UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________ .
Commission file number: 0-28080
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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 by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Common Stock, no par value; 2,441,810 shares outstanding as of July 31, 2003
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Statements of Financial Condition at
June 30, 2003 (unaudited) and December 31, 2002 (audited) 1
Consolidated Condensed Statements of Income - Three and Six
Months Ended June 30, 2003 and June 30, 2002 (unaudited) 2
Consolidated Condensed Statements of Cash Flows - Six Months
Ended June 30, 2003 and June 30, 2002 (unaudited) 3
Notes to Consolidated Condensed Financial Statements (unaudited) 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 17
ITEM 4 CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 19
ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 19
ITEM 5 OTHER INFORMATION 19
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
Page i
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
JUNE 30, DECEMBER 31,
----------- ------------
2003 2002
----------- ------------
(UNAUDITED) (Audited)
ASSETS
Cash and cash equivalents $ 30,354 $ 33,224
Securities available-for-sale 57,498 60,936
Restricted stock, at cost 4,441 4,327
Loans held for sale 20,822 13,648
Loans receivable, net 255,285 250,431
Accrued interest receivable 2,483 2,525
Premises and equipment, net 7,652 7,668
Real estate and other personal property owned 562 586
Goodwill, net of accumulated amortization 3,429 3,429
Deferred income taxes, net -- 155
Other assets 1,147 1,051
-------- --------
$383,673 $377,980
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, NOW and money market demand accounts $121,552 $107,980
Savings deposits 53,766 50,980
Time deposits 124,278 128,020
-------- --------
299,596 286,980
Federal Home Loan Bank advances 34,000 38,000
Securities sold under agreements to repurchase 9,409 12,787
Line of credit -- 700
Accrued interest payable 1,460 1,410
Advances from borrowers for taxes and insurance 103 104
Income taxes payable 197 265
Deferred income taxes, net 54 --
Trust preferred securities 3,000 3,000
Other liabilities 1,166 1,308
-------- --------
348,985 344,554
MINORITY INTEREST 3,017 2,950
Stockholders' equity:
Preferred stock, no par value; authorized 2,000,000
shares; no shares issued and outstanding
none outstanding) -- --
Common stock, no par value; authorized 8,000,000 shares;
2,441,669 and 2,439,225 shares issued and outstanding
at June 30, 2003 and December 31, 2002, respectively 27,203 27,167
Retained earnings, substantially restricted 3,741 2,476
Accumulated other comprehensive income, net 727 833
-------- --------
31,671 30,476
-------- --------
$383,673 $377,980
======== ========
Equity/Assets 8.25% 8.06%
Book Value/Share $12.97 $12.49
See Notes to Consolidated Condensed Financial Statements
Page 1
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME:
Loans receivable $ 4,582 $ 4,948 $ 9,125 $ 10,009
Mortgage-backed securities 484 767 987 1,455
Other investment securities 143 218 342 471
Other interest earning assets 74 138 197 269
-------- -------- -------- --------
Total interest income 5,283 6,071 10,651 12,204
INTEREST EXPENSE:
Deposits 1,316 1,980 2,769 4,053
Other borrowings 441 790 936 1,626
-------- -------- -------- --------
Total interest expense 1,757 2,770 3,705 5,679
-------- -------- -------- --------
Net interest income 3,526 3,301 6,946 6,525
Provision for loan losses 332 215 625 455
-------- -------- -------- --------
Net interest income after provision for
loan losses 3,194 3,086 6,321 6,070
NON-INTEREST INCOME:
Gain on sale of loans 1,806 742 3,117 1,426
Service charges and fees 334 279 604 546
Gain on sale of securities -- -- 18 86
Other 46 55 96 109
-------- -------- -------- --------
Total non-interest income 2,186 1,076 3,835 2,167
NON-INTEREST EXPENSE:
Compensation and benefits 2,155 1,540 3,975 3,039
Occupancy and equipment 422 387 826 767
Data processing fees 245 202 438 404
Other 654 772 1,366 1,511
-------- -------- -------- --------
Total non-interest expense 3,476 2,901 6,605 5,721
-------- -------- -------- --------
Income before income taxes and minority interest 1,904 1,261 3,551 2,516
Provision for income taxes 717 470 1,336 938
-------- -------- -------- --------
Income before minority interest 1,187 791 2,215 1,578
Minority interest (43) (50) (89) (99)
-------- -------- -------- --------
Net income $ 1,144 $ 741 $ 2,126 $ 1,479
======== ======== ======== ========
Basic earnings per share $ .47 $ 0.30 $ .87 $ 0.61
======== ======== ======== ========
Diluted earnings per share $ .46 $ 0.30 $ .85 $ 0.60
======== ======== ======== ========
Dividends declared per share $ .18 $ 0.17 $ .35 $ 0.32
======== ======== ======== ========
Weighted average shares outstanding - basic 2,439 2,439 2,439 2,439
======== ======== ======== ========
Weighted average shares outstanding - diluted 2,499 2,468 2,489 2,465
======== ======== ======== ========
See Notes to Consolidated Condensed Financial Statements
Page 2
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
----------------------
JUNE 30, June 30,
-------- --------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided (used) in operating activities $ (4,038) $ 4,395
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans receivable (5,501) 8,186
Purchases of securities available-for-sale (22,703) (44,797)
Proceeds from maturities, pay downs and sales of securities
available-for-sale 25,909 39,742
Purchases of restricted stock -- (50)
Purchases of premises and equipment (297) (1,242)
Proceeds from sale of premises and equipment 13 --
Proceeds from sale of real estate and other personal property 36 --
owned -- 183
Acquisition of real estate and other personal property owned -- (10)
-------- --------
Net cash provided (used) in investing activities (2,543) 2,012
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 12,616 6,074
Proceeds from Federal Home Loan Bank advances 18,500 (6,500)
Payments on Federal Home Loan Bank advances (22,500) --
Payments on line of credit (700) --
Net decrease in securities sold under agreements to repurchase (3,378) (746)
Net decrease in federal funds purchased -- (1,000)
Decrease in advances from borrowers for taxes and insurance (1) (22)
Dividends paid to stockholders (862) (792)
Proceeds from issuance of common stock 36 3
-------- --------
Net cash provided (used) in financing activities 3,711 (2,983)
-------- --------
Increase (decrease) in cash and cash equivalents (2,870) 3,424
Cash and cash equivalents at beginning of year 33,224 22,026
-------- --------
Cash and cash equivalents at end of period $ 30,354 $ 25,450
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE
- ------------------------------------------------------------
Cash payments for interest $ 3,655 $ 5,687
