UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
__X__ QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
_____ 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: 0-28080
UNITED FINANCIAL CORP.
----------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0507591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2779; 120 1st Ave. North, Great Falls, Montana 59403
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(406) 727-6106
--------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 month (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 [X] No [ ]
The number of shares outstanding of each of the Issuer's
Classes of Common Stock, as of the latest date is:
Class: Common Stock, No par value; Outstanding at May 8, 2000
-- 1,652,312 shares
<PAGE>
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1 FINANCIAL STATEMENTS.....................................................1
Consolidated Condensed Statements of Financial Condition at
March 31, 2000 and December 31, 1999 (unaudited)........................1
Consolidated Condensed Statements of Income - Three Months Ended
March 31, 2000 and March 31, 1999 (unaudited)............................2
Consolidated Condensed Statements of Cash Flows - Three Months Ended
March 31, 2000 and March 31, 1999 (unaudited)............................3
Notes to Consolidated Condensed Financial Statements......................4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................6
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............13
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.......................................................14
ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS................................14
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.........................................14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS...................14
ITEM 5 OTHER INFORMATION.......................................................14
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................................14
SIGNATURES........................................................................15
</TABLE>
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
MARCH 31, December 31,
------------------- --------------------
2000 1999
------------------- --------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,081 $ 11,457
Investment securities available-for-sale 69,659 53,044
Loans receivable, net 229,670 186,348
Loans held for sale 3,413 1,191
Premises and equipment, net 5,473 4,873
Real estate and other personal property owned 268 14
Accrued interest receivable 2,594 2,259
Federal Home Loan Bank of Seattle stock, at cost 3,095 3,046
Investment in Valley Bancorp, Inc. -- 4,549
Goodwill, net of accumulated amortization of $383 and
$336 at March 31, 2000, and December 31, 1999,
respectively 3,451 1,289
Identifiable intangibles, net of accumulated
amortization of $117 and $100 at March 31, 2000, and
December 31, 1999, respectively 520 537
Deferred income taxes, net 1,270 740
Other assets 976 879
------------------- --------------------
$330,470 $270,226
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts $ 70,164 $ 42,083
Savings deposits 48,114 48,296
Time deposits 113,493 89,503
------------------- --------------------
231,771 179,882
Federal Home Loan Bank advances 46,375 46,425
Securities sold under agreements to repurchase 13,863 11,546
Other borrowings 1,000 -
Accrued interest payable 2,085 1,528
Advances from borrowers for taxes and insurance 851 408
Income taxes payable 843 476
Other liabilities 877 602
------------------- --------------------
297,665 240,867
Minority interest 3,467 --
Stockholders' equity:
Preferred stock, no par value; 2,000,000 shares
authorized -- --
Common stock, no par value; 8,000,000 shares
authorized; 1,698,312 shares issued 28,002 28,002
Retained earnings, substantially restricted 3,380 3,251
Treasury stock, at cost; 46,000 shares (932) (932)
Accumulated other comprehensive loss (1,112) (962)
------------------- --------------------
29,338 29,359
------------------- --------------------
$330,470 $270,226
=================== ====================
Equity/Assets 8.88% 10.86%
Book Value/Share $17.76 $17.77
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 1
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
INTEREST INCOME:
Loans receivable $4,697 $3,090
Mortgage-backed securities 957 551
Investment securities 128 193
Federal Home Loan Bank stock dividends 47 23
Other interest earning assets 39 86
-------------- ---------------
Total interest income 5,868 3,943
INTEREST EXPENSE:
Deposits 2,401 1,661
Short-term borrowings 889 440
-------------- ---------------
Total interest expense 3,290 2,101
-------------- ---------------
NET INTEREST INCOME 2,578 1,842
Provision for loan losses 164 40
-------------- ---------------
Net interest income after provision for
losses on loans 2,414 1,802
NON-INTEREST INCOME:
Fees and discounts 691 717
Equity in income of Valley Bancorp, Inc. -- 32
Gain on sale of investment securities -- 15
Other income 114 53
-------------- ---------------
Total non-interest income 805 817
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,227 902
Net occupancy and equipment expense 256 177
Data processing expense 165 114
Other expenses 559 488
-------------- ---------------
Total non-interest expense 2,207 1,681
-------------- ---------------
