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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15(d) OF
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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 First Avenue 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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date:
Common Stock, no par value; 2,444,634 shares outstanding as of April 30, 2005
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Statements of Financial Condition at
March 31, 2005 and December 31, 2004 1
Consolidated Condensed Statements of Income - Three Months Ended
March 31, 2005 and March 31, 2004 2
Consolidated Condensed Statements of Cash Flows - Three Months Ended
March 31, 2005 and March 31, 2004 3
Notes to Consolidated Condensed Financial Statements 4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
ITEM 4 CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 17
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 17
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 17
ITEM 5 OTHER INFORMATION 17
ITEM 6 EXHIBITS 17
SIGNATURES 18
Page i
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share data)
(Unaudited)
MARCH 31, DECEMBER 31,
--------- ------------
2005 2004
--------- ------------
ASSETS
Cash and cash equivalents $ 16,755 19,187
Securities available-for-sale 37,609 38,949
Restricted stock, at cost 4,228 4,212
Loans held for sale 5,705 5,786
Loans receivable, net 273,174 265,011
Accrued interest receivable 2,074 1,937
Premises and equipment, net 8,616 8,471
Real estate and other personal property owned 100 293
Goodwill 1,422 1,422
Other assets 2,039 1,872
--------- ---------
$ 351,722 347,140
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, NOW and money market demand accounts $ 74,150 83,464
Savings deposits 55,039 54,427
Time deposits 125,025 120,444
--------- ---------
254,214 258,335
Federal Home Loan Bank advances 51,982 44,794
Securities sold under agreements to repurchase 8,228 7,498
Accrued interest payable 1,194 1,189
Subordinated debt owed to trust 3,093 3,093
Other liabilities 2,319 1,603
--------- ---------
321,030 316,512
--------- ---------
Stockholders' equity:
Preferred stock, no par value; authorized 2,000,000
shares; no shares issued and outstanding -- --
Common stock, no par value; authorized 8,000,000 shares;
2,444,634 and 2,436,599 shares issued and outstanding
at March 31, 2005 and December 31, 2004, respectively 26,754 26,650
Paid in capital 32 29
Retained earnings 4,055 3,871
Accumulated other comprehensive income (loss), net (149) 78
--------- ---------
30,692 30,628
--------- ---------
$ 351,722 347,140
========= =========
Equity/Assets 8.73% 8.83%
Book Value/Share $ 12.55 12.57
See Notes to Consolidated Condensed Financial Statements
Page 1
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------ ------
INTEREST INCOME
Loans receivable $4,306 3,792
Taxable investments 362 401
Nontaxable investments 4 16
Other interest earning assets 36 45
------ ------
Total interest income 4,708 4,254
------ ------
INTEREST EXPENSE
Deposits 951 844
Other borrowings 476 370
------ ------
Total interest expense 1,427 1,214
------ ------
Net interest income 3,281 3,040
Provision for loan losses -- 52
------ ------
Net interest income after provision for loan losses 3,281 2,988
------ ------
NON-INTEREST INCOME
Gain on sale of loans 537 569
Service charges and fees 270 266
Gain on sale of securities available-for-sale -- 194
Other income 23 40
------ ------
Total non-interest income 830 1,069
------ ------
NON-INTEREST EXPENSE
Compensation and benefits 1,579 1,454
Occupancy and equipment expense 368 328
Data processing fees 186 173
Other 584 539
------ ------
Total non-interest expense 2,717 2,494
------ ------
Income before income taxes 1,394 1,563
Income taxes 526 589
------ ------
Net income $ 868 974
====== ======
BASIC EARNINGS PER SHARE $ .36 .40
DILUTED EARNINGS PER SHARE $ .35 .39
Dividends declared per share $ .28 .27
Weighted average shares outstanding-basic 2,441 2,438
Weighted average shares outstanding-diluted 2,513 2,530
See Notes to Consolidated Condensed Financial Statements
Page 2
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31, March 31,
--------- ---------
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash from operating activities $ 1,711 (1,426)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans receivable (8,185) (8,894)
Purchases of securities available-for-sale (2,000) (2,009)
Proceeds from maturities, pay downs and sales of securities
available-for-sale 2,955 5,064
Purchases of premises and equipment (302) (634)
Proceeds from sale of real estate and other personal property
owned 209 46
-------- --------
Net cash from investing activities (7,323) (6,427)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (4,121) 9,175
Proceeds from Federal Home Loan Bank advances 13,000 12,000
Payments on Federal Home Loan Bank advances (5,812) (11,000)
Net increase (decrease) in securities sold under agreements to
repurchase 730 (692)
Dividends paid to stockholders (684) (660)
Redemption of common stock -- (396)
Proceeds from issuance of common stock 67 78
-------- --------
Net cash from financing activities 3,180 8,505
-------- --------
Increase (decrease) in cash and cash equivalents (2,432) 652
Cash and cash equivalents at beginning of year 19,187 13,514
-------- --------
Cash and cash equivalents at end of period $ 16,755 14,166
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash payments for interest $ 1,422 1,248
Cash payments for income taxes $ 20 --
NON CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of other personal property in settlement of loans $ 19 17
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," the "Company," "we," "our" or "us")
is a bank holding company headquartered in Great Falls, Montana, with operations
in 15 locations in 13 Montana communities. We were organized as a Minnesota
corporation in 1996. We conduct our banking business in Montana through our
wholly-owned subsidiary, Heritage Bank, a Montana corporation established in
1923.
