UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
__X__ QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number: 0-28080
UNITED FINANCIAL CORP.
----------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0507591
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2779; 120 1st Ave. North, Great Falls, Montana 59403
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(406) 727-6106
--------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the Issuer's
Classes of Common Stock, as of the latest date is:
Class: Common Stock, No par value; Outstanding at November 12, 2001
1,478,152 shares
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.................................................1
Consolidated Condensed Statements of Financial Condition at
September 30, 2001 and December 31, 2000 (unaudited)................1
Consolidated Condensed Statements of Income - Three and Nine Months
Ended September 30, 2001 and September 30, 2000 (unaudited).........2
Consolidated Condensed Statements of Cash Flows - Nine Months Ended
September 30, 2001 and September 30, 2000 (unaudited)...............3
Notes to Consolidated Condensed Financial Statements..................4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................9
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........21
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS...................................................22
ITEM 2 CHANGE IN SECURITIES................................................22
ITEM 3 DEFAULTS ON SENIOR SECURITIES.......................................22
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS...............22
ITEM 5 OTHER INFORMATION...................................................22
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K....................................22
SIGNATURES....................................................................23
i
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share and share data)
(Unaudited)
SEPTEMBER 30, December 31,
------------ ------------
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 27,231 $ 19,451
Securities available-for-sale 61,015 70,064
Loans receivable, net 264,747 251,646
Loans held for sale 6,568 2,981
Premises and equipment, net 6,331 6,387
Real estate and other personal property owned 649 1,021
Accrued interest receivable 3,802 3,351
Restricted stock, at cost 3,930 3,709
Goodwill, net of accumulated amortization of $676 and
$534 at September 30, 2001 and December 31, 2000,
respectively 3,124 3,171
Identifiable intangibles, net of accumulated amortization
of $221 and $169 at September 30, 2001 and December 31,
2000, respectively 416 468
Deferred income taxes, net -- 444
Other assets 1,043 1,108
------------ ------------
$ 378,856 $ 363,801
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts $ 91,648 $ 85,367
Savings deposits 59,606 49,203
Time deposits 130,402 126,609
------------ ------------
281,656 261,179
Federal Home Loan Bank advances 49,500 52,175
Securities sold under agreements to repurchase 8,050 11,365
Line of credit 1,000 1,250
Accrued interest payable 2,033 2,475
Advances from borrowers for taxes and insurance 372 462
Income taxes payable 418 309
Deferred income taxes, net 42 --
Trust preferred securities 3,000 --
Other liabilities 1,028 1,113
------------ ------------
347,099 330,328
Minority interest 2,986 3,525
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;
1,698,552 and 1,698,312 shares issued at September 30,
2001 and December 31, 2000, respectively 28,005 28,002
Retained earnings, substantially restricted 4,174 3,541
Treasury stock, at cost; 220,400 and 83,000 shares
at September 30, 2001 and December 31, 2000, respectively (4,055) (1,515)
Accumulated other comprehensive income (loss) 647 (80)
------------ ------------
28,771 29,948
------------ ------------
$ 378,856 $ 363,801
============ ============
Equity/Assets 7.59% 8.23%
Book Value/Share $ 19.46 $ 18.54
See Notes to Consolidated Condensed Financial Statements
Page 1
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
INTEREST INCOME
Loans receivable $ 5,681 $ 5,505 $ 16,894 $ 15,314
Mortgage-backed securities 713 992 2,223 2,928
Investment securities 208 124 743 372
Other interest earning assets 159 67 483 243
---------- ---------- ---------- ----------
Total interest income 6,761 6,688 20,343 18,857
INTEREST EXPENSE
Deposits 2,747 2,780 8,580 7,755
Other borrowings 880 1,239 2,933 3,162
Trust preferred securities 48 -- 48 --
---------- ---------- ---------- ----------
Total interest expense 3,675 4,019 11,561 10,917
---------- ---------- ---------- ----------
Net interest income 3,086 2,669 8,782 7,940
Provision for losses on loans 431 847 890 1,376
---------- ---------- ---------- ----------
Net interest income after provision for loan
losses 2,655 1,822 7,892 6,564
NON-INTEREST INCOME
Gain on sale of loans 936 653 2,356 1,822
Service charges and fees 263 238 738 668
Gain on sale of securities available-for-sale 31 -- 158 --
Other income 54 142 246 300
---------- ---------- ---------- ----------
Total non-interest income 1,284 1,033 3,498 2,790
NON-INTEREST EXPENSE
Compensation and benefits 1,580 1,433 4,403 3,902
Occupancy and equipment expense 354 309 1,045 837
Data processing fees 194 168 569 498
Other expenses 744 655 2,174 1,813
---------- ---------- ---------- ----------
Total non-interest expense 2,872 2,565 8,191 7,050
---------- ---------- ---------- ----------
Income before income taxes and minority 1,067 290 3,199 2,304
Provision for income taxes 413 107 1,238 853
---------- ---------- ---------- ----------
Income before minority interest 654 183 1,961 1,451
Minority interest (42) (15) (136) (117)
---------- ---------- ---------- ----------
Net income $ 612 $ 168 $ 1,825 $ 1,334
========== ========== ========== ==========
Basic earnings per share $ 0.41 $ 0.10 $ 1.18 $ 0.81
