FTE net interest margin ratio increased 4 basis points to 4.32% for the three months ended September 30, 2004 as compared to 4.28% for the same period in 2003 and decreased 2 basis points to 4.36% for the nine months ended September 30, 2004 as compared to 4.38% for the same period in 2003.

Noninterest Income. The Company’s principal sources of noninterest income include income from fiduciary activities, comprised principally of fees earned on trust assets; service charges on deposit accounts; technology services revenues; and, other service charges, commissions and fees. Noninterest income increased $2.4 million, or 14.0%, to $19.7 million for the three months ended September 30, 2004 as compared to $17.3 million for the same period in 2003 and $74 thousand, or less than 1%, to $53.6 million for the nine months ended September 30, 2004 as compared to $53.5 million for the same period in 2003. Significant components of the increases are discussed below.

Revenues from fiduciary activities are largely dependent on the fair value of assets under trust management. Revenues from fiduciary activities increased $163 thousand, or 12.8%, to $1.4 million for the three months ended September 30, 2004 as compared to $1.3 million for the same period in 2003 and $491 thousand, or 13.1%, to $4.3 million for the nine months ended September 30, 2004 as compared to $3.8 million for the same period in 2003.

Service charges on deposit accounts increased $62 thousand, or 1.3%, to $4.8 million for the three months ended September 30, 2004 as compared to $4.8 million for the same period in 2003 and $1.6 million, or 12.2%, to $14.5 million for the nine months ended September 30, 2004 as compared to $12.9 million for the same period in 2003. Quarter-to-date and year-to-date increases are primarily due to increases in service fee rates for check processing, account overdraft processing and stopping check payments that became effective during the second and third quarters of 2003 and the implementation of an automated overdraft processing system during the first quarter of 2004.

Technology services revenues increased $491 thousand, or 16.3%, to $3.5 million for the three months ended September 30, 2004 as compared to $3.0 million for the same period in 2003 and $1.1 million, or 13.1% to $9.7 million for the nine months ended September 30, 2004 as compared to $8.6 million for the same period in 2003. In June 2004, the Company acquired the assets of a small technology services provider. The acquisition increased the Company’s core application data processing revenues by approximately $226 thousand in third quarter 2004. The remaining quarter-to-date and year-to-date 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; mortgage loan servicing fee income; gains on loans sold; credit card fee income; brokerage revenues; debit card interchange fee income; and, ATM service charge revenues. Other service charges, commissions and fees decreased $1.3 million, or 15.5%, to $7.2 million for the three months ended September 30, 2004 as compared to $8.5 million for the same period in 2003 and $4.1 million, or 16.4%, to $20.8 million for the nine months ended September 30, 2004 as compared to $24.8 million for the same period in 2003. Higher interest rates during the second and third quarters of 2004 resulted in a reduction in the number of loans originated for sale causing revenues from the origination and sale of residential real estate loans to decrease $2.0 million and $6.6 million during the three and nine months ended September 30, 2004, respectively, as compared to the same periods in the prior year. These decreases were partially offset by increases in debit and credit card interchange fees and revenues from brokerage activities and mortgage loan servicing.

The Company recorded net investment securities losses of $52 thousand for the three months ended September 30, 2004 as compared to net investment securities losses of $1.6 million for the same period in 2003. For the nine months ended September 30, 2004, the Company recorded net investment securities losses of $762 thousand as compared to net investment securities losses of $86 thousand for the same period in 2003. Net investment securities gains and losses were primarily used to offset impairment charges and reversals related to capitalized mortgage servicing assets recorded during the same periods.

Other income increased $1.5 million, or 113.9%, to $2.8 million for the three months ended September 30, 2004 as compared to $1.3 million for the same period in 2003, and $1.6 million, or 44.2%, to $5.1 million for the nine months ended September 30, 2004 as compared to $3.6 million for the same period in 2003 primarily due to a $1.7 million gain on the sale of a branch banking office recorded during third quarter 2004.