Heritage Bank is a state-chartered commercial bank with locations in
Billings, Bozeman, Chester, Fort Benton, Geraldine, Glendive, Great Falls (three
locations), Hamilton, Havre, Kalispell, Missoula, Libby and Shelby, Montana.
Heritage Bank conducts its community banking business by soliciting deposits
from the general public through its branches and using those deposits, together
with other available funds, to originate commercial (including lease financing),
commercial real estate, residential, agricultural and consumer loans primarily
in its market areas in Montana. Heritage Bank's banking business is concentrated
in the Great Falls area with 44% of our total assets located at Heritage Bank's
Great Falls locations. Heritage Bank also invests in mortgage-backed securities,
U.S. Treasury obligations, other U.S. Government agency obligations and other
interest-earning assets.
Heritage Bank's financial condition and results of operations, and
therefore our financial condition and results of operations, depend primarily on
net interest income and fee income. Heritage Bank's financial condition and
results of operations are also significantly influenced by local and national
economic conditions, changes in market interest rates, governmental policies,
tax laws and the actions of various regulatory agencies.
Heritage Bank has a wholly-owned subsidiary HPM, Inc. which was
incorporated to acquire land and a building for a new Great Falls full service
branch location, which it leases back to Heritage Bank. The new facility opened
in April 2005 and replaces a formerly leased drive-up location in Great Falls.
Heritage Bank also holds a 14% ownership interest in Bankers' Resource
Center, a computer data center, located in Helena, Montana.
Our principal offices are located at 120 First Avenue North, Great
Falls, Montana 59401, and our telephone number is (406) 727-6106.
You can access all our periodic and current reports, free of charge, on
our website as soon as reasonably practicable after we file or furnish such
material to the Securities and Exchange Commission ("SEC"). Our website address
is www.ufcmontana.com. The contents of our website are not a part of this report
or of our other filings with the SEC.
2. BASIS OF PRESENTATION
We have prepared our consolidated financial statements included in this
report in accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information and in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the
Securities and Exchange Commission. Accordingly, our consolidated financial
statements do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, the
accompanying unaudited consolidated condensed financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the consolidated financial condition, results of
operations, and cash flows for the periods disclosed. Our operating results for
the three months ended March 31, 2005 are not necessarily indicative of the
results that we anticipate for the year ending December 31, 2005. For additional
information, you should refer to the consolidated audited financial statements
and related footnotes included in our Annual Report to Shareholders and Annual
Report on Form 10-K for the year ended December 31, 2004.
Page 4
3. COMPREHENSIVE INCOME
Unrealized gains and losses on securities available-for-sale comprise
United's only significant element of other comprehensive income.
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------- ------
Net income $ 868 974
Unrealized and realized
holding gains (losses) arising during
period, net of tax (227) 114
Less: reclassification adjustment
for gains included in net income, net of tax -- 121
----- -----
Net unrealized gains (losses) on
securities available for sale, net of tax (227) (7)
----- -----
Total comprehensive income $ 641 967
===== =====
4. COMPUTATION OF EARNINGS PER SHARE
We calculate basic earnings per share ("EPS") 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 sum of the weighted average
number of common shares used to compute basic EPS plus the incremental amount of
potential common stock determined by the treasury stock method. Potential common
stock includes the incremental shares under stock option plans.
The following table sets forth the computation of basic and diluted
earnings per share.
(IN THOUSANDS, EXCEPT PER SHARE THREE MONTHS ENDED
DATA) MARCH 31,
--------------------
2005 2004
-------- --------
Weighted average shares outstanding during the
period on which basic earnings per share is
calculated
2,441 2,438
Add: incremental shares under stock option
plans 72 92
----- -----
Average outstanding shares on which diluted
earnings per share is calculated
2,513 2,530
===== =====
NET INCOME APPLICABLE TO COMMON
STOCKHOLDERS, BASIC AND DILUTED $ 868 974
BASIC EARNINGS PER SHARE $ .36 .40
DILUTED EARNINGS PER SHARE $ .35 .39
Page 5
5. RELATED PARTIES
Central Financial Services, Inc. ("CFS") provides various management
services to United, including certain accounting and tax services, investment
consulting, personnel consulting, asset-liability management and regulatory
consulting. CFS is owned by our largest shareholder and has been providing
similar services to various banks and financial services organizations since
December of 1988. CFS fees billed to United were approximately $.1 million for
each of the three month periods ended March 31, 2005 and 2004, respectively. The
fees are billed by CFS on an hourly basis for work performed by our Chairman and
CEO, our largest shareholder, and four other CFS employees. Our Chairman and CEO
does not receive direct compensation from United for these services. He is
compensated for services as a director through director's fees of $350 per
month, and for services as an officer of United through CFS. Through CFS, our
largest shareholder and Chairman and CEO earn annual salaries of $100,000 and
$151,000, respectively. Our pro-rata portion of those salaries was approximately
54%, based upon CFS billings during those periods.
