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 June 30, 1999
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
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UNITED FINANCIAL CORP.
----------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0507591
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(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
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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 August 9,1999
1,680,812 -- shares
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS........................................................ 1
Consolidated Condensed Statements of Financial Condition at
June 30, 1999 (unaudited) and December 31, 1998............................... 1
Consolidated Condensed Statements of Income - Three and Six Months Ended
June 30, 1999 and June 30, 1998 (unaudited)................................... 2
Consolidated Condensed Statements of Cash Flows - Six Months Ended
June 30, 1999 and June 30, 1998 (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................. 15
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.......................................................... 16
ITEM 2 CHANGE IN SECURITIES....................................................... 16
ITEM 3 DEFAULTS ON SENIOR SECURITIES.............................................. 16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS...................... 16
ITEM 5 OTHER INFORMATION.......................................................... 17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................................... 17
SIGNATURES........................................................................... 18
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, except December 31)
JUNE 30, December 31,
--------- ---------
1999 1998
--------- ---------
ASSETS
Cash and cash equivalents
Cash and amounts due from banks $ 6,219 $ 9,055
Interest-earning deposits with banks 1,135 10,200
--------- ---------
7,354 19,255
Time deposits in banks 113 0
Investment securities available-for-sale, net 58,641 51,900
Loans receivable, net 171,799 143,359
Loans held for sale 1,922 5,717
Premises and equipment, net 3,950 3,483
Real estate owned, net 616 304
Accrued interest receivable 2,187 1,918
Federal Home Loan Bank stock, at cost 2,284 1,232
Investment in Valley Bancorp, Inc. 2,885 2,684
Goodwill, net of accumulated amortization of $280 and $225
at June 30, 1999 and December 31, 1998, respectively 1,345 1,400
Identifiable intangibles, net of accumulated amortization
of $65 and $30 at June 30, 1999, and December 31, 1998,
respectively 572 607
Deferred income taxes 283 102
Other assets 809 600
--------- ---------
Total assets $ 254,760 $ 232,561
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts $ 41,700 $ 41,802
Savings deposits 46,156 46,811
Time deposits 82,707 79,007
--------- ---------
170,563 167,620
FHLB of Seattle advances 41,310 22,175
Securities sold under agreements to repurchase 10,156 9,450
Accrued interest payable 1,533 1,267
Advance payments by borrowers for taxes and insurance 338 343
Income taxes payable -- 116
Other liabilities 433 1,062
--------- ---------
Total liabilities 224,333 202,033
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 28,002
Retained earnings-partially restricted 2,847 2,533
Unrealized loss on securities available-for-sale, net (422) (7)
--------- ---------
30,427 30,528
--------- ---------
$ 254,760 $ 232,561
========= =========
Equity/Assets 11.9% 13.1%
Book Value/Share $ 17.92 $ 17.98
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------ ------ ------ ------
INTEREST INCOME
Loans receivable $3,313 $2,539 $6,403 $4,492
Mortgage-backed securities 717 583 1,363 1,016
Investment securities 109 249 207 463
FHLB of Seattle stock dividends 34 21 57 36
Other Interest earning assets 39 126 125 341
------ ------ ------ ------
Total interest income 4,212 3,518 8,155 6,348
INTEREST EXPENSE
Deposits 1,681 1,530 3,343 2,770
Short-term borrowings 612 249 1,051 440
Long-term debt 12
------ ------ ------ ------
Total interest expense 2,293 1,779 4,394 3,222
------ ------ ------ ------
Net interest income 1,919 1,739 3,761 3,126
Provision for losses on loans 75 175 115 220
------ ------ ------ ------
Net interest income after provision for
losses on loans 1,844 1,564 3,646 2,906
NON-INTEREST INCOME
Fees and discounts 817 790 1,533 1,240
Equity in income of Valley Bancorp Inc. 28 -- 60 --
