UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 March 31, 2005

OR

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.

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 7,980,086 shares of common stock outstanding on March 31, 2005.

1

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

2

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

See accompanying notes to unaudited consolidated financial statements.

3

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

See accompanying notes to unaudited consolidated financial statements.

4

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

See accompanying notes to unaudited consolidated financial statements.

5

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

See accompanying notes to unaudited consolidated financial statements.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

(1)	Basis of Presentation
	In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. (the “Parent Company” or “FIBS”) and subsidiaries (the “Company”) contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position of the Company at March 31, 2005 and December 31, 2004 and the results of operations and cash flows for each of the three month periods ended March 31, 2005 and 2004, in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2004 is derived from audited consolidated financial statements, however, certain reclassifications, none of which were material, have been made to conform to the March 31, 2005 presentation.
	These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
(2)	Stock-Based Compensation
	The Company has two stock-based employee compensation plans, the 2004 Restricted Stock Award Plan and the 2001 Stock Option Plan. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and related interpretations. Compensation cost related to restricted stock awards 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. Stock options granted pursuant to the 2001 Stock Option Plan have an exercise price equal to the fair value of the Company’s common stock at date of grant. Accordingly, the Company does not recognize compensation expense for stock option awards. The following table illustrates the effect on net income and earnings per share if compensation expense had been determined for stock option awards based on an estimate of fair value of the option at the date of grant consistent with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended.

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 three months ended March 31, 2005 and 2004 were $5.96 and $4.58, respectively. Weighted average assumptions used in the valuation model include risk-free interest rates of 4.18% and 4.12%; dividend yields of 3.05% and 3.23%; and, expected stock price volatility of 8.4% and 7.8% in 2005 and 2004, respectively, and expected lives of options of 8.5 years in 2005 and 2004.

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

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment” (“SFAS No. 123(R)”), establishing accounting standards for a wide range of share-based compensation arrangements including stock options, restricted stock, performance-based stock awards, stock appreciation rights and employee stock purchase plans. SFAS No. 123(R) replaces existing requirements under SFAS No. 123 and eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. Effective April 21, 2005, the Securities and Exchange Commission amended the date for compliance with SFAS No. 123(R) to the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005. Pursuant to this ruling, the provisions of SFAS No. 123(R) are effective for the Company on January 1, 2006. The approximate impact of adoption of SFAS No. 123(R) is illustrated by the pro forma disclosure of net income and earnings per share above. However, the Company has not yet determined that it will continue to use a Black-Scholes pricing model upon the adoption of SFAS No. 123(R). Additionally, expected stock price volatility assumptions used in pricing models have a significant impact on the estimated fair value of stock options. Because the Company’s common stock is not actively traded and there is no established trading market for the stock, the Company bases expected stock price volatility assumptions on the historical volatility of the Company’s common stock calculated using the quarterly appraised value of a minority interest over a ten year period. The Company is currently evaluating the reasonableness of this method of estimation under the new guidance provided by SFAS No. 123(R) and subsequent interpretations.

(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 month periods ended March 31, 2005 and 2004.

(4)	Financial Instruments with Off-Balance Sheet Risk
	The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At March 31, 2005, commitments to extend credit to existing and new borrowers approximated $790,679, which includes $152,876 on unused credit card lines and $211,663 with commitment maturities beyond one year.
	Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. At March 31, 2005, the Company had outstanding standby letters of credit of $50,717. The estimated fair value of the obligation undertaken by the Company in issuing the standby letters of credit is included in other liabilities in the Company’s consolidated balance sheet.

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

(5)	Segment Reporting
	The Company has two operating segments, Community Banking and Technology Services. Community Banking encompasses commercial and consumer banking services offered to individuals, businesses and municipalities. Technology Services encompasses technology services provided to affiliated and non-affiliated financial institutions.
	The Other category includes the net funding cost and other expenses of the Parent Company, the operational results of non-bank subsidiaries (except the Company’s technology services subsidiary) and intercompany eliminations.
	Selected segment information for the three month periods ended March 31, 2005 and 2004 follows:

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

(6)	Commitments and Contingencies
	The Company guarantees the debt of a joint venture in which it has an ownership interest. As of March 31, 2005, the joint venture had indebtedness of $5,997.
	The Company had commitments to purchase investment securities of $12,895 as of March 31, 2005.
	The Company had commitments under construction contracts of $1,599 as of March 31, 2005.
(7)	Supplemental Disclosures to Consolidated Statement of Cash Flows
	The Company paid cash of $11,582 and $10,276 for interest during the three months ended March 31, 2005 and 2004, respectively. The Company paid no cash for income taxes during the three months ended March 31, 2005 and paid cash of $14 for income taxes during the three months ended March 31, 2004.