From time to time, Central Bank, the Stillwater, Minnesota Bank founded
by our largest shareholder in 1988, sells loan participations to Heritage Bank.
Heritage Bank did not buy loan participations from Central Bank in the first
quarter of 2005. Our CEO is the Chairman of the Board of Central Bank.
Our CEO also serves on the Board of Directors of Timberline Bank in
Grand Junction, Colorado. Heritage Bank bought loan participations from
Timberline Bank with original balances totaling approximately $5.4 million in
the first quarter of 2005. The balances of these purchased loans have since paid
down in the first quarter of 2005. Balances of loan participations outstanding
with both Central Bank and Timberline Bank at March 31, 2005 and December 31,
2004, respectively, are disclosed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein in Item 2 in the
section titled "Loans Receivable and Loans Held for Sale."
United expects such transactions to continue to occur in the future
with both Central Bank and Timberline Bank. Such sales will be made on
substantially the same terms as loan participations which are sold to
nonaffiliated persons. Our largest shareholder and our CEO serve on other bank
boards as well. These banks, to date, have not had any loan participation
activity with Heritage Bank.
Banker's Resource Center ("BRC") provides data processing services for
Heritage Bank, as well as several other banks. Heritage Bank has a 14% ownership
interest in BRC. The charges for BRC's services were $.2 million for each of the
three month periods ended March 31, 2005 and 2004, respectively.
6. SUBSEQUENT EVENT-DIVIDENDS DECLARED
On April 26, 2005, our Board of Directors declared a quarterly cash
dividend of $.28 per share, payable June 1, 2005, to shareholders of record on
May 18, 2005.
7. STOCK-BASED COMPENSATION
United has a stock-based employee compensation plan which is described
more fully in footnotes included in our Annual Report to Shareholders and Annual
Report on Form 10-K for the year ended December 31, 2004. We account for the
plan under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under the plan have an exercise price at or above the market
value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition provisions of Financial
Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation.
Page 6
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
-------- ------
Net income: As reported $ 868 974
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 4 10
----- ------
Pro forma net income $ 864 964
===== ======
Earnings per share:
Basic - as reported $ .36 .40
===== ======
Basic - pro forma $ .35 .40
===== ======
Diluted - as reported $ .35 .39
===== ======
Diluted - pro forma $ .34 .38
===== ======
8. CRITICAL ACCOUNTING POLICIES
We have identified our most critical accounting policy to be related to
the allowance for loan losses. Our allowance for loan losses methodology
incorporates a variety of risk considerations in establishing an allowance for
loan losses that management believes is appropriate. Risk factors include
historical loss experience, delinquency and charge-off trends, collateral
values, an analysis of the current loan portfolio, and the level of
non-performing and impaired loans. We also use an internal loan risk grading
system to evaluate potential losses of individual loans. Other factors include
the future economic trends in our markets and, in particular, the state of
certain industries. Changes in any of the above factors could have a significant
affect on the calculation of the allowance for loan losses in any given period.
Therefore, management performs a full analysis on a quarterly basis to ensure
that changes in estimated loan loss levels are reflected in the loan loss
allowance on a timely basis.
Another critical accounting policy is related to the carrying value of
goodwill. We use a market valuation approach in assessing goodwill impairment
and measure the carrying value similarly at least annually. Impairment analysis
of the fair value of goodwill involves a substantial amount of judgment. At
March 31, 2005 and December 31, 2004, we had $1.4 million of recorded goodwill.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires
disclosure about stock-based compensation arrangements regardless of the method
used to account for them. As permitted by SFAS No. 123, we apply the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, and therefore
disclose the difference between compensation cost included in net income and the
related cost measured by the fair value-based method defined by SFAS No. 123,
including tax effects, that would have been recognized in the statement of
operations if the fair value method had been used. Under APB Opinion No. 25, no
compensation cost has been recognized for our stock incentive plan. Had we
determined compensation cost for the plan in accordance with SFAS No. 123 and
recognized it over the vesting period, our net income and earnings per share
would have been reduced to the pro forma amounts as presented in Note 7 above.
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No 123 (R) (revised 2004), "Share-Based Payment." This Statement
requires us to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. We
will recognize that cost over the period during which an employee provides
service in exchange for the award.
This statement initially was to take effect for our interim period
ended September 30, 2005. In April 2005, the Securities and Exchange Commission
(the "SEC") announced a new rule delaying the compliance dates for SFAS 123 (R).
