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, 2001
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 7, 2001
-- 1,485,412 shares
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.................................................1
Consolidated Condensed Statements of Financial Condition at
March 31, 2001 and December 31, 2000 (unaudited)....................1
Consolidated Condensed Statements of Income - Three Months Ended
March 31, 2001 and March 31, 2000 (unaudited)........................2
Consolidated Condensed Statements of Cash Flows - Three Months
Ended March 31, 2001 and March 31, 2000 (unaudited)..................3
Notes to Consolidated Condensed Financial Statements..................4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................7
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
i
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)
MARCH 31, December 31,
------------ ------------
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 24,236 $ 19,451
Securities available-for-sale 67,401 70,064
Loans receivable, net 257,036 251,646
Loans held for sale 5,837 2,981
Premises and equipment, net 6,444 6,387
Real estate and other personal property owned 997 1,021
Accrued interest receivable 3,227 3,351
Restricted stock, at cost 3,803 3,709
Goodwill, net of accumulated amortization of $581 and
$534 at March 31, 2001, and December 31, 2000,
respectively 3,122 3,171
Identifiable intangibles, net of accumulated
amortization of $187 and $169 at March 31, 2001, and
December 31, 2000, respectively 450 468
Deferred income taxes, net 289 444
Other assets 1,005 1,108
------------ ------------
$ 373,847 $ 363,801
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts $ 83,816 $ 85,367
Savings deposits 51,113 49,203
Time deposits 131,816 126,609
------------ ------------
266,745 261,179
Federal Home Loan Bank advances 58,250 52,175
Securities sold under agreements to repurchase 8,943 11,365
Line of credit 1,400 1,250
Accrued interest payable 2,862 2,475
Advances from borrowers for taxes and insurance 466 462
Income taxes payable 620 309
Other liabilities 807 1,113
------------ ------------
340,093 330,328
Minority interest 3,586 3,525
Stockholders' equity:
Preferred stock, no par value; authorized 2,000,000
shares; no shares issued and outstanding -- --
none outstanding)
Common stock, no par value; authorized 8,000,000
shares; 1,698,312 shares issued 28,002 28,002
1,698,312 outstanding)
Retained earnings, substantially restricted 3,704 3,541
Treasury stock, at cost; 93,000 and 83,000 shares
at March 31, 2001 and December 31, 2000, respectively (1,685) (1,515)
Accumulated other comprehensive income (loss) 147 (80)
------------ ------------
30,168 29,948
------------ ------------
$ 373,847 $ 363,801
============ ============
Equity/Assets 8.08% 8.23%
Book Value/Share $ 18.80 $ 18.54
See Notes to Consolidated Condensed Financial Statements
Page 1
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---------- ----------
INTEREST INCOME:
Loans receivable $ 5,528 $ 4,746
Mortgage-backed securities 813 957
Investment securities 272 128
Other interest earning assets 149 86
---------- ----------
Total interest income 6,762 5,917
INTEREST EXPENSE:
Deposits 2,935 2,401
Other borrowings 1,051 889
---------- ----------
Total interest expense 3,986 3,290
---------- ----------
NET INTEREST INCOME 2,776 2,627
Provision for loan losses 210 164
---------- ----------
Net interest income after provision for
loan losses 2,566 2,463
NON-INTEREST INCOME:
Gain on sale of loans 556 441
Service charges and fees 216 198
Gain on sale of securities available-for-sale 127 --
Other income 108 117
---------- ----------
Total non-interest income 1,007 756
NON-INTEREST EXPENSE:
Compensation and benefits 1,335 1,227
Occupancy and equipment 337 256
Data processing fees 186 165
Other expenses 690 559
---------- ----------
Total non-interest expense 2,548 2,207
---------- ----------
Income before income taxes and minority interest 1,025 1,012
Provision for income taxes 396 398
---------- ----------
Income before minority interest 629 614
Minority interest (46) (55)
---------- ----------
Net income $ 583 $ 559
========== ==========
Basic earnings per share $ .36 $ .34
========== ==========
Diluted earnings per share $ .36 $ .34
========== ==========
Dividends declared per share $ .26 $ .26
========== ==========
Weighted average shares outstanding - basic 1,614 1,652
========== ==========
Weighted average shares outstanding - diluted 1,617 1,652
========== ==========
See Notes to Consolidated Condensed Financial Statements
Page 2
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
------------------------------