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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, 2004, including the audited financial statements contained therein, filed with the Securities and Exchange Commission.

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 identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, including, without limitation, information under the caption “Business – Risk Factors” included 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 U.S. generally accepted accounting principles 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. Actual results could differ significantly from those estimates.

     The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The most significant accounting policies followed by the Company are presented in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

     The Company has identified the allowance for loan losses and the valuation of mortgage servicing rights to be critical accounting estimates because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain, and changes in the estimates 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.

     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, all of which may be susceptible to significant change. Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 describes the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses is included below.

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     The Company utilizes the expertise of a third-party consultant to estimate quarterly the fair value of its mortgage servicing rights. 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. Management considers the determination of the fair value of mortgage servicing rights to be a critical accounting estimate because of the assets’ sensitivity to changes in estimates and assumptions used, particularly loan repayment speeds and discount rates. Notes 1 and 7 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 describe the methodology used to determine fair value of mortgage servicing rights.

EXECUTIVE OVERVIEW

     During the first quarter of 2005, the Company remained focused on improving internal efficiency and generating additional revenue through sales initiatives and pricing opportunities. The Company reported net income of $12.0 million, or $1.48 per diluted share, for the quarter ended March 31, 2005 as compared to $9.7 million, or $1.22 per diluted share, for the same period in 2004. This increase in earnings is primarily due to higher net interest income, largely the result of internal loan growth, and lower provisions for loan losses in the current year. Noninterest income for the quarter ended March 31, 2005 increased 2.8% from the same period in the prior year primarily due to increased debit and credit card interchange income and higher insurance commissions. Noninterest expense for the quarter ended March 31, 2005 increased 2.3% from the same period in the prior year primarily due to inflationary increases in salary and benefits expense and higher occupancy and depreciation costs associated with the addition and renovation of banking facilities.

RESULTS OF OPERATIONS

     Net Interest Income. Net interest income, the Company’s largest source of operating income, is derived from interest, dividends and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. The most significant impact on the Company’s net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities (“spread”). The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the spread, produces changes in the net interest income between periods.

     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.

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     Net interest income, on a fully taxable equivalent (“FTE”) basis, increased $2.9 million, or 7.7%, to $40.1 million for the three months ended March 31, 2005 as compared to $37.3 million for the same period in 2004. This increase is primarily due to increases in the average balances of interest earning loans and investment securities, and higher interest rates on loans. Increases in interest income were partially offset by higher funding costs due to increases in market interest rates. The FTE net interest margin ratio remained stable at 4.39% for the three months ended March 31, 2005 as compared to 4.40% for the same period in the prior year.

     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.

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     Noninterest Income. The Company’s principal sources of noninterest income include other service charges, commissions and fees; service charges on deposit accounts; technology services revenues; income from the origination and sale of loans; and, income from fiduciary activities. Noninterest income increased $467 thousand, or 2.8%, to $16.9 million for the three months ended March 31, 2005 as compared to $16.5 million for the same period in 2004. Significant components of the increase are discussed below.

     Other service charges, commissions and fees primarily include debit and credit card interchange income, mortgage servicing fees, investment services revenues and ATM service charge revenues. Other service charges, commissions and fees increased $1.0 million, or 22.9%, to $5.6 million for the three months ended March 31, 2005 as compared to $4.5 million for the same period in 2004 primarily due to increases in debit and credit card interchange income and higher insurance commissions.

     Service charges on deposit accounts decreased $615 thousand, or 13.2%, to $4.1 million for the three months ended March 31, 2005 as compared to $4.7 million for the same period in 2004 primarily due to lower overdraft activity.

     Technology services revenues increased $446 thousand, or 15.4%, to $3.3 million for the three months ended March 31, 2005 as compared to $2.9 million for the same period in 2004 primarily due to increases in the number of customers using the Company’s core data and item processing services.

     Revenues from fiduciary activities, comprised principally of fees earned for management of trust assets, increased $197 thousand, or 14.3%, to $1.6 million for the three months ended March 31, 2005 as compared to $1.4 million for the same period in 2004. This increase is primarily due to higher asset management fees resulting from the improved market performance of underlying trust account assets and the addition of new trust customers.

