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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number: 0-28080
UNITED FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0507591
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2779; 120 1st Ave. North, Great Falls, Montana 59403
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(406) 727-6106
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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 month (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the Issuer's
Classes of Common Stock, as of the latest date is:
Class: Common Stock, No par value; Outstanding at November 9, 1998
-- 1,698,312 shares
<PAGE>
UNITED FINANCIAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.................................................1
Consolidated Condensed Statements of Financial Condition at
September 30, 1998 (unaudited) and December 31, 1997....................1
Consolidated Condensed Statements of Income - Three and Nine Months Ended
September 30, 1998 and September 30, 1997 (unaudited)...................2
Consolidated Condensed Statements of Cash Flows - Nine Months Ended
September 30, 1998 and September 30, 1997 (unaudited)....................3
Notes to Consolidated Condensed Financial Statements......................4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................13
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........21
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS...................................................23
ITEM 2 CHANGE IN SECURITIES................................................23
ITEM 3 DEFAULTS ON SENIOR SECURITIES.......................................23
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS...............23
ITEM 5 OTHER INFORMATION...................................................23
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K....................................23
SIGNATURES....................................................................24
i
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
(Unaudited, except December 31)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
------------ -----------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,892 9,869
Time deposits in banks 98 98
Investment securities available-for-sale 55,354 14,219
Loans receivable, net 138,993 56,796
Loans held for sale 5,180 1,467
Premises and equipment, net 3,478 1,636
Real estate owned, net 432 --
Accrued interest receivable 2,051 688
Federal Home Loan Bank stock, at cost 1,130 404
Goodwill, net of accumulated amortization of $205 and
150 at September 30, 1998 and December 31, 1997,
respectively 810 494
Cash surrender value of life insurance 264 257
Due from FDIC 1,192 --
Income tax receivable 29 --
Other assets 1,194 341
----------- -----------
Total assets $ 222,097 $ 86,269
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 161,602 70,386
FHLB advances 22,175 6,425
Securities sold under agreements to repurchase 5,169 3,173
Accrued interest payable 1,275 807
Advance payments by borrowers for taxes and insurance 709 138
Income taxes payable -- 34
Other liabilities 658 208
Long-term debt -- 2,350
----------- -----------
Total liabilities 191,588 83,521
Stockholders' equity:
Preferred stock, no par value (2,000 shares authorized;
none outstanding) -- --
Common stock, no par value (8,000 shares authorized;
1,698 outstanding) 28,002 1,080
Retained earnings-partially restricted 2,354 1,540
Accumulated comprehensive income 153 128
----------- -----------
Total stockholders' equity 30,509 2,748
----------- -----------
Total liabilities and stockholders' equity $ 222,097 $ 86,269
=========== ===========
Equity/Assets 13.7% 3.2%
Book Value/Share $ 17.97 $ 5.79
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 1
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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,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 2,918 $ 1,204 $ 7,410 $ 3,267
Mortgage-backed securities 586 202 1,602 638
Investment securities 259 62 722 161
Other interest earning assets 104 54 445 123
--------- --------- --------- ---------
Total interest income 3,867 1,522 10,179 4,189
INTEREST EXPENSE
Deposits 1,629 683 4,399 1,926
Short-term borrowings 429 98 869 183
Long-term debt -- 45 12 143
--------- --------- --------- ---------
Total interest expense 2,058 826 5,280 2,252
--------- --------- --------- ---------
Net interest income 1,809 696 4,899 1,937
Provision for loan losses 115 100 335 193
--------- --------- --------- ---------
Net interest income after provision for 1,694 596 4,564 1,744
losses on loans
NON-INTEREST INCOME
Loan origination fees and discounts 741 166 1,786 466
Loan servicing fees 23 17 61 51
Customer service charges 88 77 245 209
FHLB stock dividends 20 7 56 19
Gain on sales of investment securities, net -- -- 12 --
Other income 46 34 168 83
--------- --------- --------- ---------
Total non-interest income 918 301 2,328 828
NON-INTEREST EXPENSE
Salaries and employee benefits 903 297 2,306 865
Net occupancy and equipment expense 164 55 434 170
Data processing expense 89 48 231 144
Other expenses 497 213 1,223 520
--------- --------- --------- ---------
Total non-interest expense 1,653 613 4,194 1,699
--------- --------- --------- ---------
Income before income taxes 959 284 2,698 873
Provision for income tax expense 365 118 1,035 334
--------- --------- --------- ---------
Net income $ 594 $ 166 $ 1,663 $ 539
========= ========= ========= =========
Net income per share $ .35 $ .35 $ 1.07 $ 1.13
--------- --------- --------- ---------
Weighed average shares outstanding 1,698 475 1,550 475
--------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 2
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UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,663 $ 539
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Provision for loan losses 335 193
Amortization of goodwill 55 32
Amortization of premiums on loans 61 8
Amortization of core deposit premium 10 --
Depreciation and amortization of bank premises and
equipment 183 83
Depreciation of real estate held for investment 32 --
Deferred loan fees, net (4) (14)
Amortization of discounts and premiums on investments, net 9 (38)
Gain on sales of available-for-sale, net (12) --
Net change in loans held for sale (2,015) 549
Federal Home Loan Bank stock dividends (59) (19)
Net change in income taxes payable (159) 46
Net change in accrued interest receivable (537) (140)
Net change in accrued interest payable 137 63
Increase in the cash surrender value of life insurance (7) (10)
Net change in other assets (96) 3
Net change in other liabilities (1,807) (109)
------------ ------------
Net cash provided by (used in) operating activities (2,211) 1,186
------------ ------------
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale (8,617) (1,498)
Purchases of mortgage-backed securities available-for-sale (19,434) (2,489)
Purchases of Federal Home Loan Bank stock (132) (14)
Proceeds from maturities, calls, and pay-downs of securities
available-for-sale 13,946 1,250
Mortgage-backed securities principal payments 12,404 2,025
Proceeds from sale of investment securities available-for-
sale 5,716 --
Proceeds from sale of real-estate held for investment 360 --
Net change in loans receivable (42,172) (11,067)
Purchases of premises and equipment (349) (91)
Purchase of loan production offices (225) --
Cash collected from FDIC, net of acquired State Bank's cash
and cash equivalents 9,965 --
Acquired United Financial Corp.'s cash and cash equivalents 8,113 --
------------ ------------
Net cash used in investing activities (20,425) (11,884)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 7,955 8,104
Net increase in Federal Home Loan Bank advances 15,750 4,500
Net increase(decrease)in securities sold under repurchase
agreements 1,996 (5,405)
Net increase in advance by borrowers for taxes and insurance 307 155
Payments on long-term debt (2,350) (100)
Cash dividends paid to stockholders (1,274) --
Capital contribution 2,275 --
------------ ------------
Net cash provided by financing activities 24,659 7,254
------------ ------------
Increase (decrease) in cash and cash equivalents 2,023 (3,444)
Cash and cash equivalents at beginning of year 9,869 10,089
------------ ------------
Cash and cash equivalents at end of period $ 11,892 $ 6,645
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
- -------------------------------------------------------------
Cash payments for interest $ 5,096 $ 2,188
Cash payments for income taxes $ 1,195 $ 211
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 3
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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 other
Montana communities. Substantially all of United's banking business is
currently conducted through its wholly-owned subsidiary Heritage Bank.
