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, 2002
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number: 0-28080
UNITED FINANCIAL CORP.
----------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0507591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2779; 120 1st Avenue North, Great Falls, Montana 59403
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(406) 727-6106
--------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date:
Common Stock, no par value: 1,626,150 shares outstanding as of November 12, 2002
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Statements of Financial Condition at
September 30, 2002 and December 31, 2001 (unaudited)...........................................................1
Consolidated Condensed Statements of Income - Three and Nine Months Ended
September 30, 2002 and September 30, 2001 (unaudited)..........................................................2
Consolidated Condensed Statements of Cash Flows - Nine Months Ended
September 30, 2002 and September 30, 2001 (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.....................................................18
ITEM 4 CONTROLS AND PROCEDURES........................................................................................20
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS..............................................................................................20
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................................20
ITEM 3 DEFAULTS UPON SENIOR SECURITIES................................................................................20
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................................20
ITEM 5 OTHER INFORMATION..............................................................................................20
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K...............................................................................20
SIGNATURES...............................................................................................................22
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,
------------- ------------
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 25,085 $ 22,026
Securities available-for-sale 66,019 73,263
Loans held for sale 15,806 7,713
Loans receivable, net 247,155 260,524
Accrued interest receivable 3,256 2,769
Restricted stock, at cost 4,213 3,994
Premises and equipment, net 7,653 6,609
Real estate and other personal property owned 1,437 668
Goodwill, net of accumulated amortization of $825 and
$724 at September 30, 2002, and December 31, 2001,
respectively 3,429 3,076
Identifiable intangibles, net of accumulated
amortization of $167 and $239 at September 30, 2002, and
December 31, 2001, respectively 16 399
Deferred income taxes, net 198 553
Other assets 1,094 1,136
------------ ------------
$ 375,361 $ 382,730
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts $ 101,654 $ 97,679
Savings deposits 51,867 50,829
Time deposits 129,868 133,892
------------ ------------
283,389 282,400
Federal Home Loan Bank advances 41,000 50,500
Securities sold under agreements to repurchase 10,059 9,604
Other borrowings 1,000 2,000
Accrued interest payable 1,466 1,929
Advances from borrowers for taxes and insurance 306 164
Income taxes payable 303 503
Trust preferred securities 3,000 3,000
Other liabilities 1,676 1,188
------------ ------------
342,199 351,288
Minority interest 2,981 2,845
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;
1,626,150 and 1,625,967 shares issued and outstanding
at September 30, 2002 and December 31, 2001, respectively 27,167 23,950
Retained earnings, substantially restricted 2,173 4,339
Accumulated other comprehensive income 841 308
------------ ------------
30,181 28,597
------------ ------------
$ 375,361 $ 382,730
============ ============
Equity/Assets 8.04% 7.47%
Book Value/Share $ 18.56 $ 17.59
See Notes to Consolidated Condensed Financial Statements
Page 1
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<table>
<caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
-------------- -------------- --------------- --------------
<s> <c> <c> <c> <c>
INTEREST INCOME
Loans receivable $ 4,863 $ 5,681 $14,873 $16,894
Mortgage-backed securities 730 713 2,185 2,223
Other investment securities 161 208 632 743
Other interest earning assets 129 159 397 483
-------------- -------------- --------------- --------------
Total interest income 5,883 6,761 18,087 20,343
INTEREST EXPENSE
Deposits 1,851 2,747 5,904 8,580
Other borrowings 652 928 2,278 2,981
-------------- -------------- --------------- --------------
Total interest expense 2,503 3,675 8,182 11,561
-------------- -------------- --------------- --------------
Net interest income 3,380 3,086 9,905 8,782
Provision for loan losses 445 431 900 890
-------------- -------------- --------------- --------------
Net interest income after provision for loan losses 2,935 2,655 9,005 7,892
NON-INTEREST INCOME
Gain on sale of loans 1,142 936 2,567 2,356
Service charges and fees 297 263 844 738
Gain on sale of securities available-for-sale 1 31 87 158
Other income 48 54 157 246
-------------- -------------- --------------- --------------
Total non-interest income 1,488 1,284 3,655 3,498
NON-INTEREST EXPENSE
Compensation and benefits 1,673 1,580 4,712 4,403
Occupancy and equipment expense 416 354 1,184 1,045
Data processing fees 192 194 596 569
Other expenses 819 744 2,329 2,174
--------------- -------------- -------------- --------------
Total non-interest expense 3,100 2,872 8,821 8,191
-------------- -------------- --------------- --------------
Income before income taxes and minority interest 1,323 1,067 3,839 3,199
Provision for income taxes 504 413 1,442 1,238
-------------- -------------- --------------- --------------
Income before minority interest 819 654 2,397 1,961
Minority interest (53) (42) (152) (136)
-------------- -------------- --------------- --------------
Net income $766 $ 612 $ 2,245 $ 1,825
============== ============== =============== ==============
Basic earnings per share $.47 $0.38 $1.38 $1.08
============== ============== =============== ==============
Diluted earnings per share $.47 $0.37 $1.37 $1.07
============== ============== =============== ==============
Dividends declared per share $.25 $0.24 $ .75 $0.71
============== ============== =============== ==============
Weighted average shares outstanding-basic 1,626 1,630 1,626 1,695
============== ============== =============== ==============
Weighted average shares outstanding-diluted 1,641 1,637 1,639 1,699
============== ============== =============== ==============
</table>
See Notes to Consolidated Condensed Financial Statements
Page 2
<page>
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<table>
<caption>
---------------------------------
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, September 30,
------------- -------------
2002 2001
------------- -------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (5,286) $ (1,206)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans receivable 11,535 (14,257)
Purchases of securities available-for-sale (49,995) (29,961)
Proceeds from maturities, pay downs and sales of securities
available-for-sale 58,259 40,359
Purchases of restricted stock (49) (41)
Purchase of Valley Bancorp, Inc. stock -- (831)
Purchases of premises and equipment (1,503) (376)
Proceeds from sale of premises and equipment -- 12
Proceeds from sale of real estate and other personal property
owned 214 685
Acquisition of real estate and other personal property owned (9) (22)
-------- --------
Net cash provided (used) in investing activities 18,452 (4,432)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 989 20,477
Net decrease in Federal Home Loan Bank advances (9,500) (2,675)
Advances on line of credit -- 1,750
Payments on line of credit -- (2,000)
Net increase (decrease) in securities sold under agreements to
repurchase 456 (3,315)
Net decrease in federal funds purchased (1,000) --
Increase (decrease) in advances from borrowers for taxes and
insurance 143 (90)
Proceeds from trust preferred securities -- 3,000
Purchase of treasury stock -- (2,540)
Dividends paid to stockholders (1,198) (1,192)
Proceeds from issuance of common stock 3 3
-------- --------
Net cash provided (used) by financing activities (10,107) 13,418
-------- --------
Increase in cash and cash equivalents 3,059 7,780
Cash and cash equivalents at beginning of year 22,026 19,451
-------- --------
Cash and cash equivalents at end of period $ 25,085 $ 27,231
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash payments for interest $ 8,645 $ 12,002
Cash payments for income taxes $ 1,643 $ 1,129
</table>
See Notes to Consolidated Condensed Financial Statements
Page 3
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
United Financial Corp. ("UFC") is a bank holding company headquartered in
Great Falls, Montana, with operations in 12 Montana communities and Phoenix and
Scottsdale, Arizona. UFC's banking business in Montana is conducted through its
wholly-owned subsidiary, Heritage Bank ("Heritage Bank"), and in Arizona is
conducted through Valley Bank of Arizona ("Valley Bank"), the wholly-owned
subsidiary of Valley Bancorp, Inc. ("Valley"), a majority-owned subsidiary of
UFC. Heritage Bank and Valley Bank are collectively referred to herein as the
"Banks". UFC's wholly-owned subsidiary, United Financial-Montana Capital Trust I
was established in 2001 to issue and administer $3.0 million of Capital Trust
Pass-Through Securities. UFC, Heritage Bank and Valley are collectively referred
to herein as ("United"). United had assets of approximately $375.4 million,
deposits of approximately $283.4 million and stockholders' equity of
approximately $30.2 million at September 30, 2002.