     The Company recorded net losses of $692 thousand on sales of investment securities during the three months ended March 31, 2005 as compared to net gains on sales of $30 thousand in 2004. In February 2005, the Company sold approximately $46.0 million of lower yielding U.S. government agency securities and reinvested the proceeds in higher yielding mortgage-backed and U.S. government agency securities.

     Noninterest Expense. Noninterest expense increased $827 thousand, or 2.3%, to $36.4 million for the three months ended March 31, 2005 as compared to $35.6 million for the same period in 2004. Significant components of the increase are discussed below.

     Salaries, wages and employee benefits expense increased $1.3 million, or 7.3%, to $19.7 million for the three months ended March 31, 2005 as compared to $18.3 million for the same period in 2004 primarily due to inflationary wage increases and increases in incentive bonus accruals.

     Occupancy expense increased $623 thousand, or 23.2%, to $3.3 million for the three months ended March 31, 2005 as compared to $2.7 million for the same period in 2004 largely due to the addition of new facilities and higher depreciation expense associated with upgrades of existing facilities.

     Furniture and equipment expenses increased $442 thousand, or 12.5%, to $4.0 million for the three months ended March 31, 2005 as compared to $3.5 million for the same period in 2004 primarily due to higher depreciation expense associated with the addition of new facilities and upgrades of existing facilities.

     Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. Changes in estimated servicing period and growth in the serviced loan portfolio cause amortization expense to vary between periods. Mortgage servicing rights amortization increased $320 thousand, or 37.6%, to $1.2 million for the three months ended March 31, 2005 as compared to $851 thousand for the same period in 2004.

     Other expenses include advertising and public relation 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 $1.6 million, or 18.7%, to $6.9 million for the three months ended March 31, 2005 as compared to $8.5 million for the same period in 2004 primarily due to fluctuations in impairment charges related to capitalized mortgage servicing rights. The Company reversed $463 thousand of impairment related to mortgage servicing rights during the three months ended March 31, 2005 as compared to recording impairment charges of $1.0 million during the same period in 2004.

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     Income Tax Expense. The Company’s effective combined federal and state income tax rate was 34.5% and 35.1% for the three months ended March 31, 2005 and 2004, respectively.

OPERATING SEGMENT RESULTS

     The Company’s primary operating segment is Community Banking. The Community Banking segment represented over 90% of the combined revenues and income of the Company during the three months ended March 31, 2005 and 2004, and the consolidated assets of the Company as of March 31, 2005 and December 31, 2004.

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

     Net income from the Community Banking operating segment increased $1.9 million, or 17.9%, to $12.2 million for the three months ended March 31, 2005 as compared to $10.4 million for the same period in the prior year primarily due to higher net interest income and lower provisions for loan losses.

     Net income from the Technology Services operating segment increased $227 thousand, or 24.6%, to $1.1 million for the three months ended March 31, 2005 as compared to $922 thousand for the same period in the prior year primarily due to increases in the number of customers using the Company’s core data and item processing services.

FINANCIAL CONDITION

     Loans. Total loans increased $29.5 million, or 1.1%, to $2,769.1 million as of March 31, 2005 from $2,739.5 million as of December 31, 2004 due to internal growth. All major categories of loans increased from December 31, 2004, with the largest growth occurring in indirect 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 decreased $32.4 million, or 3.7%, to $834.9 million as of March 31, 2005 from $867.3 million as of December 31, 2004. The Company evaluates its investment portfolio quarterly for other-than-temporary declines in the market value of individual investment securities. This evaluation includes monitoring credit ratings; market, industry and corporate news; volatility in market prices; and, determining whether the market value of a security has been below its cost for an extended period of time. As of March 31, 2005, the Company had investment securities with fair values of $86.5 million that had been in a continuous loss position more than twelve months. Gross unrealized losses on these securities totaled $4.0 million as of March 31, 2005 and were primarily attributable to changes in interest rates. Management believes all amounts due under the contractual terms of these securities are collectible. The Company recorded no impairment losses during the three months ended March 31, 2005 and 2004.

     Deferred Tax Asset. Deferred tax asset of $6.5 million as of March 31, 2005 increased $4.6 million from $1.9 million as of December 31, 2004 primarily due to fluctuations in net unrealized gains and losses on available-for-sale investment securities.

     Deposits. Total deposits decreased $49.3 million, or 1.5%, to $3,272.4 million as of March 31, 2005 from $3,321.7 million as of December 31, 2004, with all major deposit categories showing declines. Seasonal declines in overall deposit growth have historically occurred during the first half of the year but have been offset in some years by acquisitions and/or internal growth generated through new branch openings.