Income before income taxes and minority interest 1,012 938
Provision for income tax expense 398 365
-------------- ---------------
Income before minority interest 614 573
Minority interest (55) -
-------------- ---------------
Net income $ 559 $ 573
============== ===============
Net income per share $ .34 $ .34
============== ===============
Weighed average shares outstanding 1,652 1,698
============== ===============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 2
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
MARCH 31, 2000 March 31, 1999
--------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 559 $ 573
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 164 40
Amortization of goodwill and identifiable intangibles 66 46
Depreciation 102 59
Equity in income of Valley Bancorp Inc. - (31)
Amortization of discounts and premiums on investments
securities 135 97
Mortgage loans originated and held for sale (23,514) (23,888)
Proceeds from sales of mortgage loans held for sale 21,292 27,226
Federal Home Loan Bank stock dividends (49) (24)
Net change in accrued interest receivable 50 114
Net change in other assets (32) (124)
Net change in income taxes 343 349
Net change in accrued interest payable 498 138
Net change in other liabilities 144 (597)
Net change in minority interest 55 -
--------------------- ---------------------
Net cash provided by (used in) operating activities (187) 3,978
--------------------- ---------------------
INVESTING ACTIVITIES
Net increase in time deposits in banks - (113)
Purchases of securities available-for-sale (2,000) (17,850)
Proceeds from maturities, pay downs and sales of securities
available-for-sale 2,110 15,338
Acquisition of real estate owned, net - (345)
Net change in loans receivable (3,666) (7,443)
Purchases of premises and equipment (502) (519)
Purchase of Valley stock (1,673) -
Acquired Valley's cash and cash equivalents 1,206 -
--------------------- ---------------------
Net cash used in investing activities (4,525) (10,932)
--------------------- ---------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,806 (5,984)
Net increase (decrease) in Federal Home Loan Bank advances (50) 2,000
Net increase in securities sold under repurchase agreements 2,317 555
Net change in federal funds purchased (1,750) -
Net increase in advances from borrowers for taxes and
insurance 443 404
Advances on long-term debt 1,000 -
Dividends paid to stockholders (430) (441)
--------------------- ---------------------
Net cash provided by (used in) financing activities 3,336 (3,466)
--------------------- ---------------------
Decrease in cash and cash equivalents (1,376) (10,420)
Cash and cash equivalents at beginning of year 11,457 19,255
--------------------- ---------------------
Cash and cash equivalents at end of period $10,081 $ 8,835
===================== =====================
SUPPLEMENTAL CASH FLOW DISCLOSURE
- ----------------------------------------------------------------------------------------
Cash payments for interest $ 2,788 $ 1,963
Cash payments for income taxes $ 55 $ 25
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 3
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
United Financial Corp. ("United") is a bank holding company
headquartered in Great Falls, Montana, with operations in 11 other Montana
communities. Substantially all of United's banking business is conducted through
its wholly-owned subsidiaries Heritage Bank F.S.B. ("Heritage Bank") and
Heritage State Bank ("State Bank"), a banking subsidiary formed in 1998,
collectively referred to herein as the "Banks". United had assets of
approximately $330.5 million, deposits of approximately $231.8 million and
stockholders' equity of approximately $29.3 million at March 31, 2000. United is
now the majority shareholder of Valley Bancorp, Inc. (See Note 2).
Heritage Bank is a federally chartered stock savings bank with full
service banking offices in Chester, Glendive, Great Falls, Havre, Missoula and
Shelby, Montana, and loan production offices in Bozeman, Hamilton, Kalispell,
and Libby, Montana. The full service banking office in Missoula was opened in
February 2000. As of March 31, 2000, a full service banking location is under
construction in Bozeman, with a planned June 2000 opening date. State Bank is a
state chartered bank with full service banking operations in Fort Benton and
Geraldine, Montana. The Banks are engaged in the community banking business of
attracting deposits from the general public through their offices and using
those deposits, together with other available funds, to originate commercial
(including lease financing), commercial real estate, residential, agricultural
and consumer loans primarily in their market areas in Montana. A majority of
United's banking business is conducted in the Great Falls area. The Banks also
invest in mortgage-backed securities, U.S. Treasury obligations, other U.S.
Government agency obligations and other interest-earning assets.
The Banks' financial condition and results of operations, and therefore
the financial condition and results of operations of United, are dependent
primarily on net interest income and fee income. The Banks' financial condition
and results of operations are also significantly influenced by local and
national economic conditions, changes in market interest rates, governmental
policies, tax laws and the actions of various regulatory agencies.