UFC owned approximately 65% of Valley at September 30, 2002. As a result of
acquiring over 50% of the outstanding shares of Valley in January 2000, UFC
consolidated Valley in its financial statements effective January 1, 2000. The
aggregate purchase price of all shares of Valley purchased by UFC to date is
approximately $7.2 million. Valley had assets of approximately $71.2 million,
deposits of approximately $59.2 million and stockholders' equity of
approximately $8.6 million at September 30, 2002.
Heritage Bank is a state-chartered commercial bank with locations in
Bozeman, Chester, Fort Benton, Geraldine, Glendive, Great Falls, Hamilton,
Havre, Kalispell, Libby, Missoula and Shelby, Montana. Valley Bank is a
state-chartered commercial bank with locations in Phoenix and Scottsdale,
Arizona. The Banks are engaged in the community banking business of attracting
deposits from the general public through their offices and using those deposits,
together with other available funds, to originate commercial (including lease
financing), commercial real estate, residential, agricultural and consumer loans
primarily in their market areas in Montana and Arizona. A majority of the Banks'
banking business is conducted in the Great Falls and Phoenix areas. Based on
total assets, 44% of United's assets are located at Heritage Bank's Great Falls
locations and 16% at Valley Bank's Phoenix location. The Banks also invest in
mortgage-backed securities, U.S. Treasury obligations, other U.S. Government
agency obligations and other interest-earning assets. Heritage Bank also holds a
14% ownership interest in Bankers' Resource Center, a computer data center.
The Banks' financial condition and results of operations, and therefore the
financial condition and results of operations of United, are dependent primarily
on net interest income and fee income. The Banks' financial condition and
results of operations are also significantly influenced by local and national
economic conditions, changes in market interest rates, governmental policies,
tax laws and the actions of various regulatory agencies.
UFC's principal offices are located at 120 First Avenue North, Great Falls,
Montana, and its telephone number is (406) 727-6106.
2. BASIS OF PRESENTATION
United's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP") for interim financial information and the instructions to Form 10-Q and
Page 4
<page>
Rule 10-01 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, the
accompanying unaudited consolidated condensed financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the consolidated financial condition, results of
operations, and cash flows for the periods disclosed. Operating results for the
three and nine months ended September 30, 2002 are not necessarily indicative of
the results anticipated for the year ending December 31, 2002. For additional
information, refer to the consolidated audited financial statements and
footnotes thereto included in United's Annual Report to Shareholders and Annual
Report on Form 10-K for the year ended December 31, 2001. Certain
reclassifications have been made to the December 31, 2001 financial information
to conform to the September 30, 2002 presentation.
3. COMPREHENSIVE INCOME
United's only significant element of comprehensive income is unrealized
gains and losses on securities available-for-sale.
<table>
<caption>
THREE MONTHS ENDED Three Months Ended
SEPTEMBER 30, 2002 September 30, 2001
------------------------------------ -----------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
---------- ----------- --------- ---------- ----------- ---------
<s> <c> <c> <c> <c> <c> <c>
Net income $ 1,270 $504 $ 766 $1,025 $413 $612
Unrealized and realized
holding gains arising
during period 156 59 97 590 224 366
Less: reclassification adjustment
for gains included in net income 1 -- 1 31 12 19
------- ---- ----- ------ ---- ----
Net unrealized gains on
securities available for sale 155 59 96 559 212 347
Less: portion of unrealized gains
(loss) allocated to minority
interest (3) -- (3) 7 -- 7
------- ---- ----- ------ ---- ----
Total comprehensive income $ 1,428 $563 $ 865 $1,577 $625 $952
======= ==== ===== ====== ==== ====
</table>
Page 5
<page>
<table>
<caption>
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 2002 September 30, 2001
-------------------------------------- -------------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
---------- ----------- --------- ---------- ----------- ---------
<s> <c> <c> <c> <c> <c> <c>
Net income $3,687 $1,442 $2,245 $3,063 $1,238 $1,825
Unrealized and realized
holding gains arising
during period 932 354 578 1,172 445 727
Less: reclassification adjustment
for gains included in net income 87 33 54 158 60 98
------ ------ ------ ------ ------ ------
Net unrealized gains on
securities available for sale 845 321 524 1,014 385 629
Less: portion of unrealized gains
(loss) allocated to minority
interest 43 -- 43 61 -- 61
------ ------ ------ ------ ------ ------
Total comprehensive income $4,489 $1,763 $2,726 $4,016 $1,623 $2,393
====== ====== ====== ====== ====== ======
</table>
4. CASH EQUIVALENTS
For purposes of the consolidated condensed statements of cash flows, United
considers all cash, daily interest and non-interest bearing demand deposits with
banks with original maturities of three months or less to be cash equivalents.