Cash payments for income taxes $ 1,118 $ 1,086
NON CASH INVESTING AND FINANCING ACTIVITIES
- ------------------------------------------------------------
Vehicle financed $ 28 $ -
Acquisition of other personal property in settlement of loans $ 22 $ 82
See Notes to Consolidated Condensed Financial Statements
Page 3
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
United Financial Corp. ("United") is a bank holding company
headquartered in Great Falls, Montana, with operations in 12 Montana communities
and Phoenix and Scottsdale, Arizona. United's banking business in Montana is
conducted through its wholly-owned subsidiary, Heritage Bank ("Heritage Bank"),
and in Arizona is conducted through Valley Bank of Arizona ("Valley Bank"), the
wholly-owned subsidiary of Valley Bancorp, Inc. ("Valley"), a majority-owned
subsidiary of United. Heritage Bank and Valley Bank are collectively referred to
herein as the "Banks". United's wholly-owned subsidiary, United
Financial-Montana Capital Trust I was established in 2001 to issue and
administer $3.0 million of Capital Trust Pass-Through Securities. United had
assets of approximately $383.7 million, deposits of approximately $299.6 million
and stockholders' equity of approximately $31.7 million at June 30, 2003.
United owned approximately 65% of Valley at June 30, 2003. As a result
of acquiring over 50% of the outstanding shares of Valley in January 2000,
United has consolidated Valley in its financial statements since January 1,
2000. The aggregate purchase price of all shares of Valley purchased by United
to date is approximately $7.2 million. Valley had assets of approximately $69.0
million, deposits of approximately $56.8 million and stockholders' equity of
approximately $8.7 million at June 30, 2003. As previously announced in its
August 2003 press release, United completed the sale of Valley to Marquette
Financial Companies on July 31, 2003.
Heritage Bank is a state-chartered commercial bank with locations in
Bozeman, Chester, Fort Benton, Geraldine, Glendive, Great Falls, Hamilton,
Havre, Kalispell, Missoula, Libby and Shelby, Montana. Valley Bank is a
state-chartered commercial bank with locations in Phoenix and Scottsdale,
Arizona. The Banks are engaged in the community banking business of attracting
deposits from the general public through their offices and using those deposits,
together with other available funds, to originate commercial (including lease
financing), commercial real estate, residential, agricultural and consumer loans
primarily in their market areas in Montana and Arizona. A majority of the Banks'
banking business is conducted in the Great Falls and Phoenix areas. Based on
total assets, 44% of United's assets are located at Heritage Bank's Great Falls
locations and 16% at Valley Bank's Phoenix location. The Banks also invest in
mortgage-backed securities, U.S. Treasury obligations, other U.S. Government
agency obligations and other interest-earning assets. Heritage Bank also holds a
14% ownership interest in Bankers' Resource Center, a computer data center.
The Banks' financial condition and results of operations, and therefore
the financial condition and results of operations of United, are dependent
primarily on net interest income and fee income. The Banks' financial condition
and results of operations are also significantly influenced by local and
national economic conditions, changes in market interest rates, governmental
policies, tax laws and the actions of various regulatory agencies.
United's principal offices are located at 120 First Avenue North, Great
Falls, Montana, and its telephone number is (406) 727-6106.
United makes available all periodic and current reports, free of
charge, on its website as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission
("SEC"). United's website address is www.ufcmontana.com. The contents of our
website are not incorporated into this report or into our other filings with the
SEC.
2. BASIS OF PRESENTATION
United's consolidated financial statements, included herein, have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include
Page 4
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
consolidated financial condition, results of operations, and cash flows for the
periods disclosed. Operating results for the three and six months ended June 30,
2003 are not necessarily indicative of the results anticipated for the year
ending December 31, 2003. For additional information, refer to the consolidated
audited financial statements and footnotes thereto included in United's Annual
Report to Shareholders and Annual Report on Form 10-K for the year ended
December 31, 2002. Certain reclassifications have been made to the December 31,
2002 financial information to conform to the June 30, 2003 presentation.
3. COMPREHENSIVE INCOME
United's only significant element of comprehensive income is unrealized
gains and losses on securities available-for-sale.
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED Three Months Ended
JUNE 30, 2003 June 30, 2002
------------------------------------ ------------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
----------- ----------- --------- ---------- ----------- ---------
Net income $1,861 $717 $1,144 $1,211 $470 $ 741
Unrealized and realized
holding gains arising during period 97 37 60 1,296 492 804
Less: reclassification adjustment for
gains included in net income -- -- -- -- -- --
------ ---- ------ ------ ---- ------
Net unrealized gains on securities
available for sale 97 37 60 1,296 492 804
Less: portion of unrealized gain
allocated to minority interest (5) -- (5) 91 -- 91
------ ---- ------ ------ ---- ------
Total comprehensive income $1,963 $754 $1,209 $2,416 $962 $1,454
====== ==== ====== ====== ==== ======
SIX MONTHS ENDED Six Months Ended
JUNE 30, 2003 June 30, 2002
----------------------------------- ------------------------------------
BEFORE TAX TAX EXPENSE AFTER TAX Before Tax Tax Expense After Tax
----------- ----------- --------- ---------- ----------- ---------
Net income $3,462 $1,336 $2,126 $2,417 $ 938 $1,479
Unrealized and realized holding gains
arising during period 224 85 139 776 295 481
Less: reclassification adjustment for
gains included in net income 18 7 11 86 32 54
------ ------ ------ ------ ------ ------
Net unrealized gains on securities
available for sale 206 78 128 690 263 427
Less: portion of unrealized gains
allocated to minority interest (22) -- (22) 46 -- 46
------ ------ ------ ------ ------ ------
Total comprehensive income $3,690 $1,414 $2,276 $3,061 $1,201 $1,860
====== ====== ====== ====== ====== ======
Page 5
4. CASH EQUIVALENTS
For purposes of the consolidated condensed statements of cash flows,
United considers all cash, daily interest and non-interest bearing demand
deposits with banks with original maturities of three months or less to be cash
equivalents.
5. COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares used to compute basic EPS plus the incremental amount of potential
common stock determined by the treasury stock method. Potential common stock
includes the incremental share under stock option plans.
The following table sets forth the computation of basic and diluted earnings per
share.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Weighted average shares outstanding during
the period on which basic earnings per
share is calculated 2,439 2,439 2,439 2,439
Add: incremental shares under stock option
plans 60 29 50 26
------- ------- ------- -------
Average outstanding shares on which diluted
earnings per share is calculated 2,499 2,468 2,489 2,465
======= ======= ======= =======
Net income applicable to common
stockholders, basic $ 1,144 $ 741 $ 2,126 $ 1,479
Less: reduction of proportionate share of
Valley net income assuming option
exercises -- -- (1) (1)
------- ------- ------- -------
Net income applicable to common
stockholders, diluted $ 1,144 $ 741 $ 2,125 $ 1,478
======= ======= ======= =======
Basic earnings per share $ .47 $ .30 $ .87 $ .61
======= ======= ======= =======
Diluted earnings per share $ .46 $ .30 $ .85 $ .60
======= ======= ======= =======
6. RELATED PARTIES
Central Financial Services, Inc. ("CFS") provides various management
services to United, including certain accounting and tax services, investment
consulting, personnel consulting, asset-liability management and regulatory
consulting. CFS is owned by United's former Chairman of the Board of Directors
and its current largest shareholder and has been providing similar services to
various banks and financial services organizations since December of 1988. CFS
fees billed to United were approximately $.2 million for each of the six month
periods ended June 30, 2003 and 2002, respectively. The fees are billed by CFS
on an hourly basis for work performed by United's current Chairman and CEO,its
former Chairman, and four other employees. Neither the former Chairman or the
current Chairman and CEO of United receive direct compensation from United for
their services. Each is compensated for services as a director through
director's fees of $300 per month, and for services as an officer of United
through CFS. Through CFS, the Chairman and CEO earn annual salaries of $135,000
and $140,000,
Page 6
respectively. United's portion of those salaries was approximately 53%, based
upon CFS billings during those periods.
Banker's Resource Center ("BRC") provides data processing services for
Heritage Bank. Heritage Bank has a 14% ownership interest in BRC. The charges
for BRC's services were $.3 million for each of the six months ended June 30,
2003 and 2002.
7. DIVIDENDS DECLARED
On May 20, 2003, a 3 for 2 stock split affected as a 50% stock dividend
was approved by the Board of Directors of United, payable June 30, 2003 to
shareholders of record on June 23, 2003. As a result, all per share amounts from
time periods prior to this date have been restated to illustrate the effect of
the stock dividend. Any fractional shares were paid in cash.
On August 5, 2003, the Board of Directors of United declared a
quarterly cash dividend of $.27 per share, payable September 2, 2003, to
shareholders of record on August 19, 2003.
8. NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends SFAS No. 133 for certain decisions made by the FASB as part of the
Derivatives Implementation Group process. It also amends SFAS No. 133 to
incorporate clarification of the definition of a derivative. The new statement
is effective for contracts and hedging relationships entered into or designated
after June 30, 2003. Management currently believes that the adoption of SFAS No.
149 will not have a material impact on the Company's financial position or
results of operations.
In May 2003, FASB issued SFAS No.150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. The statement is effective for financial instruments
entered into or modified after May 31, 2003. Management currently believes that
the adoption of SFAS No. 150 will not have a material impact on the Company's
financial position or results of operations.
9. STOCK-BASED COMPENSATION
United has a stock-based employee compensation plan, which is a stock
option plan described more fully in footnotes included in United's Annual Report
to Shareholders and Annual Report on Form 10-K for the year ended December 31,
2002. United accounts for the plan under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees, and
related Interpretations." No stock-based employee compensation cost is reflected
in net income, as all options granted under the plan had an exercise price at or
above to the market value of the underlying common stock on the date of grant.
Page 7
The following table illustrates the effect on net income and earnings
per share if United had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation.
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) JUNE 30, JUNE 30,
------------------ -----------------
2003 2002 2003 2002
------ ----- ------ ------
Net income: As reported $1,144 $ 741 $2,126 $1,479
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (15) (20) (31) (41)
------ ----- ------ ------
Pro forma net income $1,129 $ 721 $2,095 $1,438
====== ===== ====== ======
Earnings per share:
Basic - as reported $ .47 $ .30 $ .87 $ .61
====== ===== ====== ======
Basic - pro forma $ .46 $ .30 $ .86 $ .59
====== ===== ====== ======
Diluted - as reported $ .46 $ .30 $ .85 $ .60
====== ===== ====== ======
Diluted - pro forma $ .45 $ .29 $ .84 $ .59
====== ===== ====== ======
10. CRITICAL ACCOUNTING POLICIES
United has identified its most critical accounting policy to be that
related to the allowance for loan losses. United's allowance for loan losses
methodology incorporates a variety of risk considerations in establishing an
allowance for loan losses that management believes is appropriate. Risk factors
include historical loss experience, delinquency and charge-off trends,
collateral values and an internal loan grading system adopted by the Banks.
Other factors include the general economic environment in United's markets and,
in particular, the state of certain industries. Changes in any of the above
factors could have a significant affect on the calculation of the allowance for
loan losses in any given period.
