UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark One)

Commission File Number: 000-49733

FIRST INTERSTATE BANCSYSTEM, INC.

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

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

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

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

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

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

The aggregate market value (appraised minority value) of the registrant’s common stock held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2004, was $21,480,375.

The number of shares outstanding of the registrant’s common stock as of January 31, 2005 was 7,966,959.

Documents Incorporated by Reference

The registrant intends to file a definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 6, 2005. The information required by Part III of this Form 10-K is incorporated by reference from such Proxy Statement.

Table of Contents

PART I

Item 1. Business

The Company

     First Interstate BancSystem, Inc. (“FIBS” and collectively with its subsidiaries, the “Company”), incorporated in Montana in 1971, is a financial and bank holding company registered under the Bank Holding Company Act of 1956, as amended. FIBS is headquartered in Billings, Montana. As of December 31, 2004, the Company had assets of $4.2 billion, deposits of $3.3 billion and total stockholders’ equity of $308 million, making it the largest banking organization in Montana and Wyoming.

     FIBS’ principal asset is a wholly-owned bank subsidiary, First Interstate Bank (“FIB” or the “Bank”), with 58 banking offices in 30 Montana and Wyoming communities. The Bank, a Montana corporation organized in 1916, delivers a comprehensive range of banking products and services, including demand and savings deposits; commercial, consumer, agricultural and real estate loans; mortgage loan origination and servicing; and, trust, investment and insurance services. The Bank serves individuals, businesses and municipalities throughout its market areas.

     The Company also conducts other financial activities through wholly-owned nonbank subsidiaries. The Company’s principal nonbank subsidiaries are as follows. i_Tech Corporation (“i_Tech”) provides technology services to the Bank and other non-affiliated customers in Montana, Wyoming and seven additional states, and provides processing support for 1,983 ATM locations in 35 states. FI Reinsurance, Ltd. (“FIR”), domiciled in Nevis Island, West Indies, was formed in 2001 to underwrite, as reinsurer, credit-related life and disability insurance. First Interstate Statutory Trust (“FIST”) was incorporated under Delaware law in 2003 for the exclusive purpose of issuing capital trust preferred securities and using the proceeds to purchase junior subordinated debentures issued by FIBS.

     The Company is the licensee under a trademark license agreement granting it an exclusive, nontransferable license to use the “First Interstate” name and logo in Montana, Wyoming and surrounding states.

Business

     The Company derives its income principally from interest charged on loans, and to a lesser extent, from interest and dividends earned on investments. The Company also derives income from noninterest sources such as fees received in connection with various lending and deposit services; trust, investment and insurance services; mortgage loan originations, sales and servicing; merchant and electronic banking services; technology services; and, from time to time, gains on sales of assets. The Company’s principal expenses include interest expense on deposits and borrowings, operating expenses, provisions for loan losses and income tax expense.

Strategic Vision

     The banking industry continues to experience change with respect to regulatory matters, consolidation, consumer needs and economic and market conditions. The Company believes it can best address this changing environment through its “Strategic Vision.” The Company’s Strategic Vision is to maintain and enhance its leadership in the financial and social fabric of the communities it serves through a commitment to customer satisfaction, creative management, productive employees and community involvement.

Business Strategy

     The Company’s strategy has been to profitably grow its business through internal growth and selective acquisitions. The Company’s focus for 2005 and 2006 includes improving efficiency through a combination of revenue generation and expense saving measures. Long term, the Company continues to look for profitable expansion opportunities in existing and contiguous markets. Much of the Company’s growth in recent years has resulted from opening new banking offices in the Bank’s market areas. During the past five years, the Company has opened nineteen de novo banking offices in Montana and Wyoming and obtained three banking offices through acquisitions.

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Operating Segments

     The Company’s operations are managed along two reportable operating segments, Community Banking and Technology Services. The Company’s principal operating segment, Community Banking, encompasses commercial and consumer banking services provided through the Bank, primarily the acceptance of deposits; extensions of credit; mortgage loan origination and servicing; and, trust, investment and insurance services.

     The Technology Services operating segment encompasses services provided by i_Tech to affiliated and non-affiliated customers, including core application data processing, ATM and debit card processing, item proof and capture, wide area network services and system support.

     For additional information regarding the Company’s operating segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations - Operating Segment Results” included in Part II, Item 7 and “Notes to Consolidated Financial Statements — Segment Reporting” included in Part IV, Item 15.

Community Banking

     The Company’s banking offices are located in communities of approximately 1,000 to 100,000 people, but serve larger market areas due to the limited number of financial institutions in other nearby communities. The Company believes that the communities served provide a stable core deposit and funding base, as well as economic diversification across a number of industries, including agriculture, energy, mining, timber processing, tourism, government services, education and medical services.

     The Company’s community banking philosophy emphasizes providing customers with commercial and consumer banking products and services at a local level using a personalized-service approach and strengthening the communities in the Bank’s market areas through community service activities.

     The Company grants significant autonomy to its banking offices in delivering and pricing products at a local level in response to market considerations and customer needs. This autonomy enables the banking offices to remain competitive and enhances the relationships between the banking offices and the customers they serve. The Company also emphasizes accountability, however, by establishing performance and incentive standards that are tied to net income and other success measures at the individual banking office and market level. The Company believes this combination of autonomy and accountability allows the banking offices to provide personalized customer service while remaining attentive to financial performance.

Centralized Services

     Certain operational activities have been centralized to provide consistent service levels to customers company-wide, to gain efficiency in management of those activities and to ensure regulatory compliance. Centralized operational activities generally support the Company’s branch banking offices in the delivery of products and services to customers and include marketing, credit review, mortgage loan sales and servicing and other operational activities.

     Additionally, FIBS provides centralized policy and management direction and specialized staff support services for the Bank to enable it to serve its markets more effectively. These services include credit administration, finance and accounting, human asset management and other support services.

     The Company’s technology subsidiary, i_Tech, provides centralized technology support services to the Bank, including system support of the general ledger, investment security, loan, deposit, web banking, document imaging, management reporting and cash management systems. i_Tech also manages the Company’s wide-area network and the ATM network used by the Bank and provides item proof and capture services. These technology services are performed through the use of computer hardware owned by the Bank and leased to i_Tech and software licensed by i_Tech.