Investment securities sales, net 15 18 30 12
Other income 59 69 113 122
------ ------ ------ ------
Total non-interest income 919 877 1,736 1,374
NON-INTEREST EXPENSE
Salaries and employee benefits 934 844 1,836 1,403
Net occupancy and equipment expense 190 156 367 270
Data processing expense 99 71 213 142
Other expenses 543 421 1,031 726
------ ------ ------ ------
Total non-interest expense 1,766 1,492 3,447 2,541
------ ------ ------ ------
Income before income taxes 997 949 1,935 1,739
Provision for income tax expense 373 375 738 670
------ ------ ------ ======
Net income $ 624 $ 574 $1,197 $1,069
====== ====== ====== ======
Net income per share $ .37 $ .34 $ .70 $ .72
====== ====== ====== ======
Weighted average shares outstanding 1,698 1,698 1,698 1,475
====== ====== ====== ======
See Notes to Consolidated Condensed Financial
Statements
Page 2
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands) SIX MONTHS ENDED
(Unaudited) June 30,
---------------------
1999 1998
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OPERATING ACTIVITIES
Net income $ 1,197 $ 1,069
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 115 220
Amortization of goodwill and identifiable intangibles 90 41
Depreciation and amortization of bank premises and equipment
and real estate held for investment 140 138
Equity in income of Valley Bancorp Inc. (60) 0
Amortization of discounts and premiums on investment
securities 162 29
Mortgage loans originated and held for sale (55,373) (34,660)
Proceeds from sales of mortgage loans held for sale 59,168 34,400
FHLB of Seattle stock dividends (58) (39)
Net change in accrued interest receivable (269) (259)
Net change in other assets (209) 131
Net change in income taxes (67) (23)
Net change in accrued interest payable 266 151
Net change in other liabilities (266) (1,930)
-------- --------
Net cash provided by (used in) operating activities 4,836 (732)
-------- --------
INVESTING ACTIVITIES
Net increase in time deposits in banks (113) 0
Purchases of securities available-for-sale (32,922) (25,575)
Proceeds from maturities, paydowns and sales of securities
available-for-sale 25,344 25,798
Purchases of FHLB of Seattle stock (994) (109)
Purchase of Valley Bancorp, Inc. stock (141) 0
Cash paid to FDIC on failed bank (333) 0
Acquisition of real estate owned (362) 0
Proceeds from sale of real-estate held for investment 37 360
Net change in loans receivable (28,555) (30,419)
Purchases of premises and equipment (594) (180)
Purchase of loan production offices 0 (225)
Acquired United Financial Corp.'s cash and cash equivalents 0 8,112
-------- --------
Net cash used in investing activities (38,633) (22,238)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 2,943 4,804
Net increase in FHLB of Seattle advances 19,135 9,000
Net increase in securities sold under repurchase agreements 706 8,613
Net decrease in advance by borrowers for taxes and insurance (5) (103)
Payments on long-term debt 0 (2,350)
Dividends paid to stockholders (883) (424)
Capital contribution 0 2,275
-------- --------
Net cash provided by financing activities 21,896 21,815
-------- --------
Decrease in cash and cash equivalents (11,901) (1,155)
Cash and cash equivalents at beginning of year 19,255 9,869
-------- --------
Cash and cash equivalents at end of period $ 7,354 $ 8,714
-------- --------
SUPPLEMENTAL CASH FLOW DISCLOSURE
- ------------------------------------------------------------------
Cash payments for interest $ 4,128 $ 2,874
Cash payments for income taxes $ 735 $ 699
See Notes to Consolidated Condensed Financial Statements
Page 3
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 12 other Montana
communities. Substantially all of United's banking business is currently
conducted through its wholly-owned subsidiaries, Heritage Bank F.S.B.
("Heritage Bank") and Heritage State Bank ("State Bank"), (collectively,
"the Banks"). United is the result of the merger on February 3, 1998 (the
"Heritage Merger") of two Montana-based savings and loan holding companies
of relatively comparable size: United Financial Corp. (as it existed prior
to the merger, ("Old United") and Heritage Bancorporation ("Heritage").
Heritage Bank is the result of the subsequent merger in May 1998 of the
savings bank subsidiaries of these two holding companies: United Savings
Bank, F.A., the savings bank subsidiary of Old United ("United Bank"), and
Heritage Bank, the savings bank subsidiary of Heritage.
