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 September 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
(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 November 8, 1999
1,659,812 shares
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS............................................................................................1
Consolidated Condensed Statements of Financial Condition at
September 30, 1999 and December 31, 1998 (unaudited)...........................................................1
Consolidated Condensed Statements of Income - Three and Nine Months Ended
September 30, 1999 and September 30, 1998 (unaudited)..........................................................2
Consolidated Condensed Statements of Cash Flows - Nine Months Ended
September 30, 1999 and September 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..............................................................................................17
ITEM 2 CHANGE IN SECURITIES...........................................................................................17
ITEM 3 DEFAULTS ON SENIOR SECURITIES..................................................................................17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................................17
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)
SEPTEMBER 30, December 31,
------------------ -------------------
1999 1998
------------------ -------------------
ASSETS
Cash and cash equivalents $8,111 $19,255
Investment securities available-for-sale, net 55,928 51,900
Loans receivable, net 184,440 143,359
Loans held for sale 1,186 5,717
Premises and equipment, net 4,456 3,483
Real estate owned, net 71 304
Accrued interest receivable 2,595 1,918
Federal Home Loan Bank stock, at cost 2,992 1,232
Investment in Valley Bancorp, Inc. 2,950 2,684
Goodwill, net of accumulated amortization of $308 and $225
at September 30, 1999 and December 31,1998, respectively 1,317 1,400
Identifiable intangibles, net of accumulated amortization
of $82 and $30 at September 30, 1999, and December 31,
1998, respectively 555 607
Deferred income taxes, net 313 102
Other assets 893 600
------------------ -------------------
Total assets $265,807 $232,561
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 167,212 167,620
FHLB of Seattle advances 56,290 22,175
Securities sold under agreements to repurchase 9,869 9,450
Accrued interest payable 1,511 1,267
Advance payments by borrowers for taxes and insurance 768 343
Income taxes payable 23 116
Other liabilities 440 1,062
------------------ -------------------
Total liabilities 236,113 202,033
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 issued) 28,002 28,002
Treasury stock, at cost (33,500 shares) (694) --
Retained earnings-substanially restricted 3,054 2,533
Unrealized loss on securities available-for-sale, net (668) (7)
------------------ -------------------
29,694 30,528
------------------ -------------------
$265,807 $232,561
================== ===================
Equity/Assets 11.2 % 13.1 %
Book Value/Share $17.83 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- -------------- --------------- --------------
INTEREST INCOME
Loans receivable $3,671 $2,918 $10,074 $7,410
Mortgage-backed securities 699 586 2,062 1,602
Investment securities 114 259 322 722
FHLB of Seattle stock dividends 47 20 104 56
Other interest earning assets 23 104 147 445
-------------- -------------- --------------- --------------
Total interest income 4,554 3,887 12,709 10,235
INTEREST EXPENSE
Deposits 1,735 1,629 5,079 4,399
Short-term borrowings 812 429 1,863 869
Long-term debt - - - 12
-------------- -------------- --------------- --------------
Total interest expense 2,547 2,058 6,942 5,280
-------------- -------------- --------------- --------------
Net interest income 2,007 1,829 5,767 4,955
Provision for losses on loans 54 115 168 335
-------------- -------------- --------------- --------------
Net interest income after provision for losses
on loans 1,953 1,714 5,599 4,620
NON-INTEREST INCOME
Fees and discounts 789 852 2,323 2,092
Equity in income of Valley Bancorp Inc. 26 - 86 -
Investment securities sales, net - - 30 12
Other income 54 46 166 168
-------------- -------------- --------------- --------------
Total non-interest income 869 898 2,605 2,272
NON-INTEREST EXPENSE
Salaries and employee benefits 968 903 2,804 2,306
Net occupancy and equipment expense 192 164 558 434
Data processing expense 89 89 303 231
Other expenses 512 497 1,544 1,223
-------------- -------------- --------------- --------------
Total non-interest expense 1,761 1,653 5,209 4,194
-------------- -------------- --------------- --------------
Income before income taxes 1,061 959 2,995 2,698
Provision for income tax expense 417 365 1,154 1,035
-------------- -------------- --------------- --------------
Net income $644 $594 $1,841 $1,663
============== ============== =============== ==============
Net income per share $.38 $.35 $1.09 $1.07
============== ============== =============== ==============
Weighted average shares outstanding 1,681 1,698 1,692 1,550
============== ============== =============== ==============