United's principal offices are located at 120 First Avenue North, Great
Falls, Montana, and its telephone number is (406) 727-6106. Heritage Bank has a
wholly owned subsidiary, Community Service Corporation ("CSC"), which owned and
managed real estate held for investment during 1999, but which is inactive at
March 31, 2000. Heritage Bank holds an 11% ownership interest in Bankers'
Resource Center, a computer data center. United, Heritage Bank, State Bank and
CSC are collectively referred to herein as "United."
2. VALLEY BANCORP, INC.
During 1999, United increased its ownership in Valley Bancorp Inc.
("Valley") to 39.93% of Valley's outstanding shares at December 31, 1999. On
January 10, 2000, United increased its ownership to 50.6% and combined with
additional shares acquired thereafter United currently owns 54.03% of the
outstanding shares of Valley as of March 31, 2000. Valley is a bank holding
company located in Phoenix, Arizona and is the parent company of Valley Bank of
Arizona, a state chartered commercial bank. Valley had assets of approximately
$58.7 million, deposits of approximately $50.9 million and stockholders' equity
of approximately $7.5 million at March 31, 2000. The aggregate purchase price of
the shares of Valley purchased to date is $6.1 million, including $1.7 million
for shares acquired in 1999. As a result of acquiring over 50% of the
outstanding shares of Valley, United has consolidated Valley with its financial
statements effective January 1, 2000.
Page 4
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3. BASIS OF PRESENTATION
United's consolidated financial statements, included herein, have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, the information
contained herein reflects all postings and disclosures (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial condition, results of operations, and cash flows for the
periods disclosed. Operating results for the three months ended March 31, 2000,
are not necessarily indicative of the results anticipated for the year ending
December 31, 2000. For additional information, refer to the consolidated audited
financial statements and footnotes thereto included in United's Annual Report to
Shareholders and Annual Report on Form 10-K for the year ended December 31,
1999.
4. STOCK INCENTIVE PLAN
On January 25, 2000, United's Board of Directors adopted the United
Financial Corp. 2000 Long-Term Incentive and Stock Option Plan (the "Plan"),
subject to approval by the Company's shareholders.
The Plan provides for a maximum of 120,000 shares of United's Common
Stock for issuance under options or other awards, subject to adjustment in
certain circumstances. Any employee, officer, director, consultant or
independent contractor of the Company and its subsidiaries is eligible to
receive awards under the Plan. Awards under the Plan will be available for grant
until January 25, 2010. However, an option of the award granted may extend
beyond such time.
United's existing stock appreciation rights plan was rescinded by the
Board of Directors upon its approval of this stock option plan.
5. COMPREHENSIVE INCOME
United's only significant element of comprehensive income is unrealized
gains and losses on available-for-sale securities.
<TABLE>
<CAPTION>
(In thousands)
(Unaudited)
MARCH 31, 2000 March 31, 1999
---------------------------------------- ----------------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
----------- ------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized and realized holding losses
arising during period $(243) $(93) $(150) $(87) $(32) $(55)
Less: reclassification adjustment for gains
included in net income -- -- -- 15 6 9
----------- ------------- ------------ ------------ -------------- ------------
Net unrealized losses on securities $(243) $(93) $(150) $(72) $(26) $(46)
=========== ============= ============ ============ ============== ============
</TABLE>
Page 5
<PAGE>
6. CASH EQUIVALENTS
For purposes of the Consolidated Condensed Statements of Cash Flows,
United considers all cash, daily interest and non-interest bearing demand
deposits with banks with original maturities of three months or less to be cash
equivalents.
7. STOCKHOLDERS' EQUITY
On February 3, 1998, United issued a warrant (the Warrant) to purchase
10,000 shares of its common stock to D.A. Davidson & Co., exercisable at the
price of $26.25 per share, in exchange for investment banking services provided
to United.
8. COMPUTATION OF NET INCOME PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares used to compute basic EPS plus the incremental amount of potential
common stock determined by the treasury stock method. The only potential common
shares are the warrants issued to D.A. Davidson. Basic and diluted EPS are the
same, as the potential common shares do not have a material impact.
9. DIVIDENDS DECLARED
On April 25, 2000, the Board of Directors of United declared a
first-quarter cash dividend of $.26 per share, payable May 22, 2000, to
shareholders of record on May 8, 2000.