MARCH 31, 2001 March 31, 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (1,355) $ (187)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable (5,719) (3,623)
Purchases of securities available-for-sale (15,243) (2,000)
Proceeds from maturities, pay downs and sales of securities
available-for-sale 18,415 2,110
Purchases of restricted stock (39) --
Purchase of Valley Bancorp, Inc. stock (8) (1,673)
Purchases of premises and equipment (200) (502)
Proceeds from sale of premises and equipment 12 --
Proceeds from sale of real estate and other personal property
owned 145 --
Acquisition of real estate and other personal property owned (5) (43)
Acquired cash and cash equivalents of Valley -- 1,206
---------- ----------
Net cash used in investing activities (2,642) (4,525)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 5,565 1,806
Net increase (decrease) in Federal Home Loan Bank advances 6,075 (50)
Advances on line of credit 150 1,000
Net increase (decrease) in securities sold under agreements to
repurchase (2,422) 2,317
Net decrease in federal funds purchased -- (1,750)
Increase in advances from borrowers for taxes and insurance 4 443
Purchase of treasury stock (170) --
Dividends paid to stockholders (420) (430)
---------- ----------
Net cash provided by financing activities 8,782 3,336
---------- ----------
Increase (decrease) in cash and cash equivalents 4,785 (1,376)
Cash and cash equivalents at beginning of year 19,451 11,457
---------- ----------
Cash and cash equivalents at end of period $ 24,236 $ 10,081
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
- ---------------------------------------------------------------------------
Cash payments for interest $ 3,598 $ 2,788
Cash payments for income taxes $ 85 $ 55
See Notes to Consolidated Condensed Financial Statements
Page 3
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
United Financial Corp. ("UFC") is a bank holding company headquartered
in Great Falls, Montana, with operations in 12 Montana communities and Phoenix
and Scottsdale, Arizona. UFC's banking business is conducted through its
wholly-owned subsidiary, Heritage Bank, and Valley Bank of Arizona ("Valley
Bank"), the wholly-owned subsidiary of Valley Bancorp, Inc. ("Valley"),
collectively referred to herein as the "Banks". UFC, Heritage Bank and Valley
are collectively referred to herein as ("United"). United had assets of
approximately $373.8 million, deposits of approximately $266.7 million and
stockholders' equity of approximately $30.2 million at March 31, 2001.
UFC is the majority shareholder of Valley. In March 2001, UFC acquired
an additional 1,400 shares of Valley bringing its ownership to 56.60% at March
31, 2001. As a result of acquiring over 50% of the outstanding shares of Valley
in January 2000, UFC began to consolidate Valley in its financial statements
effective January 1, 2000. The aggregate purchase price of the shares of Valley
purchased to date is $6.3 million, including $8,000 for shares purchased in
2001, $1.9 million for shares acquired in 2000, $1.7 million for shares acquired
in 1999, and $2.7 million for shares acquired in 1998. Valley had assets of
approximately $70.8 million, deposits of approximately $60.2 million and
stockholders' equity of approximately $8.3 million at March 31, 2001.
Heritage Bank (formerly Heritage Bank F.S.B.) is a state chartered
commercial bank with full service banking offices in Bozeman, Chester, Fort
Benton, Geraldine, Glendive, Great Falls, Havre, Missoula, and Shelby, Montana,
and loan production offices in Hamilton, Kalispell, and Libby, Montana. Valley
Bank is a state chartered commercial bank with full service banking operations
in Phoenix and Scottsdale, Arizona. 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 and Arizona. A majority of the Banks' banking business is conducted in
the Great Falls and Phoenix areas. 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.
UFC'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 is
inactive at March 31, 2001. Heritage Bank holds an 11% ownership interest in
Bankers' Resource Center, a computer data center.
2. HERITAGE BANK AND HERITAGE STATE BANK MERGER
In 2000, UFC had a wholly-owned subsidiary Heritage State Bank ("State
Bank"), a state chartered commercial bank formed in 1998 with full service
banking operations in Fort Benton and Geraldine, Montana. Effective January 1,
2001, Heritage Bank F.S.B., a federally chartered stock savings bank, merged
into State Bank's state banking charter. State Bank then changed its name to
Heritage Bank and relocated its main office to Great Falls, Montana. Beginning
in 2001, Heritage Bank is regulated by the FDIC and the State of Montana.