At June 30, 2003, United had $3.4 million of recorded goodwill which in
accordance with its current accounting policies, is no longer amortized to
expense during the years ended December 31, 2003 and 2002, but rather is
reviewed annually by management for any impairment writedown. This accounting
policy for goodwill is considered a critical one for United because of the
significant accounting estimates made by management in assessing any potential
impairment writedown. Such accounting estimates can be significant due to the
possibility that future events affecting them may differ from management's
current judgements.
11. SUBSEQUENT EVENTS
On July 31, 2003, United completed the disposition of its
majority-owned subsidiary Valley pursuant to a Merger Agreement dated May 22,
2003 (the "Merger Agreement"), as a result of which Valley became a wholly-owned
subsidiary of Marquette Financial Companies, a Minnesota corporation
("Marquette"). United owned approximately 65% of Valley's issued and outstanding
capital stock. As provided in the Merger Agreement, the net purchase price paid
by Marqeutte for all Valley capital stock outstanding was approximately $14.6
million. The net proceeds received by United on July 31, 2003 were approximately
$9.0 million. United's after tax gain on the sale of Valley was approximately
$.7 million.
The Board of Directors of Valley determined it to be in the best
interests of Valley to terminate the Valley Bank of Arizona 401(K) Profit
Sharing Plan ("The Plan") as of July 31, 2003, prior to the acquisition by
Marquette. All participates in the Plan will be 100% vested upon Plan
termination and the assets of the Plan will be distributed to the participants
in accordance with their interest as soon as administratively feasible after
July 31, 2003.
Page 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
1. FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements.
Statements that are not historical or current facts, including statements about
beliefs and expectations, are forward-looking statements. Forward-looking
statements involve inherent risks and uncertainties, and important factors could
cause actual results to differ materially from those anticipated, including the
following. In addition to those contained in United's reports on file with the
SEC: (i) general economic or industry conditions could be less favorable than
expected, resulting in a deterioration in credit quality, a change in the
allowance for loan losses, or a reduced demand for United's products and
services; (ii) changes in the domestic interest rate environment could reduce
net interest income and could increase loan losses; (iii) changes in the
extensive laws, regulations and policies governing financial services companies
could alter United's business environment or affect operations; (iv) the
potential need to adapt the industry changes in information technology systems,
on which United is highly dependent, could present operational issues or require
significant capital spending; (v) competitive pressures could intensify and
affect United's profitability, including as a result of continued industry
consolidation, the increased availability of financial services from non-banks,
technological developments, or bank regulatory reform; (vi) the impact of
weather conditions in the geographic markets and business areas in which United
conducts it business; and (vii) capital investments in United's businesses may
not produce expected growth in earnings anticipated at the time of the
expenditure. Forward-looking statements speak only as of the date they are made,
and United undertakes no obligation to update them in light of new information
of future events.
2. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE SIX MONTHS
ENDED JUNE 30 2003 TO THE YEAR ENDED DECEMBER 31, 2002.
(IN THOUSANDS) SELECTED FINANCIAL CONDITION DATA
(UNAUDITED)
JUNE 30, Dec. 31, $ %
2003 2002 Change Change
-------- -------- ---------- ------
Cash and cash equivalents $ 30,354 $ 33,224 $ (2,870) (8.6)%
Securities available-for-sale 57,498 60,936 (3,438) (5.6)
Restricted stock, at cost 4,441 4,327 114 2.6
Loans held for sale 20,822 13,648 7,174 52.6
Loans receivable, net 255,285 250,431 4,854 1.9
Premises and equipment, net 7,652 7,668 (16) (.2)
Real estate and other
personal property owned 562 586 (24) (4.1)
Goodwill, net 3,429 3,429 -- --
All other assets 3,630 3,731 (101) (2.7)
Total assets 383,673 377,980 5,693 1.5
Deposits 299,596 286,980 12,616 4.4
Federal Home Loan Bank advances 34,000 38,000 (4,000) (10.5)
Securities sold under
agreements to repurchase 9,409 12,787 (3,378) (26.4)
Line of credit -- 700 (700) (100.0)
Trust preferred securities 3,000 3,000 -- --
All other liabilities 2,979 3,087 (108) (3.5)
Total liabilities 348,985 344,554 4,431 1.3
Stockholders' equity, net 31,671 30,476 1,195 3.9
Total assets increased $5.7 million to $383.7 million at June 30, 2003
from $378.0 million at December 31, 2002. The increase in assets was primarily
the result of an increase in loans receivable and loans held for sale of
approximately $12.0 million, offset by a
Page 9
decrease in cash and cash equivalents of approximately $2.9 million and a
decrease in securities available for sale of approximately $3.4 million.
SECURITIES AVAILABLE-FOR-SALE - Securities available-for-sale decreased
$3.4 million to $57.5 million at June 30, 2003 from $60.9 million at December
31, 2002. The decrease was the result of $22.7 million of purchases, offset by
$25.9 million of maturities and calls, sales and principal repayments and a $.2
million decrease in unrealized gains on securities.
A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF THE
CONSOLIDATED AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO AT THE DATES INDICATED IS
AS FOLLOWS:
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, 2003
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
U.S. GOVERNMENT AND FEDERAL
AGENCIES $ 7,295 $ 126 $ - $ 7,421
MORTGAGE-BACKED SECURITIES 45,459 631 - 46,090
MUNICIPAL BONDS 1,944 298 - 2,242
CORPORATE BONDS AND EQUITY
SECURITIES 1,526 219 - 1,745
------- ------ ------- -------
$56,224 $1,274 $ - $57,498
======= ====== ======= =======
December 31, 2002
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
U.S. Government and federal
agencies $13,793 $ 238 $ - $14,031
Mortgage-backed securities 42,195 1,060 - 43,255
Municipal bonds 1,945 54 - 1,999
Corporate bonds and equity
securities 1,526 125 - 1,651
------- ------ ------- -------
$59,459 $1,477 $ - $60,936
======= ====== ======= =======
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased $4.9 million to $255.3 million at June 30, 2003 from $250.4 million at
December 31, 2002. The increase in loans during the first six months of 2003 was
primarily in the commercial real estate loan category. Other loan categories
have remained fairly constant or decreased slightly as a result of a weakened
state and national economy and the resulting impact on loan demand. United has
also slowed its acquisition of participation loans from outside Montana due to
reduced interest rates and the concerns of a possible national recession. The
loan portfolio includes: real estate residential mortgages, commercial and
agricultural mortgages, agricultural and commercial non-mortgage loans, consumer
loans secured by real estate, and various consumer installment loans. The Banks
also purchase and participate in commercial and lease financing loans. The Banks
had $35.8 million and $39.5 million of participation and purchased loans as of
June 30, 2003 and 2002, respectively.