========== ========== ========== ==========
Diluted earnings per share $ 0.41 $ 0.10 $ 1.18 $ 0.81
========== ========== ========== ==========
Dividends declared per share $ 0.26 $ 0.26 $ 0.78 $ 0.78
========== ========== ========== ==========
Basic weighted average shares outstanding 1,482 1,645 1,541 1,650
========== ========== ========== ==========
Diluted weighted average shares outstanding 1,488 1,645 1,545 1,650
========== ========== ========== ==========
See Notes to Consolidated Condensed Financial Statements
Page 2
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
-----------------------------
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, September 30,
------------ ------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided (used) in operating activities $ (1,206) $ 2,368
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable (14,257) (27,372)
Purchases of securities available-for-sale (29,961) (6,254)
Proceeds from maturities, pay downs and sales of securities
available-for-sale 40,359 7,390
Purchases of restricted stock (41) (211)
Proceeds from redemption of restricted stock -- 31
Purchase of Valley Bancorp, Inc. stock (831) (1,722)
Purchases of premises and equipment (376) (2,085)
Proceeds from sale of premises and equipment 12 --
Proceeds from sale of real estate and other personal property
owned 685 71
Acquisition of real estate and other personal property owned (22) (34)
Acquired cash and cash equivalents of Valley -- 1,206
------------ ------------
Net cash used in investing activities (4,432) (28,980)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 20,477 17,286
Net increase (decrease) in Federal Home Loan Bank advances (2,675) 10,250
Advances on line of credit 1,750 1,105
Payments on line of credit (2,000) (230)
Net decrease in securities sold under agreements to repurchase (3,315) (845)
Net decrease in federal funds purchased -- (400)
Increase (decrease) in advances from borrowers for taxes and
insurance (90) 491
Proceeds from trust preferred securities 3,000 --
Purchase of treasury stock (2,540) (105)
Dividends paid to stockholders (1,192) (1,287)
Proceeds from issuance of common stock 3 --
------------ ------------
Net cash provided by financing activities 13,418 26,265
------------ ------------
Increase (decrease) in cash and cash equivalents 7,780 (347)
Cash and cash equivalents at beginning of year 19,451 11,457
------------ ------------
Cash and cash equivalents at end of period $ 27,231 $ 11,110
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
- ------------------------------------------------------------------
Cash payments for interest $ 12,002 $ 6,189
Cash payments for income taxes $ 1,129 $ 986
See Notes to Consolidated Condensed Financial Statements
Page 3
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
United Financial Corp. ("UFC") is a bank holding company headquartered
in Great Falls, Montana, with operations in 12 Montana communities and Phoenix
and Scottsdale, Arizona. UFC's banking business is conducted through its
wholly-owned subsidiary, Heritage 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's wholly-owned subsidiary,
United Financial-Montana Capital Trust I administers the $3.0 million of Capital
Trust Pass-Through Securities. (See Item 2) UFC, Heritage Bank and Valley are
collectively referred to herein as ("United"). United had assets of
approximately $378.9 million, deposits of approximately $281.7 million and
stockholders' equity of approximately $28.8 million at September 30, 2001.
UFC is the majority shareholder of Valley, with an ownership of
approximately 65% at September 30, 2001. As a result of acquiring over 50% of
the outstanding shares of Valley in January 2000, UFC began to consolidate
Valley in its financial statements effective January 1, 2000. Valley had assets
of approximately $76.1 million, deposits of approximately $64.9 million and
stockholders' equity of approximately $8.6 million at September 30, 2001.
Heritage Bank (formerly Heritage Bank F.S.B.) is a state chartered
commercial bank with locations in Bozeman, Chester, Fort Benton, Geraldine,
Glendive, Great Falls, Havre, Missoula, Shelby, Hamilton, Kalispell, and Libby,
Montana. Valley Bank is a state chartered commercial bank with locations in
Phoenix and Scottsdale, Arizona. The Banks are engaged in the community banking
business of attracting deposits from the general public through their offices
and using those deposits, together with other available funds, to originate
commercial (including lease financing), commercial real estate, residential,
agricultural and consumer loans primarily in their market areas in Montana and
Arizona. A majority of the Banks' banking business is conducted in the Great
Falls and Phoenix areas. 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.
UFC's principal offices are located at 120 First Avenue North, Great
Falls, Montana, and its telephone number is (406) 727-6106. Heritage Bank holds
an 11% ownership interest in Bankers' Resource Center, a computer data center.
2. HERITAGE BANK AND HERITAGE STATE BANK MERGER
In 2000, UFC had a wholly-owned subsidiary Heritage State Bank ("State
Bank"), a state chartered commercial bank formed in 1998 with full service
banking operations in Fort Benton and Geraldine, Montana. Effective January 1,
2001, Heritage Bank F.S.B., a federally chartered stock savings bank, merged
into State Bank's state banking charter. State Bank then changed its name to
Heritage Bank and relocated its main office to Great Falls, Montana. Beginning
in 2001, Heritage Bank is regulated by the FDIC and the State of Montana.
Page 4
3. BASIS OF PRESENTATION
United's consolidated financial statements, included herein, have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial
condition, results of operations, and cash flows for the periods disclosed.
Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results anticipated for the year ending December
31, 2001. For additional information, refer to the consolidated audited
financial statements and footnotes thereto included in United's Annual Report to
Shareholders and Annual Report on Form 10-K for the year ended December 31,
2000. Certain reclassifications have been made to the September 30, 2000
financial information to conform to the September 30, 2001 presentation.
4. STOCK INCENTIVE PLAN
On May 22, 2001, United's Board of Directors approved a stock option
award of 37,816 shares with the option price equal to the May 22, 2001 market
price of $17.65.
5. COMPREHENSIVE INCOME
United's only significant element of comprehensive income is unrealized
gains and losses on securities available-for-sale.
THREE MONTHS ENDED Three Months Ended
SEPTEMBER 30, 2001 September 30, 2000
----------------------------------- ------------------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
--------- --------- --------- --------- --------- ---------
Net income $ 1,025 $ 413 $ 612 $ 275 $ 107 $ 168
Unrealized and realized
holding gains arising
during period 590 224 366 768 292 476
Less: reclassification adjustment
for gains included in net income 31 12 19 -- -- --
--------- --------- --------- --------- --------- ---------
Net unrealized gains on
securities available for sale 559 212 347 768 292 476
Less: portion of unrealized gains
(loss) allocated to minority
interest 7 -- 7 (30) -- (30)
--------- --------- --------- --------- --------- ---------
Total comprehensive income $ 1,577 $ 625 $ 952 $ 1,073 $ 399 $ 674
========= ========= ========= ========= ========= =========
Page 5
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 2001 September 30, 2000
----------------------------------- ------------------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
--------- --------- --------- --------- --------- ---------
Net income $ 3,063 $ 1,238 $ 1,825 $ 2,187 $ 853 $ 1,334
Unrealized and realized
holding gains arising
during period 1,172 445 727 285 108 177
Less: reclassification adjustment
for gains included in net income 158 60 98 -- -- --
--------- --------- --------- --------- --------- ---------
Net unrealized gains on
securities available for sale 1,014 385 629 285 108 177
Less: portion of unrealized gains
(loss) allocated to minority
interest 61 -- 61 (98) -- (98)
--------- --------- --------- --------- --------- ---------
Total comprehensive income $ 4,016 $ 1,623 $ 2,393 $ 2,570 $ 961 $ 1,609
========= ========= ========= ========= ========= =========
6. CASH EQUIVALENTS
For purposes of the consolidated condensed statements of cash flows,
United considers all cash, daily interest and non-interest bearing demand
deposits with banks with original maturities of three months or less to be cash
equivalents.
7. COMPUTATION OF NET INCOME PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares used to compute basic EPS plus the incremental amount of potential
common stock determined by the treasury stock method. Potential common stock
includes a warrant to purchase 10,000 shares of common stock exercisable at a
price of $26.25 per share through February 3, 2003 and the incremental shares
under stock option plans. The warrant was excluded from the calculation of
diluted EPS for the three month and nine month periods ended September 30, 2001
and 2000 because the effect of inclusion would have been antidilutive using the
treasury stock method.
8. DIVIDENDS DECLARED
On October 30, 2001, the Board of Directors of United declared a
quarterly cash dividend of $.26 per share, payable November 26, 2001, to
shareholders of record on November 12, 2001.
9. TREASURY STOCK
On August 14, 2001, UFC purchased 7,500 shares of treasury stock at a
price of $18.18 per share.
10. RELATED PARTIES
Central Financial Services, Inc. ("CFS") provides various management
services to UFC and Heritage Bank, including accounting and tax services,
investment consulting, personnel consulting, insurance advisory services and
regulatory consulting. CFS is owned by UFC's Chairman of the Board of Directors
and largest shareholder. CFS fees were $279,000, and $263,000 for the nine
months ended September 30, 2001 and 2000, respectively.
Page 6
11. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, United adopted SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES as amended by SFAS No. 138
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
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. As of September 30, 2001, United 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 United.
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 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 United. SFAS No. 140
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001.
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS,
and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF.
United is required to adopt the provisions of Statement 141 immediately
and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that United
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, United will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase
Page 7
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful life, United
will be required to test the intangible asset for impairment in accordance with
the provisions of Statement 142 within the first interim period. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require United to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this United must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. United will then have up to six months from the date
of adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and United must perform the second step of the
transitional impairment test. In the second step, United must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in United's statement of income.
As of the date of adoption, United expects to have unamortized goodwill
in the amount of $3.0 million and unamortized identifiable intangible assets in
the amount of $.4 million, both of which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $.2 million for the nine months ended September 30, 2001 and $.3 million for
the year ended December 31, 2000. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on United's financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
Page 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
1. FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings made by UFC with the
Securities and Exchange Commission, in UFC's press releases or other public
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. UFC wishes
to caution readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors-including regional and national economic conditions, changes in
levels of market interest rates, credit risks of lending activities and
competitive and regulatory factors-could affect UFC's financial performance and
could cause UFC's actual results for future periods to differ materially from
those anticipated or projected.
UFC does not undertake, and specifically disclaims, any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
2. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 TO DECEMBER 31, 2000.