See Notes to Consolidated Condensed Financial Statements
Page 2
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands) NINE MONTHS ENDED
(Unaudited) SEPTEMBER 30,
-------------------------------------------
1999 1998
-------------------- ---------------------
OPERATING ACTIVITIES
Net income $1,841 $1,663
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 168 335
Amortization of goodwill and identifiable intangibles 135 55
Depreciation and amortization of bank premises and equipment
and real estate held for investment 219 215
Deferred fees, net - (4)
Equity in income of Valley Bancorp Inc. (86) -
Amortization of discounts and premiums on investment securities 221 80
Gain on sale of real estate owned (5) -
Mortgage loans originated and held for sale (87,368) (55,600)
Proceeds from sales of mortgage loans held for sale 91,899 53,585
FHLB of Seattle stock dividends (107) (59)
Net change in accrued interest receivable (677) (537)
Net change in other assets (64) (103)
Net change in income taxes 109 (159)
Net change in accrued interest payable 244 137
Net change in other liabilities (289) (1,807)
-------------------- ----------------------
Net cash provided by (used in) operating activities 6,240 (2,199)
-------------------- ----------------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (33,922) (28,051)
Proceeds from maturities, paydowns and sales of securities
available-for-sale 28,599 32,054
Purchase of Federal Home Loan Bank stock (1,653) (132)
Purchase of Valley Bancorp, Inc. stock (180) -
Cash paid to FDIC on failed bank (333) -
Proceeds from sale of real estate owned 375 360
Net change in loans receivable (41,631) (42,172)
Purchases of premises and equipment (1,176) (349)
Cash collected from FDIC, net of acquired State Bank's cash
and cash equivalents - 9,965
Purchase of loan production offices - (225)
Acquired United Financial Corp.'s cash and cash equivalents - 8,113
-------------------- ----------------------
Net cash used in investing activities (49,921) (20,437)
-------------------- ----------------------
FINANCING ACTIVITIES
Net increase (decrease)in deposits (408) 7,955
Net increase in FHLB of Seattle advances 34,115 15,750
Net increase in securities sold under repurchase agreements 419 1,996
Net increase in advance by borrowers for taxes and insurance 425 307
Payments on long-term debt - (2,350)
Dividends paid to stockholders (1,320) (1,274)
Capital contribution - 2,275
Purchase of treasury stock (694) -
-------------------- ----------------------
Net cash provided by financing activities 32,537 24,659
-------------------- ----------------------
Increase (decrease) in cash and cash equivalents (11,144) 2,023
Cash and cash equivalents at beginning of year 19,255 9,869
-------------------- ----------------------
Cash and cash equivalents at end of period $8,111 $11,892
==================== ======================
SUPPLEMENTAL CASH FLOW DISCLOSURE
- ----------------------------------------------------------------------------------------
Cash payments for interest $6,698 $5,096
Cash payments for income taxes $1,055 $1,195
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 Old United in January 1998 was not included in the
reported 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 nine month periods ended September 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
SEPTEMBER 30, 1999 September 30, 1998
---------------------------------------- -----------------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
----------- ------------ ----------- ------------ -------------- ---------
Net income $1,061 $417 $644 $959 $365 $594
Holding gains (losses) arising during period (399) (153) (246) 249 96 153
Less: reclassification adjustment for gains
included in net income - - - - - -
----------- ------------ ----------- ------------ -------------- ---------
Net unrealized gains (losses) on securities (399) (153) (246) 249 96 153
----------- ------------ ----------- ------------ -------------- ---------
Total comprehensive income $662 $264 $398 $1,208 $461 $747
=========== ============ =========== ============ ============== =========
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 1999 September 30, 1998
---------------------------------------- -----------------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
----------- ------------- ------------ ------------ ------------ ---------
Net income $2,995 $1,154 $1,841 $2,698 $1,035 $1,663
Holding gains (losses) arising during period (1,104) (425) (679) 261 101 160
Less: reclassification adjustment for gains
included in net income 30 12 18 12 5 7
----------- ----------- ------------ ------------ ------------ -----------
Net unrealized gains (losses) on securities (1,074) (413) (661) 249 96 153
----------- ----------- ------------ ------------ ------------ -----------
Total comprehensive income $1,921 $741 $L,180 $2,947 $1,131 $1,816
=========== =========== ============ ============ ============ ===========
4. RECLASSIFICATIONS
Certain reclassifications have been made to the September 30, 1998
financial statements to conform to the September 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.