During the six months ended June 30, 2003, loans held for sale
increased $7.1 million to $20.8 million at June 30, 2003 from approximately
$13.7 million at December 31, 2002, as loan originations outpaced secondary
market sales. Approximately $166.9 million of residential real estate loans were
originated for sale and $159.8 million of residential real estate loans were
sold to the secondary market during the six month period ending June 30, 2003.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve increased $.4 million
to $4.0 million at June 30, 2003 as compared to $3.6 million at December 31,
2002. A loan loss provision of $.6 million for the six months ended June 30,
2003 was offset by loans in the amount of $.2 million which were determined by
United's management to be uncollectible and subsequently
Page 10
charged-off. The loan loss reserve at June 30, 2003 is an amount which
management believes is adequate given the relatively low level of non-performing
assets and management's assessment of loan risk. The allowance for loan losses
to total loans at June 30, 2003 was 1.54%.
LOANS RECEIVABLE, NET OF UNAMORTIZED NET DEFERRED LOAN FEES, AT THE
DATES INDICATED ARE SUMMARIZED AS FOLLOWS:
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, December 31,
2003 2002
-------- ------------
First mortgage loans and contracts secured
by real estate $ 73,068 $ 73,801
Commercial real estate loans 72,243 72,993
Commercial loans 61,865 59,428
Auto and other consumer loans 27,807 25,331
Second mortgage consumer loans 4,957 5,559
Agricultural loans 16,722 14,548
Tax exempt municipal loans 1,677 1,469
Savings account and other loans 939 875
-------- --------
259,278 254,004
Less: Allowance for loan losses 3,993 3,573
-------- --------
$255,285 $250,431
======== ========
A SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES FOR THE DATES
INDICATED ARE AS FOLLOWS:
(IN THOUSANDS) SIX MONTHS ENDED Year Ended
JUNE 30, 2003 December 31, 2002
---------- -----------------
Balance, beginning of period $3,573 $ 3,503
Provision for loan losses 625 1,170
Losses charged off (212) (1,189)
Recoveries 7 89
------ -------
Balance, end of period $3,993 $ 3,573
====== =======
NON-PERFORMING ASSETS - When a borrower fails to make a scheduled
payment on a loan and does not cure the delinquency within 15 days, United's
policy is to contact the borrower between the 15th and 30th day of delinquency
to establish a repayment schedule. If a loan is not current, or a realistic
repayment schedule is not being followed by the 90th day of delinquency, United
will generally proceed with legal action to foreclose the property after the
loan has become contractually delinquent 90 days. Loans contractually past due
90 days are classified as non-performing. However, not all loans past due 90
days automatically result in the non-accrual of interest income. If a 90 day
past due loan has adequate collateral, or is FHA insured or VA guaranteed,
leading to the conclusion that loss of principal and interest would likely not
be realized, then interest income will continue to be accrued.
The Banks follow regulatory guidelines with respect to placing loans on
non-accrual status. When a loan is placed on non-accrual status, all previously
accrued and uncollected interest is reversed. At June 30, 2003 United had
non-accrual loans totaling $.5 million and loans totaling $.4 million past due
90 days and still accruing. At December 31, 2002 by comparison, United's
non-accrual loans totaled $.3 million and loans past due 90 days and still
accruing totaled $.6 million.
The Banks are required to review, classify and report to their Board of
Directors their assets on a regular basis and classify them as "substandard"
(distinct possibility that some loss will be sustained), "doubtful" (high
likelihood of loss), or "loss" (uncollectible). Adequate valuation allowances
are required to be established for assets classified as substandard or doubtful
in accordance with generally accepted accounting principles. If an asset is
classified as
Page 11
a loss, the institution must either establish a specific valuation allowance
equal to the amount classified as loss or charge off such amount. At June 30,
2003 and December 31, 2002, United had no assets classified as loss. At both
June 30, 2003 and December 31, 2002, United had $.1 million classified as
doubtful. At both June 30, 2003 and December 31, 2002, United had $.8 million of
reported substandard assets. As a percent of total assets, substandard assets
were approximately .21% at both June 30, 2003 and December 31, 2002. At both
June 30, 2003 and December 31, 2002, impaired loans were $.9 million. Impaired
loans included those loans classified as either substandard or doubtful. As a
percentage of total assets, impaired loans were approximately .23% at both June
30, 2003 and December 31, 2002.
PREMISES AND EQUIPMENT - This category remained at $7.7 million at both
June 30, 2003 and December 31, 2002. The Banks invested approximately $.3
million in fixed assets during the first six months of 2003, primarily in
connection with the construction of the new Heritage Bank branch facility in
Billings, Montana and the relocation of the Heritage Bank branch in Libby,
Montana. The purchases of premises and equipment were offset by approximately
$.3 million of depreciation.
DEPOSITS - Deposits increased $12.6 million to $299.6 million at June
30, 2003 from $287.0 million at December 31, 2002. This increase was primarily
the result of the continued growth of three Heritage Bank branches in Bozeman,
Glendive and Great Falls, Montana. Valley Bank's total deposits decreased $5.0
million from December 31, 2002 to June 30, 2003.
