UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number: 0-28080
UNITED FINANCIAL CORP.
----------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0507591
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2779, 120 1st 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 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; 1,626,150 shares outstanding as of July 31, 2002
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Statements of Financial Condition at
June 30, 2002 and December 31, 2001 (unaudited)..............................1
Consolidated Condensed Statements of Income - Three and Six Months Ended
June 30, 2002 and June 30, 2001 (unaudited)...................................2
Consolidated Condensed Statements of Cash Flows - Six Months Ended
June 30, 2002 and June 30, 2001 (unaudited)...................................3
Notes to Consolidated Condensed Financial Statements (unaudited)...............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 UPON 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.............................................18
SIGNATURES.............................................................................19
Page 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)
JUNE 30, December 31,
------------ ------------
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 25,450 $ 22,026
Securities available-for-sale 79,179 73,263
Loans held for sale 5,112 7,713
Loans receivable, net 251,801 260,524
Accrued interest receivable 2,953 2,769
Restricted stock, at cost 4,154 3,994
Premises and equipment, net 7,553 6,609
Real estate and other personal property owned 567 668
Goodwill, net of accumulated amortization of $825 and
$724 at June 30, 2002, and December 31, 2001,
respectively 3,429 3,076
Identifiable intangibles, net of accumulated
amortization of $157 and $239 at June 30, 2002, and
December 31, 2001, respectively 26 399
Deferred income taxes, net 258 553
Other assets 1,102 1,136
------------ ------------
$ 381,584 $ 382,730
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts $ 101,292 $ 97,679
Savings deposits 53,550 50,829
Time deposits 133,632 133,892
------------ ------------
288,474 282,400
Federal Home Loan Bank advances 44,000 50,500
Securities sold under agreements to repurchase 8,858 9,604
Other borrowings 1,000 2,000
Accrued interest payable 1,920 1,929
Advances from borrowers for taxes and insurance 142 164
Income taxes payable 355 503
Trust preferred securities 3,000 3,000
Other liabilities 1,122 1,188
------------ ------------
348,871 351,288
Minority interest 2,991 2,845
Stockholders' equity:
Preferred stock, no par value; authorized 2,000,000
shares; no shares issued and outstanding -- --
none outstanding)
Common stock, no par value; authorized 8,000,000 shares;
1,626,150 and 1,625,967 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 27,167 23,950
Retained earnings, substantially restricted 1,813 4,339
Accumulated other comprehensive income 742 308
------------ ------------
29,722 28,597
------------ ------------
$ 381,584 $ 382,730
============ ============
Equity/Assets 7.79% 7.47%
Book Value/Share $ 18.28 $ 17.59
See Notes to Consolidated Condensed Financial Statements
Page 1
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans receivable $ 4,948 $ 5,685 $ 10,009 $ 11,213
Mortgage-backed securities 767 698 1,455 1,510
Other investment securities 218 263 471 535
Other interest earning assets 138 175 269 324
------------ ------------ ------------ ------------
Total interest income 6,071 6,821 12,204 13,582
INTEREST EXPENSE:
Deposits 1,980 2,898 4,053 5,833
Other borrowings 790 1,003 1,626 2,054
------------ ------------ ------------ ------------
Total interest expense 2,770 3,901 5,679 7,887
------------ ------------ ------------ ------------
Net interest income 3,301 2,920 6,525 5,695
Provision for loan losses 215 249 455 458
------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 3,086 2,671 6,070 5,237
NON-INTEREST INCOME:
Gain on sale of loans 742 865 1,426 1,420
Service charges and fees 279 259 546 475
Gain on sale of securities available-for-sale -- -- 86 127
Other income 55 83 109 192
------------ ------------ ------------ ------------
Total non-interest income 1,076 1,207 2,167 2,214
NON-INTEREST EXPENSE:
Compensation and benefits 1,540 1,488 3,039 2,824
Occupancy and equipment expenses 387 355 767 691
Data processing fees 202 189 404 375
Other expenses 772 739 1,511 1,429
------------ ------------ ------------ ------------
Total non-interest expense 2,901 2,771 5,721 5,319
------------ ------------ ------------ ------------
Income before income taxes and minority interest 1,261 1,107 2,516 2,132
Provision for income taxes 470 429 938 825
------------ ------------ ------------ ------------
Income before minority interest 791 678 1,578 1,307
Minority interest (50) (47) (99) (93)
------------ ------------ ------------ ------------
Net income $ 741 $ 631 $ 1,479 $ 1,214
============ ============ ============ ============
Basic earnings per share $ 0.46 $ 0.38 $ 0.91 $ 0.70
============ ============ ============ ============
Diluted earnings per share $ 0.45 $ 0.37 $ 0.90 $ 0.70
============ ============ ============ ============
Dividends declared per share $ 0.25 $ 0.24 $ 0.49 $ 0.47
============ ============ ============ ============
Weighted average shares outstanding - basic 1,626 1,679 1,626 1,728
============ ============ ============ ============
Weighted average shares outstanding - diluted 1,640 1,684 1,637 1,731
============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements
Page 2
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
-----------------------------
JUNE 30, June 30,
------------ ------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided (used) in operating activities $ 4,395 $ (239)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans receivable 8,186 (12,190)
Purchases of securities available-for-sale (44,797) (21,135)
Proceeds from maturities, pay downs and sales of securities
available-for-sale 39,742 27,108
Purchases of restricted stock (50) (41)
Purchase of Valley Bancorp, Inc. stock -- (8)
Purchases of premises and equipment (1,242) (283)
Proceeds from sale of premises and equipment -- 12
Proceeds from sale of real estate and other personal property
owned 183 588
Acquisition of real estate and other personal property owned (10) (14)
------------ ------------
Net cash provided (used) in investing activities 2,012 (5,963)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,074 15,365
Net increase (decrease) in Federal Home Loan Bank advances (6,500) 75
Advances on line of credit -- 1,750
Net decrease in securities sold under agreements to repurchase (746) (3,293)
Net decrease in federal funds purchased (1,000) --
Decrease in advances from borrowers for taxes and insurance (22) (280)