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
Page 5
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 October 8, 1999, the Board of Directors of United declared a
cash dividend of $.26 per share, payable November 22, 1999, to
shareholders of record on November 8, 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 $224,000 and $160,000
for the nine months ended September 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 Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims, any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
2. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF SEPTEMBER 30, 1999 TO
DECEMBER 31, 1998.
(In thousands)
(Unaudited, except December 31)
SELECTED FINANCIAL CONDITION RECAP
SEPT. 30, Dec. 31,
1999 1998 Change
------------------- ------------------ ------------------
Cash and cash equivalents $8,111 $ 19,255 $(11,144)
Investment securities, available
for-sale, net 55,928 51,900 4,028
Loans receivable, net 184,440 143,359 41,081
Loans held for sale 1,186 5,717 (4,531)
Premises and equipment, net 4,456 3,483 973
Real estate owned, net 71 304 (233)
FHLB of Seattle stock, at cost 2,992 1,232 1,760
Investment in Valley Bancorp,
Inc. 2,950 2,684 266
Goodwill, net 1,317 1,400 (83)
Identifiable intangibles,
net 555 607 (52)
All other assets 3,801 2,620 1,181
Total assets 265,807 232,561 33,246
Deposits 167,212 167,620 (408)
FHLB of Seattle advances 56,290 22,175 34,115
Securities sold under
agreements to repurchase 9,869 9,450 419
All other liabilities 2,742 2,788 (46)
Total liabilities 236,113 202,033 34,080
Stockholders' equity, net 29,694 30,528 (834)
GENERAL - Total assets increased $33.2 million to $265.8 million
at September 30, 1999 from $232.5 million at December 31, 1998. The
increase in assets was primarily the result of
Page 7
an increase in loans receivable. The $11.1 million decrease in cash and
cash equivalents was offset by a $4.0 million increase in investment
securities and a $1.8 million increase in FHLB of Seattle stock. Total
deposits decreased $.4 million.
INVESTMENT SECURITIES - Investment securities available-for-sale
increased $4.0 million to $55.9 million at September 30, 1999 from $51.9
million at December 31, 1998. The increase was the result of $33.9
million of purchases, partially offset by $28.6 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)
SEPTEMBER 30, 1999
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------- ---------------- ---------------- ----------------
U.S. Government and Federal
agencies $11,181 $ - $(304) $10,877
Mortgage-backed securities 41,695 - (517) 41,178
Municipal bonds 2,096 - (129) 1,967
Other investments 2,041 - (135) 1,906
---------------- ---------------- ---------------- ----------------
$57,013 $ - $(1,085) $55,928
================ ================ ================ ================
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
$41.1 million to $184.4 million at September 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
nine months. In February 1998, Heritage Bank 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 commercial and lease financing
loans. Heritage Bank had $42.6 million of participation and purchased
loans as of September 30, 1999.
During the nine months ended September 30, 1999, loans held for
sale decreased $4.5 million to $1.2 million at September 30, 1999 from
approximately $5.7 million at December 31, 1998. Approximately $87.4
million of loans were originated for sale and $91.9 million of loans were
sold to the secondary market during the nine month period ending
September 30, 1999.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve at September 30,
1999 was $1.6 million compared to $1.5 million at December 31, 1998.
During the nine months ended September 30,
Page 8
1999 loans in the amount of $61,000 were determined by management to be
uncollectable and subsequently charged-off. However, management
aggressively pursues recoveries which totaled $43,000 during the nine
months ended September 30, 1999. The loan loss reserve at September 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 September 30, 1999 was
.88%.
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 September 30, 1999 and December 31, 1998, United had no
assets classified as loss. At September 30, 1999 and December 31, 1998,
United has $4,000 and $553,000 of reported doubtful assets, respectively.
At September 30, 1999 and December 31, 1998, United had $586,000 and
$405,000 of reported substandard assets, respectively. As a percent of
total assets, classified assets were approximately .22%, and .41% at
September 30, 1999 and December 31, 1998, respectively.
REAL ESTATE HELD FOR INVESTMENT - The $.2 million decrease was the
result of the sale of 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
was sold in July 1999.
FHLB OF SEATTLE STOCK - FHLB of Seattle stock increased
approximately $1.8 million to $3.0 million at September 30, 1999 from
$1.2 million at December 31, 1998. This increase was the result of $.1
million of reinvested stock dividends and stock purchases of $1.7
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 $1.0 million to
$4.5 million at September 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, and .5 million of land in Bozeman. Heritage Bank
invested approximately $.3 million in fixed assets during the first nine
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 members. The
purchases of premises and equipment were offset by approximately $.2
million of depreciation.