(In Thousands) SELECTED FINANCIAL CONDITION RECAP
(Unaudited)
SEPT. 30, Dec. 31,
2001 2000 Change
------------------------------------------
Cash and cash equivalents $ 27,231 $ 19,451 $ 7,780
Securities available-for-sale 61,015 70,064 (9,049)
Loans receivable, net 264,747 251,646 13,101
Loans held for sale 6,568 2,981 3,587
Premises and equipment, net 6,331 6,387 (56)
Real estate and other
personal property owned 649 1,021 (372)
Restricted stock, at cost 3,930 3,709 221
Goodwill, net 3,124 3,171 (47)
Identifiable intangibles, net 416 468 (52)
All other assets 4,845 4,903 (58)
Total assets 378,856 363,801 15,055
Deposits 281,656 261,179 20,477
Federal Home Loan Bank advances 49,500 52,175 (2,675)
Securities sold under
agreements to repurchase 8,050 11,365 (3,315)
Line of credit 1,000 1,250 (250)
Trust preferred securities 3,000 -- 3,000
All other liabilities 3,893 4,359 (466)
Total liabilities 347,099 330,328 16,771
Stockholders' equity, net 28,771 29,948 (1,177)
Total assets increased $15.1 million to $378.9 million at September 30,
2001 from $363.8 million at December 31, 2000. The increase in assets was
primarily the result of increase in loans receivable and loans held for sale.
Page 9
SECURITIES AVAILABLE-FOR-SALE- Securities available-for-sale decreased
$9.1 million to $61.0 million at September 30, 2001 from $70.1 million at
December 31, 2000. The decrease was the result of $30.0 million of purchases,
offset by $40.4 million of maturities, sales, and principal repayments and a
$1.3 million increase in unrealized gains on securities.
A comparison of the amortized cost and estimated fair value of the
consolidated available-for-sale investment portfolio at the dates indicated is
as follows:
(In thousands)
(Unaudited)
SEPTEMBER 30, 2001
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S. GOVERNMENT AND FEDERAL
AGENCIES $ 14,920 $ 392 $ -- $ 15,312
MORTGAGE-BACKED SECURITIES 41,620 750 -- 42,370
MUNICIPAL BONDS 1,784 5 -- 1,789
CORPORATE BONDS AND EQUITY
SECURITIES 1,542 8 (6) 1,544
---------- ---------- ---------- ----------
$ 59,866 $ 1,155 $ (6) $ 61,015
========== ========== ========== ==========
December 31, 2000
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Government and Federal
Agencies $ 23,783 $ 112 $ (23) $ 23,872
Mortgage-backed securities 41,622 109 (195) 41,536
Municipal bonds 2,742 -- (25) 2,717
Corporate bonds and equity
securities 2,042 -- (103) 1,939
---------- ---------- ---------- ----------
$ 70,189 $ 221 $ (346) $ 70,064
========== ========== ========== ==========
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased $13.1 million to $264.7 million at September 30, 2001 from $251.6
million at December 31, 2000. The increase 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 includes: real estate residential mortgages, commercial and
agricultural mortgages, agricultural and commercial non-mortgage, consumer loans
secured by real estate, and various consumer installment loans. The Banks also
purchased and participated in commercial and lease financing loans. The Banks
had $48.2 million of participation and purchased loans as of September 30, 2001.
During the nine months ended September 30, 2001, loans held for sale
increased $3.6 million to $6.6 million at September 30, 2001 from approximately
$3.0 million at December 31, 2000. Approximately $116.7 million of loans were
originated for sale and $113.1 million of loans were sold to the secondary
market during the nine month period ending September 30, 2001.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve increased $.6 million
to $3.1 million at September 30, 2001 from $2.5 million at December 31, 2000. A
loan loss provision of $.9 million for the nine months ended September 30, 2001
was offset by loans in the amount of $.3 million which were determined by
United's management to be uncollectible and subsequently charged-off. The loan
loss reserve at September 30, 2001 is an amount which management believes is
adequate given the low level of non-performing assets and management's
assessment of loan risk. The allowance for loan losses to total loans at
September 30, 2001 was 1.15%.
Page 10
NON-PERFORMING ASSETS - When a borrower fails to make a scheduled
payment on a loan and does not cure the delinquency within 15 days, United's
policy is to contact the borrower between the 15th and 30th day of delinquency
to establish a repayment schedule. If a loan is not current, or a realistic
repayment schedule is not being followed by the 90th day of delinquency, United
will generally proceed with legal action to foreclose the property after the
loan has become contractually delinquent 90 days. Loans contractually past due
90 days are classified as non-performing. However, not all loans past due 90
days automatically result in the non-accrual of interest income. If a 90 day
past due loan has adequate collateral, or is FHA insured or VA guaranteed,
leading to the conclusion that loss of principal and interest would likely not
be realized, then interest income will continue to be accrued.
United places loans on nonaccrual status when collection of principal
or interest is considered doubtful. When a loan is placed on non-accrual status,
all previously accrued and uncollected interest is reversed. At September 30,
2001 United had non-accrual loans totaling $1.4 million and loans totaling $.5
million past due 90 days and still accruing.
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 GAAP. If an asset is classified as a loss, the institution
must either establish a specific valuation allowance equal to the amount
classified as loss or charge off such amount. At September 30, 2001 and December
31, 2000, United had no assets classified as loss. At September 30, 2001 and
December 31, 2000, United had $1.3 million and $.4 million respectively
classified as doubtful. At September 30, 2001 and December 31, 2000, United had
$.6 million and $.8 million of reported substandard assets respectively. As a
percent of total assets, substandard assets were approximately .15% and .21% at
September 30, 2001 and December 31, 2000, respectively.