As a calendar year-end company, this new rule extends our compliance date for
SFAS 123 (R) to our March 31, 2006 interim financial statements filed with the
SEC.
We have also identified our accounting method for securities
available-for-sale to be a critical accounting policy. We
Page 7
carry securities available-for-sale at fair value and exclude unrealized gains
and losses (net of related tax effects) from earnings. We report these
unrealized gains and losses (net of related tax effects) as a separate component
of stockholders' equity. While fair values are determined per market quotes from
independent brokers and are not subject to management estimation, the carrying
value of the securities is subject to market variations. At March 31, 2005 and
December 31, 2004, the unrealized gain (loss) on securities available-for-sale
to mark them to market was $(.2) million and $.1 million, respectively.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
1. CAUTIONARY STATEMENT
All statements included or incorporated by reference in this report,
other than statements or characterizations of historical fact, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. We base these forward-looking statements on our
current expectations, estimates and projections about our industry, management's
beliefs, and certain assumptions made by us, all of which are subject to change.
Forward-looking statements can often be identified by words such as
"anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks,"
"estimates," "may," "will," "should," "would," "could," "potential," "continue,"
"ongoing," similar expressions, and variations or negatives of these words, and
include, but are not limited to, statements regarding projected results of
operations, market acceptance and performance of our products and services, the
competitive nature of and anticipated growth in our markets, our accounting
estimates, assumptions and judgments, the impact of tax accounting elections,
and management's future strategic plans. These forward-looking statements are
not guarantees of future results and are subject to risks, uncertainties and
assumptions that are difficult to predict and that could cause our actual
results to differ materially and adversely from those expressed in any
forward-looking statement. The risks and uncertainties referred to above
include, but are not limited to: (i) general economic or industry conditions
could deteriorate or be less favorable than expected, resulting in a
deterioration in credit quality, a change in the allowance for loan losses, or a
reduced demand for our products and services; (ii) changes in the domestic
interest rate environment could reduce net interest income and could increase
loan losses; (iii) changes in the extensive laws, regulations and policies
governing financial services companies could alter our business environment or
affect operations; (iv) the potential need to adapt to industry changes in
information technology systems, on which we are highly dependent, could present
operational issues or require significant capital spending; (v) competitive
pressures could intensify and affect our profitability, including as a result of
continued industry consolidation, the increased availability of financial
services from non-banks, technological developments, or bank regulatory reform;
(vi) the impact of weather conditions in the geographic markets and business
areas in which we conduct business; and (vii) capital investments in our
businesses may not produce expected growth in earnings anticipated at the time
of the expenditure. These forward-looking statements speak only as of the date
of this report. We undertake no obligation to revise or update publicly any
forward-looking statement for any reason. You should also carefully review the
risk factors described in documents we file from time to time with the
Securities and Exchange Commission.
Page 8
2. KEY PERFORMANCE INDICATORS.
Our executive level management consider the following to be key
performance indicators.
MARCH 31, 2005 December 31, 2004
-------------- -----------------
Capital ratios:
Tier 1 leverage ratio 9.38% 9.33
Tier 1 risk-based capital ratio 10.92% 11.08
Total risk-based capital ratio 12.14% 12.33
Allowance for loan losses to loans 1.31% 1.38
Nonperforming loans to total loans .17% .15
Book value per share $ 12.55 12.57
(In Thousands)
Loans receivable, gross $ 276,799 268,719
Allowance for loan losses $ 3,625 3,708
Nonperforming loans $ 466 402
Total assets $ 351,722 347,140
Total deposits $ 254,214 258,335
Net loans to deposits 107.46% 102.58
THREE MONTHS ENDED
------------------------------------
MARCH 31, 2005 December 31, 2004
-------------- -----------------
Net earnings:
Return on average assets 1.00% 1.24
Return on average common equity 11.39% 12.02
Net interest margin 4.10% 4.07
Earnings per share-basic $ .36 .40
Earnings per share-diluted $ .35 .39
Dividends per share $ .28 .27
Non Financial:
Full-time employees 122 116
New deposit accounts 1,318 1,157
Closed deposit accounts 1,001 733
Full service branches 13 13
ATM's 9 9
Page 9
3. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF MARCH 31, 2005
TO DECEMBER 31, 2004.
(In Thousands) SELECTED FINANCIAL CONDITION DATA
MARCH 31, December 31, $
2005 2004 Change
---------- ------------ --------
Cash and cash equivalents $ 16,755 19,187 (2,432)
Securities available-for-sale 37,609 38,949 (1,340)
Restricted stock, at cost 4,228 4,212 16
Loans held for sale 5,705 5,786 (81)
Loans receivable, net 273,174 265,011 8,163
Premises and equipment, net 8,616 8,471 145
Real estate and other
personal property owned 100 293 (193)
Goodwill 1,422 1,422 -
All other assets 4,113 3,809 304
Total assets 351,722 347,140 4,582
Deposits 254,214 258,335 (4,121)
Federal Home Loan Bank
advances 51,982 44,794 7,188
Securities sold under
agreements to repurchase 8,228 7,498 730
Subordinated debt 3,093 3,093 -
All other liabilities 3,513 2,792 721
Total liabilities 321,030 316,512 4,518
Stockholders' equity, net 30,692 30,628 64
TOTAL ASSETS - Total assets increased $4.6 million to $351.7 million at
March 31, 2005 from $347.1 million at December 31, 2004. Assets increased
primarily because of a net increase in loans receivable and loans held for sale
of approximately $8.1 million. This increase in total assets was offset by a
decrease in securities available-for-sale of approximately $1.3 million. Other
decreases totaling $2.2 million are detailed in the table above.