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     Repurchase Agreements. In addition to deposits, repurchase agreements with primarily commercial depositors provide an additional source of funds for the Company. All outstanding repurchase agreements are due in one day. Repurchase agreements increased $28.7 million, or 6.4%, to $478.4 million as of March 31, 2005 from $449.7 million as of December 31, 2004.

     Other Borrowed Funds. Other borrowed funds decreased $4.0 million, or 50.0%, to $4.0 million as of March 31, 2005 from $8.0 million as of December 31, 2004 primarily due to the timing of tax deposits made by customers and the subsequent withdrawal of funds by the federal government.

     Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $6.7 million, or 39.4%, to $23.6 million as of March 31, 2005 from $16.9 million as of December 31, 2004 primarily due to timing of corporate income tax payments.

ASSET QUALITY

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

     Non-performing assets increased $2.1 million, or 9.5%, to $23.8 million as of March 31, 2005 as compared to $21.7 million as of December 31, 2004 primarily due to one commercial loan past due 90 days or more but in the process of renewal as of March 31, 2005 and the transfer to OREO of a building previously used as a branch banking office.

     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 $793 thousand, or 32.8%, to $1.6 million for the three months ended March 31, 2005 as compared to $2.4 million for the same period in the prior year. The allowance for loan losses was $42.7 million, or 1.54% of total loans, as of March 31, 2005 as compared to $42.1 million, or 1.54% of total loans, at December 31, 2004.

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     The following table sets forth information regarding the Company’s allowance for loan losses as of and for the periods indicated.

CAPITAL RESOURCES

     A significant source of strength of a financial institution is its stockholders’ equity. Stockholders’ equity is influenced primarily by earnings, dividends and, to a lesser extent, sales and redemptions of common stock and changes in the unrealized holding gains or losses, net of taxes, on available-for-sale investment securities. Stockholders’ equity increased $2.6 million, or less than 1.0% to $311.0 million as of March 31, 2005 from $308.3 million as of December 31, 2004. Increases resulting from earnings retention were partially offset by unrealized holding losses on available-for-sale investment securities. At March 31, 2005, the Company and its bank subsidiary each exceeded the “well-capitalized” requirements issued by the Federal Reserve Board.

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 targets 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 short-term interest rates shift gradually up or down 2%.

     As of March 31, 2005, the Company’s income simulation model predicted net interest income would decrease $2.3 million, or 1.4%, assuming a gradual 2% increase in short-term market interest rates and gradual 1.0% increase in long-term interest rates. This scenario predicts the Company’s funding sources will reprice faster than its interest earning assets and at higher rates, thereby reducing interest rate spread and net interest margin. Conversely, assuming a gradual 2% decrease in short-term market interest rates and gradual 1.0% decrease in long-term interest rates, the Company’s income simulation model predicted net interest income would decrease $166 thousand, or less than 1.0%.

     The preceding interest rate sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results.

LIQUIDITY MANAGEMENT

     Liquidity measures the Company’s ability to meet current and future cash flow needs as they become due. The Company manages its liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of its shareholders. The Company’s liquidity position is supported by management of its liquid assets and liabilities. Liquid assets include cash, interest bearing

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deposits in banks, federal funds sold, available-for-sale investment securities and maturing or prepaying balances in the Company’s held-to-maturity investment and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and borrowings. The Company does not engage in derivatives or related hedging activities to support its liquidity position.

     Short-term and long-term liquidity requirements of the Company are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in the Company’s loan and investment portfolios, debt obligations and increases in customer deposits.

     For additional information regarding the Company’s operating, investing and financing cash flows, see “Consolidated Statements of Cash Flows” contained herein.

     As a holding company, FIBS is a corporation separate and apart from its bank subsidiary and, therefore, provides for its own liquidity. Substantially all of FIBS’ revenues are obtained from management fees and dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to FIBS. Management of FIBS believes that such restrictions will not have an impact on the ability of FIBS to meet its ongoing cash obligations.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

     As of March 31, 2005, 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, 2004.

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(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of March 31, 2005, 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 March 31, 2005 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 Securities and Exchange Commission’s rules and forms.

     There were no changes in the Company’s internal controls over financial reporting for the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, such controls.

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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, 2004.

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

(a) During February 2005, the Company issued 5,513 unregistered shares of its common stock to senior officers as part of incentive bonuses paid to them and 1,000 unregistered shares to a senior officer pursuant to the Company’s 2004 Restricted Stock Award Plan. The aggregate value of unregistered shares issued was $361,472. The 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 (to the extent applicable) 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 three months ended March 31, 2005.