To our shareholders,
We are pleased to report record quarterly net income of $16,134,000, or $1.95 per diluted share, compared to $11,959,000, or $1.48 per diluted share, in first quarter 2005. Return on average equity was 18.41% in first quarter 2006 compared to 15.53% in first quarter 2005, return on average assets was 1.44% versus 1.17%, and efficiency ratio improved to 59.00% versus 64.60%.
Quarterly Results
Net interest income of $45,614,000 in first quarter 2006 was $6,281,000 more than first quarter 2005. The net interest margin of 4.59% increased 20 basis points over the same period last year. Compared to fourth quarter 2006, net interest margin increased 10 basis points. In spite of an increasingly competitive environment, our net interest margin has improved due largely to growth of low cost deposits in conjunction with strong loan growth. First quarter 2006 average loans grew $318,893,000, or 12%, while quarterly average deposits grew $231,830,000, or 7%, due mainly to demand deposit growth, over the same period last year.
Noninterest income of $19,120,000 was $2,171,000, or 13%, higher than first quarter 2005. Components of the increase were gain on sale of assets, debit card revenue, technology services revenue and financial services revenue increases of $739,000, $361,000, $325,000 and $169,000, respectively. Gain on sale of assets increased as a result of a $692,000 loss on sale of securities recorded in first quarter 2005 with no such loss recorded in first quarter 2006.
Noninterest expense of $38,194,000 was $1,798,000, or 5%, higher than the comparable quarter in 2005. In first quarter 2005, we recorded a $463,000 mortgage servicing impairment reversal compared to a $170,000 impairment reversal for the first quarter of 2006. In addition, salary and benefits expense increased $1,768,000, or 9%, as compared to first quarter 2005 primarily due to inflationary wage increases and higher incentive bonus accruals. Also contributing to the increase in salary and benefits was the implementation of a new accounting standard, SFAS 123R, which required us to record $187,000 of expense in first quarter 2006 for stock option awards; this expense was not recognized in prior years under the prior accounting standards applicable to stock options. Partially offsetting those expense increases, first quarter 2005 contained other losses of $878,000 compared to $99,000 in first quarter 2006. During first quarter 2005, we announced our strategic decision to exit our Wal-Mart locations. In January 2006, three of our four remaining Wal-Mart branches were merged into other First Interstate branches and the fourth and final Wal-Mart branch was sold. The previously mentioned other losses recorded in 2005 were primarily related to occupancy cost and expenses connected with exiting our Wal-Mart locations.
Financial Highlights
Three Months ended March 31
| | | | | | | | | | | | | |
| (unaudited) | | 2006 | | | 2005 | | | % Change | |
| (in thousands except per share data) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
OPERATING RESULTS | | | | | | | | | | | | |
| Net income | | $ | 16,134 | | | $ | 11,959 | | | | 34.9 | % |
| Diluted earnings per share | | | 1.95 | | | | 1.48 | | | | 32.0 | % |
| Dividends per share | | | 0.50 | | | | 0.42 | | | | 19.0 | % |
| | | | | | | | | | | | | |
PERIOD END BALANCES | | | | | | | | | | | | |
| Assets | | | 4,632,647 | | | | 4,201,211 | | | | 10.3 | % |
| Loans | | | 3,116,927 | | | | 2,769,056 | | | | 12.6 | % |
| Investment Securities | | | 995,861 | | | | 834,941 | | | | 19.3 | % |
| Deposits | | | 3,512,581 | | | | 3,272,388 | | | | 7.3 | % |
| Common Stockholders’ Equity | | | 359,647 | | | | 310,951 | | | | 15.7 | % |
| Common Shares Outstanding | | | 8,108 | | | | 7,980 | | | | 1.6 | % |
| | | | | | | | | | | | | |
QUARTERLY AVERAGES | | | | | | | | | | | | |
| Assets | | | 4,548,963 | | | | 4,160,025 | | | | 9.3 | % |
| Loans | | | 3,059,385 | | | | 2,740,492 | | | | 11.6 | % |
| Investment Securities | | | 966,262 | | | | 859,152 | | | | 12.5 | % |
| Deposits | | | 3,482,337 | | | | 3,250,507 | | | | 7.1 | % |
| Common Stockholders’ Equity | | | 355,327 | | | | 312,227 | | | | 13.8 | % |
| Common Shares Outstanding | | | 8,108 | | | | 7,970 | | | | 1.7 | % |
On April 7, 2006, the Company paid a $.58 dividend per common share.
First quarter 2006 has shown stronger than expected growth in both loans and deposits. Net interest margin continued to show steady improvement, in spite of competitive pressure on deposits and loans. We believe the quality of our loan portfolio remains high. Maintaining our net interest margin and high loan quality remains a top priority for the Company during the remainder of 2006. Our continued success reflects the talents and values of our team of employees, officers, directors and advisory directors for the achievement of another record in quarterly earnings.
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| Lyle R. Knight | | Terrill R. Moore |
| President | | Executive Vice President |
| Chief Executive Officer | | Chief Financial Officer |