Noninterest Expense. Noninterest expense increased $6.1 million, or 19.2%, to $37.9 million for the three months ended September 30, 2004 as compared to $31.8 million for the same period in 2003 and $4.1 million, or 4.0% to $105.9 million for the nine months ended September 30, 2004 as compared to $101.8 million for the same period in 2003. Significant components of the increases are discussed below.

Furniture and equipment expenses increased $532 thousand, or 16.0%, to $3.8 million for the three months ended September 30, 2004 as compared to $3.3 million for the same period in 2003 and $1.3 million, or 14.0%, to $11.1 million for the nine months ended September 30, 2004 as compared to $9.8 million for the same period in 2003. Quarter-to-date and year-to-date increases are primarily due to depreciation expense associated with computer mainframe hardware and software placed into service during June 2003.

Other expenses include advertising and public relation costs; legal, audit and other professional fees; office supply, postage, freight, telephone and travel expenses; other losses; amortization of capitalized mortgage servicing assets; and, adjustment of valuation reserves related to capitalized mortgage servicing assets. Other expenses increased $3.8 million, or 50.0%, to $11.5 million for the three months ended September 30, 2004 as compared to $7.7 million for the same period in 2003 primarily due to adjustment of valuation reserves related to capitalized mortgage servicing assets. Mortgage servicing assets 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. During third quarter 2004, the Company recorded impairment of $1.2 million as compared to the reversal of $2.6 million of impairment during the same period in 2003. For the nine months ended September 30, 2004, the Company recorded impairment charges of $104 thousand as compared to $163 thousand for the same period in 2003.

Other expenses decreased $979 thousand, or 3.2%, to $29.9 million for the nine months ended September 30, 2004 as compared to $30.8 million for the same period in 2003. During 2003, the Company expensed $1.9 million of debt issuance costs associated with trust preferred securities redeemed in April 2003. In addition, amortization of capitalized mortgage servicing assets decreased $517 thousand year over year due to changes in the estimated periods of net servicing income. These decreases were partially offset by three non-recurring losses aggregating $446 thousand, increases in ATM expense and normal inflationary increases in other expenses occurring during the first nine months of 2004.

Income Tax Expense. The Company’s effective combined federal and state income tax rate was 35.2% and 35.9% for the nine months ended September 30, 2004 and 2003, 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 nine months ended September 30, 2004 and 2003.

Community Banking. Community banking net income decreased $685 thousand, or 5.6%, to $11.5 million for the three months ended September 30, 2004 as compared to $12.2 million for the same period in 2003. Decreases in net income due to adjustments of valuation reserves related to capitalized mortgage servicing assets and lower revenues from the origination and sale of residential real estate loans were partially offset by internally generated growth in net interest income, a $1.7 million gain on the sale of a branch banking office and lower net losses on sales of investment securities recorded in third quarter 2004.

Community banking net income increased $1.2 million, or 3.5%, to $35.0 million for the nine months ended September 30, 2004 as compared to $33.8 million for the same period in 2003 primarily due to higher net interest income resulting from internal loan and deposit growth and a $1.7 million gain on the sale of a branch banking office. In addition, the community banking segment experienced increases in debit and credit card interchange fees, service charges on deposit accounts and revenues from mortgage loan servicing and brokerage activities. These increases were partially offset by lower revenues from the origination and sale of residential real estate loans and inflationary and performance related increases in salaries, wages and benefits expense.

Technology Services. Technology services net income decreased $255 thousand, or 20.3%, to $1.0 million for the three months ended September 30, 2004 as compared to $1.3 million for the same period in 2003 and $785 thousand, or 21.5%, to $2.9 million for the nine months ended September 30, 2004 as compared to $3.6 million for the same period in 2003 primarily due to higher depreciation related to computer mainframe hardware and software placed into service during June 2003 and increases in salaries, wages and benefits expense necessary to support growth.