The Heritage Merger was treated as a reverse acquisition and accounted
for as a purchase in accordance with generally accepted accounting
principles. Because the shareholders and management of Heritage controlled
the operations of United after the Heritage Merger, Heritage was considered
the acquirer for accounting purposes.
Consistent with Heritage being the acquiring corporation for
accounting purposes, the historical financial statements of United, for
periods prior to the Heritage Merger, are those of Heritage, and not Old
United as it existed prior to the Heritage Merger. Accordingly, the
historical statements of operations of United reflect only the operations
of Old United commencing with the closing date of the Merger. Therefore,
premerger net income of United in January 1998 was not included in the
actual first quarter 1998 results. Under the purchase method of accounting,
the assets and liabilities of Old United and its subsidiary were adjusted
to their estimated fair values and combined with the historical book values
of the assets and liabilities of Heritage.
2. 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 and six month periods ended June 30, 1999, are not
necessarily indicative of the results anticipated for the year ending
December 31, 1999. 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, 1998.
Page 4
3. COMPREHENSIVE INCOME
The Company's only significant element of comprehensive income is
unrealized gains and losses on available-for-sale securities.
THREE MONTHS ENDED Three Months Ended
JUNE 30, 1999 June 30, 1998
------------------------------- -----------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
------- ------- ------- ------- ------- -------
Net income $ 997 $ 373 $ 624 $ 949 $ 375 $ 574
Holding gains (losses) arising
during period (616) (238) (378) 166 64 102
Less: reclassification adjustment
for gains included in net
income 15 6 9 18 7 11
------- ------- ------- ------- ------- -------
Net unrealized gains (losses) on
securities (601) (232) (369) 148 57 91
------- ------- ------- ------- ------- -------
Total comprehensive income $ 396 $ 141 $ 255 $ 1,097 $ 432 $ 665
======= ======= ======= ======= ======= =======
SIX MONTHS ENDED Six Months Ended
JUNE 30, 1999 June 30, 1998
------------------------------- -----------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
------- ------- ------- ------- ------- -------
Net income $ 1,935 $ 738 $ 1,197 $ 1,739 $ 670 $ 1,069
Holding gains (losses) arising
during period (705) (272) (433) 160 62 98
Less: reclassification adjustment
for gains included in net
income 30 12 18 12 5 7
------- ------- ------- ------- ------- -------
Net unrealized gains (losses) on
securities (675) (260) (415) 148 57 91
------- ------- ------- ------- ------- -------
Total comprehensive income $ 1,262 $ 480 $ 782 $ 1,887 $ 727 $ 1,160
======= ======= ======= ======= ======= =======
4. RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1998
financial statements to conform to the June 30, 1999 presentation.
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.
6. 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.
Page 5
7. 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.
8. DIVIDENDS DECLARED
On July 26, 1999, the Board of Directors of United declared a
second-quarter cash dividend of $.26 per share, payable August 23, 1999, to
shareholders of record on August 9, 1999.
9. 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 $140,000 and $109,000 for
the six months ended June 30, 1999 and 1998, respectively.
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 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 Bank's financial
performance and could cause the Bank'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.
2. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF JUNE 30, 1999 TO
DECEMBER 31, 1998.
(In thousands)
(Unaudited, except December 31)
SELECTED FINANCIAL CONDITION RECAP
JUNE 30, Dec. 31,
1999 1998 Change
----------------------------------
Cash and cash equivalents $ 7,354 $ 19,255 $(11,901)
Investment securities,
available-for-sale, net 58,641 51,900 6,741
Loans receivable, net 171,799 143,359 28,440
Loans held for sale 1,922 5,717 (3,795)
Premises and equipment, net 3,950 3,483 467
Real estate owned, net 616 304 312
FHLB of Seattle stock, at cost 2,284 1,232 1,052
Investment in Valley Bancorp,
Inc 2,885 2,684 201
Goodwill, net 1,345 1,400 (55)
Identifiable intangibles,
net 572 607 (35)
All other assets 3,392 2,620 772
Total assets 254,760 232,561 22,199
Deposits 170,563 167,620 2,943
FHLB of Seattle advances 41,310 22,175 19,135
Securities sold under
agreements to repurchase 10,156 9,450 706
All other liabilities 2,304 1,062 1,242
Total liabilities 224,333 200,307 24,026
Stockholders' equity, net 30,427 30,528 (101)
Page 7
GENERAL - Total assets increased $22.2 million to $254.7 million at
June 30, 1999 from $232.5 million at December 31, 1998. The increase in
assets was primarily the result of an increase in loans receivable. The
$11.9 million decrease in cash and cash equivalents was offset by a $6.7
million increase in investment securities and a $1.0 million increase in
FHLB of Seattle stock. Total deposits increased $2.9 million.