5. COMPUTATION OF 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 11,000 shares of common stock exercisable at a price of
$23.86 per share through February 3, 2003 and the incremental shares under stock
option plans. The warrant was excluded from the calculation of diluted EPS for
the three and nine month periods ended September 30, 2002 and 2001 because the
effect of inclusion would have been antidilutive using the treasury stock
method.
Page 6
THE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER
SHARE.
<table>
<caption>
IN THOUSANDS, EXCEPT PER SHARE THREE MONTHS ENDED NINE MONTHS ENDED
DATA) SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
2002 2001 2002 2001
------ ------ ------ ------
<s> <c> <c> <c> <c>
Weighted average shares outstanding during
the period on which basic earnings per
share is calculated 1,626 1,630 1,626 1,695
Add: incremental shares under stock option
plans 15 6 13 4
------ ----- ------ ------
Average outstanding shares on which diluted
earnings per share is calculated 1,641 1,636 1,639 1,699
====== ===== ====== ======
Net income applicable to common
stockholders, basic $ 766 612 2,245 1,825
Less: reduction of proportionate share of
Valley net income assuming option
exercises -- -- (2) (2)
------ ----- ------ ------
Net income applicable to common
stockholders, diluted $ 766 612 2,243 1,823
====== ===== ====== ======
Basic earnings per share $ .47 .38 1.38 1.08
====== ===== ====== ======
Diluted earnings per share $ .47 .37 1.37 1.07
====== ===== ====== ======
</table>
6. RELATED PARTIES
Central Financial Services, Inc. ("CFS") provides various management
services to United, including certain accounting and tax services, investment
consulting, personnel consulting, asset liability management and regulatory
consulting. CFS is owned by United's Chairman of the Board of Directors and
largest shareholder and has been providing similar services to various banks and
financial services organizations since December of 1988. CFS fees billed to
United were approximately $369,000 and $279,000 for the nine month periods ended
September 30, 2002 and 2001, respectively. The fees are billed by CFS on an
hourly basis for work performed by United's chairman and CEO, and four other CFS
employees. The chairman and CEO of United do not receive direct compensation
from United for their services. Each is compensated for services as a director
through director's fees of $250 per month, and for services as an officer of
United through CFS. Through CFS, the chairman and CEO earn annual salaries of
$130,000 and $132,000, respectively. United's portion of those salaries was
approximately 57%, based upon CFS billings during those periods.
Banker's Resource Center ("BRC") provides data processing services for
Heritage Bank. Heritage Bank has a 14% ownership interest in BRC, a computer
data center. The charges for BRC's services were $.4 million for both of the
nine months ended September 30, 2002 and 2001.
Page 7
7. DIVIDENDS DECLARED
On October 22, 2002, the Board of Directors of United declared a quarterly
cash dividend of $.25 per share, payable November 25, 2002, to shareholders of
record on November 11, 2002.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations", and No.142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. SFAS No. 142 eliminates the amortization of
goodwill relating to past and future acquisitions and instead subjects goodwill
to an impairment assessment at least annually. United adopted the provisions of
SFAS No. 142 to existing goodwill and other intangible assets for years
beginning January 1, 2002. The adoption of SFAS No. 142 will cease further
amortization of goodwill and will have a pretax impact on income of
approximately $.2 million on an annual basis.
In June 2001, FASB approved for issuance SFAS No. 143, "Accounting for
Asset Retirement Obligations," which addresses the accounting for legal
obligations associated with the retirement of tangible long-lived assets. Under
SFAS No. 143, the fair value of a liability for an asset retirement obligation
shall be recognized in the period in which the obligation is incurred. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002, with early
adoption permitted. United does not expect SFAS No. 143 to have a material
effect on United's financial position or results of operations.
In August 2001, FASB approved for issuance SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets." SFAS No. 144 was issued to
resolve implementation issues that had been created under SFAS No. 121. Under
SFAS No. 144, one accounting model is required to be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and certain additional disclosures are required. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 31, 2001.
United does not expect SFAS No. 144 to have a material effect on United's
financial position or results of operations.
On April 30, 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections." SFAS
No. 145 updates, clarifies, and simplifies existing accounting pronouncements,
by rescinding SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board Opinion 30 will now be used to classify those
gains and losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
Finally, SFAS No. 145 also makes technical corrections to existing
pronouncements. United currently believes that the adoption of SFAS No. 145 will
not have a material impact on the United's financial position or results of
operations.
In June 2002, FASB approved for issuance SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 was issued to
clarify the date at which a liability should be recognized for costs associated
with exit and disposal activities. SFAS No. 146 nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3. Under Issue No. 94-3, the date at which the
liability was recognized was the date of an entity's commitment to an exit plan.
SFAS No. 146 requires that a liability for the cost of exit or disposal
activities
Page 8
<page>
be recognized when the liability is incurred. A fundamental conclusion in this
statement is that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability. Also,
this statement establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. United currently believes that the adoption of SFAS No. 146 will not
have a material impact on United's financial position or results of operations.
In October 2002, FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB No. 72 and 144 and FASB
Interpretation No. 9." SFAS No. 147 concluded that for a transaction that is a
business combination, the unidentified intangible asset that is required to be
recognized under paragraph 5 of SFAS No. 72 represents goodwill that should be
accounted for under SFAS No. 142. The statement also concluded that SFAS No. 141
provides sufficient guidance for assigning amounts to assets acquired and
liabilities assumed; therefore, the specialized industry guidance in
Interpretation 9 and paragraph 4 of SFAS No. 72 is no longer necessary. Finally,
SFAS No. 147 clarifies that a branch acquisition that meets the definition of a
business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. This statement is effective on
October 1, 2002. United does not expect SFAS No. 147 to have a material effect
on United's financial position or results of operations.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
1. FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements.
Statements that are not historical or current facts, including statements about
beliefs and expectations, are forward-looking statements. Forward-looking
statements involve inherent risks and uncertainties, and important factors could
cause actual results to differ materially from those anticipated, including the
following. In addition to those contained in United's reports on file with the
SEC: (i) general economic or industry conditions could be less favorable than
expected, resulting in a deterioration in credit quality, a change in the
allowance for loan losses, or a reduced demand for United's products and
services; (ii) changes in the domestic interest rate environment could reduce
net interest income and could increase loan losses; (iii) changes in the
extensive laws, regulations and policies governing financial services companies
could alter United's business environment or affect operations; (iv) the
potential need to adapt to the industry changes in information technology
systems, on which United is highly dependent, could present operational issues
or require significant capital spending; (v) competitive pressures could
intensify and affect United's profitability, including as a result of continued
industry consolidation, the increased availability of financial services from
non-banks, technological developments, or bank regulatory reform; (vi) the
impact of weather conditions on businesses and borrowers and on general economic
conditions in the geographic markets and business areas in which United conducts
it business; and (vii) capital investments in United's businesses may not
produce expected growth in earnings anticipated at the time of the expenditure.