Other. Other net losses decreased $196 thousand, or 11.9%, to $1.4 million for the three months ended September 30, 2004 as compared to $1.6 million for the same period in 2003 and $2.1 million, or 32.0%, to $4.5 million for the nine months ended September 30, 2004 as compared to $6.5 million for the same period in 2003 primarily due to the write-off of $1.9 million of debt issuance costs associated with trust preferred securities redeemed in April 2003. These decreases were partially offset by a non—recurring loss of $285 thousand occurring during the first quarter of 2004.

FINANCIAL CONDITION

Loans. Total loans increased $120 million, or 4.7%, to $2,675 million as of September 30, 2004 from $2,555 million as of December 31, 2003 primarily due to internal growth in commercial real estate, construction and consumer 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 satisfying pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. Investment securities increased $41 million, or 5.2%, to $841 million as of September 30, 2004 from $800 million as of December 31, 2003 due to investment of funds generated through internal deposit growth. The Company evaluates its investment portfolio quarterly for other-than-temporary declines in the market value of individual investment securities. This evaluation includes monitoring credit ratings; market, industry and corporate news; volatility in market prices; and, determining whether the market value of a security has been below its cost for an extended period of time.

The following table shows the gross unrealized losses and fair values of investment securities, aggregated by investment category, and the length of time individual investment securities have been in a continuous unrealized loss position, as of September 30, 2004.


	Less than 12 months				12 months or more				Total
(Dollars in Thousands)			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
	Value		losses		value		losses		value		losses
Available-for-Sale Other mortgage-backed securities	$	341,015	$	2,472	$	80,870	$	2,105	$	421,885	$	4,577
Held-to-Maturity State, county & municipal securities		1,223		7		2,280		71		3,503		78

Premises and Equipment. Premises and equipment increased $8 million, or 6.7%, to $120 million as of September 30, 2004 from $112 million as of December 31, 2003 primarily due to continuing costs related to the construction of new branch banking offices and the remodel of existing branch banking offices.

Goodwill. Goodwill decreased $236 thousand, or less than 1%, to $37 million as of September 30, 2004 from $38 million as of December 31, 2003 due to the sale of a branch banking office in third quarter 2004.

Mortgage Servicing Assets. Net mortgage servicing assets increased $2 million, or 17.1%, to $17 million as of September 30, 2004 from $14 million as of December 31, 2003 primarily due to internal loan origination.

Deposits. Total deposits increased $80 million, or 2.5%, to $3,237 million as of September 30, 2004 from $3,157 million as of December 31, 2003 primarily due to internal growth in demand and savings deposits.

In addition to deposits, the Company also uses other traditional funding sources to support its earning asset portfolio including other borrowed funds consisting primarily of tax deposits due to the federal government and repurchase agreements.

Repurchase Agreements. All outstanding repurchase agreements are with primarily commercial depositors and are due in one day. Repurchase agreements increased $78 million, or 24.0%, to $401 million as of September 30, 2004 from $323 million as of December 31, 2003. Fluctuations in repurchase agreements are primarily due to a strong emphasis placed on providing cash management services to commercial and governmental authorities.

Other Borrowed Funds. Other borrowed funds increased $914 thousand, or 12.8%, to $8 million as of September 30, 2004 from $7 million as of December 31, 2003. Fluctuations in other borrowed funds are generally due to timing of tax deposits made by customers and the subsequent withdrawal of funds by the federal government.

Long Term Debt. Long term debt is comprised principally of fixed rate notes with the Federal Home Loan Bank (“FHLB”), an unsecured revolving term loan and unsecured subordinated notes. Long term debt decreased $5 million, or 10.6%, to $43 million as of September 30, 2004 from $48 million as of December 31, 2003 primarily due to repayment of revolving term debt and FHLB notes.

Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $2 million, or 12.0%, to $22 million as of September 30, 2004 from $19 million as of December 31, 2003 primarily due to timing of corporate income tax payments.

Capital. Total stockholder’s equity increased $28 million, or 10.2%, to $302 million as of September 30, 2004 from $274 million as of December 31, 2003. The increase is primarily the result of operating activities during the period, consisting of net income of $33.4 million less dividends declared of $9.0 million. The remaining increase is the result of the issuance of stock to employees, officers and directors of the Company.

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 decreased $6 million, or 19.1%, to $25 million as of September 30, 2004 as compared to $31 million as of December 31, 2003 primarily due to the matured loans of one commercial borrower in the process of renewal at December 31, 2003 and the pay-off of loans of two commercial borrowers that were on non-accrual at December 31, 2003.

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 decreased $76 thousand, or 1.0%, to $7.3 million for the nine months ended September 30, 2004 as compared to $7.4 million for the same period in 2003. The allowance for loan losses was $42 million, or 1.58% of total loans, as of September 30, 2004 as compared to $39 million, or 1.52% of total loans, at December 31, 2003.

ASSET LIABILITY MANAGEMENT

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 that reprice or mature within a given period of time. Management monitors the sensitivity of the 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 interest earning assets and interest bearing liabilities repricing or maturing in less than five years. The Company attempts to maintain a mix of interest earning assets and interest bearing liabilities 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, no assurances can be given that the Company is not at risk in the event of rate increases or decreases and there can be no assurance as to the actual effect changes in interest rates will have on the Company’s net interest margin.

LIQUIDITY

Liquidity. The objective of liquidity management is to maintain the Company’s ability to meet the day-to-day cash flow requirements of customers who wish to withdraw funds or require funds to meet their credit needs. The Company manages its liquidity position to meet the needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of 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 management of its investment portfolio, which provides a flow of reinvestable cash. In addition, redeployment of maturing balances in the Company’s loan portfolio also provides 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.

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.

CAPITAL RESOURCES

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 September 30, 2004, the Company and its bank subsidiary each exceeded the “well-capitalized” requirements issued by the Federal Reserve Board.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

As of September 30, 2004, 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 Annual Report on Form 10-K for the year ended December 31, 2003.

Item 4.

CONTROLS AND PROCEDURES

Management of the Company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. As of September 30, 2004, an evaluation was performed under the supervision, and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures as of September 30, 2004 were effective in ensuring that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported within the time period required by the SEC’s rules and forms.

There were no changes in the Company’s internal controls over financial reporting for the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, such controls.

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes in legal proceedings as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) During July 2004, the Company issued 1,000 unregistered shares of its common stock to senior officers valued at an aggregate of $52,500 pursuant to the Company’s 2004 Restricted Stock Award Plan. These issuances were made in reliance upon the “no sale” provisions of Section 2(a)(3) of the Securities Act of 1933, and upon the exemptions from registration under Section 4(2) of the Securities Act of 1933.

(b) Not applicable.

(c) The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the nine months ended September 30, 2004.

Total Number of

Maximum Number

Shares Purchased

of Shares That

Total Number

as Part of Publicly

May Yet Be

Of Shares

Average Price

Announced Plans

Purchased Under the

Period

Purchased

Paid Per Share

Or Programs⁽¹⁾

Plans or Programs

July 2004

2,752

52.50

Not Applicable

August 2004

11,133

54.38

Not Applicable

September 2004

34,725

54.50

Not Applicable

Quarter-to-date

48,610

54.36

Not Applicable

⁽¹⁾ The common stock of the Company is not actively traded, and there is no established trading market for the stock. There is only one class of common stock, with 91.4% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 8.6% without such restrictions. The Company has a right of first refusal to repurchase the restricted stock. Additionally, restricted stock held by officers, directors and employees of the Company may be called by the Company under certain conditions. The Company has no obligation to purchase restricted or unrestricted stock, but has historically purchased such stock. All purchases indicated in the table above were effected pursuant to private transactions.