United had assets of approximately $222 million, deposits of
approximately $162 million and stockholders' equity of approximately $31
million at September 30, 1998. United is the result of the merger on
February 3, 1998 (the "Heritage Merger") of two Montana-based savings and
loan holding companies of relatively comparable size: Heritage
Bancorporation ("Heritage") and United Financial Corp. as it existed
prior to the Heritage Merger ("Old United"). Heritage Bank is the result
of the subsequent merger in May 1998 of the savings association
subsidiaries of these two holding companies: United Savings Bank, F.A.,
the savings institution subsidiary of Old United ("United Bank"), and
Heritage Bank, the savings institution subsidiary of Heritage. After the
Heritage Merger, the new management of United significantly changed
United's business strategy to a more growth-oriented expansion strategy.
See note 2 - Heritage Merger.
Heritage Bank is a federally chartered stock savings bank with
full service banking offices located in Chester, Glendive, Great Falls,
Havre and Shelby, Montana, and loan production offices located in
Bozeman, Hamilton, Kalispell, Libby, Missoula and Polson, Montana.
Heritage Bank is engaged in the community banking business of attracting
deposits from the general public through its 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 its market areas in Montana.
A substantial part of United's banking business is conducted in the Great
Falls area. Heritage Bank also invests in mortgage-backed securities,
U.S. Treasury obligations, other U.S. Government agency obligations and
other interest-earning assets.
Heritage Bank's financial condition and results of operations, and
therefore the financial condition and results of operation of United, are
dependent primarily on net interest income and fee income. Heritage
Bank's 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.
In August 1998, United organized a Montana state chartered banking
subsidiary, Heritage State Bank ("State Bank") to acquire a portion of
the assets of a failed commercial bank in Fort Benton, Montana. See note
20 - Recent Development. As a result of the formation of State Bank,
United, which was formerly regulated by the Office of Thrift Supervision
("OTS") as a savings and loan holding company, became a bank holding
company subject to supervision by the Federal Reserve Board. Heritage
Bank, as a federally chartered savings institution, remains subject to
supervision by the OTS as its principal regulator and both Heritage Bank
and State Bank, as financial institutions with deposits insured by the
Federal Deposit Insurance Corporation ("FDIC"), remain subject to
regulation by the FDIC.
Heritage Bank has a wholly owned subsidiary, Community Service
Corporation ("CSC"), which owns and manages real estate held for
investment. United, Heritage Bank, State Bank and CSC are collectively
referred to herein as "United."
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2. HERITAGE MERGER
On February 3, 1998, Heritage merged into United, and an aggregate
of 475,000 shares (or 28%) of United Common Stock was issued to the
former shareholders of Heritage (the "Former Heritage Shareholders"). At
that time, the United Board was increased to nine members and five
persons nominated by the Former Heritage Shareholders (the "Heritage
Nominees") were elected to the United Board. Subsequently, a non-Heritage
Nominee resigned from the United Board. In May 1998, two senior officers
of Heritage Bank were elected to the United Board. The Heritage Nominees
and former Heritage senior officers presently constitute a majority of
the United Board.
The Heritage Merger was treated as a reverse acquisition and
accounted for as a purchase in accordance with generally accepted
accounting principles. Because the shareholders and management of
Heritage controlled the operations of United after the Heritage Merger,
Heritage was considered the acquirer for accounting purposes.
Accordingly, the historical statements of operations of United now are
the historical financial statements of Heritage and do not include the
results of Old United for periods prior to the Heritage Merger. At the
time of the Heritage Merger, Old United had approximately $96 million of
assets, $71 million of deposits and $40 million of loans, and Heritage
had approximately $90 million of assets, $69 million of deposits and $60
million of loans.
The new management of United has changed United's business
strategy as it existed prior to the Heritage Merger and is engaging in a
growth-oriented expansion strategy by pursuing internal and external
growth opportunities, when available. United is in the process of
expanding the customer base of Heritage Bank by emphasizing commercial,
agricultural and consumer loans as well as the mortgage business
previously emphasized by United Bank. Management will consider pursuing
external growth through opening new branches, possible acquisitions of
other financial institutions, as well as expansion of the geographic area
currently served. This strategy is consistent with the growth-oriented
expansion pursued by Heritage prior to the Heritage Merger.
United's new business strategy may subject United to a greater
degree of risk. Historically, Old United had concentrated on residential
lending, as home loans were believed to present the least amount of risk.
Commercial real estate loans, commercial loans and consumer loans, which
constituted a larger portion of Heritage's portfolio and lending
activities, had been made by Old United only on a limited basis. Risks
associated with this new business strategy include increased risk of
losses on loans, provision for loan losses which exceed historical
levels, difficulties in integrating or managing new branches or acquired
institutions, and problems relating to the management of growth. There
can be no assurance that United will be successful in instituting this
new business strategy or in managing growth.
3. MARKET AREA AND COMPETITION
Prior to the Heritage Merger, Old United's primary market area had
been the Great Falls, Montana metropolitan area and the areas surrounding
its offices in Glendive, Havre and Shelby, Montana. With the Heritage
Merger, Chester, Montana was added as a market area as well as the market
area served by a Loan Production Office ("LPO") in Bozeman. Since the
Heritage Merger, United has also added offices in Fort Benton and
Geraldine and LPOs in Hamilton, Kalispell, Libby, Missoula and Polson,
Montana.
Great Falls, the county seat of Cascade County and a regional
trade center, is one of the largest cities in Montana. The estimated 1997
Great Falls and Cascade county populations were approximately 58,000 and
81,000, respectively. The economy of Great Falls is largely based on
agriculture, health care and Department of Defense activities. Malmstrom
Air Force Base ("MAFB"), which employs over 4,000 people, is the largest
Page 5
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employer in Great Falls and Cascade County. Reduction in size or closure
of MAFB would adversely affect United.
The economies of Chester, Glendive, Fort Benton, Geraldine, Havre
and Shelby, Montana are dependent to a large extent on agricultural,
livestock and railroad activities. Areas served by United's LPOs are less
dependent upon agriculture. Areas such as, Bozeman, Hamilton, Kalispell,
Missoula and Polson are also supported in part by tourism and higher
education. Nevertheless, agriculture is the predominant activity in the
State of Montana and any adverse trend could adversely affect United.
Heritage Bank and State Bank, like other depository institutions,
are operating in a rapidly changing environment and, therefore, face
considerable competition in the attraction of deposits and the
origination of loans. Historically, the most direct competition for
deposits has come from other savings institutions, credit unions and
commercial banks. There are approximately 30 depository institutions,
commercial banks, credit unions and savings institutions with offices in
United's market areas. Non-depository financial service organizations,
primarily in the securities and insurance industries, have also become
competitors for retail savings and investment funds. United's deposit
programs compete with money market mutual funds, government securities
and other investment alternatives. United competes for deposits by
offering a variety of deposit accounts at interest rates based upon
market conditions, convenient business hours, quality service and
convenient branch locations.