Forward-looking statements speak only as of the date they are made, and United
undertakes no obligation to update them in light of new information of future
events.
Page 9
<page>
2. CHANGES IN STATEMENT OF FINANCIAL CONDITION DATA FROM SEPTEMBER 30, 2002
TO DECEMBER 31, 2001
<table>
<caption>
(IN THOUSANDS) SELECTED FINANCIAL CONDITION DATA
(UNAUDITED)
SEPTEMBER 30, December 31, $ %
2002 2001 Change Change
------------- ------------ --------- --------
<s> <c> <c> <c> <c>
Cash and cash equivalents $ 25,085 $ 22,026 $ 3,059 13.9%
Securities available-for-sale 66,019 73,263 (7,244) (9.9)
Loans held for sale 15,806 7,713 8,093 104.9
Loans receivable, net 247,155 260,524 (13,369) (5.1)
Restricted stock, at cost 4,213 3,994 219 5.5
Premises and equipment, net 7,653 6,609 1,044 15.8
Real estate and other
personal property owned 1,437 668 769 115.3
Goodwill, net 3,429 3,076 353 11.5
Identifiable intangibles, net 16 399 (383) (95.9)
All other assets 4,548 4,458 90 2.0
Total assets 375,361 382,730 (7,369) (1.9)
Deposits 283,389 282,400 989 .4
Federal Home Loan Bank advances 41,000 50,500 (9,500) (18.8)
Securities sold under
agreements to repurchase 10,059 9,604 456 (4.7)
Other borrowings 1,000 2,000 (1,000) (50.0)
Trust preferred securities 3,000 3,000 -- --
All other liabilities 3,751 3,784 (33) (.9)
Total liabilities 342,199 351,288 (9,089) (2.6)
Stockholders' equity, net 30,181 28,597 1,584 5.5
</table>
Total assets decreased $7.3 million to $375.4 million at September 30, 2002
from $382.7 million at December 31, 2001. Loans receivable decreased $13.4
million and loans held for sale increased $8.1 million, while cash and cash
equivalents increased approximately $3.1 million, securities held for investment
decreased $7.3 million and premises and equipment, net increased $1.0 million.
SECURITIES AVAILABLE-FOR-SALE - Securities available-for-sale decreased
$7.3 million to $66.0 million at September 30, 2002 from $73.3 million at
December 31, 2001. The decrease was the result of $50.0 million of purchases,
offset by $58.2 million of maturities, sales, and principal repayments and a $.9
million increase in unrealized gains on securities.
Page 10
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:
<table>
<caption>
(IN THOUSANDS)
(UNAUDITED) SEPTEMBER 30, 2002
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<s> <c> <c> <c>
U.S. GOVERNMENT AND FEDERAL
AGENCIES $14,699 $ 257 -- $14,956
MORTGAGE-BACKED SECURITIES 46,771 1,037 -- 47,808
MUNICIPAL BONDS 1,531 80 -- 1,611
CORPORATE BONDS AND EQUITY
SECURITIES 1,525 119 -- 1,644
------- ------ ------- -------
$64,526 $1,493 -- $66,019
======= ====== ======= =======
</table>
<table>
<caption>
December 31, 2001
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<s> <c> <c> <c> <c>
U.S. Government and Federal
agencies $30,439 $ 338 $ (70) $30,707
Mortgage-backed securities 38,938 400 (56) 39,282
Municipal bonds 1,784 7 (46) 1,745
Corporate bonds and equity
securities 1,542 1 (14) 1,529
------- ----- -------- -------
$72,703 $ 746 $ (186) $73,263
======= ===== ======== =======
</table>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable decreased
$13.3 million to $247.2 million at September 30, 2002 from $260.5 million at
December 31, 2001. United has slowed its acquisition of participation loans from
outside Montana due to reduced interest rates available on these loans and the
concerns of the national economy. Also, a weakened state and national economy
has reduced loan demand. The Banks also purchase and participate in commercial
and lease financing loans. The Banks had $38.7 million of participation and
purchased loans as of September 30, 2002 and $44.4 million as of December 31,
2001.
During the nine months ended September 30, 2002, loans held for sale
increased $8.1 million to $15.8 million at September 30, 2002 from approximately
$7.7 million at December 31, 2001, as loan originations outpaced secondary
market sales. Approximately $130.8 million of loans were originated for sale and
$122.7 million of loans were sold to the secondary market during the nine month
period ending September 30, 2002.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve decreased $.1 million to
$3.4 million at September 30, 2002 as compared to $3.5 million at December 31,
2001. A loan loss provision of $.8 million for the nine months ended September
30, 2002 was offset by loans in the amount of $1.0 million which were determined
by United's management to be uncollectable and subsequently charged-off. The
loan loss reserve at September 30, 2002 is an amount which management believes
is adequate given the level of non-performing assets and management's assessment
of loan risk. The allowance for loan losses to total loans at September 30, 2002
was 1.35%, compared to 1.33% at December 31, 2001.