INVESTMENT SECURITIES - Investment securities available-for-sale
increased $6.7 million to $58.6 million at June 30, 1999 from $51.9 million
at December 31, 1998. The increase was the result of $32.9 million of
purchases, partially offset by $25.3 million of maturities, sales, and
principal repayments. The remainder of the decrease was the result of
premium amortization and unrealized losses on market valuations.
A comparison of the amortized cost and estimated fair value of
United's available for sale investment portfolio at the dates indicated is
as follows:
(In thousands)
(Unaudited, except for December 31)
JUNE 30, 1999
----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. Government and Federal
agencies $ 10,451 $ -- $ (325) $ 10,126
Mortgage-backed securities 44,728 16 (315) 44,429
Municipal bonds 2,106 4 -- 2,110
Other investments 2,041 -- (65) 1,976
-------- -------- -------- --------
$ 59,326 $ 20 $ (705) $ 58,641
======== ======== ======== ========
December 31, 1998
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
U.S. Government and Federal
agencies $ 13,643 $ 26 $ (33) $ 13,636
Mortgage-backed securities 36,370 77 (94) 36,353
Municipal bonds 859 31 (5) 885
Other investments 1,039 -- (13) 1,026
-------- -------- -------- --------
$ 51,911 $ 134 $ (145) $ 51,900
======== ======== ======== ========
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased $28.5 million to $171.8 million at June 30, 1999 from $143.3
million at December 31, 1998. The loans receivable increase is a direct
result of strong loan demand generated through officer call programs,
increased market area, continued purchase of participation loans and lease
financing loans, and a favorable interest rate environment in the past six
months. Heritage Bank recently established two additional loan production
offices in the western Montana cities of Kalispell and Polson and the
formation of State Bank added two branches in Fort Benton and Geraldine,
Montana. The Heritage Bank 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
Page 8
commercial and lease financing loans. Heritage Bank had $ 37.9 million of
participation and purchased loans as of June 30, 1999.
During the six months ended June 30, 1999, loans held for sale
decreased $3.8 million to $1.9 million at June 30, 1999 from approximately
$5.7 million at December 31, 1998. Approximately $55.4 million of loans
were originated for sale and $59.2 million of loans were sold to the
secondary market during the six month period ending June 30, 1999.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve at June 30, 1999 was
$1.6 million compared to $1.5 million at December 31, 1998. During the six
months ended June 30, 1999 loans in the amount of $30,000 were determined
by management to be uncollectable and subsequently charged-off. However,
management aggressively pursues recoveries which totaled $41,000 during the
six months ended June 30, 1999. The loan loss reserve at June 30, 1999 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 June 30, 1999 was .93%.
NON-PERFORMING ASSETS - 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 June 30, 1999 and December 31, 1998, United had no assets classified as
loss. At June 30, 1999 and December 31, 1998, United has $440,000 and
$553,000 of reported doubtful assets, respectively. The doubtful balance
includes a loan of $416,000 to a company which originates and secures home
equity loans. A subsidiary of the borrower filed for Chapter 11 bankruptcy
protection in March 1999. United had placed the loan on non-accrual in
December 1998, and has allocated loss reserves for any potential loss on
the loan. As of June 30, 1999, the loan was current with regard to
principal and interest payments, and the third quarter's payment was made
on a timely basis. At June 30, 1999 and December 31, 1998, United had
$47,000 and $405,000 of reported substandard assets, respectively. As a
percent of total assets, classified assets were approximately .02%, and
.41% at June 30, 1999 and December 31, 1998, respectively.