Page 4
3. BASIS OF PRESENTATION
United's consolidated financial statements, included herein, have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("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 accompanying unaudited consolidated condensed financial
statements contain all adjustments (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, 2001 are not necessarily
indicative of the results anticipated for the year ending December 31, 2001. 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, 2000. Certain
reclassifications have been made to the March 31, 2000 financial information to
conform to the March 31, 2001 presentation.
4. COMPREHENSIVE INCOME
United's only significant element of comprehensive income is unrealized
gains and losses on securities available-for-sale.
(In thousands)
(Unaudited)
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2001 March 31, 2000
-------------------------------- ----------------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
-------- -------- -------- -------- -------- --------
Net income $ 979 $ 396 $ 583 $ 957 $ 398 $ 559
Unrealized and realized
holding gains (losses) arising
during period 534 203 331 (243) (93) (150)
Less: reclassification adjustment for
gains included in net income 127 48 79 -- -- --
-------- -------- -------- -------- -------- --------
Net unrealized gains (losses) on
securities available for sale 407 155 252 (243) (93) (150)
Less: Portion of unrealized gain
(loss) allocated to minority interest 25 -- 25 (9) -- (9)
-------- -------- -------- -------- -------- --------
Total comprehensive income $ 1,361 $ 551 $ 810 $ 723 $ 305 $ 418
======== ======== ======== ======== ======== ========
5. 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.
Page 5
6. 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. Potential common stock
includes a warrant to purchase 10,000 shares of common stock exercisable at a
price of $26.25 per share through February 3, 2003 and the incremental shares
under stock option plans. The warrant was excluded from the calculation of
diluted EPS for the three month periods ended March 31, 2001 and 2000 because
the effect of inclusion would have been antidilutive using the treasury stock
method.
7. RELATED PARTIES
Central Financial Services, Inc. ("CFS") provides various management
services to UFC and Heritage Bank, including accounting and tax services,
investment consulting, personnel consulting, insurance advisory services and
regulatory consulting. CFS is owned by UFC's Chairman of the Board of Directors
and largest shareholder. CFS fees were $85,160, and $89,590 for the three months
ended March 31, 2001 and 2000, respectively.
8. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2000, UFC adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities.
SFAS Nos. 133 and 138 establish accounting and reporting standards requiring
that derivative instruments (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS Nos. 133 and 138 require that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. As of March 31, 2001, UFC was not
engaged in hedging activities nor did it hold any derivative instruments which
required adjustments to carrying values under SFAS Nos. 133 or 138. Therefore,
the adoption had no impact on the consolidated financial statements of UFC.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a Replacement of FASB Statement No. 125." SFAS No. 140 revises accounting
standards for securitizations and transfers of financial assets and collateral
and requires certain disclosures, but carries forward most of SFAS No. 125's
provisions without change. SFAS No. 140 is effective for recognition and
reclassification of collateral and disclosures relating to securitization
transactions and collateral for fiscal years ended after December 15, 2000.
Adoption of these provisions did not have a material effect on the consolidated
financial statements, results of operations or liquidity of UFC. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Management expects that adoption of
these provisions will not have a material effect on the consolidated financial
statements, results of operations or liquidity of UFC.
Page 6
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 UFC with the
Securities and Exchange Commission, in UFC'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. UFC 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 UFC's financial performance and
could cause UFC's actual results for future periods to differ materially from
those anticipated or projected.
UFC 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.
2. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE THREE MONTHS
ENDED MARCH 31, 2001 TO THE YEAR ENDED DECEMBER 31, 2000.
(In thousands) SELECTED FINANCIAL CONDITION RECAP
(Unaudited)
MARCH 31, Dec. 31,
2001 2000 Change
------------------------------------------------
Cash and cash equivalents $ 24,236 $ 19,451 $ 4,785
Securities available-for-sale 67,401 70,064 (2,663)
Loans receivable, net 257,036 251,646 5,390
Loans held for sale 5,837 2,981 2,856
Premises and equipment, net 6,444 6,387 57
Real estate and other
Personal property owned 997 1,021 (24)
Restricted stock, at cost 3,803 3,709 94
Goodwill, net 3,122 3,171 (49)
Identifiable intangibles, net 450 468 (18)
All other assets 4,521 4,903 (382)
Total assets 373,847 363,801 10,046
Deposits 266,745 261,179 5,566
Federal Home Loan Bank advances 58,250 52,175 6,075
Securities sold under
Agreements to repurchase 8,943 11,365 (2,422)
Line of credit 1,400 1,250 150
All other liabilities 4,755 4,359 396
Total liabilities 340,093 330,328 9,765
Total assets increased $10.0 million to $373.8 million at March 31,
2001 from $363.8 million at December 31, 2000. The increase in assets was
primarily the result of increase in cash and cash equivalents, loans receivable
and loans held for sale.