Page 11
LOANS RECEIVABLE, NET OF UNAMORTIZED NET DEFERRED LOAN FEES, AT THE DATES
INDICATED ARE SUMMARIZED AS FOLLOWS:
<table>
<caption>
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, December 31,
2002 2001
------------ ------------
<s> <c> <c>
First mortgage loans and contracts secured
by real estate $ 71,286 $ 81,588
Commercial real estate loans 72,870 77,627
Commercial loans 57,474 60,579
Auto and other consumer loans 25,566 23,970
Second mortgage consumer loans 5,908 5,438
Agricultural loans 14,713 11,607
Tax exempt municipal loans 1,506 1,685
Savings account and other loans 1,210 1,533
-------- --------
250,533 264,027
Less: Allowance for loan losses 3,378 3,503
-------- --------
$247,155 $260,524
======== ========
</table>
A SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES FOR THE DATES INDICATED
ARE AS FOLLOWS:
<table>
<caption>
(IN THOUSANDS) NINE MONTHS ENDED Year ended
SEPTEMBER 30, 2002 December 31, 2001
------------------ -----------------
<s> <c> <c>
Balance, beginning of period $ 3,503 $ 2,526
Provision for loan losses 900 1,640
Losses charged off (1,093) (701)
Recoveries 68 38
------- -------
Balance, end of period $ 3,378 $ 3,503
======= =======
</table>
NON-PERFORMING ASSETS - United follows regulatory guidelines with respect
to placing loans on non-accrual status. When a loan is placed on non-accrual
status, all previously accrued and uncollected interest is reversed. At
September 30, 2002 United had non-accrual loans totaling $.3 million and loans
totaling $.6 million past due 90 days and still accruing. At December 31, 2001
United had non-accrual loans totaling $2.1 million and loans totaling $.3
million past due 90 days and still accruing.
United is required to review, classify and report to its Board of Directors
its assets on a regular basis and classify them as "substandard" (distinct
possibility that some loss will be sustained), "doubtful" (high likelihood of
loss), or "loss" (uncollectible). Adequate valuation allowances are required to
be established for assets classified as substandard or doubtful in accordance
with generally accepted accounting principles. If an asset is classified as a
loss, the institution must either establish a specific valuation allowance equal
to the amount classified as loss or charge off such amount. At September 30,
2002 and December 31, 2001, United had no assets classified as loss. At
September 30, 2002 and December 31, 2001, United had $.1 million and $.8
million, respectively, classified as doubtful. At September 30, 2002 and
December 31, 2001, United had $.8 million and $1.9 million of reported
substandard assets, respectively. As a percent of total assets, substandard
assets were approximately .32% and .50% at September 30, 2002 and December 31,
2001, respectively.
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED - The $.8 million increase
includes approximately $.9 million of repossessed personal property acquired by
Page 12
<page>
Valley Bank during the first nine months of 2002, offset by sales of repossessed
personal property by Heritage Bank of approximately $.1 million.
PREMISES AND EQUIPMENT - Premises and Equipment increased $1.0 million to
$7.6 million at September 30, 2002 from $6.6 million at December 31, 2001. The
Banks invested approximately $1.5 million in fixed assets during the first nine
months of 2002, primarily in connection with the construction of the new
Heritage Bank branch facility in Great Falls, Montana and the relocation of the
Heritage Bank branch in Kalispell, Montana. The purchases of premises and
equipment were offset by approximately $.5 million of depreciation.
DEPOSITS - Deposits increased $1.0 million to $283.4 million at September
30, 2002 from $282.4 million at December 31, 2001. This increase was primarily
the result of the continued growth of the three new Heritage Bank branches in
Bozeman, Kalispell and Missoula, Montana, and Valley Bank's new branch in
Scottsdale, Arizona.
DEPOSITS AT THE DATES INDICATED ARE SUMMARIZED AS FOLLOWS:
<table>
<caption>
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, December 31,
2002 2001
------------- ------------
<s> <c> <c> <c> <c>
Demand accounts $ 44,697 15.8% $ 46,689 16.5%
Now and money market accounts 56,958 20.1 50,990 18.1
Savings accounts 51,867 18.3 50,829 18.1
Certificate of deposits 129,867 45.8 133,892 47.3
-------- ---- -------- ----
$283,389 100% $282,400 100%
======== ==== ======== ====
</table>
BORROWED FUNDS - FHLB advances decreased $9.5 million from December 31,
2001 to September 30, 2002. Securities sold under agreements to repurchase
increased $.5 million to $10.1 million at September 30, 2002 from $9.6 million
at December 31, 2001.
STOCKHOLDERS' EQUITY - Stockholders' equity increased $1.6 million to
$30.2 million at September 30, 2002 from $28.6 million at December 31, 2001.
This increase is due to $2.2 million of net income for the nine months ended
September 30, 2002 less cash dividends declared of $1.2 million, and a
$.6 million increase in unrealized gains net of tax effects, associated with
securities classified as available-for-sale being adjusted to market value.
3. ASSET/LIABILITY MANAGEMENT
United's earnings depend to a large extent on the level of its "net
interest income." Net interest income depends upon the difference (referred to
as "interest rate spread") between the yield on United's loan and investment
portfolios and interest-earning cash balances ("interest-earning assets"), and
the rates paid on its deposits and borrowings ("interest-bearing liabilities").
Net interest income is further affected by the relative amounts of United's
interest-earning assets and interest-bearing liabilities. In recent years,
United's interest-earning assets have exceeded interest-bearing liabilities.
However, when interest-earning assets decrease as a result of non-accrual loans
and investments in non-interest earning assets, net interest income and interest
rate spread also decrease and any continued decrease in the level of
interest-earning assets would generally result in a negative impact on earnings.
One of the primary objectives of United's management has been to
restructure United's balance sheet to reduce its vulnerability to changes in
Page 13
<page>
interest rates ("interest rate risk"). Savings institutions historically have
suffered from a mismatch in the term to maturity of their assets and
liabilities, with mortgage loan assets tending to be of a much longer term than
deposits, the primary liabilities of savings institutions. In periods of rising
interest rates, this mismatch can render savings institutions vulnerable to
increases in costs of funds (deposits and borrowings) that can outstrip
increases in returns on longer-term fixed rate loans and investments, resulting
in a decrease in positive interest rate spread and lower earnings.
Several strategies have been employed by United to minimize the mismatch of
asset and liability maturities. For the past several years, Heritage Bank has
maintained a policy of selling the majority of newly-originated long-term (15 to
30-year maturity) fixed-rate mortgage loans to the secondary market. These loans
are sold at their outstanding principal balance, which is the prearranged
contract purchase price, and therefore, no gain or loss is realized at sale.
United promotes the origination and retention of loans providing for periodic
interest rate adjustments, shorter terms to maturity or balloon provisions.
United also emphasizes investment in adjustable rate or shorter-term
mortgage-backed securities and other interest-earning investments. When
maturities of loans increase, United offsets the increased interest rate risk
with matching funds and maturities with FHLB borrowings.