4. OTHER ACTIVITIES
United has no direct subsidiaries other than Heritage Bank and
State Bank. Heritage Bank has a wholly owned service corporation, CSC,
which owns and manages a limited amount of real estate held for
investment. As a result of United recently becoming a bank holding
company, United will be required to divest CSC within two years of the
date United became a bank holding company. Heritage Bank also holds an
11% ownership interest in Bankers' Resource Center, a computer data
center, which provides certain data processing services to Heritage Bank
and other financial institutions in Montana.
5. BASIS OF PRESENTATION
United's consolidated financial statements, included herein, have
been prepared in accordance with Generally Accepted Accounting Principals
("GAAP") for interim financial information and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the
opinion of management, the information contained herein reflects all
postings and disclosures (consisting only of normal recurring
adjustments) necessary for a fair presentation of the consolidated
financial condition, results of operations, and changes in cash flows for
the periods disclosed. Operating results for the three and nine months
ended September 30, 1998, are not necessarily indicative of the results
anticipated for the year ending December 31, 1998. 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, 1997.
Consistent with Heritage being the acquiring corporation for
accounting purposes, the historical financial statements of United, for
periods prior to the Heritage Merger, are those of Heritage, and not Old
United as it existed prior to the Heritage Merger. Accordingly, the
historical statements of operations of United reflect only the operations
of Old United commencing with the closing date of the Merger. Under the
purchase method of accounting, the assets and liabilities of Old United
and its subsidiary were adjusted to their estimated fair values and
combined with the historical book values of the assets and liabilities of
Heritage. The actual revaluation of Old
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United's net assets acquired is subject to the completion of studies and
evaluations of management.
6. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. This statement requires
that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the some prominence as other financial statements.
United adopted the provisions of SFAS No. 130 as of January 1, 1998.
COMPREHENSIVE INCOME DISCLOSURE:
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED Three Months Ended
SEPTEMBER 30, 1998 September 30, 1997
---------------------------------- ----------------------------------
Before Tax After Before Tax After
Tax Expense Tax Tax Expense Tax
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Unrealized holding gains
arising during period $ 249 $ 96 $ 153 $ 187 $ 69 $ 118
Less: reclassification
adjustment for gains
included in net income -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net unrealized gains on
securities $ 249 $ 96 $ 153 $ 187 $ 69 $ 118
======== ======== ======== ======== ======== ========
<CAPTION>
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 1998 September 30, 1997
---------------------------------- ----------------------------------
Before Tax After Before Tax After
Tax Expense Tax Tax Expense Tax
-------- -------- -------- -------- -------- --------
Unrealized holding gains
arising during period $ 261 $ 101 $ 160 $ 187 $ 69 $ 118
Less: reclassification
adjustment for gains
included in net income 12 5 7 -- -- --
-------- -------- -------- -------- -------- --------
Net unrealized gains on
securities $ 249 $ 96 $ 153 $ 187 $ 69 $ 118
======== ======== ======== ======== ======== ========
</TABLE>
7. RECLASSIFICATIONS
Certain reclassifications have been made to the September 30, 1997
and December 31, 1997 financial statements to conform to the September
30, 1998 presentation.
8. 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.
9. LENDING ACTIVITIES
Lending activities are United's primary source of both interest
income and fee income. United's interest income from loans receivable was
approximately $7.4 million and $3.3 million, or approximately 59.2% and
65.1% of total income for the nine months
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ended September 30, 1998 and 1997 respectively. To date, United's
principal lending activity has been the origination of residential loans
on existing real estate, including conventional residential real estate
loans (loans which are neither insured nor partially guaranteed by
government agencies) and residential real estate loans insured by the
Federal Housing Administration ("FHA") or partially guaranteed by the
Veterans Administration ("VA"). In the first nine months of 1998, United
has used increased FHLB borrowings, repurchase agreements and certain
maturing assets that were formerly invested by Old United in investment
securities, as well as cash equivalents and deposits, to expand its loan
portfolio. Accordingly, its interest income from loans receivable, as
well as the percentage of total income represented by interest from loans
receivable, has increased.
Although Old United and Heritage were of comparable size at the
time of the Heritage Merger, the composition of their assets and loan
portfolios, and their lending policies, differed substantially.
Approximately 85% of the loan portfolio of Old United at December 31,
1997 consisted of first mortgage loans (including over 55% of the total
portfolio in 1-4 residential loans), while only 7%, 7% and 1% represented
consumer, commercial and agricultural non-mortgage loans, respectively.
In contrast, only approximately 65% of the loan portfolio of Heritage at
December 31, 1997 consisted of first mortgage loans (including less than
39% in residential mortgage loans), while 20%, 4% and 9% consisted of
commercial, agricultural and consumer non-mortgage loans, respectively.
In general, the lending operations of Heritage more closely paralleled
the lending activities of a commercial bank than a savings bank. As a
result of the Heritage Merger, United now uses the lending policies,
guidelines and procedures of Heritage and, accordingly, is placing more
emphasis on commercial and consumer lending and effective use of its
capital.
10. INVESTMENT PORTFOLIO
The investment activities of United are designed to provide an
investment alternative for funds not presently required to meet loan
demand, assist Heritage Bank and State Bank in meeting potential
regulatory liquidity requirements, assist in maximizing income consistent
with quality and liquidity requirements, supply collateral to secure
public funds and retail repurchase agreements, provide a means for
balancing market and credit risks, and provide consistent income and
market value throughout changing economic times.
United's portfolio consists primarily of obligations of U.S.
government and its agencies and mortgage-backed securities, state and
local governments, and agency collateralized obligation securities.
United's investment portfolio does not contain concentration of
investments in any one issuer in excess of 10% of United's total
investment portfolio. Exempt from this calculation are securities of the
U.S. government and U.S. government agencies. All of United's investments
are classified as available-for-sale.
11. DEPOSIT ACTIVITIES
Deposits are attracted from within United's market area through
the offering of a broad selection of deposit instruments, including NOW
accounts, money market accounts, regular savings accounts, certificates
of deposit and retirement savings plans. Deposit account terms vary,
according to the minimum balance required, the time period the funds must
remain on deposit and the interest rate, among other factors. In
determining the terms of its deposit accounts, United considers current
market interest rates, profitability to United, matching deposit and loan
products offered by its competition and its customer preferences and
concerns. United reviews its deposit mix and pricing weekly.
Early withdrawal from time deposits subjects the depositor to an
early withdrawal penalty which is currently equal to six months of
simple, nominal interest when the
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original maturity is longer than one year, three months of simple,
nominal interest when original maturity is 92 days to one year, and all
interest earned when original maturity is 91 days or less.
As a matter of policy, United does not accept, place or solicit
brokered deposits. Although deposits are not solicited outside of
Montana, traditionally, a small number of United's depositors have
resided outside Montana. As market demand generally dictates deposit
maturities and rates, United intends to continue to offer those types of
accounts that have broad market appeal.