SECURITIES AVAILABLE-FOR-SALE - Securities available-for-sale decreased
$1.3 million to $37.6 million at March 31, 2005 from $38.9 million at December
31, 2004. The decrease was the result of $2.9 million of principal repayments,
offset by $2.0 million of purchases. We incurred unrealized losses on securities
available-for-sale of $ .4 million, before income taxes, for the quarter ended
March 31, 2005.
Page 10
We summarize loans receivable, net of unamortized net deferred loan
fees, as of March 31, 2005 and December 31, 2004, in the following table:
(IN THOUSANDS)
MARCH 31, December 31,
2005 2004
--------- ------------
First mortgage loans and contracts secured
by real estate $ 105,972 100,322
Commercial real estate loans 54,628 51,017
Commercial loans 63,786 62,410
Auto and other consumer loans 28,671 29,762
Second mortgage consumer loans 6,448 6,123
Agricultural loans 13,483 15,109
Tax exempt municipal loans 2,627 2,698
Loans on deposits and other loans 1,184 1,278
--------- ---------
276,799 268,719
Less: Allowance for loan losses (3,625) (3,708)
--------- ---------
$ 273,174 265,011
========= =========
Allowance for loan losses for the periods indicated are:
(IN THOUSANDS) THREE MONTHS ENDED Year Ended
MARCH 31, 2005 December 31, 2004
------------------ -----------------
Balance, beginning of period $ 3,708 3,755
Provision for loan losses - 70
Losses charged off (85) (185)
Recoveries 2 68
------------------ -----------------
Balance, end of period $ 3,625 3,708
================== =================
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased by $8.2 million to $273.2 million at March 31, 2005 from $265.0
million at December 31, 2004. We attribute the increase primarily to growth in
the real estate loan category. The increase consists of a $5.7 million increase
in first mortgage loans and contracts secured by real estate, a $3.6 million
increase in commercial real estate loans and a $1.4 million increase in
commercial loans. These increases were offset by a $1.4 million decrease in
agricultural loans and a $1.1 million decrease in consumer loans.
Heritage Bank purchases and participates in commercial and lease
financing loans. In the normal course of business, banks often purchase loans
from other banks that would exceed the originating bank's lending limit.
Heritage Bank had $27.4 million and $25.7 million of participation and purchased
loans as of March 31, 2005 and December 31, 2004, respectively. The $27.4
million balance at March 31, 2005 includes $3.7 million of loans purchased from
Central Bank and $4.3 million in loans purchased from Timberline Bank. The $25.7
million balance at December 31, 2004 includes $3.8 million of loans purchased
from Central Bank and $.2 million of loans purchased from Timberline Bank. Each
of the loans purchased from Central Bank and Timberline Bank were loans that
would have exceeded those banks' lending limits when originated. Heritage Bank
has no participated loans sold as a result of legal lending limit issues.
The $5.7 million increase in first mortgage loans and contracts secured
by real estate includes a $4.1 million increase in loan balances purchased from
Timberline Bank. The remaining increase in this loan category of $1.6 million,
as well as the $3.6 million increase and the $1.4 million increase in commercial
real estate loans and commercial loans, respectively, came primarily from our
Bozeman, Great Falls and Billings markets. Each of these markets have performed
well in the first quarter of 2005, adding loans to new customers and continuing
financing to existing customers.
During the three months ended March 31, 2005, loans held for sale
decreased $.1 million to $5.7 million at March 31, 2005 from approximately $5.8
million at December 31, 2004. We originated for sale approximately $27.1 million
of residential
Page 11
real estate loans, and we sold $27.2 million of residential real estate loans to
the secondary market during the three month period ending March 31, 2005.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses decreased $.1
million to $3.6 million at March 31, 2005 as compared to $3.7 million at
December 31, 2004. The decrease resulted from loan charge offs of $.1 million
for the three months ended March 31, 2005. Management believes the allowance for
loan losses at March 31, 2005 was adequate given the relatively low level of
non-performing assets and management's assessment of loan risk. The allowance
for loan losses to total loans at March 31, 2005 was 1.31% as compared to 1.38%
at December 31, 2004.