4. LIQUIDITY AND CAPITAL RESOURCES
United's primary sources of funds are deposits, FHLB borrowings, repurchase
agreements, proceeds from loan sales, and loan and mortgage-backed securities
repayments. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by market interest rates, economic
conditions and competition. In a period of declining interest rates, mortgage
prepayments generally increase. As a result, these proceeds from mortgage
prepayments generally would be invested in lower yielding loans or other
investments which have the effect of reducing interest income. In a period of
rising interest rates, mortgage prepayments would generally decrease and the
proceeds from such prepayments generally would be invested in higher yielding
loans or investments which would have the effect of increasing interest income.
The Banks' most liquid assets are cash and cash in banks and highly liquid,
short-term investments. The levels of these assets are dependent on the Banks'
operating, financing, lending, and investing activities during any given period.
Liquidity management of the Banks is both a daily and long-term function of
United's management strategy. Excess funds are generally invested in FHLB
overnight funds. If the Banks should require funds beyond their ability to
generate them internally, additional sources of funds are available through the
use of FHLB advances. At September 30, 2002 the Banks had outstanding borrowings
of $52.1 million which included $41.0 million of FHLB advances, $10.1 million of
repurchase agreements and $1.0 million of other borrowed money. At December 31,
2001 the Banks had outstanding borrowings of $62.1 million which included $50.5
million of FHLB advances, $9.6 million of repurchase agreements and $2.0 million
of other borrowed money.
UFC, as a bank holding company separate from its subsidiaries, provides for
its own liquidity. Substantially all 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 14
<page>
5. CRITICAL ACCOUNTING POLICIES
United has identified its most critical accounting policy to be that
related to the allowance for loan losses. United's allowance for loan losses
methodology incorporates a variety of risk considerations in establishing an
allowance for loan losses that management believes is appropriate. Risk factors
include historical loss experience, delinquency and charge-off trends,
collateral values and an internal loan grading system adopted by the Banks.
Other factors include the general economic environment in United's markets and,
in particular, the state of certain industries. Changes in any of the above
factors could have a significant affect on the calculation of the allowance for
loan losses in any given period.
6. RESULTS OF OPERATIONS-COMPARISON OF THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
<table>
<caption>
(IN THOUSANDS) SELECTED INCOME STATEMENT DATA
(UNAUDITED} ---------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
2002 2001 $ Change % Change
-------- -------- -------- --------
<s> <c> <c> <c> <c>
Interest income $ 5,883 $ 6,761 $ (878) (13.0)%
Interest expense 2,503 3,675 (1,172) (31.9)
-------- -------- -------- --------
Net interest income 3,380 3,086 294 9.5
Provision for losses on loans 445 431 14 3.2
-------- -------- -------- --------
Net interest income after
provision for losses on loans 2,935 2,655 280 10.6
Non-interest income 1,488 1,284 204 15.9
Non-interest expense 3,100 2,872 228 8.0
-------- -------- -------- --------
Income before income taxes
and minority interest 1,323 1,067 256 24.0
Provision for income tax expense 504 413 91 21.9
-------- -------- -------- --------
Net income before minority
interest 819 $ 654 165 25.3
Minority interest (53) (42) (11) 25.4
-------- -------- -------- --------
Net income $ 766 $ 612 $ 154 25.3%
======== ======== ======== ========
</table>
NET INCOME - United had net income of $.8 million, or basic and diluted
earnings per share of $.47, for the three months ended September 30, 2002. For
the same period in 2001, United had net income of $.6 million, or basic and
diluted earnings per share of $.38 and $.37, respectively. Valley had net income
of $.1 million for each of the three months ended September 30, 2002 and 2001.
NET INTEREST INCOME - Like most financial institutions, the most
significant component of United's earnings is net interest income, which is the
difference between the interest earned on interest-earning assets (loans,
investment securities, mortgage-backed securities and other interest-earning
assets), and the interest paid on deposits and borrowings. This amount, when
divided by average interest-earning assets, is referred to as the net interest
margin, expressed as a percentage. Net interest income and net interest margins
are affected by changes in interest rates, the volume and the mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. The difference between the yield on interest-earning
assets and the cost of interest-bearing liabilities expressed as a percentage is
referred to as the net interest-rate spread. Net interest income increased $.3
million from $3.1 million for the three months ended September 30, 2001 to $3.4
million for the three months ended September 30, 2002. Net interest margin
increased .30% from 3.50% for the three month period ended September 30, 2001 to
3.80% for the three month period ended September 30, 2002. Net interest spread
increased .40% from
Page 15
<page>
3.27% for the three month period ended September 30, 2001 to 3.67% for the three
month period ended September 30, 2002. Increased volume of interest-earning
assets, decreases in funding rates at FHLB and decreased interest rates on
consumer deposits resulted in an increase in both net interest margin and net
interest spread. United has used the funds from additional deposits during 2002
to manage interest rate risk.
INTEREST INCOME - Interest income decreased from $.9 million from $6.8
million for the three month period ended September 30, 2001 to $5.9 for the
three month period ended September 30, 2002. For the three month period ended
September 30, 2002, compared to the three month period ended September 30, 2001,
interest on loans receivable increased $.8 million, and interest on
mortgage-backed securities, investments and interest on other interest-earning
assets decreased $.1 million.
INTEREST EXPENSE - Interest expense decreased $1.2 million from $3.7
million for the three month period ended September 30, 2001 to $2.5 million for
the three month period ended September 30, 2002. Although the average balance of
deposits increased $9.0 million for the third quarter ended 2002 compared to the
same quarter in 2001, lower interest rates during the third quarter of 2002
allowed for a decrease in interest expense on deposits of $.9 million during the
third quarter of 2002 compared to the same quarter in 2001.
For the three month period ended September 30, 2002, compared to the three
month period ended September 30, 2001, interest on other borrowings decreased
$.3 million. The average balance of other borrowings decreased $4.8 million for
the quarter ended September 30, 2002 as compared to 2001. The combination of the
decrease in borrowings and lower interest rates on borrowed funds in 2002
resulted in a $.3 million decrease in interest expense on other borrowings in
the third quarter of 2002 compared to the same period in 2001.
PROVISION FOR LOAN LOSSES - United provided $.4 million for loan losses in
both of the third quarters ended September 30, 2002 and 2001. Although the state
and national economics have weakened in 2002 as compared to 2001, asset quality
at the Banks has remained relatively strong. United's past due and non-accrual
loans totaled .35% and .71% of total loans at September 30, 2002 and 2001,
respectively.
