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, 1998
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 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [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 11, 1998
-- 1,698,312 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, 1998 (unaudited) and December 31, 1997...............................................................1
Consolidated Condensed Statements of Income - Three Months Ended
March 31, 1998 and March 31, 1997 (unaudited)..................................................................2
Consolidated Condensed Statements of Cash Flows - Three Months Ended
March 31, 1998 and March 31, 1997 (unaudited)..................................................................3
Notes to Consolidated Condensed Financial Statements.............................................................4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................................................8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................13
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS..............................................................................................13
ITEM 2 CHANGE IN SECURITIES...........................................................................................13
ITEM 3 DEFAULTS ON SENIOR SECURITIES..................................................................................13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................................13
ITEM 5 OTHER INFORMATION..............................................................................................14
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K...............................................................................14
SIGNATURES...............................................................................................................15
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, except December 31)
MARCH 31, December 31,
------------------- -------------------
1998 1997
------------------- -------------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks $ 1,861 $2,485
Interest-earning deposits with banks 20,730 7,384
------------------- -------------------
Total cash and cash equivalents 22,591 9,869
Time deposits in banks 98 98
Investment securities available-for-sale 55,880 14,219
Loans receivable, net 106,811 56,796
Loans held for sale 3,225 1,467
Premises and equipment, net 3,328 1,636
Real estate owned, net 889 -
Accrued interest receivable 1,609 688
Federal Home Loan Bank stock, at cost 1,024 404
Goodwill, net of accumulated amortization of $168,114 and 150,444 at March 31,
1998 and December 31, 1997, respectively 984 494
Cash surrender value of life insurance 260 257
Other assets 572 341
------------------- -------------------
Total assets $197,271 $86,269
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts $ 36,156 $24,166
Savings deposits 39,546 12,008
Time deposits 72,147 34,212
------------------- -------------------
Total deposits 147,849 70,386
FHLB advances 9,425 6,425
Securities sold under agreements to repurchase 6,900 3,173
Accrued interest payable 1,062 807
Advance payments by borrowers for taxes and insurance 712 138
Income taxes payable 217 34
Other liabilities 990 208
Long-term debt - 2,350
------------------- -------------------
Total liabilities 167,155 83,521
Stockholders' equity:
Preferred stock, no par value (2,000,000 shares
authorized; none outstanding) - -
Common stock, no par value (8,000,000 shares authorized; 1,698,312
outstanding) 28,002 1,080
Retained earnings-partially restricted 2,035 1,540
Accumulated comprehensive income 79 128
------------------- -------------------
Total stockholders' equity 30,116 2,748
------------------- -------------------
Total liabilities and stockholders' equity $197,271 $86,269
=================== ===================
Equity/Assets 15.3% 3.2%
Gross Book Value/Share $17.74 $5.79
See Notes to Consolidated Condensed Financial Statements
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1998 1997
------------------- -------------------
INTEREST INCOME
Loans $1,953 $984
Mortgage-backed securities 433 219
Investment securities 214 37
Other Interest earning assets 215 42
------------------- -------------------
Total interest income 2,815 1,282
INTEREST EXPENSE
Deposits 1,240 601
Short-term borrowings 191 42
Long-term debt 12 48
------------------- -------------------
Total interest expense 1,443 691
------------------- -------------------
Net interest income 1,372 591
Provision for losses on loans 45 -
------------------- -------------------
Net interest income after provision for losses on loans 1,327 591
NON-INTEREST INCOME
Fees and discounts 450 221
FHLB stock dividends 15 6
Loss on sales of investment securities, net (6) -
Other income 53 24
------------------- -------------------
Total non-interest income 512 251