Heritage Bank follows regulatory guidelines when it suspends interest
accrual on a loan. When a loan is placed on non-accrual status, all previously
accrued and uncollected interest is reversed from interest income. At March 31,
2005, Heritage Bank had non-accrual loans totaling $.4 million and loans
totaling $.1 million past due for 90 days and still accruing interest. At
December 31, 2004 by comparison, Heritage Bank's non-accrual loans totaled $.3
million and loans past due for 90 days and still accruing interest totaled $.1
million.
Heritage Bank's policy is to review, classify and report to its Board
of Directors its assets on a regular basis and specify any assets that are
"substandard" (the possibility that some loss could be sustained), "doubtful"
(high likelihood of loss), or "loss" (uncollectible). Adequate valuation
allowances must be established for assets classified as substandard or doubtful
in accordance with generally accepted accounting principles. If Heritage Bank
classifies an asset as a loss, Heritage Bank must either establish a specific
valuation allowance equal to the amount classified as a loss or charge off such
amount. At March 31, 2005 and December 31, 2004, Heritage Bank had no assets
classified as losses. At both March 31, 2005 and December 31, 2004, Heritage
Bank had $.3 million of assets classified as doubtful. At both March 31, 2005
and December 31, 2004, Heritage Bank had $.1 million of reported substandard
assets. As a percent of total Heritage Bank assets, substandard assets were
approximately .03% at March 31, 2005 and .01% at December 31, 2004. At both
March 31, 2005 and December 31, 2004, impaired loans totaled $.4 million.
Impaired loans included those loans classified as either substandard or
doubtful.
DEPOSITS - Deposits decreased by $4.1 million to $254.2 million at
March 31, 2005 from $258.3 million at December 31, 2004. The decreases in demand
accounts, NOW and money market accounts from December 31, 2004 to March 31, 2005
reflect the normal volatility in these types of accounts. These balances are
typically higher at year end and decrease during the first quarter of the year.
Average balances of demand accounts for the year ended December 31, 2004 were
$42.7 million and for the quarter ended March 31, 2005 were $41.3 million, a
decrease of only $1.4 million on average. Average balances of NOW and money
market accounts for the year ended December 31, 2004 were $32.4 million and for
the quarter ended March 31, 2005 were $32.6 million, an increase of $.2 million
on average. The increases in savings and certificates of deposits primarily
resulted from a combination of competitive rates on all deposit offerings, and
Heritage Bank's commitment to community banking, both of which continue to
attract depositors. The following table breaks down our deposits, as of March
31, 2005 and December 31, 2004, by types and amounts.
(IN THOUSANDS)
MARCH 31, December 31,
2005 2004
--------- ------------
Demand accounts $ 42,167 16.5% 47,489 18.4
NOW and money market accounts 31,983 12.6 35,974 13.9
Savings accounts 55,039 21.7 54,427 21.1
Certificate of deposits 125,025 49.2 120,444 46.6
---------------- -------------------
$254,214 100.0% 258,334 100.0
================ ===================
BORROWED FUNDS - Federal Home Loan Bank advances increased $7.2 million
from $44.8 million at December 31, 2004 to $52.0 million at March 31, 2005. The
increase of $7.2 million consists of $13.0 million in advances and $5.8 million
in repayments. Heritage Bank used the proceeds from the additional advances to
fund the increase in loans and to offset the decrease in deposits during the
first quarter of 2005. Securities sold under agreements to repurchase decreased
$.7 million to $8.2 million at March 31, 2005 from $7.5 million at December 31,
2004.
STOCKHOLDERS' EQUITY - Stockholders' equity totaled $30.7 million at
March 31, 2005, up $.1 million from $30.6 million at December 31, 2004.
Stockholders' equity activity during the first quarter included $.9 million of
net income less cash dividends declared of $.7 million, and less a $.1 million
decrease due to increases in unrealized losses on investments
available-for-sale.
Page 12
4. MATERIAL CHANGES IN RESULTS OF OPERATIONS-COMPARISON OF THE THREE
MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004.
(IN THOUSANDS) SELECTED INCOME STATEMENT DATA
-----------------------------------
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2005 2004 $ Change % Change
------ ------ -------- --------
Interest income $4,708 4,254 454 10.7%
Interest expense 1,427 1,214 213 17.6
------ ------ ------ ------
Net interest income 3,281 3,040 241 7.9
Provision for losses on loans -- 52 (52) (100.0)
------ ------ ------ ------
Net interest income after
provision for losses on loans 3,281 2,988 293 9.8
Non-interest income 830 1,069 (239) (22.4)
Non-interest expense 2,717 2,494 223 9.0
------ ------ ------ ------
Income from continuing operations
before income taxes 1,394 1,563 (169) (10.8)
Income taxes 526 589 (63) (10.7)
------ ------ ------ ------
Net income $ 868 974 (106) (10.9)%
====== ====== ====== ======
NET INCOME - United had net income of $.9 million, or basic and diluted
earnings per share of $.36 and $.35, respectively, for the quarter ended March
31, 2005, as compared to net income of $1.0 million, or basic and diluted
earnings per share of $.40 and $.39, respectively for the same quarter in 2004.