Purchase of treasury stock -- (2,403)
Dividends paid to stockholders (792) (806)
Proceeds from issuance of common stock 3 2
------------ ------------
Net cash provided (used) by financing activities (2,983) 10,410
------------ ------------
Increase in cash and cash equivalents 3,424 4,208
Cash and cash equivalents at beginning of year 22,026 19,451
------------ ------------
Cash and cash equivalents at end of period $ 25,450 $ 23,659
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
- -------------------------------------------------------------
Cash payments for interest $ 5,687 $ 7,876
Cash payments for income taxes $ 1,086 $ 745
See Notes to Consolidated Condensed Financial Statements
Page 3
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
United Financial Corp. ("UFC") is a bank holding company headquartered
in Great Falls, Montana, with operations in 12 Montana communities and Phoenix
and Scottsdale, Arizona. UFC's banking business in Montana is conducted through
its wholly-owned subsidiary, Heritage Bank ("Heritage Bank"), and in Arizona is
conducted through Valley Bank of Arizona ("Valley Bank"), the wholly-owned
subsidiary of Valley Bancorp, Inc. ("Valley"), a majority-owned subsidiary of
UFC. Heritage Bank and Valley Bank are collectively referred to herein as the
"Banks". UFC's wholly-owned subsidiary, United Financial-Montana Capital Trust I
was established in 2001 to issue and administer $3.0 million of Capital Trust
Pass-Through Securities. UFC, Heritage Bank and Valley are collectively referred
to herein as ("United"). United had assets of approximately $381.6 million,
deposits of approximately $288.5 million and stockholders' equity of
approximately $29.7 million at June 30, 2002.
UFC owned approximately 65% of Valley at June 30, 2002. As a result of
acquiring over 50% of the outstanding shares of Valley in January 2000, UFC
consolidated Valley in its financial statements effective January 1, 2000. The
aggregate purchase price of all shares of Valley purchased by UFC to date is
approximately $7.2 million. Valley had assets of approximately $74.7 million,
deposits of approximately $62.5 million and stockholders' equity of
approximately $8.6 million at June 30, 2002.
Heritage Bank is a state-chartered commercial bank with locations in
Bozeman, Chester, Fort Benton, Geraldine, Glendive, Great Falls, Hamilton,
Havre, Kalispell, Libby, Missoula and Shelby, Montana. Valley Bank is a
state-chartered commercial bank with locations in Phoenix and Scottsdale,
Arizona. The Banks are engaged in the community banking business of attracting
deposits from the general public through their offices and using those deposits,
together with other available funds, to originate commercial (including lease
financing), commercial real estate, residential, agricultural and consumer loans
primarily in their market areas in Montana and Arizona. A majority of the Banks'
banking business is conducted in the Great Falls and Phoenix areas. Based on
total assets, 44% of United's assets are located at Heritage Bank's Great Falls
locations and 16% at Valley Bank's Phoenix location. The Banks also invest in
mortgage-backed securities, U.S. Treasury obligations, other U.S. Government
agency obligations and other interest-earning assets. Heritage Bank also holds a
14% ownership interest in Bankers' Resource Center, a computer data center.
The Banks' financial condition and results of operations, and therefore
the financial condition and results of operations of United, are dependent
primarily on net interest income and fee income. The Banks' financial condition
and results of operations are also significantly influenced by local and
national economic conditions, changes in market interest rates, governmental
policies, tax laws and the actions of various regulatory agencies.
UFC's principal offices are located at 120 First Avenue North, Great
Falls, Montana, and its telephone number is (406) 727-6106.
2. BASIS OF PRESENTATION
United's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") for interim financial information and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, the
accompanying unaudited consolidated condensed financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the consolidated financial condition, results of
operations, and cash flows for the periods disclosed. Operating results for the
three and six months ended June 30, 2002 are not necessarily indicative of the
results anticipated for the year ending December 31, 2002. For additional
information, refer to the consolidated audited financial statements and
Page 4
footnotes thereto included in United's Annual Report to Shareholders and Annual
Report on Form 10-K for the year ended December 31, 2001. Certain
reclassifications have been made to the December 31, 2001 financial information
to conform to the June 30, 2002 presentation.
3. COMPREHENSIVE INCOME
United's only significant element of comprehensive income is unrealized
gains and losses on securities available-for-sale.
(In thousands)
(Unaudited)
THREE MONTHS ENDED Three Months Ended
JUNE 30, 2002 June 30, 2001
------------------------------------ ------------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
---------- ----------- ---------- ---------- ----------- ----------
Net income $ 1,211 $ 470 $ 741 $ 1,060 $ 429 $ 631
Unrealized and realized
holding gains arising during period 1,296 492 804 263 100 163
Less: reclassification adjustment for
gains included in net income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net unrealized gains on securities
available for sale 1,296 492 804 263 100 163
Less: portion of unrealized gain
allocated to minority interest 91 -- 91 29 -- 29
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income $ 2,416 $ 962 $ 1,454 $ 1,294 $ 529 $ 765
========== ========== ========== ========== ========== ==========
SIX MONTHS ENDED Six Months Ended
JUNE 30, 2002 June 30, 2001
------------------------------------ ------------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
---------- ----------- ---------- ---------- ----------- ----------
Net income $ 2,417 $ 938 $ 1,479 $ 2,039 $ 825 $ 1,214
Unrealized and realized holding gains
arising during period 776 295 481 797 303 494
Less: reclassification adjustment for
gains included in net income 86 32 54 127 48 79
---------- ---------- ---------- ---------- ---------- ----------
Net unrealized gains on securities
available for sale 690 263 427 670 255 415
Less: portion of unrealized gains
allocated to minority interest 46 -- 46 54 -- 54
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income $ 3,061 $ 1,201 $ 1,860 $ 2,655 $ 1,080 $ 1,575
========== ========== ========== ========== ========== ==========
4. 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.
5. COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares used to compute basic EPS plus the incremental amount of potential
Page 5
common stock determined by the treasury stock method. Potential common stock
includes a warrant to purchase 11,000 shares of common stock exercisable at a
price of $23.86 per share through February 3, 2003 and the incremental shares
under stock option plans. The warrant was excluded from the calculation of
diluted EPS for the three and six month periods ended June 30, 2002 and 2001
because the effect of inclusion would have been antidilutive using the treasury
stock method.
The following table sets forth the computation of basic and diluted earnings per
share.
THREE MONTH ENDED SIX MONTH ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Weighted average shares outstanding during
the period on which basic earnings per
share is calculated 1,626,000 1,679,405 1,625,972 1,727,664
Add: incremental shares under stock option
plans 13,739 4,767 11,849 3,695
------------ ------------ ------------ ------------
Average outstanding shares on which diluted
earnings per share is calculated 1,639,739 1,684,172 1,637,821 1,731,359
============ ============ ============ ============
Net income applicable to common
stockholders, basic $ 741,105 630,806 1,478,733 1,213,596
Less: reduction of proportionate share of
Valley net income assuming option
exercises (472) (305) (930) (1,296)
------------ ------------ ------------ ------------
Net income applicable to common
stockholders, diluted $ 740,633 630,501 1,477,803 1,212,300
============ ============ ============ ============
Basic earnings per share $ .46 .38 .91 .70
============ ============ ============ ============
Diluted earnings per share $ .45 .37 .90 .70
============ ============ ============ ============
6. 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 United's Chairman of the Board of Directors and
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 $233,000 and $179,000 for the six month periods ended
June 30, 2002 and 2001, respectively. The fees are billed by CFS on an hourly
basis for work performed by United's chairman and CEO, and four other CFS
employees. The chairman and CEO of United do not receive direct compensation
from United for their services. Each is compensated for services as a director
through director's fees of $250 per month, and for services as an officer of
United through CFS. Through CFS, the chairman and CEO earn annual salaries of
$130,000 and $132,000, respectively. United's portion of those salaries was
approximately 57%, based upon CFS billings during those periods.
Banker's Resource Center ("BRC") provides data processing services for
Heritage Bank. Heritage Bank has a 14% ownership interest in BRC, a computer
data center. The charges for BRC's services were $.3 million for both of the six
months ended June 30, 2002 and 2001.
Page 6
7. DIVIDENDS DECLARED
On May 21, 2002, a 10% stock dividend was approved by the Board of
Directors of United, payable June 28, 2002 to shareholders of record on June 24,
2002. As a result, all per share amounts from time periods prior to this date
have been restated to illustrate the effect of the stock dividend. Any
fractional shares were paid in cash. The net effect on United's stockholders'
equity as a result of the 10% stock dividend was to reduce retained earnings and
increase common stock by $3.2 million, respectively.
On July 23, 2002, the Board of Directors of United declared a quarterly
cash dividend of $.25 per share, payable August 27, 2002, to shareholders of
record on August 13, 2002.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations", and No.142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. SFAS No. 142 eliminates the amortization of
goodwill relating to past and future acquisitions and instead subjects goodwill
to an impairment assessment at least annually. United adopted the provisions of
SFAS No. 142 to existing goodwill and other intangible assets for years
beginning January 1, 2002. The adoption of SFAS No. 142 will cease further
amortization of goodwill and will have a pretax impact on income of
approximately $.2 million on an annual basis.
In June 2001, FASB approved for issuance SFAS 143, "Accounting for
Asset Retirement Obligations," which addresses the accounting for legal
obligations associated with the retirement of tangible long-lived assets. Under
SFAS 143, the fair value of a liability for an asset retirement obligation shall
be recognized in the period in which the obligation is incurred. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company does not expect SFAS 143 to have a material effect on the
Company's financial position or results of operations.
In August 2001, FASB approved for issuance SFAS 144, "Accounting for
the Impairment or Disposal of Long-lived Assets." SFAS 144 was issued to resolve
implementation issues that had been created under SFAS 121. Under SFAS 144, one
accounting model is required to be used for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired, and certain
additional disclosures are required. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 31, 2001. The
Company does not expect SFAS 144 to have a material effect on the Company's
financial position or results of operations.
On April 30, 2002, FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections."
SFAS 145 updates, clarifies, and simplifies existing accounting pronouncements,
by rescinding SFAS 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Accounting Principles
Board Opinion 30 will now be used to classify those gains and losses.
Additionally, SFAS 145 amends SFAS 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. Finally,
SFAS 145 also makes technical corrections to existing pronouncements. Management
currently believes that the adoption of SFAS 145 will not have a material impact
on the Company's financial position or results of operations.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
1. FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements.
Statements that are not historical or current facts, including statements about
beliefs and expectations, are forward-looking statements. Forward-looking
statements involve inherent risks and uncertainties, and important factors could
Page 7
cause actual results to differ materially from those anticipated, including the
following. In addition to those contained in United's reports on file with the
SEC: (i) general economic or industry conditions could 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 United's 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 United's business environment or affect operations; (iv) the
potential need to adapt the industry changes in information technology systems,
on which United is highly dependent, could present operational issues or require
significant capital spending; (v) competitive pressures could intensify and
affect United's 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 United
conducts it business; and (vii) capital investments in United's businesses may
not produce expected growth in earnings anticipated at the time of the
expenditure. Forward-looking statements speak only as of the date they are made,
and United undertakes no obligation to update them in light of new information
of future events.