12. BORROWINGS
United relies on borrowings from the Federal Home Loan Bank
("FHLB") of Seattle to finance its short-term, and increasingly its
longer term, financing needs. The FHLB of Seattle functions as the
central reserve bank providing credit for savings institutions and
certain other member financial institutions. In recent periods,
borrowings from the FHLB of Seattle have been available at rates that are
as favorable, or more favorable, than the rates that United would be
required to pay on deposits. Further, borrowings from the FHLB are
available at various maturities, facilitating the accurate matching of
asset and liability maturity dates. United has used these available
borrowings during the past nine months in part to fund expansion of its
lending activities.
As a member of the FHLB of Seattle, Heritage Bank is required to
own capital stock in the FHLB of Seattle and is authorized to apply for
advances on the security of specified collateral. Advances are made
pursuant to several different credit programs. Each credit program has
its own interest rate and range of maturities. Heritage Bank's currently
established available FHLB advance credit line is 25% of assets. The FHLB
of Seattle is required to review its credit limitations and standards at
least annually. At September 30, 1998 and at December 31, 1997,
$22,175,000 and $6,425,000, respectively, of FHLB advances were
outstanding.
United also generates funds through the sale of investment
securities under agreements requiring their repurchase at a premium that
represents interest. The securities underlying agreements to repurchase
are for the same securities originally sold and are held in a custody
account by a third party. United had $5.2 million and $3.2 million of
securities sold under repurchase agreements at September 30, 1998 and at
December 31, 1997, respectively.
13. STOCKHOLDERS' EQUITY
Stockholder's equity increased $27,761,000 from December 31,
1997 of which $24,647,000 was the purchase price consideration of the
stock deemed to be issued to Old United in connection with the Heritage
Merger. A capital contribution of $2,275,000 was made just prior to the
Heritage Merger and the proceeds were used to pay-off the outstanding
long-term debt of Heritage as part of the conditions of the Heritage
Merger. United had net income for the nine months ended September 30,
1998 of $1,663,000. United paid cash dividends to shareholders totaling
$1,274,,000. There was a $25,000 increase in the unrealized gain on
investment securities available for sale. The balance of paid-in
capital was capitalized into common stock due to the fact that United's
stock has no par value.
On February 3, 1998, United issued a warrant (the Warrant) to
purchase 10,000 shares of its common stock to D.A. Davidson & Co.,
exercisable at the price of $26.25 per share, in exchange for
investment banking services provided to United.
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14. COMPUTATION OF NET INCOME PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the equity. The only potential common
shares are the warrants issued to D. A. Davidson. Basic and diluted EPS
are the same, as the potential common shares do not have a material
impact.
15. DIVIDENDS DECLARED
On October 19, 1998, the Board of Directors of United declared a
third-quarter cash dividend of $.25 per share, payable November 23, 1998,
to shareholders of record on November 9, 1998.
16. YEAR 2000
Many currently installed computer systems and software are coded
to accept only two-digit entries in the date code fields. These date code
fields will need to accept four-digit entries to distinguish 21st century
dates from 20th century dates. This problem could result in system
failures or miscalculations causing disruptions of business operations,
including production of erroneous data, inability to process
transactions, and other operational problems. As a result, many
companies' computer systems and software will need to be upgraded or
replaced in order to comply with Year 2000 requirements. The potential
global impact of the Year 2000 problem is not known, and, if not
corrected in a timely manner, could affect United as well as the U.S. and
world economy.
United has undertaken efforts to address Year 2000 issues. United
has formed a project team, including the President and Operations Officer
of Heritage Bank, a contracted Year 2000 compliance person and a
contracted computer consulting firm, to evaluate the Year 2000 impact on
United's mission-critical computer hardware and software and embedded
technologies in its physical plant and automated equipment (such as ATMs,
proof machines, vaults and security systems). Heritage Bank is also in
the process of ascertaining the Year 2000 readiness of its customers. As
a result of the recent merger of United Bank into Heritage Bank, the
project team is in the process of reevaluating its Year 2000 readiness.
In addition to evaluating the scope of Year 2000 issues, the project team
is in the process of prioritizing tasks, developing implementation plans
and establishing completion and testing schedules. United is replacing,
modifying or reprogramming certain systems, is requiring that new
purchased hardware and software be Year 2000 compliant and continuing to
test its systems.
The majority of Heritage Bank's information processing is
performed by Banker's Resource Center, of which Heritage Bank is an 11%
owner. Banker's Resource Center is regulated by banking regulators, has
had various exams by banking regulators and is currently in the process
of conducting Year 2000 certification testing. Banker's Resource Center
provides periodic reports to Heritage Bank on the status of its Year 2000
project readiness. During the past two years, and also in conjunction
with merging the operations of Heritage Bank and United Bank in May 1998,
United has upgraded the majority of its internal computer hardware and
software to Year 2000 compliant systems. Additionally, all of United's
personal computers are being tested by its computer consulting firm.
United has a budget of $105,000 for replacement of teller equipment, its
telephone system and other Year 2000 costs. To date, approximately
$60,000 has been spent on the Year 2000 project.
Apart from United's Year 2000 efforts, federal banking regulators
conduct special examinations of FDIC insured banks and savings
associations to determine whether they are
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<PAGE>
taking necessary steps to prepare for the Year 2000 issue. These agencies
are closely monitoring the progress made by these institutions in
completing key steps required by their individual Year 2000 plans. The
OTS, which regulates Heritage Bank, conducted an onsite Year 2000
examination in May 1998 and has scheduled a follow-up examination for
November 1998.
United expects that replacement, renovation and testing of its
critical internal computer hardware and software and embedded
technologies will be substantially complete by December 31, 1998, which
will allow time for necessary refinements and additional testing before
December 31, 1999.
Ultimately, the potential impact of Year 2000 issues will depend
not only on the success of the corrective measures that United
undertakes, but also on the way in which the Year 2000 issue is addressed
by customers, vendors, service providers, counterparts, utilities,
governmental agencies and other entities with which United does business.
United is communicating with some of these parties to heighten their
awareness of Year 2000 issues, to learn how they are addressing them and
to evaluate any likely impact on United. United also is asking important
vendors for commitment dates for their Year 2000 readiness and delivery
of compliant software and other products. In addition, United is
monitoring the Year 2000 preparations of entities such as the Federal
Reserve, which provides services for processing and settling payments and
securities transactions between banks. Year 2000 efforts of third parties
are not within United's control, however, and their failure to remediate
Year 2000 issues successfully could result in business disruption,
increased operating cost and increased credit risk for United. At the
present time, it is not possible to determine whether any such events are
likely to occur, or to quantify any potential negative impact they may
have on United's future results of operations and financial condition.
The United Board is currently evaluating the possible allocation of a
portion of its loan loss reserve specifically to potential losses from
Year 2000 complications, particularly with its commercial loan customers.
