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, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number: 0-28080
UNITED FINANCIAL CORP.
----------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0507591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2779, 120 1st Ave. North, Great Falls, Montana 59403
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(406) 727-6106
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934). 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, par value: 1,626,150 shares outstanding as of May 6, 2003
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS 1
Consolidated Condensed Statements of Financial Condition at
March 31, 2003 and December 31, 2002 (unaudited) 1
Consolidated Condensed Statements of Income - Three Months
Ended March 31, 2003 and March 31, 2002 (unaudited) 2
Consolidated Condensed Statements of Cash Flows - Three Months
Ended March 31, 2003 and March 31, 2002 (unaudited) 3
Notes to Consolidated Condensed Financial Statements 4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
ITEM 4 CONTROLS AND PROCEDURES 14
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 15
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5 OTHER INFORMATION 15
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES AND CERTIFICATIONS 16
i
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share and share data)
(Unaudited)
MARCH 31, December 31,
-------- --------
2003 2002
-------- --------
ASSETS
Cash and cash equivalents $ 28,014 $ 33,224
Securities available-for-sale 61,472 60,936
Restricted stock, at cost 4,392 4,327
Loans held for sale 15,688 13,648
Loans receivable, net 251,518 250,431
Accrued interest receivable 2,422 2,525
Premises and equipment, net 7,615 7,668
Real estate and other personal property owned 594 586
Goodwill, net of accumulated amortization 3,429 3,429
Deferred income taxes, net -- 155
Other assets 1,083 1,051
-------- --------
$376,227 $377,980
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, NOW and money market accounts $109,700 $107,980
Savings deposits 55,986 50,980
Time deposits 125,510 128,020
-------- --------
291,196 286,980
Federal Home Loan Bank advances 34,000 38,000
Securities sold under agreements to repurchase 9,930 12,787
Line of credit 500 700
Accrued interest payable 1,447 1,410
Advances from borrowers for taxes and insurance 266 104
Income taxes payable 572 265
Deferred income taxes, net 16 --
Trust preferred securities 3,000 3,000
Other liabilities 1,465 1,308
-------- --------
342,392 344,554
Minority interest 2,979 2,950
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 shares issued and outstanding 27,167 27,167
1,698,312 outstanding)
Retained earnings, substantially restricted 3,028 2,476
Accumulated other comprehensive income, net 661 833
-------- --------
30,856 30,476
-------- --------
$376,227 $377,980
======== ========
Equity/Assets 8.20% 8.06%
Book Value/Share $ 18.97 $ 18.74
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,
---------------------
2003 2002
------- -------
INTEREST INCOME:
Loans receivable $ 4,543 $ 5,061
Mortgage-backed securities 503 688
Other investment securities 199 253
Other interest earning assets 123 131
------- -------
Total interest income 5,368 6,133
INTEREST EXPENSE:
Deposits 1,453 2,073
Other borrowings 496 836
------- -------
Total interest expense 1,949 2,909
------- -------
Net interest income 3,419 3,224
Provision for loan losses 292 240
------- -------
Net interest income after provision for
loan losses 3,127 2,984
NON-INTEREST INCOME:
Gain on sale of loans 1,310 683
Service charges and fees 245 267
Gain on sale of securities 18 86
Other 75 55
------- -------
Total non-interest income 1,648 1,091
NON-INTEREST EXPENSE:
Compensation and benefits 1,820 1,499
Occupancy and equipment 404 381
Data processing fees 192 202
Other 712 738
------- -------
Total non-interest expense 3,128 2,820
------- -------
Income before income taxes and minority interest 1,647 1,255
Provision for income taxes 619 468
------- -------
Income before minority interest 1,028 787
Minority interest (46) (49)
------- -------
Net income $ 982 $ 738
======= =======
Basic earnings per share $ .60 $ .45
======= =======
Diluted earnings per share $ .59 $ .45
======= =======
Dividends declared per share $ .265 $ .235
======= =======
Weighted average shares outstanding - basic 1,626 1,626
======= =======
Weighted average shares outstanding - diluted 1,657 1,640
======= =======
See Notes to Consolidated Condensed Financial Statements
Page 2
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) THREE MONTHS ENDED
THREE MONTHS ENDED
-----------------------
MARCH 31, March 31,
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002
-------- --------
Net cash provided by operating activities $ 240 $ 3,667
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans receivable (1,408) 3,766
Purchases of securities available-for-sale (17,501) (24,715)
Proceeds from maturities, pay downs and sales of securities