2. CHANGES IN STATEMENT OF FINANCIAL CONDITION DATA FROM JUNE 30, 2002 TO
DECEMBER 31, 2001.
(In thousands) SELECTED FINANCIAL CONDITION DATA
(Unaudited)
JUNE 30, Dec. 31, $ %
2002 2001 Change Change
----------------------------------------------------
Cash and cash equivalents $ 25,450 $ 22,026 $ 3,424 15.5%
Securities available-for-sale 79,179 73,263 5,916 8.1
Loans held for sale 5,112 7,713 (2,601) (33.7)
Loans receivable, net 251,801 260,524 (8,723) (3.3)
Restricted stock, at cost 4,154 3,994 160 4.0
Premises and equipment, net 7,553 6,609 944 14.3
Real estate and other
personal property owned 567 668 (101) (15.1)
Goodwill, net 3,429 3,076 353 11.5
Identifiable intangibles, net 26 399 (373) (93.5)
All other assets 4,313 4,458 (145) (3.3)
Total assets 381,584 382,730 (1,146) (.3)
Deposits 288,474 282,400 6,074 2.2
Federal Home Loan Bank advances 44,000 50,500 (6,500) (12.9)
Securities sold under
agreements to repurchase 8,858 9,604 (746) (7.8)
Other borrowings 1,000 2,000 (1,000) (50.0)
Trust preferred securities 3,000 3,000 -- --
All other liabilities 3,539 3,784 (245) (6.5)
Total liabilities 348,871 351,288 (2,417) (.7)
Stockholders' equity, net 29,722 28,597 1,125 3.9
Total assets decreased $1.1 million to $381.6 million at June 30, 2002
from $382.7 million at December 31, 2001. Loans receivable and loans held for
sale decreased approximately $11.3 million, while cash and cash equivalents
increased approximately $3.4 million, securities held for investment increased
$5.9 million and premises and equipment, net increased $.9 million.
SECURITIES AVAILABLE-FOR-SALE - Securities available-for-sale increased
$5.9 million to $79.2 million at June 30, 2002 from $73.3 million at December
31, 2001. The increase was the result of $44.8 million of purchases, offset by
$39.7 million of maturities, sales, and principal repayments and a $.8 million
increase in unrealized gains on securities.
Page 8
A comparison of the amortized cost and estimated fair value of the
consolidated available-for-sale investment portfolio at the dates indicated is
as follows:
(In thousands)
(Unaudited)
JUNE 30, 2002
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S. GOVERNMENT AND FEDERAL
AGENCIES $ 23,693 $ 224 $ -- $ 23,917
MORTGAGE-BACKED SECURITIES 50,875 1,062 (15) 51,922
MUNICIPAL BONDS 1,731 15 -- 1,746
CORPORATE BONDS AND EQUITY
SECURITIES 1,542 52 -- 1,594
---------- ---------- ---------- ----------
$ 77,841 $ 1,353 $ (15) $ 79,179
========== ========== ========== ==========
December 31, 2001
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Government and federal
agencies $ 30,439 $ 338 $ (70) $ 30,707
Mortgage-backed securities 38,938 400 (56) 39,282
Municipal bonds 1,784 7 (46) 1,745
Corporate bonds and equity
securities 1,542 1 (14) 1,529
---------- ---------- ---------- ----------
$ 72,703 $ 746 $ (186) $ 73,263
========== ========== ========== ==========
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
decreased $8.7 million to $251.8 million at June 30, 2002 from $260.5 million at
December 31, 2001. United has slowed its acquisition of participation loans from
outside Montana due to reduced interest rates and the concerns of the national
recession. Also, a weakened state and national economy have reduced loan demand.
The diverse loan portfolio includes: real estate residential mortgages,
commercial and agricultural mortgages, agricultural and commercial non-mortgage,
consumer loans secured by real estate, and various consumer installment loans.
The Banks also purchase and participate in commercial and lease financing loans.
The Banks had $39.5 million of participation and purchased loans as of June 30,
2002.
During the six months ended June 30, 2002, loans held for sale
decreased $2.6 million to $5.1 million at June 30, 2002 from approximately $7.7
million at December 31, 2001, as secondary market sales outpaced loan
originations. Approximately $66.2 million of loans were originated for sale and
$68.8 million of loans were sold to the secondary market during the six month
period ending June 30, 2002.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve decreased $.2 million
to $3.3 million at June 30, 2002 as compared to $3.5 million at December 31,
2001. A loan loss provision of $.5 million for the six months ended June 30,
2002 was offset by loans in the amount of $.7 million which were determined by
United's management to be uncollectable and subsequently charged-off. The loan
loss reserve at June 30, 2002 is an amount which management believes is adequate
given the level of non-performing assets and management's assessment of loan
risk. The allowance for loan losses to total loans at June 30, 2002 was 1.28%.
NON-PERFORMING ASSETS - United follows regulatory guidelines with
respect to placing loans on non-accrual status. When a loan is placed on
non-accrual status, all previously accrued and uncollected interest is reversed.
At June 30, 2002 United had non-accrual loans totaling $1.5 million and loans
totaling $.1 million past due 90 days and still accruing.