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, December 31,
2003 2002
-------- ------------
Demand accounts $ 64,143 21.4% $ 48,228 16.8%
Now and money market accounts 57,409 19.2 59,752 20.8
Savings accounts 53,766 17.9 50,980 17.8
Certificate of deposits 124,278 41.5 128,020 44.6
-------- ----- -------- -----
$299,596 100.0% $286,980 100.0%
======== ===== ======== =====
BORROWED FUNDS - FHLB advances decreased $4.0 million from December 31,
2002 to June 30, 2003, a net result of $18.5 million in advances and $22.5
million in repayments. Securities sold under agreements to repurchase decreased
$3.4 million to $9.4 million at June 30, 2003 from $12.8 million at December 31,
2002.
STOCKHOLDERS' EQUITY - Stockholders' equity increased $1.2 million to
$31.7 million at June 30, 2003 from $30.5 million at December 31, 2002. This
increase is due to $2.1 million of net income for the six months ended June 30,
2003 less cash dividends declared of $.8 million, and a $.1 million decrease 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 JUNE 30, 2003 AND JUNE 30, 2002.
(IN THOUSANDS) SELECTED INCOME STATEMENT DATA
-----------------------------------------------
(UNAUDITED) THREE MONTHS ENDED JUNE 30,
-----------------------------------------------
$ %
2003 2002 Change Change
------- ------- ------- ------
Interest income $ 5,283 $ 6,071 $ (788) (13.0)%
Interest expense 1,757 2,770 (1,013) (36.6)
------- ------- ------- -----
Net interest income 3,526 3,301 225 6.8
Provision for loan losses 332 215 117 54.4
------- ------- ------- -----
Net interest income after
provision for loan losses 3,194 3,086 108 3.5
Non-interest income 2,186 1,076 1,110 103.2
Non-interest expense 3,476 2,901 575 19.8
------- ------- ------- -----
Income before income taxes
and minority interest 1,904 1,261 643 50.9
Provision for income taxes 717 470 247 52.6
------- ------- ------- -----
Net income before minority
interest 1,187 $ 791 396 50.0
Minority interest (43) (50) (7) (14.3)
------- ------- ------- -----
Net income $ 1,144 $ 741 $ 403 54.3%
======= ======= ======= =====
NET INCOME - United reported net income of $1.1 million, or basic and
diluted earnings per share of $.47 and $.46, respectively, for the three months
ended June 30, 2003. For the same period in 2002, United reported net income of
$.7 million, or basic and diluted earnings per share of $.30. Valley reported
net income of $.1 million for each of the three months ended June 30, 2003 and
2002.
NET INTEREST INCOME - Like most financial institutions, the most
significant component of United's earnings is net interest income, which is the
difference between the interest earned on interest-earning assets (loans,
investment securities, mortgage-backed securities and other interest-earning
assets), and the interest paid on deposits and borrowings. This amount, when
divided by average interest-earning assets, is referred to as the net interest
margin, expressed as a percentage. Net interest income and net interest margins
are affected by changes in interest rates, the volume and the mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. The difference between the yield on interest-earning
assets and the cost of interest-bearing liabilities expressed as a percentage is
referred to as the net interest-rate spread. Net interest income increased $.2
million from $3.3 million for the three months ended June 30, 2002 to $3.5
million for the three months ended June 30, 2003. Net interest margin increased
..37% to 4.03% for the three months ended June 30, 2003 from 3.66% for the same
period last year. Net interest-rate spread increased .45% to 3.94% for the three
months ended June 30, 2003 from 3.49% for the same period last year. Although
total interest income decreased $.8 million, primarily as a result of interest
rate cuts by the Federal Reserve Bank which began in 2001, the decrease in
interest expense due to interest rate cuts was even greater, at $1.0 million,
resulting in a net increase in net interest income of $.2 million.
INTEREST INCOME - Interest income decreased $.8 million from $6.1
million for the three month period ended June 30, 2002 to $5.3 million for the
three month period ended June 30, 2003. For the three month period ended June
30, 2003, compared to the three month period ended June 30, 2002, interest on
loans receivable decreased $.4 million. Interest on mortgage-backed securities
and investments also decreased $.4 million for the three month period ended June
20, 2003, compared to the same period in 2002.
INTEREST EXPENSE - Interest expense decreased $1.0 million from $2.8
million for the three month period ended June 30, 2002 to $1.8 million for the
three month period ended June 30, 2003.
Page 13
For the three month period ended June 30, 2003, compared to the three
month period ended June 30, 2002, interest on deposits decreased $.7 million,
and interest on other borrowings decreased $.3 million. Although the average
balance of deposits increased 1.5% from June 30, 2002 to 2003, lower interest
rates during the second quarter of 2003 allowed for a decrease in interest
expense on deposits. The $.3 million decrease in interest on other borrowings is
the result of a decrease in interest on FHLB advances. The average balance of
FHLB advances decreased 27.1% from June 30, 2002 to June 30, 2003.
PROVISION FOR LOAN LOSSES - United provided $.3 million for loan losses
in the second quarter ended June 30, 2003 and $.2 million for the same period in
2002. Asset quality at the Banks has remained relatively strong. United's past
due and non-accrual loans totaled .36% and .69% of total loans at June 30, 2003
and 2002, respectively.
The provision for loan losses is determined by management as the amount
to be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio in accordance with GAAP. Future
additions to United's allowance for loan losses and any change in the related
ratio of the allowance for loan losses to non-performing assets are dependent
upon the performance and composition of United's loan portfolio, the economy,
inflation, changes in real estate values and interest rates and the view of the
regulatory authorities toward adequate reserve levels.
NON-INTEREST INCOME - In addition to net interest income, United
generates significant non-interest income from a range of retail banking
services, including mortgage banking activities and service charges for deposit
services. Non-interest income increased $1.1 million from $1.1 million for the
three month period ended June 30, 2002 to $2.2 million for the three month
period ended June 30, 2003.