Available-for-sale 16,666 21,106
Purchases of restricted stock -- (48)
Purchases of premises and equipment (126) (390)
Proceeds from sale of premises and equipment 13 --
Proceeds from sale of real estate and other personal property owned 16 66
Acquisition of real estate and other personal property owned -- (4)
-------- --------
Net cash used by investing activities (2,340) (219)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 4,216 1,782
Proceeds from Federal Home Loan Bank advances 4,000 (3,500)
Payments on Federal Home Loan Bank advances (8,000) --
Payments on line of credit (200) --
Net decrease in securities sold under agreements to repurchase (2,857) (708)
Net decrease in federal funds purchased -- (1,000)
Increase in advances from borrowers for taxes and insurance 162 170
Dividends paid to stockholders (431) (385)
-------- --------
Net cash used by financing activities (3,110) (3,641)
-------- --------
Decrease in cash and cash equivalents (5,210) (193)
Cash and cash equivalents at beginning of year 33,224 22,026
-------- --------
Cash and cash equivalents at end of period $ 28,014 $ 21,833
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE
- -------------------------------------------------------------------
Cash payments for interest $ 1,912 $ 2,876
Cash payments for income taxes $ 25 $ 150
NONCASH INVESTING AND FINANCING ACTIVITIES
- -------------------------------------------------------------------
Vehicle financed $ 28 $ --
See Notes to Consolidated Condensed Financial Statements
Page 3
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
United Financial Corp. ("United") is a bank holding company
headquartered in Great Falls, Montana, with operations in 12 Montana communities
and Phoenix and Scottsdale, Arizona. United'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 United. Heritage Bank and Valley Bank are collectively referred to
herein as the "Banks". United'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. United had
assets of approximately $376.2 million, deposits of approximately $291.2 million
and stockholders' equity of approximately $30.9 million at March 31, 2003.
United owned approximately 65% of Valley at March 31, 2003. As a result
of acquiring over 50% of the outstanding shares of Valley in January 2000,
United has consolidated Valley in its financial statements since January 1,
2000. The aggregate purchase price of all shares of Valley purchased by United
to date is approximately $7.2 million. Valley had assets of approximately $68.2
million, deposits of approximately $56.3 million and stockholders' equity of
approximately $8.6 million at March 31, 2003.
Heritage Bank is a state-chartered commercial bank with locations in
Bozeman, Chester, Fort Benton, Geraldine, Glendive, Great Falls, Hamilton,
Havre, Kalispell, Missoula, Libby 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.
United's principal offices are located at 120 First Avenue North, Great
Falls, Montana, and its telephone number is (406) 727-6106.
United makes available all periodic and current reports, free of
charge, on its website as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission
("SEC"). United's website address is www.ufcmontana.com. The contents of our
website are not incorporated into this report or into our other filings with the
SEC.
2. BASIS OF PRESENTATION
United's consolidated financial statements, included herein, 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
Page 4
for a fair presentation of the consolidated financial condition, results of
operations, and cash flows for the periods disclosed. Operating results for the
three months ended March 31, 2003 are not necessarily indicative of the results
anticipated for the year ending December 31, 2003. For additional information,
refer to the consolidated audited financial statements and footnotes thereto
included in United's Annual Report to Shareholders and Annual Report on Form
10-K for the year ended December 31, 2002. Certain reclassifications have been
made to the December 31, 2002 financial information to conform to the March 31,
2003 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
MARCH 31, 2003 March 31, 2002
------------------------------------- --------------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
---------- ----------- --------- ---------- ----------- ---------
Net income $ 1,601 $ 619 $ 982 $ 1,206 $ 468 $ 738
Unrealized and realized
holding losses arising
during period (364) (137) (227) (605) (228) (377)
Less: reclassification adjustment for
gains included in net income 18 7 11 86 32 54
------- ------- ------- ------- ------- -------
Net unrealized losses on
securities available for sale (346) (130) (216) (519) (196) (323)
Less: Portion of unrealized loss
allocated to minority interest (17) -- (17) (45) -- (45)
------- ------- ------- ------- ------- -------
Total comprehensive income $ 1,272 $ 489 $ 783 $ 732 $ 272 $ 460
======= ======= ======= ======= ======= =======
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.
Page 5
5. COMPUTATION OF NET INCOME PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares used to compute basic EPS plus the incremental amount of potential
common stock determined by the treasury stock method. 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,
----------------
2003 2002
------ ------
Weighted average shares outstanding during
the period on which basic earnings per
share is calculated 1,626 1,626
Add: incremental shares under stock option
plans 31 15
------ ------
Average outstanding shares on which diluted
earnings per share is calculated
1,657 1,641
====== ======
Net income applicable to common
stockholders, basic $ 982 $ 738
Less: reduction of proportionate share of
Valley net income assuming option
exercises -- --
------ ------
Net income applicable to common
stockholders, diluted $ 982 $ 738
====== ======
Basic earnings per share $ .60 $ .45
====== ======
Diluted earnings per share $ .59 $ .45
====== ======
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 former Chairman of the Board of Directors
and its current 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 $.1 million for each of the three month periods ended
March 31, 2003 and 2002, respectively. The fees are billed by CFS on an hourly
basis for work performed by United's current chairman and CEO, its former
chairman and four other employees. Neither the former chairman or the current
chairman and CEO of United receive direct compensation from United for their
services. Each is compensated for services as a director through director's fees
of $300 per month, and for services as an officer of United through CFS. Through
CFS, the former chairman and current chairman and CEO earn annual salaries of
$135,000 and $140,000, respectively. United's portion of those salaries was
approximately 53%, 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 $.2 million and $.1 million for
the three months ended March 31, 2003 and 2002, respectively.
Page 6
7. DIVIDENDS DECLARED
On April 23, 2003, the Board of Directors of United declared a
quarterly cash dividend of $.265 per share, payable May 27, 2003, to
shareholders of record on May 12, 2003.
8. STOCK-BASED COMPENSATION
United has a stock-based employee compensation plan, which is a stock
option plan described more fully in footnotes included in United's Annual Report
to Shareholders and Annual Report on Form 10-K for the year ended December 31,
2002. United accounts 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 had an exercise price at or
above to 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 United had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------
(UNAUDITED) QUARTER ENDED MARCH 31,
-----------------------
2003 2002
------- -------
Net income: As reported $ 982 $ 738
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (13) (20)
------- -------
Pro forma net income $ $ 718
======= =======
Earnings per share:
Basic - as reported $ .60 $ .45
======= =======
Basic - pro forma $ .60 $ .44
======= =======
Diluted - as reported $ .59 $ .45
======= =======
Diluted - pro forma $ .58 $ .44
======= =======
9. 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.
At March 31, 2003, United had $3.4 million of recorded goodwill which
in accordance with its current accounting policies, is no longer amortized to
expense during the years ended December 31, 2003 and 2002, but rather is
reviewed annually by management for any impairment writedown. This accounting
policy for goodwill is considered a critical one for United because of the
significant accounting estimates made by management in assessing any potential
impairment writedown. Such accounting estimates can be significant due to the
possibility that future events affecting them may differ from management's
current judgements.
Page 7
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
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. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE THREE MONTHS
ENDED MARCH 31, 2003 TO THE YEAR ENDED DECEMBER 31, 2002.
(IN THOUSANDS) SELECTED FINANCIAL CONDITION RECAP
(UNAUDITED)
MARCH 31, Dec. 31,
2003 2002 Change
--------------------------------
Cash and cash equivalents $ 28,014 $ 33,224 $ (5,210)
Securities available-for-sale 61,472 60,936 536
Restricted stock, at cost 4,392 4,327 65
Loans held for sale 15,688 13,648 2,040
Loans receivable, net 251,518 250,431 1,087
Premises and equipment, net 7,615 7,668 (53)
Real estate and other
personal property owned 594 586 8
Goodwill, net 3,429 3,429 --
All other assets 3,505 3,731 (226)
Total assets 376,227 377,980 (1,753)
Deposits 291,196 286,980 4,216
Federal Home Loan Bank advances 34,000 38,000 (4,000)
Securities sold under
agreements to repurchase 9,930 12,787 (2,857)
Line of credit 500 700 (200)
Trust preferred securities 3,000 3,000 --
All other liabilities 3,766 3,087 679
Total liabilities 342,392 344,554 (2,162)
Stockholders' equity, net 30,856 30,476 380
Total assets decreased $1.8 million to $376.2 million at March 31, 2003
from $378.0 million at December 31, 2002. The decrease in assets was primarily
the result of a decrease in cash and cash equivalents of approximately $5.2
million offset by an increase in loans receivable and loans held for sale of
approximately $3.1 million.
Page 8
SECURITIES AVAILABLE-FOR-SALE - Securities available-for-sale increased
$.6 million to $61.5 million at March 31, 2003 from $60.9 million at December
31, 2002. The increase was the result of $17.5 million of purchases, offset by
$16.7 million of maturities and calls, sales and principal repayments and a $.2
million decrease in unrealized gains on securities.
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)
MARCH 31, 2003
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. GOVERNMENT AND FEDERAL
AGENCIES $ 8,294 $ 152 $ -- $ 8,446
MORTGAGE-BACKED SECURITIES 48,534 661 (102) 49,093
MUNICIPAL BONDS 1,945 309 -- 2,254
CORPORATE BONDS AND EQUITY
SECURITIES 1,525 154 -- 1,679
-------- -------- -------- --------
$ 60,298 $ 1,276 $ (102) $ 61,472
======== ======== ======== ========
December 31, 2002
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
U.S. Government and federal
agencies $ 13,793 $ 238 $ -- $ 14,031
Mortgage-backed securities 42,195 1,060 -- 43,255
Municipal bonds 1,945 54 -- 1,999
Corporate bonds and equity
securities 1,526 125 -- 1,651
-------- -------- -------- --------
$ 59,459 $ 1,477 $ -- $ 60,936
======== ======== ======== ========
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased $1.1 million to $251.5 million at March 31, 2003 from $250.4 million
at December 31, 2002. The increase in loans during the first quarter of 2003 was
primarily in the commercial real estate loan category. Other loan categories
have remained fairly constant or decreased slightly as a result of a weakened
state and national economy and the resulting impact on loan demand. United has
also slowed its acquisition of participation loans from outside Montana due to
reduced interest rates and the concerns of a possible national recession. The
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
$41.8 million and $39.3 million of participation and purchased loans as of March
31, 2003 and 2002, respectively.
During the three months ended March 31, 2003, loans held for sale
increased $2.0 million to $15.7 million at March 31, 2003 from approximately
$13.7 million at December 31, 2002, as loan originations outpaced secondary
market sales. Approximately $64.7 million of residential real estate loans were
originated for sale and $62.7 million of residential real estate loans were sold
to the secondary market during the three month period ending March 31, 2003.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve increased $.2 million
to $3.8 million at March 31, 2003 as compared to $3.6 million at December 31,
2002. A loan loss provision of $.3 million for the three months ended March 31,
2003 was offset by loans in the amount of $.1 million which were determined by
United's management to be uncollectable and subsequently charged-off. The loan
loss reserve at March 31, 2003 is an amount which management believes is
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, 2003 was 1.47%.
Page 9
LOANS RECEIVABLE, NET OF UNAMORTIZED NET DEFERRED LOAN FEES, AT THE DATES
INDICATED ARE SUMMARIZED AS FOLLOWS:
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, December 31,
2003 2002
-------- --------
First mortgage loans and contracts secured
by real estate $ 73,285 $ 73,801
Commercial real estate loans 74,679 72,993
Commercial loans 60,976 59,428
Auto and other consumer loans 24,913 25,331
Second mortgage consumer loans 5,218 5,559
Agricultural loans 13,862 14,548
Tax exempt municipal loans 1,463 1,469
Savings account and other loans 900 875
-------- --------
255,296 254,004
Less: Allowance for loan losses 3,778 3,573
-------- --------
$251,518 $250,431
======== ========
A SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES FOR THE DATES INDICATED
ARE AS FOLLOWS:
(IN THOUSANDS) THREE MONTHS ENDED Year ended
MARCH 31, 2003 December 31, 2002
------------------ -----------------
Balance, beginning of period $ 3,573 $ 3,503
Provision for loan losses 292 1,170
Losses charged off (88) (1,189)
Recoveries 1 89
------- -------
Balance, end of period $ 3,778 $ 3,573
======= =======
NON-PERFORMING ASSETS - When a borrower fails to make a scheduled
payment on a loan and does not cure the delinquency within 15 days, United's
policy is to contact the borrower between the 15th and 30th day of delinquency
to establish a repayment schedule. If a loan is not current, or a realistic
repayment schedule is not being followed by the 90th day of delinquency, United
will generally proceed with legal action to foreclose the property after the
loan has become contractually delinquent 90 days. Loans contractually past due
90 days are classified as non-performing. However, not all loans past due 90
days automatically result in the non-accrual of interest income. If a 90 day
past due loan has adequate collateral, or is FHA insured or VA guaranteed,
leading to the conclusion that loss of principal and interest would likely not
be realized, then interest income will continue to be accrued.
The Banks follow 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 March 31, 2003 United had
non-accrual loans totaling $.7 million and loans totaling $.3 million past due
90 days and still accruing. At December 31, 2002 by comparison, United's
non-accrual loans totaled $.3 million and loans past due 90 days and still
accruing totaled .6 million.
The Banks are required to review, classify and report to their Board of
Directors their 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
March 31, 2003 and December 31, 2002, United had no assets classified as loss.
At both March 31, 2003 and December 31, 2002, United had $.1 million classified
as doubtful. At both March 31, 2003 and December 31, 2002, United had $.8
million of reported substandard assets. As a percent of
Page 10
total assets, substandard assets were approximately .21% at both March 31, 2003
and December 31, 2002.
PREMISES AND EQUIPMENT - This category decreased $.1 million to $7.6
million at March 31, 2003 from $7.7 million at December 31, 2002. The Banks
invested approximately $.1 million in fixed assets during the first three months
of 2003, primarily in connection with the construction of the new Heritage Bank
branch facility in Billings, Montana and the relocation of the Heritage Bank
branch in Libby, Montana. The purchases of premises and equipment were offset by
approximately $.2 of depreciation.
DEPOSITS - Deposits increased $4.2 million to $291.2 million at March
31, 2003 from $287.0 million at December 31, 2002. This increase was primarily
the result of the continued growth of the three new Heritage Bank branches in
Bozeman, Kalispell and Missoula, Montana, and Valley Bank's new branch in
Scottsdale, Arizona.
DEPOSITS AT THE DATES INDICATED ARE SUMMARIZED AS FOLLOWS:
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, December 31,
2003 2002
-------- --------
Demand accounts $ 52,535 18.1% $ 48,228 16.8%
Now and money market accounts 57,165 19.6 59,752 20.8
Savings accounts 55,986 19.2 50,980 17.8
Certificate of deposits 125,510 43.1 128,020 44.6
-------- ----- -------- -----
$291,196 100% $286,980 100%
======== ===== ======== =====
BORROWED FUNDS - FHLB advances decreased $4.0 million from December 31,
2002 to March 31, 2003, a net result of $4.0 million in advances and $8.0
million in repayments. Securities sold under agreements to repurchase decreased
$2.9 million to $9.9 million at March 31, 2003 from $12.8 million at December
31, 2002.
STOCKHOLDERS' EQUITY - Stockholders' equity increased $.4 million to
$30.9 million at March 31, 2003 from $30.5 million at December 31, 2002. This
increase is due to $1.0 million of net income for the three months ended March
31, 2003 less cash dividends declared of $.4 million, and a $.2 million decrease
in unrealized gains net of tax effects, associated with securities classified as
available-for-sale being adjusted to market value.
3. MATERIAL CHANGES IN RESULTS OF OPERATIONS-COMPARISON OF THE THREE MONTHS
ENDED MARCH 31, 2003 AND MARCH 31, 2002.
(IN THOUSANDS) INCOME RECAP
(UNAUDITED) ----------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002 Change
--------------------------
Interest income $5,368 $6,133 $ (765)
Interest expense 1,949 2,909 (960)
------ ------ ------
Net interest income 3,419 3,224 195
Provision for loan losses 292 240 52
------ ------ ------
Net interest income after
provision for loan losses 3,127 2,984 143
Non-interest income 1,648 1,091 557
Non-interest expense 3,128 2,820 308
------ ------ ------
Income before income taxes
and minority interest 1,647 1,255 392
Provision for income taxes 619 468 151
------ ------ ------
Net income before minority
interest $1,028 $ 787 $ 241
====== ====== ======
Page 11
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 $.2
million to $3.4 million for the three months ended March 31, 2003 from $3.2
million for the three months ended March 31, 2002. Net interest margin increased
..24% to 3.84% for the three months ended March 31, 2003 from 3.60% for the same
period last year. Net interest-rate spread increased .30% to 3.72% for the three
months ended March 31, 2003 from 3.42% for the same period last year. Although
total interest income decreased $.8 million primarily as a result of interest
rate cuts by the Federal Reserve Bank which began in 2001, the decrease in
interest expense due to interest rate cuts was even greater, at $1.0 million,
resulting in a net increase in net interest income of $.2 million.
INTEREST INCOME - Interest income decreased $.8 million from $6.1
million for the three month period ended March 31, 2002 to $5.3 million for the
three month period ended March 31, 2003.
For the three month period ended March 31, 2003, compared to the three
month period ended March 31, 2002, interest on loans receivable decreased $.5
million. Interest on mortgage-backed securities and investments and interest on
other interest-earning assets decreased $.3 million for the three month period
ended March 31, 2003 compared to the same period the prior year.
INTEREST EXPENSE - Interest expense decreased $1.0 million from $2.9
million for the three month period ended March 31, 2002 to $1.9 million for the
three month period ended March 31, 2003.
For the three month period ended March 31, 2003, compared to the three
month period ended March 31, 2002, interest on deposits decreased $.6 million,
and interest of other borrowings decreased $.4 million. Although the average
balance of deposits increased 3.0% from March 31, 2002 to 2003, lower interest
rates during the first quarter of 2003 allowed for a decrease in interest
expense on deposits. The $.4 million decrease in interest on other borrowings
included a $.3 million decrease in interest on FHLB advances. The average
balance of FHLB advances decreased 24.3% from March 31, 2002 to March 31, 2003.
The average balance of other borrowings decreased 4.0% from March 31, 2002 to
2003, resulting in a $.1 million decrease in interest expense on other
borrowings.
PROVISION FOR LOAN LOSSES - United provided $.3 million for loan losses
in the first three months of 2003, as compared to $.2 million in the first three
months of 2002. Although the state and national economics have weakened in 2003
and 2002 as compared to 2001, asset quality at the Banks has remained strong,
and United's past due and non-accrual loans totaled .52% and .76% of total loans
at March 31, 2003 and 2002, 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 increased $.6 million for the three month period
ended March 31, 2003 to $1.7 million from $1.1 million for the
Page 12
three month period ended March 31, 2002. United's loan demand continued to be
strong in the home lending market, and particularly the refinancing market,
during the first three months of 2003, as interest rates continue to be at
levels which are attractive to customers in the home lending market. Gain on
sale of loans increased a record $.6 million for the three month period ending
March 31, 2003 to $1.3 million from $.7 million for the same period in 2002.
NON-INTEREST EXPENSE - Non-interest expense increased $.3 million during
the three month period ending March 31, 2003 as compared to the same period in
2002. This increase was principally due to increased personnel expenses
associated with commissions to loan originators in United's mortgage banking
department.
4. 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"). 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 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.
5. 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 13
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 March 31, 2003 the Banks had outstanding borrowings of
$44.4 million which included $34.0 million of FHLB advances, $9.9 million of
repurchase agreements and $.5 million of other borrowed money. At December 31,
2002 the Banks had outstanding borrowings of $51.5 million which included $38.0
million of FHLB advances, $12.8 million of repurchase agreements and $.7 million
of other borrowed money.
United, as a bank holding company separate from its subsidiaries,
provides for its own liquidity. Substantially all of the bank holding company'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 the bank holding company include a line of credit with a correspondent bank.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes there has been no material change in interest rate
risk since December 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, 2002.
ITEM 4 CONTROLS AND PROCEDURES
United's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that United's disclosure controls and procedures are adequately designed
to ensure that information required to be disclosed by United in the reports
that it files or submits under the Securities and Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in applicable rules and forms. There were no significant
changes made in our internal controls or, to our knowledge, in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
Page 14
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
Although not involved in any material pending litigation as of March 31,
2003, United is a plaintiff 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 CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5 OTHER INFORMATION.
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
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).
99.1 Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of principal financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. B. Reports on
Form 8-K
United did not file any current reports on Form 8-K during the quarter
ended March 31, 2003.
Page 15
SIGNATURES AND CERTIFICATIONS
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, 2003 /s/ Kurt R. Weise
------------------------- -----------------------------------
Kurt R. Weise
Chairman and Chief
Executive Officer
(Duly Authorized Officer and
Principal Executive Officer)
Date May 12, 2003 /s/ Paula J. Delaney
------------------------ -----------------------------------
Paula J. Delaney
Chief Financial Officer
(Principal Financial
and Accounting Officer)
Page 16
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Kurt R. Weise, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15b-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date May 12, 2003 /s/ Kurt R. Weise
------------------ ----------------------------
Kurt R. Weise
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
Page 17
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Paula J. Delaney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15b-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date May 12, 2003 /s/ Paula J. Delaney
------------------ ----------------------------
Paula J. Delaney
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 18