At December 31, 2001 United had non-accrual loans totaling $2.1 million and
loans totaling $.3 million past due 90 days and still accruing.
Page 9
United is required to review, classify and report to its Board of
Directors its assets on a regular basis and classify them as "substandard"
(distinct possibility that some loss will be sustained), "doubtful" (high
likelihood of loss), or "loss" (uncollectible). Adequate valuation allowances
are required to be established for assets classified as substandard or doubtful
in accordance with generally accepted accounting principles. If an asset is
classified as a loss, the institution must either establish a specific valuation
allowance equal to the amount classified as loss or charge off such amount. At
June 30, 2002 and December 31, 2001, United had no assets classified as loss. At
June 30, 2002 and December 31, 2001, United had $.2 million and $.8 million
respectively classified as doubtful. At June 30, 2002 and December 31, 2001,
United had $1.6 million and $1.9 million of reported substandard assets,
respectively. As a percent of total assets, substandard assets were
approximately .41% and .50% at June 30, 2002 and December 31, 2001,
respectively.
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED - The $.1 million
decrease includes approximately $.1 million of repossessed personal property
acquired by United during the first six months of 2002, offset by sales of
repossessed personal property of approximately $.2 million.
RESTRICTED STOCK - Federal Home Loan Bank (FHLB) stock increased
approximately $.2 million to $4.2 million at June 30, 2002 from $4.0 million at
December 31, 2001. This increase was the result of $.1 million of reinvested
stock dividends and purchases of approximately $.1 million. FHLB stock purchases
are made as required to support the increased scope of operations.
PREMISES AND EQUIPMENT - This category increased $1.0 million to $7.6
million at June 30, 2002 from $6.6 million at December 31, 2001. The Banks
invested approximately $1.3 million in fixed assets during the first six months
of 2002, primarily in connection with the construction of the new Heritage Bank
branch facility in Great Falls, Montana and the relocation of the Heritage Bank
branch in Kalispell, Montana. The purchases of premises and equipment were
offset by approximately $.3 million of depreciation.
GOODWILL - Goodwill increased $.3 million due to the reclassification
of cost previously classified as identifiable intangibles prior to the
implementation of SFAS No. 142. Goodwill did not decrease due to amortization
during the six months ending June 30, 2002, also because of the adoption of SFAS
No. 142. See "Notes to Consolidated Financial Statements - New Accounting
Pronouncements".
IDENTIFIABLE INTANGIBLES - Identifiable intangibles decreased $.3
million for the reclassification of costs to goodwill as discussed above.
Amortization of intangibles totaled approximately $20,000 during the six months
ending June 30, 2002. Identifiable intangibles are being amortized over fifteen
years.
DEPOSITS - Deposits increased $6.1 million to $288.5 million at June
30, 2002 from $282.4 million at December 31, 2001. This increase was primarily
the result of the continued growth of the two new Heritage Bank branches in
Bozeman and Missoula, Montana, and Valley Bank's new branch in Scottsdate,
Arizona.
BORROWED FUNDS - FHLB advances decreased $6.5 million from December 31,
2001 to June 30, 2002. Securities sold under agreements to repurchase decreased
$.7 million to $8.9 million at June 30, 2002 from $9.6 million at December 31,
2001.
TRUST PREFERRED SECURITIES - In July 2001, UFC issued junior
subordinated debentures, aggregating $3.0 million to United Financial-Montana
Capital Trust I ("Trust"). The Trust issued preferred securities, as part of a
pooled issue, with an aggregate liquidation amount of $3.0 million ($1,000 per
capital security) to third-party investors. The junior subordinated debentures
and cash are the sole assets of the Trust. The preferred securities are
includable as Tier I capital for regulatory capital purposes. The offering price
was $1,000 per capital security. The junior subordinated debentures and the
preferred securities pay interest and dividends, respectively, on a semi-annual
basis, which are included in interest expense. The Trust is a statutory business
trust formed under the laws of the State of Delaware and is wholly-owned by UFC.
The junior subordinated debentures and preferred securities will mature on July
25, 2031. The junior subordinated debentures and preferred securities can be
Page 10
redeemed contemporaneously, in whole or in part, after five years at decreasing
premiums with the permission of the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). UFC has provided a full and unconditional
guarantee of the obligations of the Trust in the event of the occurrence of an
event of default, as defined. Debt issuance costs totaling $.1 million were
capitalized related to the debenture offering and are being amortized over the
10-year non-premium callable life of the preferred securities.
STOCKHOLDERS' EQUITY - Stockholders' equity increased $1.1 million to
$29.7 million at June 30, 2002 from $28.6 million at December 31, 2001. This
increase is due to $1.5 million of net income for the six months ended June 30,
2002 less cash dividends declared of $.8 million, and a $.4 million increase in
unrealized gains net of tax effects, associated with securities classified as
available-for-sale being adjusted to market value.
3. 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 ("interest-earning assets"), and
the rates paid on its deposits and borrowings ("interest-bearing liabilities").
Net interest income is further affected by the relative amounts of United's
interest-earning assets and interest-bearing liabilities. In recent years,
United's 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 the primary objectives of United's management has been to
restructure United's balance sheet to reduce its vulnerability to changes in
interest rates ("interest rate risk"). Savings institutions historically have
suffered 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 savings institutions. In periods of rising
interest rates, this mismatch can render savings 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 decrease in positive interest rate spread and lower earnings.