REAL ESTATE HELD FOR INVESTMENT - The $.3 million increase was the
result of real estate acquired by Heritage Bank through a foreclosure. A
foreclosure sale had been completed pending approval of an IRS lien
release. Other real estate owned also includes a twenty-four unit apartment
complex in Glendive, Montana, owned as a depreciating investment by
Heritage Bank's wholly owned subsidiary, Community Service Corporation. The
apartment complex has been sold with a closing date of July 30,1999.
FHLB OF SEATTLE STOCK - FHLB of Seattle stock increased approximately
$1.1 million to $2.3 million at March 31, 1999 from $1.2 million at
December 31, 1998. This increase was the result of $58,000 of reinvested
stock dividends and stock purchases of $1.0 million. FHLB stock purchases
are made as required by the FHLB of Seattle to support the increased scope
of operations.
PREMISES AND EQUIPMENT - This category increased $.5 million to $4.0
million at June 30, 1999 from $3.5 million at December 31, 1998. This
increase was primarily due to the acquisition of $.4 million of land in
Missoula. Heritage Bank invested approximately $.2 million in fixed assets
during the first six months of 1999 for (1) the purchase of computer and
office equipment for the branches and additional staff members, and (2)
remodeling of the main banking facility in Great Falls to accommodate added
staff
Page 9
members. The purchases of premises and equipment were offset by
approximately $.1 million of depreciation.
GOODWILL - Goodwill decreased to $1.3 million at June 30, 1999 from
$1.4 million at December 31, 1998, due to $55,000 of amortization during
the six months ending June 30, 1999. The goodwill is currently being
amortized over 15 years.
DEPOSITS - Deposits increased $3.0 million to $170.6 million at June
30, 1999 from $167.6 million at December 31, 1998. The increase in deposits
during 1999 resulted primarily from the application of competitive rates on
all deposit offerings by United as well as the offering of a greater array
of loan products to attract depositors.
BORROWED FUNDS - FHLB of Seattle advances increased $19.1 million to
$41.3 million at June 30, 1999 from $22.2 million at December 31, 1998.
Securities sold under agreements to repurchase increased $.7 million to
$10.2 million at June 30, 1999 from $9.5 million at December 31, 1998. The
additional borrowings in the first six months of 1999 were used to fund
increases in United's loan portfolio.
STOCKHOLDERS' EQUITY - Stockholders' equity decreased $.1 million to
$30.4 million at June 30, 1999 from $30.5 million at December 31, 1998.
This decrease is due to $1.2 million of net income for the six months ended
June 30, 1999 less cash dividends declared of $.9 million and a $.4 million
increase in unrealized losses associated with assets classified as
available-for-sale being adjusted to market value.
Page 10
3. MATERIAL CHANGES IN RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS
ENDED JUNE 30, 1999 AND JUNE 30, 1998
(In thousands)
(Unaudited)
INCOME RECAP
--------------------------
THREE MONTHS ENDED JUNE 30,
--------------------------
1999 1998 Change
------ ------ ------
Interest income $4,212 $3,518 694
Interest expense 2,293 1,779 514
------ ------ ------
Net interest income 1,919 1,739 180
Provision for loan losses 75 175 (100)
Non-interest income 919 877 42
Non-interest expense 1,766 1,492 274
------ ------ ------
Income before income taxes 997 949 48
Provision for income taxes 373 375 (2)
------ ------ ------
Net income $ 624 $ 574 $ 50
====== ====== ======
NET INCOME - Net income increased $50,100 to $623,900 for the three
months ended June 30, 1999 from $573,800 for the same period last year.
INTEREST INCOME - Interest income increased $.7 million to $4.2
million for the three months ended June 30, 1999 from $3.5 million for the
same period last year. Interest income on loans receivable increased $.8
million to $3.3 million for the three months ended June 30, 1999 from $2.5
million for the same period last year. Interest income on all other
interest earning investments including investment securities decreased
$80,000 for the three months ended June 30, 1999 from the same period last
year. This decrease was the result of funds from Heritage Bank being used
to fund loan growth at Heritage State Bank, rather than being invested with
third party institutions.