10. RELATED PARTIES
Central Financial Services, Inc. ("CFS") provides various management
services to United, including accounting and tax services, investment
consulting, personnel consulting, insurance advisory services and regulatory
consulting. CFS is owned by United's Chairman of the Board of Directors and
largest shareholder. CFS fees were $89,590, and $55,000 for the three months
ended March 31, 2000 and 1999, respectively.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
1. FORWARD LOOKING STATEMENTS
When used in this form 10-Q or future filings made by the Company with
the Securities and Exchange Commission, in the Company's press releases or other
public shareholder communications, or in oral statements made with the approval
of an authorized executive officer, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors-including regional and national economic conditions, changes in
levels of market interest rates, credit risks of lending activities and
competitive and regulatory factors-could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims, any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Page 6
<PAGE>
2. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE THREE MONTHS
ENDED MARCH 31, 2000 TO THE YEAR ENDED DECEMBER 31, 1999.
<TABLE>
<CAPTION>
(In thousands) SELECTED FINANCIAL CONDITION RECAP
(Unaudited) Valley Bancorp
MARCH 31, Dec. 31, Inc. Acquired Net
2000 1999 Change January 1,2000 Change
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 10,081 $ 11,457 $ (1,376) $1,206 $(2,582)
Investment securities,
available-for-sale, net 69,659 53,044 16,615 17,134 (519)
Loans receivable, net 229,670 186,348 43,322 39,863 3,459
Loans held for sale 3,413 1,191 2,222 -- 2,222
Premises and equipment, net 5,473 4,873 600 200 400
Real estate and other
personal property owned 268 14 254 211 43
Federal Home Loan Bank stock 3,095 3,046 49 -- 49
Investment in Valley -- 4,549 (4,549) -- (4,549)
Goodwill, net 3,451 1,289 2,162 -- 2,162
Identifiable intangibles, net 520 537 (17) -- (17)
All other assets 4,840 3,878 962 875 87
Total assets 330,470 270,226 60,244 59,489 755
Deposits 231,771 179,882 51,889 50,083 1,806
Federal Home Loan Bank advances 46,375 46,425 (50) -- (50)
Securities sold under
Agreements to repurchase 13,863 11,546 2,317 -- 2,317
Other borrowings 1,000 -- 1,000 -- 1,000
All other liabilities 4,656 3,014 1,642 1,964 (322)
Total liabilities 297,665 240,867 56,798 52,047 4,751
</TABLE>
GENERAL - The various increases in financial statement amounts
discussed are primarily the result of consolidating Valley as of
January 1, 2000. Financial statement changes strictly from United
operations, without the impact of the consolidation of Valley, will be
identified and discussed separately. Such changes include the changes
of Valley since January 1, 2000.
Total assets increased $60.2 million to $330.5 million at
March 31, 2000 from $270.2 million at December 31, 1999. The increase
in assets was primarily the result of the acquisition of $59.5 million
of assets from the consolidation of Valley.
INVESTMENT SECURITIES - Investment securities
available-for-sale increased $16.6 million to $69.7 million at March
31, 2000 from $53.0 million at December 31, 1999. The Valley
consolidation accounted for an increase of $17.1 million. The net
decrease of $.5 million was the result of $2.0 million of purchases,
offset by $2.1 million of maturities, sales, and principal repayments,
$.1 million of amortization and a $.3 million increase in unrealized
loss on securities.
Page 7
<PAGE>
A comparison of the amortized cost and estimated fair value of
the consolidated available for sale investment portfolio at the dates
indicated is as follows:
<TABLE>
<CAPTION>
(In thousands)
(Unaudited)
MARCH 31, 2000
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND FEDERAL
AGENCIES $ 24,419 $ -- $ (798) $ 23,621
MORTGAGE-BACKED SECURITIES 43,064 68 (1,313) 41,819
MUNICIPAL BONDS 2,292 -- (127) 2,165
OTHER INVESTMENTS 2,254 -- (200) 2,054
---------------- ---------------- ---------------- ----------------
$ 72,029 $ 68 $ (2,438) $ 69,659
================ ================ ================ ================
December 31, 1999
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
U.S. Government and Federal
Agencies $ 10,210 $ -- $ (416) $ 9,794
Mortgage-backed securities 40,261 90 (896) 39,455
Municipal bonds 2,095 2 (162) 1,935
Other investments 2,041 -- (181) 1,860
---------------- ---------------- ---------------- ----------------
$ 54,607 $ 92 $ (1,655) $ 53,044
================ ================ ================ ================
</TABLE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans
receivable increased $43.3 million to $229.7 million at March 31, 2000
from $186.4 million at December 31, 1999. The Valley consolidation
accounted for $39.9 million of this increase. The remaining loans
receivable increase of $3.4 million is a direct result of strong loan
demand generated through officer call programs, increased market area
and continued purchase of participation loans and lease financing
loans. The diverse loan portfolio includes: real estate residential
mortgages, commercial and agricultural mortgages, agricultural and
commercial non-mortgage, consumer loans secured by real estate, and
various consumer installment loans. Heritage Bank also purchases and
participates in commercial and lease financing loans. Heritage Bank had
$44.4 million of participation and purchased loans as of March 31,
2000.