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Lending Activities

     FIBS has comprehensive credit policies establishing company-wide underwriting and documentation standards to assist Bank management in the lending process and to limit risk to the Company. The credit policies establish lending authorities based on the experience level and authority of the personnel located in each branch and market. The policies also establish thresholds at which loan requests must be approved by the Company’s credit committee and/or the Bank’s board of directors.

     The Bank offers short and long-term real estate, consumer, commercial, agricultural and other loans to individuals and businesses in its market areas. While each loan must meet minimum underwriting standards established in the Company’s credit policies, lending officers are granted certain levels of autonomy in approving and pricing loans to assure that the banking offices are responsive to competitive issues and community needs in each market area.

     Real Estate Loans. The Bank provides interim and permanent financing for both single-family and multi-unit properties, medium-term loans for commercial, agricultural and industrial property and/or buildings and equity lines of credit secured by real estate. Residential real estate loans are generally sold in the secondary market. Those residential real estate loans not sold are typically secured by first liens on the financed property and generally mature in less than 15 years. Commercial, agricultural and industrial loans are generally secured by first liens on income-producing real estate and generally mature in less than five years.

     Consumer Loans. The Bank’s consumer loans include personal loans, credit card loans and equity lines of credit. Personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis. Credit cards are offered to individual and business customers in the Company’s market areas. Equity lines of credit are generally floating rate loans secured by personal property. Approximately 53% of the Company’s consumer loans are indirect dealer paper that is created when the Company purchases consumer loan contracts advanced for the purchase of automobiles, boats and other consumer goods from consumer product dealers.

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

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

     For additional information about the Company’s loan portfolio, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Loans.”

Funding Sources

     The Bank offers traditional depository products including checking, savings and time deposits. Additional funding sources include federal funds purchased for one day periods; repurchase agreements with primarily commercial depositors; time deposits brokered outside the Company’s market areas; and, short-term borrowings from the Federal Home Loan Bank of Seattle (“FHLB”). Deposits at the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to statutory limits.

     Under repurchase agreements, the Company sells investment securities held by the Company to a customer under an agreement to repurchase the investment securities at a specified time or on demand. The Company does not, however, physically transfer the investment securities. As of December 31, 2004, all outstanding repurchase agreements were due in one day.

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     For additional information on the Banks’ funding sources, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Deposits,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Other Borrowed Funds,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Federal Funds Purchased and Securities Sold Under Repurchase Agreements,” included in Part II, Item 7.

Competition

     Commercial banking is highly competitive. The Bank competes with other commercial banks for deposits, loans, trust, investment and insurance accounts; and, with savings and loan associations, savings banks and credit unions for deposits and loans. In addition, the Bank competes with other institutions including personal loan companies, mortgage banking companies, finance companies, insurance companies, securities firms, mutual funds and certain government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services.

     While historically the technology services industry has been highly decentralized, there is an accelerating trend toward consolidation resulting in fewer companies competing over larger geographic regions. i_Tech’s competitors vary in size and include national, regional and local operations.

Employees

     At December 31, 2004, the Company employed 1,574 full-time equivalent employees. None of the Company’s employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good.

Regulation and Supervision

     Financial holding companies and commercial banks are subject to extensive regulation under both federal and state law. Set forth below is a summary description of certain laws that relate to the regulation of FIBS and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

First Interstate BancSystem, Inc.

     As a bank and financial holding company, FIBS is subject to regulation under the Bank Holding Company Act of 1956, as amended, and to supervision and regulation by the Federal Reserve.

     Under Federal Reserve regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both.

     FIBS is required to obtain the prior approval of the Federal Reserve for the acquisition of 5% or more of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve is also required for the merger or consolidation of FIBS and another bank holding company.

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

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     FIBS may engage in authorized financial activities provided that it remains a financial holding company and meets certain regulatory standards of being well-capitalized and well-managed. If FIBS fails to meet the well-capitalized or well-managed regulatory standards, it may be required to cease its financial holding company activities or, in certain circumstances, to divest of the Bank. FIBS does not currently engage in significant financial holding company businesses or activities not otherwise permitted to bank holding companies generally.

     Under the GLB Act, if FIBS engages in certain financial activities currently authorized to financial holding companies, FIBS, or its affiliates, may become subject to additional laws and regulations relating to the particular activity, such as certain state and federal securities laws and regulations. FIBS may also become subject to supervision or examination by additional regulatory authorities granted regulatory authority over the activity under the GLB Act, such as the Securities and Exchange Commission (“SEC”) or state securities regulatory authorities.

The Bank

     The Bank is subject to numerous laws and regulations generally applicable to financial institutions and financial services. The extensive regulation of the Bank limits both the activities in which the Bank may engage and the conduct of the permitted activities. Further, the laws and regulations impose reporting and information collection obligations on the Bank. The Bank incurs significant costs relating to compliance with the various laws and regulations and the collection and retention of information.

     The Bank is subject to the supervision of and regular examination by the Federal Reserve, the State of Montana, Division of Banking and Financial Institutions and, with respect to its activities in Wyoming, the State of Wyoming, Department of Audit. If any of the foregoing regulatory agencies determine that the financial condition, capital resources, asset quality, earning prospects, management, liquidity or other aspects of a bank’s operations are unsatisfactory or that a bank or its management is violating or has violated any law or regulation, various remedies are available to such agencies. These remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of a bank, to assess civil monetary penalties, to remove officers and directors and to terminate a bank’s deposit insurance, which would result in a revocation of a bank’s charter. The Bank has not been the subject of any such actions by regulatory agencies.

     The FDIC insures the deposits of the Bank in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. See “Premiums for Deposit Insurance” below. The Bank is subject to the Federal Deposit Insurance Act (“FDIA”) and FDIC regulations relating to the deposit insurance. The Bank may also be subject to supervision and examination by the FDIC, in addition to the regular supervision and examination by the Bank’s primary state and federal banking regulators.

Restrictions on Transfers of Funds to FIBS and the Bank

     Large portions of FIBS’ revenues are, and will continue to be, dividends paid by the Bank. The Bank is limited, under both state and federal law, in the amount of dividends that may be paid from time to time. In general, the Bank 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.

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

     Financial and other transactions between the Bank and FIBS or any FIBS affiliate are also limited under applicable state and federal law. Among other things, the Bank may not lend funds to, or otherwise extend credit to or for the benefit of, FIBS or FIBS affiliates, except on specified types and amounts of collateral and other terms required by state and federal law. In addition, the Federal Reserve has authority to define and limit, from time to time, the transactions between banks and their affiliates. The Federal Reserve issued Regulation W, which became effective April 1, 2003. Regulation W imposes significant additional limitations on transactions in which the Bank may engage with FIBS or FIBS affiliates in addition to the limits under the federal statutes.