United is developing a contingency plan to mitigate potential delays or
other problems, in the event of various problem scenarios and intends to
assess such a plan based on the outcome of its validation phase of its
Year 2000 compliance program and the results of surveying its major
suppliers and customers.
The foregoing discussion regarding Year 2000, including the
discussion of the timing and effectiveness of implementation and cost of
United's Year 2000 project, contains forward-looking statements, which
are based on management's best estimates derived using various
assumptions. These forward-looking statements involve inherent risks and
uncertainties, and actual results could differ materially from those
contemplated by such statements. Factors that might cause material
differences include, but are not limited to, the availability to locate
and correct all relevant computer codes, and its ability to respond to
unforeseen Year 2000 complications. Such material differences could
result in, among other things, business disruption, operating problems,
financial loss, legal liability and similar risks.
17. RELATED PARTIES
Central Financial Services, Inc. ("CFS") provides various
management services to United, including accounting and tax services,
investment consulting, personnel consulting, insurance advisory services
and regulatory consulting. CFS is owned by United's Chairman of the Board
of Directors and largest shareholder. CFS fees were $99,000, and $60,000
for the nine months ended September 30, 1998 and 1997, respectively.
18. COMMITMENTS AND CONTINGENCIES
Heritage Bank has sold loans to various investors in the secondary
market under sales agreements which contain repurchase provisions. Under
the repurchase provisions, Heritage Bank may be required to repurchase a
loan if a borrower becomes 90 days
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delinquent any time during the first seven months, or at any time during
the life of the loan if it is determined that appropriate underwriting
guide lines were not followed at the inception of the loan. The balance
of loans sold with repurchase provisions remaining at September 30, 1998
is approximately $45.1 million. No loans were repurchased by Heritage
Bank during the first nine months of 1998 and only one loan was
repurchased during 1997 for $95,000. Total loans sold during the first
nine months of 1998 were approximately $53.6 million.
In June 1997, Heritage Bank entered into a five-year service
contract for data processing services with Banker's Resource Center. In
the event of early termination of the service contract by Heritage Bank,
the bank has agreed to pay an amount equal to fifty percent of the
average monthly fee paid for services multiplied by the number of months
remaining under the term of the contract.
Heritage Bank has a Salary Continuation Agreement with its
President, Kevin P. Clark. The agreement contains a lifetime retirement
benefit, a disability benefit, a change of control benefit and a death
benefit. The benefits are based on Mr. Clark's years of service. Heritage
Bank owns two single premium insurance policies in connection with this
agreement. The policies have a cash value at September 30, 1998 of
$264,000.
At the July 1998 board meeting of United, the United Financial
Corp. Stock Appreciation Rights Plan was adopted. The plan is essentially
a cash bonus program tied to the price movement of United common stock.
Awards totaling 26,500 shares were made and approved by the board. The
strike price was $28.06 per share. The cash award payable under the plan
will equal the number of shares awarded to an employee multiplied by the
employees vesting percentage, multiplied by the excess of the stock price
over the strike price. Each employee has a three year vesting period. As
of September 30, 1998, no accrual for liabilities under the plan was
necessary. See exhibit 10.1 for the plan.
19. SIGNIFICANT TRANSACTIONS
In February 1998, Heritage Bank purchased the assets of three loan
production offices located in Missoula, Hamilton and Libby, Montana, for
approximately $225,000.
On June 30, 1998, United sold real estate held for investment
consisting of a twenty-four unit apartment building owned and managed by
Heritage Bank's subsidiary, Community Service Corporation, for $360,000
in cash with no book gain or loss.
On August 7, 1998, United, through its newly formed Montana
state-chartered commercial banking subsidiary, State Bank, acquired
certain assets and assumed insured deposits of approximately $12.7
million of Q Bank, which was declared a failed bank by federal and state
banking regulatory authorities on August 7, 1998. Q Bank's Fort Benton,
Montana and Geraldine, Montana branches were reopened on August 10, 1998
as branches of State Bank. State Bank paid a $454,000 premium for the
right to acquire such assets and assume Q Bank's insured deposits.
20. RECENT DEVELOPMENT
On August 26, 1998, United announced that it had signed agreements
to acquire approximately 24.2% of Valley Bancorp. Valley Bancorp is a
bank holding company located in Phoenix, Arizona and is the parent
company of Valley Bank of Arizona, a state chartered commercial bank,
with assets of $45 million, deposits of $38 million and loans of $22
million as of September 30, 1998. United intends to acquire, for $6.25
per share, 267,705 shares of Valley Bancorp from various stockholders and
150,000 shares held by CFS. United currently owns 13,000 shares of Valley
Bancorp. United received approval from the Federal Reserve Board for the
acquisition of such shares on October 22, 1998. See exhibits - 10.1 and
10.2 - Stock Purchase Agreements.
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<PAGE>
21. SUBSEQUENT EVENT
On October 5, 1998, United announced that the board of directors
had terminated the definitive merger agreement with Chouteau County
Bancshares Inc. ("Chouteau") of Fort Benton, Montana as a result of the
depressed agricultural economy and other market conditions. United had
previously announced on July 8, 1998 that it and Chouteau had signed a
definitive merger agreement to acquire Chouteau, the parent of First
State Bank of Fort Benton and Fort Benton Insurance Agency Inc.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
1. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 TO THE YEAR ENDED DECEMBER 31, 1997.
(In thousands)
(Unaudited, except December 31)
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION RECAP
----------------------------------------------------------------------------------
Heritage
Old United State Bank
Acquired Acquired
SEPT. 30, Dec. 31, Feb. 3, Aug. 7,
1998 1997 Change 1998 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total assets $ 222,097 $ 86,269 $ 135,828 $ 98,039 $ 13,211
Cash and cash equivalents 11,892 9,869 2,023 8,113 268
Mortgage-backed securities 38,722 10,664 28,058 20,967 55
Investment securities 16,632 3,555 13,077 23,417 662
Loans receivable, net 138,993 56,796 82,197 39,551 855
Loans held for sale 5,180 1,467 3,713 1,698 --
FHLB stock 1,130 404 726 535 --
Real estate owned, net 432 -- 432 824 --
Premises and equipment, net 3,478 1,636 1,842 1,635 --
Goodwill, net 810 494 316 371 --
Due from FDIC 1,192 -- 1,192 -- 10,889
All other assets 3,636 1,384 2,252 928 482
Deposits 161,602 70,386 91,216 70,586 12,665
Borrowed funds 27,344 9,598 17,746 -- --
Long-term debt -- 2,350 (2,350) -- --
All other liabilities 2,642 1,187 1,455 2,806 546
Total liabilities 191,588 83,521 108,067 73,392 13,211
Stockholders' equity, net 30,509 2,748 27,761 24,647 --
</TABLE>
GENERAL - The consolidated financial statements for the year ended
December 31, 1997 contained herein, reflect the historical financial
position and results of operations of Heritage Bank and thus do not
reflect or include the financial position and results of operations of
Old United.