The provision for loan losses is determined by management as the amount to
be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio in accordance with GAAP. Future
additions to United's allowance for loan losses and any change in the related
ratio of the allowance for loan losses to non-performing assets are dependent
upon the performance and composition of United's loan portfolio, the economy,
inflation, changes in real estate values and interest rates and the view of the
regulatory authorities toward adequate reserve levels.
NON-INTEREST INCOME - In addition to net interest income, United generates
significant non-interest income from a range of retail banking services,
including mortgage banking activities and service charges for deposit services.
Non-interest income increased $.2 million from $1.3 million for the three month
period ended September 30, 2001 to $1.5 million for the three month period ended
September 30, 2002. United continued to experience strong demand in the home
lending market and particularly the refinancing market, during the three month
periods ended September 30, 2002 and 2001.
NON-INTEREST EXPENSE - United's non-interest expense increased $.2 million
during the three month period ending September 30, 2002 as compared to the same
period in 2001.
Page 16
<page>
7. RESULTS OF OPERATIONS-COMPARISON OF THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
<table>
<caption>
(IN THOUSANDS) SELECTED INCOME STATEMENT DATA
---------------------------------------------------------------
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
2002 2001 $ Change % Change
-------- --------- -------- --------
<s> <c> <c> <c> <c>
Interest income $ 18,087 $ 20,343 $(2,256) (11.09)%
Interest expense 8,182 11,561 (3,379) (29.23)
-------- -------- ------- -----
Net interest income 9,905 8,782 1,123 12.79
Provision for losses on loans 900 890 10 1.12
-------- -------- ------- -----
Net interest income after
provision for losses on loans 9,005 7,892 1,113 14.11
Non-interest income 3,655 3,498 157 4.47
Non-interest expense 8,821 8,191 630 7.69
-------- -------- ------- -----
Income before income taxes
and minority interest 3,839 3,199 640 20.01
Provision for income tax expense 1,442 1,238 204 16.48
-------- ------- -----
Net income before minority
interest 2,397 $ 1,961 436 22.25
Minority interest (152) (136) 16 12.23
-------- -------- ------- -----
Net income $ 2,245 $ 1,825 $ 420 28.13%
======== ======== ======= =====
</table>
NET INCOME - United had net income of $2.2 million, or basic and diluted
earnings per share of $1.38 and $1.37, respectively, for the nine months ended
September 30, 2002. For the same period in 2001, United had net income of $1.8
million, or basic and diluted earnings per share of $1.08. Valley had net income
of $.4 million and $ .3 million for the nine months ended September 30, 2002 and
2001, respectively.
NET INTEREST INCOME - Net interest income increased $1.1 million from $8.8
million for the nine months ended September 30, 2001 to $9.9 million for the
nine months ended September 30, 2002. Net interest margin increased .34% to
3.70% for the nine month period ended September 30, 2002 from 3.36% for the same
period last year. Net interest spread increased .42% to 3.55% for the nine month
period ended September 30, 2002 from 3.13% for the same period last year.
Increased volume of interest earning assets, decreases in funding rates at FHLB
and decreased interest rates on customer deposits resulted in an increase in
both net interest margin and interest rate spread. United has used the funds
from additional deposits in 2002 to manage interest rate risk.
INTEREST INCOME - Interest income decreased $2.2 million from $20.3 million
for the nine month period ended September 30, 2001 to $18.1 million for the nine
month period ended September 30, 2002. For the nine month period ended September
30, 2002, compared to the nine month period ended September 30, 2001, interest
on loans receivable increased $2.0 million, and interest on mortgage-backed
securities, investments and interest on other interest-earning assets decreased
$.2 million.
INTEREST EXPENSE - Interest expense decreased $3.4 million from $11.6
million for the nine month period ended September 30, 2001 to $8.2 million for
the nine month period ended September 30, 2002. For the nine month period ended
September 30, 2002, compared to the nine month period ended September 30, 2001,
interest on deposits decreased $2.7 million. Although the average balances of
deposits increased $15.3 million for the nine month period ended September 30,
2002 compared to the same period in 2001, lower interest rates on customer
deposits during the third quarter of 2002 allowed for a decrease in interest
expense on deposits of $2.7 million for the nine month period ended September
30,
Page 17
<page>
2002, compared to the same period in 2001. Average balances of other borrowings
decreased $6.2 million from September 30, 2001 to 2002. The combination of the
decrease in borrowings as well as lower interest rates in 2002, resulted in a
$.7 million decrease in interest on other borrowings.
PROVISION FOR LOAN LOSSES - United provided $.9 million for loan losses for
both the nine months ended September 30, 2002 and 2001.
NON-INTEREST INCOME - Non-interest income increased $.1 million from $3.5
million for the nine months ended September 30, 2001 to $3.6 million for the
nine months ended September 30, 2002. United has experienced relatively strong
demand in the home lending market, and particularly the home refinancing market
during the first nine months of 2002 and 2001, as mortgage interest rates
remained at attractive levels for borrowers. As a result of this strong market,
demand for home loans, mortgage fee income increased $.2 million in the first
nine months of 2002. Customer service charges and other fees decreased $.1
million in the first nine months of 2002.
NON-INTEREST EXPENSE - United's non-interest expense increased $.6 million
during the nine month period ending September 30, 2002 as compared to the same
period in 2001. Compensation and benefits increased $.3 million and other
operating expenses increased $.3 million.
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, 2002, the most recent information available. Management believes there has
been no material change in interest rate risk since June 30, 2002. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein in Item 2 and refer to the
Interest Rate Risk Management discussion included in United's Annual Report on
Form 10-K for the year ended December 31, 2001.
Page 18
<page>
<table>
<caption>
HERITAGE BANK
ESTIMATED INCREASE (DECREASE)
IN NET INTEREST INCOME: +200 bp -200 bp
---------- -----------
<c> <c> <c>
0-90 days $ (8,508) $ (69,468)
91-360 days (266,840) (72,563)
2 years (588,336) (89,219)
3 years (888,540) (127,168)
</table>
<table>
<caption>
VALLEY BANK
ESTIMATED INCREASE (DECREASE)
IN NET INTEREST INCOME: +200 bp -200 bp
---------- -----------
<c> <c> <c>
0-90 days $ (28,262) $ (32,962)
91-360 days (138,986) (78,557)
2 years (277,391) (215,046)
3 years (340,886) (426,445)
</table>
The preceding sensitivity analysis does not represent a forecast and should
not be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions, including the nature
and timing of interest rate levels including yield curve shape, prepayments on
loans and securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment/replacement of assets and liability cash flows and
others. Sensitivity analysis does not reflect actions that United might take in
responding to or anticipating changes in interest rates.