Heritage Bank sells and retains servicing for a portion of its
residential real estate loans to agencies of Montana such as the
Montana Board of Investments and the Montana Board of Housing. United
recognizes mortgage servicing rights as an asset regardless of whether
the servicing rights are acquired or retained on loans originated and
subsequently sold. The mortgage servicing rights are assessed for
impairment based on the fair value of the mortgage servicing rights. As
of March 31, 2000 and December 31, 1999, the carrying value of
originated servicing rights was approximately $122,000 and $102,000,
respectively.
During the three months ended March 31, 2000, loans held for
sale by United increased $2.2 million to $3.4 million at March 31, 2000
from approximately $1.2 million at December 31, 1999. Approximately
$23.5 million of loans were originated for sale and $21.3 million of
loans were sold to the secondary market during the three month period
ending March 31, 2000.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve increased
$.5 million to $2.1 million at March 31, 2000 compared to $1.6 million
at December 31, 1999. The increase includes Valley's loan loss reserve
at consolidation of $.4 million. The remaining increase is a $.1
million loan loss provision for the three months ended March 31, 2000.
During the three months ended March 31, 2000 loans in the amount of
$6,055 were determined by United's management to be uncollectable and
subsequently charged-off.
Page 8
<PAGE>
However, management aggressively pursues recoveries which totaled
$6,170 for this same three month period. The loan loss reserve at March
31, 2000 is an amount which management believes is adequate given the
low level of non-performing assets and management's assessment of loan
risk. The United allowance for loan losses to total loans at March 31,
2000 was .88%.
NON-PERFORMING ASSETS - When a borrower fails to make a
scheduled payment on a loan and does not cure the delinquency within 15
days, United's policy is to contact the borrower between the 15th and
30th day of delinquency to establish a repayment schedule. If a loan is
not current, or a realistic repayment schedule is not being followed by
the 90th day of delinquency, United will generally proceed with legal
action to foreclose the property after the loan has become
contractually delinquent 90 days. Loans contractually past due 90 days
are classified as non-performing. However, not all loans past due 90
days automatically result in the non-accrual of interest income. If a
90 day past due loan has adequate collateral, or is FHA insured or VA
guaranteed, leading to the conclusion that loss of principal and
interest would likely not be realized, then interest income will
continue to be accrued.
United follows regulatory guidelines with respect to placing
loans on non-accrual status. When a loan is placed on non-accrual
status, all previously accrued and uncollected interest is reversed. At
March 31, 2000 United had non-accrual loans totaling $786,000 and loans
totaling $109,000 past due 90 days and still accruing.
United is required to review, classify and report to its Board
of Directors its assets on a regular basis and classify them as
"substandard" (distinct possibility that some loss will be sustained),
"doubtful" (high likelihood of loss), or "loss" (uncollectible).
Adequate valuation allowances are required to be established for assets
classified as substandard or doubtful in accordance with generally
accepted accounting principles. If an asset is classified as a loss,
the institution must either establish a specific valuation allowance
equal to the amount classified as loss or charge off such amount. At
March 31, 2000 and December 31, 1999, United had no assets classified
as loss or as doubtful. At March 31, 2000 and December 31, 1999, United
had $956,000 and $506,000 of reported substandard assets, respectively.
As a percent of total assets, substandard assets were approximately
.29%, and .19% at March 31, 2000 and December 31, 1999, respectively.
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED - The $254,000
increase includes $211,000 in other real estate held by Valley as of
January 1, 2000 and $43,000 of repossessed personal property acquired
by United during the first three months of 2000.
FEDERAL HOME LOAN BANK STOCK - Federal Home Loan Bank (FHLB)
stock increased approximately $49,000 to $3.1 million at March 31, 2000
from $3.0 million at December 31, 1999. This increase was the result of
$49,000 of reinvested stock dividends. FHLB stock purchases are made as
required to support the increased scope of operations.
PREMISES AND EQUIPMENT - This category increased $.6 million
to $5.5 million at March 31, 2000 from $4.9 million at December 31,
1999. Valley accounted for $.2 million of the increase. The balance of
the increase of $.4 million was primarily due to the construction of
the two new branches in Bozeman and Missoula. Heritage Bank invested
approximately $67,000 in fixed assets during the first three months of
2000. This increase was primarily due to (1) the purchase of a computer
upgrade for all branches, and (2) furniture and fixtures for the new
Bozeman and Missoula offices. The purchases of premises and equipment
were offset by approximately $77,000 of depreciation.