Total assets increased $135.8 million to $222.1 million at
September 30, 1998 from $86.3 million at December 31, 1997. The increase
in assets was primarily the result of the acquisition of $98.0 million of
assets from Old United in connection with the Heritage Merger and $12.7
million of assets (including cash due from FDIC) associated with the
formation of State Bank. Mortgage-backed securities increased $28.0
million, investment securities increased $13.0 million and net loans
receivable increased $82.2 million. The rapid growth in the first nine
months of 1998 reflects the application of the lending and investment
policies of Heritage Bank to the United organization. In
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<PAGE>
addition, deposits increased $91.2 million and stockholders' equity
increased $27.8 million.
MORTGAGE-BACKED & INVESTMENT SECURITIES - Mortgage-backed
securities increased $28.0 million to $38.7 million at September 30, 1998
from $10.7 million at December 31, 1997. The increase was the result of
the acquisition of $21.0 million of mortgage-backed securities associated
with the Heritage Merger and less than $.1 million of mortgage backed
securities associated with the formation of State Bank and $19.4 million
of purchases, partially offset by $12.4 million of principal repayments.
Investment securities increased $13.1 million to $16.6 million at
September 30, 1998 from $3.5 million at December 31, 1997. The increase
was the result of the acquisition of $23.4 million of investment
securities related to the Heritage Merger, the acquisition of $.7 million
of investment securities associated with the formation of State Bank and
the purchase of $8.6 million of investment securities. These increases
were offset by the sale of the $5.3 million Kemper U.S. Government bond
mutual fund at a realized loss of $6,000, the sale of two corporate bonds
with a book values of $.4 million for a gain of $18,000 and $13.9 million
of calls, maturities, and principal payments on other investments
securities.
A comparison of the amortized cost and estimated fair value of
United's available for sale investment portfolio at the dates indicated
is as follows:
(In thousands)
(Unaudited, except for December 31)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES $ 15,198 $ 79 $ (22) $ 15,255
MORTGAGE-BACKED SECURITIES 38,580 206 (64) 38,722
MUNICIPAL BONDS 1,210 60 (3) 1,267
OTHER INVESTMENTS 117 -- (7) 110
---------- ---------- ---------- ----------
$ 55,105 $ 345 $ (96) $ 55,354
========== ========== ========== ==========
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Government and agencies $ 1,890 $ 21 $ (2) $ 1,909
Mortgage-backed securities 10,529 152 (17) 10,664
Municipal bonds 1,207 40 (8) 1,239
Other investments 390 17 -- 407
---------- ---------- ---------- ----------
$ 14,016 $ 230 $ (27) $ 14,219
========== ========== ========== ==========
</TABLE>
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<PAGE>
ANALYSIS OF INVESTMENT YIELDS AND MATURITIES
(In thousands)
(Unaudited, except for December 31)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
UP TO 1 - 5 5 - 10 10 YEARS TOTAL
1 YEAR YEARS YEARS AND BEYOND
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES $ 2,314 $ 12,438 $ 503 -- $ 15,255
MORTGAGE-BACKED SECURITIES 1,962 11,956 3,817 20,957 38,722
MUNICIPAL BONDS 10 147 1,056 54 1,267
OTHER SECURITIES 110 -- -- -- 110
TOTAL INVESTMENTS $ 4,396 $ 24,571 $ 5,376 $ 21,011 $ 55,354
========== ========== ========== ========== ==========
WEIGHTED AVERAGE YIELD 7.7% 6.0% 6.3% 5.9% 6.1%
<CAPTION>
December 31, 1997
Up to 1 - 5 5 - 10 10 Years Total
1 Year Years Years and Beyond
---------- ---------- ---------- ---------- ----------
U.S. Government and agencies -- $ 1,402 $ 507 -- $ 1,909
Mortgage-backed securities 884 5,024 1,125 3,631 10,664
Municipal bonds -- 67 1,069 103 1,239
Other securities -- -- 407 -- 407
---------- ---------- ---------- ---------- ----------
Total investments $ 884 $ 6,493 $ 3,108 $ 3,734 $ 14,219
========== ========== ========== ========== ==========
Weighted average yield 5.6% 6.7% 6.3% 7.4% 6.7%
</TABLE>
Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers have the right to prepay
obligations with or without penalties.
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased $82.2 million to $139.0 million at September 30, 1998 from
$56.8 million at December 31, 1997. This increase was partially due to
the acquisition of $39.5 million of net loans receivable in connection
with the Heritage Merger and $.9 million of net loan receivable in
connection with the formation of State Bank. The additional $42.2 million
loans receivable increase is a direct result of strong loan demand
generated through officer call programs, increased market area, continued
purchase of participation loans and lease financing loans, and a
favorable interest rate environment in the past nine months. Heritage
Bank recently established two additional loan production offices in the
western Montana cities of Kalispell and Polson and the formation of State
Bank added two branches in Fort Benton and Geraldine, Montana. The
Heritage Bank diverse loan portfolio includes: real estate residential
mortgages, commercial and agricultural mortgages, agricultural and
commercial non-mortgage, consumer loans secured by real estate, and
various consumer installment loans. Heritage Bank also purchases and
participates in commercial and lease financing loans. Heritage Bank had $
million of participation and purchased loans as of September 30, 1998.
Heritage Bank sells and retains servicing for a portion of its
residential real estate loans to agencies of Montana such as the Montana
Board of Investments and the Montana Board of Housing.
During the nine months ended September 30, 1998, loans held for
sale increased $3.7 million to $5.2 million at September 30, 1998 from
approximately $1.5 at December 31, 1997. This increase was partially due
to the acquisition of $1.7 million of loans held for sale in connection
with the Heritage Merger. Approximately $55.6 million loans were
originated for sale and $53.6 million of loans were sold to the secondary
market during the nine month period ending September 30, 1998.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve at September 30,
1998 was $1,485,000 compared to $846,000 at December 31, 1997. The
$639,000 increase in the reserve was primarily the result of $302,000 of
loan loss reserves acquired in connection with the Heritage Merger,
$31,000 of loan loss reserves acquired in the formation of State Bank and
a provision for loan losses of $335,000 for the nine months ended
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<PAGE>
September 30, 1998. Loans in the amount of $29,000 were determined by
management to be uncollectable and subsequently charged-off. However,
management aggressively pursues recoveries. The loan loss reserve at
September 30, 1998 is an amount which management believes is adequate
given the low level of non-performing assets and management's assessment
of loan risk. The allowance for loan losses to total loans at September
30, 1998 was 1.06%.
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.
Heritage Bank 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, 1998 Heritage Bank had one non-accrual loan of $65,000 and
$468,000 of loans 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,
1998 and December 31, 1997, United had no assets classified as doubtful
or loss. At September 30, 1998 and December 31, 1997, United had $166,000
and $65,000 of reported substandard assets, respectively. As a percent of
total assets, substandard assets were approximately .03%, and .09% at
September 30, 1998 and December 31, 1997, respectively.