NON-INTEREST EXPENSE
Salaries and employee benefits 559 278
Net occupancy and equipment expense 114 56
Data processing expense 71 47
Other expenses 305 178
------------------- -------------------
Total non-interest expense 1,049 559
------------------- -------------------
Income before income taxes 790 283
Provision for income tax expense 295 130
------------------- -------------------
Net income $495 $153
=================== ===================
Net income per share $.40 $.32
------------------- -------------------
Weighed average shares outstanding 1,250 475
------------------- -------------------
See Notes to Consolidated Condensed Financial Statements
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands, Unaudited)
THREE MONTHS ENDED
-----------------------------------------
March 31, 1998 March 31, 1997
------------------- -------------------
OPERATING ACTIVITIES
Net income $495 $153
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 45 -
Amortization of goodwill 18 11
Amortization of premiums on loans 15 3
Amortization of core deposit premium 3 -
Depreciation and amortization of bank premises and equipment 52 28
Depreciation of real estate held for investment 11 -
Deferred loan fees, net - (31)
Amortization of discounts and premiums on investments, net (9) 2
Losses on sales of available-for-sale, net 6 -
Net change in loans held for sale (60) 617
Federal Home Loan Bank stock dividends (18) (6)
Net change in income taxes payable 109 63
Net change in accrued interest receivable (123) 1
Net change in accrued interest payable (29) 90
Increase in the cash surrender value of life insurance (3) (3)
Net change in other assets (101) (6)
Net change in other liabilities (1,401) (110)
------------------- -------------------
Net cash provided by (used in) operating activities (990) 812
------------------- -------------------
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale (3,500) (699)
Purchases of mortgage-backed securities available-for-sale (8,884) (2,501)
Purchase of Federal Home Loan Bank stock (67) -
Proceeds from maturities, calls, and paydowns of securities available-for-sale 7,100 160
Mortgage-backed securities principal payments 2,623 1,921
Proceeds from sale of investment securities available-for-sale 5,308 -
Net change in loans receivable (10,524) (1,723)
Purchases of premises and equipment (68) (28)
Purchase of loan production offices (225) -
Acquired United Financial Corp.'s cash and cash equivalents 8,113 -
------------------- -------------------
Net cash provided by (used in) investing activities (124) (2,870)
------------------- -------------------
FINANCING ACTIVITIES
Net increase in deposits 6,874 2,035
Net increase in Federal Home Loan Bank advances 3,000 0
Net increase in securities sold under repurchase agreements 3,727 (4,257)
Net increase in advance by borrowers for taxes and insurance 310 149
Payments on long-term debt (2,350) -
Capital Contribution 2,275 -
------------------- -------------------
Net cash provided by (used in) financing activities 13,836 (2,073)
------------------- -------------------
Increase (decrease) in cash and cash equivalents 12,722 (4,131)
Cash and cash equivalents at beginning of year 9,869 10,089
------------------- -------------------
Cash and cash equivalents at end of period $22,591 $5,958
=================== ===================
SUPPLEMENTAL CASH FLOW DISCLOSURE
- ------------------------------------------------------------------------------
Cash payments for interest $1,471 $601
Cash payments for income taxes $180 $45
See Notes to Consolidated Condensed Financial Statements
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
United Financial Corp. is a savings bank holding company
headquartered in Great Falls, Montana. Its wholly owned subsidiaries,
United Savings Bank, F.A. (United Bank) and Heritage Bank, F.S.B.
(Heritage Bank), are federally chartered stock savings banks. United Bank
has a wholly owned subsidiary, Community Service Corporation, which owns
and manages real estate held for investment. United Financial Corp. and
its subsidiaries are collectively referred to as the Company, as
constituted post-Merger, or United Financial, as constituted pre-Merger.
United Bank and Heritage Bank are collectively referred to herein as the
Banks. Full service branches are located in Shelby, Chester, Havre and
Glendive, Montana, and loan production offices are located in Bozeman,
Missoula, Hamilton and Libby, Montana. The Banks' deposits are insured by
the Federal Deposit Insurance Corporation - Savings Association Insurance
Fund (SAIF). The Banks are members of the Federal Home Loan Bank of
Seattle, Washington and are subject to comprehensive supervision,
regulation, and examination by the Office of Thrift Supervision and the
FDIC. The Banks are also subject to the regulations of the Board of
Governors of the Federal Reserve System. See Note 2 for information
regarding the merger of the Banks.