INTEREST EXPENSE - Total interest expense increased approximately $.5
million to $2.3 million for the three months ended June 30, 1999 from $1.8
million for the same period last year. Interest expense on deposits
increased $.2 million to $1.7 million for the three months ended June 30,
1999 from $1.5 million for the same period last year. Interest expense on
FHLB advances and securities sold under agreements to repurchase increased
$.4 million to $.6 million for the three months ended June 30, 1999 from
$.2 million for the same period last year. This increase is primarily due
to an increase in average interest bearing liabilities.
PROVISION FOR LOAN LOSSES - The provision for loan losses decreased
$100,000 to $75,000 for the three months ended June 30, 1999 as compared to
$175,00 for the same period last year. The Company had increased the
provision for loan losses for the six months ended June 30, 1998 due to the
increase in total loans held in its portfolio and the changing economic
conditions experienced to that date.
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
Page 11
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 $42,900 to
$919,900 for the three months ended June 30, 1999 from $877,000 for the
same period last year. This increase was primarily the result of the
Company's prorata share of Valley Bancorp, Inc.'s income for the three
months ended June 30, 1999. There also was a slight increase in customer
service charges in 1999.
NON-INTEREST EXPENSE - This category increased $.3 million to $1.8
million for the three months ended June 30, 1999 from $1.5 million for the
same quarter last year. Salary and employee benefits increased $90,000 to
$934,000 for the three months ended June 30, 1999 compared to $844,000 for
the same quarter last year. Net occupancy and equipment increased $34,000
to $190,000 for the three months ended June 30, 1999 from $156,000 for the
same quarter last year. This increase was primarily due to the continued
staffing and furnishings of the branches acquired in the 1998 merger.
4. MATERIAL CHANGES IN RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS
ENDED JUNE 30, 1999 AND JUNE 30, 1998
(In thousands)
(Unaudited)
INCOME RECAP
-----------------------------
THREE MONTHS ENDED JUNE 30,
-----------------------------
1999 1998 Change
------- ------- -------
Interest income $ 8,155 $ 6,348 $ 1,807
Interest expense 4,394 3,222 1,172
------- ------- -------
Net interest income 3,761 3,126 635
Provision for loan losses 115 220 (105)
Non-interest income 1,736 1,374 362
Non-interest expense 3,447 2,541 906
------- ------- -------
Income before income taxes 1,935 1,739 196
Provision for income taxes 738 670 68
------- ------- -------
Net income $ 1,197 $ 1,069 $ 128
======= ======= =======
NET INCOME - Net income increased $.1 million to $1.2 million for the
six months ended June 30, 1999 from $1.1 million for the same period last
year.
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. United's net interest income increased $.6 million
from $3.1 million for the six months ended June 30, 1998 to $3.7 million
for the six months ended June 30, 1999. United's net interest margin
decreased .41% to 3.44% for the six month period ended June 30, 1999 from
3.85% for the same period last year.
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INTEREST INCOME - Interest income increased $1.8 million to $8.1
million for the six months ended June 30, 1999 from $6.3 million for the
same period last year. The increase was the result of an increase in
interest earning assets from the same period in 1998. Interest income on
loans receivable increased $1.9 million to $6.4 million for the six months
ended June 30, 1999 from $4.5 million for the same period last year.
Interest income on mortgage-backed securities and interest income on all
other interest earning investments including investment securities
decreased $.1 million to $1.7 million for the six months ended June 30,1999
from $1.8 million for the same period last year.
INTEREST EXPENSE - Total interest expense increased approximately $1.2
million to $4.4 million for the six months ended June 30, 1999 from $3.2
million for the same period last year. The increase was primarily the
result of the expense associated with the increased deposit base and
increase FHLB borrowings from the same period in 1998. Interest expense on
deposits increased $.5 million to $3.3 million for the six months ended
June 30, 1999 from $2.8 million for the same period last year. Interest
expense on FHLB advances and securities sold under agreements to repurchase
increased $.6 million to $1.0 million for the six months ended June 30,
1999 from $.4 million for the same period last year. This increase is
primarily due to an increase in average interest bearing liabilities.
PROVISION FOR LOAN LOSSES - The provision for loan losses decreased
$.1 million to $.1 million for the six months ended June 30, 1999 as
compared to $.2 million for the same period last year. The Company had
increased the provision for loan losses due to the increase in total loans
held in its portfolio in 1998 and the changing economic conditions
experienced to that date.