SECURITIES AVAILABLE-FOR-SALE- Securities available-for-sale decreased
$2.7 million to $67.4 million at March 31, 2001 from $70.1 million at December
31, 2000. The decrease was the
Page 7
result of $15.2 million of purchases, offset by $18.3 million of maturities,
sales, and principal repayments and a $.4 million increase in unrealized gains
on securities.
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:
(In thousands)
(Unaudited)
MARCH 31, 2001
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------- ---------------- ---------------- ----------------
U.S. GOVERNMENT AND FEDERAL
AGENCIES $ 21,984 $ 189 $ -- $ 22,173
MORTGAGE-BACKED SECURITIES 40,854 190 (54) 40,990
MUNICIPAL BONDS 2,240 28 (20) 2,248
CORPORATE BONDS AND EQUITY
SECURITIES 2,041 4 (55) 1,990
---------------- ---------------- ---------------- ----------------
$ 67,119 $ 411 $ (129) $ 67,401
================ ================ ================ ================
December 31, 2000
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
U.S. Government and Federal
Agencies $ 23,783 $ 112 $ (23) $ 23,872
Mortgage-backed securities 41,622 109 (195) 41,536
Municipal bonds 2,742 -- (25) 2,717
Corporate bonds and equity
securities 2,042 -- (103) 1,939
---------------- ---------------- ---------------- ----------------
$ 70,189 $ 221 $ (346) $ 70,064
================ ================ ================ ================
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased $5.4 million to $257.0 million at March 31, 2001 from $251.6 million
at December 31, 2000. The increase 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. The Banks also
purchased and participated in commercial and lease financing loans. The Banks
had $52.5 million of participation and purchased loans as of March 31, 2001.
During the three months ended March 31, 2001, loans held for sale
increased $2.8 million to $5.8 million at March 31, 2001 from approximately $3.0
million at December 31, 2000. Approximately $26.0 million of loans were
originated for sale and $23.2 million of loans were sold to the secondary market
during the three month period ending March 31, 2001.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve remained consistent
at $2.5 million at March 31, 2001 and December 31, 2000. A loan loss provision
of $.2 million for the three months ended March 31, 2001 was offset by loans in
the amount of $.2 million which were determined by United's management to be
uncollectable and subsequently charged-off. However, management aggressively
pursues recoveries which totaled approximately $24,000 for this same three month
period. The loan loss reserve at March 31, 2001 is an amount which management
believes is adequate given the low level of non-performing assets and
management's assessment of loan risk. The allowance for loan losses to total
loans at March 31, 2001 was .97%.
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
Page 8
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, 2001 United had
non-accrual loans totaling $1.6 million and loans totaling $.4 million 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, 2001 and December 31, 2000, United had no assets classified as loss.
At March 31, 2001 and December 31, 2000, United had $.3 million and $.4 million
respectively classified as doubtful. At March 31, 2001 and December 31, 2000,
United had $1.4 million and $.8 million of reported substandard assets,
respectively. As a percent of total assets, substandard assets were
approximately .36%, and .21% at March 31, 2001 and December 31, 2000,
respectively.
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED - The slight decrease
includes approximately $124,000 of repossessed personal property acquired by
United during the first three months of 2001, offset by sales of repossessed
personal property of approximately $145,000.
RESTRICTED STOCK - Federal Home Loan Bank (FHLB) stock increased
approximately $94,000 to $3.8 million at March 31, 2001 from $3.7 million at
December 31, 2000. This increase was the result of $55,000 of reinvested stock
dividends and purchases of approximately $39,000. FHLB stock purchases are made
as required to support the increased scope of operations.
PREMISES AND EQUIPMENT - This category remained constant at $6.4
million at March 31, 2001 and at December 31, 2000. The Banks invested
approximately $200,000 in fixed assets during the first three months of 2001.
The purchases of premises and equipment were offset by approximately $133,000 of
depreciation.
GOODWILL - Goodwill decreased approximately $49,000 primarily due to
amortization during the three months ending March 31, 2001. The goodwill is
currently being amortized over 15 to 25 years.