REAL ESTATE HELD FOR INVESTMENT - The $432,000 increase was
primarily the result of $824,000 of real estate acquired in connection
with the Heritage Merger. On June 30, 1998, a twenty-four unit apartment
building was sold for $360,000 in cash. There was no book gain or loss
recorded on this sale. At September 30, 1998 real estate owned was
comprised of a twenty-four unit apartment complex in Glendive, Montana,
owned as depreciating investments by Heritage Bank's wholly owned
subsidiary, Community Service Corporation.
FHLB STOCK - FHLB stock increased approximately $726,000 to
$1,130,000 at September 30, 1998 from $404,000 at December 31, 1997. This
increase was the result of $535,000 of FHLB stock acquired in connection
with the Heritage Merger, $132,000 of FHLB stock purchases, and $59,000
of reinvested stock dividends. FHLB stock purchases were made as required
to support the increased scope of operations.
PREMISES AND EQUIPMENT - This category increased $1,842,000 to
$3,478,000 at September 30, 1998 from $1,636,000 at December 31, 1997.
This increase was primarily due to the acquisition of $1,635,000 of
premises and equipment related to the Heritage Merger. Heritage Bank
invested approximately $390,000 in fixed assets during the first nine
months of 1998. This increase was primarily due to (1) the purchase of
computer and office equipment for the branches and additional staff
members, (2) remodeling of the main banking facility in Great Falls to
accommodate added staff members, (3) the
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<PAGE>
acquisition of $41,000 of computers and office equipment associated with
the three loan production offices purchased in February and (4) the
purchase of furniture, equipment and leasehold improvements in
conjunction with the opening of two new loan production offices. The
purchases of premises and equipment were offset by approximately $183,000
of depreciation.
GOODWILL - Goodwill increased $316,000 to $810,000 at September
30, 1998 from $494,000 at December 31, 1997. This increase is primarily
due to $371,000 of goodwill acquired in relation to the Heritage Merger,
which was offset by $55,000 of amortization during the nine months ending
September 30, 1998. The goodwill is currently being amortized over 10
years.
DUE FROM FDIC - On August 7, 1998, State Bank acquired the insured
deposits and a portion of the assets of a failed bank from the FDIC. The
FDIC maintained control of the remaining assets and liabilities of the
failed bank. The initial amount due from the FDIC, to fund the insured
deposits, was approximately $10.9 million and by the end of September
1998 the FDIC had funded $9.7 million, leaving a balance of $1.2 million.
The FDIC is currently in the process of determining the fair market value
of the fixed assets of the failed bank, and State Bank has the option to
purchase these assets from the FDIC. The average outstanding balance due
from the FDIC earns interest based on a predetermined settlement rate.
DEPOSITS - Deposits increased $91.2 million to $161.6 million at
September 30, 1998 from $70.4 million at December 31, 1997. This increase
was primarily the result of the acquisition of $70.6 million of deposits
from Old United and $12.6 million of deposits associated with the
formation of State Bank. The additional $8.0 million increase was
comprised of an increase of $5.4 million in NOW and money market demand
accounts, a decrease of $1.2 million in savings accounts and a increase
of $3.8 million in time deposits. This increase in deposits during the
first nine months of 1998 resulted primarily from the application of
competitive rates on all deposits offered by United as well as the
offering of a greater array of loan products to attract depositors.
BORROWED FUNDS - Borrowed funds increased $17.7 million to $27.3
million at September 30, 1998 from $9.6 million at December 31, 1997. All
borrowings prior to February 3, 1998 represented borrowings by Heritage
Bank, as Old United had no outstanding borrowings. The increase was due
to $30.8 million in new FHLB advances, less $15.1 million in repayments
of FHLB advances and a net increase of $2.0 million in securities sold
under repurchase agreements. The additional borrowings in the first nine
months of 1998 were used to fund increases in United's loan portfolio.
LONG-TERM DEBT - This category decreased $2.35 million to zero
from $2.35 million at December 31, 1997. The reduction was the result of
a principal reduction payment of $75,000 made by Heritage Bank in January
1998, and the balance of the long-term debt being paid on February 3,
1998 immediately preceding the Heritage Merger with funding from a
corresponding $2,275,000 contribution of capital.
STOCKHOLDERS' EQUITY - Stockholders' equity increased $27.8
million to $30.5 million at September 30, 1998 from $2.7 million at
December 31, 1997. This increase is due to $1,663,000 of net income for
the nine months ended September 30, 1998 less cash dividends declared of
$849,000, a $25,000 increase in unrealized gains associated with assets
classified as available-for-sale being adjusted to market value, a $2.3
million contribution of capital, and $24.6 million of net stockholders'
equity acquired in connection with the Heritage Merger.
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<PAGE>
2. MATERIAL CHANGES IN RESULTS OF OPERATIONS.
On February 3, 1998, Heritage merged into Old United in a
transaction accounted for as a purchase and a reverse merger. The
following charts compare the unaudited statements of income for the three
and nine months ended September 30, 1998 and 1997 to the unaudited pro
forma combined statements of income for the three and nine months ended
September 30, 1998 and 1997. The following unaudited pro forma combined
financial information gives effect to the Heritage Merger based on the
purchase accounting adjustments, estimates and other assumptions
described in the accompanying notes. The unaudited pro forma combined
statements of income for the three and nine month periods ending
September 30, 1998 and 1997 are based upon the unaudited quarterly
consolidated statements of income of Heritage and Old United. The
unaudited pro forma combined statements of income combines the historical
consolidated statements of income of Heritage and Old United as if the
Heritage Merger had become effective as of the beginning of the period
presented. The selected pro forma combined financial data is unaudited
and is not necessarily indicative of the results of operations that would
have been achieved had the Heritage Merger occurred on such dates or of
the results of operation that may be achieved in the future.
<TABLE>
<CAPTION>
(In thousands)
(Unaudited)
INCOME RECAP
--------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------- -----------------------------------
1998 1997 Change 1998 1997 Change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 3,867 $ 1,522 $ 2,345 $ 3,867 $ 3,326 $ 541
Interest expense 2,058 826 1,232 2,058 1,679 379
--------- --------- --------- --------- --------- ---------
Net interest income 1,809 696 1,113 1,809 1,647 162
Provision for loan losses 115 100 15 115 100 15
Non-interest income 918 301 617 918 493 425
Non-interest expense 1,653 613 1,040 1,653 1,134 519
--------- --------- --------- --------- --------- ---------
Income before income taxes 959 284 675 959 906 53
Provision for income taxes 365 118 247 365 351 14
--------- --------- --------- --------- --------- ---------
Net income $ 594 $ 166 $ 428 $ 594 $ 555 $ 39
========= ========= ========= ========= ========= =========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------- -----------------------------------
1998 1997 Change 1998 1997 Change
--------- --------- --------- --------- --------- ---------
Interest income $ 10,179 $ 4,189 $ 5,990 $ 10,739 $ 9,626 $ 1,113
Interest expense 5,280 2,252 3,028 5,536 4,774 762
--------- --------- --------- --------- --------- ---------
Net interest income 4,899 1,937 2,962 5,203 4,852 351
Provision for loan losses 335 193 142 340 193 147
Non-interest income 2,328 828 1,500 2,416 1,310 1,106
Non-interest expense 4,194 1,699 2,495 4,483 3,323 1,160
--------- --------- --------- --------- --------- ---------
Income before income taxes 2,698 873 1,825 2,796 2,646 150
Provision for income taxes 1,035 334 701 1,071 999 72
--------- --------- --------- --------- --------- ---------
Net income $ 1,663 $ 539 $ 1,124 $ 1,725 $ 1,647 $ 78
========= ========= ========= ========= ========= =========
</TABLE>
GENERAL - Consistent with the purchase method of accounting, the
historical information being presented reflects only the operations of
Heritage for the three and nine months ended September 30, 1997. The
statement of operations for the three and nine months ended September 30,
1998 includes the results of operations of Heritage combined with the
result of operations of Old United commencing after the Heritage Merger
on February 3, 1998.