The Company's principal business is attracting deposits from the
general public through its offices and using those deposits, together
with other available funds, to originate commercial (including lease
financing), commercial real estate, residential, agriculture and consumer
loans. The residential loans and certain of the agricultural and
commercial loans are secured by mortgages. The Company also invests in
mortgage-backed securities, U.S. Treasury obligations, other U.S.
Government agency obligations and interest-earning deposits.
The Company's financial condition and results of operations are
dependent primarily on net interest income and fee income. Net interest
income is the difference between the interest income earned on loans,
mortgage-backed securities, other investment securities and
interest-earning deposits, less cost of funds, consisting of interest
paid on deposits and borrowed money. The Company's 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.
2. HERITAGE MERGER
On February 3, 1998, United Financial and Heritage Bancorporation
(Heritage) merged (the Merger). In connection with the Merger, which was
structured as a merger of Heritage into United Financial, each
outstanding share of Heritage common stock was converted into 47.5 shares
of United Financial's common stock. An aggregate of 475,000 shares (or
28%) of United Financial's common stock was issued in connection with the
Merger. A capital contribution of $2,275,000 was made just prior to the
Merger and the proceeds were used to pay-off the outstanding long-term
debt as part of the conditions of the Merger.
The Merger was treated as a reverse acquisition and accounted for
as a purchase by Heritage in accordance with generally accepted
accounting principles (GAAP). Heritage was considered the accounting
acquirer because Heritage effectively acquired the operations of United
Financial as a result of the change in control and other related
consequences of the Merger.
The merger of the Banks was completed on May 4, 1998, with United
Bank merging into Heritage Bank. On that date, the operations of the
Banks merged into one main
branch located at 120 First Avenue North, Great Falls, Montana and
United Bank's former location was closed, except for its drive-up
facility. In addition, United Bank was converted to Heritage Bank's
data center.
3. BASIS OF PRESENTATION
The Company's consolidated financial statements included herein
have been prepared in accordance with 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, changes in stockholders' equity, and changes in cash flows
for the periods disclosed. Operating results for the three months ended
March 31, 1998, are not necessarily indicative of the results anticipated
for the year ending December 31, 1998. For additional information, refer
to the consolidated audited financial statements and footnotes thereto
included in the Company's Annual Report to Shareholders and Annual Report
on Form 10-K for the year ended December 31, 1997.
Consistent with Heritage being the acquiring corporation for
accounting purposes, the historical financial statements of the Company
commencing with this Report are those of Heritage, and not United
Financial as it existed prior to the Merger. Accordingly, the historical
statements of operations of the Company reflect only the operations of
United Financial commencing with the closing date of the Merger. Under
the purchase method of accounting, the assets and liabilities of United
Financial and its subsidiary were adjusted to their estimated fair value
and combined with the historical book values of the assets and
liabilities of Heritage. The actual revaluation of United Financial's net
assets acquired is subject to the completion of studies and evaluations
of management.
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the some prominence as other
financial statements. This Company adopted the provisions of SFAS No. 130
as of January 1, 1998.
COMPREHENSIVE INCOME DISCLOSURE:
(Dollars in thousands)
(Unaudited)
MARCH 31, 1998 March 31, 1997
--------------------------------------- ---------------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
----------- ------------- ----------- ----------- ------------- -----------
Unrealized holding gains arising during
period $125 $46 $79 $84 $31 $53
Less: reclassification adjustment for
gains included in net income
- - - - - -
----------- ------------- ----------- ----------- ------------- -----------
Net unrealized gains on securities
$125 $46 $79 $84 $31 $53
=========== ============= =========== =========== ============= ===========
5. RECLASSIFICATIONS
Certain reclassifications have been made to the March 31, 1997 and
December 31, 1997 financial statements to conform with the March 31, 1998
presentation.