NON-INTEREST INCOME - Non-interest income increased $.3 million to
$1.7 million for the six months ended June 30, 1999 from $1.4 million for
the same period last year. This increase was primarily the result of
continued growth in loan origination fees and discounts in the six months
ended June 30, 1999. Another significant factor in this category was the
prorata share of Valley Bancorp, Inc.'s income of $60,000 for the six
months ended June 30, 1999.
NON-INTEREST EXPENSE - This category increased $.9 million to $3.4
million for the six months ended June 30, 1999 from $2.5 million for the
same quarter last year. Salary and employee benefits increased $.4 million
to $1.8 million for the six months ended June 30, 1999 compared to $1.4
million for the same period last year. Net occupancy and equipment
increased $.1 million to $.4 million for the six months ended June 30, 1999
from $.3 million for the same quarter last year. These increases are the
result of continued staffing and furnishing of the branches acquired in the
1998 merger.
INCOME TAXES - Income tax expense increased $68,000 due to the
$196,000 increase in income before taxes, which is tax affected for
non-deductible goodwill amortization and tax-free interest on municipal
bonds and loans.
YEAR 2000
Many currently installed computer systems and software are coded to
accept only two-digit entries in the date code fields. These date code
fields will need to accept four-digit entries to distinguish 21st century
dates from 20th century dates. This problem could result in system failures
or miscalculations causing disruptions of business operations, including
production of erroneous data, inability to process transactions, and other
operational problems. As a result, many companies' computer systems and
software will need to be upgraded or replaced in order to comply with Year
2000 requirements. The potential global impact of the Year 2000 problem is
not known,
Page 13
and, if not corrected in a timely manner, could affect United as well as
the U.S. and world economy generally.
United has undertaken efforts to address Year 2000 issues. United has
formed a project team, including the President and Operations Officer of
Heritage Bank, a contracted Year 2000 compliance person and a contracted
computer consulting firm, to evaluate the Year 2000 impact on United's
mission-critical computer hardware and software and embedded technologies
in its physical plant and automated equipment (such as ATMs, proof
machines, vaults and security systems). Heritage Bank and State Bank are
also in the process of ascertaining the Year 2000 readiness of their
customers. As a result of the May 1998 merger of United Bank into Heritage
Bank, and the August 1998 acquisition of State Bank, the project team is in
the process of reevaluating its Year 2000 readiness. In addition to
evaluating the scope of Year 2000 issues, the project team is in the
process of prioritizing tasks, developing implementation plans and
establishing completion and testing schedules. United is replacing,
modifying or reprogramming certain systems, is requiring that new purchased
hardware and software be Year 2000 compliant, and continuing to test its
systems.
The majority of United's information processing is performed by
Banker's Resource Center, of which Heritage Bank is an 11% owner. Banker's
Resource Center is regulated by banking regulators, has had various exams
by banking regulators, and is currently in the process of conducting Year
2000 certification testing. Banker's Resource Center provides periodic
reports to United on the status of its Year 2000 project readiness. During
the past two years, and also in conjunction with merging the operations of
Heritage Bank and United Bank in May 1998, United has upgraded the majority
of its internal computer hardware and software to Year 2000 compliant
systems. Additionally, all of United's personal computers are being tested
by its computer consulting firm. United has a budget of $105,000 for
replacement of teller equipment, its telephone system and other Year 2000
costs. To date, approximately $133,000 has been spent on the Year 2000
project. The United Board of Directors is currently reviewing the Y2K
budget for the extra costs. Actual costs are not expected to exceed
$150,000.
Apart from United's Year 2000 efforts, federal banking regulators
conduct special examinations of FDIC insured banks and savings associations
to determine whether they are taking necessary steps to prepare for the
Year 2000 issue. These agencies are closely monitoring the progress made by
these institutions in completing key steps required by their individual
Year 2000 plans. The OTS, which regulates Heritage Bank, conducted an
onsite Year 2000 examination in May 1998 and follow-up examinations in
November 1998 and May 1999. The FDIC conducted a Year 2000 Phase II
Readiness Assessment of State Bank in February 1999.