GOODWILL - Goodwill increased $2.2 million from the
consolidation of Valley to $3.5 million at March 31, 2000 from $1.3 at
December 31, 1999. Goodwill decreased $49,000 due to amortization
during the three months ending March 31, 2000. The goodwill is
currently being amortized over 15 and 25 years.
Page 9
<PAGE>
DEPOSITS - Deposits increased $51.9 million to $231.8 million
at March 31, 2000 from $179.9 million at December 31, 1999, which
includes a $50.1 million increase from consolidating Valley. The net
increase in deposits was $1.8 million.
BORROWED FUNDS - FHLB advances decreased $50,000 from December
31, 1999 to March 31, 2000. Securities sold under agreements to
repurchase increased $2.3 million to $13.9 million at March 31, 2000
from $11.6 million at December 31, 1999. The additional borrowings in
the first three months of 2000 were used to fund increases in United's
loan portfolio.
STOCKHOLDERS' EQUITY - Stockholders' equity decreased $21,000
to $29.3 million at March 31, 2000 from $29.4 million at December 31,
1999. This decrease is due to $559,000 of net income for the three
months ended March 31, 2000 less cash dividends declared of $441,000
and a $150,000 increase in unrealized losses net of tax effects,
associated with assets classified as available-for-sale being adjusted
to market value.
3. MATERIAL CHANGES IN RESULTS OF OPERATIONS-COMPARISON OF THE THREE
MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999.
<TABLE>
<CAPTION>
(In thousands) INCOME RECAP
(Unaudited)
------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------------------
CONSOLIDATED
WITH United
VALLEY Only United Only
---------------------------------------- ------------------------------ ------------
2000 1999 Change 2000 1999 Change
------------- ------------ ----------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $5,868 $3,943 $1,925 $4,721 $3,943 $ 778
Interest expense 3,290 2,101 1,189 2,734 2,101 633
------------- ------------ ----------- ----------------- -------------- ------------
Net interest income 2,578 1,842 736 1,987 1,842 145
Provision for losses on loans 164 40 124 120 40 80
------------- ------------ ----------- ----------------- -------------- ------------
Net interest income after
Provision for losses on loans 2,414 1,802 612 1,867 1,802 65
Non-interest income 805 817 (12) 758 817 (59)
Non-interest expense 2,207 1,681 526 1,740 1,681 59
------------- ------------ ----------- ----------------- -------------- ------------
Income before income taxes
And minority interest 1,012 938 74 885 938 (53)
Provision for income tax expense 398 365 33 326 365 (39)
------------- ------------ ----------- ----------------- -------------- ------------
Net income before minority
Interest $ 614 $ 573 $ 41 $ 559 $ 573 $ (14)
============= ============ =========== ================= ============== ============
</TABLE>
GENERAL - The table above includes United's 1999 operating
results compared to the 2000 operating results consolidated with Valley
as well as a comparison of United only operating results for both three
month periods ended March 31, 1999 and 2000
NET INTEREST INCOME - Like most financial institutions, the
most significant component of both United's and Valley's earnings is
net interest income, which is the difference between the interest
earned on interest-earning assets (loans, investment securities,
mortgage-backed securities and other interest-earning assets), and the
interest paid on deposits and borrowings. This amount, when divided by
average interest-earning assets, is referred to as the net interest
margin, expressed as a percentage. Net interest income and net interest
margins are affected by changes in interest rates, the volume and the
mix of interest-earning assets and interest-bearing liabilities, and
the level of non-performing assets. The difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities
expressed as a percentage is referred to as the net interest-rate
spread. Net interest income increased $736,000 from $1.8 million for
the three months ended March 31, 1999 to $2.6 million for the three
months ended March 31, 2000. Net interest margin decreased .18% to
3.35% for the three month period ended March 31, 2000 from 3.53% for
the same period last year. United has used the funds from additional
deposits and borrowings to fund growth in its loan portfolio.
Page 10
<PAGE>
Although net interest income increased, higher funding rates at FHLB
and increased competition for loan rates resulted in a decrease in net
interest margin.
INTEREST INCOME - The principal reason for the increase in
United's net interest income from the three month period ended March
31, 1999 compared to the three month period ended March 31, 2000 was an
increase in interest-earning assets from the Valley consolidation.