6. CASH EQUIVALENTS
For purposes of the Consolidated Condensed Statements of Cash
Flows, the Company 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
Stockholder's equity increased $27,368,000 of which $24,647,000
was the purchase price consideration of the stock deemed to be issued to
United Financial in connection with the Merger. A capital contribution of
$2,275,000 was made just prior to the Merger and the proceeds were used
to pay-off the outstanding long-term debt of Heritage as part of the
conditions of the Merger. The Company had net income for the quarter of
$495,000. There was a $49,000 decrease in the unrealized gain on
investment securities available for sale. The balance of paid-in capital
was capitalized into common stock due to the fact that the Company's
stock has no par value.
On February 3, 1998 the Company 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 the Company.
8. COMPUTATION OF NET INCOME PER SHARE
Basic earnings per share (EPS) excludes dilution and is computed
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the equity. Basic and diluted EPS are
the same, as the potential common shares do not have a material impact.
9. DIVIDENDS DECLARED
On April 27, 1998, the Board of Directors of the Company declared
a second-quarter cash dividend of $.25 per share, payable May 25, 1998,
to shareholders of record on May 11, 1998.
10. RELATED PARTIES
Central Financial Services, Inc. (CFS) provides various management
services to the Company, including accounting and tax services,
investment consulting, personnel consulting, insurance advisory services
and regulatory consulting. CFS is owned by the Company's Chairman of the
Board of Directors and largest shareholder. CFS fees were $48,000, and
$19,000 for the three months ended March 31, 1998 and 1997, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Bank has sold loans to various investors in the secondary
market under sales agreements which contain recourse provisions. Under
the recourse provisions, the Bank may be required to repurchase a loan if
a borrower fails to make three monthly payments within 120 days after the
sale of the loan. The balance of loans sold with recourse provisions
remaining at March 31, 1998 is approximately $7,124,000.
In June 1997, Heritage Bank entered into a five-year service
contract for data processing services. In the event of early termination
of the service contract by Heritage Bank, the bank has agreed to pay an
amount equal to fifty percent of the average monthly fee paid for
services multiplied by the number of months remaining under the term of
the contract.
The Company has a Salary Continuation Agreement with the Banks'
President, Kevin P. Clark. The agreement contains a lifetime retirement
benefit, a disability benefit, a change of control benefit and a death
benefit. The benefits are based on Mr. Clark's years of service. The
Company holds a fully funded life insurance policy in connection with
this agreement.
12. SIGNIFICANT TRANSACTIONS
In February 1998, the Company purchased the assets of three loan
production offices located in Missoula, Hamilton, and Libby, Montana, for
approximately $225,000.
13. SUBSEQUENT EVENT
On April 22, 1998, the Company and Chouteau County Bancshares,
Inc. (Chouteau) announced that they had reached an agreement in principle
to merge. Chouteau is a bank holding company. Its wholly owned
subsidiary, First State Bank of Fort Benton is a commercial bank with
approximately $68 million in assets and one banking office in Fort
Benton, Montana. Under the proposed terms of the agreement, the Company
will serve as the parent company of the combined entity, which would
include Heritage Bank and its subsidiary, Community Service Corporation,
and First State Bank of Fort Benton and its subsidiary, Fort Benton
Insurance Agency, Inc.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
1. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE
THREE MONTHS ENDED MARCH 31, 1998 TO THE YEAR ENDED DECEMBER 31, 1997.