Several strategies have been employed by United to minimize the
mismatch of asset and liability maturities. For the past several years, Heritage
Bank has maintained a policy of selling the majority of newly-originated
long-term (15 to 30-year maturity) fixed-rate mortgage loans to the secondary
market. These loans are sold at their outstanding principal balance, which is
the prearranged contract purchase price, and therefore, no gain or loss is
realized at sale. United promotes the origination and retention of loans
providing for periodic interest rate adjustments, shorter terms to maturity or
balloon provisions. United also emphasizes investment in adjustable rate or
shorter-term mortgage-backed securities and other interest-earning investments.
When maturities of loans increase, United offsets the increased interest rate
risk with matching funds and maturities with FHLB borrowings.
4. LIQUIDITY AND CAPITAL RESOURCES
United's 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, these proceeds from mortgage
prepayments generally would be invested 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 the
proceeds from such prepayments generally would be invested in higher yielding
loans or investments which would have the effect of increasing interest income.
Page 11
The Banks' most liquid assets are cash and cash in banks and highly
liquid, short-term investments. The levels of these assets are dependent on the
Banks' operating, financing, lending, and investing activities during any given
period.
Liquidity management of the Banks is both a daily and long-term
function of United's management strategy. Excess funds are generally invested in
FHLB overnight funds. If the Banks should require funds beyond their ability to
generate them internally, additional sources of funds are available through the
use of FHLB advances. At June 30, 2002 the Banks had outstanding borrowings of
$53.9 million which included $44.0 million of FHLB advances, $8.9 million of
repurchase agreements and $1.0 million of other borrowed money. At December 31,
2001 the Banks had outstanding borrowings of $62.1 million which included $50.5
million of FHLB advances, $9.6 million of repurchase agreements and $2.0 million
of other borrowed money.
UFC, as a bank holding company separate from its subsidiaries, provides
for its own liquidity. A substantial portion of UFC's revenue is dividends
received from Heritage Bank. In general, the Banks are limited, without the
prior consent of state and federal regulators, to payment of dividends that do
not exceed the current year net income plus retained earnings from the two
preceding calendar years. Additional sources of liquidity for UFC include a line
of credit with a correspondent bank.
5. CRITICAL ACCOUNTING POLICIES
United has identified its most critical accounting policy to be that
related to the allowance for loan losses. United's 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 and an internal loan grading system adopted by the Banks.
Other factors include the general economic environment in United's 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.
6. RESULTS OF OPERATIONS-COMPARISON OF THE THREE MONTHS ENDED JUNE 30,
2002 AND JUNE 30, 2001.
(In thousands) SELECTED INCOME STATEMENT DATA
(Unaudited) -------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------
$ %
2002 2001 Change Change
---------- ---------- ---------- ----------
Interest income $ 6,071 $ 6,821 $ (750) (11.0)%
Interest expense 2,770 3,901 (1,131) (29.0)
---------- ---------- ---------- ----------
Net interest income 3,301 2,920 381 13.0
Provision for loan losses 215 249 (34) (13.8)
---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses 3,086 2,671 415 15.6
Non-interest income 1,076 1,207 (131) (10.9)
Non-interest expense 2,901 2,771 130 4.7
---------- ---------- ---------- ----------
Income before income taxes
and minority interest 1,261 1,107 154 14.0
Provision for income taxes 470 429 41 9.7
---------- ---------- ---------- ----------
Net income before minority
interest $ 791 $ 678 $ 113 16.7
Minority interest (50) (47) (3) 6.3
---------- ---------- ---------- ----------
Net income $ 741 $ 631 $ 110 17.4
========== ========== ========== ==========
NET INCOME - United reported net income of $.7 million, or basic and
diluted earnings per share of $.46 and $.45, respectively, for the three months
ended June 30, 2002. For the same period in 2001, United reported net income of
Page 12
$.6 million, or basic and diluted earnings per share of $.38 and $.37,
respectively. Valley reported net income of $.1 million for each of the three
months ended June 30, 2002 and 2001.
NET INTEREST INCOME - Like most financial institutions, the most
significant component of United's earnings is net interest income, which is the
difference between the interest earned on interest-earning assets (loans,
investment securities, mortgage-backed securities and other interest-earning
assets), and the interest paid on deposits and borrowings. This amount, when
divided by average interest-earning assets, is referred to as the net interest
margin, expressed as a percentage. Net interest income and net interest margins
are affected by changes in interest rates, the volume and the mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. The difference between the yield on interest-earning
assets and the cost of interest-bearing liabilities expressed as a percentage is
referred to as the net interest-rate spread. Net interest income increased $.4
million from $2.9 million for the three months ended June 30, 2001 to $3.3
million for the three months ended June 30, 2002. Net interest margin increased
..36% to 3.66% for the three months ended June 30, 2002 from 3.30% for the same
period last year. Net interest-rate spread increased .47% to 3.49% for the three
months ended June 30, 2002 from 3.02% for the same period last year. Increased
volume of interest-earning assets, and decreases in funding rates at FHLB and
decreased rates on customer deposits resulted in an increase in both net
interest margin and net interest-rate spread. United has used the funds from
additional deposits and borrowings to manage interest rate risk.
INTEREST INCOME - Interest income decreased $.7 million from $6.8
million for the three month period ended June 30, 2001 to $6.1 million for the
three month period ended June 30, 2002. For the three month period ended June
30, 2002, compared to the three month period ended June 30, 2001, interest on
loans receivable decreased $.7 million. Interest on mortgage-backed securities
and investments remained consistent for the two periods.
INTEREST EXPENSE - Interest expense decreased $1.1 million from $3.9
million for the three month period ended June 30, 2001 to $2.8 million for the
three month period ended June 30, 2002. Although deposits increased 4.3% from
June 30, 2001 to 2002, lower interest rates during the second quarter of 2002
allowed for a decrease in interest expense on deposits of $.9 million during the
second quarter of 2002 compared to the second quarter of 2001.