The replacement, renovation and testing of its critical internal
computer hardware and software and embedded technologies have progressed as
scheduled as of June 30, 1999, which is expected to allow time for
necessary refinements and additional testing before December 31, 1999.
Heritage Bank is currently in the process of installing and testing a new
teller system platform which is widely used by other banks and which has
been certified Year 2000 compliant by the vendor. The United Board of
Directors continues to actively monitor the Company's Year 2000 efforts.
United has developed a Business Resumption Contingency Plan to mitigate
potential delays or other problems, in the event of various problem
scenarios and intends to assess such a plan based on the outcome of its
validation phase of its Year 2000 compliance program and the results of
surveying its major suppliers and customers. A due date of September 30,
1999 has been set to provide training and conduct rehearsals for the
alternative procedures contained in the Business Resumption Contingency
Plan.
Ultimately, the potential impact of Year 2000 issues will depend not
only on the success of the corrective measures that United undertakes, but
also on the way in which
Page 14
the Year 2000 issue is addressed by customers, vendors, service providers,
counterparts, utilities, governmental agencies and other entities with
which United does business. United is communicating with certain of these
parties to heighten their awareness of Year 2000 issues, to learn how they
are addressing them and to evaluate any likely impact on United. United
also is asking important vendors for commitment dates for their Year 2000
readiness and delivery of compliant software and other products. In
addition, United is monitoring the Year 2000 preparations of entities such
as the Federal Reserve Bank, which provides services for processing and
settling payments and securities transactions between banks. Year 2000
efforts of third parties are not within United's control, however, and
their failure to remediate Year 2000 issues successfully could result in
business disruption, increased operating cost and increased credit risk for
United. At the present time, it is not possible to determine whether any
such events are likely to occur, or to quantify any potential negative
impact they may have on United's future results of operations and financial
condition. The United Board of Directors evaluated the possible allocation
of a portion of its loan loss reserve specifically to potential losses from
Year 2000 complications, particularly with its commercial loan customers.
Although this risk will be closely monitored in 1999 by both senior
management and the United Board of Directors, no allocation of the loan
loss reserve has been deemed necessary at this time.
The foregoing discussion regarding Year 2000, including the discussion
of the timing and effectiveness of implementation and cost of United's Year
2000 project, contains forward-looking statements, which are based on
management's best estimates derived using various assumptions. These
forward-looking statements involve inherent risks and uncertainties, and
actual results could differ materially from those contemplated by such
statements. Factors that might cause material differences include, but are
not limited to, the availability to locate and correct all relevant
computer codes, and its ability to respond to unforeseen Year 2000
complications. Such material differences could result in, among other
things, business disruption, operating problems, financial loss, legal
liability and similar risks.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes there has been no material change in interest rate
risk since December 31, 1998. 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, 1998.
Page 15
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.
None
ITEM 3 DEFAULTS ON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On May 20, 1999, United Financial Corp. held its Annual Meeting. The
shareholders elected three directors and ratified KPMG LLP as independent
auditors for the Company.
The shareholders of United Financial Corp. voted as follows with respect
to:
Approval of Directors:
FOR WITHHELD
Larry D. Albert 1,543,017 9,425
Jerome H. Hentges 1,543,017 9,425
Steve L. Feurt 1,542,667 9,775
To ratify appointment of KPMG LLP as independent auditors for the Company:
For: 1,550,717
Against: 1,275
Abstain: 450
Page 16
ITEM 5 OTHER INFORMATION.
Subsequent to June 30, 1999, the Company purchased treasury stock as
follows:
Settlement Date No. of Shares Price/Share Cost of Treasury
Stock
7/8/99 7,500 $21.00 $157,500.00
8/3/99 10,000 $20.50 $205,000.00
------ -----------
17,500 $362,500.00
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 not file a current Report on form 8-K in the quarter ended
June 30, 1999.
Page 17
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 August 14, 1999 /s/ John M. Morrison
--------------------------------
John M. Morrison
Chairman
(Duly Authorized Representative)
Date August 14, 1999 /s/ Kurt R. Weise
--------------------------------
Kurt R. Weise
President and Chief
Executive Officer
(Duly Authorized Representative)
Page 18