(Dollars in thousands)
(Unaudited, except December 31)
SELECTED FINANCIAL CONDITION RECAP
---------------------------------------------------------------------------------
United Financial
March 31, December 31, Acquired
1998 1997 Change Feb. 3, 1998
------------------- -------------------- ------------------- --------------------
Total assets $197,271 $86,269 $111,002 $98,640
Cash and cash equivalents 22,591 9,869 12,722 8,113
Mortgage-backed securities 37,126 9,890 27,236 20,967
Investment securities 18,629 4,125 14,504 23,417
Loans receivable, net 106,811 56,796 50,015 39,551
Loans held for sale 3,224 1,467 1,757 1,698
FHLB stock 1,024 404 620 535
Real estate owned 889 - 889 900
Premises and equipment 3,328 1,636 1,692 1,635
Goodwill 984 494 490 166
All other assets 2,665 1,588 1,077 1,658
Deposits 147,849 70,386 77,463 70,586
Borrowed funds 16,325 9,598 6,727 -
Long-term debt - 2,350 (2,350) -
All other liabilities 2,981 1,187 1,794 3,228
Total liabilities 167,155 83,521 83,634 73,814
Stockholders' equity, net 30,116 2,748 27,368 24,826
GENERAL - The consolidated financial statements for the year ended
December 31, 1997 contained in this Report reflect the historical
financial position and results of operations of Heritage and thus do not
reflect or include the financial position and results of operations of
United Financial.
Total assets increased $111.0 million to $197.3 million at March
31, 1998 from $86.3 million at December 31, 1997. The increase in assets
was primarily the result of the acquisition of $98.6 million of assets
from United Financial in connection with the Merger. Mortgage-backed
securities increased $27.2 million, investment securities increased $14.5
million and loans receivable increased $50.0 million. In addition,
deposits increased $77.5 million and stockholders' equity increased $27.4
million.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities increased
$27.2 million to $37.1 million at March 31, 1998 from $9.9 million at
December 31, 1997. The increase was the result of the acquisition of
$21.0 million of mortgage-backed securities associated with the Merger
and $8.9 million of purchases, partially offset by $2.6 million of
principal repayments.
INVESTMENT SECURITIES - This category increased $14.5 million to
$18.6 million at March 31, 1998 from $4.1 million at December 31, 1997.
The increase was the result of the acquisition of $23.4 million of
investment securities related to the Merger and the purchase of $3.5
million of investments. These increases were offset by the sale of the
$5.3 million Kemper U.S. Government bond mutual fund at a realized
loss of $6,000 and $7.1 million of calls, maturities, and principal
payments on other investments and securities.
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased $50.0 million to $106.8 million at March 31, 1998 from $56.8
million at December 31, 1997. This increase was primarily due to the
acquisition of $39.6 million of net loans receivable in connection with
the Merger. The increase in gross loan balances was offset by the net
increase in the reserve for loan losses of $40,000.
During the three months ended March 31, 1998, loans held for sale
increased $1.8 million to $3.2 million at March 31, 1998 from
approximately $1.4 at December 31, 1997. This increase was primarily due
to the acquisition of $1.7 million of loans held for sale in connection
with the Merger. Approximately $16.5 million loans were originated for
sale and $16.4 million of loans were sold to the secondary market,
thereby increasing net loans held for sale for the quarter approximately
$60,000.
REAL ESTATE HELD FOR INVESTMENT - The $889,000 increase in the
first quarter of 1998 was primarily the result of $900,000 of real estate
acquired in connection with the Merger. At March 31, 1998 real estate
owned was comprised of two 24-unit apartment complexes in Glendive,
Montana, owned as depreciating investments by United Bank's wholly owned
subsidiary, Community Service Corporation.
FHLB STOCK - FHLB stock increased $620,000 to $1,024,000 at March
31, 1998 from $404,000 at December 31, 1997. This increase was the result
of $535,000 of FHLB stock acquired in connection with the Merger, $67,000
of FHLB stock purchases, and $18,000 of reinvested stock dividends.
PREMISES AND EQUIPMENT - This category increased $1.7 million to
$3.3 million at March 31, 1998 from $1.6 million at December 31, 1997.
This increase was primarily due to the acquisition of $1.6 million of
premises and equipment related to the Merger. Approximately $67,000 of
the increase was due to the purchase of computer and office equipment and
remodeling of the main banking facility in Great Falls, Montana,
approximately $41,000 was for computers and office furniture acquired in
conjunction with the purchase of the loan production facilities. The
purchases of premises and equipment were offset by approximately $52,000
of depreciation.