DEPOSITS - Deposits increased $5.6 million to $266.7 million at March
31, 2001 from $261.2 million at December 31, 2000. This increase was primarily
the result of the opening of the two new Heritage Bank branches in Bozeman and
Missoula, Montana and the new Valley Bank branch in Scottsdale, Arizona.
BORROWED FUNDS - FHLB advances increased $6.1 million from December 31,
2000 to March 31, 2001. Securities sold under agreements to repurchase decreased
$2.4 million to $8.9 million at March 31, 2001 from $11.4 million at December
31, 2000. The net additional borrowings in the first three months of 2001 were
used to fund increases in United's loan portfolio.
STOCKHOLDERS' EQUITY - Stockholders' equity increased $.2 million to
$30.2 million at March 31, 2001 from $30.0 million at December 31, 2000. This
increase is due to $.6 million of net income for the three months ended March
31, 2001 less cash dividends declared of $.4 million, purchases of treasury
stock of $.2 million and a $.2 million increase in unrealized
Page 9
gains net of tax effects, associated with securities 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, 2001 AND MARCH 31, 2000.
(In thousands) INCOME RECAP
---------------------------------------------
(Unaudited) THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2001 2000 Change
---------------------------------------------
Interest income $6,762 $5,917 $ 845
Interest expense 3,986 3,290 696
---------------------------------------------
Net interest income 2,776 2,627 149
Provision for loan losses 210 164 46
---------------------------------------------
Net interest income after
provision for loan losses 2,566 2,463 103
Non-interest income 1,007 756 251
Non-interest expense 2,548 2,207 341
---------------------------------------------
Income before income taxes
and minority interest 1,025 1,012 13
Provision for income taxes 396 398 (2)
---------------------------------------------
Net income before minority
interest $ 629 $ 614 $ 15
=============================================
NET INTEREST INCOME - Like most financial institutions, the most
significant component of United'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 $.2
million from $2.6 million for the three months ended March 31, 2000 to $2.8
million for the three months ended March 31, 2001. Net interest margin decreased
.19% to 3.23% for the three months ended March 31, 2001 from 3.42% for the same
period last year. Net interest-rate spread decreased .14% to 2.94% for the three
months ended March 31, 2001 from 3.08% for the same period last year. Although
net interest income increased, funding rates at FHLB and increased competition
for loan rates resulted in a decrease in both net interest margin and net
interest-rate spread. United has used the funds from additional deposits and
borrowings to fund growth in its real estate loan portfolio and to manage
interest rate risk.
INTEREST INCOME - Interest income increased $.9 million from $5.9
million for the three month period ended March 31, 2000 to $6.8 million for the
three month period ended March 31, 2001.
For the three month period ended March 31, 2001, compared to the three
month period ended March 31, 2000, interest on loans receivable increased $.8
million. Interest on mortgage-backed securities and investments and interest on
other interest-earning assets remained relatively constant at $1.1 million for
both periods.
INTEREST EXPENSE - Interest expense increased $.7 million from $3.3
million for the three month period ended March 31, 2000 to $4.0 million for the
three month period ended March 31, 2001.
For the three month period ended March 31, 2001, compared to the three
month period ended March 31, 2000, interest on deposits increased $.5 million,
and interest on other borrowings increased $.2 million.
Page 10
PROVISION FOR LOAN LOSSES - United provided $210,000 for loan losses in
the first three months of 2001, as compared to $164,000 in the first three
months of 2000. 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 increased $.2 million for the three month periods
ending March 31, 2001 to $1.0 million from $.8 million for the three month
period ended March 31, 2000. United experienced strong demand in the home
lending market, and particularly the refinancing market during the first three
months of 2001, as interest rates were lower than the same period last year.
United also recorded a gain from sale of securities available for sale of $.1
milion in the three month period ended March 31, 2001. No such gains on sale of
securities were realized in the same period last year.
NON-INTEREST EXPENSE - Non-interest expense increased $.3 million
during the three month period ending March 31, 2001 as compared to the same
period in 2000. This increase was principally due to the operating expenses for
the new branches opened in the second quarter of 2000 in Bozeman and Missoula,
Montana, and Scottsdale, Arizona.
INCOME TAXES - Income tax expense remained at $.4 million for the three
month periods ending March 31, 2001 and 2000 as a result of fairly consistent
earnings, after adjustment for non-deductible goodwill amortization and tax-free
interest on municipal bonds and loans, for those three month periods.