United's loan demand continued to be strong in the home lending market,
and particularly the refinancing market, during the second three months of 2003,
as interest rates continued to be at levels which were attractive to customers
in the home lending market. Gain on sale of loans increased a record $1.1
million for the three month period ending June 30, 2003 to $1.8 million from $.7
million for the same period in 2002.
NON-INTEREST EXPENSE - Non-interest expense increased $.6 million during
the three month period ending June 30, 2003 as compared to the same period in
2002. This increase was principally due to the increased personnel expenses
associated with commissions to loan originators in United's mortgage banking
department.
Page 14
4. MATERIAL CHANGES IN RESULTS OF OPERATIONS-COMPARISON OF THE SIX MONTHS
ENDED JUNE 30, 2003 AND JUNE 30, 2002.
SELECTED INCOME STATEMENT DATA
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
$ %
2003 2002 Change Change
------- ------- ------- ------
Interest income $10,651 $12,204 $(1,553) (12.7)%
Interest expense 3,705 5,679 (1,974) (34.7)
------- ------- ------- ------
Net interest income 6,946 6,525 421 6.4
Provision for losses on loans 625 455 170 37.4
------- ------- ------- ------
Net interest income after
provision for losses on loans 6,321 6,070 251 4.1
Non-interest income 3,835 2,167 1,668 77.0
Non-interest expense 6,605 5,721 884 15.4
------- ------- ------- ------
Income before income taxes
and minority interest 3,551 2,516 1,035 41.1
Provision for income tax expense 1,336 938 398 42.4
------- ------- ------- ------
Net income before minority
interest 2,215 $ 1,578 637 40.4
Minority interest (89) (99) (10) (10.3)
------- ------- ------- ------
Net Income $ 2,126 $ 1,479 $ 647 43.8%
======= ======= ======= ======
NET INCOME - United reported net income of $2.1 million, or basic and
diluted earnings per share of $.87 and $.85, respectively, for the six months
ended June 30, 2003. For the same period in 2002, United reported net income of
$1.5 million, or basic and diluted earnings per share of $.61 and $.60
respectively. Valley reported net income of $.3 million for each of the six
months ended June 30, 2003 and 2002.
NET INTEREST INCOME - Net interest income increased $.4 million from
$6.5 million for the six months ended June 30, 2002 to $6.9 million for the six
months ended June 30, 2003. Net interest margin increased .33% to 3.95% for the
six month period ended June 30, 2003 from 3.62% for the same period last year.
Net interest-rate spread increased .41% to 3.86% for the six months ended June
30, 2003 from 3.45% for the same period last year. Although total interest
income decreased $1.6 million, primarily as a result of interest rate cuts by
the Federal Reserve Bank which began in 2001, the decrease in interest expense
due to interest rate cuts was even greater, at $2.0 million, resulting in a net
increase in net interest income of $.4 million.
INTEREST INCOME - Interest income decreased $1.6 million from $12.2
million for the six month period ended June 30, 2002 to $10.6 million for the
six month period ended June 30, 2003. For the six month period ended June 30,
2003, compared to the six month period ended June 30, 2002, interest on loans
receivable decreased $.9 million, interest on mortgage-backed securities and
investments decreased $.6 million while interest on other interest-earning
assets decreased $.1 million.
INTEREST EXPENSE - Interest expense decreased $2.0 million from $5.7
million for the six month period ended June 30, 2002 to $3.7 million for the six
month period ended June 30, 2003. Although the average balance of deposits
increased 2.2% from June 30, 2002 to 2003, lower interest rates during the first
six months of 2003 allowed for a decrease in interest expense on deposits of
$1.3 million. The $.7 million decrease in interest on other borrowings included
a $.6 million decrease in interest on FHLB advances. The average balance of FHLB
advances decreased 25.6% from June 30, 2002 to June 30, 2003. Interest expense
on other borrowings decreased $.1 million during the same time period.
PROVISION FOR LOAN LOSSES - United provided $.6 million and $.5 million
for loan losses for the six months ended June 30, 2003 and 2002, respectively.
Page 15
NON-INTEREST INCOME - Non-interest income was $3.8 million for the six
months ended June 30, 2003 compared to $2.2 million in 2002. This income
consisted primarily of a record $3.1 million in gain on sale of loans in the
first six months of 2003, an increase of $1.7 million or 118.6% over the same
period in 2002. Customer service charges represented $.5 million in income, up
slightly from 2002. The remaining $.2 million in income was loan servicing fees
and other income which remained consistent from 2002 to 2003.
NON-INTEREST EXPENSE - United's non-interest expense increased $.9
million during the six month period ending June 30, 2003 as compared to the same
period in 2002. This increase was principally due to increased personnel
expenses associated with commissions to loan originators in United's mortgage
banking department.
5. ASSET/LIABILITY MANAGEMENT
United's earnings depend to a large extent on the level of its "net
interest income." Net interest income depends upon the difference (referred to
as "interest rate spread") between the yield on United's loan and investment
portfolios and interest-earning cash balances ("interest-earning assets"), and
the rates paid on its deposits and borrowings ("interest-bearing liabilities").
Net interest income is further affected by the relative amounts of United's
interest-earning assets and interest-bearing liabilities. In recent years,
United's interest-earning assets have exceeded interest-bearing liabilities.
However, when interest-earning assets decrease as a result of non-accrual loans
and investments in non-interest earning assets, net interest income and interest
rate spread also decrease and any continued decrease in the level of
interest-earning assets would generally result in a negative impact on earnings.
One of the primary objectives of United's management has been to
restructure United's balance sheet to reduce its vulnerability to changes in
interest rates ("interest rate risk"). Commercial banking institutions can
suffer from a mismatch in the term to maturity of their assets and liabilities,
with mortgage loan assets tending to be of a much longer term than deposits, the
primary liabilities of commercial banking institutions. In periods of rising
interest rates, this mismatch can render commercial banking institutions
vulnerable to increases in costs of funds (deposits and borrowings) that can
outstrip increases in returns on longer-term fixed rate loans and investments,
resulting in a decrease in positive interest rate spread and lower earnings.