GOODWILL - Goodwill increased $490,000 to $984,000 at March 31,
1998 from $494,000 at December 31, 1997. This increase is due to $324,000
of goodwill acquired in relation to the Merger and $183,000 acquired in
the purchase of the loan production offices. The goodwill is being
amortized over 10 years.
DEPOSITS - Deposits increased $77.4 million to $147.8 million at
March 31, 1998 from $77.4 million at December 31, 1997. This increase was
primarily the result of the acquisition of $70.6 million of deposits from
United Financial. The $77.4 million increase was comprised of increases
of $11.9 million in NOW and money market demand accounts, $27.5 million
in savings accounts and $37.9 million in certificates of deposit.
BORROWED FUNDS - Borrowed funds increased $6.7 million to $16.3
million at March 31, 1998 from $9.6 million at December 31, 1997. United
Financial did not have any outstanding debt at the time of the Merger.
The $6.7 million increase was due to $3.0 million in new FHLB advances
and a net increase of $3.7 million in securities sold under repurchase
agreements.
LONG-TERM DEBT - This category decreased $2.35 million to zero
from $2.35 million at December 31, 1997. The note was secured by the
outstanding shares of Heritage Bank and was guaranteed by certain
principal shareholders of Heritage. In January 1998, a principal
reduction payment of $75,000 was made by Heritage. The
balance of the long-term debt was paid on February 3, 1998 immediately
preceding the Merger with funding from a corresponding $2,275,000
contribution of capital.
STOCKHOLDERS' EQUITY - Stockholders' equity increased $27.4
million to $30.1 million at March 31, 1998 from $2.7 million at December
31, 1997. This increase is due to $495,000 of net income for the three
months ended March 31, 1998, $49,000 related to the change in unrealized
gains associated with assets classified as available-for-sale being
adjusted to market value, a $2.3 million contribution of capital, and
$24.6 million of net stockholders' equity acquired in connection with the
Merger.
2. MATERIAL CHANGES IN RESULTS OF OPERATIONS - COMPARISON OF THE
THREE MONTHS ENDED MARCH 31, 1998, AND MARCH 31, 1997
(Dollars in thousands)
(Unaudited)
INCOME RECAP
---------------------------------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
1998 1997 Change
--------------- --------------- ---------------
Interest income $2,815 $1,282 $1,533
Interest expense 1,443 691 752
--------------- --------------- ---------------
Net interest income 1,372 591 781
Provision for loan losses 45 - 45
Non-interest income 512 251 261
Non-interest expense 1,049 559 490
--------------- --------------- ---------------
Income before income taxes 790 283 507
Provision for income taxes 295 130 165
--------------- --------------- ---------------
Net income $495 $153 $342
=============== =============== ===============
The following unaudited pro forma combined financial information
gives effect to the Merger based on the purchase accounting adjustments,
estimates and other assumptions. The unaudited pro forma combined
statements of income for the three months ended March 31, 1998 and 1997
are based upon the unaudited consolidated condensed statements of income
of Heritage and United Financial. The unaudited pro forma combined
statements of income for the three months ended March 31, 1997 combines
the historical consolidated statements of income of Heritage and United
Financial as if the Merger had become effective on January 1, 1997. The
unaudited pro forma combined statements of income for the three months
ended March 31, 1998 combines the historical consolidated statements of
income of Heritage and United Financial as if the Merger had become
effective on January 1, 1998.
UNITED FINANCIAL CORP.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1998 1997
------------------- -------------------
Interest income 3,359 3,067
Interest expense 1,699 1,498
------------------- -------------------
Net interest income 1,660 1,569
Provision for losses on loans 50 -
------------------- -------------------
Net interest income after provision for losses on loans 1,610 1,569
Non-interest income 600 392
Non-interest expense 1,338 1,113
------------------- -------------------
Income before income taxes 872 848
Provision for income tax expense 331 342
------------------- -------------------
Net income $541 $506
=================== ===================
Net income per share $.32 $.30
------------------- -------------------
Weighed average shares outstanding 1,698 1,698
------------------- -------------------
See Notes to Consolidated Condensed Financial Statements
GENERAL - Consistent with the purchase method of accounting, the
historical information being presented reflects only the operations of
Heritage for the three months ended March 31, 1997. Also, the Statement
of Operations for the three months ended March 31, 1998 includes the
results of operations of Heritage combined with the results of operations
of United Financial commencing after the Merger on February 3, 1998.