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED - During 2000, Heritage
Bank 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 carrying value of this property net of accumulated
depreciation is $.5 million at both September 30, 2001 and December 30, 2000.
The property is currently being leased to a third party.
Real estate and other personal property owned decreased $.4 million to
$.6 million at September 30, 2001 from $1.0 million at December 31, 2000. United
acquired additional real estate property of approximately $166,000 during the
first nine months of 2001, offset by sales of real estate property with a book
value of approximately $405,000. Sale proceeds on the sale were approximately
$451,000 resulting in a gain on sale of approximately $46,000. Depreciation on
real estate property was approximately $15,000 for the first nine months of
2001. The decrease also includes approximately $274,000 of repossessed personal
property acquired by United during the first nine months of 2001, offset by
sales of repossessed personal property with a book value of approximately
$234,000. Sale proceeds were also approximately $234,000 and no gain or loss was
reported. Charge offs to the loan loss provision were approximately 151,000.
Page 11
RESTRICTED STOCK - Federal Home Loan Bank (FHLB) stock increased $.2
million to $3.9 million at September 30, 2001 from $3.7 million at December 31,
2000. This increase was the result of $179,800 of reinvested stock dividends and
purchases of approximately $41,000. FHLB stock purchases are made as required to
support the increased scope of operations.
PREMISES AND EQUIPMENT - This category remained constant at $6.4
million at September 30, 2001 and at December 31, 2000. The Banks invested
approximately $376,000 in fixed assets during the first nine months of 2001. The
purchases of premises and equipment were offset by approximately $428,000 of
depreciation.
GOODWILL - Goodwill decreased approximately $142,000 primarily due to
amortization during the nine months ending September 30, 2001. This decrease was
offset by approximately $95,000 of additional goodwill due to purchases of
Valley stock. The goodwill is currently being amortized over 15 to 25 years.
DEPOSITS - Deposits increased $20.5 million to $281.7 million at
September 30, 2001 from $261.2 million at December 31, 2000. This increase was
primarily the result of the opening of the two new Heritage Bank branches in
Bozeman and Missoula, Montana and the new Valley Bank branch in Scottsdale,
Arizona.
BORROWED FUNDS - FHLB advances decreased $2.7 million from December 31,
2000 to September 30, 2001. Securities sold under agreements to repurchase
decreased $3.3 million to $8.1 million at September 30, 2001 from $11.4 million
at December 31, 2000. During the first nine months of 2001, $1.7 million was
advanced on the line of credit and repayments totaled $2 million.
TRUST PREFERRED SECURITIES - Trust preferred securities increased $3.0
million at September 30, 2001 as United received funding in July 2001 on $3.0
million of Capital Trust Pass-Through Securities ("TRUPS"). The $3.0 million
TRUPS qualify as Tier 1 capital for regulatory reporting purposes and are
presented on the balance sheet as subordinated debt for GAAP reporting purposes.
STOCKHOLDERS' EQUITY - Stockholders' equity decreased $1.2 million to
$28.7 million at September 30, 2001 from $29.9 million at December 31, 2000.
This decrease is a combination of $1.8 million of net income for the nine months
ended September 30, 2001 less cash dividends declared of $1.2 million, purchases
of treasury stock of $2.5 million and a $.7 million increase in unrealized gains
net of tax effects, associated with securities classified as available-for-sale
being adjusted to market value.
Page 12
3. MATERIAL CHANGES IN RESULTS OF OPERATIONS. COMPARISON OF THE THREE
MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000.
(In thousands) INCOME RECAP
(Unaudited) THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2001 2000 Change
-------- -------- --------
Interest income $ 6,761 $ 6,688 $ 73
Interest expense 3,675 4,019 (344)
-------- -------- --------
Net interest income 3,086 2,669 417
Provision for loan losses 431 847 (416)
-------- -------- --------
Net interest income after
provision for loan losses 2,655 1,822 833
Non-interest income 1,284 1,033 251
Non-interest expense 2,872 2,565 307
-------- -------- --------
Income before income taxes
and minority interest 1,067 290 777
Provision for income taxes 413 107 306
-------- -------- --------
Net income before minority
interest $ 654 $ 183 $ 471
======== ======== ========
NET INTEREST INCOME - Like most financial institutions, the most
significant component of both the Banks' and Valley's earnings is net interest
income, which is the difference between the interest earned on interest-earning
assets (loans, investment securities, mortgage-backed securities and other
interest-earning assets), and the interest paid on deposits and borrowings. This
amount, when divided by average interest-earning assets, is referred to as the
net interest margin, expressed as a percentage. Net interest income and net
interest margins are affected by changes in interest rates, the volume and the
mix of interest-earning assets and interest-bearing liabilities, and the level
of non-performing assets. The difference between the yield on interest-earning
assets and the cost of interest-bearing liabilities expressed as a percentage is
referred to as the net interest-rate spread. Net interest income increased $.4
million from $2.7 million for the three months ended September 30, 2000 to $3.1
million for the three months ended September 30, 2001. Net interest margin
increased .31% from 3.15% for the three month period ended September 30, 2000 to
3.46% for the three month period ended September 30, 2001. Net interest spread
increased .35% from 2.88% for the three month period ended September 30, 2000 to
3.23% for the three month period ended September 30, 2001. The increase in net
interest income, lower funding rates at FHLB and decreased competition for loan
rates resulted in an increase in net interest margin. United has used the funds
from additional deposits and borrowings to fund growth in its real estate loan
portfolio and to manage interest rate risk.