GOODWILL - Goodwill decreased to $1.3 million at September 30,
1999 from $1.4 million at December 31, 1998, due to $83,000 of
amortization during the nine months ending September 30, 1999. The
goodwill is currently being amortized over 15 years.
DEPOSITS - Deposits decreased $.4 million to $167.2 million at
September 30, 1999 from $167.6 million at December 31, 1998. A $6.4
million increase in certificates of deposit and savings accounts during
1999 resulted primarily from the application of competitive rates on
deposit offerings by United as well as the offering of a greater array of
loan products to attract depositors. This increase was offset by a $6.8
million decrease in NOW and money market demand accounts which was the
result of normal business fluctuations in a selected number of United's
larger customer accounts.
BORROWED FUNDS - FHLB of Seattle advances increased $34.1 million
to $56.3 million at September 30, 1999 from $22.2 million at December 31,
1998. Securities sold under agreements to repurchase increased $.4
million to $9.9 million at September 30, 1999 from $9.5 million at
December 31, 1998. The additional borrowings in the first nine months of
1999 were used to fund increases in United's loan portfolio.
Page 9
STOCKHOLDERS' EQUITY - Stockholders' equity decreased $.8 million
to $29.7 million at September 30, 1999 from $30.5 million at December 31,
1998. This decrease is due to $1.8 million of net income for the nine
months ended September 30, 1999 less cash dividends declared of $1.3
million, a $.6 million increase in unrealized losses associated with assets
classified as available-for-sale being adjusted to market value and
treasury stock purchases of $.7 million.
Page 10
3. MATERIAL CHANGES IN RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(In thousands)
(Unaudited)
INCOME RECAP
---------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
1999 1998 Change
----------------- ----------------- -----------------
Interest income $4,554 $3,887 $667
Interest expense 2,547 2,058 489
----------------- ----------------- -----------------
Net interest income 2,007 1,829 178
Provision for loan losses 54 115 (61)
Non-interest income 869 898 (29)
Non-interest expense 1,761 1,653 108
----------------- ----------------- -----------------
Income before income taxes 1,061 959 102
Provision for income taxes 417 365 52
----------------- ----------------- -----------------
Net income $644 $594 $50
================= ================= =================
NET INCOME - Net income increased $50,000 to $644,000 for the
three months ended September 30, 1999 from $594,000 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 $.2
million to $2.0 million for the three months ended September 30, 1999
from $1.8 million for the three months ended September 30, 1998. United's
net interest margin decreased .42% to 3.24% for the three month period
ended September 30, 1999 from 3.66% for the same period last year.
Although net interest income increased, higher funding rates at Federal
Home Loan Bank and increased competition for loan rates resulted in a
decrease in net interest margin.
INTEREST INCOME - Interest income increased $.7 million to $4.6
million for the three months ended September 30, 1999 from $3.9 million
for the same period last year. Interest income on loans receivable
increased $.8 million to $3.7 million for the three months ended
September 30, 1999 from $2.9 million for the same period last year.
Interest income on all other interest earning investments including
investment securities decreased $.1 million for the three months ended
September 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. Also, funds from United have been used to purchase treasury
stock and Valley Bancorp stock, rather than being invested with third
party institutions.
Page 11
INTEREST EXPENSE - Total interest expense increased approximately
$.5 million to $2.5 million for the three months ended September 30, 1999
from $2.0 million for the same period last year. Interest expense on
deposits increased $.1 million to $1.7 million for the three months ended
September 30, 1999 from $1.6 million for the same period last year.
Interest expense on FHLB advances and securities sold under agreements to
repurchase increased $.4 million to $.8 million for the three months
ended September 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 $61,000 to $54,000 for the three months ended September 30,
1999 as compared to $115,000 for the same period last year. The Company
had increased the provision for loan losses for the three months ended
September 30, 1998 due to the increase in non-performing assets, 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 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 decreased $29,000 to
$869,000 for the three months ended September 30, 1999 from $898,000 for
the same period last year. This decrease is primarily the result of a
decrease in loan origination fees and discounts due to a decline in the
volume of refinancing activity during the three months ended September
30, 1999 as compared to the same period last year. This decrease was
partially offset by increases in the Company's equity in income of Valley
Bancorp, Inc. for the three months ended September 30, 1999, and a slight
increase in customer service charges in 1999.