NET INCOME - Net income increased $342,700, or 69.2%, to $495,400
for the three months ended March 31, 1998 from $152,700 for the same
period last year. Pro forma net income increased $34,600 to $540,600 for
the three months ended March 31, 1998 from $506,000 for the same period
last year.
INTEREST INCOME - Interest income increased $1.5 million to $2.8
million for the three months ended March 31, 1998 from $1.3 million for
the same period last year. The increase was primarily the result of
income from the interest earning assets acquired in the Merger and an
increase in interest earning assets from the same period in 1997. Pro
forma interest income increased 8.7%, or $292,000, to $3.4 million for
the three months ended March 31, 1998 from $3.1 million for the same
period in 1997. Interest income on loans receivable increased $1.0
million to $2.0 million for the three months ended March 31, 1998 from
$1.0 million for the same period last year. Interest income on
mortgage-backed securities increased $214,000 to $433,000 for the three
months ended March 31, 1998 from $219,000 for the same period last year.
Interest income on all other interest earning investments including
investment securities increased $351,000 to $429,000 for the three months
ended March 31, 1998 from less than $78,000 for the same period last
year.
INTEREST EXPENSE - Total interest expense increased approximately
$752,000, or 52.0%, to $1.4 million for the three months ended March 31,
1998 from $691,000 for the same period last year. The increase was
primarily the result of the deposit expense associated with the deposit
base acquired in the Merger. Pro forma interest expense increased
approximately $201,000, or 11.8%, to $1.7 million for the three months
ended March 31, 1998 from $1.5 million for the same period last year.
This increase is primarily due to an increase in average interest bearing
liabilities. Interest expense on deposits increased $639,000 to $1.2
million for the three months ended March 31, 1998 from $601,000 for the
same period last year. Interest expense on FHLB advances and securities
sold under agreements to repurchase increased $149,000 to $191,000 for
the three months ended March 31, 1998 from $42,000 for the same period
last year. Interest expense on long-term debt decreased $36,000 to
$12,000 for the three months ended March 31, 1998 from $48,000 for the
same period last year. The decrease in interest expense on long-term debt
is primarily due to the fact that the debt was paid off on February 3,
1998 from cash provided by a capital contribution to the Company.
PROVISION FOR LOAN LOSSES - The provision for loan losses
increased to $45,000 for the three months ended March 31, 1998 as
compared to no provision for the same period last year. The Company
increased the provision for loan losses due to the increase in total
loans held in its portfolio.
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 the Company's allowance for loan losses
and any change in the related ratio of the allowance for loan losses to
non-performing loans are dependent upon the performance and composition
of the Company'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 - Non-interest income increased $261,000, or
51%, to $512,000 for the three months ended March 31, 1998 from $251,000
for the same period last year. This increase was primarily the result of
loan fees and other service charges increasing $229,000, or 51%, in the
first quarter of 1998 compared to last year. The Company sold the Kemper
U.S. Government mutual bond fund for a loss of $6,000 in the first
quarter of 1998. Pro forma non-interest income increased $208,000 to
$600,000 for the three months ended March 31, 1998 from $392,000 for the
same quarter last year.