Interest income increased $2.0 million from $3.9 million for the three
month period ended March 31, 1999 to $5.9 million for the three month
period ended March 31, 2000.
For the three month period ended March 31, 2000, compared to
the three month period ended March 31, 1999, interest on loans
receivable increased $1.6 million, interest on mortgage-backed
securities and investments increased $.3 million and interest on other
interest-earning assets decreased $.1 million.
INTEREST EXPENSE - The principal reason for the increase in
United's net interest expense from the three month period ended March
31, 1999 to the three month period ended March 31, 2000 was an increase
in interest-bearing liabilities due to the consolidation of Valley.
Interest expense increased $1.2 million from $2.1 million for the three
month period ended March 31, 1999 to $3.3 million for the three month
period ended March 31, 2000.
For the three month period ended March 31, 2000, compared to
the three month period ended March 31, 1999, interest on deposits
increased $.7 million, and interest on short-term borrowings increased
$.5 million.
PROVISION FOR LOAN LOSSES - United provided $164,000 for loan
losses in the first three months of 2000, as compared to $40,000 in the
first three months of 1999. The increase in the loan loss provision is
a result of strong loan demand.
The provision for loan losses is determined by management as
the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which
is considered adequate to absorb losses inherent in the loan portfolio
in accordance with GAAP. Future additions to United's allowance for
loan losses and any change in the related ratio of the allowance for
loan losses to non-performing assets are dependent upon the performance
and composition of United's loan portfolio, the economy, inflation,
changes in real estate values and interest rates and the view of the
regulatory authorities toward adequate reserve levels.
NON-INTEREST INCOME - In addition to net interest income,
United generates significant non-interest income from a range of retail
banking services, including mortgage banking activities and service
charges for deposit services. Non-interest income remained at $.8
million for the three month periods ending March 31, 2000 and 1999.
United did experience a decline in the home lending market, and
particularly the refinancing market during the first three months of
2000, as interest rates were higher than the same period last year.
This decrease was offset by an increase in customer service charges and
mortgage servicing rights income in the first three months of 2000.
NON-INTEREST EXPENSE - United's non-interest expense increased
$.5 million during the three month period ending March 31, 2000 as
compared to the same period in 1999. This increase was principally due
to the consolidation of Valley.
INCOME TAXES - Income tax expense increased $33,000 to
$398,000 for the three month period ending March 31, 2000 from $365,000
for the same period of 1999. The principal reason for the increase was
increased net income, after adjustment for non-deductible goodwill
amortization and tax-free interest on municipal bonds and loans, from
the consolidation of Valley.
Page 11
<PAGE>
BUSINESS SEGMENT RESULTS - United manages its operations and
prepares management reports with a primary focus on geographical areas.
Operating segments information, including earnings performance on an
operating cash basis, is presented in the following schedule. United
allocates centrally provided services to the business segments based
upon estimated usage of those services. The operating segment
identified as other includes the Parent company and eliminations of
transactions between segments.
The following table sets forth certain operating segment
information for the three month periods ended March 31, 2000 and
1999(in thousands). Operating information is not presented for Valley
as of March 31, 1999 as its statements were not consolidated with
United at that time.
