To our shareholders,
We are pleased to report record quarterly net income of $16,746,000, or $2.02 per diluted share, compared to $15,274,000, or $1.88 per diluted share, in third quarter 2005. Return on average equity was 18.01% in third quarter 2006 compared to 18.30% in third quarter 2005, return on average assets was unchanged at 1.39%, and efficiency ratio improved to 59.70% versus 59.96%.
Quarterly Results
Net interest income of $47,802,000 in third quarter 2006 was $3,185,000 more than third quarter 2005. This increase resulted from growth in average loans notwithstanding a decrease in net interest margin. Third quarter 2006 average loans grew $342,965,000, or 12%, over the same period last year. The net interest margin decreased 12 basis points from third quarter 2005 to 4.48% for third quarter 2006. Net interest margin has declined due to growth of higher cost deposits and securities sold under repurchase agreements. Third quarter 2006 average deposits grew $167,380,000, or 5%, due mainly to demand deposit growth, over the same period last year. The provision for loan losses of $2,029,000 was $654,000, or 48%, higher than third quarter 2005.
Noninterest income of $21,378,000 was $3,815,000, or 22%, higher than third quarter 2005. Major components of the increase were gain on sale of assets, technology services revenue, debit card revenue and financial services revenue increases of $1,662,000, $717,000, $375,000 and $356,000, respectively. Gain on sale of assets increased as a result of a $1,811,000 loss on sale of securities recorded in third quarter 2005 with no such loss recorded in third quarter 2006.
Noninterest expense of $41,300,000 was $4,057,000, or 11%, higher than the comparable quarter in 2005. Salary and benefits expense increased $1,689,000, or 8%, as compared to third quarter 2005 primarily due to inflationary wage increases and higher incentive bonus and profit sharing accruals. Also contributing to the increase in salary and benefits was the implementation of a new accounting standard which required us to record $163,000 of expense in third quarter 2006 for stock option awards; this expense was not recognized in prior years under the prior accounting standards applicable to stock options. In addition, a $654,000 mortgage servicing impairment was recorded in third quarter 2006 compared to a $985,000 impairment reversal for the third quarter of 2005.
On October 6, 2006, we paid a $.61 dividend per common share. The Board of Directors approved a resolution on July 27, 2006 to increase future quarterly dividends to $.61 per common share until further notice.
Year to Date
On a year to date basis, net income of $49,017,000, or $5.92 per diluted share, was $8,904,000, or 22%, higher than net income of $40,113,000, or $4.94 per diluted share in the first three quarters of 2005. Return on average equity was 18.05% in the first three quarters of 2006 compared to 16.82% for the same period last year, return on average assets was 1.40% versus 1.26%, and efficiency ratio was 59.12% versus 62.79%.
Financial Highlights
Three Months ended September 30
| | | | | | | | | | | | | |
| (unaudited) | | 2006 | | | 2005 | | | %Change | |
| (in thousands except per share data) |
| | | | | | | | | | | | | |
| OPERATING RESULTS |
| Net income | | $ | 16,746 | | | $ | 15,274 | | | | 9.6 | % |
| Diluted earnings per share | | | 2.02 | | | | 1.88 | | | | 7. | % |
| Dividends per share | | | 0.58 | | | | 0.48 | | | | 20.8 | % |
| | | | | | | | | | | | | |
| PERIOD END BALANCES |
| Assets | | | 4,823,959 | | | | 4,457,739 | | | | 8.2 | % |
| Loans | | | 3,288,470 | | | | 2,982,325 | | | | 10.3 | % |
| Investment securities | | | 1,051,000 | | | | 887,912 | | | | 18.4 | % |
| Deposits | | | 3,616,063 | | | | 3,477,115 | | | | 4.0 | % |
| Common stockholders’ equity | | | 388,482 | | | | 342,167 | | | | 13.5 | % |
| Common shares outstanding | | | 8,160 | | | | 8,097 | | | | 0.8 | % |
| | | | | | | | | | | | | |
| QUARTERLY AVERAGES |
| Assets | | | 4,767,599 | | | | 4,369,721 | | | | 9.1 | % |
| Loans | | | 3,272,203 | | | | 2,929,238 | | | | 11.7 | % |
| Investment securities | | | 1,015,254 | | | | 894,369 | | | | 13.5 | % |
| Deposits | | | 3,558,325 | | | | 3,390,945 | | | | 4.9 | % |
| Common stockholders’ equity | | | 368,980 | | | | 331,174 | | | | 11.4 | % |
| Common shares outstanding | | | 8,093 | | | | 7,981 | | | | 1.4 | % |
When comparing the year to date performance of 2006 to 2005, there are some items that affect comparability. One such item is loss on sale of securities. In conjunction with a restructuring of our investment portfolio in 2005, losses of $2,941,000 were recognized in 2005 compared to gains of $23,000 in 2006. In addition, $266,000 of mortgage servicing impairments were recorded in 2006 compared to $1,297,000 of impairment reversals in 2005. Also, in the first three quarters of 2005, we recorded $952,000 of expenses related to the closure of Wal-Mart branches compared to $23,000 in the first three quarters of 2006.
The Company continued to improve operational efficiency and maintained the efficiency ratio under 60% on a year to date basis. This progress would not be possible without the dedication of our talented team of employees, officers, and directors. Their commitment to providing our customers with a high level of personalized service continues to show in the financial results of the Company. Thanks again for contributing to the continued success of First Interstate BancSystem.
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| Lyle R. Knight | | Terrill R. Moore |
| President | | Executive Vice President |
| Chief Executive Officer | | Chief Financial Officer |