INTEREST INCOME - Interest income remained at $6.8 million for the
three month periods ended September 30, 2000 and September 30, 2001.
For the three month period ended September 30, 2001, compared to the
three month period ended September 30, 2000, interest on loans receivable
increased $.1 million, interest on mortgage-backed securities and investments
decreased $.2 million and interest on other interest-earning assets increased
$.1 million.
INTEREST EXPENSE - Interest expense decreased $.3 million from $4.0
million for the three month period ended September 30, 2000 to $3.7 million for
the three month period ended September 30, 2001.
Page 13
For the three month period ended September 30, 2001, compared to the
three month period ended September 30, 2000, interest on other borrowings
decreased $.3 million. The increase in interest expense due to the $3.0 million
increase in trust preferred securities was offset by a decrease in interest
expense on deposits.
PROVISION FOR LOAN LOSSES - United provided $431,000 for loan losses
for the three months ended September 30, 2001, as compared to $847,000 for the
same period last year. The three month provision of $847,000 in 2000 included a
one-time special provision of $810,000 related to the deterioration of a single
loan. Heritage Bank made a one-time special provision for this single loan of
$675,000, while the remaining balance of $135,000 was made by Valley.
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 $.2 million from $1.0 million for the
three month period ended September 30, 2000 to $1.2 million for the three month
period ended September 30, 2001. United experienced a significant increase in
the home lending market, as interest rates remained at levels favorable for
lending during the three month period ended September 30, 2001.
NON-INTEREST EXPENSE - United's non-interest expense increased $.3
million during the three month period ending September 30, 2001 as compared to
the same period in 2000.
INCOME TAXES - Income tax expense increased $.3 million to $413,000 for
the three month period ending September 30, 2001 from $107,000 for the same
period of 2000. This was a result of higher earnings in the current quarter due
to the one-time special loan loss provisions discussed above, which were taken
in the three month period ended September 30, 2000.
Page 14
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 elimination of
transactions between segments.
The following table sets forth certain operating segment information
for the three month periods ended September 30, 2001 and 2000(in thousands
except per share data).
HERITAGE
2001: BANK VALLEY OTHER CONSOLIDATED
------------ ------------ ------------ ------------
Net interest income (loss) $ 2,403 $ 732 $ (49) $ 3,086
Provision for loan losses 395 36 -- 431
------------ ------------ ------------ ------------
Net interest income (loss) after
provision for loan losses 2,008 696 (49) 2,655
Non-interest income 1,224 60 -- 1,284
Non-interest expense 2,145 583 144 2,872
------------ ------------ ------------ ------------
Income (loss) before income taxes
and minority interest 1,087 173 (193) 1,067
Income tax expense (benefit) 416 64 (67) 413
Minority interest -- -- (42) (42)
------------ ------------ ------------ ------------
Net income (loss) 671 109 (168) 612
Amortization of goodwill, core deposit
intangible and purchase valuations 64 -- 22 86
------------ ------------ ------------ ------------
Cash earnings (loss) $ 735 $ 109 $ (146) $ 698
============ ============ ============ ============
PER SHARE DATA
Basic earnings per share $ 0.41
Diluted earnings per share $ 0.41
Basic cash earnings per share $ 0.47
Diluted cash earnings per share $ 0.47
Weighted average shares outstanding - basic 1,482
Weighted average shares outstanding - diluted 1,488
Page 15
HERITAGE HERITAGE
2000: BANK STATE BANK VALLEY OTHER CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net interest income $ 1,926 $ 149 $ 585 $ 9 $ 2,669
Provision for loan losses 687 -- 160 -- 847
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 1,239 149 425 9 1,822
Non-interest income 870 11 152 -- 1,033
Non-interest expense 1,821 111 529 104 2,565
------------ ------------ ------------ ------------ ------------
Income (loss) before income
taxes and minority interest 288 49 48 (95) 290
Income tax expense (benefit) 108 19 15 (35) 107
Minority interest -- -- -- (15) (15)
------------ ------------ ------------ ------------ ------------
Net income (loss) 180 30 33 (75) 168
Amortization of goodwill,
core deposit intangible,
and purchase valuations 76 8 -- 22 106
------------ ------------ ------------ ------------ ------------
Cash earnings (loss) $ 256 $ 38 $ 33 $ (53) $ 274
============ ============ ============ ============ ============
PER SHARE DATA
Basic earnings per share $ 0.10
Diluted earnings per share $ 0.10
Basic cash earnings per share $ 0.17
Diluted cash earnings per share $ 0.17
Weighted average shares outstanding - basic 1,645
Weighted average shares outstanding - diluted 1,645
4. ASSET/LIABILITY MANAGEMENT
The objective of United's asset/liability management is to maintain the
Banks' ability to meet the daily cash flow requirements of their customers. The
Banks manage their liquidity positions to meet the needs of their customers,
while maintaining an appropriate balance between assets and liabilities to meet
shareholders' return on investment objectives. The Banks monitor the sources and
uses of funds on a daily basis to maintain an acceptable liquidity position.