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Effect of Government Policies and Legislation

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

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

     From time to time, legislation is enacted which has the effect of imposing additional operating restrictions and increasing the cost of doing business, as has been the case with recently enacted laws regarding anti-terrorism and consumer privacy. New legislation may also limit or expand permissible activities or affect the competitive balance between banks and other financial service providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial service providers are frequently made in Congress, in the Montana and Wyoming legislatures and before various bank regulatory and other professional agencies. The likelihood of major legislative changes and the impact such changes might have on FIBS or the Bank are impossible to predict.

Capital Standards

     The federal banking agencies have adopted minimum capital requirements for insured banks that are applicable to the Bank. In addition, the Federal Reserve has adopted minimum capital requirements that are applicable to FIBS. The capital requirements are intended to, among other things, provide a means for evaluating the capital adequacy and soundness of the institutions. The federal banking agencies may also set higher capital requirements for particular institutions in specified circumstances under federal laws and regulations.

     At December 31, 2004, the Bank and FIBS each met the “well-capitalized” requirements applicable to the respective institution. The “well-capitalized” standard is the highest level of the minimum capital requirements established by the federal agencies. Neither the Bank nor FIBS is subject to a minimum capital requirement other than those applicable to banks or bank holding companies generally.

     For more information concerning the capital ratios of FIBS, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition - Capital Resources and Liquidity Management” and “Notes to Consolidated Financial Statements - Regulatory Capital” included in Part IV, Item 15.

Compliance and Safety and Soundness Standards

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

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Premiums for Deposit Insurance

     Deposits in the Bank are insured by the FDIC in accordance with the FDIA. Insurance premiums are assessed semiannually by the FDIC at a level sufficient to maintain the insurance reserves required under the FDIA and relevant regulations. The insurance premium charged to a bank is determined based upon risk assessment criteria, including relevant capital levels, results of bank examinations by state and federal regulators and other information. The Bank currently is assessed the most favorable deposit insurance premiums under the risk-based premium system.

Community Reinvestment Act and Fair Lending Developments

     The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities or in authorizing expansion activities by the Bank and FIBS.

     In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The Bank received an “outstanding” rating on its most recent examination.

Risk Factors

     Readers should consider carefully the following factors in evaluating the Company and its business.

Asset Quality

     A significant source of risk for the Company arises from the possibility that losses will be sustained by the Bank because borrowers and guarantors may fail to perform in accordance with the terms of their loans. These loans may be unsecured or secured, depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of diverse real and personal property which may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events. The Company has adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for loan losses, that management believes are appropriate to mitigate the risk of loss by assessing the likelihood of nonperformance and the value of available collateral, monitoring loan performance and diversifying the Company’s credit portfolio. Such policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. See “Business — Lending Activities” above.

Interest Rate Risk

     Banking companies’ earnings depend largely on the relationship between the yield on earning assets, primarily loans and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest earning assets and interest bearing liabilities and the level of non-performing assets. Fluctuations in interest rates affect the demand of customers for the Company’s products and services. The Company is subject to interest rate risk to the degree that its interest bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than its interest earning assets. Significant fluctuations in interest rates could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. For additional information regarding interest rate risk, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset Liability Management — Interest Rate Risk.”

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Changes in the Value of Goodwill and Mortgage Servicing Rights

     Under current accounting standards, the Company is not required to amortize goodwill but rather must evaluate goodwill for impairment at least annually. If deemed impaired at any point in the future, an impairment charge representing all or a portion of goodwill will be recorded to current earnings in the period in which the impairment occurred. The capitalized value of net mortgage servicing rights is amortized to earnings over the period of estimated servicing income. Mortgage servicing rights are also subject to periodic impairment reviews. If they are deemed impaired at any point in the future, an impairment charge will be recorded to current earnings in the period in which the impairment occurred. Impairment related to mortgage servicing rights may be reversed if the market value of the mortgage servicing rights recovers. For additional information regarding goodwill and mortgage servicing rights, see “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies” included in Part IV, Item 15.

Breach of Information Security and Technology Dependence

     The Company depends upon data processing, software, communication and information exchange on a variety of computing platforms and networks and over the internet. Despite instituted safeguards, the Company cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Company’s wholly-owned subsidiary, i_Tech, provides technology services to the Bank and other non-affiliated customers. In addition, the Company relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and the Company could be exposed to claims from customers. Any of these results could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity.

Economic Conditions; Limited Geographic Diversification

     The Company’s banking operations are located in Montana and Wyoming. As a result of the geographic concentration of its operations, the Company’s results depend largely upon economic conditions in these areas. Although markets served by the Company are economically diverse, a deterioration in economic conditions could adversely impact the quality of the Company’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity.

Ability of the Company to Execute Its Business Strategy

     The financial performance and profitability of the Company will depend on its ability to execute its business strategy and manage its future growth. Although the Company believes that it has substantially integrated recently acquired banks into the Company’s operations, there can be no assurance that unforeseen issues relating to the assimilation or prior operations of these banks, including the emergence of any material undisclosed liabilities, will not materially adversely affect the Company. In addition, any future acquisitions or other future growth may present operating and other problems that could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. The Company’s financial performance will also depend on the Company’s ability to maintain profitable operations through implementation of its Strategic Vision. Moreover, the Company’s future performance is subject to a number of factors beyond its control, including pending and future federal and state banking legislation, regulatory changes, unforeseen litigation outcomes, inflation, lending and deposit rate changes, interest rate fluctuations, increased competition and economic conditions. Accordingly, there can be no assurance that the Company will be able to continue the growth or maintain the level of profitability it has recently experienced.

Dependence on Key Personnel

     The Company’s success depends to a significant extent on the management skills of its existing executive officers and directors, many of whom have held officer and director positions with the Company for many years. The loss or unavailability of any of its key executives or directors, including Thomas W. Scott, Chairman of the Board of Directors, Lyle R. Knight, President and Chief Executive Officer, Terrill R. Moore, Executive Vice President and Chief Financial Officer, or Ed Garding, Executive Vice President and Chief Credit Officer, could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. See Part III, Item 10, “Directors and Executive Officers of the Registrant.”