NON-INTEREST EXPENSE - This category increased 490,000, or 47%, to
$1,049,000 for the three months ended March 31, 1998 from $559,000 for
the same quarter last year. This increase was primarily due to the
Merger. Salary and employee benefits increased $282,000 to $559,000 for
the three months ended March 31, 1998 compared to $277,000 for the same
quarter last year. This increase was primarily due to the addition of the
employees of United Bank. Annual salary increases have been offset by
attrition of employees of the Banks. Net occupancy and equipment
increased $58,000 to $114,000 for the three months ended March 31, 1998
from $56,000 for the same quarter last year. This increase was primarily
due to the Merger and the acquisition of United Bank's four branches as
well as the purchase of three loan production offices. Also included in
non-interest expense were one-time Merger related costs incurred in the
first quarter of approximately $85,000, two months of goodwill
amortization totaling approximately $5,000, increased data processing
expense and other services due to duplication of services prior to the
merger of the Banks. Pro forma non-interest expense increased $225,000 to
$1.3 million for the three months ended March 31, 1998 from $1.1 million
for the same quarter last year.
INCOME TAXES - Income tax expense increased $165,000 due to the
$507,000 increase in income before taxes, which is tax affected for
non-deductible goodwill amortization and tax-free interest on municipal
bonds and loans. Pro forma income tax expense was approximately $331,000
for the first quarter 1998 compared to $342,000 for the same period last
year.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes there has been no material change in interest
rate risk since December 31, 1997. 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 Financial's Annual Report
on Form 10-K for the year ended December 31, 1997.
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.
In exchange for all of the outstanding stock of Heritage and in
connection with the Merger, the Company issued 475,000 shares of its common
stock to the former shareholders of Heritage on February 3, 1998. The issuance
of shares of common stock did not involve a public offering and therefore was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"). On February 3, 1998, the Company 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 the Company. The issuance of the Warrant
did not involve a public offering and therefore was exempt from registration
pursuant to Section 4(2) of the Securities Act.
ITEM 3 DEFAULTS ON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On February 3, 1998, at separate special meetings of the shareholders of
United Financial and Heritage, the shareholders of United Financial approved the
Restated Agreement and Plan of Merger, dated as of August 25, 1997, between
United Financial and Heritage (the Merger Agreement). The shareholders of
Heritage approved the Merger Agreement and the nomination of five directors to
be elected by the Board of Directors of United Financial to serve upon the
Company's Board of Directors upon consummation of the Merger.
The shareholders of United Financial voted as follows with respect to the
approval of the Merger Agreement:
For: 684,933
Against: 14,364
Abstain: 5,530
The shareholders of Heritage voted as follows with respect to the
approval of the Merger Agreement:
For: 10,000
Withheld: 0
The shareholders of Heritage voted as follows with respect to the
nomination of directors to serve on the Company's Board of Directors:
John M. Morrison For: 10,000
Withheld: 0
Kurt R. Weise For: 10,000
Withheld: 0
Janice M. Graser For: 10,000
Withheld 0
Larry D. Albert For: 10,000
Withheld: 0
Jerome H. Hentges For: 10,000
Withheld: 0
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
- ------- -------------------------------------------------------
2.1 Articles of Combination of United Bank with
and into Heritage Bank
2.2 Plan of Reorganization and Merger Agreement (Dated October
9, 1997 and entered into by and among Heritage Bank,
Great Falls, Montana, and United Bank, Great Falls,
Montana)
10.1 Service Agreement (between CFS and the
Company, dated February 3, 1998)
10.2 Service Agreement (between CFS and United
Bank, dated February 3, 1998)
10.3 Service Agreement (between CFS and Heritage
Bank, dated December 18, 1996)
10.4 Salary Continuation Agreement (of Kevin P.
Clark, dated January 1, 1996)
27.1 Financial Data Schedule
B. Reports on Form 8-K
On February 18, 1998 the Company filed a Current Report on Form 8-K
disclosing the completion of the Merger.
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, 1998 /s/ John M. Morrison
--------------- ----------------------------
John M. Morrison
President and Chief Executive Officer
(Duly Authorized Representative)
Date May 15, 1998 /s/ Kurt R. Weise
--------------- ----------------------------
Kurt R. Weise
President and Chief Operating Officer
(Duly Authorized Representative)