Several strategies have been employed by United to minimize the
mismatch of asset and liability maturities. For the past several years, Heritage
Bank has maintained a policy of selling the majority of newly-originated
long-term (15 to 30-year maturity) fixed-rate mortgage loans to the secondary
market. These loans are sold at their outstanding principal balance, which is
the prearranged contract purchase price, and therefore, no gain or loss is
realized at sale. The amount recognized on the income statement caption gain on
sale of loans represents fee income only. 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.
6. LIQUIDITY AND CAPITAL RESOURCES
United's primary sources of funds are deposits, FHLB borrowings,
repurchase agreements, proceeds from loan sales, and loan and mortgage-backed
securities repayments. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by market interest rates, economic
conditions and competition. In a period of declining interest rates, mortgage
prepayments generally increase. As a result, these proceeds from mortgage
prepayments generally would be invested in lower yielding loans or other
investments which have the effect of reducing interest income. In a period of
rising interest rates, mortgage prepayments would generally decrease and the
proceeds from such prepayments generally would be invested in higher yielding
loans or investments which would have the effect of increasing interest income.
Page 16
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK - Market risk is the risk of loss in a financial instrument
arising from adverse changes in market rates/prices such as interest rates,
foreign currency exchange rates, commodity prices and equity prices. Since
United's earnings depend on its level of interest rate spread, its primary
market risk exposure is interest rate risk ("IRR").
INTEREST RATE RISK - United has established a formal IRR policy, and
the Banks have an Asset/Liability Management Committee ("ALCO") and an
Investment Committee, which meet at least quarterly to review and report on
management's efforts to minimize IRR. Several asset/liability management
strategies have been employed by United to minimize its exposure to IRR. These
include selling most newly-originated long-term fixed-rate mortgages, promoting
the origination and retention of loans providing for periodic interest rate
adjustments, shorter terms to maturity or balloon provisions, and investing in
adjustable rate or shorter-term mortgage-backed securities and other
interest-earning investments.
The Asset/Liability Management Committee utilizes an institutional
funds management service detailed simulation model to quantify the estimated
exposure of net interest income ("NII") to sustained interest rate changes. The
model predicts the impact of changing interest rates on the interest income
received and interest expense paid on assets and liabilities. This sensitivity
analysis is compared to ALCO policy limits which specify a maximum tolerance
level for NII given a 200 basis point (bp) rise or decline in interest rates.
The following summarizes the sensitivity analysis for the Banks as of
March 31, 2003, the most recent information available. Management believes there
has been no material change in interest rate risk since March 31, 2003. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein in Item 2 and refer to the
Interest Rate Risk Management discussion included in United's Annual Report on
Form 10-K for the year ended December 31, 2002.
HERITAGE BANK
Estimated increase (decrease)
in net interest income: +200 bp -200 bp
------- -------
0-90 days $ 14,752 $ (103,032)
91-360 days (83,695) (199,556)
2 years (172,559) (475,060)
3 years (243,518) (768,470)
VALLEY BANK
Estimated increase (decrease)
in net interest income: +200 bp -200 bp
------- -------
0-90 days $ (21,782) $ (32,515)
91-360 days (64,470) (102,536)
2 years (43,131) (359,788)
3 years 16,274 (655,107)
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
Page 17
reduction of future earnings and stockholders' equity resulting from both lower
net interest income ("NII") and lower EVE caused by changes in market interest
rates. EVE is the difference between United's depository portfolio value and its
loans receivable portfolio value. EVE thus provides a leading indicator of
future potential changes in both NII and stockholders' equity.
Heritage Bank and Valley Bank have both established maximum percentage
changes for EVE at 1.5% of total assets, given an 100 basis point change in
interest rates. EVE, as a percent to total assets was as follows:
HERITAGE BANK VALLEY BANK
Percent to Total Assets:
March 31, 2003 .58% .57%
December 31, 2002 .85% .96%
The Banks periodically review and make changes to established limits
for EVE changes due to mergers and other market factors.
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operation results.
These hypothetical estimates are based upon numerous assumptions, including the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of assets and liability cash flows
and others. The EVE analysis does not reflect actions that Heritage Bank or
Valley Bank might take in responding to or anticipating changes in interest
rates.
ITEM 4 CONTROLS AND PROCEDURES
United's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that United's disclosure controls and procedures are adequately designed
to ensure that information required to be disclosed by United in the reports
that it files or submits under the Securities and Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in applicable rules and forms. There were no significant
changes made in our internal controls or, to our knowledge, in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
Page 18
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
Although not involved in any material pending litigation as of June,
2003, United is a plaintiff in various legal proceedings arising in the normal
course of business. In the opinion of management, the disposition of current
litigation will not have a material effect on United's consolidated financial
position, results of operations, or liquidity.
ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On May 20, 2003, United Financial Corp. held its Annual Meeting of
Shareholders. The shareholders elected two directors for three year terms.
The shareholders of United Financial Corp. voted as follows with
respect to:
Approval of Directors:
FOR WITHHELD
Kurt R. Weise 1,471,094 3,765
Kevin C. Clark 1,472,139 2,720
ITEM 5 OTHER INFORMATION.
NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
3.1 Articles of Incorporation of United Financial Corp., as
amended (incorporated by reference to Exhibit 3.1 of United's
Annual Report on Form 10-K dated March 31, 1998).
3.2 Bylaws of United Financial Corp., as amended (incorporated by
reference to Exhibit 3.1 of United's Annual Report on Form
10-K dated March 31, 1998).
31.1 Certification of chief executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of chief financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of principal financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
Item 12 Disclosure of Results of Operations and Financial Conditions.
Page 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
United Financial Corp.
Date August 14, 2003 /s/ Kurt R. Weise
---------------------- --------------------------------
Kurt R. Weise
Chairman and Chief
Executive Officer
(Duly Authorized Officer and
Principal Executive Officer)
Date August 14, 2003 /s/ Paula J. Delaney
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Paula J. Delaney
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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