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Competition

     National competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Bank. Moreover, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the GLB Act have increased competition in the financial services industry and in the Bank’s markets, including competition from larger, multi-state financial holding companies and their bank and nonbank affiliates. There can be no assurance that the Company will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. See “Business — Competition” and “Business — Regulation and Supervision” above.

Government Regulation and Monetary Policy

     The Company and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Company conducts its banking business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit holders of the Company’s securities. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Company. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company, and any unfavorable change in these conditions could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. See “Business — Regulation and Supervision” above.

Control by Affiliates

     The directors and executive officers of the Company beneficially own 60.9% of the outstanding common stock of the Company. Many of these directors and executive officers are members of the Scott family, which collectively owns 77.5% of the outstanding common stock. By virtue of such ownership, these affiliates are able to control the election of directors and the determination of the Company’s business, including transactions involving any merger, share exchange, sale of assets outside the ordinary course of business and dissolution.

Lack of Trading Market; Market Prices

     The common stock of FIBS is not actively traded, and there is no established trading market for the stock. There is only one class of common stock, with 90.7% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 9.3% without such restrictions. FIBS has a right of first refusal to repurchase the restricted stock at fair market value currently determined as the minority appraised value per share based upon the most recent quarterly appraisal available to FIBS. Additionally, restricted stock held by officers, directors and employees of the Company may be called by the Company under certain conditions. All stock not subject to such restrictions may be sold at a price per share that is acceptable to the shareholder. FIBS has no obligation to purchase restricted or unrestricted stock, but has historically purchased such stock. During 2004, the Company repurchased 12,577 shares of its unrestricted stock from participants in the Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. (“Savings Plan”) and 81,804 shares of its restricted stock from shareholders. All shares were repurchased at the most recent minority appraised value at the repurchase date.

     The appraised minority value of FIBS common stock represents the estimated fair market valuation of a minority interest in such stock, taking into account adjustments for the lack of marketability of the stock and other factors. This value does not represent an actual trading price between a willing buyer and seller of the FIBS common stock in an informed, arm’s-length transaction. As such, the appraised minority value is only an estimate as of a specific date, and there can be no assurance that such appraisal is an indication of the actual value holders of FIBS common stock may realize with respect to shares held by them. Moreover, the estimated fair market value of the FIBS common stock may be materially different at any date other than the valuation dates.

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     FIBS has no obligation, by contract, policy or otherwise to purchase stock from any shareholder desiring to sell or to create any market for the stock. Historically, it has been the practice of FIBS to repurchase common stock to maintain a shareholder base with restrictions on sale or transfer of the stock. In the last three calendar years (2002-2004), FIBS repurchased a total of 239,413 shares of common stock, 185,872 of which were restricted by shareholder agreements. FIBS repurchased the stock at the most recent appraised minority value at the repurchase date, in accordance with the shareholder agreements. FIBS’ repurchases of stock are subject to corporate law and regulatory restrictions that could prevent stock repurchases. See also Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

Website Access to United States Securities and Exchange Commission Filings

     All reports filed electronically by the Company with the SEC, including the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments to those reports, are accessible at no cost through the Company’s website at www.firstinterstatebank.com as soon as reasonably practicable after they have been filed with the SEC. These reports are also accessible on the SEC’s website at www.sec.gov.

Item 2. Properties

     The Company’s principal executive offices and a banking office are anchor tenants in a commercial building located in Billings, Montana. The building is owned by a joint venture partnership in which the Bank is one of two partners, owning a 50% interest in the partnership. As of December 31, 2004, the Company leased approximately 83,023 square feet of space in the building.

     As of December 31, 2004, the Company also provided banking services at 57 additional locations in Montana and Wyoming, of which 30 locations are owned by the Company and 27 locations are leased from independent third parties.

     The Company leases approximately 24,368 square feet of office space for its operations center, also located in Billings, Montana, and an aggregate of approximately 53,729 square feet of office space in Montana, Colorado, Idaho and Oregon for its technology services subsidiary.

     The Company believes its facilities are adequate to meet its needs for at least the next twelve months.

Item 3. Legal Proceedings

     In the normal course of business, the Company is named or threatened to be named as a defendant in various lawsuits. In the opinion of management, following consultation with legal counsel, the pending lawsuits are without merit or, in the event the plaintiff prevails, the ultimate liability or disposition thereof will not have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity.

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

     No matters were submitted to a vote of security holders during the fourth quarter of 2004.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

Description of FIBS Capital Stock

     The authorized capital stock of FIBS consists of 20,000,000 shares of common stock without par value, of which 7,970,300 shares were outstanding as of December 31, 2004, and 100,000 shares of preferred stock without par value, none of which were outstanding as of December 31, 2004.

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Common Stock

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

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

     The common stock of FIBS is not actively traded, and there is no established trading market for the stock. There is only one class of common stock, with 90.7% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 9.3% held by 17 shareholders without such restrictions, including the Company’s 401(k) plan which holds 79.4% of the unrestricted shares. See also Part I, Item 1, “Risk Factors — Lack of Trading Market; Market Prices.”

     Quarter-end minority appraisal values for the past two years, determined by Alex Sheshunoff & Co. Investment Banking, are as follows:

     As of December 31, 2004, options for 781,661 shares of the FIBS common stock were outstanding at various exercise prices, ranging from $40.00 to $54.50. The aggregate cash proceeds to be received by FIBS upon exercise of all options outstanding at December 31, 2004, would be $34.2 million, or a weighted average exercise price of $43.74 per share.

     Resale of FIBS stock may be restricted pursuant to the Securities Act of 1933 and applicable state securities laws. In addition, most shares of FIBS stock are subject to shareholder’s agreements:

	•	Members of the Scott family, as majority shareholders of FIBS, are subject to a shareholder’s agreement (“Scott Agreement”). The Scott family, under the Scott Agreement, has agreed to limit the transfer of shares owned by members of the Scott family to family members or charities, or with FIBS’ approval, to the Company’s officers, directors, advisory directors or to the Company’s Savings Plan.
	•	Shareholders of the Company who are not Scott family members, with the exception of 17 shareholders who own an aggregate of 740,762 shares of unrestricted stock, are subject to shareholder’s agreements (“Shareholder Agreements”). Stock subject to the Shareholder Agreements may not be sold or transferred without triggering the Company’s option to acquire the stock in accordance with the terms of the Shareholder Agreements. In addition, the Shareholder Agreements grant the Company the right to repurchase all or some of the stock under certain conditions.