NON-INTEREST EXPENSE - This category increased $.1 million to $1.8
million for the three months ended September 30, 1999 from $1.7 million
for the same quarter last year. Salary and employee benefits increased
$65,000 to $968,000 for the three months ended September 30, 1999
compared to $903,000 for the same quarter last year. Net occupancy and
equipment increased $28,000 to $192,000 for the three months ended
September 30, 1999 from $164,000 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 NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(In thousands)
(Unaudited)
INCOME RECAP
---------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
1999 1998 Change
----------------- ----------------- -----------------
Interest income $12,709 $10,235 $2,474
Interest expense 6,942 5,280 1,662
----------------- ----------------- -----------------
Net interest income 5,767 4,955 812
Provision for loan losses 168 335 (167)
Non-interest income 2,605 2,272 333
Non-interest expense 5,209 4,194 1,015
----------------- ----------------- -----------------
Income before income taxes 2,995 2,698 297
Provision for income taxes 1,154 1,035 119
----------------- ----------------- -----------------
Net income $1,841 $1,663 $178
================= ================= =================
Page 12
NET INCOME - Net income increased $.1 million to $1.8 million for
the nine months ended September 30, 1999 from $1.7 million for the same
period last year.
NET INTEREST INCOME - United's net interest income increased $.8
million to $5.8 million for the nine months ended September 30, 1999 from
$5.0 million for the nine months ended September 30, 1998. United's net
interest margin decreased .18% to 3.29% for the nine month period ended
September 30, 1999 from 3.47% for the same period last year. Although net
interest income increased, higher funding rates at Federal Home Loan Bank
and increased competition for lower loan rates resulted in a decrease in
net interest margin.
INTEREST INCOME - Interest income increased $2.5 million to $12.7
million for the nine months ended September 30, 1999 from $10.2 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 $2.7 million to $10.1 million for the nine
months ended September 30, 1999 from $7.4 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 $.2 million to $2.6 million for the nine months
ended September 30,1999 from $2.8 million for the same period last year.
INTEREST EXPENSE - Total interest expense increased approximately
$1.7 million to $6.9 million for the nine months ended September 30, 1999
from $5.2 million for the same period last year. The increase was
primarily the result of the expense associated with the increased deposit
base and increased FHLB borrowings from the same period in 1998. Interest
expense on deposits increased $.7 million to $5.1 million for the nine
months ended September 30, 1999 from $4.4 million for the same period
last year. Interest expense on FHLB advances and securities sold under
agreements to repurchase increased $1.0 million to $1.9 million for the
nine months ended September 30, 1999 from $.9 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 $.2 million to $.1 million for the nine months ended September
30, 1999 as compared to $.3 million for the same period last year. The
Company had increased the provision for loan losses due to the increase
in total loans, including non-performing assets, 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
$2.6 million for the nine months ended September 30, 1999 from $2.3
million for the same period last year. This increase was primarily the
result of continued growth in loan origination fees and discounts in the
nine months ended September 30, 1999. Another significant factor in this
category was the equity of income of Valley Bancorp, Inc. of $86,000 for
the nine months ended September 30, 1999.
NON-INTEREST EXPENSE - This category increased $1.0 million to
$5.2 million for the nine months ended September 30, 1999 from $4.2
million for the same quarter last year. Salary and employee benefits
increased $.5 million to $2.8 million for the nine months ended September
30, 1999 compared to $2.3 million for the same period last year. Net
occupancy and equipment increased $.1 million to $.5 million for the nine
months ended September 30, 1999 from $.4 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 $.1 million to $1.1
million for the nine months ended September 30, 1999 from $1.0 million
for the same period last year. The increase is due to the $.3 million
increase in income before taxes, which is tax affected for non-deductible
goodwill amortization and tax-free interest on municipal bonds and loans.
Page 13
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, 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 had 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 September 30, 1999, which is expected to allow time
for necessary refinements and additional testing before December 31,
1999. In October 1999, Heritage Bank installed a new teller system
platform which is widely used by other banks and which has been certified
Year 2000 compliant by the vendor, and is currently in the process of
testing that system. 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. Management is currently providing training and conducting
Page 14
rehearsals for the alternative procedures contained in the Business
Resumption Contingency Plan.
In accordance with OTS regulations, United's management has
developed a cash and liquidity plan to provide adequate funds for the
Banks' Y2K needs. Additional funding sources have been established to
meet Y2K cash demands as needed.