<TABLE>
<CAPTION>
Heritage Heritage
2000: Bank State Bank Valley Other Consolidated
----------------- ---------------- ----------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 1,819 155 $ 591 $ 17 $ 2,582
Non-interest income 670 24 111 -- 805
----------------- ---------------- ----------------- ----------------------------------
Total revenue 2,489 179 702 17 3,387
Provision for loan losses 120 -- 44 -- 164
Non-interest expense 1,480 115 467 78 2,140
----------------- ---------------- ----------------- ----------------------------------
Pretax cash earnings(loss) 889 64 191 (61) 1,083
----------------- ---------------- ----------------- ----------------------------------
Income tax expense(benefit) 325 22 72 (21) 398
Minority interest -- -- -- (55) (55)
----------------- ---------------- ----------------- ----------------------------------
Cash earnings(1) 564 42 119 (95) 630
Amortization of goodwill and
CDI 41 8 -- 22 71
----------------- ---------------- ----------------- ----------------------------------
Net income $ 523 $ 34 $ 119 $ (117) $ 559
================= ================ ================= ==================================
PER SHARE DATA
Cash earnings per share $ 0.38
Net income per share $ 0.34
Weighted average shares 1,652
Outstanding
BALANCE SHEET DATA
Assets $ 252,799 $ 18,789 $ 58,667 $ 215 $ 330,470
Loans receivable, net 178,040 14,780 36,816 34 229,670
Deposits 168,526 12,487 50,851 (93) 231,771
Stockholders' equity 19,992 2,015 7,541 210 29,338
(1) Before amortization of
Goodwill and core deposit
Intangible
</TABLE>
Page 12
<PAGE>
<TABLE>
<CAPTION>
Heritage Heritage
1999: Bank State Bank Valley Other Consolidated
----------------- ---------------- ----------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 1,695 $ 79 $ -- $ 72 $ 1,846
Non-interest income 777 8 -- 32 817
----------------- ---------------- ----------------- ----------------------------------
Total revenue 2,472 87 -- 104 2,663
Provision for loan losses 40 -- -- -- 40
Non-interest expense 1,457 120 -- 59 1,636
----------------- ---------------- ----------------- ----------------------------------
Pretax cash earnings(loss) 975 (33) -- 45 987
----------------- ---------------- ----------------- ----------------------------------
Income tax expense(benefit) 364 (16) -- 17 365
Cash earnings(1) 611 (17) -- 28 622
Amortization of goodwill and
CDI 41 8 -- -- 49
----------------- ---------------- ----------------- ----------------------------------
Net income $ 570 $ (25) $ -- $ 28 $ 573
================= ================ ================= ==================================
PER SHARE DATA
Cash earnings per share $ 0.37
Net income per share $ 0.34
Weighted average shares 1,698
Outstanding
BALANCE SHEET DATA
Assets $ 210,955 $ 14,685 $ -- $ 3,793 $ 229,433
Loans receivable, net 139,879 10,200 -- 683 150,762
Deposits 153,210 9,479 -- (1,053) 161,636
Stockholders' equity 20,436 1,830 -- 8,348 30,614
(1) Before amortization of
goodwill and core deposit
intangible
</TABLE>
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes there has been no material change in interest rate
risk since December 31, 1999. For additional information, see Management's
Discussion and Analysis of Financial Condition and Results of Operations
included herein in Item 2 and refer to the Interest Rate Risk Management
discussion included in United's Annual Report on Form 10-K for the year ended
December 31, 1999.
Page 13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Company is involved from time to time in litigation normal for its
type of business.
ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5 OTHER INFORMATION.
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
A. The following exhibits are included herein:
Exhibit
Number Description of Exhibit
- ------ --------------------------------------------------------------
27.1 Financial Data Schedule
B. Reports on Form 8-K
The Company did file a current Report on Form 8-K in the quarter ended
March 31, 2000 to report United's acquisition of additional stock in Valley,
bringing its ownership to 50.6% of Valley's outstanding shares.
Page 14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
United Financial Corp.
Date May 15, 2000 /s/ John M. Morrison
---------------------- --------------------------------
John M. Morrison
Chairman of the Board
(Duly Authorized
Representative)
Date May 15, 2000 /s/ Kurt R. Weise
---------------------- --------------------------------
Kurt R. Weise
President and Chief
Executive Officer
(Duly Authorized
Representative)
Page 15
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT
REPORT ON FORM 10Q FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,481
<INT-BEARING-DEPOSITS> 500
<FED-FUNDS-SOLD> 1,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,659
<INVESTMENTS-CARRYING> 69,659
<INVESTMENTS-MARKET> 69,659
<LOANS> 229,670
<ALLOWANCE> 2,147
<TOTAL-ASSETS> 330,470
<DEPOSITS> 231,771
<SHORT-TERM> 13,863
<LIABILITIES-OTHER> 4,656
<LONG-TERM> 47,375
0
0
<COMMON> 28,002
<OTHER-SE> 1,336
<TOTAL-LIABILITIES-AND-EQUITY> 330,470
<INTEREST-LOAN> 4,697
<INTEREST-INVEST> 1,085
<INTEREST-OTHER> 86
<INTEREST-TOTAL> 5,868
<INTEREST-DEPOSIT> 2,401
<INTEREST-EXPENSE> 3,290
<INTEREST-INCOME-NET> 2,578
<LOAN-LOSSES> 164
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,207
<INCOME-PRETAX> 957
<INCOME-PRE-EXTRAORDINARY> 957
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 559
<EPS-BASIC> .34
<EPS-DILUTED> .34
<YIELD-ACTUAL> 7.63
<LOANS-NON> 786
<LOANS-PAST> 109
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,979
<CHARGE-OFFS> 6
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2,147
<ALLOWANCE-DOMESTIC> 2,147
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