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     Purchases of FIBS common stock made through the Company’s Savings Plan are not restricted by Shareholder Agreements, due to requirements of the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code. However, since the Savings Plan does not allow distributions “in kind,” any distributions from an employee’s account in the Savings Plan will allow, and may require, the Financial Services division of the Bank (the “Plan Trustee”), to sell the FIBS stock. While FIBS has no obligation to repurchase the stock, it is likely that FIBS will repurchase FIBS stock sold by the Savings Plan. Any such repurchases would be upon terms set by the Plan Trustee and accepted by FIBS.

     There are 688 record shareholders of FIBS as of December 31, 2004, including the Company’s Savings Plan as trustee for 588,370 shares held on behalf of 1,462 individual participants in the plan. Of such participants, 307 individuals also own shares of FIBS stock outside of the plan. The Plan Trustee votes the shares based on the instructions of each participant. In the event the participant does not provide the Plan Trustee with instructions, the Plan Trustee votes those shares in accordance with voting instructions received from a majority of the participants in the plan.

Dividends

     It is the policy of FIBS to pay a dividend to all common shareholders quarterly. Dividends are declared and paid in the month following the calendar quarter. The dividend amount is periodically set by the FIBS Board of Directors. The FIBS Board of Directors has no current intention to change its dividend policy, but no assurance can be given that the Board may not, in the future, change or eliminate the payment of dividends.

     Historical quarterly dividends for 2003 and 2004 are as follows:

Dividend Restrictions

     For a description of restrictions on the payment of dividends, see Item 1, “Business - Regulation and Supervision — Restrictions on Transfers of Funds to FIBS and the Bank.”

Preferred Stock

     The authorized capital stock of FIBS includes 100,000 shares of preferred stock. The FIBS Board of Directors is authorized, without approval of the holders of common stock, to provide for the issuance of preferred stock from time to time in one or more series in such number and with such designations, preferences, powers and other special rights as may be stated in the resolution or resolutions providing for such preferred stock. The FIBS Board of Directors may cause FIBS to issue preferred stock with voting, conversion and other rights that could adversely affect the holders of the common stock or make it more difficult to effect a change of control of the Company.

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Securities Authorized for Issuance Under Equity Compensation Plans

     The following table provides information as of December 31, 2004, regarding the Company’s equity compensation plans.

	(1)	Excludes number of securities to be issued upon exercise of outstanding options, warrants and rights.
	(2)	Represents stock options pursuant to the Company’s 2001 Stock Option Plan. See “Notes to Consolidated Financial Statements — Employee Benefit Plans” included in Part IV, Item 15.
	(3)	Represents restricted stock pursuant to the Company’s 2004 Restricted Stock Award Plan. See “Notes to Consolidated Financial Statements — Employee Benefit Plans” included in Part IV, Item 15.

Sales of Unregistered Securities

     During 2004, the Company issued 15,732 unregistered shares of its common stock to 142 senior officers, including 10,000 shares pursuant to the Company’s 2004 Restricted Stock Award Plan, and 5,732 shares pursuant to incentive bonuses. The shares were valued at an aggregate of $795,234. These issuances were made in reliance upon the “no sale” provision of Section 2(a)(3) of the Securities Act of 1933, and upon the exemption from registration (to the extent applicable) under Section 4(2) of the Securities Act of 1933.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended December 31, 2004.

(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 90.7% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 9.3% 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.

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Item 6. Selected Consolidated Financial Data

     The following selected consolidated financial data with respect to the Company’s consolidated financial position as of December 31, 2004 and 2003, and its results of operations for the fiscal years ended December 31, 2004, 2003 and 2002, has been derived from the audited consolidated financial statements of the Company included in Part IV, Item 15. This data should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and such consolidated financial statements, including the notes thereto. The selected consolidated financial data with respect to the Company’s consolidated financial position as of December 31, 2002, 2001 and 2000, and its results of operations for the fiscal years ended December 31, 2001 and 2000, has been derived from the audited consolidated financial statements of the Company not included herein.

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	(1)	On January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Under the provisions of SFAS No. 142, goodwill is no longer amortized over an estimated useful life. Selected financial data for 2001 and 2000 have not been restated to reflect the nonamortization provisions of SFAS No. 142. Goodwill amortization expense, net of income tax benefit, was $1.9 million and $1.7 million in 2001 and 2000, respectively.
	(2)	Dividends per common share divided by basic earnings per common share.
	(3)	For purposes of computing the ratio of non-performing assets to total loans and OREO, non-performing assets include nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans and OREO.
	(4)	For purposes of computing the ratio of allowance for loan losses to non-performing loans, non-performing loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and restructured loans.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

     Certain statements contained in this document that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. 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 statements. Such factors include, among others, the following: 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; the availability of capital to fund the expected expansion of the Company’s business; and, other factors referenced in this document, including, without limitation, information under the caption “Business — Risk Factors” in Part I, Item 1. Given these uncertainties, shareholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements speak only as of the date on which such statements are made. 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.

Critical Accounting Estimates and Significant Accounting Policies

     The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company’s significant accounting policies are summarized in “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies” included in Part IV, Item 15.

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     The Company’s critical accounting estimates are summarized below. Management considers an accounting estimate to be critical if: 1) the accounting estimate requires management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain, and 2) changes in the estimate that are reasonably likely to occur from period to period, or the use of different estimates that management could have reasonably used in the current period, would have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

Allowance for Loan Losses

     The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of subjective measurements, including management’s assessment of the internal risk classifications of loans, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company’s consolidated financial statements, results of operations or liquidity. The allowance for loan losses is maintained at an amount the Company believes is sufficient to provide for estimated losses inherent in its loan portfolio at each balance sheet date. Management continuously monitors qualitative and quantitative trends in the loan portfolio, including changes in the levels of past due, internally classified and non-performing loans. As a result, the Company’s historical experience has provided for an adequate allowance for loan losses. For additional information regarding the allowance for loan losses, its relation to the provision for loan losses and risk related to asset quality, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Provision for Loan Losses” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition — Allowance for Loan Losses” below and “Notes to Consolidated Financial Statements — Allowance for Loan Losses” included in Part IV, Item 15.