The decrease in net income is primarily attributed to a decrease in non-interest
income related to sales of investment securities in 2004 which is discussed
below.
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 and other interest-earning assets), and the interest paid
on deposits and borrowings. We refer to this amount, when divided by average
interest-earning assets, 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. We refer
to the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities expressed as a percentage as the "net interest-rate
spread". Net interest income increased $.3 million from $3.0 million for the
three months ended March 31, 2004 to $3.3 million for the three months ended
March 31, 2005. Net interest margin increased .03% from 4.07% for the three
month period ended March 31, 2004 to 4.10% for the three month period ended
March 31, 2005. Net interest spread increased .10% from 3.95% for the three
month period ended March 31, 2004 to 4.05% for the three month period ended
March 31, 2005.
INTEREST INCOME - Interest income increased $.5 million from $4.3
million for the three month period ended March 31, 2004 to $4.7 for the three
month period ended March 31, 2005. For the three month period ended March 31,
2005, compared to the three month period ended March 31, 2004, interest on loans
receivable increased $.5 million, and interest on investments and other
interest-earning assets remained consistent.
INTEREST EXPENSE - Interest expense increased $.2 million from $1.2
million for the three month period ended March 31, 2004 to $1.4 million for the
three month period ended March 31, 2005. The average balance of deposits
increased $19.9 million for the first quarter ended 2005 compared to the same
quarter in 2004, resulting in a $.1 million increase in interest expense.
For the three month period ended March 31, 2005, compared to the three
month period ended March 31, 2004, interest on other borrowings increased $.1
million. The average balance of other borrowings increased $13.6 million for the
quarter ended March 31, 2005 as compared to the same quarter in 2004.
PROVISION FOR LOAN LOSSES - United provided $.1 million for loan losses
in the first quarter ended March 31, 2004 and made no provision in the first
quarter of 2005. Asset quality at Heritage Bank remained relatively strong
during the first quarter of 2005. Heritage Bank's past due and non-accrual loans
totaled .17% and .30% of total loans at March 31, 2005 and 2004, respectively.
Page 13
Management determines the provision for loan losses as the amount to be
added to the allowance for loan losses, after management deducts net
charge-offs, in order to bring the allowance to a level which management
considers adequate to absorb probable losses inherent in the loan portfolio in
accordance with GAAP. Future additions to United's allowance for loan losses and
any change in the related ratio of the allowance for loan losses to
non-performing assets are dependent upon the performance and composition of
United's loan portfolio, the economy, inflation, changes in real estate values
and interest rates and the view of the regulatory authorities toward adequate
reserve levels.
NON-INTEREST INCOME - In addition to net interest income, United
generates non-interest income from a range of retail banking services, including
mortgage banking activities and service charges for deposit services.
Non-interest income decreased $.2 million from $1.0 million for the three month
period ended March 31, 2004 to $.8 million for the three month period ended
March 31, 2005. The decrease is due to a $.2 million gain on sale of investment
securities in the first quarter of 2004. We had no such investment gains in
2005.
NON-INTEREST EXPENSE - United's non-interest expense increased $.2
million during the three month period ending March 31, 2005 as compared to the
same period in 2004. This increase was principally due to the increased
personnel expenses associated with staffing the new branch in Billings, Montana
for Heritage Bank, as well as increased accounting costs associated with
Sarbanes-Oxley compliance.
5. ASSET/LIABILITY MANAGEMENT
United's earnings depend to a large extent on the level of its "net
interest income." Net interest income depends upon the difference (referred to
as "interest rate spread") between the yield on United's loan and investment
portfolios and interest-earning cash balances (referred to as "interest-earning
assets"), and the rates paid on its deposits and borrowings (referred to as
"interest-bearing liabilities"). The relative amounts of our interest-earning
assets and interest-bearing liabilities also affect net interest income. In
recent years, our interest-earning assets have exceeded interest-bearing
liabilities. However, when interest-earning assets decrease as a result of
non-accrual loans and investments in non-interest earning assets, net interest
income and interest rate spread also decrease and any continued decrease in the
level of interest-earning assets would generally result in a negative impact on
earnings.
One of management's primary objectives has been to restructure the
balance sheet to reduce our vulnerability to changes in interest rates (referred
to as "interest rate risk"). Commercial banking institutions can suffer from a
mismatch in the term to maturity of their assets and liabilities, with mortgage
loan assets tending to be of a much longer term than deposits, the primary
liabilities of commercial banking institutions. In periods of rising interest
rates, this mismatch can render commercial banking institutions vulnerable to
increases in costs of funds (deposits and borrowings) that can outstrip
increases in returns on longer-term fixed rate loans and investments, resulting
in a reduction in interest rate spread and lower earnings.