Other borrowings decreased 1% from June 30, 2001 to 2002. The combination
of the decrease in borrowings as well as lower interest rates in 2002 resulted
in a $.2 million decrease in interest on other borrowings for three month period
ended June 30, 2002, compared to the three month period ended June 30, 2001.
PROVISION FOR LOAN LOSSES - United provided $.2 million for loan losses
in both of the second quarters ended June 30, 2002 and 2001. Although the state
and national economies have weakened in 2002 as compared to 2001, asset quality
at the Banks has remained relatively strong. United's past due and non-accrual
loans totaled .63% and .69% of total loans at June 30, 2002 and 2001,
respectively.
The provision for loan losses is determined by management as the amount
to be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio in accordance with GAAP. Future
additions to United's allowance for loan losses and any change in the related
ratio of the allowance for loan losses to non-performing assets are dependent
upon the performance and composition of United's loan portfolio, the economy,
inflation, changes in real estate values and interest rates and the view of the
regulatory authorities toward adequate reserve levels.
NON-INTEREST INCOME - In addition to net interest income, United
generates significant non-interest income from a range of retail banking
services, including mortgage banking activities and service charges for deposit
services. Non-interest income decreased $.1 million from $1.2 million for the
three month period ended June 30, 2001 to $1.1 million for the three month
period ended June 30, 2002. United continued to experience consistent demand in
the home lending market, and particularly the refinancing market, during the
three month periods ended June 30, 2002 and 2001.
Page 13
NON-INTEREST EXPENSE - Non-interest expense increased $.1 million during
the three month period ending June 30, 2002 as compared to the same period in
2001. This increase was principally due to the increased operating expenses for
the new branches opened in Bozeman and Missoula, Montana, and Scottsdale,
Arizona.
INCOME TAXES - Income tax expense increased $.1 million to $.5 million
for the three month period ending June 30, 2002 from $.4 million for the same
period of 2001.
7. RESULTS OF OPERATIONS-COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002
AND JUNE 30, 2001.
SELECTED INCOME STATEMENT DATA
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------
$ %
2002 2001 Change Change
---------- ---------- ---------- ----------
Interest income $ 12,204 $ 13,582 $ (1,378) (10.1)%
Interest expense 5,679 7,887 (2,208) (28.0)
---------- ---------- ---------- ----------
Net interest income 6,525 5,695 830 14.6
Provision for losses on loans 455 458 (3) (.7)
---------- ---------- ---------- ----------
Net interest income after
provision for losses on loans 6,070 5,237 833 15.9
Non-interest income 2,167 2,214 (47) (2.1)
Non-interest expense 5,721 5,319 402 7.6
---------- ---------- ---------- ----------
Income before income taxes
and minority interest 2,516 2,132 384 18.0
Provision for income tax expense 938 825 113 13.7
---------- ---------- ---------- ----------
Net income before minority
interest $ 1,578 $ 1,307 $ 271 20.7
Minority interest (99) (93) (6) 6.5
---------- ---------- ---------- ----------
Net Income $ 1,479 $ 1,214 $ 265 21.8
========== ========== ========== ==========
NET INCOME - United reported net income of $1.5 million, or basic and
diluted earnings per share of $.91 and $.90, respectively, for the six months
ended June 30, 2002. For the same period in 2001, United reported net income of
$1.2 million, or basic and diluted earnings per share of $.70. Valley reported
net income of $.3 million and $.2 million for the six months ended June 30, 2002
and 2001, respectively.
NET INTEREST INCOME - Net interest income increased $.8 million from
$5.7 million for the six months ended June 30, 2001 to $6.5 million for the six
months ended June 30, 2002. Net interest margin increased .36% to 3.62% for the
six month period ended June 30, 2002 from 3.26% for the same period last year.
Net interest-rate spread increased .48% to 3.45% for the six months ended June
30, 2002 from 2.97% for the same period last year. Increased volume of
interest-earning assets, decreases in funding rates at FHLB and decreased rates
on customer deposits resulted in an increase in both net interest margin and
interest-rate spread. United has used the funds from additional deposits and
borrowings to manage interest rate risk.
INTEREST INCOME - Interest income decreased $1.4 million from $13.6
million for the six month period ended June 30, 2001 to $12.2 million for the
six month period ended June 30, 2002. For the six month period ended June 30,
2002, compared to the six month period ended June 30, 2001, interest on loans
receivable decreased $1.2 million, interest on mortgage-backed securities and
investments decreased $.1 million while interest on other interest-earning
assets decreased $.1 million.
INTEREST EXPENSE - Interest expense decreased $2.2 million from $7.9
million for the six month period ended June 30, 2001 to $5.7 million for the six
month period ended June 30, 2002. Although deposits increased 4.3% from June 30,
2001 to 2001, lower interest rates on customer deposits during the second
quarter of 2002 allowed for a decrease in interest expense on deposits of $1.8
million for the six month period ended June 30, 2002, compared to the six month
period ended June 30, 2001.
Page 14
Other borrowings decreased 1% from June 30, 2001 to 2002. The
combination of the decrease in borrowings as well as lower interest rated in
2002, resulted in a $.4 million decrease in interest on other borrowings.
PROVISION FOR LOAN LOSSES - United provided $.5 million for loan losses
for both the six months ended June 30, 2002 and 2001.
NON-INTEREST INCOME - Non-interest income was $2.2 million for both the
six months ended June 30, 2002 and 2001. United has experienced relatively
strong demand in the home lending market, and particularly the refinancing
market during the first six months of 2002 and 2001, as mortgage interest rates
remained at attractive levels for borrowers.
NON-INTEREST EXPENSE - United's non-interest expense increased $.4
million during the six month period ending June 30, 2002 as compared to the same
period in 2001. This increase was principally due to the continued staffing and
operating expenses for the new branches opened in Bozeman and Missoula, Montana,
and Scottsdale, Arizona.
INCOME TAXES - Income tax expense increased $.1 million to $.9 million
for the six month period ended June 30, 2002 from $.8 million for the same
period last year.
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 ("ALCO") 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.
The Asset/Liability Management Committee utilizes an institutional
funds management service detailed simulation model 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. This sensitivity
analysis is compared 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 summarizes the sensitivity analysis for the Banks as of
March 31, 2002, the most recent information available. Management believes there
has been no material change in interest rate risk since March 31, 2002. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein in Item 2 and refer to the
Interest Rate Risk Management discussion included in United's Annual Report on
Form 10-K for the year ended December 31, 2001.
Page 15
HERITAGE BANK
Estimated increase (decrease)
in net interest income: +200 bp -200 bp
------- -------
0-90 days $ 16,084 $ (78,690)
91-360 days (155,840) (95,899)
2 years (322,913) (205,503)
3 years (485,028) (320,065)
VALLEY BANK
Estimated increase (decrease)
in net interest income: +200 bp -200 bp
------- -------
0-90 days $ 7,226 $ (22,995)
91-360 days 4,728 (46,977)
2 years 1,605 (106,930)
3 years 64,181 (232,582)
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon 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 others. Sensitivity analysis does not reflect actions that United might take
in responding to or anticipating changes in interest rates.
INTEREST RATE SENSITIVITY OF THE ECONOMIC VALUE OF EQUITY - Mismatches
of interest rate repricing between assets and liabilities create interest rate
risk. Interest rate risk affects the market value of equity, also called the
economic value of equity ("EVE"). Measurement of the EVE is an attempt to
establish a methodology to gauge the potential for the reduction of future
earnings and stockholders' equity resulting from both lower net interest income
("NII") and lower EVE caused by changes in market interest rates. EVE is the
difference between United's depository portfolio value and its loans receivable
portfolio value. EVE thus provides a leading indicator of future potential
changes in both NII and stockholders' equity.
Heritage Bank and Valley Bank have both established maximum percentage
changes for EVE at 1.5% of total assets, given an 100 basis point change in
interest rates. EVE, as a percent to total assets was as follows:
HERITAGE BANK VALLEY BANK
Percent to Total Assets:
March 31, 2002 .88% 1.56%
December 31, 2001 1.21% 1.55%
The Banks periodically review and make changes to established limits
for EVE changes due to mergers and other market factors. Though Valley Bank is
slightly over 1.5% of assets, management considers this to be within prudent
standards.
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. The EVE analysis does not reflect actions that Heritage Bank or
Valley Bank might take in responding to or anticipating changes in interest
rates.
Page 16
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
Although not involved in any material pending litigation as of June 30,
2002, United is a defendant in various legal proceedings arising in the normal
course of business.
ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On May 21, 2002, United Financial Corp. held its Annual Meeting of
Shareholders. The shareholders elected three directors for three year terms.
The shareholders of United Financial Corp. voted as follows with respect
to:
Approval of Directors:
FOR WITHHELD
Steve L. Feurt 1,585,539 40,296
Larry D. Albert 1,588,728 37,107
Jerome H. Hentges 1,590,539 35,296
ITEM 5 OTHER INFORMATION.
NONE
Page 17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
Excluded from this list of exhibits, pursuant to Paragraph (b)
(4) (iii) (A) of Item 601 of Regulation S-K, may be one or more instruments
defining the rights of holders of long-term debt of the registrant. The
registrant hereby agrees that it will, upon request of the Securities and
Exchange Commission, furnish to the Commission a copy of any such instrument.
3.1 Articles of Incorporation of United Financial Corp.,
as amended (incorporated by reference to Exhibit 3.1
of UFC'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 UFC's
Annual Report on Form 10-K dated March 31, 1998).
10.1 Promissory Note issued by United Financial Corp. to
Wells Fargo Bank Minnesota National Association,
dated November 16, 2001.
10.2 Second Amendment to Letter Agreement between Wells
Fargo Bank Minnesota National Association and United
Financial Corp., dated November 16, 2001.
10.3 Service Agreement between United Financial Corp. and
Central Financial Services, Inc., dated January 1,
2002.
10.4 Service Agreement between Heritage Bank and Central
Financial Services, Inc., dated January 1, 2002.
10.5 Management Retention Supplemental Retirement Income
Salary Continuation Plan between Kevin Clark and
Heritage Bank, revised January 10, 1996.
10.6 Heritage Bank Supplemental Retirement Agreement
between Heritage Bank and Steve L. Feurt, dated
October 25, 1999.
10.7 Indenture between United Financial Corp. and The Bank
of New York, as trustee, dated July 16, 2001.
10.8 Amended and Restated Declaration of Trust of United
Financial - Montana Capital Trust I among United
Financial Corp. and the trustees, administrators and
holders named therein, dated July 16, 2001.
10.9 Guarantee Agreement between United Financial Corp.
and The Bank of New York, as trustee, dated July 16,
2001.
10.10 United Financial Corp. 2000 Long-Term Incentive and
Stock Option Plan.
99.1 Certification
B. Reports on Form 8-K
None
Page 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
United Financial Corp.
Date August 13, 2002 /s/ Kurt R. Weise
---------------------- -------------------
Kurt R. Weise
President and Chief
Executive Officer
(Principal Executive
Officer)
Date August 13, 2002 /s/ Paula J. Delaney
---------------------- ---------------------
Paula J. Delaney
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19