Valuation of Mortgage Servicing Rights

     The Company recognizes as assets the rights to service mortgage loans for others, whether acquired or internally originated. Mortgage servicing rights are initially recorded at fair value and are amortized over the period of estimated servicing income. Mortgage servicing rights are carried on the consolidated balance sheet at the lower of amortized cost or fair value. The Company utilizes the expertise of a third-party consultant to estimate the fair value of its mortgage servicing rights quarterly. In evaluating the mortgage servicing rights, the consultant uses discounted cash flow modeling techniques, which require estimates regarding the amount and timing of expected future cash flows, including assumptions about loan repayment rates, costs to service, as well as interest rate assumptions that contemplate the risk involved. Management believes the valuation techniques and assumptions used by the consultant are reasonable.

     Determining the fair value of mortgage servicing rights is considered a critical accounting estimate because of the assets’ sensitivity to changes in estimates and assumptions used, particularly loan repayment speeds and discount rates. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

     At December 31, 2004, the consultant’s valuation model indicated that an immediate 0.5% decrease in interest rates would result in a reduction in fair value of mortgage servicing rights of $9.3 million and an immediate 1.0% decrease in interest rates would result in a reduction in fair value of $13.5 million.

     For additional information regarding mortgage servicing rights, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Servicing Rights” included below and “Notes to Consolidated Financial Statements — Mortgage Servicing Rights,” included in Part IV, Item 15.

Executive Overview

     FIBS is a financial and bank holding company with 58 banking offices in 30 communities throughout Montana and Wyoming. The Company differentiates itself from competitors by focusing on providing superior service to its banking and technology services customers and emphasizing community service to improve the communities it serves.

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     The Company derives its income principally from interest charged on loans, and to a lesser extent, from interest and dividends earned on investments. The Company also derives income from noninterest sources such as fees received in connection with various lending and deposit services; trust, investment and insurance services; mortgage loan originations, sales and servicing; merchant and electronic banking services; technology services; and, from time to time, gains on sales of assets. The Company’s principal expenses include interest expense on deposits and borrowings, operating expenses, provisions for loan losses and income tax expense.

     During 2004, the Company continued to focus on improving operating efficiencies while growing internally through the effective offering and promotion of competitively priced products and services. This strategy resulted in increased earnings in 2004. Net income of $45.4 million in 2004 exceeded 2003 earnings by 11.5%, and earnings per diluted share increased $.53 to $5.68 in 2004. Net interest income, on a fully taxable-equivalent basis, increased $10.0 million in 2004 primarily due to growth in loans and investment securities and decreases in interest expense on deposits. Net income for 2004 was also positively impacted by lower provisions for loan losses, the reversal of mortgage servicing rights impairment and a gain on the sale of a banking office. Income from the origination and sale of residential real estate mortgages decreased as a result of the current sustained low interest rate environment. However, much of this revenue loss was replaced by increased fee revenue, primarily from service charges on deposit accounts, investment services fees and mortgage loan servicing fees.

     The Company not only grew in terms of earnings but also in terms of asset size, surpassing $4.2 billion in total assets in 2004. Most of the increase in total assets was attributable to internal growth in loans, primarily funded by increases in customer deposits and securities sold under repurchase agreements.

     Faced with continued challenges of a sustained low interest rate environment and a flattened yield curve, the Company’s focuses in 2005 are on improving internal efficiency and implementing revenue generation strategies. Improvements in internal efficiency are expected through control of operating expenses, implementation of new technologies and consolidation of like operational and administrative functions, where appropriate. Revenue generation strategies include new and expanded sales initiatives and development of new pricing opportunities.

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

Results of Operations

     Increases in the Company’s earnings during recent years have been effected through a successful combination of internal growth and acquisitions. Internal growth experienced by the Company is reflected by an increased volume of customer loans and deposits, without giving effect to acquisitions. The Company’s internal growth has largely been accomplished through a combination of effective offering and promotion of competitively priced products and services and the opening of several de novo banking offices. Net income was $45.4 million, or $5.68 per diluted share, in 2004, as compared to $40.8 million, or $5.15 per diluted share, in 2003, and $34.5 million, or $4.41 per diluted share, in 2002.

Net Interest Income

     Net interest income, the largest source of the Company’s operating income, is derived from interest, dividends and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. Interest earning assets primarily include loans and investment securities. Interest bearing liabilities include deposits and various forms of indebtedness. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the composition of interest earning assets and interest bearing liabilities.

     The most significant impact on 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. The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the interest rate spread, produces changes in the net interest income between periods.

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     The following table presents, for the periods indicated, condensed average balance sheet information for the Company, together with interest income and yields earned on average interest earning assets and interest expense and rates paid on average interest bearing liabilities.

	(1)	Average loan balances include nonaccrual loans. Interest income on loans includes amortization of loan fees, which is not material.
	(2)	Interest income and average rates for tax exempt loans and securities are presented on a fully-taxable equivalent (“FTE”) basis.
	(3)	Includes interest on federal funds purchased, securities sold under repurchase agreements and other borrowed funds. Excludes long-term debt.
	(4)	Net FTE yield on interest earning assets during the period equals (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

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     Net interest income on a fully taxable-equivalent (“FTE”) basis increased $10.0 million, or 7.0%, during 2004. This increase reflects the combined effects of increases in the average balances of interest earning assets, primarily loans and investment securities, as well as a decrease in interest expense on interest bearing liabilities resulting from declines in market interest rates. Net FTE interest income increased $4.7 million, or 3.4%, to $143.6 million in 2003, from $138.8 million in 2002, primarily due to loan and deposit growth.

     The net FTE yield on interest earning assets decreased 3 basis points, or less than 1.0%, to 4.34% in 2004, as compared to 4.37% in 2003, and 29 basis points to 4.37% in 2003, as compared to 4.66% in 2002. The declining yields are primarily due to decreases in the spread between rates earned on interest earning assets and rates paid on interest bearing liabilities combined with the impact of reinvesting funds received through prepayments and repricing on loans, investment securities and borrowings at current market interest rates.

     The table below sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from estimated changes in average asset and liability balances (volume) and estimated changes in average interest rates (rate). Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other.

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

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

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

Provision for Loan Losses

     The provision for loan losses creates an allowance for loan losses known and inherent in the loan portfolio at each balance sheet date. 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 assessed levels. Periodically, provisions are made for loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the provision for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses. Ultimate loan losses

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may vary from current estimates. For additional information concerning the provision for loan losses, see “Critical Accounting Estimates and Significant Accounting Policies” above.