Management has employed several strategies to minimize the mismatch of
asset and liability maturities. Heritage Bank sells the majority of
newly-originated long-term (15 to 30-year maturity) fixed-rate mortgage loans to
the secondary market. Heritage Bank sells these loans at their outstanding
principal balance, which is the prearranged contract purchase price, and
therefore, the amount recognized under the income statement caption "gain on
sale of loans" represents fee income only. Heritage Bank promotes the
origination and retention of loans providing for periodic interest rate
adjustments, shorter terms to maturity or balloon provisions. Heritage Bank also
emphasizes investment in adjustable rate or shorter-term mortgage-backed
securities and other interest-earning investments. When maturities of loans
increase, management offsets the increased interest rate risk with matching
funds and maturities with Federal Home Loan Bank borrowings.
6. LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, FHLB borrowings, repurchase
agreements, proceeds from loan sales, and loan and mortgage-backed securities
repayments. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by market interest rates, economic
conditions and competition. In a period of declining interest rates, mortgage
prepayments generally increase. As a result, we generally would invest these
proceeds from mortgage prepayments in lower yielding loans or other investments
which have the effect of reducing interest income. In a period of rising
interest rates, mortgage prepayments would generally decrease and we generally
would invest the proceeds from such prepayments in higher yielding loans or
investments which would have the effect of increasing interest income.
Page 14
United is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on our operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, United and Heritage Bank must
meet specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting guidelines. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative requirements for capital adequacy include minimum amounts
and ratios set forth in the table below. As of March 31, 2005 United met all
regulatory capital adequacy requirements to which it is subject.
Minimum for capital
adequacy purposes
Consolidated: Actual
---------------------------- ------------------------
(In thousands) Amount Ratio Amount Ratio
-------------- ------------ ------------- ------------ --------
March 31, 2005:
Total risk-based capital $ 35,987 12.14% 23,710 8.0
Tier I risk-based capital 32,362 10.92 11,855 4.0
Tier I leverage 32,362 9.38 13,799 4.0
Minimum for capital
adequacy purposes
Heritage Bank: Actual
---------------------------- -------------------------
(In thousands) Amount Ratio Amount Ratio
-------------- ------------ ------------- ------------- --------
March 31, 2005:
Total risk-based capital $ 30,078 10.18% 23,634 8.0
Tier I risk-based capital 26,453 8.95 11,817 4.0
Tier I leverage 26,453 7.75 13,717 4.0
Page 15
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
Heritage Bank has an Asset/Liability Management Committee ("ALCO") and an
Investment Committee, which meet at least quarterly to review and report on
management's efforts to minimize IRR. United has employed several
asset/liability management strategies to minimize its exposure to IRR. These
strategies 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.
The Asset/Liability Management Committee utilizes a detailed simulation
model prepared by an institution fund management service to quantify the
estimated exposure of net interest income ("NII") to sustained interest rate
changes. The model predicts the impact of changing interest rates on the
interest income received and interest expense paid on assets and liabilities. We
compare this sensitivity analysis to ALCO policy limits which specify a maximum
tolerance level for NII given a 200 basis point (bp) rise or decline in interest
rates.
The following table summarizes the sensitivity analysis for Heritage
Bank as of December 31, 2004, the most recent information available. Management
believes there has been no material change in interest rate risk since December
31, 2004. 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 our Annual
Report on Form 10-K for the year ended December 31, 2004.
Heritage Bank
Estimated (decrease)
in net interest income: +200 bp -200 bp
------- -------
0-90 days $ (21,641) $ (65,529)
91-360 days (249,903) (105,548)
2 years (446,588) (310,364)
3 years (552,119) (597,980)
The preceding sensitivity analysis does not represent a forecast and
you should not rely upon the analysis as being indicative of expected operating
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 other assumptions. Sensitivity analysis does not
reflect actions that United might take in responding to or anticipating changes
in interest rates.
ITEM 4 CONTROLS AND PROCEDURES.
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were
effective. There were no changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) of the Exchange Act) during our first
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Page 16
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
Although neither we nor Heritage Bank is involved in any material
pending litigation as of March 31, 2005, Heritage Bank is a defendant in various
legal proceedings arising in the normal course of business. In the opinion of
management, the disposition of current litigation will not have a material
effect on United's consolidated financial position, results of operations, or
liquidity.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS .
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5 OTHER INFORMATION.
None
ITEM 6 EXHIBITS.
A. Exhibits
3.1 Articles of Incorporation of United Financial Corp.,
as amended (incorporated by reference to Exhibit 3.1
of United's Annual Report on Form 10-K dated March
31, 1998).
3.2 Bylaws of United Financial Corp., as amended
(incorporated by reference to Exhibit 3.1 of United's
Annual Report on Form 10-K dated March 31, 1998).
31.1 Certification of chief executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of chief financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of chief executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of chief financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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 May 12, 2005 /s/ Kurt R. Weise
----------------------------- -------------------
Kurt R. Weise
Chairman and Chief
Executive Officer
(Duly Authorized Officer and
Principal Executive Officer)
Date May 12, 2005 /s/ Paula J. Delaney
----------------------------- ---------------------
Paula J. Delaney
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 18