INTEREST RATE SENSITIVITY OF THE ECONOMIC VALUE OF EQUITY - Mismatches of
interest rate repricing between assets and liabilities create interest rate
risk. Interest rate risk affects the market value of equity, also called the
economic value of equity ("EVE"). Measurement of the EVE is an attempt to
establish a methodology to gauge the potential for the reduction of future
earnings and stockholders' equity resulting from both lower NII and lower EVE
caused by changes in market interest rates. EVE is the difference between
United's depository portfolio value and its loans receivable portfolio value.
EVE thus provides a leading indicator of future potential changes in both NII
and stockholders' equity.
Heritage Bank and Valley Bank have both established maximum percentage
changes for EVE at 1.5% of total assets, given an 100 basis point change in
interest rates. EVE, as a percent to total assets was as follows:
<table>
<caption>
HERITAGE BANK VALLEY BANK
PERCENT TO TOTAL ASSETS:
<s> <c> <c>
June 30, 2002 1.41% 1.67%
March 31, 2002 .88% 1.56%
December 31, 2001 1.21% 1.55%
</table>
The Banks periodically review and make changes to established limits for
EVE changes due to mergers and other market factors. Though Valley Bank is
slightly over 1.5% of assets, management considers this to be within prudent
standards and continues to monitor the ratio. The EVE calculation contains a
significant number of assumptions, some of which are not always reliable.
Management does not consider this to be a major departure from policy.
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
Page 19
<page>
deposits, reinvestment/replacement of assets and liability cash flows and
others. The EVE analysis does not reflect actions that Heritage Bank or Valley
Bank might take in responding to or anticipating changes in interest rates.
ITEM 4 CONTROLS AND PROCEDURES.
United's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that United's disclosure controls and procedures are adequately designed
to ensure that information required to be disclosed by United in the reports
that it files or submits under the Securities and Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in applicable rules and forms. There were no significant
changes made in our internal controls or, to our knowledge, in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
Although not involved in any material pending litigation as of September
30, 2002, United is a defendant in various legal proceedings arising in the
normal course of business.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5 OTHER INFORMATION.
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
3.1 Articles of Incorporation of United Financial Corp., as amended
(incorporated by reference to Exhibit 3.1 of UFC's Annual Report
on Form 10-K dated March 31, 1998).
3.2 Bylaws of United Financial Corp., as amended (incorporated by
reference to Exhibit 3.1 of UFC's Annual Report on Form 10-K
dated March 31, 1998).
10.1 Promissory Note issued by United Financial Corp. to Wells Fargo
Bank Minnesota National Association, dated November 16, 2001
(incorporated by reference to Exhibit 10.1 of UFC's Quarterly
Report on Form 10-Q dated June 30, 2002).
10.2 Second Amendment to Letter Agreement between Wells Fargo Bank
Minnesota National Association and United Financial Corp., dated
November 16, 2001 (incorporated by reference to Exhibit 10.2 of
UFC's Quarterly Report on Form 10-Q dated June 30, 2002).
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10.3 Service Agreement between United Financial Corp. and Central
Financial Services, Inc., dated January 1, 2002 (incorporated by
reference to Exhibit 10.3 of UFC's Quarterly Report on Form 10-Q
dated June 30, 2002).
10.4 Service Agreement between Heritage Bank and Central Financial
Services, Inc., dated January 1, 2002 (incorporated by reference
to Exhibit 10.4 of UFC's Quarterly Report on Form 10-Q dated
June 30, 2002).
10.5 Management Retention Supplemental Retirement Income Salary
Continuation Plan between Kevin Clark and Heritage Bank, revised
January 10, 1996 (incorporated by reference to Exhibit 10.5 of
UFC's Quarterly Report on Form 10-Q dated June 30, 2002).
10.6 Heritage Bank Supplemental Retirement Agreement between Heritage
Bank and Steve L. Feurt, dated October 25, 1999 (incorporated by
reference to Exhibit 10.6 of UFC's Quarterly Report on Form 10-Q
dated June 30, 2002).
10.7 Indenture between United Financial Corp. and The Bank of New
York, as trustee, dated July 16, 2001 (incorporated by reference
to Exhibit 10.7 of UFC's Quarterly Report on Form 10-Q dated
June 30, 2002).
10.8 Amended and Restated Declaration of Trust of United Financial -
Montana Capital Trust I among United Financial Corp. and the
trustees, administrators and holders named therein, dated July
16, 2001 (incorporated by reference to Exhibit 10.8 of UFC's
Quarterly Report on Form 10-Q dated June 30, 2002).
10.9 Guarantee Agreement between United Financial Corp. and The Bank
of New York, as trustee, dated July 16, 2001 (incorporated by
reference to Exhibit 10.9 of UFC's Quarterly Report on Form 10-Q
dated June 30, 2002).
10.10 United Financial Corp. 2000 Long-Term Incentive and Stock Option
Plan (incorporated by reference to Exhibit 10.10 of UFC's
Quarterly Report on Form 10-Q dated June 30, 2002).
10.11 Letter Agreement between Wells Fargo Bank Minnesota National
Association and United Financial Corp., dated November 17, 1999.
10.12 First Amendment to Letter Agreement between Wells Fargo Bank
Minnesota National Association and United Financial Corp., dated
September 29, 2000.
99.1 Certification
B. Reports on Form 8-K
None
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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, 2002 /s/ Kurt R. Weise
------------------- -----------------------------------------
Kurt R. Weise
President and Chief
Executive Officer
(Principal Executive
Officer)
Date November 13, 2002 /s/ Paula J. Delaney
------------------- -----------------------------------------
Paula J. Delaney
Chief Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, Kurt R. Weise, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15b-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
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c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 13, 2002 /s/ Kurt R. Weise
------------------- -----------------------------------------
Kurt R. Weise
President and Chief
Executive Officer
(Principal Executive
Officer)
I, Paula J. Delaney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15b-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
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<page>
those entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 13, 2002 /s/ Paula J. Delaney
------------------- -----------------------------------------
Paula J. Delaney
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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