     The provision for loan losses decreased 11.4% to $8.7 million in 2004, from $9.9 million in 2003. The Company reduced its provision for loan losses due to lower levels of non-performing loans, net charge-offs and internally classified loans in 2004.

     The provision for loan losses increased 7.2% to $9.9 million in 2003, from $9.2 million in 2002, primarily due to the application of historical loan loss rates to internal loan risk classifications and management’s assessment of risk associated with higher levels of criticized loans and current economic conditions in the agriculture and hotel/motel market sectors.

Noninterest Income

     Principal sources of noninterest income include service charges on deposit accounts; other service charges, commissions and fees; technology services revenues; income from the origination and sale of loans; and, income from fiduciary activities, comprised principally of fees earned on trust assets. Noninterest income increased 1.6% to $71.3 million in 2004, from $70.2 million in 2003, and 15.2% to $70.2 million in 2003, from $60.9 million in 2002. Increases in noninterest income are a function of changes in each of the principal categories, as discussed below.

     Services charges on deposit accounts increased 7.2% to $18.9 million in 2004, from $17.6 million in 2003, and 11.9% to $17.6 million in 2003, from $15.7 million in 2002, primarily due to increases in service fee rates for 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. Additionally, declining interest rates have reduced earnings credits on business checking accounts resulting in increased check processing revenues in 2004 and 2003.

     Other service charges, commissions and fees primarily include debit and credit card interchange income; mortgage servicing fees; investment services revenues; and, ATM service charge revenues. Other service charges, commissions and fees increased 20.4% to $19.2 million in 2004, from $16.0 million in 2003, and 33.5% to $16.0 million in 2003, from $12.0 million in 2002. These increases are primarily attributable to additional fee income from higher volumes of credit and debit card transactions; increases in mortgage servicing revenues due to higher volumes of mortgage loans serviced; and, increases in investment services revenues.

     Technology services revenues increased 14.7% to $13.2 million in 2004, from $11.5 million in 2003. During June 2004, the Company acquired the assets of a small technology services provider. The acquisition increased revenues by approximately $742,000 during the last half of 2004. The remaining increase is primarily due to higher fee income resulting from increases in the number of customers using the Company’s item processing services and higher ATM transaction volumes. Technology services revenues increased 4.1% to $11.5 million in 2003, from $11.0 in 2002, primarily due to higher ATM transaction volumes.

     Income from the origination and sale of loans includes origination and processing fees on residential real estate loans held for sale and gains on residential real estate loans sold to third parties. Fluctuations in market interest rates have a significant impact on the level of income generated from the origination and sale of loans. Higher interest rates can substantially reduce the demand for home loans and loans to refinance existing mortgages. Conversely, lower interest rates generally stimulate refinancing and home loan origination. Income from the origination and sale of loans decreased 45.4% to $8.4 million in 2004, from $15.3 million in 2003. This decline is due to a decrease in the number of new and refinanced loans resulting from an extended period of historically low interest rates. Income from the origination and sale of loans increased 66.9% to $15.3 million in 2003, from $9.2 million in 2002. Historically low market interest rates in 2003 caused a significant increase in the number of home loans originated and refinanced in 2003 as compared to 2002.

     Revenues from fiduciary activities increased 11.6% to $5.7 million in 2004, from $5.1 million in 2003, and 9.1% to $5.1 million in 2003, from $4.7 million in 2002 primarily due to increases in the market value of underlying assets and increases in new accounts.

     The Company recorded net losses of $797,000 on sales of investment securities during 2004, as compared to net losses on sales of $75,000 in 2003, and net gains on sales of $2.5 million in 2002. Net investment securities gains and losses were primarily used to offset impairment charges and reversals related to capitalized mortgage servicing rights that were recorded during the same periods.

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     Other income primarily includes increases in bank-owned life insurance revenues, check printing income, agency stock dividends and gains on sales of assets other than investment securities. Other income increased 42.2% to $6.6 million in 2004, from $4.7 million in 2003, primarily due to a $1.7 million gain on the sale of a banking office recorded during third quarter 2004. Other income decreased 19.2% to $4.7 million in 2003, from $5.8 million in 2002 primarily due to a $1.2 million dollar gain on the sale of a banking office recorded during third quarter 2002.

Noninterest Expense

     Noninterest expense increased 4.1% to $143.6 million in 2004, from $137.9 million in 2003, and 3.1% to $137.9 million in 2003, from $133.8 million in 2002. Significant components of these increases are discussed below.

     Salaries, wages and employee benefits expense increased 5.7% to $74.0 million in 2004, from $70.0 million in 2003, primarily due to inflationary wage increases. Exclusive of deferred costs related to the origination of loans, salaries, wages and employee benefits expenses increased 4.3% to $81.1 million in 2004, from $77.8 million in 2003. The Company’s focus on internal efficiencies during 2004 resulted in a reduction of 43 full time equivalent employees as compared to 2003. Savings due to employee reductions were offset primarily by increased group insurance costs.

     Exclusive of deferred costs related to the origination of loans, salaries, wages and employee benefits expenses increased 11.2% to $77.8 million in 2003, from $70.0 million in 2002 primarily due to inflationary wage increases and higher staffing levels to support internal growth and the acquisition of banking offices.

     Occupancy expense increased 10.4% to $11.9 million in 2004, from $10.8 million in 2003, and 2.3% to $10.8 million in 2004, from $10.6 million in 2003, primarily due to higher depreciation and maintenance expenses associated with the upgrade of existing facilities and the addition of new facilities.

     Furniture and equipment expense increased 14.9% to $15.1 million in 2004, from $13.1 million in 2003, due to higher depreciation associated with the upgrade of existing facilities, the addition of new facilities and technology upgrades. Furniture and equipment expense decreased less than 1.0% to $13.1 million in 2003, from $13.2 million in 2002 primarily due to decreases in maintenance expense.

     Professional fees increased 16.3% to $3.2 million in 2004, from $2.7 million in 2003, primarily due to outsourcing of certain customer service functions by the Company’s technology subsidiary. The Company also incurred professional fees related to implementations of automated overdraft processing and account reconciliation systems in 2004. Professional fees increased 6.3% to $2.7 million in 2003, from $2.6 million in 2002 primarily due to fees incurred in evaluating the benefits of automating certain operational functions of the Bank.