4. ASSET/LIABILITY MANAGEMENT
The objective of United's asset/liability management is to maintain the
Banks' ability to meet the daily cash flow requirements of their customers. The
Banks manage their liquidity positions to meet the needs of their customers,
while maintaining an appropriate balance between assets and liabilities to meet
shareholders' return on investment objectives. The Banks monitor the sources and
uses of funds on a daily basis to maintain an acceptable liquidity position.
Additional sources of liquidity include customer deposits, FHLB advances and
securities sold under agreements to repurchase.
UFC, as a bank holding company separate from its subsidiaries, provides
for its own liquidity. A substantial portion of UFC's revenue is dividends
received from Heritage Bank. In general, the Banks are limited, without the
prior consent of state and federal regulators, to payment of dividends that do
not exceed the current year net income plus retained earnings from the two
preceding calendar years. Additional sources of liquidity for UFC include a line
of credit with a correspondent bank.
Page 11
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 UFC and eliminations of
transactions between segments.
The following table sets forth certain operating segment information
for the three month periods ended March 31, 2001 and 2000(in thousands except
per share data).
Heritage
2001: Bank Valley Other Consolidated
---------- ---------- ---------- ------------
Net interest income $ 2,092 $ 682 $ 2 $ 2,776
Provision for loan losses 186 24 -- 210
---------- ---------- ---------- ----------
Net interest income after provision for 1,906 658 2 2,566
loan losses
Non-interest income 866 141 -- 1,007
Non-interest expense 1,827 630 91 2,548
---------- ---------- ---------- ----------
Income (loss) before income taxes
and minority interest 945 169 (89) 1,025
Income tax expense (benefit) 362 62 (28) 396
Minority interest -- -- (46) (46)
---------- ---------- ---------- ----------
Net income 583 107 (107) 583
Amortization of goodwill, core deposit
intangible and purchase valuations 70 -- 23 93
---------- ---------- ---------- ----------
Cash earnings $ 653 $ 107 $ (84) $ 676
========== ========== ========== ==========
PER SHARE DATA
Basic net income per share $ 0.36
Diluted net income per share $ 0.36
Basic cash earnings per share $ 0.42
Diluted cash earnings per share $ 0.42
Weighted average shares outstanding - basic 1,614
Weighted average shares outstanding - diluted 1,617
Page 12
Heritage Heritage
2000: Bank State Bank Valley Other Consolidated
---------- ---------- ---------- ---------- ------------
Net interest income $ 1,836 156 $ 618 $ 17 $ 2,627
Provision for loan losses 120 -- 44 -- 164
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,716 156 574 17 2,463
Non-interest income 649 23 84 -- 756
Non-interest expense 1,517 123 467 100 2,207
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes and minority interest 848 56 191 (83) 1,012
Income tax expense (benefit) 325 22 72 (21) 398
Minority interest -- -- -- (55) (55)
---------- ---------- ---------- ---------- ----------
Net income 523 34 119 (117) 559
Amortization of goodwill,
core deposit intangible,
and purchase valuations 41 8 -- 22 71
---------- ---------- ---------- ---------- ----------
Cash earnings $ 564 $ 42 $ 119 $ (95) $ 630
========== ========== ========== ========== ==========
PER SHARE DATA
Basic net income per share $ 0.34
Diluted net income per share $ 0.34
Basic cash earnings per share $ 0.38
Diluted cash earnings per share $ 0.38
Weighted average shares outstanding - basic 1,652
Weighted average shares outstanding - diluted 1,652
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes there has been no material change in interest rate
risk since December 31, 2000. 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, 2000.
Page 13
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
Although not involved in any material pending litigation as of March
31, 2001, United is a defendant in various legal proceedings arising in the
normal course 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.
On May 2, 2001, in a private transaction, UFC purchased 119,900 shares
of treasury stock at a price of $18.63 per share.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
A. The following exhibits are included herein:
Exhibit
Number Description of Exhibit
- -------- -------------------------------------------------------------------
None
B. Reports on Form 8-K
None
Page 14
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, 2001 /s/ John M. Morrison
-------------------- -----------------------------------
John M. Morrison
Chairman of the Board
(Duly Authorized
Representative)
Date May 15, 2001 /s/ Kurt R. Weise
--------------------- -----------------------------------
Kurt R. Weise
President and Chief
Executive Officer
(Duly Authorized
Representative)
Page 15