Additional sources of liquidity include customer deposits, FHLB advances and
securities sold under agreements to repurchase.
UFC, as a bank holding company separate from its subsidiaries, provides
for its own liquidity. A substantial portion of UFC's revenue is dividends
received from Heritage Bank. In general, the Banks are limited, without the
prior consent of state and federal regulators, to payment of dividends that do
not exceed the current year net income plus retained earnings from the two
preceding calendar years. Additional sources of liquidity for UFC include a line
of credit with a correspondent bank.
Page 16
5. MATERIAL CHANGES IN RESULTS OF OPERATIONS-COMPARISON OF THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000.
(In thousands) INCOME RECAP
(Unaudited) NINE MONTHS ENDED SEPT. 30,
----------------------------------
2001 2000 Change
-------- -------- --------
Interest income $ 20,343 $ 18,857 $ 1,486
Interest expense 11,561 10,917 644
-------- -------- --------
Net interest income 8,782 7,940 842
Provision for losses on loans 890 1,376 (486)
-------- -------- --------
Net interest income after
provision for losses on loans 7,892 6,564 1,328
Non-interest income 3,498 2,790 708
Non-interest expense 8,191 7,050 1,141
-------- -------- --------
Income before income taxes
and minority interest 3,199 2,304 895
Provision for income tax expense 1,238 853 385
-------- -------- --------
Net income before minority
interest $ 1,961 $ 1,451 $ 510
======== ======== ========
NET INTEREST INCOME - Net interest income increased $.9 million from
$7.9 million for the nine months ended September 30, 2000 to $8.8 million for
the nine months ended September 30, 2001. Net interest margin increased .06% to
3.32% for the nine month period ended September 30, 2001 from 3.26% for the same
period last year. Net interest spread increased .07% to 3.05% for the nine month
period ended September 30, 2001 from 2.98% for the same period last year. The
increase in net interest income, lower funding rates at FHLB and decreased
competition for loan rates resulted in an increase in net interest margin.
United has used the funds from additional deposits and borrowings to fund growth
in its real estate loan portfolio, as well as to manage interest rate risk.
INTEREST INCOME - Interest income increased $1.5 million from $18.8
million for the nine month period ended September 30, 2000 to $20.3 million for
the nine month period ended September 30, 2001.
For the nine month period ended September 30, 2001, compared to the
nine month period ended September 30, 2000, interest on loans receivable
increased $1.6 million, interest on mortgage-backed securities and investments
decreased $.3 million and interest on other interest-earning assets increased
$.2 million.
INTEREST EXPENSE - Interest expense increased $.6 million from $10.9
million for the nine month period ended September 30, 2000 to $11.6 million for
the nine month period ended September 30, 2001.
For the nine month period ended September 30, 2001, compared to the
nine month period ended September 30, 2001, interest on deposits increased $.8
million, and interest on other borrowings decreased $.2 million.
PROVISION FOR LOAN LOSSES - United provided $.9 million for loan losses
for the nine months ended September 30, 2001, as compared to $1.4 million in the
first nine months of 2000. The nine month provision in 2000 of $1.4 million
included a one-time special provision of $.8 million related to the
deterioration of a single loan. Heritage Bank made a one-time special provision
for this single loan of $.7 million, while the remaining balance of $.1 million
was made by Valley. The regular nine month loan loss reserve of $.6 million was
made by United as a result of strong loan demand and increased non-performing
assets.
Page 17
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 $.7 million from $2.8 million for the
nine months ended September 30, 2000 to $3.5 million for the nine months ended
September 30, 2001. United did experience a rebound in the home lending market
as compared to 2000, and particularly the refinancing market during the first
nine months of 2001, as interest rates were lower than the same period last
year. As a result of this strong market demand for home loans, mortgage fee
income increased $.5 million in the first nine months of 2001. Customer service
charges and gain on sale of securities available-for-sale increased $.1 million
and $.2 million respectively in the first nine months of 2001. Other income
decreased $.1 million.
NON-INTEREST EXPENSE - United's non-interest expense increased $1.1
million during the nine month period ending September 30, 2001 as compared to
the same period in 2000. Compensation and benefits increased $.5 million and
other operating expenses increased $.6 million.
INCOME TAXES - Income tax expense increased $.4 million for the nine
month period ended September 30, 2001 as compared to the same period in 2000.
This is the result of an increase in income before income taxes (adjusted for
minority interest) of $.5 million due primarily to the one-time special loan
loss reserve charge in 2000 discussed above.
Page 18
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 elimination of
transactions between segments.
The following table sets forth certain operating segment information
for the nine month periods ended September 30, 2001 and 2000(in thousands except
per share data).