     Outsourced technology services expense increased 24.0% to $3.0 million in 2004, from $2.4 million in 2003, and 23.0% to $2.4 million in 2003, from $1.9 million in 2002, primarily due to ATM and debit card transaction processing fees paid to third party processors. These fees fluctuate with transaction volumes.

     Other expenses primarily include advertising and public relations costs; office supply, postage, freight, telephone and travel expenses; other losses; and, impairment charges or reversals related to capitalized mortgage servicing rights and long-lived assets pending disposition. Other expenses decreased 7.0% to $31.4 million in 2004, from $33.8 million in 2003. During 2003, the Company expensed unamortized debt issuance costs of $1.9 million, recorded fraud losses of $561,000 and accrued $400,000 for building repairs. Also contributing to lower expense in 2004 was the reversal of impairment on mortgage servicing rights of $263,000 in 2004, as compared to impairment charges of $1.0 million in 2003. These decreases in other expenses were partially offset by increases in fees paid to directors, increases in costs associated with credit card incentive programs and inflationary increases in other expenses.

     Other expenses increased 1.8% to $33.8 million in 2003, from $33.2 million in 2002, primarily due to the write-off of unamortized debt issuance costs associated with trust preferred securities redeemed in April 2003, increases in fraud losses, additional accruals for a building repair and increases in costs related to credit card incentive programs. These increases were partially offset by fluctuations in impairment charges related to capitalized mortgage servicing assets and long-lived assets pending disposition. The Company recorded impairment charges related to capitalized mortgage servicing assets of $1.0 million in 2003, as compared to $2.8 million in 2002. Additionally, during 2002, the Company recorded impairment charges of $1.3 million on equipment disposed of in 2003.

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Income Tax Expense

     The Company’s effective federal tax rate was 30.6% for the year ended December 31, 2004 and 29.8% for the years ended December 31, 2003 and 2002. State income tax applies only to pretax earnings of entities operating within Montana, Colorado, Idaho and Oregon. The Company’s effective state tax rate was 3.9%, 5.6% and 6.1% for years ended December 31, 2004, 2003 and 2002, respectively. The decrease in the state tax rate for 2004 reflects the recognition of state tax benefits from prior years.

Operating Segment Results

     The Company’s primary operating segment is Community Banking. The Community Banking segment represented over 90% of the combined revenues and income of the Company during 2004, 2003 and 2002, and consolidated assets of the Company as of December 31, 2004 and 2003.

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

     For additional information regarding the Company’s operating segments, see “Business - Operating Segments” included in Part I, Item 1, and “Notes to Consolidated Financial Statements - Segment Reporting” and “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies” included in Part IV, Item 15.

Summary of Quarterly Results

     The following table presents the Company’s unaudited quarterly results of operations for the fiscal years ended December 31, 2004 and 2003.

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     Results for the fourth quarter of 2004 improved over the fourth quarter of 2003, primarily due to increases in net interest income, which increased 7.1% as a result of internal growth. The net yield on interest earning assets for the quarter ended December 31, 2004 was 4.30%, a decrease of 4 basis points from the fourth quarter of 2003. This compression in net interest margin is the result of balance reductions on higher-yielding, fixed rate loans and increases in deposits at current market rates. The Company recorded lower provisions for loan losses during the quarter ended December 31, 2004, as compared to fourth quarter 2003 due to improvements in asset quality. Additionally, the Company recorded a reversal of impairment related to capitalized mortgage servicing rights of $367,000 during fourth quarter 2004 as compared to impairment charges of $883,000 during fourth quarter 2003. Offsetting these increases in income were higher depreciation and maintenance expenses, higher amortization expense related to mortgage servicing rights and increases in group medical insurance expense.

     Results for the fourth quarter of 2004 improved over the third quarter of 2004, primarily due to increases in net interest income, lower provisions for loan losses and the reversal of impairment related to capitalized mortgage servicing rights. These increases were partially offset by decreases in income from the origination and sale of loans and higher amortization expense related to capitalized mortgage servicing rights. In addition, the Company recorded a $1.7 million gain on the sale of a banking office during third quarter 2004.

Financial Condition

     Total assets increased 8.7% to $4,217 million as of December 31, 2004, from $3,880 million as of December 31, 2003, primarily due to internal growth in loans. Asset growth was primarily funded by increases in customer deposits and securities sold under repurchase agreements.

Loans

     The Company’s loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and other loans, including fixed and variable rate loans. Fluctuations in the loan portfolio are directly related to the economies of the communities served by the Company.

     Total loans increased 7.2% to $2,740 million as of December 31, 2004, from $2,555 million as of December 31, 2003, the result of internal growth. All loan categories demonstrated growth with the exception of agricultural loans. The most significant growth occurred in loans secured by commercial real estate and construction loans, which increased 11.3% and 21.2%, respectively, from December 31, 2003. Total loans increased 14.2% to $2,555 million as of December 31, 2003, from $2,237 million as of December 31, 2002, primarily due to internal growth, particularly in loans secured by commercial real estate and construction loans, and the acquisition of a bank holding company and its bank subsidiary.

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     The following table presents the composition of the Company’s loan portfolio as of the dates indicated:

Loans Outstanding

     The following table presents the maturity distribution of the Company’s loan portfolio and the sensitivity of the loans to changes in interest rates as of December 31, 2004:

     For additional information concerning the Company’s loan portfolio and its credit administration policies, see Part I, Item 1, “Business — Lending Activities.”

Investment Securities

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

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     Investment securities increased 8.5% to $867 million as of December 31, 2004, from $800 million as of December 31, 2003, due to investment of funds primarily generated through internal deposit growth. The weighted average yield on investment securities decreased 19 basis points to 3.89% in 2004, from 4.08% in 2003, primarily due to the investment of funds received through deposit growth and early repayment of mortgage-backed investment securities in shorter duration U.S. agency securities in anticipation of market interest rate increases.

     Investment securities increased less than 1% to $800 million as of December 31, 2003, from $799 million as of December 31, 2002. During 2003, available-for-sale investment securities were sold to offset mortgage servicing right impairment adjustments recorded during the same period. Proceeds from investment security sales and prepayments of mortgage-backed securities were used to fund loan growth or were reinvested in securities.

     The following table sets forth the book value, percentage of total investment securities and average yield for the Company’s investment securities as of December 31, 2004:

Securities Maturities and Yield