Item 3. Defaults upon Senior Securities

None.

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

(a) The Annual Meeting of Shareholders of First Interstate BancSystem, Inc. was held on May 14, 2004.

(b) Five directors were elected to serve three year terms. David H. Crum, William B. Ebzery, Charles M. Heyneman, Terry W. Payne and Homer A. Scott, Jr. were elected as directors with terms expiring in 2007. The following directors remained in office: James W. Haugh, C. Gary Jennings, Robert L. Nance and Thomas W. Scott with terms expiring in 2005; and, Elouise C. Cobell, Richard A. Dorn, Lyle R. Knight, James R. Scott, Julie A. Scott and Sandra A. Scott Suzor with terms expiring in 2006.

(c) The following matters were submitted to a vote of security holders at the Annual Meeting of Shareholders:

Matter

For

Against

Not Voted

Election of Directors

Nominees:

Charles M. Heyneman

5,781,206

60,503

—


Matter	For		Against		Not Voted
Directors Continuing in Office:
David H. Crum		5,784,110		57,599		—
William B. Ebzery		5,783,998		57,711		—
Terry W. Payne		5,784,110		57,599		—
Homer A. Scott, Jr.		5,784,110		57,599		—
Appointment of McGladrey & Pullen LLP as Independent Certified Public Accountants		5,742,505		682		98,522


Index			Page
Part I. Financial Information
	Item 1 —	Financial Statements (unaudited)
		Consolidated Balance Sheets September 30, 2004 and December 31, 2003		3
		Consolidated Statements of Income Three and nine months ended September 30, 2004 and 2003		4
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income Nine months ended September 30, 2004 and 2003		5
		Consolidated Statements of Cash Flows Nine months ended September 30, 2004 and 2003		6
		Notes to Unaudited Consolidated Financial Statements		8
	Item 2 —	Management’s Discussion and Analysis of Financial Condition And Results of Operations		14
	Item 3 —	Quantitative and Qualitative Disclosures about Market Risk		19
	Item 4 —	Controls and Procedures		19
Part II. Other Information
	Item 1 —	Legal Proceedings		20
	Item 2 —	Unregistered Sales of Equity Securities and Use of Proceeds		20
	Item 3 —	Defaults Upon Senior Securities		20
	Item 4 —	Submission of Matters to a Vote of Security Holders		20
	Item 5 —	Other Information		21
	Item 6 —	Exhibits		21
Signatures				22

	31.1		Certification of Quarterly Report on Form 10-Q pursuant to Section 302 of the Sarbanes Oxley Act of 2002 by Chief Executive Officer.

	31.2		Certification of Quarterly Report on Form 10-Q pursuant to Section 302 of the Sarbanes Oxley Act of 2002 by Chief Financial Officer.

	32		Certification of Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes Oxley Act of 2002.


Date October 22, 2004
	/s/ LYLE R. KNIGHT
	Lyle R. Knight
	President and Chief Executive Officer


Date October 22, 2004
	/s/ TERRILL R. MOORE
	Terrill R. Moore
	Executive Vice President and Chief Financial Officer

	(a)		The Annual Meeting of Shareholders of First Interstate BancSystem, Inc. was held on May 14, 2004.

	(b)		Five directors were elected to serve three year terms. David H. Crum, William B. Ebzery, Charles M. Heyneman, Terry W. Payne and Homer A. Scott, Jr. were elected as directors with terms expiring in 2007. The following directors remained in office: James W. Haugh, C. Gary Jennings, Robert L. Nance and Thomas W. Scott with terms expiring in 2005; and, Elouise C. Cobell, Richard A. Dorn, Lyle R. Knight, James R. Scott, Julie A. Scott and Sandra A. Scott Suzor with terms expiring in 2006.

	(c)		The following matters were submitted to a vote of security holders at the Annual Meeting of Shareholders: