UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITY 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 Number)
P.O. Box 2779, 120 1st Avenue North, Great Falls, Montana 59403
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (406) 727-6106
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing price of such stock on
the Nasdaq National Market as of February 28, 2001, was $16,117,503.
The number of shares of Registrant's common stock outstanding on
February 28, 2001 was 1,615,312. Registrant's common stock is traded on the
Nasdaq National Market, symbol UBMT.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held on May 22, 2001 are incorporated by reference into Part
III of this Form 10-K.
UNITED FINANCIAL CORP.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................................. 1
ITEM 2. PROPERTIES...........................................................14
ITEM 3. LEGAL PROCEEDINGS....................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................................15
ITEM 6. SELECTED FINANCIAL DATA..............................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................35
ITEM 11. EXECUTIVE COMPENSATION...............................................35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K..........................................................36
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PART I
ITEM 1. BUSINESS
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. In 2000, UFC's banking business was conducted through
its wholly-owned subsidiaries, Heritage Bank F.S.B. ("Heritage Bank") and
Heritage State Bank ("State Bank"), and Valley Bank of Arizona ("Valley Bank"),
the wholly-owned subsidiary of Valley Bancorp, Inc. ("Valley"), collectively
referred to herein as the "Banks".
UFC is now the majority shareholder of Valley having increased its
ownership in Valley from 39.93% at December 31, 1999 to 56.52% at December 31,
2000. As a result of acquiring over 50% of the outstanding shares of Valley, UFC
began to consolidate Valley in its financial statements effective January 1,
2000. See Part IV, Item 24 - "Notes to Consolidated Financial Statements -
Acquisition". The aggregate purchase price of the shares of Valley purchased to
date is $6.3 million, including $1.9 million for shares acquired in 2000, $1.7
million for shares acquired in 1999, and $2.7 million for shares acquired in
1998. Valley had assets of approximately $71.0 million, deposits of
approximately $62.7 million and stockholders' equity of approximately $8.1
million at December 31, 2000. In March 2001, UFC acquired an additional 1,400
shares of Valley bringing its ownership to 56.60%.
UFC, Heritage Bank, State Bank and Valley are collectively referred to
herein as ("United"). UFC, Heritage Bank, and State Bank are collectively
referred to herein as ("United Only"). United had assets of approximately $364
million, deposits of approximately $261 million and stockholders' equity of
approximately $30 million at December 31, 2000. UFC is the result of the merger
on February 3, 1998 (the "Heritage Merger") of two Montana-based savings and
loan holding companies of relatively comparable size: United Financial Corp. (as
it existed prior to the merger, "Old United") and Heritage Bancorporation
("Heritage"). Heritage Bank is the result of the subsequent merger in May 1998
of the savings bank subsidiaries of these two holding companies: United Savings
Bank, F.A., the savings bank subsidiary of Old United ("United Bank"), and
Heritage Bank, the savings bank subsidiary of Heritage.
Heritage Bank is a federally chartered stock savings bank with full
service banking offices in Bozeman, Chester, Glendive, Great Falls, Havre,
Missoula, and Shelby, Montana, and loan production offices in Hamilton,
Kalispell, and Libby, Montana. State Bank is a state chartered bank formed in
1998 with full service banking operations in Fort Benton and Geraldine, Montana.
Valley Bank is a state chartered commercial bank with full service banking
operations 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. A majority of the Banks' banking business is conducted in the
Great Falls and Phoenix areas. The Banks also invest in mortgage-backed
securities, U.S. Treasury obligations, other U.S. Government agency obligations
and other interest-earning assets.
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. Heritage Bank has a
wholly owned subsidiary, Community Service Corporation ("CSC"), which owned and
managed real estate held for investment during 1999, but which is inactive at
December 31, 2000. Heritage Bank holds an 11% ownership interest in Bankers'
Resource Center, a computer data center.
1
As a result of the formation of State Bank in August 1998, UFC, which
was formerly regulated by the Office of Thrift Supervision ("OTS") as a savings
and loan holding company, became a bank holding company subject to supervision
by the Federal Reserve Board. Heritage Bank, as a federally chartered savings
bank, was subject to supervision by the OTS in 2000 as its principal regulator
and both Heritage Bank and State Bank, as financial institutions with deposits
insured by the Federal Deposit Insurance Corporation ("FDIC"), remain subject to
regulation by the FDIC.
HERITAGE BANK AND STATE BANK MERGER. In 2000, Heritage Bank received
approval to merge into State Bank's state banking charter. Effective January 1,
2001 State Bank changed its name to Heritage Bank and relocated its main office
to Great Falls, Montana. Beginning in 2001, the new Heritage Bank will be
regulated by the FDIC and the Montana Department of Commerce.
LENDING ACTIVITIES
GENERAL. Lending activities are United's primary source of both
interest income and fee income. United's interest income from loans receivable
was approximately $20.7 million, $13.8 million and $10.5 million, or
approximately 81%, 80% and 74% of total interest income, for the years ended
December 31, 2000, 1999 and 1998, respectively. Interest income for 2000
includes $3.7 million from the consolidation of Valley. To date, United's
principal lending activity has been the origination of real estate loans,
including conventional residential real estate loans (loans which are neither
insured nor partially guaranteed by government agencies) and residential real
estate loans insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Veterans Administration ("VA"), agricultural loans and
commercial loans.
The following table sets forth the composition of United's loans
receivable at December 31, 2000, 1999 and 1998:
(Dollars in thousands)
December 31, December 31, December 31,
------------------------ ------------------------ ------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ----------- ------------ ----------- ------------
Loans secured by real estate:
1 - 4 residential $ 31,087 12.2 % $ 34,097 18.1 % $ 27,109 18.7%
5 or more residential 6,326 2.5 5,237 2.8 6,601 4.6
Construction 12,850 5.0 10,564 5.6 9,224 6.4
Agricultural 24,689 9.7 16,210 8.6 10,275 7.1
Commercial 65,268 25.7 30,594 16.3 27,449 18.9
------------- ---------- ----------- ------------ ----------- ------------
Total loans secured by real
estate 140,220 55.1 96,702 51.4 80,658 55.7
Commercial loans 59,576 23.4 60,060 32.0 37,564 25.9
Tax exempt municipal loans 1,489 .6 1,428 .8 1,477 1.0
Agricultural loans 12,233 4.8 9,805 5.2 8,191 5.7
Savings account and other
loans 1,192 .5 961 .5 728 .5
Second mortgage consumer
loans 17,217 6.8 7,702 4.1 9,066 6.3
Auto and other consumer loans 22,245 8.8 11,276 6.0 7,160 4.9
------------- ---------- ----------- ------------ ----------- ------------
Total loans receivable 254,172 100.0 % 187,934 100.0 % 144,844 100.0%
============ ============ ============
Less:
Allowance for loan losses 2,526 1,586 1,485
------------ ----------- -----------
Net loans receivable $251,646 $186,348 $143,359
============ =========== ===========
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The following table sets forth the composition of United's loans
receivable at December 31, 1997 and 1996 (on a pro forma combined basis):
(Dollars in thousands) Pro Forma Combined
December 31,
---------------------------------------------------
1997 1996
------------------------ ------------------------
Amount Percent Amount Percent
------------ ----------- ------------ -----------
Loans secured by real estate:
1 - 4 residential $43,156 45.4 % $38,755 49.8 %
5 or more residential 6,705 7.1 4,758 6.1
Construction 5,476 5.8 4,405 5.6
Agricultural 2,980 3.1 880 1.1
Commercial 11,437 12.0 9,932 12.8
------------ ----------- ------------ -----------
Total loans secured by real
estate 69,754 73.4 58,730 75.4
Commercial loans 13,435 14.2 11,556 14.8
Tax exempt municipal loans 795 .8 -- --
Agricultural loans 2,951 3.1 468 .6
Savings account and other loans 616 0.7 278 .4
Second mortgage consumer loans 2,311 2.5 1,699 2.3
Auto and other consumer loans 5,075 5.3 5,040 6.5
------------ ----------- ------------ -----------
Total loans receivable 94,937 100.0 % 77,771 100.0 %
=========== ===========
Less:
Allowance for loan losses 1,146 463
------------ ------------
Net loans receivable $93,791 $77,308
============ ============
RESIDENTIAL (NON-CONSTRUCTION) REAL ESTATE LENDING. Residential
mortgage lending constitutes a significant portion of United's lending
activities. United's residential loan originations are conducted by residential
loan production officers in its nine banking offices and its three loan
production offices in Montana. Virtually all of United's residential loan
production is secured by properties located in Montana.
Under United's residential lending policies, most loans originated
conform to Government National Mortgage Association/Federal National Mortgage
Association ("GNMA/FNMA") secondary mortgage market standards and are secured by
residential property with a value of not more than 80% (or 95% if private
mortgage insurance is obtained) of the principal amount of the loan. In
accordance with federal guidelines, an appraisal by an independent licensed or
certified appraiser is required for all residential loans in excess of $250,000.
United generally also obtains appraisals or valuations on most residential loans
under $250,000. The terms of United's conventional real estate loans provide
that the loan can be prepaid without penalty and typically include a due-on-sale
clause that provides for acceleration of indebtedness upon the sale or other
disposition of secured property. Evidence of fire, casualty and hazard insurance
with a mortgagee clause in favor of United is required prior to settlement of
residential and commercial real estate loans. Title insurance is generally
required on properties securing such loans.
Most of United's residential loans are originated through personal
contacts of loan officers, including contacts with local realtors, and through
referrals from deposit customers. Although the majority of United's loans are
fixed rate loan products, United offers both fixed and adjustable rate
residential loans. United offers a variety of adjustable-rate mortgage loans
("ARMs"), the interest rates on which vary with the movement of the index upon
which the interest rates are based. If the interest rates change, loan payments,
balances or terms may be adjusted. United's primary indexes are the 1, 3, 5 and
10-year constant maturity Treasury indexes. Most of the ARMs currently
originated by United have loan terms of 10 to 30 years with rate adjustments
generally every 1, 3, 5 or 10 years during the term of the loan. Generally,
interest rate adjustments on United's ARMs are limited to changes of 2.5% -
3.25% per year and 6% - 10% for the life of the loan.
3
The majority of United's total production of long-term (15 to 30-year
maturity) fixed rate residential loans is originated according to pre-arranged
underwriting standards that result in immediate sale to the secondary market,
primarily to mortgage bankers and pension funds. While origination and sale of
these loans produces fee income, the loans are carried at their outstanding
principal balance, which is the contracted purchase price, and therefore no gain
or loss is realized at sale, except for gain associated with recognizing any
retained mortgage servicing rights. United sold long-term fixed-rate mortgage
loans to the secondary market in aggregate amounts of $108.7 million in 2000.
United also sells long-term fixed-rate loans that are refinances of existing
portfolio loans or permanent financing of completed construction loans to the
secondary market or State of Montana housing agencies. These loans are carried
at their outstanding principal balance, which was the contracted purchase price,
and therefore no gain or loss was realized at sale. During 2000, United sold
portfolio loans in aggregate amounts of $7.9 million. United retains a limited
number of adjustable rate mortgages and fixed rate mortgage loans up to 15-year
maturities for its own portfolio.
REAL ESTATE CONSTRUCTION LOANS. In addition to permanent real estate
mortgage loans, United also provides interim financing for the construction of
single-family and multi-unit dwellings, commercial real estate and improvements
of real estate. Construction loans are generally made for periods of
approximately six months, with interest paid at periodic intervals. Such loans
may be extended for several months due to adverse weather conditions or other
justifiable delays in construction. United provides financing primarily for a
limited number of contractors who have demonstrated an ability to complete
projects and financial responsibility in residential development and
construction and have operated in United's lending area for a number of years.
COMMERCIAL AND AGRICULTURAL REAL ESTATE LOANS. United engages in
commercial real estate lending secured by both commercial and agricultural
properties. Occasionally when making such loans, United participates in the U.S.
Small Business Administration's program for guaranteed commercial real estate
loans. United's loans on commercial and agricultural real estate are primarily
first lien loans with 10 to 15-year maturities and adjustable interest rates
based on U.S. Treasury indexes for 1, 3 and 5 years. While OTS regulations limit
the level of commercial real estate lending by a federally charted thrift
institution to 400% of its capital, this limitation has not had a material
impact on the lending activities of Heritage Bank to date.
NON-MORTGAGE COMMERCIAL AND AGRICULTURAL LENDING. In addition to real
estate lending, United offers commercial and agricultural non-mortgage loans.
OTS regulations limit the level of commercial non-mortgage lending by a
federally chartered thrift institution to 20% of total assets. In 2000,
increased commercial demand has caused Heritage Bank to exceed the 20% limit.
United is no longer subject to this limitation as a result of merging Heritage
Bank into State Bank effective January 1, 2001.
United offers commercial lines of credit, equipment term loans, working
capital loans and loans guaranteed by the Small Business Administration to its
business customers. It also offers seasonal lines of credit and term equipment
loans to its agricultural borrowers and purchases, on a participation basis,
loans originated outside its normal market areas. These are generally purchased
from commercial banks and third party loan production offices. These purchased
participations allow United to diversify its geographic risk and are purchased
with a higher level of underwriting standards since a direct customer
relationship does not exist. Most of United's commercial non-mortgage loans are
originated or purchased by United's senior lending staff in Great Falls and
Phoenix.
CONSUMER LENDING. United's consumer loan portfolio includes home
equity, home improvement, line of credit, auto, deposit account, dealer loans
and credit card receivables. United has entered into agreements with certain
local merchants to purchase qualifying conditional sales contracts. Although
some consumer lending is conducted through loan production offices, most of
United's consumer lending is
4
conducted at branch offices and United's home office in Great Falls. United
requires fire, hazard and casualty insurance for loans secured by home equity
and casualty insurance for loans secured by autos and recreational vehicles.
INVESTMENT ACTIVITIES
The investment activities of United are designed to provide an
investment alternative for funds not presently required to meet loan demand,
assist the Banks in meeting potential regulatory liquidity requirements, assist
in maximizing income consistent with quality and liquidity requirements, supply
collateral to secure public funds and retail repurchase agreements, provide a
means for balancing market and credit risks, and provide consistent income and
market value throughout changing economic times.
Interest income from investment activities was approximately $4.4
million, $3.2 million, and $3.1 million or approximately 17%, 18% and 22%, of
United's total interest income for the years ended December 31, 2000, 1999, and
1998, respectively.
United's portfolio consists primarily of obligations of the U.S.
government and its agencies, mortgage-backed securities, and municipal bonds.
United's investment portfolio does not contain a concentration of investments in
any one issuer in excess of 10% of United's total investment portfolio, except
for securities of the U.S. government and U.S. government agencies. All of the
United's investments are classified as available-for-sale.
The following table sets forth the carrying values of United's
investments at December 31, 2000, 1999 and 1998:
(Dollars in thousands)
December 31, December 31, December 31,
2000 1999 1998
------------- ------------- -------------
U.S. government and agencies $ 23,872 $9,794 $ 13,637
Mortgage-backed securities 41,536 39,455 36,353
Municipal bonds 2,717 1,935 885
Other investments 1,939 1,860 1,025
------------- ------------- -------------
$ 70,064 $ 53,044 $ 51,900
============= ============= =============
During 2000, United received $8.8 million in mortgage-backed security
principal payments and had $0.8 million of calls and maturities of investment
securities, while purchasing $7.8 million in investment securities and
mortgage-backed securities. United also recorded an unrealized gain in market
values of its investment portfolio of $1.4 million. The remaining increase of
$17.5 million was due to the consolidation of Valley.
SOURCES OF FUNDS
The primary sources of funds for United's lending and investment
activities are deposits, repurchase agreements, FHLB borrowings, loan and
mortgage-backed securities repayments, proceeds from loan sales, investment
securities interest payments and maturities, and net operating revenues. United
has funded a large portion of the increase in its loan portfolio through
additional FHLB borrowings and maturing of investment securities, as well as new
deposit liabilities and repurchase agreements.
DEPOSIT ACTIVITIES. Deposits are attracted from within United's market
area through the offering of a broad selection of deposit instruments, including
NOW accounts, money market accounts, regular savings accounts, certificates of
deposit and retirement savings plans. Deposit account terms vary, according to
the minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. In determining the terms of its
deposit accounts, United considers current market interest rates, profitability
to United, matching deposit and loan products offered by its competition and its
customer preferences and concerns. United reviews its deposit mix and pricing
weekly.
5
The following table sets forth the composition of United's deposits at
December 31, 2000, 1999 and 1998:
(Dollars in thousands) December 31, December 31, December 31,
-------------------------- ------------------------- --------------------------
2000 1999 1998
-------------------------- ------------------------- --------------------------
Type: Amount Percent Amount Percent Amount Percent
------------- ------------ ------------ ------------ ------------- ------------
Non-interest bearing $ 33,349 12.7 % $ 18,751 10.4 % $ 18,895 11.3 %
Interest bearing:
NOW & money market
demand accounts 52,018 20.0 23,333 13.0 22,907 13.7
Savings accounts 49,203 18.8 48,295 26.8 46,811 27.9
Time deposits 126,609 48.5 89,503 49.8 79,007 47.1
------------- ------------ ------------ ------------ -------------- -----------
Total $261,179 100.0 % $179,882 100.0 % $167,620 100.0 %
============= ============ ============ ============ ==========================
Scheduled maturities of certificates of deposit at December 31, 2000
are as follows:
Due within one year $ 98,015
Due within two to three years 22,862
Due within four to five years 5,732
-----------
Totals $126,609
===========
Time deposits of $100,000 or more were approximately $30.8 million,
$15.9 million, and $13.0 million at December 31, 2000, 1999, and 1998,
respectively. Amounts in excess of $100,000 are not insured by a federal agency.
Maturity of time deposits of $100,000 or more at December 31, 2000 are
as follows:
(Dollars in thousands)
Less than three months $ 5,012
Three to six months 8,343
Six to twelve months 10,090
Greater than twelve months 7,307
-----------
Total $30,752
===========
Early withdrawal from time deposits subjects the depositor to an early
withdrawal penalty which is currently equal to six months of simple, nominal
interest when the original maturity is longer than one year, three months of
simple, nominal interest when original maturity is 92 days to one year, and all
interest earned when original maturity is 91 days or less.
As a matter of policy, United does not accept, place or solicit
brokered deposits. Although deposits are not solicited outside of Montana,
historically, a small number of the Banks' depositors have resided outside
Montana and Arizona. As market demand generally dictates deposit maturities and
rates, United intends to continue to offer those types of accounts that it
believes have broad market appeal.
BORROWINGS. United relies to a significant extent on borrowings from
the Federal Home Loan Bank ("FHLB") to finance its short-term, and increasingly
its longer term, financing needs. The FHLB functions as the central reserve bank
providing credit for savings institutions and certain other member financial
institutions. In 2000, borrowings from the FHLB have been available at rates
that are as favorable, or more favorable, than the rates that United would be
required to pay on deposits. Further, borrowings from the FHLB are available at
various maturities, facilitating the accurate matching of asset and liability
maturity dates. United has used these available borrowings during the past year
in part to fund expansion of its lending activities.
As members of the FHLB, the Banks are required to own capital stock in
the FHLB and are authorized to apply for advances on the security of specified
collateral.
6
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Heritage Bank's and
State Bank's established available FHLB advance credit line for 2000 was 30% and
10% of assets, respectively. As a merged bank, the new Heritage Bank will have a
credit line of 25% of assets in 2001. Valley Bank's borrowing capacity is
approximately $3.0 million. The FHLB is required to review its credit
limitations and standards at least annually. At December 31, 2000, 1999 and
1998, $52.2 million, $46.4 million and $22.2 million, respectively, of FHLB
advances were outstanding.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. United also generates
funds through the sale of investment securities under agreements requiring their
repurchase at a premium that represents interest. The securities underlying
agreements to repurchase are for the same securities originally sold and are
held in a custody account by a third party. For the years ended December 31,
2000, 1999 and 1998 securities sold under agreements to repurchase averaged
approximately $11.5 million, $10.3 million and $7.1 million, respectively. The
maximum outstanding at any month end during the years ended December 31, 2000,
1999 and 1998 was approximately $13.9 million, $11.5 million and $11.8 million,
respectively. United had $11.4 million, $11.5 million and $9.4 million of
securities sold under repurchase agreements at December 31, 2000, 1999 and 1998,
respectively.
OTHER ACTIVITIES
Heritage Bank has a wholly owned service corporation, CSC, which owned
and managed a limited amount of real estate held for investment during 1999 and
was inactive during 2000. Heritage Bank also holds an 11% ownership interest in
Bankers' Resource Center, a computer data center, which provides certain data
processing services to Heritage Bank, State Bank and UFC.
MARKET AREA
Great Falls, the county seat of Cascade County and a regional trade
center, is one of the largest cities in Montana. The estimated 2000 Great Falls
and Cascade County populations were approximately 57,000 and 80,000,
respectively. The economy of Great Falls, is largely based on agriculture,
health care and Department of Defense activities. Malmstrom Air Force Base
("MAFB"), which employs approximately 4,800 people, is the largest employer in
Great Falls and Cascade County. Any significant reduction in size or closure of
MAFB would likely adversely affect United and its results of operations and
financial condition.
The economies of Chester, Fort Benton, Geraldine, Glendive, Havre,
Libby and Shelby, Montana are dependent to a large extent on agricultural,
livestock and railroad activities. Areas served by United's LPOs are less
dependent upon agriculture. Areas such as Bozeman, Hamilton, Kalispell and
Missoula are also supported in part by tourism and higher education.
Nevertheless, agriculture is the predominant activity in the State of Montana
and any adverse trends in agriculture could adversely affect United.
Phoenix is the largest metropolitan area in Arizona with a population
of approximately 3 million. Arizona is one of the fastest growing states in the
nation, according to the 2000 Census. Arizona's population grew to 5.1 million
or 40% over the past decade, more than triple the national rate. Major
employment industries are service industries, construction and light
manufacturing. A slowdown in the real estate economy or manufacturing could
adversely affect United.
COMPETITION
The Banks, like other depository institutions, are operating in a
rapidly changing environment and, therefore, face considerable competition in
the attraction of deposits and the origination of loans. Historically, the most
direct competition for deposits has come from other savings banks, credit unions
and commercial banks. There are approximately 35 depository institutions,
commercial banks, credit unions and savings banks with offices in United's
Montana market areas, and approximately 77
7
in its Arizona market area. Non-depository financial service organizations,
primarily in the securities and insurance industries, have also become
competitors for retail savings and investment funds. United's deposit programs
compete with money market mutual funds, government securities and other
investment alternatives. United competes for deposits by offering a variety of
deposit accounts at interest rates based upon market conditions, convenient
business hours, quality service and convenient branch locations.
EMPLOYEES
At March 15, 2001, Heritage Bank employed 89 full-time employees and 21
part-time employees, and Valley employed 25 full-time employees and 1 part-time
employee. United maintains a comprehensive employee benefit program providing,
among other benefits, hospitalization and major medical insurance, paid sick
leave, disability, life insurance and 401K retirement plans. United's employees
are not represented by any collective bargaining group. See Part IV, Item 16. -
"Notes to Consolidated Financial Statements - Employee Benefit Plans."
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the
executive officers of UFC. All executive officers are elected annually by the
Board of Directors. There are no arrangements or understandings between
individual officers and any other person pursuant to which he was elected as an
officer.
Name Age Position Held
- ---- --- -------------
John M. Morrison 64 Chairman of UFC; Director of Valley and Valley Bank
Kurt R. Weise 44 Director, President and Chief Executive Officer of
UFC; Vice President of Heritage Bank; Vice President
and Director of Valley and Valley Bank
Kevin P. Clark 45 Director, Secretary and Senior Vice President of UFC;
President and Chief Executive Officer of Heritage
Bank; Director of Valley
Steve L. Feurt 45 Director, Executive Credit Officer of UFC and Senior
Vice President and Senior Lending Officer of Heritage
Bank
MR. MORRISON has served as Chairman of UFC since February 1998. Mr.
Morrison's term of office as a director of UFC expires at UFC's annual
shareholder meeting in 2003. Mr. Morrison was elected to the Valley and Valley
Bank boards in March 1996. Before the Heritage Merger, he served as Chairman of
Heritage since 1994. Mr. Morrison is the Chief Executive Officer and sole
shareholder of Central Bancshares, the parent company of Central Bank, located
in Stillwater, Minnesota, which was founded by Mr. Morrison in 1988. He is also
the sole shareholder and Chairman of the Board of Directors of Central Financial
Services ("CFS"), a bank consulting firm. Mr. Morrison was the Chairman and
majority shareholder of Bank of Montana System, a bank holding company with
approximately $800 million in assets ("BMS"), prior to its sale to Norwest
Corporation in 1994. He is involved in various other businesses, and sits on a
number of boards including University of St. Thomas, Fairview Corporation,
Fairview-University Medical Center and Fairview-University of Minnesota.
MR. WEISE has served as President, Chief Executive Officer and a
director of UFC since the annual shareholder meeting in 1999. Mr. Weise had
served as President, Chief Operating Officer and a director of UFC and Vice
President of Heritage Bank since February 1998. Mr. Weise's term of office as a
director of UFC expires at UFC's annual shareholder meeting in 2003. Mr. Weise
was elected to the Valley and Valley Bank boards in March 1999. Before the
Heritage Merger, he served as Vice President, Treasurer and a director of
Heritage. Mr. Weise also serves as President of CFS and President of Central
Bancshares. He has been involved with the Central Bank group of companies since
they were founded in 1988. He was the Chief Financial Officer of BMS until its
sale to Norwest Corporation.
8
MR. CLARK has served as Secretary of UFC and President and Chief
Executive Officer of Heritage Bank since February 1998. Mr. Clark was elected as
Vice President and a director of UFC in May 1998, and his term of office as a
director of UFC expires at UFC's annual shareholder meeting in 2001. Mr. Clark
was elected to the Valley board in May 2000. Before the Heritage Merger, he
served as President, Chief Executive Officer and a director of Heritage Bank
since 1994. Mr. Clark served in various capacities with BMS until its sale to
Norwest Corporation, including President, Chief Executive Officer and a director
of Bank of Montana, a subsidiary of BMS, and Regional Vice President of BMS.
MR. FEURT has served as Chief Credit Officer of UFC and Senior Vice
President and Chief Credit Officer of Heritage Bank since February 1998. Mr.
Feurt was elected as a director of United in May 1998, and his term of office as
a director of UFC expires at UFC's annual shareholder meeting in 2002. Before
the Heritage Merger, he served as Senior Vice President, Senior Credit Officer
and a director of Heritage Bank since 1994. Mr. Feurt served as Senior Vice
President, Senior Credit Officer and a director of BMS and Bank of Montana from
1984 until the sale of BMS to Norwest Corporation.
SUPERVISION AND REGULATION
UFC. UFC became a registered bank holding company under the Bank
Holding Company Act ("BHCA") in 1998 by reason of its ownership of State Bank.
Bank holding companies are subject to the general supervision and
regulation by the Federal Reserve Bank ("FRB"). Under the BHCA and FRB
regulations, a bank holding company may engage in banking, managing or
controlling banks, furnishing or performing services for banks it controls and
conducting activities that the FRB has determined to be closely related to
banking. Bank holding companies must also obtain the prior approval of the FRB
before acquiring 5% or more of the outstanding shares of another bank or bank
holding company and must provide notice to, and in some situations obtain the
prior approval of, the FRB in connection with the acquisition of 5% or more of
the outstanding shares of a company engaged in a "bank related" business.
Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner. In addition, it is the
FRB's policy that in serving as a source of strength to its subsidiary banks, a
bank holding company should stand ready to use available resources to provide
adequate capital to its subsidiary banks during periods of financial stress or
adversity. A bank holding company's failure to meet its obligations to serve as
a source of strength to its subsidiary banks will generally be considered by the
FRB to be an unsafe and unsound practice or a violation of FRB regulations, or
both.
Bank holding companies are subject to certain limitations on redemption
of common stock or other equity securities. In addition, the FRB has issued
regulations setting minimum capital standards for bank holding companies.
Depending on the capital classification of a bank holding company, it may be
restricted from engaging in certain non-bank activities or from acquiring
interests in additional banks or other depository institutions. As of December
31, 2000, UFC met all minimum capital requirements issued by the FRB.
Under the BHCA, as amended by the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"), a bank holding company
may acquire banks throughout the United States subject only to state or federal
deposit caps and state minimum age requirements. Effective June 1, 1997, the
Interstate Act authorized interstate branching by acquisition and consolidation
in those states that had not opted out by that date. Montana has opted out of
the interstate branching by acquisition and consolidation until October 1, 2001.
Although the Interstate Act and Montana law prohibits interstate branching by
State Bank, neither statute applies to Heritage Bank. As a federal savings bank,
Heritage Bank has the ability, subject to the prior approval of the OTS, to
engage in interstate branching activities. The State of Arizona adopted the
Interstate Act immediately and allows interstate banking.
9
Under the Financial Services Modernization Act, bank holding companies
are authorized to affiliate with any financial company (for example, insurance
or securities companies) and to cross-sell an affiliates products. This permits
bank holding companies to expand their product mix to adapt to changing market
conditions.
United and its subsidiaries are deemed affiliates within the meaning of
the Federal Reserve Act, and transactions between the affiliates are subject to
certain restrictions. Accordingly, UFC and its respective subsidiaries must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA").
Generally, these sections restrict "covered transactions" (I.E., loans,
purchases of assets, guaranties and similar transactions) to a percentage of the
depository institution's capital and surplus, require that such transaction be
appropriately collateralized and require that such transactions be on terms as
favorable to the depository institution as transactions with non-affiliates.
Loans to insiders (officers, directors and 10% shareholders) of a depository
institution are subject to Sections 22(g) and (h) of the FRA and regulations
thereunder. Among other things, such loans must be made on terms substantially
the same as loans to non-insiders.
DEPOSITORY INSTITUTION SUBSIDIARIES--HERITAGE BANK, STATE BANK AND
VALLEY BANK. Heritage Bank is a federally chartered stock savings bank regulated
by the OTS. Effective January 1, 2001, Heritage Bank merged into State Bank. The
merged entity is now subject to the commercial bank regulation described herein
for State Bank. State Bank is a Montana-chartered commercial bank. As such,
State Bank is subject to regulation and supervision by the Montana Department of
Commerce, Division of Banking and Financial Institutions (the "Montana
Division") and the FDIC. Valley Bank is a Arizona-chartered commercial bank. As
such, Valley Bank is subject to regulation and supervision by the Arizona State
Banking Department (the "Arizona Department") and the FDIC. The Banks deposits
are insured by the FDIC.
In addition to the federal banking agency statutes and regulation,
State Bank and Valley Bank are subject to Montana and Arizona statutes governing
their respective activities and regulations issued by the Montana Division and
the Arizona Department. The Montana and Arizona statutes and regulations place
limitations on the business and other activities of State Bank and Valley Bank
which may be more restrictive than limitations applicable to depository
institutions that are not State-chartered commercial banks. In particular, and
among other limitations, the establishment and operation of new branch offices,
are limited by, and subject to approval by, the Montana Division and the Arizona
Department. In addition, State-chartered commercial banks are generally not
authorized to make investments in subsidiary companies or to make other
investments in equity securities or to engage in securities or insurance
activities. Some federally chartered depository institutions located in Montana
and Arizona may engage in such activities without regard to State law.
By reason of FDIC insurance, the Banks are insured depository
institutions for purposes of certain federal laws and regulations. The federal
laws that apply to the Banks regulate, among other things, the scope of their
businesses, their investments, the reserves against deposits, the timing and
availability of deposited funds and certain aspects of their lending activities.
These laws and regulations governing the depository institution activities have
generally been promulgated to protect depositors and not to protect stockholders
of such institutions or their holding companies. These laws and regulations are
designed to ensure that appropriate action is taken to address concerns
regarding the safe and sound operation of insured depository institutions and
generally relate to internal control and information systems, loan documentation
and credit underwriting, asset growth, management performance and earnings. If
an insured depository institution fails to meet the applicable standards and
regulatory requirements, an appropriate banking agency may require that the
institution prepare and submit to the agency an acceptable plan for addressing
the regulatory concern. If the plan submitted is deemed inadequate, or if the
institution fails to submit or comply with the required plan, a banking agency
may take further action with respect to the regulatory concerns, including
institution of an enforcement action with respect to the institution.
10
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations in a number
of specific areas to insure depository institution safety and soundness,
including internal controls, credit underwriting, asset growth, management
compensation, asset quality and earnings performance. FDICIA also contains
provisions intended to change independent auditing requirements, to restrict the
activities of certain insured depository institutions, to change various
consumer banking laws and to limit the ability of "under-capitalized banks" to
borrow from the FRB's discount window or to acquire brokered deposits.
The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") significantly changed existing federal banking legislation and
regulation, including significant increases in FDIC insurance premiums,
separation of the FDIC insurance into two deposit insurance funds, authorizing
bank holding companies to own savings associations, increasing the federal
banking agencies' enforcement powers and increasing the civil and criminal
penalties for violations of federal banking laws and regulations.
The Banks are subject to certain federal consumer laws, including the
Community Reinvestment Act of 1977, as amended ("CRA"), and other fair lending
laws and regulations which impose nondiscriminatory lending requirements on
insured depository institutions. In recent periods, federal regulatory agencies
have sought a more rigorous enforcement of the CRA and other fair lending laws
and regulations. A successful challenge to a depository institution's
performance under the CRA and related fair lending laws and regulations could
result in a variety of sanctions, including the required payment of damages and
civil money penalties, prospective and retrospective injunctive relief and the
imposition of restrictions on mergers and acquisitions or other activities of
the depository institution or the holding companies controlling such depository
institutions. Private parties may also have the ability to challenge an
institution's performance under the fair lending laws in private class action
litigation.
The OTS conducted a CRA performance evaluation in July 1999 and
Heritage Bank was rated as having had "an outstanding record of meeting
community credit needs". The FDIC conducted a CRA performance evaluation in
April 2000 and State Bank was rated as having had "a satisfactory record in
providing for the credit needs of its assessment area".
Federal regulatory banking agencies have also established uniform
capital requirements for all insured depository institutions. An insured
depository institution that does not achieve and maintain required capital
levels may be subject to supervisory action through the issuance of capital
directives, cease and desist orders or other written orders or agreements with
the appropriate federal banking agency. Failure of an insured depository
institution to meet the required capital levels may also prohibit or limit the
ability of a bank holding company controlling such institution to engage in
merger and acquisition activities or other expansion activities. As of December
31, 2000, the Banks met the "well capitalized" requirements issued by the
applicable federal banking agency.
Depository institutions generally depend upon the difference between
the interest rate paid by it on deposits and other borrowings and the interest
rate received on loans extended to customers and on investment securities. The
interest rates are highly sensitive to many factors beyond the control of
depository institutions, including general economic conditions in the primary
market area and the broader economy. In addition to general economic conditions
affecting business generally, depository institutions such as the Banks are
affected by federal government policies and actions of regulatory agencies. In
particular, the FRB through its various operations and powers may affect
interest rates charged on loans or paid on deposits. Such changes in interest
rates affect the growth and quality of depository institution loans, investments
and deposits.
Federal banking regulatory agencies may institute enforcement actions
against depository institutions, their parent holding companies and other
institution-affiliated parties with respect to violations of any federal law or
regulation.
11
Enforcement actions may include the appointment of a conservator or receiver,
the issuance of cease and desist orders or other formal action, termination of
insurance of deposits and the imposition of civil money penalties. The Banks are
currently not subject to any such enforcement actions.
From time to time, various types of federal and state legislation have
been proposed that would result in additional regulation of, or restrictions on,
the business of depository institutions. It cannot be predicted whether such
legislation will be adopted or how such legislation would affect the business of
the Banks.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. Prior to its merger with
State Bank, the OTS had extensive authority over the operations of Heritage
Bank, including, among other things, the ability to assess civil money
penalties, to issue cease and desist orders or removal orders, and to initiate
injunctive actions for violations of laws and regulations and for unsafe or
unsound practices. Heritage Bank was required to file periodic reports with the
OTS and was also subject to periodic examinations by the OTS and the FDIC. The
OTS and the FDIC have entered into an agreement that provides for joint
examinations by the FDIC and the OTS.
Under federal law, the aggregate amount of loans that Heritage Bank was
permitted to make to any one borrower ("LTOB") could not exceed 15% of
unimpaired capital and surplus. Amounts up to an additional 10% of unimpaired
capital and surplus could be extended for loans and extensions of credit fully
secured by readily marketable collateral, which is defined to include certain
financial instruments and bullion having a market value at least equal to the
loan amount.
The OTS has amended the LTOB limitation to permit savings associations
meeting certain requirements, including capital requirements, to extend loans to
one borrower in additional amounts under certain circumstances limited
essentially to loans to develop or complete residential housing units. At
December 31, 2000, Heritage Bank's LTOB limit was approximately $2,913,000. The
maximum aggregate amount of loans outstanding to a single borrower at December
31, 2000 was approximately $1,655,000. At December 31, 2000, Heritage Bank was
in compliance with the LTOB limitations. As of January 1, 2001, the new Heritage
Bank is subject to a State of Montana lending limit of 20% of capital, and is no
longer subject to the OTS limits.
DEPOSIT INSURANCE AND FDIC REGULATION. Heritage Bank is a member of the
Savings Association Insurance Fund ("SAIF"), and State Bank and Valley Bank are
members of Bank Insurance Fund ("BIF"), both administered by the FDIC. Savings
deposits are insured up to the applicable limits (generally $100,000 per insured
depositor) by the FDIC. The FDIC is empowered to impose deposit insurance
premiums, conduct examinations and require reporting by the Banks. The FDIC may
also prohibit the Banks from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC can also
initiate enforcement actions against the Banks, after, in the case of Heritage
Bank, giving the OTS an opportunity to take such action, and may terminate the
deposit insurance of the Banks if it determines that the Banks have engaged or
are engaging in any unsafe or unsound practice, or are in an unsafe or unsound
condition.
For 2000, the FDIC assessment rate was 2.10 basis points per $100 of
insured deposits, for the Banks. As a result, the Banks' 2000 FDIC deposit
insurance premium was approximately $102,000. FDIC assessment rates for 2001
will be 1.96 basis points per $100 of insured deposits.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations required
federal savings institutions such as Heritage Bank to satisfy three capital
requirements: (i) tangible capital must not be less than 1.5% of adjusted total
assets, (ii) core capital must not be less than 3% of adjusted total assets and
(iii) risk-based capital must not be less than 8.0% of "risk-adjusted" assets.
Heritage Bank exceeded these minimum standards at December 31, 2000.
Heritage Bank's tangible and core capital includes stockholders'
equity, less intangible assets and certain investments in subsidiaries that
conduct activities not
12
permissible for a national bank. Purchased mortgage servicing rights may be
included in tangible capital at the lower of 90% of fair market value, 90% of
original cost, or 100% of current amortized book value.
Risk-based capital is determined by assigning a risk-weight, ranging
from 0% for government securities to 100% for certain equity investments, to
each of an institution's assets, including the credit-equivalent amount of
off-balance sheet assets. An institution is required to maintain total
regulatory capital (consisting of both "core capital" and supplementary capital;
primarily comprised of the allowance for loan losses) equal to the regulatory
mandated percentage (8%) of the sum of its assets multiplied by their respective
risk-weights. The OTS also requires institutions with more than a "normal" level
of interest-rate risk ("IRR") to maintain additional risk-based capital. A
savings institution with a greater than normal IRR is required to deduct from
total capital, for purposes of calculating its risk-based capital requirement,
an amount equal to one-half the difference between the institution's measured
IRR and the normal level of IRR, multiplied by the present value of its total
assets. Based on its current capital position, most recent OTS calculated IRR,
and proposed exemption criteria, Heritage Bank would not have an IRR capital
adjustment.
FDICIA places much greater emphasis on capital as a measure of
performance and establishes a rigid regulatory scheme based almost entirely on
capital levels. The five statutory capital categories established by FDICIA are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The Banks' capital position
exceeds the definition of "well capitalized." FDICIA also mandates that
regulations be promulgated adding other risk-based capital requirements covering
(a) concentrations of credit risk, (b) risks from nontraditional activities and
(c) the capital impact of fair value adjustments associated with FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." See
Part IV, Item 20 - "Notes to Consolidated Financial Statements - Regulatory
Matters."
QUALIFIED THRIFT LENDER TEST. Unless a savings institution meets the
Qualified Thrift Lender ("QTL") test, it is classified and subject to regulation
as a national bank or becomes subject to a number of limitations on investment,
branching, advances, dividends and other activities. The QTL test generally
requires that an insured institution's Qualified Thrift Investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities and loans for education purposes, loans to small
businesses and loans made through credit cards or credit card accounts) equal or
exceed 65% of the institution's portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and qualifying liquid assets up to 20% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. Savings
associations may include shares of stock of the FHLBs, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation as QTIs. As of December
31, 2000, Heritage Bank met the test.
LIQUIDITY. All savings associations are required to maintain qualifying
liquid assets equal to a percentage designated by the Director of the OTS
(currently 4%) of the balance of its withdrawable deposit accounts and
borrowings payable in one year or less. Liquid assets for purposes of this ratio
include specified short-term assets (E.G., cash, certain time deposits, certain
banker's acceptances and short-term United States Government obligations), and
long-term assets (E.G., United States Government obligations and certain state
agency obligations). Monetary penalties will be imposed, unless waived, for
failure to meet liquidity requirements. Heritage Bank has exceeded liquidity
requirements for 2000. Being a state-chartered bank, State Bank is not subject
to the same liquidity requirements as Heritage Bank. However, a recent FDIC exam
found State Bank's liquidity to be satisfactory considering the relationship and
support from Heritage Bank. A June 1999 exam by the Arizona State Banking
Commission found Valley Bank's liquidity to be satisfactory. A December 2000
examination by the FRB found Valley Bank's liquidity to be satisfactory.
FEDERAL HOME LOAN BANK SYSTEM. Heritage Bank is a member of the FHLB of
Seattle, Washington. Valley Bank is a member of the FHLB of San Francisco,
13
California. Each FHLB serves as a reserve or central bank for its members within
its assigned region, is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB system and makes loans (advances) to its
members in accordance with the policies and the procedures established by the
FHLB board of directors. All advances from the FHLB are required to be fully
secured by sufficient collateral as is determined by the FHLB. The Banks are
required to purchase and maintain FHLB stock in an amount equal to the greater
of 1% of the unpaid principal of residential mortgage loans, or 5% of FHLB
advances outstanding.
TAXATION
GENERAL. United Only files consolidated Federal and state income tax
returns pursuant to a tax sharing agreement. Valley files separate consolidated
Federal and State of Arizona income tax returns. Generally, with some
exceptions, including Heritage Bank's reserve for bad debts discussed below,
United is subject to Federal and state income taxes in the same manner as other
corporations.
The following discussion of tax matters is intended solely as a summary
and does not purport to be a comprehensive description of all the tax rules
applicable to United.
TAX BAD DEBT RESERVES. For taxable years beginning prior to January 1,
1996, savings institutions, such as Heritage Bank, which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts"), were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income.
Federal legislation repealed the reserve method of accounting for bad
debt reserves for tax years beginning after December 31, 1995. As a result,
savings associations could no longer calculate their deduction for bad debts
using the percentage-of-taxable-income method. Instead, savings associations
were required to compute their deduction based on actual charge-offs during the
taxable year or, if the savings association or its controlled group had assets
of less than $500 million, based on actual loss experience over a period of
years. This legislation also required savings associations to recapture into
income over a six-year period their post-1987 additions to their bad debt tax
reserves, thereby generating additional current tax liability. At December 31,
2000, Heritage Bank's bad debt reserve for tax purposes was approximately
$3,477,000. At December 31, 2000, approximately $20,000 remained of post-1987
reserves which are being recaptured into taxable income over a period of one
year. For additional information regarding federal and state income taxes, see
Part IV, Item 12 - "Notes to Consolidated Financial Statements - Income Taxes."
ITEM 2. PROPERTIES
The physical assets of United as of December 31, 2000 consist of a
modern banking facility located at 120 First Avenue North, Great Falls, Montana,
which is the location of the corporate offices as well as the main branch
location for Heritage Bank. This facility, which is owned by Heritage Bank,
includes a full service bank with 4 drive-up lanes, a real estate department,
accounting and loan servicing departments, and support staff for Heritage Bank
and UFC. Heritage Bank also leases a drive-up detached facility located at 10th
Avenue South, Great Falls, Montana, and owns a facility located at 601 First
Avenue North, Great Falls, Montana. The 601 First Avenue North facility is
currently being leased to a third party. See Part IV, Item 14 - "Notes to
Consolidated Financial Statements - Leases." Heritage Bank has six full-service
branches located in Bozeman, Chester, Glendive, Havre, Missoula and Shelby,
Montana. These six facilities are owned by Heritage Bank and have drive-up
services. Heritage Bank also leases three loan production offices in Hamilton,
Kalispell, and Libby, Montana. State Bank facilities include two full service
locations, owned by State Bank, located in Fort Benton and Geraldine, Montana.
There is no debt on any of the owned facilities.
14
Valley Bank leases office space for its main branch location at 3550 N.
Central Avenue, Phoenix, Arizona, and land in Scottsdale, Arizona for its full
service branch location. The full service branch banking facility in Scottsdale
is owned by Valley Bank.
ITEM 3. LEGAL PROCEEDINGS
Although not involved in any material pending litigation as of February
28, 2001, United is a defendant in various legal proceedings arising in the
normal course of business.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders though the
solicitation of proxies or otherwise during the quarter ended December 31, 2000.
PART II
ITEM 5. MARKET FOR UNITED COMMON EQUITY AND RELATED STOCKHOLER MATTERS
MARKET INFORMATION
United common stock is quoted on the Nasdaq National Market under the
symbol "UBMT." The closing sale price per share of United common stock on
February 28, 2001 was $16.75.
SHAREHOLDER DATA
As of February 5, 2001 there were approximately 225 owners of record of
United common stock and an estimated 865 additional beneficial holders whose
shares of United common stock were held in street name by brokerage houses.
COMMON STOCK MARKET PRICES
The Company's quarterly (high and low) stock prices for the past two
years are as follows:
UBMT Stock Price
-------------------
High Low
------- ------
1999 First Quarter $24.125 $22.00
Second Quarter 23.00 21.00
Third Quarter 21.25 17.50
Fourth Quarter 20.875 16.75
2000 First Quarter $17.00 $11.20
Second Quarter 15.10 12.40
Third Quarter 15.20 14.00
Fourth quarter 16.20 13.50
DIVIDEND PAYMENT HISTORY ON UNITED COMMON STOCK
The UFC Board declared dividends of $.25 for each of the second, third
and fourth quarters of 1998, for a total of $.75 per share, and $.26 for each of
the four quarters of 1999 and 2000, for a total of $1.04 per share.
The declaration and payment of future dividends by the UFC Board is
dependent upon United's net income, financial condition, economic and market
conditions, industry standards, certain regulatory and tax considerations and
other conditions. See "Supervision and Regulation." No assurance can be given,
or should be assumed, as to the amount, timing or frequency of future dividend
payments.
15
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
(Dollars in thousands, except per
share data) Year ended December 31,
--------------------------------------------------------------
2000(4) 1999 1998 1997(5) 1996(5)
--------- --------- --------- --------- ---------
OPERATING DATA:
Interest income $ 25,509 $ 17,340 $ 14,249 $ 5,773 $ 4,520
Interest expense 14,978 9,556 7,393 3,157 2,419
--------- --------- --------- --------- ---------
Net interest income 10,531 7,784 6,856 2,616 2,101
Provision for loan losses 1,629 204 335 492 160
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 8,902 7,580 6,521 2,124 1,941
Non-interest income 4,090 3,530 3,292 1,103 1,059
Non-interest expense 9,550 7,102 6,147 2,361 2,251
--------- --------- --------- --------- ---------
Income before income taxes 3,442 4,008 3,666 866 749
Provision for income taxes 1,287 1,539 1,399 324 263
--------- --------- --------- --------- ---------
Net income before minority interest 2,155 2,469 2,267 542 486
Minority interest (151) -- -- -- --
--------- --------- --------- --------- ---------
Net income $ 2,004 $ 2,469 $ 2,267 $ 542 $ 486
========= ========= ========= ========= =========
PER SHARE DATA(1):
Basic earnings per share $ 1.22 $ 1.47 $ 1.43 $ 1.14 $ 1.02
Diluted earnings per share $ 1.22 $ 1.47 $ 1.43 $ 1.14 $ 1.02
Dividends per share 1.04 1.04 .75 -- --
Book value per share 18.54 17.77 17.98 5.78 4.59
Shares used to calculate per share
data (Book Value) 1,615 1,652 1,698 475 475
Shares used to calculate per share
data (Earnings) 1,647 1,684 1,588 475 475
FINANCIAL CONDITION DATA(2):
Assets $ 363,801 $ 270,226 $ 232,561 $ 86,269 $ 71,280
Net loans and loans held for sale 254,627 187,539 149,076 58,263 43,853
Investment securities 70,064 53,044 51,900 14,219 14,172
Deposits 261,179 179,882 167,620 70,386 57,641
FHLB advances 52,175 46,425 22,175 6,425 1,425
Other borrowings and securities sold
under agreements to repurchase 12,616 11,546 9,451 5,523 8,925
Stockholders' equity 29,947 29,359 30,528 2,748 2,178
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
Return on average assets .57% .98% 1.06% .73% .81%
Return on average stockholders'
equity 5.45% 8.52% 7.47% 21.45% 25.78%
Net interest margin 3.23% 3.32% 3.34% 3.83% 3.74%
Efficiency ratio (3) 65.32% 62.77% 60.58% 63.46% 63.67%
Net charge-offs to average loans .44% .06% .03% .06% .27%
Nonperforming loans to total loans .47% .18% .68% .47% .06%
Allowance for loan losses to total
loans .99% .84% 1.02% 1.43% .88%
Nonperforming loans to allowance for
loan losses 45.96% 21.88% 66.07% 31.56% 6.96%
Average equity to average assets 10.54% 11.51% 14.17% 3.19% 3.05%
Dividend payout ratio 85.52% 70.94% 56.18 -- --
(1) Share and per share amounts for Heritage have been restated to
retroactively reflect the issuance of 475,000 shares of United common
stock in exchange for all outstanding shares of common stock of
Heritage.
(2) At period end.
(3) Non-interest expense/(net interest income + non-interest income);
excludes September 1996 pretax charge for SAIF assessment of $239,000.
(4) Includes Valley Bancorp. Inc.
(5) Historical audited balances for Heritage
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED UFC AND PRO FORMA COMBINED FINANCIAL DATA OF HERITAGE AND OLD UNITED
GENERAL. Certain statements in this Report, including the following
section, constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which involve risks and uncertainties.
United's actual results may differ significantly from the results discussed in
such forwarding-looking statements. Factors that might cause such a difference
include, but are not limited to, economic conditions, competition and weather
conditions in the geographic and business areas in which United conducts its
operations, fluctuations in interest rates, credit quality and government
regulations.
UFC is the result of the combination on February 3, 1998 of two savings
and loan holding companies operating in Montana: Heritage and Old United.
Although UFC was the surviving corporation, the merger was treated as a reverse
merger for accounting purposes because the stockholders and management of
Heritage controlled the operation of UFC after the Heritage Merger. Using
purchase accounting, the historical financial statements of UFC included in this
Report for periods preceding the Heritage Merger reflect only the operations of
Heritage, while the historical financial statements for periods after the
Heritage Merger reflect combined operations.
The following "Historical United" for 2000 and 1999 is derived from the
audited consolidated financial statements. "Historical United" for 2000 includes
Valley. Unaudited United Only financial data for 2000 is presented for
comparative purposes. See Part IV, Item 24 - "Notes to Consolidated Financial
Statements - Acquisition."
The following unaudited pro forma combined financial information for
1998 gives effect to the Heritage Merger based on the purchase accounting
adjustments, estimates and other assumptions described in the accompanying
notes. The unaudited pro forma combined statement of income for the year ended
December 31, 1998 which combines United's results of operations for the year
ended December 31, 1998 and the operations of Old United for the period from
January 1, 1998 to January 31, 1998, is presented for comparative purposes. The
unaudited pro forma combined statement of income combines the historical
consolidated statements of income of Heritage and Old United as if the Heritage
Merger had become effective as of January 1, 1998. The pro forma combined
statement of income for the year ended December 31, 1998 is unaudited and is not
necessarily indicative of the results of operations that would have been
achieved had the Heritage Merger occurred on such date or of the results of
operations that may be achieved in the future.
17
(In thousands) Unaudited
Historical Unaudited Historical Pro Forma
United United Only United Combined
December December December December
31, 31, 31, 31,
------------ ------------ ------------ ------------
2000 2000 1999 1998
------------ ------------ ------------ ------------
Total interest income $ 25,509 $ 20,552 $ 17,340 $ 14,730
Total interest expense 14,978 12,413 9,556 7,649
------------ ------------ ------------ ------------
Net interest income 10,531 8,139 7,784 7,081
Provision for loan losses 1,629 1,330 204 340
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 8,902 6,809 7,580 6,741
Total non-interest income 4,090 3,818 3,530 3,450
Total non-interest expense 9,550 7,519 7,102 6,427
------------ ------------ ------------ ------------
Income before income taxes 3,442 3,108 4,008 3,764
Provision for income tax expense 1,287 1,104 1,539 1,434
------------ ------------ ------------ ------------
Net income before minority interest 2,155 2,004 2,469 2,330
------------ ------------ ------------ ------------
Minority interest (151) -- -- --
------------ ------------ ------------ ------------
Net income $ 2,004 $ 2,004 $ 2,469 $ 2,330
============ ============ ============ ============
Net income per share - basic $ 1.22 $ 1.22 $ 1.47 $ 1.37
============ ============ ============ ============
Weighted average shares
outstanding - basic 1,647 1,647 1,684 1,698
============ ============ ============ ============
Net income per share - diluted $ 1.22 $ 1.22 $ 1.47 $ 1.37
============ ============ ============ ============
Weighted average shares
outstanding - diluted 1,647 1,647 1,684 1,698
============ ============ ============ ============
See Note to Pro Forma Combined Financial Data
NOTE TO PRO FORMA COMBINED FINANCIAL DATA
BASIS OF PRESENTATION. The unaudited pro forma combined statements of
income for the year ended 1998 combines the historical consolidated statements
of income of Heritage and Old United as if the Heritage Merger had become
effective at the beginning of the respective period. Certain amounts in the
historical financial statements of Old United have been reclassified in the pro
forma combined financial information to conform to Heritage's historical
financial statements.
18
RESULTS OF OPERATIONS
Net income for 2000 was $2.0 million, a decrease of $.5 million from
1999. While net interest income for United Only increased 4.6%, additions to the
loan loss reserve in the third quarter of 2000 and expenses related to the
merger of Heritage Bank and State Bank contributed to a decrease in net income
for 2000. United also incurred additional personnel and operating costs related
to new branches opened in Bozeman and Missoula, Montana and Scottsdale, Arizona,
and expects some of these new branch expenses to be ongoing in the year 2001.
Net income was $2.5 million in 1999 as compared to $2.3 million in
1998. Increased loan volumes in 1999 were the primary reason for increased
interest income. This was offset by additional interest expense due to deposit
growth and additional FHLB borrowings, resulting in an increase in net interest
income of 13.5%. Continued loan growth and consistent rates paid on deposits
resulted in a $.2 million increase in net income for 1999.
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 and expressed as a percentage. Net interest income and net interest
margin 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.
The following table illustrates the changes in United's net interest
income due to changes in volume and changes in net interest income due to
changes in rate:
(Dollars in thousands) Year Ended December 31, Year Ended December 31,
2000 vs. 1999 1999 (Actual) vs. 1998
(Pro Forma Combined)
---------------------------------------- -----------------------------------------
Increase (decrease) due to Increase (decrease) due to
---------------------------------------- -----------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
-------- -------- -------- -------- -------- -------- -------- --------
Interest earning assets:
Loans $ 5,929 $ 676 $ 290 $ 6,895 $ 3,434 $ (294) $ (94) $ 3,046
Investment and mortgage
backed securities 819 313 80 1,212 166 (71) (4) 91
Other interest earning
assets 173 (74) (38) 61 (492) (151) 116 (527)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest earning
assets 6,921 915 332 8,168 3,108 (516) 18 2,610
Interest bearing
liabilities:
Interest bearing
checking 254 (64) (34) 156 (37) (11) 1 (47)
Savings deposits 809 369 162 1,340 178 129 15 322
Time deposits 2,179 207 99 2,485 482 (213) (24) 245
Borrowings 1,041 299 100 1,440 1,236 74 77 1,387
-------- -------- -------- -------- -------- -------- -------- --------
Total interest bearing
Liabilities 4,283 811 327 5,421 1,859 (21) 69 1,907
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income $ 2,638 $ 104 $ 5 $ 2,747 $ 1,249 $ (495) $ (51) $ 703
======== ======== ======== ======== ======== ======== ======== ========
19
The following tables set forth average balances for interest-earning
assets and interest-bearing liabilities, the interest and yield on interest
earning assets, the interest and rate paid on interest bearing liabilities, the
net interest income and net interest spread, and the net interest margin for the
periods indicated:
Average Balance Sheet
(Dollars in thousands) Actual
---------------------------------------------
Year Ended December 31, 2000
Average Average
Balance Interest Yield/Rate
----------- ----------- -----------
Interest earning assets:
Loans (1) $245,707 $ 20,720 8.43%
Investment and mortgage backed
securities 73,159 4,394 6.01%
Other interest earning assets 6,760 395 5.84%
----------- -----------
Total interest earning assets 325,626 25,509 7.83%
Non-interest earning assets 23,017
-----------
Total assets 348,643
===========
Interest bearing liabilities:
Interest bearing checking $ 56,240 635 1.13%
Savings deposits 68,906 3,178 4.61%
Time deposits 122,837 7,048 5.73%
Borrowings 68,582 4,117 6.01%
----------- -----------
Total interest bearing liabilities $316,565 14,978 4.73%
===========
-----------
Net interest income $ 10,531
===========
Net interest spread 3.10%
Net interest margin(2) 3.23%
Average Balance Sheet
(Dollars in thousands) Actual
---------------------------------------------
Year Ended December 31, 1999
Average Average
Balance Interest Yield/Rate
----------- ----------- -----------
Interest earning assets:
Loans (1) $171,957 $ 13,824 8.04%
Investment and mortgage backed
securities 58,192 3,182 5.47%
Other interest earning assets 4,451 334 7.50%
----------- -----------
Total interest earning assets 234,600 17,340 7.39%
Non-interest earning assets 17,221
-----------
Total assets $251,821
===========
Interest bearing liabilities:
Interest bearing checking $ 36,754 478 1.30%
Savings deposits 47,851 1,838 3.84%
Time deposits 83,129 4,563 5.49%
Borrowings 49,610 2,677 5.40%
----------- -----------
Total interest bearing liabilities $217,344 9,556 4.40%
===========
-----------
Net interest income $7,784
===========
Net interest spread 2.99%
Net interest margin(2) 3.32%
(1) Includes nonaccrual loans.
(2) Computed on a fully taxable basis, without regard to tax equivalent
yields.
20
Average Balance Sheet
(Dollars in thousands) Pro Forma Combined
---------------------------------------------
Year Ended December 31, 1998
Average Average
Balance Interest Yield/Rate
----------- ----------- -----------
Interest earning assets:
Loans (1) $130,307 $ 10,743 8.25%
Investment and mortgage backed
securities 55,440 3,348 6.04%
Other interest earning assets 9,765 639 6.54%
----------- ----------- -----------
Total interest earning assets 195,512 14,730 7.53%
Non-interest earning assets 18,770
-----------
Total assets $214,282
===========
Interest bearing liabilities:
Interest bearing checking $ 38,105 526 1.38%
Savings deposits 42,842 1,525 3.56%
Time deposits 74,767 4,309 5.76%
Borrowings 25,625 1,289 5.03%
----------- ----------- -----------
Total interest bearing liabilities $181,339 7,649 4.22%
===========
-----------
Net interest income $7,081
===========
Net interest spread 3.31%
Net interest margin(2) 3.62%
(1) Includes nonaccrual loans.
(2) Computed on a fully taxable basis, without regard to tax equivalent
yields.
As illustrated in the preceding tables, the principal reason for the
increase in net interest income from 1998 to 1999, and 1999 to 2000, was an
increase in the volume of United's interest earning assets. The decrease in
interest income in 1999 due to a planned decrease in the volume of investment
securities held was more than offset by a large positive contribution from
increased loan volumes, as funds from borrowings, deposits and repayments of
investment securities were applied to increase the volume of higher yielding
loan assets. This increased volume of loans was largely responsible for the $2.6
million increase in interest income from 1998 to 1999. The increased volume of
loans and the consolidation of Valley were largely responsible for the $8.2
million increase in interest income from 1999 to 2000. Average interest rates
earned on loans increased during these periods as market interest rates
increased slightly. Rates earned on investment securities decreased slightly
from 1998 to 1999 and increased slightly from 1999 to 2000.
Rates paid on deposits remained relatively constant from 1998 to 1999
and from 1999 to 2000, resulting in only minimal changes in interest expense as
a result of changes in such rates. An $8.4 million increase in time deposit
accounts from 1998 to 1999 and a $24.0 million increase in short-term
borrowings, resulted in a $1.9 million increase in interest expense from 1998 to
1999. Further increases in borrowings from 1999 to 2000, particularly in
repurchase agreements and FHLB borrowings along with a $39.7 million increase in
time deposits, caused an increase of $5.0 million in interest expense in 2000 as
compared to 1999.
The increased interest expense was more than offset by the increased
interest income resulting from expansion of United's loan portfolio during both
2000 and 1999. United's net interest income increased $2.7 million from $7.8
million for 1999 to $10.5 million for 2000 and increased $.7 million from $7.1
million for the year ended December 31, 1998 to $7.8 million for the year ended
December 31, 1999. $2.4 million of the increase in net interest income in 2000
was attributable to the consolidation of Valley.
PROVISION FOR LOAN LOSS. United provided $1.6 million for loan losses
in 2000 compared to $204,000 in 1999 and $340,000 in 1998. $0.3 million of the
increase in the provision is due to the consolidation of Valley. The remainder
of the increase is
21
due to loan growth and to larger than expected additions to the loan loss
reserve primarily related to the deterioration of a single loan. The loan was
made to a private company in the commercial construction industry. Collateral on
the loan includes accounts receivable and equipment, and collection efforts are
continuing.
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 by $.6 million in 2000 to $4.1 million
compared to $3.5 million in 1999. Non-interest income remained consistent in
1999 when compared to 1998. $0.3 million of the increase in 2000 was due to the
consolidation of Valley. The remainder of the 2000 increase was due to
recognizing a $0.3 million gain on the sale of servicing rights related to
Montana Board of Housing loans. Loan origination fees declined $.1 million
during 1999. Other non-interest income, including servicing fees on mortgage
loans, service charges and FHLB stock dividends, remained relatively constant
from 1998 to 1999. Loan servicing fees increased $.1 million in 1999 due to
mortgage servicing rights recorded and also $.1 million from equity in income of
Valley. United also recognized a small amount of gain on sale of investment
securities in 1999 and 1998.
NON-INTEREST EXPENSE. Non-interest expense increased $2.4 million, or
34.5%, to $9.5 million in 2000, and increased $.7 million, or 10.5%, to $7.1
million in 1999. The consolidation of Valley accounted for $2.0 million of the
2000 increase. Exclusive of the impact of the Valley consolidation, salary and
employee benefit expense represented $.2 million of the 2000 increase and was
the result of additional staffing and rate increases for existing employees.
Salary and employee benefit expense, which increased $.5 million to $3.9 million
in 1999 from $3.4 million in 1998, also accounted for most of the increase in
1999. This increase was due primarily to additional staffing of loan originators
and rate increases for existing employees.
INCOME TAXES. Income tax expense decreased $.2 million to $1.3 million
for 2000 and increased $.1 million to $1.5 million for 1999 from $1.4 million
for 1998. The principal reason for the decrease in 2000 was the additional loan
loss provision in the third quarter of 2000. The principal reason for the
increase in 1999 was increased income.
FINANCIAL CONDITION
GENERAL. United's total assets increased $93.6 million to $363.8 at
December 31, 2000 from $270.2 million at December 31, 1999, and increased $37.7
million in 1999 from $232.5 million at December 31, 1998. The 2000 increase in
assets was primarily the result of the addition of $56.5 million of assets from
the consolidation of Valley, a $25.4 million increase in loans receivable, and a
$6.8 million increase in cash and cash equivalents. The principal reason for the
increases in 1999 was growth in United's loan portfolio, which increased $43
million during 1999.
LOANS RECEIVABLE AND LOANS HELD FOR SALE. Net loans receivable
increased $65.3 million to $251.6 million at December 31, 2000 from $186.3
million at December 31, 1999. The consolidation of Valley accounted for $39.9
million of this increase. The remaining loans receivable increase of $25.4
million is a direct result of strong loan demand generated through officer call
programs, increased market area and continued purchase of participation loans
and lease financing loans. The diverse loan portfolio
22
includes: real estate residential mortgages, commercial and agricultural
mortgages, agricultural and commercial non-mortgages, 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 $52.9 million
of participation and purchased loans as of December 31, 2000.
Net loans receivable increased $43 million during 1999 to $186.3
million at December 31, 1999. Nearly all loan categories continued to show
steady growth, although not at the same pace as 1998, due to increases in rates
later in 1999.
Heritage Bank sells and retains servicing for a portion of its
residential real estate loans to agencies of Montana such as the Montana Board
of Investments and the Montana Board of Housing. Heritage Bank recognizes
mortgage servicing rights as an asset regardless of whether the servicing rights
are acquired or retained on loans originated and subsequently sold. The mortgage
servicing rights are assessed for impairment based on the fair value of the
mortgage servicing rights. In November 2000, Heritage Bank entered into an
agreement with an unrelated third party to sell all of its servicing rights
associated with Montana Board of Housing loans existing at November 30, 2000
which had outstanding principal balances of approximately $49.6 million. The
sales price was 1.03% of the outstanding principal balance at close of business
November 30, 2000, or approximately $510,000. A gain on the sale of
approximately $255,000 is included in other non-interest income for the year
ended December 31, 2000. At December 31,2000, Heritage Bank has a receivable
related to the sale of approximately $258,000 due in March 2001. The receivable
is included in other assets in the consolidated statement of financial
condition. As of December 31, 2000 and 1999, the carrying value of originated
servicing rights was approximately $9,000 and $102,000, respectively. Heritage
Bank's servicing portfolio as of December 31, 2000 was $53.9 million and as of
December 31, 1999 was $39.7 million. Approximately $49.5 million of the
servicing portfolio at December 31, 2000 was being serviced under a short-term
sub-servicing agreement which expires in February 2001.
During 2000, loans held for sale by United increased $1.8 million to
$3.0 million at December 31, 2000 from approximately $1.2 million at December
31, 1999. Approximately $110.5 million of loans were originated for sale and
$108.7 million of loans were sold to the secondary market during the year ending
December 31, 2000.
INVESTMENT SECURITIES AVAILABLE FOR SALE. United's investment
securities available for sale increased $17 million to $70 million during 2000
and increased $1.1 million to $53 million during the year ended December 31,
1999. The consolidation of Valley accounted for an increase of $17.5 million in
2000. In 2000, United's purchases were approximately $7.8 million while sales,
maturities and calls totaled $9.6 million. United also recorded an unrealized
gain in market values of approximately $1.4 million in 2000.
OTHER ASSETS. Real estate and other personal property owned increased
$1 million during 2000 to $1 million at December 31, 2000. The consolidation of
Valley accounted for $.2 million of the increase. $.3 million of the increase
resulted from United transferring loans to real estate and other personal
property owned. The remainder of the increase was due to United being required
by its regulators to reclassify to real estate owned a duplicate facility
previously reported as premises and equipment. At December 31, 2000 this
duplicate facility had a net carrying value of $.5 million. Real estate and
other personal property owned decreased $.3 million during 1999 as the result of
the sale of an apartment complex for $.4 million.
Restricted Stock increased $.7 million during 2000. United purchased
$.3 million of additional FHLB stock during 2000 and purchased $1.6 million of
FHLB stock during 1999, primarily as required to support the increased scope of
its operations. United received FHLB stock dividends of $.2 million in 2000. The
remaining increase of $.2 million was a result of the consolidation of Valley.
Premises and equipment increased $1.5 million during 2000 due mainly to
completing the construction of the two new Heritage Bank branches in Missoula
and Bozeman, Montana and the new Valley Bank branch in Scottsdale, Arizona. This
increase
23
was offset by $.5 million in depreciation expense and $.5 million reclassified
to real estate owned. The consolidation of Valley resulted in $.2 million
increase.
Premises and equipment increased $1.4 million during 1999, as the
result of the construction of the two new branches in Missoula and Bozeman as
well as computer purchases and upgrades for Year 2000 compliance.
Goodwill and identifiable intangibles increased $1.8 million in 2000
from the increased ownership and resulting consolidation of Valley. Goodwill and
identifiable intangibles decreased $.2 million during 1999 due to amortization.
Components of goodwill are currently being amortized over 15 and 25 years.
DEPOSITS AND BORROWINGS. United experienced a net increase in deposits
of $81.3 million in 2000, which includes a $50.1 million increase from the
consolidation of Valley, and a net increase of $12.3 million in 1999. The
increase in deposits during 2000 and 1999 resulted from a combination of the
application of competitive rates on all deposit offerings, and United's
commitment to community banking, both of which have attracted depositors.
FHLB advances and securities sold under agreements to repurchase
increased $5.6 million in 2000 and $26.3 million in 1999. The additional
borrowings in both years, were used to fund increases in United's real estate
loan portfolio, as well as to manage interest rate risk. Line of credit
borrowings had a net increase of $1.3 million from borrowings by UFC to fund
treasury stock purchases and purchases of Valley stock.
NONPERFORMING 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 nonperforming. However, not all loans past due 90 days
automatically result in the non-accrual of interest income. If a 90 days 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 following schedule details the amounts of United's nonperforming
assets, consisting of nonaccrual loans, accruing loans past due over 90 days and
restructured loans.
(Dollars in thousands) Pro Forma Combined
December 31, December 31, December 31, December 31, December 31
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -----------
Principal Balances:
Accruing loans past due
over 90 days $ 258 $ 117 $ 387 $ 437 $ 45
Non-accrual loans 903 230 594 4 --
------------ ------------ ------------ ------------ -----------
Total $ 1,161 $ 347 $ 981 $ 441 $ 45
------------ ------------ ------------ ------------ -----------
Interest:
Due on non-accrual loans $ 264 $ 14 $ 12 $ -- $ --
Included in income none none none none none
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 accounting principles generally accepted in the United States
of America. If an asset is classified as a loss, the institution must either
establish a specific valuation allowance equal to
24
the amount classified as loss or charge off such amount. At December 31, 2000,
United had $.4 million of reported doubtful assets and no assets classified as
loss. At December 31, 1999, United had $6,000 of reported doubtful assets and no
assets classified as loss. At December 31, 2000, 1999 and 1998, United had $.8
million, $.5 million and $.4 million, respectively, of reported substandard
assets. As a percent of total assets, substandard assets were approximately
.21%, .19% and .17% at December 31, 2000, 1999 and 1998, respectively.
PROVISION FOR LOAN LOSSES. The following schedule details changes in
United's loan loss reserve at December 31 for each of the three years indicated:
(Dollars in thousands) Pro Forma Combined
----------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December
2000 1999 1998 31, 1997 31, 1996
---------- ---------- ---------- ---------- ----------
Balance beginning of period $ 1,586 $ 1,485 $ 1,146 $ 463 $ 401
Provision for loan losses 1,629 204 340 717 160
Acquired from State Bank -- -- 43 -- --
Acquired from Valley 393 -- -- -- --
Charge-offs:
Residential (3) (16) -- --
Commercial (1,073) (59) (4) (10) (98)
Consumer (62) (34) (52) (25) -
---------- ---------- ---------- ---------- ----------
Total charge-offs (1,138) (109) (56) (35) (98)
Recoveries 56 7 12 1 --
---------- ---------- ---------- ---------- ----------
Net charge-offs (1,082) (102) (44) (34) (98)
---------- ---------- ---------- ---------- ----------
Balance end of period end $ 2,526 $ 1,586 $ 1,485 $ 1,146 $ 463
========== ========== ========== ========== ==========
Allowance for loan losses to:
Total loans at period .99% .84% 1.03% 1.21% .59%
========== ========== ========== ========== ==========
Net charge-offs to average
loans .44% .06% .04% .04% .15%
========== ========== ========== ========== ==========
25
The following schedule allocates the loan loss reserve based on
management's judgment of potential losses in the respective areas. While
management has allocated the reserve to various portfolio segments for purposes
of this table, the reserve is general in nature and is available for the
portfolio in its entirety.
(Dollars in thousands)
December 31, 2000 December 31, 1999 December 31, 1998
-------------------------- ------------------------- -------------------------
% of % of % of
loans to loans to loans to
total total total
Allowance loans Allowance loans Allowance loans
------------ ------------ ------------ ----------- ------------ -----------
Real estate loans:
1 - 4 residential $ 475 12.2% $ 128 18.1% $ 124 18.7%
5 or more residential 68 2.5 52 2.8 66 4.6
Construction 149 5.0 84 5.6 92 6.4
Commercial and agricultural 695 35.4 488 24.9 462 26.0
Non-real estate loans:
Commercial and agricultural 874 28.2 712 37.2 601 31.6
Consumer 265 16.7 122 11.4 140 12.7
------------ ------------ ------------ ----------- ------------ -----------
Total $ 2,526 100.0% $ 1,586 100.0% $ 1,485 100.0%
============ ============ ============ =========== ============ ===========
(Dollars in thousands)
Pro Forma Combined
December 31, 1997 December 31, 1996
--------------------------- --------------------------
% of % of
loans to loans to
total total
Allowance loans Allowance loans
------------ ------------ ------------ -----------
Real estate loans:
1 - 4 residential $ 387 45.4% $ 195 49.8%
5 or more residential 67 7.1 33 6.1
Construction 55 5.8 35 5.6
Commercial and agricultural 217 15.1 86 13.9
Non-real estate loans:
Commercial and agricultural 259 17.3 96 15.4
Consumer 161 9.3 18 9.2
------------ ------------ ------------ -----------
Total $ 1,146 100% $ 463 100%
============ ============ ============ ===========
26
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED. Total real estate and
other personal property owned ("REO") of United was $1.0 million, $14,000 and
$304,000 at December 31, 2000, 1999 and 1998, respectively. The schedule below
details properties both held for sale and investment by United as of the dates
indicated.
(Dollars in thousands)
December 31, December 31, December 31,
2000 1999 1998
------------ ------------- ------------
REO held for sale $ 332 $ -- $ --
Allowance for possible losses -- -- --
REO held for investment 547 -- 328
Accumulated depreciation (15) -- (24)
------------- ------------- ------------
Total REO held for investment $ 532 -- $304
============ ============= ============
As a percent of total assets .24% .0% .13%
============ ============= ============
Other personal property
held for sale $ 158 $ 14 $ --
------------ ------------- ------------
As a percent of total assets .04% .01% --%
============ ============= ============
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
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 the 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 the FHLB borrowings.
27
The following tables provide information regarding the maturity of
loans included in United's portfolio as of December 31, 2000. The amounts
reflected in the following table give no effect to assumptions regarding loan
prepayments or payoffs. Loans with variable rates of interest are classified as
due when the loan principal balances are contractually due, not when the
interest rate reprices.
(Dollars in thousands)
December 31, 2000
-------------------------------------------------
5 Years
Up to 1 - 5 and
1 Year Years Beyond Total
---------- ---------- ---------- ----------
Loans:
Loans secured by real estate:
Adjustable rate (all
property types) $ 7,185 $ 19,674 $ 23,302 $ 50,161
1-4 family residential 7,282 12,495 16,855 36,632
Multi-family and commercial 3,292 30,322 12,028 45,642
Construction and undeveloped
land 11,708 3,471 2,702 17,881
---------- ---------- ---------- ----------
Loans secured by real
estate 29,467 65,962 54,887 150,316
Commercial non-real
estate(1) 17,691 40,873 5,966 64,530
Agricultural non-real estate 4,457 5,394 414 10,265
Consumer(2) 2,542 15,474 8,519 26,535
---------- ---------- ---------- ----------
Net loans $ 54,157 $ 127,703 $ 69,786 $ 251,646
========== ========== ========== ==========
Total loans
due after
December 31,
2001
------------
Fixed interest rates $154,513
Floating or adjustable rates
or balloon payments 42,976
------------
$197,489
============
(1) Includes loans on commercial savings accounts
(2) Includes consumer loans secured by real estate
28
The following table sets forth the book value, maturities and weighted
average yield of United's investment portfolio at the dates indicated:
(Dollars in thousands)
December 31, 2000
--------------------------------------------------------
10 years
Up to 1 - 5 5 - 10 and
1 year years years beyond Total
-------- -------- -------- -------- --------
U.S. government and agencies $ 998 $ 16,978 $ 5,896 $ -- $ 23,872
Mortgage-backed securities -- 3,158 5,938 32,440 41,536
Municipal bonds -- 381 562 1,775 2,718
Other -- 495 1,415 28 1,938
-------- -------- -------- -------- --------
Total securities $ 998 $ 21,012 $ 13,811 $ 34,243 $ 70,064
======== ======== ======== ======== ========
Weighted average yield 6.67% 6.07% 6.51% 6.48% 6.43%
December 31, 1999
--------------------------------------------------------
10 years
Up to 1 - 5 5 - 10 and
1 year years years beyond Total
-------- -------- -------- -------- --------
U.S. government and agencies $ 200 $ 4,809 $ 4,785 $ -- $ 9,794
Mortgage-backed securities 1,050 4,391 4,026 29,988 39,455
Municipal bonds 3 376 300 1,257 1,936
Other -- 478 1,350 31 1,859
-------- -------- -------- -------- --------
Total securities $ 1,253 $ 10,054 $ 10,461 $ 31,276 $ 53,044
======== ======== ======== ======== ========
Weighted average yield 6.98% 7.05% 7.14% 6.30% 6.62%
December 31, 1998
--------------------------------------------------------
10 years
Up to 1 - 5 5 - 10 and
1 year years years beyond Total
-------- -------- -------- -------- --------
U.S. government and agencies $ 2,325 $ 6,221 $ 3,125 $ 1,966 $ 13,637
Mortgage-backed securities 1,573 10,474 564 23,741 36,352
Municipal bonds 10 199 622 54 885
Other 986 -- -- 39 1,025
-------- -------- -------- -------- --------
Total securities $ 4,894 $ 16,894 $ 4,311 $ 25,800 $ 51,899
======== ======== ======== ======== ========
Weighted average yield 5.87% 5.97% 6.14% 6.10% 6.04%
STOCKHOLDERS' EQUITY. Stockholders' equity at December 31, 2000 was
$30.0 million, or 8.23% of total assets, up slightly from $29.4 million, or
10.86% of total assets, at December 31, 1999. At December 31, 2000, book value
was $18.54 per share. The increase in stockholders' equity is primarily due to
net income of $2.0 million for 2000, offset by the payment of $1.7 million in
dividends on UFC's common stock, the purchase of 37,000 shares of treasury stock
for $.6 million, and a decrease in net unrealized losses on securities of $.9
million.
BUSINESS SEGMENT RESULTS. United manages its operations and prepares
management reports with a primary focus on geographical areas. Operating
segments information, including earnings performance on an operating cash basis,
is presented in the following schedule. United allocates centrally provided
services to the business segments based upon estimated usage of those services.
The operating segment identified as other includes UFC and eliminations of
transactions between segments.
29
Heritage Bank includes United's thrift banking operations in ten
Montana cities. The bank experienced steady growth in 2000 with loans increasing
$21.9 million or 12.8% over 1999 and deposits increasing $16.8 million or 10.0%.
Operating cash earnings for 2000 decreased $.4 million from 1999. Net income
decreased 22.2% to $1.9 million from $2.5 million in 1999. The decrease was
primarily due to the larger than expected addition to the reserve for loan
losses for the deterioration of a single loan in the third quarter of 2000. On
an operating cash basis, net interest income increased 8.0% to $7.7 million in
2000, non-interest income increased 6.3% to $3.6 million, and non-interest
expense increased 5.3% to $6.5 million. Heritage Bank's operating cash
performance efficiency ratio was 57.91% in 2000 as compared to 59.68% in 1999.
During 1998, United formed State Bank to acquire a portion of the
business of a failed commercial bank in Fort Benton, Montana. State Bank has one
branch office in Geraldine, Montana. The acquisition of State Bank was accounted
for as a purchase and results of operations prior to the acquisition date of
August 7, 1998 are not included in the segment information. Therefore the year
1998 is not comparable to 1999. On the acquisition date, United, through State
Bank, acquired certain assets of approximately $1.6 million and assumed certain
liabilities of approximately $14 million. State Bank paid a $454,000 premium for
the right to acquire such assets and assume the bank's insured deposits.
State Bank was relatively stable in 2000 with loans decreasing $.9
million to $14.1 million and deposits increasing $1.5 million to $13.5 million.
Operating cash earnings for 2000 were approximately $151,000 compared to a 1999
loss of approximately $29,000. Net interest income for 2000 was $.6 million and
non-interest income rose to approximately $67,000. On an operating cash basis,
non-interest expense decreased only slightly. The operating cash efficiency
ratio for 2000 was 65.97% as compared to 94.06% for 1999.
Valley's net interest income was $2.4 million in 2000. Non-interest
income and non-interest expense was $.4 million and $2 million, respectively.
The operating cash efficiency ratio for 2000 was 71.48%.
30
The following table sets forth certain operating segment information
for the years ended December 31, 2000, 1999 and 1998 (in thousands except per
share data):
Heritage
Bank State Bank Valley Other Consolidated
------------ ------------ ------------ ------------ ------------
2000:
Net interest income $ 7,650 600 2,391 45 10,686
Non-interest income 3,572 67 450 1 4,090
------------ ------------ ------------ ------------ ------------
Total revenue 11,222 667 2,841 46 14,776
Provision for loan losses 1,330 -- 299 -- 1,629
Non-interest expense(1) 6,499 440 2,031 310 9,280
------------ ------------ ------------ ------------ ------------
Pretax cash earnings(loss) 3,393 227 511 (264) 3,867
Income tax expense(benefit) 1,176 76 183 (148) 1,287
Minority interest -- -- -- (151) (151)
------------ ------------ ------------ ------------ ------------
Cash earnings(1) 2,217 151 328 (267) 2,429
Amortization of goodwill and
Core Deposit Intangible (CDI) 165 30 -- 80 275
Amortization of purchase
valuations 140 -- -- 10 150
------------ ------------ ------------ ------------ ------------
Net income(loss) $ 1,912 121 328 (357) 2,004
============ ============ ============ ============ ============
PER SHARE DATA
Basic cash earnings per share $ 1.48
Diluted cash earnings per share $ 1.47
Basic net income per share $ 1.22
Diluted net income per share $ 1.22
Weighted average shares
outstanding - basic 1,646
Weighted average shares
outstanding - diluted 1,647
AVERAGE BALANCE SHEET DATA
Assets $ 258,671 18,830 62,625 8,525 348,643
Loans receivable, net 191,113 15,014 39,539 42 245,707
Allowance for loan losses 1,795 133 497 -- 2,425
Deposits 171,618 12,527 53,978 -- 247,983
Stockholders' equity 20,005 2,050 7,575 29,187 36,762
PERFORMANCE RATIOS
Return on average assets .74% .64% .52% -- .57%
Return on average equity 9.56% 5.90% 4.33% -- 5.45%
Efficiency ratio 60.08% 70.46% 71.48% -- 65.32%
OPERATING CASH PERFORMANCE
RATIOS
Return on average assets .86% .80% .52% -- .70%
Return on average equity 11.08% 7.37% 4.33% -- 6.61%
Efficiency ratio 57.91% 65.97% 71.48% -- 62.80%
(1) Before amortization of goodwill, purchase valuations and core deposit
intangible.
31
Heritage Bank State Bank Other Consolidated
------------------- ------------------- ------------------- -----------------------
1999 1998 1999 1998 1999 1998 1999 1998
Net interest income $ 7,085 6,364 444 87 270 420 7,799 6,871
Non-interest income 3,360 3,276 43 14 128 2 3,531 3,292
------------------- ------------------- ------------------- -----------------------
Total revenue 10,445 9,640 487 101 398 422 11,330 10,163
Provision for loan
losses 110 335 94 -- -- -- 204 335
Non-interest expense 6,174 5,499 458 136 290 407 6,922 6,042
------------------- ------------------- ------------------- -----------------------
Pretax cash earnings
(loss) 4,161 3,806 (65) (35) 108 15 4,204 3,786
Income tax expense
(benefit) 1,537 1,413 (36) (17) 39 3 1,540 1,399
------------------- ------------------- ------------------- -----------------------
Cash earnings(1) 2,624 2,393 (29) (18) 69 12 2,664 2,387
Amortization of
goodwill, purchase
valuations and CDI 165 110 30 10 -- -- 195 120
------------------- ------------------- ------------------- -----------------------
Net income (loss) $ 2,459 2,283 (59) (28) 69 12 2,469 2,267
=================== =================== =================== =======================
PER SHARE DATA
Cash earnings per share $1.58 1.50
Net income per share $1.47 1.43
Weighted average shares
outstanding 1,684 1,588
AVERAGE BALANCE SHEET DATA
Total assets $ 230,958 198,093 16,522 10,577 4,341 5,613 251,821 214,283
Net loans 159,340 126,902 11,992 2,936 625 469 171,957 130,307
Allowance for loan
losses 1,489 1,216 93 46 -- -- 1,582 1,262
Total deposits 157,819 147,843 10,303 9,168 (388) (1,297) 167,734 155,714
Equity 20,553 15,985 1,804 1,359 (6,619) (13,013) 28,976 30,358
PERFORMANCE RATIOS
Return on average
assets 1.06 1.15% -0.36% -0.26% -- -- 0.98% 1.06%
Return on average
equity 11.96% 14.28% -3.25% -2.05% -- -- 8.52% 7.47%
Efficiency ratio 60.63% 57.64% 100.27% 144.79% -- -- 62.77% 60.58%
OPERATING CASH
PERFORMANCE RATIOS
Return on average
assets 1.14% 1.21% -0.17% -0.17% -- -- 1.06% 1.11%
Return on average
equity 12.77% 14.97% -1.57% -1.31% -- -- 9.20% 7.86%
Efficiency ratio 59.68% 57.04% 94.06% 134.78% -- -- 61.10% 59.45%
(1) Before amortization of goodwill and core deposit intangible.
32
ITEM 7A. 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 Asset/Liability Management Committees and Investment Committees,
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.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE. Interest rate risk
sensitivity of net portfolio value ("NPV") measurement seeks to establish a
methodology to measure the potential for the reduction of earnings and
stockholders' equity resulting from both lower net interest income ("NII") and
lower NPV caused by changes in market interest rates. NPV is the difference
between United's depository portfolio value and its loans receivable portfolio
value. NPV thus provides a leading indicator of future potential changes in both
NII and stockholders' equity. Because of its asset size (less than $500
million), Heritage Bank falls under an OTS exemption that allows utilization of
an asset/liability computer simulation program prepared and distributed by the
OTS. The OTS Thrift Financial Report includes Schedule CMR that provides
detailed information about the balances, interest rates, repricing, and maturity
characteristics of Heritage Bank's financial instruments. By utilizing Heritage
Bank's Schedule CMR data, the OTS runs computer simulations ("Net Portfolio
Value Model") utilizing OTS assumptions. Heritage Bank, per OTS requirements,
has established maximum percentage changes for NPV resulting from instantaneous
changes in interest rates of 100 to 300 basis points. A maximum change of -15%
for an instantaneous 200 basis point change in interest rate has been
established by United. A 200 basis point change is used by the OTS as the
current Interest Rate Sensitivity Measure by which thrifts are evaluated.
Heritage Bank periodically reviews and makes changes to established limits for
NPV changes due to mergers and other market factors.
The following table demonstrates Heritage Bank's December 31, 2000 NPV
and the present value of total assets, NPV ratio and basis point change for
three instantaneous increases and the three instantaneous decreases in interest
rates:
Interest Rate Sensitivity of Net Portfolio Value
(Dollars in thousands)
Instanta- Net Portfolio Value NPV as % of PV of Assets
neous ---------------------------------------------------------------------------------------------------
Change in Rates $ Amount $ Change % Change Total Assets NPV Ratio Change
- ---------------- --------------- --------------- --------------- ------------------ --------------- ----------------
+300 bp 13,850 -9,389 -40% 265,491 5.22% -311 bp
+200 bp 16,976 -6,264 -27% 269,948 6.29% -204 bp
+100 bp 20,147 -3,093 -13% 274,473 7.34% -99 bp
0 bp 23,240 -- --% 278,951 8.33% --
-100 bp 26,128 2,888 +12% 283,271 9.22% +89 bp
-200 bp 29,365 6,126 +26% 287,987 10.20% +187 bp
-300 bp 33,458 10,219 +44% 293,584 11.40% +307 bp
33
The following table demonstrates Heritage Bank's December 31, 1999 NPV
and the present value of total assets, NPV ratio and basis point change for
three instantaneous increases and the three instantaneous decreases in interest
rates:
Interest Rate Sensitivity of Net Portfolio Value
(Dollars in thousands)
Instanta- Net Portfolio Value NPV as % of PV of Assets
neous ---------------------------------------------------------------------------------------------------
Change in Rates $ Amount $ Change % Change Total Assets NPV Ratio Change
- ---------------- --------------- --------------- --------------- ------------------ --------------- ----------------
+300 bp 13,355 -8,687 -39% 238,101 5.61% -320 bp
+200 bp 16,307 -5,735 -26% 242,206 6.73% -207 bp
+100 bp 19,231 -2,811 -13% 246,304 7.81% -100 bp
0 bp 22,042 -- --% 250,317 8.81% --
-100 bp 24,581 2,539 +12% 254,093 9.67% +87 bp
-200 bp 27,289 5,247 +24% 258,072 10.57% +177 bp
-300 bp 30,183 8,141 +37% 262,262 11.51% +270 bp
The preceding tables for 2000 and 1999 would indicate a decrease in NPV
based on three instantaneous increases and three instantaneous decreases. This
would be consistent with increasing interest rates during 1999 and 2000. Total
present value of total assets has increased based on asset growth in 2000.
However, based on the three increases and decreases in rates, the value of total
assets would also decrease based on increasing interest rates.
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operation results.
These hypothetical estimates are based upon numerous assumptions, including the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of assets and liability cash flows
and others. Sensitivity analysis does not reflect actions that Heritage Bank
might take in responding to or anticipating changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The management of United has prepared and is responsible for the
consolidated financial statements of United. These statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America applied on a consistent basis.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in United's
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission on or about April 20, 2001 is
incorporated herein by reference. Information regarding executive officers is
set forth in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation and
Other Information," "Compensation of Directors" and "Stock Price Performance
Graph" in the Proxy Statement is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Securities Ownership of
Certain Beneficial Owners" and " Securities Ownership of Management" in the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions between Management and the Company" in the Proxy Statement
is incorporated herein by reference.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
List of Documents filed by Company as part of this Report.
(a) (1) FINANCIAL STATEMENTS:
The following consolidated financial statements of United Financial
Corp. are included herein as follows:
Pages in Annual Report
----------------------
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, F-2
December 31, 2000 and 1999
CONSOLIDATED STATEMENTS OF INCOME - YEARS ENDED F-3
December 31, 2000, 1999, and 1998
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME - YEARS ENDED F-4
December 31, 2000, 1999, and 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED F-5
December 31, 2000, 1999, and 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
(2) FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted because they are
inapplicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(3) EXHIBITS.
The exhibits listed in the accompanying index are filed as part of this
Report or incorporated by reference as indicated therein.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2000
None
36
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2000 and 1999
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors and Stockholders
United Financial Corp.:
We have audited the accompanying consolidated statements of financial condition
of United Financial Corp. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Financial
Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
February 16, 2001
F-1
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
DECEMBER 31,
-------------------------------
Assets 2000 1999
------ ------------- -------------
Cash and cash equivalents $ 19,450,725 11,456,801
Securities available-for-sale 70,063,913 53,044,472
Loans receivable, net 251,646,258 186,347,794
Loans held for sale 2,980,839 1,191,111
Restricted stock, at cost 3,708,650 3,046,200
Accrued interest receivable 3,350,862 2,258,662
Premises and equipment, net 6,386,714 4,872,670
Real estate and other personal property owned 1,021,651 13,657
Deferred tax asset, net 443,858 740,107
Investment in Valley Bancorp, Inc. -- 4,548,949
Goodwill, net of accumulated amortization of $533,545 and
$343,700 at December 31, 2000 and 1999, respectively 3,170,686 1,289,456
Identifiable intangibles, net of accumulated amortization
of $169,255 and $99,904 at December 31, 2000 and 1999, 468,061 537,412
respectively
Other assets 1,108,686 878,604
------------- -------------
$ 363,800,903 270,225,895
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Non-interest bearing deposits $ 33,348,678 18,750,554
Interest bearing deposits 227,830,608 161,130,984
Federal Home Loan Bank advances 52,175,000 46,425,000
Securities sold under agreements to repurchase 11,365,699 11,545,959
Line of credit 1,250,000 --
Advances from borrowers for taxes and insurance 462,069 408,161
Income taxes payable 308,630 476,273
Accrued interest payable 2,474,944 1,528,035
Accrued expenses and other liabilities 1,113,104 601,973
------------- -------------
Total liabilities 330,328,732 240,866,939
------------- -------------
Minority interest 3,524,691 --
------------- -------------
Stockholders' equity:
Preferred stock, no par value; authorized 2,000,000
shares; no shares issued and outstanding -- --
Common stock, no par value; authorized 8,000,000
shares; 1,698,312 shares issued 28,001,579 28,001,579
Retained earnings, substantially restricted 3,541,106 3,250,876
Treasury stock, at cost, 83,000 shares and 46,000 shares
at December 31, 2000 and 1999, respectively (1,515,250) (931,649)
Accumulated other comprehensive loss (79,955) (961,850)
------------- -------------
Total stockholders' equity 29,947,480 29,358,956
------------- -------------
Commitments and contingencies $ 363,800,903 270,225,895
============= =============
See accompanying notes to consolidated financial statements.
F-2
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
YEARS ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
------------ ------------ ------------
Interest income:
Loans receivable $ 20,719,610 13,824,741 10,515,655
Mortgage-backed securities 3,898,950 2,747,649 2,189,305
Investment securities 495,207 432,987 914,676
Time deposits in banks -- 1,607 6,709
Other interest-earning assets 395,117 333,651 622,694
------------ ------------ ------------
Total interest income 25,508,884 17,340,635 14,249,039
------------ ------------ ------------
Interest expense:
Deposits 10,725,909 6,879,588 6,090,923
Federal Home Loan Bank advances 3,444,117 2,171,681 898,446
Securities sold under agreements to repurchase 672,773 505,199 391,281
Other borrowings 135,222 -- 11,917
------------ ------------ ------------
Total interest expense 14,978,021 9,556,468 7,392,567
------------ ------------ ------------
Net interest income 10,530,863 7,784,167 6,856,472
Provision for loan losses 1,628,569 203,500 335,000
------------ ------------ ------------
Net interest income after provision for
loan losses 8,902,294 7,580,667 6,521,472
------------ ------------ ------------
Non-interest income:
Loan origination fees on loans sold 2,500,551 2,524,190 2,606,436
Loan servicing fees 296,474 211,732 78,600
Customer service charges 591,612 420,523 336,684
Gain on sale of securities -- 30,357 43,162
Equity in income of Valley Bancorp, Inc. -- 126,367 1,550
Other 701,295 217,042 225,603
------------ ------------ ------------
Total non-interest income 4,089,932 3,530,211 3,292,035
------------ ------------ ------------
Non-interest expense:
Compensation and benefits 5,165,880 3,895,030 3,369,524
Occupancy and equipment 1,139,624 742,331 625,110
Deposit insurance premiums 102,241 121,088 82,873
Data processing fees 671,237 398,022 349,251
Other 2,470,642 1,945,896 1,720,734
------------ ------------ ------------
Total non-interest expense 9,549,624 7,102,367 6,147,492
------------ ------------ ------------
Income before income taxes 3,442,602 4,008,511 3,666,015
Income taxes 1,287,477 1,539,239 1,398,595
------------ ------------ ------------
Income before minority interest 2,155,125 2,469,272 2,267,420
Minority interest (151,171) -- --
------------ ------------ ------------
Net income $ 2,003,954 2,469,272 2,267,420
============ ============ ============
Basic earnings per share $ 1.22 1.47 1.43
============ ============ ============
Diluted earnings per share $ 1.22 1.47 1.43
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2000, 1999, and 1998
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY
----------- ----------- ----------- ----------- ------------- ------------
Balances at December 31, 1997 $ 100 1,080,028 1,539,605 -- 128,182 2,747,915
Comprehensive income:
Net income -- -- 2,267,420 -- -- 2,267,420
Decrease in net unrealized gains
on securities available-for-sale,
net of reclassification adjustment -- -- -- -- (135,083) (135,083)
-----------
Total comprehensive income 2,132,337
-----------
Issuance of 1,223,312 shares, net of
issuance costs of $125,617 24,646,451 -- -- -- -- 24,646,451
Change in par value of stock to no par 1,080,028 (1,080,028) -- -- -- --
Capital contribution 2,275,000 -- -- -- -- 2,275,000
Dividends declared ($.75 per share) -- -- (1,273,736) -- -- (1,273,736)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 28,001,579 -- 2,533,289 -- (6,901) 30,527,967
Comprehensive income:
Net income -- -- 2,469,272 -- -- 2,469,272
Increase in net unrealized losses
on securities available-for-sale,
net of reclassification adjustment -- -- -- -- (954,949) (954,949)
-----------
Total comprehensive income 1,514,323
-----------
Dividends declared ($1.04 per share) -- -- (1,751,685) -- -- (1,751,685)
Treasury shares purchased at cost
(46,000 shares) -- -- -- (931,649) -- (931,649)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 28,001,579 -- 3,250,876 (931,649) (961,850) 29,358,956
Comprehensive income:
Net income -- -- 2,003,954 -- -- 2,003,954
Decrease in net unrealized losses
on securities available-for-sale,
net of reclassification adjustment -- -- -- -- 881,895 881,895
-----------
Total comprehensive income 2,885,849
-----------
Dividends declared ($1.04 per share) -- -- (1,713,724) -- -- (1,713,724)
Treasury shares purchased at cost
(37,000 shares) -- -- -- (583,601) -- (583,601)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 $28,001,579 -- 3,541,106 (1,515,250) (79,955) 29,947,480
=========== =========== =========== =========== =========== ===========
Year Ended December 31,
-----------------------------------------
Disclosure of reclassification amount: 2000 1999 1998
- -------------------------------------- -----------------------------------------
Unrealized holding gains (losses) arising during the period 1,437,089 (1,582,029) (257,794)
Tax (expense) benefit (552,488) 609,043 96,166
----------- ----------- -----------
Net after tax 884,601 (972,986) (161,628)
----------- ----------- -----------
Reclassification adjustment for gains included in net income -- (30,357) (43,162)
Tax expense -- 12,320 16,617
----------- ----------- -----------
Net after tax -- (18,037) (26,545)
Portion of unrealized gain allocated to minority interest (2,706) -- --
----------- ----------- -----------
Net change in unrealized gain (loss) on availiable-for-sale securities 881,895 (954,949) (135,083)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 2,003,954 2,469,272 2,267,420
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,628,569 203,500 335,000
Amortization of goodwill and identifiable intangibles 259,196 187,477 105,683
Depreciation 500,167 287,083 320,080
Net gain on sale of premises and equipment (5,807) -- --
Deferred income tax expense (benefit) (33,814) (41,604) 117,440
Equity in income of Valley Bancorp, Inc. -- (126,367) (1,550)
Amortization of premiums and discounts on
securities and loans 133,253 265,178 (30,636)
Gain on sale of investment securities -- (30,357) (43,162)
Gain on sale of loans 169,000 105,000 --
Gain on sale of real estate owned -- (4,970) --
Mortgage loans originated and held for sale (110,510,643) (114,591,857) (85,999,406)
Proceeds from sales of mortgage loans held for sale 108,720,915 119,117,722 81,749,817
FHLB stock dividends (208,100) (161,100) (82,800)
Increase in accrued interest receivable (707,302) (340,297) (404,023)
Decrease (increase) in other assets (328,793) (383,127) 2,185,394
Increase (decrease) in income taxes payable (197,232) 360,639 (168,053)
Increase in accrued interest payable 888,315 260,927 129,408
Increase (decrease) in accrued expenses
and other liabilities 380,058 (127,019) (2,568,482)
Minority interest 151,171 -- --
------------- ------------- -------------
Net cash provided (used) by operating
activities 2,842,907 7,450,100 (2,087,870)
------------- ------------- -------------
Cash flows from investing activities:
Net decrease in time deposits in banks -- -- 98,000
Net increase in loans receivable (27,393,985) (43,534,649) (46,497,741)
Purchases of securities available-for-sale (7,834,019) (33,921,870) (37,033,497)
Proceeds from maturities, paydowns and sales of securities
available-for-sale 9,570,153 30,990,562 44,300,431
Proceeds from redemption of FHLB stock 31,300 -- --
Purchases of restricted stock (271,300) (1,652,800) (210,600)
Purchase of Valley Bancorp, Inc. stock -- (1,746,591) (2,682,241)
Cash paid to FDIC on failed bank -- (333,245) --
Purchases of premises and equipment (2,350,777) (1,661,802) (940,655)
Proceeds from sale of premises and equipment 26,100 -- --
Proceeds from sale of real estate and other personal
property owned 105,045 662,213 360,000
Additions of real estate and other personal
property owned (55,476) (39,748) (4,756)
Acquisition of identifiable intangibles -- -- (183,316)
Acquisition of minority interest in Valley Bancorp, Inc. (1,923,050) -- --
Acquired cash and cash equivalents in merger -- -- 8,112,629
Acquired cash and cash equivalents of failed bank -- -- 11,553,977
Acquired cash and cash equivalents of Valley
Bancorp, Inc. 1,205,576 -- --
------------- ------------- -------------
Net cash used by investing activities (28,890,433) (51,237,930) (23,127,769)
------------- ------------- -------------
Cash flows from financing activities:
Net increase in deposits 31,215,127 12,261,454 13,982,987
Net increase in FHLB advances 5,750,000 24,250,000 15,750,000
Advances on line of credit 1,555,000 -- --
Payments on line of credit (305,000) -- (2,350,000)
Net increase (decrease) in securities sold under
repurchase agreements (180,260) 2,095,387 6,277,423
Net decrease in federal funds purchased (1,750,000) -- --
Increase (decrease) in advances from borrowers for
taxes and insurance 53,908 65,554 (59,450)
Capital contribution -- -- 2,275,000
Purchase of treasury stock (583,601) (931,649) --
Dividends paid to stockholders (1,713,724) (1,751,685) (1,273,736)
------------- ------------- -------------
Net cash provided by financing activities 34,041,450 35,989,061 34,602,224
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 7,993,924 (7,798,769) 9,386,585
Cash and cash equivalents at beginning of year 11,456,801 19,255,570 9,868,985
------------- ------------- -------------
Cash and cash equivalents at end of year $ 19,450,725 11,456,801 19,255,570
============= ============= =============
Cash paid during the year for:
Interest, approximately $ 14,074,000 9,280,000 6,933,000
Income taxes, approximately 1,519,000 1,220,000 1,449,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-5
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
The accompanying consolidated financial statements include the
accounts of United Financial Corp. (UFC) and UFC's wholly-owned
subsidiaries, Heritage Bank, F.S.B. (Heritage) and Heritage
State Bank (Heritage State), Community Service Corporation
(CSC), a wholly-owned subsidiary of Heritage, and, effective
January 1, 2000 (see note 24), UFC's majority owned subsidiary
Valley Bancorp, Inc. (Valley). UFC, Heritage, Heritage State,
Valley and CSC are herein referred to collectively as "the
Company." All significant intercompany balances and transactions
have been eliminated in consolidation. UFC owns 56.52% of the
outstanding stock of Valley at December 31, 2000 compared to
39.93% at December 31, 1999 and 25% at December 31, 1998.
The Company, through its subsidiary banks, provides a full range
of banking services to individual and corporate customers in
central and western Montana and Phoenix and Scottsdale, Arizona.
The subsidiary banks are subject to competition from other
financial service providers. The Company and its subsidiary
banks are also subject to the regulations of certain government
agencies and undergo periodic examinations by those regulatory
authorities.
On February 3, 1998, Heritage Bancorporation merged with United
Financial Corp. ("Old United"). Heritage Bancorporation was the
parent company of Heritage Bank (acquired by Heritage
Bancorporation in June 1994) and Old United was the parent
company of United Savings Bank. The merger resulted in a
combined entity, UFC, owning these two subsidiary banks. The
subsidiary banks were combined into one bank called Heritage
Bank in May 1998.
The merger was treated as a reverse acquisition accounted for as
a purchase of Old United by Heritage Bancorporation. Consistent
with Heritage Bancorporation being the acquiring corporation,
the historical statements of operations of the combined entity
only reflect the operations of United commencing on and after
the closing date of the merger.
In August 1998, UFC formed Heritage State to acquire a portion
of the business of a failed commercial bank in Fort Benton,
Montana.
(b) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America. In preparing the consolidated
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial
condition and income and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination
of the allowance for loan losses. Management believes the
allowance for loan losses is adequate, however, future additions
to the allowance may be necessary based on changes in factors
affecting the borrowers' ability to repay. In addition, various
regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such
agencies may require the Company to recognize additions to the
allowance based on their judgments about information available
to them at the time of their examination.
F-6 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(c) CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the
Company considers all cash, daily interest demand deposits,
amounts due from banks and interest-bearing deposits with banks
with original maturities of three months or less to be cash
equivalents. At December 31, 2000, $5,773,127 of
interest-bearing deposits with banks and $4,200,000 of daily
interest demand deposits were combined with cash as "cash
equivalents". At December 31, 1999, $3,546,001 interest-bearing
deposits with banks were combined with cash as "cash
equivalents".
(d) SECURITIES AVAILABLE FOR SALE
Securities available-for-sale include securities that management
intends to use as part of its overall asset/liability management
strategy and that may be sold in response to changes in interest
rates and resultant prepayment risk and other related factors.
Securities available-for-sale are carried at fair value and
unrealized gains and losses (net of related tax effects) are
excluded from earnings and reported as a separate component of
stockholders' equity. All investment and mortgage-backed
securities acquired are classified as available-for-sale.
Declines in the fair value of available-for-sale securities
below carrying value that are other than temporary are charged
to expense as realized losses and the related carrying value
reduced to fair value. The cost of any investment, if sold, is
determined by specific identification.
Premiums and discounts on investment securities are amortized or
accreted into income using a method which approximates the
level-yield interest method.
(e) LOANS RECEIVABLE AND LOAN FEES
Loans receivable are stated at unpaid principal balances, less
unearned discounts and net deferred loan origination fees.
Interest on loans is credited to income as earned. Interest
receivable is accrued only if deemed collectible. Discounts on
purchased loans are amortized into interest income using the
level-yield method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.
Loans are placed on nonaccrual status when collection of
principal or interest is considered doubtful. Interest income
previously accrued on these loans, but not yet received, is
reversed in the current period. Interest subsequently recovered
is credited to income in the period collected.
Material loan origination fees and related direct origination
costs are deferred and the net fee or cost is recognized as
interest income using the level-yield method over the
contractual life of the loans, adjusted for prepayments.
Origination fees on loans sold to the secondary market are
recognized when the loan is sold. Amortization of deferred loan
origination fees and costs and the accretion of unearned
discounts are suspended during periods in which the related loan
is on nonaccrual status.
F-7 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(f) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's
evaluation of the adequacy of the allowance, including an
assessment of the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of
any underlying collateral, current economic conditions and
independent appraisals.
Additions to the allowance arise from charges to operations
through the provision for loan losses or from the recovery of
amounts previously charged off. The allowance is reduced by
loans charged off. Loans are charged off when management
believes there has been permanent impairment of their carrying
values.
The Company also provides an allowance for losses on specific
loans which are deemed to be impaired. Groups of small balance
homogeneous loans (generally consumer loans) are evaluated for
impairment collectively. A loan is considered impaired when,
based upon current information and events, it is probable that
the Company will be unable to collect, on a timely basis, all
principal and interest according to the contractual terms of the
loan's original agreement. When a specific loan is determined to
be impaired, the allowance for loan losses is increased through
a charge to expense for the amount of the impairment. The amount
of the impairment is measured using cash flows discounted at the
loan's effective interest rate, except when it is determined
that the sole source of repayment for the loan is the operation
or liquidation of the underlying collateral. In such cases, the
current value of the collateral, reduced by anticipated selling
costs, is used in place of discounted cash flows. Generally,
when a loan is deemed impaired, current period interest
previously accrued but not collected is reversed against current
period interest income. Income on such impaired loans is then
recognized only to the extent that cash in excess of any amounts
charged off to the allowance for loan losses is received and
where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought
fully current with respect to interest and principal and when,
in the judgment of management, the loans are estimated to be
fully collectible as to both principal and interest.
(g) LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or fair value. The
Company expects the loans to be sold with no gain or loss, in
the short-term.
(h) GOODWILL AND IDENTIFIABLE INTANGIBLES
Goodwill and identifiable intangibles represent the excess of
cost over the fair value of the net assets at the date acquired.
Goodwill is being amortized against income using the
straight-line method over 15 to 25 years. Identifiable
intangibles are being amortized against income using the
straight-line method over 5 to 15 years. UFC recorded $493,567
of goodwill in 2000 related to the acquisition of Valley shares.
No goodwill was recorded in 1999 or 1998.
F-8 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The Company assesses the recoverability of these intangible
assets by determining whether the amortization of the goodwill
and identifiable intangible balances over their remaining lives
can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of impairment, if
any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash
flows are not achieved.
(i) RESTRICTED STOCK INVESTMENTS
The Company holds stock in the Federal Home Loan Bank of Seattle
(FHLB) and the Federal Reserve Bank (FRB). FHLB and FRB stocks
are restricted as they may only be sold to another member
institution or the FHLB or FRB at their par values. Due to
restrictive terms, and the lack of a readily determinable market
value, FHLB and FRB stocks are carried at cost.
(j) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on straight-line and
accelerated methods over the estimated useful lives of 39 years
for the building, 5 to 40 years for improvements, and 3 to 10
years for furniture, fixtures and equipment.
(k) REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED
Real estate owned represents real estate assets acquired through
foreclosure or deed in lieu and is comprised of properties held
for sale and held for investment. Foreclosed assets held for
sale are carried at the lower of fair value minus estimated
costs to sell, or cost. Fair value is determined as the amount
that could be reasonably expected in a current sale (other than
a forced or liquidation sale) between a willing buyer and a
willing seller.
(l) STOCK-BASED COMPENSATION
Compensation cost for stock-based compensation to employees is
measured at the grant date using the intrinsic value method.
Under the intrinsic value method, compensation cost is the
excess of the market price of the stock at the grant date over
the amount an employee must pay to ultimately acquire the stock
and is recognized on a straight-line basis over any related
service period.
(m) INCOME TAXES
Deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences
between the financial statement carrying amounts of assets and
liabilities and their respective tax bases. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in tax expense in the period that includes the
enactment date.
(n) EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net
income by the weighted average number of common shares
outstanding during 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.
F-9 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(o) LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of the asset may
not be recoverable. An impairment loss is recognized if the sum
of the expected future cash flows is less than the carrying
amount of the asset. The amount of the impairment loss, if any,
is based on the asset's fair value, which may be estimated by
discounting the expected future cash flows. At December 31, 2000
and 1999, there were no assets that were considered impaired.
There were no impairment losses recognized during 2000, 1999 or
1998.
(p) MORTGAGE SERVICING RIGHTS
The Company recognizes as assets the rights to service mortgage
loans for others, whether acquired or internally originated.
Servicing assets are initially recorded at fair value based on
comparable market quotes and are amortized in proportion to and
over the period of estimated net servicing income. Servicing
assets are periodically evaluated for impairment by stratifying
the servicing assets based on predominant risk characteristics
of the underlying loans including loan type, note rate and loan
term. Servicing assets are included in other assets on the
accompanying consolidated statement of financial condition.
(q) COMPREHENSIVE INCOME
The Company is required to report its comprehensive income,
which includes net income, as well as other changes in
stockholders' equity that result from transactions and economic
events other than those with stockholders in a separate
statement. The Company's only significant element of other
comprehensive income is unrealized gains and losses on
securities available-for-sale.
(r) RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998
amounts to conform to the 2000 presentation.
(s) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" was issued. In June 2000,
SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of SFAS No. 133" was
issued. SFAS Nos. 133 and 138 establish accounting and reporting
standards requiring that derivative instruments (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS Nos. 133 and 138 require that
changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met.
The Company adopted the provisions of SFAS Nos. 133 and 138
effective January 1, 2001. As of December 31, 2000, the Company
was not engaged in hedging activities nor did it hold any
derivative instruments which required adjustments to carrying
values under SFAS Nos. 133 or 138. Therefore, the adoption had
no impact on the consolidated financial statements of the
Company.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - a Replacement of FASB Statement No. 125." SFAS
No. 140 revises accounting standards for securitizations and
transfers of financial assets and
F-10 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
collateral and requires certain disclosures, but carries
forward most of SFAS No. 125's provisions without change. SFAS
No. 140 is effective for recognition and reclassification of
collateral and disclosures relating to securitization
transactions and collateral for fiscal years ended after
December 15, 2000. Adoption of these provisions did not have a
material effect on the consolidated financial statements,
results of operations or liquidity of the Company. SFAS No. 140
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001.
Management expects that adoption of these provisions will not
have a material effect on the consolidated financial statements,
results of operations or liquidity of the Company.
(2) CASH ON HAND AND IN BANKS
The subsidiary banks are required to maintain an average reserve balance
with the FRB, or maintain such reserve in cash on hand. The amount of
this required reserve balance at December 31, 2000 was approximately
$817,000. An additional $225,000 compensating balance is required to be
maintained with the FRB for check clearing services.
(3) SECURITIES AVAILABLE-FOR-SALE
The amortized cost, unrealized gains and losses, and estimated fair
values of investment and mortgage-backed securities available-for-sale
at December 31 are as follows:
2000
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
U.S. Government and
federal agencies $ 23,783,367 111,558 (23,030) 23,871,895
Mortgage-backed securities 41,622,251 108,899 (195,457) 41,535,693
Municipal bonds 2,742,322 -- (24,634) 2,717,688
Corporate bonds and equity
securities 2,041,723 -- (103,086) 1,938,637
------------ ------------ ------------ ------------
$ 70,189,663 220,457 (346,207) 70,063,913
============ ============ ============ ============
1999
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
U.S. Government and
federal agencies $ 10,210,411 -- (416,193) 9,794,218
Mortgage-backed securities 40,260,666 89,533 (895,451) 39,454,748
Municipal bonds 2,094,961 2,414 (162,041) 1,935,334
Corporate bonds and equity
securities 2,041,273 -- (181,101) 1,860,172
------------ ------------ ------------ ------------
$ 54,607,311 91,947 (1,654,786) 53,044,472
============ ============ ============ ============
F-11 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Maturities of securities available-for-sale by contractual maturity at
December 31, 2000 are shown below. Maturities of securities do not
reflect repricing opportunities present in many adjustable rate
securities. At December 31, 2000 and 1999, $16,093,390 and $19,170,844,
respectively, of variable rate securities are included in securities
available-for-sale.
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ------------
Due within one year $ 1,000,000 997,540
Due after one year through five years 17,866,178 17,854,503
Due after five years through ten years 7,843,374 7,872,781
Due after ten years 1,857,860 1,803,396
------------ ------------
28,567,412 28,528,220
Mortgage-backed securities 41,622,251 41,535,693
------------ ------------
$ 70,189,663 70,063,913
============ ============
The Company has not entered into any swaps, options, or futures
contracts. Included in the municipal bonds and U.S. Government and
federal agencies security amounts are investments which have call
features. At December 31, 2000, the Company had securities callable
within one year with amortized cost and estimated fair value of
$16,947,465 and $16,916,919, respectively. The securities are primarily
included in the due after one year through five years category in the
table above.
There were no sales of securities available-for-sale during the year
ended December 31, 2000. Gross proceeds from sales of securities were
$10,123,123 and $7,594,567 for the years ended December 31, 1999 and
1998 respectively, resulting in gross gains of $30,357 and gross losses
of $0 in 1999, and gross gains of $63,880 and gross losses of $20,718 in
1998.
There are no significant concentrations of investments at December 31,
2000 (greater than 10% of stockholders' equity) in any individual
security issuer, except for U.S. Government or agency-backed securities.
Investment securities with amortized cost of $19,594,810 and $19,466,986
at December 31, 2000 and 1999, respectively, were pledged to secure
public and non-public deposits, federal funds borrowings and for other
purposes required or permitted by law. The fair value of securities
pledged at December 31, 2000 and 1999 was $19,584,013 and $18,218,551,
respectively.
F-12 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(4) LOANS RECEIVABLE, NET
Loans receivable, net, at December 31 are summarized as follows:
2000 1999
------------- -------------
First mortgage loans and contracts secured by real estate $ 74,951,805 66,107,637
Commercial real estate loans 65,268,215 30,594,201
Commercial loans 59,575,759 60,060,456
Auto and other consumer loans 22,245,120 11,275,882
Second mortgage consumer loans 17,217,411 7,702,056
Agricultural loans 12,232,631 9,804,791
Tax exempt municipal loans 1,489,128 1,427,646
Savings account and other loans 1,191,734 960,944
------------- -------------
254,171,803 187,933,613
Less: Allowance for loan losses 2,525,545 1,585,819
------------- -------------
$ 251,646,258 186,347,794
============= =============
A summary of activity in the allowance for loan losses for the years
ended December 31 follows:
2000 1999 1998
------------- ------------- -------------
Balance, beginning of year $ 1,585,819 1,484,680 845,905
Balance acquired 392,857 -- 347,900
Provision for loan losses 1,628,569 203,500 335,000
Losses charged off, net of recoveries (1,081,700) (102,361) (44,125)
------------- ------------- -------------
Balance, end of year $ 2,525,545 1,585,819 1,484,680
============= ============= =============
At December 31, 2000, the Company had no concentrations of loans which
exceeded 10% of total loans other than the categories disclosed above.
Loans receivable include approximately $88,882,000 and $44,984,000 in
adjustable rate loans at December 31, 2000 and 1999, respectively.
Nonaccrual loans amounted to approximately $903,000 and $230,000 at
December 31, 2000 and 1999, respectively. If interest on nonaccrual
loans had been accrued, such income would have approximated $264,000 and
$14,000, respectively. Loans contractually past due ninety days or more
aggregating approximately $258,000 on December 31, 2000 and
approximately $117,000 on December 31, 1999 were on accrual status. Such
loans are deemed adequately secured and in the process of collection.
Impaired loans at December 31, 2000 and 1999 are approximately
$1,200,000 and $500,000, respectively. The related reserves for
impairment included in the allowance for loan losses at December 31,
2000 and 1999 are approximately $324,000 and $79,000, respectively. The
average recorded investment in impaired loans for the years ended
December 31, 2000, 1999 and 1998 was approximately $850,000, $70,000 and
$50,000, respectively. Interest income recognized on impaired loans
during 2000, 1999 and 1998 was approximately $128,000, $41,000 and
$38,000, respectively.
F-13 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
At December 31, 2000 and 1999 approximately $52,852,000 and $55,691,000,
respectively, of the Company's loans receivable are obligations of
customers located outside of the Company's trade area.
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and letters of credit and involve, to varying degrees, elements
of credit risk. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Financial instruments outstanding at December 31 whose contract amounts
represent credit risk include:
2000 1999
------------ ------------
Unused lines of credit $ 33,328,000 12,910,000
Commitments outstanding - fixed rate 3,392,000 3,609,000
Letters of credit 176,000 77,219
============ ============
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31 is summarized as follows:
2000 1999
------------ ------------
Loans receivable $ 2,592,371 1,752,476
Mortgage-backed securities 298,325 229,682
Investment securities 434,038 265,404
Time deposits in banks and other interest-earning assets 26,128 11,100
------------ ------------
$ 3,350,862 2,258,662
============ ============
(6) PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
2000 1999
------------ ------------
Land $ 1,180,331 714,913
Building and improvements 4,345,386 2,677,611
Furniture, fixtures and equipment 2,811,132 1,665,768
Construction in progress -- 936,812
------------ ------------
8,336,849 5,995,104
Accumulated depreciation (1,950,135) (1,122,434)
------------ ------------
$ 6,386,714 4,872,670
============ ============
F-14 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
At December 31, 1999 there is included in building and improvements
approximately $530,000 related to a duplicate facility which was held
for sale. In 2000, this property was reclassified to real estate owned
(see Note 7).
(7) REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED
During 2000, the Company was required by its regulators to reclassify to
real estate owned an asset held for the production of income which was
previously classified in premises and equipment. The asset is being
carried at cost, less accumulated depreciation. Depreciation is being
computed using the straight-line method over the estimated useful life
of the asset. The asset is currently being leased (see Note 14).
During 2000, the Company sold real estate and other personal property
acquired through foreclosure with an aggregate book value of
approximately $105,000 and reported no gain or loss. During 1999, the
Company sold real estate held for investment with a book value of
approximately $325,000 and recorded a gain of approximately $5,000 on
the sale. Also during 1999, the Company sold real estate and other
personal property acquired through foreclosure with an aggregate book
value of $342,000 and reported no gain or loss.
The Company transferred loans of $330,365 and $0 to real estate and
other personal property owned during the years ended December 31, 2000
and 1999, respectively.
(8) DEPOSITS
Deposits at December 31 are summarized as follows:
2000 1999
---------------------------------------------- ----------------------------
Weighted
Average rate Amount % Amount %
-------------- ------------- ------- ------------ -------
Demand accounts 0.00% $ 33,348,678 12.7% $ 18,750,554 10.4%
NOW and money market accounts 3.55% 52,018,226 20.0 23,332,776 13.0
Savings accounts 4.30% 49,203,249 18.8 48,295,547 26.8
Certificates of deposit: 2.00 to 3.99% 5,820 -- 8,657 --
4.00 to 4.99% 409,215 .1 15,772,283 8.8
5.00 to 5.99% 35,991,330 13.8 59,323,533 33.0
6.00 to 6.99% 76,711,121 29.4 14,398,188 8.0
7.00 to 7.99% 13,491,647 5.2 -- --
------------- ------- ------------ -------
Total certificates of deposit 6.35% 126,609,133 48.5 89,502,661 49.8
------------- ------- ------------ -------
Total interest-bearing deposits 5.27% 227,830,608 87.3 161,130,984 89.6
------------- ------- ------------ -------
4.59% $ 261,179,286 100.0% $179,881,538 100.0%
============= ======= ============ =======
F-15 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Scheduled maturities of certificates of deposit at December 31, 2000 are
as follows:
Due within one year $ 98,015,266
Due within two to three years 22,862,191
Due within four to five years 5,731,676
------------
$126,609,133
============
Certificates of deposit of $100,000 or more are approximately
$30,752,000 and $15,894,000 at December 31, 2000 and 1999, respectively.
Amounts in excess of $100,000 are not insured by a federal agency.
Interest expense on deposits for the years ended December 31 is
summarized as follows:
2000 1999 1998
------------ ------------ ------------
NOW and money market accounts $ 1,461,675 479,045 267,275
Savings accounts 2,099,262 1,837,886 1,610,134
Certificates of deposit 7,164,972 4,562,657 4,213,514
------------ ------------ ------------
$ 10,725,909 6,879,588 6,090,923
============ ============ ============
(9) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31 are summarized as
follows:
2000 1999
------------ ------------
5.55% to 7.48% fixed rate advances, interest payable monthly $ 46,175,000 40,425,000
5.52% to 6.12% putable advances, put options exercisable quarterly, interest
payable monthly 4,000,000 6,000,000
6.81% guaranteed spread advance, interest payable monthly 2,000,000 --
------------ ------------
$ 52,175,000 46,425,000
============ ============
The weighted average interest rate on these advances was 6.57% and 5.77%
at December 31, 2000 and 1999, respectively.
Contractual principal repayments on advances from the Federal Home Loan
Bank subsequent to December 31, 2000 are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2001 $ 24,675,000
2002 14,500,000
2003 9,000,000
2004 --
2005 2,000,000
Thereafter 2,000,000
------------
$ 52,175,000
============
F-16 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Advances from the FHLB are secured by pledges of FHLB stock and a
blanket assignment of Heritage's and Heritage State's unpledged,
qualifying mortgage loans, mortgage-backed securities and U.S.
Government and federal agency securities.
At December 31, 2000, the Company had a Cash Management Advance (CMA)
note with a maximum allowable advance of $81,550,200, subject to
available collateral limits. The CMA note expires September 14, 2001.
There were no outstanding advances on the CMA note as of December 31,
2000.
At December 31, 2000, Heritage and Heritage State's current established
available FHLB advance credit lines are 30% and 10% of assets,
respectively. Valley's FHLB borrowing capacity was approximately $3.0
million at December 31, 2000.
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31 consist of
the following:
2000
---------------------------------------------------------------
ESTIMATED FAIR
WEIGHTED BOOK VALUE VALUE
REPURCHASE AVERAGE OF UNDERLYING OF UNDERLYING
AMOUNT RATE SECURITIES SECURITIES
------------ ------------ ------------ ------------
To repurchase within:
1 - 30 days $ 4,823,617 5.98% $ 6,899,271 6,895,091
31 - 90 days 3,836,589 6.42 4,460,346 4,466,950
Greater than 90 days 2,705,493 6.13 4,618,208 4,575,429
------------ ------------ ------------
$ 11,365,699 6.16% $ 15,977,825 15,937,470
============ ============ ============
1999
---------------------------------------------------------------
ESTIMATED FAIR
WEIGHTED BOOK VALUE VALUE
REPURCHASE AVERAGE OF UNDERLYING OF UNDERLYING
AMOUNT RATE SECURITIES SECURITIES
------------ ------------ ------------ ------------
To repurchase within:
1 - 30 days $ 1,646,328 5.38% $ 2,368,390 2,313,161
31 - 90 days 854,827 5.18 2,268,389 2,191,401
Greater than 90 days 9,044,804 5.66 11,022,544 11,688,380
------------ ------------ ------------
$ 11,545,959 5.58% $ 15,659,323 16,192,942
============ ============ ============
The securities underlying agreements to repurchase are for the same
securities originally sold and are held in a custody account by a third
party. For the year ended December 31, 2000 and 1999, securities sold
under agreements to repurchase averaged approximately $11,485,000 and
$10,299,000, respectively, and the maximum outstanding at any month end
during the year was approximately $13,863,000 and $11,546,000,
respectively.
F-17 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(11) LINES OF CREDIT
Heritage established a Federal Funds line with Wells Fargo. The total
line is $10,000,000 with a daily interest rate equal to the Wells Fargo
federal funds rate, which was 6.50% at December 31, 2000. Advances up to
$5,000,000 are unsecured, and advances over $5,000,000 are secured by
investment securities. There were no amounts outstanding at December 31,
2000; however, borrowings were advanced during 2000.
UFC also has a line of credit of $3,000,000 with Wells Fargo with an
interest rate of 1.75% over the Wells Fargo federal funds rate, which
was 8.25% at December 31, 2000. This line is secured by UFC's Heritage
stock and expires October 30, 2001. Interest is payable quarterly.
Principal is payable at maturity. The principal balance outstanding at
December 31, 2000 was $1,250,000.
Valley has a line of credit of $3,000,000 at Wells Fargo at December 31,
2000, with a daily interest rate equal to the Wells Fargo federal funds
rate, which was 6.50% at December 31, 2000. There were no amounts
outstanding at December 31, 2000; however, borrowings were advanced
during 2000. All outstanding principal and unpaid accrued interest is
due and payable the next business day. Borrowings are secured by
securities available-for-sale.
In addition, Valley has a line of credit of $3,000,000 at M & I
Thunderbird Bank (M&I) at December 31, 2000, with an interest rate equal
to the M & I federal funds rate, which was 6.31% at December 31, 2000.
There were no amounts outstanding at December 31, 2000; however,
borrowings were advanced during 2000. All outstanding principal and
unpaid accrued interest is due and payable two business days from date
of advance. Borrowings are secured by securities available-for-sale.
(12) INCOME TAXES
Income tax expense for the years ended December 31 is summarized as
follows:
FEDERAL STATE TOTAL
------------ ------------ ------------
2000:
Current $ 1,128,159 193,132 1,321,291
Deferred (71,352) 37,538 (33,814)
------------ ------------ ------------
$ 1,056,807 230,670 1,287,477
============ ============ ============
1999:
Current $ 1,301,647 279,196 1,580,843
Deferred (40,571) (1,033) (41,604)
------------ ------------ ------------
$ 1,261,076 278,163 1,539,239
============ ============ ============
1998:
Current $ 1,057,210 223,945 1,281,155
Deferred 92,662 24,778 117,440
------------ ------------ ------------
$ 1,149,872 248,723 1,398,595
============ ============ ============
F-18 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Income tax expense for the years ended December 31 differs from
"expected" income tax expense (computed by applying the Federal
corporate income tax rate of 34% to income before income taxes) as
follows:
2000 1999 1998
------------ ------------ ------------
Computed "expected" tax expense $ 1,170,485 1,362,894 1,246,445
Increase (decrease) resulting from:
State taxes, net of Federal income
tax effects 152,242 183,588 164,157
Goodwill amortization 64,548 40,164 25,544
Tax-exempt interest (55,867) (45,085) (18,307)
Equity in undistributed earnings of
Valley Bancorp, Inc. -- (42,965) (527)
Other, net (43,931) 40,643 (18,717)
------------ ------------ ------------
$ 1,287,477 1,539,239 1,398,595
============ ============ ============
Differences between the financial statement carrying amounts and the tax
bases of assets and liabilities that give rise to significant portions
of deferred tax assets and liabilities at December 31 are as follows:
2000 1999
------------ ------------
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 914,244 629,487
Investments, due to difference in basis 118,975 107,594
Premises and equipment and real estate owned, due to
difference in basis 59,152 59,159
Basis differences, due to purchase accounting 23,726 7,568
Unrealized losses on securities available-for-sale 48,501 600,989
Other 36,632 81,226
------------ ------------
Total gross deferred tax assets 1,201,230 1,486,023
------------ ------------
Deferred tax liabilities:
Loans, due to difference in basis 195,091 221,633
Stock in FHLB, principally due to stock dividends not
recognized for tax purposes 347,772 267,782
Premises and equipment, principally due to differences in
depreciation 207,760 249,968
Prepaid SAIF assessment 6,749 6,533
------------ ------------
Total gross deferred tax liabilities 757,372 745,916
------------ ------------
Net deferred tax asset $ 443,858 740,107
============ ============
F-19 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the existence of, or generation
of, taxable income in the periods which those temporary differences are
deductible. Management considers the scheduled reversal of deferred tax
liabilities, taxes paid in carryback years, projected future taxable
income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and estimates of future
taxable income over the periods which the deferred tax assets are
deductible, at December 31, 2000 and 1999 management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences.
Retained earnings at December 31, 2000 includes approximately $3,477,000
for which no provision for Federal income tax has been made. This amount
represents the base year income tax bad debt reserve. This amount is
treated as a permanent difference and deferred taxes are not recognized
unless it appears this reserve will be reduced and thereby result in
taxable income in the foreseeable future. The Company is not currently
contemplating any changes to its business or operations which would
result in a recapture of the base year bad debt reserve into taxable
income.
(13) MORTGAGE SERVICING RIGHTS
Total servicing rights, net of accumulated amortization, were
approximately $9,000 and $102,000 at December 31, 2000 and 1999,
respectively. Servicing rights of $169,000 and $105,000 were capitalized
in 2000 and 1999, respectively. Amortization expense of $29,141, $2,679
and $0 was recognized in 2000, 1999, and 1998, respectively. There were
no impairment losses recognized in 2000, 1999, or 1998. At December 31,
2000, the estimated fair value of the Company's servicing assets
approximates their carrying value.
In November 2000, Heritage entered into an agreement with an unrelated
third party to sell all of its servicing rights associated with Montana
Board of Housing loans existing at November 30, 2000 which had
outstanding principal balances of approximately $49,600,000. The sales
price was 1.03% of the outstanding principal balance at close of
business November 30, 2000, or approximately $510,000. A gain on the
sale of approximately $255,000 is included in other non-interest income
for the year ended December 31, 2000. At December 31, 2000, Heritage has
a receivable related to the sale of approximately $258,000 due in March
2001. The receivable is included in other assets in the accompanying
consolidated statement of financial condition.
Real estate loans serviced for others, which are not included in the
accompanying consolidated financial statements, totaled approximately
$53,933,000 and $39,742,000 at December 31, 2000 and 1999, respectively.
Approximately $49,547,000 of the real estate loans serviced for others
at December 31, 2000 were being serviced under a short-term
sub-servicing agreement which expires in February 2001.
F-20 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(14) LEASES
The Company as Lessor:
In April 2000, Heritage entered into an operating lease to rent a
duplicate facility which had been held for sale in 1999. The lease is
for a period of three years, terminating in April 2003, with one
three-year option to renew. Monthly rentals are $8,500, with an increase
upon renewal not to exceed 6%. The lease includes a purchase option for
a price of $650,000, with 25% of all lease payments applied to the
purchase price.
At December 31, 2000, the cost of the asset under lease was
approximately $546,500. Accumulated depreciation was $14,550 at December
31, 2000. The net carrying value of approximately $531,950 is included
in real estate and other personal property owned on the accompanying
December 31, 2000 consolidated statement of financial condition.
Future minimum rentals under this lease are as follows:
YEAR ENDING DECEMBER 31,
2001 $ 102,000
2002 102,000
2003 34,000
-------------
$ 238,000
=============
For the year ended December 31, 2000, rental income recorded included in
the accompanying consolidated statement of income was $76,500.
The Company as Lessee:
The Company leases certain land and office space under noncancelable
operating leases. Total rental expense for the years ended December 31,
2000, 1999 and 1998 was $194,120, $31,440 and $19,799, respectively.
The total future minimum lease payments required under operating leases
which have initial or remaining noncancelable lease terms in excess of
one year at December 31, 2000 are as follows:
YEAR ENDING DECEMBER 31,
2001 $ 222,733
2002 204,427
2003 201,773
2004 201,773
2005 199,500
Thereafter 1,055,881
-------------
$ 2,086,088
=============
F-21 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(15) RELATED PARTIES
Central Financial Services (CFS) provides various management services to
the Company, including accounting, tax and insurance advisory services,
and investment, personnel and regulatory consulting. CFS is owned by
UFC's Chairman of the Board of Directors and largest shareholder. The
charges were $348,053, $308,691 and $209,335 for the years ended
December 31, 2000, 1999, and 1998, respectively.
The Company participates in loans with a bank controlled by UFC's
Chairman of the Board of Directors. At December 31, 2000 and 1999, the
outstanding balances of loans purchased from this bank were $5,794,343
and $6,231,237, respectively.
At December 31, 2000, the Board of Directors and officers of the Company
had approximately $2,614,000 on deposit with subsidiary banks.
At December 31, 2000 and 1999, the Board of Directors and executive
officers of the Company had $1,762,469 and $1,372,227, respectively, in
outstanding loans with Heritage. These loans were made on substantially
the same terms, including interest rates and collateral, as those
prevailing at the time for comparable risk of collectibility.
A summary of activity with respect to aggregate loans to related parties for the
year ended December 31, 2000 follows:
Balance, beginning of year $ 1,372,227
New loans 667,201
Repayments (276,959)
-------------
Balance, end of year $ 1,762,469
=============
(16) EMPLOYEE BENEFIT PLANS
Heritage and Heritage State have a savings plan under Section 401(k) of
the Internal Revenue Code. Eligible employees can contribute up to 15%
of their monthly wages. Heritage and Heritage State matched an amount
equal to 75% of the employee's contribution, up to 6% of total wages.
Participants are at all times fully vested in their contributions and
are immediately vested in the employer's contributions. Heritage and
Heritage State 401(k) contributions and administrative costs were
approximately $115,000, $107,000 and $104,000 during the years ended
December 31, 2000, 1999 and 1998, respectively.
Valley has a savings and profit sharing plan for employees meeting
certain service requirements. This plan qualifies under Section 401(k)
of the Internal Revenue Code. The plan allows each employee to
contribute up to 20% of his or her annual compensation. At the
discretion of the Board of Directors, Valley may also make additional
contributions, dependent on profits, but not to exceed 25% of the
employee's annual compensation after taking into consideration Valley's
previous matching contributions. During the year ended December 31,
2000, Valley contributed approximately $20,000 to the plan.
F-22 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Heritage has a deferred compensation agreement with an employee that
provides for predetermined periodic payments over 15 years upon
retirement or death. In the event of acquisition of the Company by a
third party, disability or early retirement, the predetermined payments
are based on years of service. Amounts expensed under this agreement
were approximately $8,500 for the year ended December 31, 2000 and
$3,300 for each of the years ended December 31, 1999 and 1998. Heritage
owns two single premium insurance policies in connection with this
agreement. The policies have a cash value, which is included in other
assets on the accompanying consolidated statements of financial
condition, of approximately $297,000 and $282,000 at December 31, 2000
and 1999, respectively.
In October 1999, Heritage adopted a supplemental retirement agreement
with an employee that provides for salary continuation benefits upon
retirement, disability, or death. The employee is vested in the plan 10%
for every plan year of employment and 100% vested after 10 plan years.
The effective date for vesting is January 1, 1997. The employee is
considered 100% vested upon determination of full or partial disability,
death, or change of control, with payment made in a lump sum within 60
days. The normal retirement benefit will be paid in either a lump sum or
at the election of the employee an annuity shall be purchased using all
available accrued amounts. The amount expensed under this agreement was
approximately $4,900 and $970, respectively, for the years ended
December 31, 2000 and 1999.
(17) STOCK OPTION PLANS
In January 2000, the United Financial Corp. 2000 Long-Term Incentive and
Stock Option Plan (the Plan) was approved by the Company's Board of
Directors. The Plan provides for the grant of incentive stock options
(ISOs) and non-qualified stock options to certain full and part-time
employees and directors of the Company. The plan provides for award of
options for a maximum of 120,000 shares of Company common stock. Vesting
for each award is at the discretion of the compensation committee of the
Board of Directors. The term of the options is 10 years for ISOs and for
non-qualified stock options. The option price for all ISOs granted under
the Plan shall be determined by the compensation committee, but shall
not be less than 100% of the fair market value of the common stock at
the date of grant of such option. The option price for all non-qualified
options shall also be determined by the compensation committee. Options
granted to 10% or greater shareholders will be based upon 110% of market
value and can not be exercised before five years. A change in control,
as defined in the Plan, will immediately vest all options upon
completion of such a change in control.
In May 2000, the Board of Directors granted options to acquire 31,800
shares of common stock. The grant of these options and adoption of the
Plan was ratified by a vote of the Company's shareholders at the annual
meeting in May 2000. The Company's existing stock appreciation rights
plan, pursuant to which no stock appreciation rights were granted, was
rescinded by the Board of Directors upon its approval of the Plan.
F-23 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
At December 31, 2000, total shares available for option grants under the
Plan were 88,200. Changes in shares issuable under options granted by
the Company for the year ended December 31, 2000 are summarized as
follows:
OPTIONS OUTSTANDING
-----------------------------------
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
-------------- ------------------
Balance at January 1, 2000 -- --
Granted 31,800 $ 14.875
Canceled -- --
Became exercisable -- --
--------------
31,800 $ 14.875
Balance at December 31, 2000 ==============
The stock options outstanding at December 31, 2000 consist of the
following:
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS
SHARES EXERCISE PRICE REMAINING LIFE EXERCISABLE
- ------------------ ------------------ ------------------ ------------------
31,800 $ 14.875 9.5 years --
================== ================== ================== ==================
Valley has a stock option plan for officers and directors (the 1995
Plan). Options are granted at the discretion of Valley's Board of
Directors. The option price for all options granted under the 1995 Plan
shall not be less than 100% of the fair market value of the common stock
on the date of grant of such option. The options granted are available
to be exercised at the rate of 20% per year from the date of grant and
expire ten years from date of grant. Valley has reserved 200,000 shares
of common stock for exercise of options under the 1995 Plan. At December
31, 2000, total shares available for option grants under the 1995 Plan
were 103,750. The following table is presented to summarize stock option
activity:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------------------
WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
-------------- ------------------ -------------- ------------------
Balance at January 1, 2000 94,250 $ 5.00 47,650 $ 5.00
Granted -- -- -- --
Canceled -- -- -- --
Became exercisable -- -- 17,650 5.00
-------------- --------------
Balance at December 31, 2000 94,250 5.00 65,300 5.00
============== ==============
The stock options outstanding at December 31, 2000 consist of the
following:
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS
SHARES EXERCISE PRICE REMAINING LIFE EXERCISABLE
- ------------------ ------------------ ------------------ ------------------
94,250 5.00 6.3 years 62,900
================== ================== ================== ==================
F-24 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The pro forma per share weighted-average fair value of stock options
granted during 2000 was $2.30 using the Black-Scholes option-pricing
model with the following assumptions: expected dividend yield 6.40%,
risk-free interest rate of 6.74%; volatility of 23.35% and expected life
of 5 years.
Based on the intrinsic value method, no compensation cost has been
recognized for any stock option grants in the accompanying financial
statements. Had the Company determined compensation cost based on the
estimated fair value at the grant date for its stock options, the
Company's net income and net income per share for the year ended
December 31, 2000 would have been as follows:
2000
--------------
Net income: As reported $ 2,003,954
Pro forma 1,978,199
Basic earnings per share: As reported $ 1.22
Pro forma 1.20
Diluted earnings per share: As reported $ 1.22
Pro forma 1.20
On February 26, 1996, Valley issued 25,000 common stock warrants to an
unrelated third party in exchange for services. The warrants are
exercisable at $5.00 per warrant for a period of four years beginning
February 26, 1997.
(18) EARNINGS PER SHARE
The following table sets forth the compilation of basic and diluted
earnings per share for the years ended December 31:
2000 1999 1998
------------ ------------ ------------
Weighted average shares outstanding during the year
on which basic earnings per share is calculated 1,646,545 1,684,246 1,587,711
Add: incremental shares under stock option plans 154 -- --
------------ ------------ ------------
Average outstanding shares on which diluted earnings
per share is calculated 1,646,699 1,684,246 1,587,711
============ ============ ============
Net income applicable to common stockholders, basic $ 2,003,954 2,469,272 2,267,420
Less: reduction of proportionate share of Valley net
income assuming option and warrant exercises (3,126) -- --
------------ ------------ ------------
Net income applicable to common stockholders, diluted $ 2,000,828 2,469,272 2,267,420
============ ============ ============
Basic earnings per share $ 1.22 1.47 1.43
============ ============ ============
Diluted earnings per share $ 1.22 1.47 1.43
============ ============ ============
F-25 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The Company had no antidilutive potential common stock for the year
ended December 31, 2000. The Company had no potential common stock
during the years ended December 31, 1999 or 1998.
(19) CONDENSED QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
YEAR ENDED DECEMBER 31, 2000
----------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Interest income $ 6,801,018 6,637,034 6,202,810 5,868,022
Interest expense 4,060,835 4,018,610 3,608,983 3,289,593
------------ ------------ ------------ ------------
Net interest income 2,740,183 2,618,424 2,593,827 2,578,429
Provision for loan losses (252,819) (847,125) (364,250) (164,375)
Non-interest income 1,150,784 1,083,584 1,050,483 805,081
Non-interest expense (2,499,479) (2,564,950) (2,277,828) (2,207,367)
------------ ------------ ------------ ------------
Income before income taxes
and minority interest 1,138,669 289,933 1,002,232 1,011,768
Income tax expense (434,568) (107,213) (347,994) (397,702)
------------ ------------ ------------ ------------
Net income before minority interest 704,101 182,720 654,238 614,066
Minority interest (34,078) (14,907) (46,976) (55,210)
------------ ------------ ------------ ------------
Net income $ 670,023 167,813 607,262 558,856
============ ============ ============ ============
Net income per share:
Basic $ 0.41 0.10 0.37 0.34
============ ============ ============ ============
Diluted $ 0.41 0.10 0.37 0.34
============ ============ ============ ============
YEAR ENDED DECEMBER 31, 1999
----------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Interest income $ 4,631,360 4,554,257 4,211,608 3,943,410
Interest expense 2,614,442 2,547,594 2,292,998 2,101,434
------------ ------------ ------------ ------------
Net interest income 2,016,918 2,006,663 1,918,610 1,841,976
Provision for loan losses (35,000) (53,500) (75,000) (40,000)
Non-interest income 925,102 868,953 919,135 817,021
Non-interest expense (1,893,963) (1,761,713) (1,765,524) (1,681,167)
------------ ------------ ------------ ------------
Income before income taxes 1,013,057 1,060,403 997,221 937,830
Income tax expense (385,135) (416,415) (373,305) (364,384)
------------ ------------ ------------ ------------
Net income $ 627,922 643,988 623,916 573,446
============ ============ ============ ============
Net income per share:
Basic $ 0.38 0.38 0.37 0.34
============ ============ ============ ============
Diluted $ 0.38 0.38 0.37 0.34
============ ============ ============ ============
F-26 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(20) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Company's operations. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines
that involve quantitative measures of the assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting guidelines. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set
forth in the tables below). As of December 31, 2000, the Company met all
capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notifications from the federal
banking agencies categorized Heritage, Heritage State, and Valley as
"well capitalized" under the regulatory framework for prompt corrective
action (PCA). To be categorized as "well capitalized" the banks must
maintain minimum ratios as set forth in the following tables. There are
no conditions or events that management believes have changed the
institutions' PCA category.
Minimum to be "well
Minimum for capital capitalized" under PCA
Actual adequacy purposes provisions
---------------------- ---------------------- -----------------------
Consolidated: (in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------- ---------- --------- ---------- --------- ---------- ----------
December 31, 2000:
Total capital $ 32,437 12.15% $ 21,345 8.0% $ N/A --
Tier I capital 29,912 11.21 -- -- N/A --
Tier I leverage 29,912 8.47 14,119 4.0 N/A --
Tangible capital 29,912 8.30 14,412 4.0 N/A --
December 31, 1999:
Total capital 25,429 14.10 14,477 8.0 N/A --
Tier I capital 28,392 15.75 -- -- N/A --
Tier I leverage 28,392 10.54 10,776 4.0 N/A --
Tangible capital 28,392 10.52 10,799 4.0 N/A --
Heritage:
- ---------
December 31, 2000:
Total capital 21,373 11.39 15,014 8.0 18,768 10.0
Tier I capital 19,496 10.39 -- -- 11,261 6.0
Tier I leverage 19,496 7.09 8,246 3.0 13,744 5.0
Tangible capital 19,496 7.09 4,123 1.5 -- --
December 31, 1999:
Total capital 21,087 13.17 12,813 8.0 16,016 10.0
Tier I capital 19,634 12.26 -- -- 9,610 6.0
Tier I leverage 19,634 7.86 7,492 3.0 12,486 5.0
Tangible capital 19,634 7.86 3,746 1.5 -- --
F-27 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Minimum to be "well
Minimum for capital capitalized" under PCA
Actual adequacy purposes provisions
---------------------- ---------------------- -----------------------
Heritage State: Amount Ratio Amount Ratio Amount Ratio
- -------------- ---------- --------- ---------- --------- ---------- ----------
December 31, 2000:
Total capital $ 1,859 12.60% $ 1,181 8.0% $ 1,476 10.0%
Tier I capital 1,725 11.69 590 4.0 885 6.0
Tier I leverage 1,725 9.76 707 4.0 883 5.0
December 31, 1999:
Total capital 1,706 12.77 1,069 8.0 1,336 10.0
Tier I capital 1,573 11.78 534 4.0 801 6.0
Tier I leverage 1,573 8.60 731 4.0 914 5.0
Valley:
- -------
December 31, 2000:
Total capital 8,220 12.31 5,341 8.0 6,676 10.0
Tier I capital 7,705 11.54 2,671 4.0 4,006 6.0
Tier I leverage 7,705 11.38 2,707 4.0 3,384 5.0
The total capital and Tier I capital ratios are determined based on
risk-weighted assets. The Tier I leverage and tangible capital ratios
are determined based on tangible assets.
Savings banks, such as Heritage, that meet or exceed their capital
requirements may make capital distributions during any one year up to an
amount that would reduce its surplus capital ratio to no less than
one-half of its surplus capital ratio at the beginning of the calendar
year. State banks, such as Heritage State and Valley, may pay dividends
up to the total of the prior two years earnings without permission of
the State regulator.
(21) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value for financial
instruments, whether or not recognized in the statements of financial
condition. A financial instrument is defined as cash, evidence of an
ownership interest in an entity, or a contract that both imposes a
contractual obligation on one entity to deliver cash or another
financial instrument to a second entity.
The following assumptions and methods were used by the Company in
estimating the fair value of its financial instruments:
FINANCIAL ASSETS. Due to the liquid nature of the instruments,
the carrying value of cash and cash equivalents and time
deposits in banks approximates fair value. For all securities
available-for-sale, the fair value is based upon quoted market
prices. The fair value of loans receivable held by Heritage was
obtained from the Office of Thrift Supervision Risk Management
Division Analysis (OTS Analysis). The OTS Analysis primarily
employs the discounted cash flow method which estimates fair
value by discounting the cash flows the instruments are expected
to generate by the yields currently available to investors on
instruments of comparable risk and duration. Therefore, to
calculate present value, the OTS model has assumptions about the
size and timing of expected cash flows and appropriate discount
rates. The fair value of loans receivable was estimated by
discounting future cash
F-28 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
flow using current rates at which similar loans would be made.
The fair value of loans receivable for Valley and Heritage State
was obtained from an internally generated fair value model which
primarily employs the discounted cash flow method which
estimates fair value by discounting the cash flows the
instruments are expected to generate by the yields currently
available to investors on instruments of comparable risk and
duration. Therefore, to calculate present value, the model has
assumptions about the size and timing of expected cash flows and
appropriate discount rates. The fair value of loans receivable
was estimated by discounting future cash flow using current
rates at which similar loans would be made. The fair value of
loans held for sale approximates carrying fair, as the carrying
value is the lower of cost or fair value, and the Company
expects the loans to be sold, with no gain or loss, in the
short-term. The fair value of restricted stock approximates
redemption value. The fair value of accrued interest receivable
approximates book value as the Company expects contractual
receipt in the near-term. The fair value of the investment in
Valley Bancorp, Inc. was based on the current market value of
Valley stock at December 31, 1999.
FINANCIAL LIABILITIES. The fair value of NOW, money market
accounts, demand accounts and non-term savings deposits
approximates book values as rates are periodically adjusted to
market rates. The fair value of time deposits held by Heritage
was obtained from the OTS Analysis. The fair value of time
deposits was estimated by discounting the future cash flows
using current rates for similar deposits. The fair value of time
deposits held by Valley and Heritage State was obtained from an
internally generated fair value model. The fair value of time
deposits was estimated by discounting future cash flow using
current rates at which deposits would be acquired. Because the
interest rate on the line of credit approximates the Company's
current long-term borrowing rate, the fair value of the line of
credit approximates the carrying value. The fair value of FHLB
advances and securities sold under agreements to repurchase was
obtained from the OTS Analysis. The fair value of accrued
interest payable approximates book value due to contractual
payment in the near-term.
OFF-BALANCE SHEET. Commitments made to extend credit represent
commitments for loan originations, the majority of which are
contracted for immediate sale and therefore no fair value
adjustment is necessary.
LIMITATIONS. Fair value estimates are made at a specific point
in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular
instrument. Because no market exists for a significant portion
of the Company's financial instruments, fair value estimates are
based on judgments regarding comparable market interest rates,
future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax effect of
the difference between the fair value and carrying value of financial
instruments can have a significant effect on fair value estimates and
have not been considered in the estimates presented herein.
F-29 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The approximate book value and fair value of the Company's financial
instruments as of December 31 are as follows:
2000 1999
---------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 19,451,000 19,451,000 11,457,000 11,457,000
Securities available-for-sale 70,064,000 70,064,000 53,044,000 53,044,000
Loans receivable, net 251,646,000 249,495,000 186,348,000 187,500,000
Loans held for sale 2,981,000 2,981,000 1,191,000 1,191,000
Restricted stock 3,709,000 3,709,000 3,046,000 3,046,000
Investment in Valley Bancorp, Inc. -- -- 4,549,000 4,815,000
Accrued interest receivable 3,351,000 3,351,000 2,259,000 2,259,000
Financial liabilities:
Deposits 261,179,000 261,878,000 179,882,000 179,384,000
FHLB advances and securities sold under
agreements to repurchase 63,541,000 63,458,000 57,971,000 57,244,000
Line of credit 1,250,000 1,250,000 -- --
Accrued interest payable 2,475,000 2,475,000 1,528,000 1,528,000
(22) COMMITMENTS AND CONTINGENCIES
Heritage has sold loans to various investors in the secondary market
under sales agreements which contain repurchase provisions. Under the
repurchase provisions, Heritage may be required to repurchase a loan if
a borrower fails to make three monthly payments within 120 days after
the sale of the loan. The balance of loans sold with repurchase
provisions remaining at December 31, 2000 is approximately $13,230,000.
There were no loans repurchased during 2000.
In June 1997, Heritage and Heritage State entered into a five-year
service contract for data processing services. In October 1995, Valley
entered into a seven-year service contract for data processing services.
In the event of early termination of either of these service contracts
by the Company, the Company has agreed to pay an amount equal to fifty
percent of the average monthly fee paid for services multiplied by the
number of months remaining under the term of the contract.
The Company is a defendant in legal proceedings arising in the normal
course of business. In the opinion of management, after consultation
with legal counsel, the disposition of pending litigation will not have
a material effect on the Company's consolidated financial position,
results of operations, or liquidity.
F-30 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(23) PARENT COMPANY INFORMATION (CONDENSED)
The summarized financial information for United Financial Corp. is
presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31,
-----------------------------
ASSETS 2000 1999
------ ------------ ------------
Cash and cash equivalents ($63,458 and $373,232, respectively, deposited
with Heritage) $ 98,430 556,592
Securities available-for-sale 1,862,040 1,889,957
Investment in subsidiary banks 22,804,688 22,136,685
Investment in Valley Bancorp, Inc. 4,581,774 4,548,949
Loans receivable 31,533 135,884
Accrued interest receivable 22,584 24,414
Goodwill, net 1,991,558 --
Other assets 57,161 248,657
------------ ------------
Total assets $ 31,449,768 29,541,138
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Line of credit $ 1,250,000 --
Other liabilities 252,288 182,182
------------ ------------
Total liabilities 1,502,288 182,182
------------ ------------
Common stock 28,001,579 28,001,579
Retained earnings 3,541,106 3,250,876
Treasury stock (1,515,250) (931,649)
Accumulated other comprehensive loss (79,955) (961,850)
------------ ------------
Total stockholders' equity 29,947,480 29,358,956
------------ ------------
Total liabilities and stockholders' equity $ 31,449,768 29,541,138
============ ============
CONDENSED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Cash dividends from bank subsidiaries $ 2,200,000 2,760,000 1,225,828
Interest income 124,073 270,270 432,153
Other income 1,263 127,526 1,988
------------ ------------ ------------
2,325,336 3,157,796 1,659,969
------------ ------------ ------------
Expenses:
Interest expense 78,461 -- 11,917
Other operating expenses 400,320 290,213 407,075
------------ ------------ ------------
478,781 290,213 418,992
------------ ------------ ------------
Income before equity in undistributed earnings of
subsidiaries and income taxes 1,846,555 2,867,583 1,240,977
Dividends in excess of earnings of subsidiaries -- (359,635) --
Equity in undistributed earnings of subsidiaries 10,084 -- 1,028,932
------------ ------------ ------------
Income before income taxes 1,856,639 2,507,948 2,269,909
Income tax expense (benefit) (147,315) 38,676 2,489
------------ ------------ ------------
Net income $ 2,003,954 2,469,272 2,267,420
============ ============ ============
F-31 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 2,003,954 2,469,272 2,267,420
Adjustments to reconcile net income to net cash
provided by operating activities:
Dividends in excess of earnings of
subsidiaries -- 359,635 --
Equity in undistributed earnings of
subsidiaries (10,084) -- (1,028,932)
Equity in income of Valley -- (126,367) (1,550)
Amortization of goodwill 79,517 -- --
Amortization of securities premiums and
discounts, net -- 28,480 3,649
Increase (decrease) in other assets and
liabilities, net 236,485 51,391 (76,098)
------------ ------------ ------------
Net cash provided by operating
activities 2,309,872 2,782,411 1,164,489
------------ ------------ ------------
Cash flows from investing activities:
Purchases of securities available-for-sale -- (2,004,167) (45,192)
Proceeds from sales and maturities of securities
available-for-sale 97,990 2,050,430 3,000,000
Purchase of Valley stock -- (1,746,591) (2,682,241)
Acquisition of minority interest in Valley (1,923,050) -- --
Net decrease in loans receivable 104,351 562,122 52,006
Capital contribution to Heritage State -- (700,000) (1,374,000)
Acquired cash and cash equivalents in
merger -- -- 3,468,600
------------ ------------ ------------
Net cash provided by (used in) investing
activities (1,720,709) (1,838,206) 2,419,173
------------ ------------ ------------
Cash flows from financing activities:
Advances on line of credit 1,555,000 -- --
Payments on line of credit (305,000) -- (2,350,000)
Purchase of treasury stock (583,601) (931,649) --
Capital contribution -- -- 2,275,000
Dividends paid to stockholders (1,713,724) (1,751,685) (1,273,736)
------------ ------------ ------------
Net cash used in financing activities (1,047,325) (2,683,334) (1,348,736)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (458,162) (1,739,129) 2,234,926
Cash and cash equivalents at beginning of year
556,592 2,295,721 60,795
------------ ------------ ------------
Cash and cash equivalents at end of year $ 98,430 556,592 2,295,721
============ ============ ============
F-32 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(24) ACQUISITION
UFC's investment in Valley was accounted for by the equity method in
1999 and 1998. On January 10, 2000, UFC's ownership percentage increased
to 50.6%. Therefore, effective January 1, 2000, the Company began to
consolidate Valley in its financial statements. The following presents a
pro forma condensed statement of financial condition for the Company at
January 1, 2000 as if Valley were consolidated as of that date.
Assets January 1, 2000
------ ---------------
(unaudited)
Cash and cash equivalents $ 12,662,377
Securities available-for-sale 69,963,771
Loans receivable, net 226,211,207
Loans held for sale 1,191,111
Premises and equipment, net 5,072,768
Real estate and other personal property owned 224,484
Accrued interest receivable 2,643,560
Goodwill, net 2,866,964
Other assets 5,911,714
--------------
Total assets $ 326,747,956
==============
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 229,964,160
Federal Home Loan Bank advances 46,425,000
Securities sold under agreements to repurchase 11,545,959
Federal funds purchased 1,750,000
Accrued interest payable 1,586,629
Other liabilities 1,647,068
--------------
Total liabilities 292,918,816
Minority interest 4,470,184
Total stockholders' equity 29,358,956
--------------
Total liabilities and stockholders' equity $ 326,747,956
==============
F-33 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The following presents a pro forma condensed statement of income of the
Company for the year ended December 31, 1999 as if Valley were
consolidated during that period:
(Unaudited)
Interest income $ 21,787,994
Interest expense 11,527,296
--------------
Net interest income 10,260,698
Provision for loan losses 322,000
--------------
Net interest income after provision for loan
losses 9,938,698
Non-interest income 3,769,283
Non-interest expense 8,970,033
--------------
Income before income taxes 4,737,948
Income taxes 1,817,964
--------------
Income before minority interest 2,919,984
Minority interest (270,743)
--------------
Net income $ 2,649,241
==============
Basic earnings per share $ 1.57
==============
Diluted earnings per share $ 1.57
==============
(25) OPERATING SEGMENT INFORMATION
The Company evaluates segment performance internally based on individual
bank charter, and thus the operating segments are so defined. All
segments, except for the segment defined as "other," are based on
commercial banking operations. The operating segment defined as "other"
includes UFC and elimination of transactions between segments.
The accounting policies of the individual operating segments are the
same as those of the Company described in note 1. Transactions between
operating segments are primarily conducted at fair value, resulting in
profits that are eliminated for reporting consolidated results of
operations. Expenses for centrally provided services are allocated based
on the estimated usage of those services.
F-34 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The following is a summary of selected operating segment information for
the years ended December 31, 2000, 1999 and 1998.
Heritage
Heritage State Valley Other Consolidated
------------ ------------ ------------ ------------ ------------
2000:
Net interest income $ 7,494,623 599,506 2,391,122 45,612 10,530,863
Provision for loan
losses 1,330,000 -- 298,569 -- 1,628,569
------------ ------------ ------------ ------------ ------------
Net interest income
after provision 6,164,623 599,506 2,092,553 45,612 8,902,294
Non-interest income 3,572,008 67,254 449,407 1,263 4,089,932
Non-interest expense 6,648,634 470,388 2,030,281 400,321 9,549,624
------------ ------------ ------------ ------------ ------------
Income before income
taxes 3,087,997 196,372 511,679 (353,446) 3,442,602
Income taxes (benefit) 1,175,882 75,734 183,176 (147,315) 1,287,477
------------ ------------ ------------ ------------ ------------
Income before minority
interest 1,912,115 120,638 328,503 (206,131) 2,155,125
Minority interest -- -- -- (151,171) (151,171)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,912,115 120,638 328,503 (357,302) 2,003,954
============ ============ ============ ============ ============
Total assets $275,800,965 17,586,972 71,024,165 (611,199) 363,800,903
Loans receivable, net 193,079,468 14,059,321 44,475,936 31,533 251,646,258
Total deposits 185,046,156 13,517,695 62,679,085 (63,650) 261,179,286
Total stockholders'
equity 20,680,863 2,123,825 8,106,465 (963,673) 29,947,480
============ ============ ============ ============ ============
F-35 (Continued)
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Heritage
Heritage State Other Consolidated
------------ ------------ ------------ ------------
1999:
Net interest income $ 7,069,704 444,193 270,270 7,784,167
Provision for loan
losses 110,000 93,500 -- 203,500
------------ ------------ ------------ ------------
Net interest income
after provision 6,959,704 350,693 270,270 7,580,667
Non-interest income 3,359,447 43,238 127,526 3,530,211
Non-interest expense 6,323,404 488,750 290,213 7,102,367
------------ ------------ ------------ ------------
Income (loss) before income
taxes 3,995,747 (94,819) 107,583 4,008,511
Income taxes (benefit) 1,536,735 (36,172) 38,676 1,539,239
------------ ------------ ------------ ------------
Net income (loss) $ 2,459,012 (58,647) 68,907 2,469,272
============ ============ ============ ============
Total assets $249,073,839 19,087,125 2,064,931 270,225,895
Loans receivable, net 171,204,354 15,007,555 135,884 186,347,794
Total deposits 168,224,959 12,044,923 (388,344) 179,881,538
Total stockholders'
equity 20,150,527 1,986,159 7,222,270 29,358,956
============ ============ ============ ============
1998:
Net interest income $ 6,349,622 86,615 420,235 6,856,472
Provision for loan
losses 335,000 -- -- 335,000
------------ ------------ ------------ ------------
Net interest income
after provision 6,014,622 86,615 420,235 6,521,472
Non-interest income 3,275,871 14,176 1,988 3,292,035
Non-interest expense 5,594,481 145,937 407,074 6,147,492
------------ ------------ ------------ ------------
Income (loss) before income
taxes 3,696,012 (45,146) 15,149 3,666,015
Income taxes (benefit) 1,413,391 (17,285) 2,489 1,398,595
------------ ------------ ------------ ------------
Net income (loss) $ 2,282,621 (27,861) 12,660 2,267,420
============ ============ ============ ============
Total assets $214,763,551 11,394,328 6,403,330 232,561,209
Loans receivable, net 138,992,675 3,668,432 698,006 143,359,113
Total deposits 159,287,569 9,629,918 (1,297,403) 167,620,084
Total stockholders'
equity 21,352,771 1,337,523 7,837,673 30,527,967
============ ============ ============ ============
(26) SUBSEQUENT EVENT
In June 2000, Heritage and Heritage State filed applications to merge
into Heritage State's state banking charter. At December 31, 2000 the
FDIC, the OTS and the State of Montana had all approved the merger
applications. Effective January 1, 2001 Heritage State changed its name
to Heritage Bank and relocated its main office to Great Falls, Montana.
Beginning in 2001, Heritage Bank will be regulated by the FDIC and the
State of Montana.
F-36
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) 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.
By: /s/John M. Morrison By: /s/Kurt R. Weise
------------------------------- -------------------------------
John M. Morrison Kurt R. Weise
Chairman of the Board President and Chief Executive Officer
(Duly Authorized Representative) (Duly Authorized Representative)
Date: March 30, 2001 Date: March 30, 2001
------------------------------ ------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
By: /s/John M. Morrison By: /s/Kurt R. Weise
------------------------------- -------------------------------
John M. Morrison Kurt R. Weise
Director Director
Date: March 30, 2001 Date: March 30, 2001
------------------------------ ------------------------------
By: /s/ Larry D. Albert By: /s/Dr. J. William Bloemendaal
------------------------------- -------------------------------
Larry D. Albert Dr. J. William Bloemendaal
Director Director
Date: March 30, 2001 Date: March 30, 2001
------------------------------ ------------------------------
By: /s/Elliott L. Dybdal By: /s/Jerome H. Hentges
------------------------------- -------------------------------
Elliott L. Dybdal Jerome H. Hentges
Director Director
Date: March 30, 2001 Date: March 30, 2001
------------------------------ ------------------------------
By: /s/William L. Madison By: /s/ Kevin P. Clark
------------------------------- -------------------------------
William L. Madison Kevin P. Clark
Director Director
Date: March 30, 2001 Date: March 30, 2001
------------------------------ ------------------------------
By: /s/Steve L. Feurt
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Steve L. Feurt
Director
Date: March 30, 2001
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EXHIBITS INDEX.
Exhibit Number Description
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21.1 Subsidiaries of the Company.
23.1 Consent of Experts