HERITAGE
2001: BANK VALLEY OTHER CONSOLIDATED
------------ ------------ ------------ ------------
Net interest income (loss) $ 6,739 $ 2,109 $ (66) $ 8,782
Provision for loan losses 805 85 -- 890
------------ ------------ ------------ ------------
Net interest income (loss) after 5,934 2,024 (66) 7,892
provision for loan losses
Non-interest income 3,185 313 -- 3,498
Non-interest expense 5,989 1,823 379 8,191
------------ ------------ ------------ ------------
Income (loss) before income taxes
and minority interest 3,130 514 (445) 3,199
Income tax expense (benefit) 1,197 189 (148) 1,238
Minority interest -- -- (136) (136)
------------ ------------ ------------ ------------
Net income (loss) 1,933 325 (433) 1,825
Amortization of goodwill, core deposit
intangible and purchase valuations 198 -- 67 265
------------ ------------ ------------ ------------
Cash earnings (loss) $ 2,131 $ 325 $ (366) $ 2,090
============ ============ ============ ============
PER SHARE DATA
Basic earnings per share $ 1.18
Diluted earnings per share $ 1.18
Basic cash earnings per share $ 1.36
Diluted cash earnings per share $ 1.35
Weighted average shares outstanding - basic 1,541
Weighted average shares outstanding - diluted 1,545
Page 19
HERITAGE HERITAGE
2000: BANK STATE BANK VALLEY OTHER CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net interest income $ 5,702 $ 456 $ 1,745 $ 37 $ 7,940
Provision for loan losses 1,130 -- 246 -- 1,376
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 4,572 456 1,499 37 6,564
Non-interest income 2,385 43 362 -- 2,790
Non-interest expense 4,950 346 1,460 294 7,050
------------ ------------ ------------ ------------ ------------
Income (loss) before income
taxes and minority interest 2,007 153 401 (257) 2,304
Income tax expense (benefit) 764 59 148 (118) 853
Minority interest -- -- -- (117) (117)
------------ ------------ ------------ ------------ ------------
Net income (loss) 1,243 94 253 (256) 1,334
Amortization of goodwill,
core deposit intangible,
and purchase valuations 229 23 -- 68 320
------------ ------------ ------------ ------------ ------------
Cash earnings (loss) $ 1,472 $ 117 $ 253 $ (188) $ 1,654
============ ============ ============ ============ ============
PER SHARE DATA
Basic earnings per share $ 0.81
Diluted earnings per share $ 0.81
Basic cash earnings per share $ 1.00
Diluted cash earnings per share $ 1.00
Weighted average shares outstanding - basic 1,650
Weighted average shares outstanding - diluted 1,650
Page 20
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK - Market risk is the risk of loss in a financial instrument
arising from adverse changes in market rates/prices such as interest rates,
foreign currency exchange rates, commodity prices and equity prices. Since
United's earnings depend on its level of interest rate spread, its primary
market risk exposure is interest rate risk ("IRR").
INTEREST RATE RISK - United has established a formal IRR policy, and
the Banks have an Asset/Liability Management Committee ("ALCO") and an
Investment Committee, which meet at least quarterly to review and report on
management's efforts to minimize IRR. Several asset/liability management
strategies have been employed by United to minimize its exposure to IRR. These
include selling most newly-originated long-term fixed-rate mortgages, promoting
the origination and retention of loans providing for periodic interest rate
adjustments, shorter terms to maturity or balloon provisions, and investing in
adjustable rate or shorter-term mortgage-backed securities and other
interest-earning investments.
The Asset/Liability Management Committee utilizes an institutional
funds management service detailed simulation model to quantify the estimated
exposure of net interest income ("NII") to sustained interest rate changes. The
model predicts the impact of changing interest rates on the interest income
received and interest expense paid on assets and liabilities. This sensitivity
analysis is compared to ALCO policy limits which specify a maximum tolerance
level for NII given a 200 basis point (bp) rise or decline in interest rates.
The following summarizes the sensitivity analysis for the Banks as of
June 30, 2001, the most recent information available. Management believes there
has been no material change in interest rate risk since June 30, 2001. For
additional information, see Management's Discussion and Analysis of Financial
Condition and Results of Operations included herein in Item 2 and refer to the
Interest Rate Risk Management discussion included in United's Annual Report on
Form 10-K for the year ended December 31, 2000.
HERITAGE BANK
Estimated increase (decrease)
in net interest income: +200 bp -200 bp
------- -------
0-90 days $ (27,718) $ 4,787
91-365 days (663,588) 425,366
2 years (1,475,321) 834,121
3 years (2,287,054) 1,242,876
VALLEY BANK
Estimated increase (decrease)
in net interest income: +200 bp -200 bp
------- -------
0-90 days $ 6,807 $ (24,555)
91-365 days (72,888) (97,936)
2 years (102,388) (258,164)
3 years (131,888) (418,391)
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions, including the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of assets and liability cash flows
and others. Sensitivity analysis does not reflect actions that United might take
in responding to or anticipating changes in interest rates.
Page 21
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
Although not involved in any material pending litigation as of
September 30, 2001, United is a defendant in various legal proceedings arising
in the normal course of business.
ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5 OTHER INFORMATION.
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
A. The following exhibits are included herein:
Exhibit
Number Description of Exhibit
- ------- ------------------------------------------------------------------
None
B. Reports on Form 8-K
Item 4. Changes in Registrant's Certifying Accountant.
Page 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
United Financial Corp.
Date November 13, 2001 /s/ John M. Morrison
----------------------- -------------------------------------
John M. Morrison
Chairman of the Board
(Duly Authorized
Representative)
Date November 13, 2001 /s/ Kurt R. Weise
----------------------- -------------------------------------
Kurt R. Weise
President and Chief
Executive Officer
(Duly Authorized
Representative)
Pagea 23