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 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
MARKET RISK. Market risk is the risk of loss in a financial
instrument arising from adverse changes in market rates/prices such as
interest rates, foreign currency exchange rates, commodity prices and
equity prices. Since United's earnings depend on its level of interest
rate spread, its primary market risk exposure is interest rate risk
("IRR").
INTEREST RATE RISK. United has established a formal IRR policy,
and the Banks have an Asset/Liability Management Committee and an
Investment Committee, which meet at least quarterly to review and report
on management's efforts to minimize IRR. Several asset/liability
management strategies have been employed by United to minimize its
exposure to IRR. These include selling most newly-originated long-term
fixed-rate mortgages, promoting the origination and retention of loans
providing for periodic interest rate adjustments, shorter terms to
maturity or balloon provisions, and investing in adjustable rate or
shorter-term mortgage-backed securities and other interest-earning
investments.
Page 15
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE. Interest rate
risk sensitivity of net portfolio value ("NPV") measurement seeks to
establish a methodology to measure the potential for the reduction of
earnings and stockholders' equity resulting from both lower net interest
income ("NII") and lower NPV caused by changes in market interest rates.
NPV is the difference between the Bank's depository portfolio value and
its loans receivable portfolio value. NPV thus provides a leading
indicator of future potential changes in both NII and stockholders'
equity. Because of its asset size (less than $500 million), Heritage Bank
falls under an OTS exemption that allows utilization of an
asset/liability computer simulation program prepared and distributed by
the OTS. The OTS Thrift Financial Report includes Schedule CMR that
provides detailed information about the balances, interest rates,
repricing, and maturity characteristics of the Bank's financial
instruments. By utilizing the Bank's Schedule CMR data, the OTS runs
computer simulations ("Net Portfolio Value Model") utilizing OTS
assumptions. Heritage Bank, per OTS requirements, has established maximum
percentage changes for NPV resulting from instantaneous changes in
interest rates of 100 to 400 basis points. A maximum change of -15% for
an instantaneous 200 basis point change in interest rate has been
established. A 200 basis point change is used by the OTS as the current
Interest Rate Sensitivity Measure by which thrifts are evaluated.
Heritage Bank periodically reviews and makes changes to established
limits for NPV changes due to mergers and other market factors.
The following table demonstrates Heritage Bank's June 30, 1999 NPV
and the present value of total assets, NPV ratio and basis point change
for three instantaneous increases and the three instantaneous decreases
in interest rates:
Interest Rate Sensitivity of Net Portfolio Value
(Dollars in thousands)
Instantaneous Net Portfolio Value NPV as % of PV of Assets
Change in ------------------------------------------------------------------------
Rates $ Amount $ Change % Change Total Assets NPV Ratio Change
- --------- ------- -------- -------- ------------ --------- ------
+300 bp 15,363 -7,232 -32 % 225,630 6.81 % -275 bp
+200 bp 17,885 -4,710 -21 % 229,325 7.80 % -176 bp
+100 bp 20,334 -2,261 -10 % 232,975 8.73 % -83 bp
0 bp 22,595 236,470 9.56 %
- -100 bp 24,704 2,109 +9 % 239,848 10.30 % +74 bp
- -200 bp 27,194 4,599 +20 % 243,637 11.16 % +161 bp
- -300 bp 30,001 7,406 +33 % 247,784 12.11 % +255 bp
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operation results.
These hypothetical estimates are based upon numerous assumptions, including the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of assets and liability cash flows
and others. Sensitivity analysis does not reflect actions that United might take
in responding to or anticipating changes in interest rates.
Page 16
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.
None
ITEM 5 OTHER INFORMATION.
On October 5, 1999, the Company purchased 5,000 shares of treasury stock at
a price of $19.375 per share.
Subsequent to September 30, 1999 and through November 5, 1999, the Company
has purchased an additional 166,000 shares of Valley Bancorp, Inc. stock. This
brings the Company's total cost investment to $4,104,000 and represents a 36.30%
ownership percentage.
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
September 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 November 12, 1999 /s/ John M. Morrison
----------------- -------------------------------------
John M. Morrison
Chairman
(Duly Authorized Representative)
Date November 12, 1999 /s/ Kurt R. Weise
----------------- -------------------------------------
Kurt R. Weise
President and Chief
Executive Officer
(Duly Authorized Representative)
Page 18