Page 18
<PAGE>
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. United's net interest income increased $1.1
million from $.7 million for the three months ended September 30, 1997 to
$1.8 million for the three months ended September 30, 1998 and increased
$3.0 million from $1.9 million for the nine months ended September 30,
1997 to $4.9 million for the nine months ended September 30, 1998. This
increase was primarily the result of net interest income from the
interest-earning assets and liabilities acquired in the Heritage Merger.
In addition to the interest-earning assets and liabilities acquired in
the Heritage Merger, United has used the funds from additional deposits
and borrowings to fund growth in its loan portfolio. United's pro forma
combined income statement illustrates the effect of United's growth from
increases in its loan portfolio, deposit base and short-term borrowings
since the Heritage Merger. United's pro forma net interest income
increased $.2 million from $1.6 million for the three months ended
September 30, 1997 to $1.8 million for the three months ended September
30, 1998 and increased $.4 million from $4.8 million for the nine months
ended September 30, 1997 to $5.2 million for the nine months ended
September 30, 1998.
INTEREST INCOME - The principal reason for the increase in
United's net interest income from the three and nine month periods ended
September 30, 1997 compared to the three and nine month periods ended
September 30, 1998 was an increase in United's interest-earning assets.
Interest income increased $2.3 million from $1.5 million for the three
month period ended September 30, 1997 to $3.8 million for the three month
period ended September 30, 1998 and increased $6.0 million from $4.2
million for the nine month period ended September 30, 1997 to $10.2
million for the nine month period ended September 30, 1998. The primary
reason for this increase was the acquisition of Old United's
interest-earning assets including its $40 million loan portfolio, $44
million investment portfolio, and $8 million of interest-earning
deposits.
For the three month period ended September 30, 1998, compared to
the three month period ended September 30, 1997, interest on loans
receivable increased $1.7 million, interest on mortgage-backed securities
and investments increased $.6 million and interest on other
interest-earning assets increased less than $.1 million. For the nine
month period ended September 30, 1998, compared to the nine month period
ended September 30, 1997, interest on loans receivable increased $4.1
million, interest on mortgage-backed securities and investments increased
$1.6 million and interest on other interest-earning assets increased $.3
million.
During the first nine months of 1998, and primarily since the
Heritage Merger, United had a net increase in its loan portfolio of $41.8
million and a planned net decrease in its investment portfolio of $4.0
million. The impact of these changes on interest income are reflected in
the pro forma combined income statements. During the three month period
ended September 30, 1998, pro forma combined interest income increased
$.5 million from $3.3 million at September 30, 1997 to $3.8 million at
September 30, 1998, of this increase $.9 million was due to interest on
loans receivable offset by a $.3 million decrease in interest on
investments and other interest-earning assets. During the nine month
period ended September 30, 1998, pro forma combined interest income
increased $1.1 million from $9.6 million at September 30, 1997 to $10.7
million at September 30, 1998, of this increase $2.0 million was due to
interest on loans receivable and $.2 million was
Page 19
<PAGE>
due to other interest-earning assets which were offset by a $1.1 million
decrease in interest on investments.
INTEREST EXPENSE - The principal reason for the increase in
United's net interest expense from the three and nine month periods ended
September 30, 1997 to the three and nine month periods ended September
30, 1998 was an increase in United's interest-bearing liabilities. United
acquired $70.6 million of deposits in the Heritage Merger, $12.7 million
of deposits with the formation of State Bank and experienced an increase
in deposits of $8.0 million and an increase in short-term borrowings of
$17.7 million offset by a decrease in long-term debt of $2.35 million.
Interest expense increased $1.2 million from $.8 million for the three
month period ended September 30, 1997 to $2.0 million for the three month
period ended September 30, 1998 and increased $3.0 million from $2.3
million for the nine month period ended September 30, 1997 to $5.3
million for the nine month period ended September 30, 1998.
For the three month period ended September 30, 1998, compared to
the three month period ended September 30, 1997, interest on deposits
increased $.9 million, interest on short-term borrowings increased $.3
million and interest on long-term debt decreased less than $.1 million.
For the nine month period ended September 30, 1998, compared to the nine
month period ended September 30, 1997, interest on deposits increased
$2.4 million, interest on short-term borrowings increased $.7 million and
interest on long-term debt decreased $.1 million.
During the first nine months of 1998, and primarily since the
Heritage Merger, United has increased its FHLB advances to fund a portion
of the growth in its loan portfolio. A large portion of the increase in
United's deposit expense is attributable to the deposits acquired in the
Heritage Merger. The pro forma combined income statements illustrate the
effect of the increase short-term borrowings and deposit growth. During
the three month period ended September 30, 1998, pro forma interest
income increased $.4 million from $1.7 million at September 30, 1997 to
$2.1 million at September 30, 1998, of this increase $.1 million was due
to interest on deposits and $.3 million was due to interest on short-term
borrowings. During the nine month period ended September 30, 1998, pro
forma interest income increased $.7 million from $4.8 million at
September 30, 1997 to $5.5 million at September 30, 1998, of this
increase $.2 million was due to interest on deposits and $.5 million was
due to interest on short-term borrowings.
PROVISION FOR LOAN LOSSES - United provided $335,000 for loan
losses in the first nine months of 1998, ($340,000 on a pro forma
combined basis) as compared to $193,000 in the first nine months of 1997.
United provided $115,000 for loan losses in the three period ending
September 30, 1998 as compared to $100,000 in the three month period
ending September 30, 1997. The increase in the provision for loan losses
is in part because of the increased average balance in loans receivable
and in part because of management's evaluation of overall economic
conditions, both regionally and nationally.
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 wide range of retail
banking services, including mortgage banking activities and service
charges for deposit services. Non-interest income increased $.6 million,
to $.9 million for the three month period ending September 30, 1998
compared to $.3 million the same period in 1997. Non-interest income
increased $1.5
Page 20
<PAGE>
million, to $2.3 million for the first nine month of 1998 as compared $.8
million to the same period in 1997. The principal reason for the increase
was the strength of the home lending market, and particularly the
refinancing market during the first nine months of 1998, as interest
rates were relatively low and stable. The active refinancing market
during this period resulted in substantial increases in loan origination
fees and discounts on the sale of mortgage loans of $.6 million and $1.3
million for the three and nine month periods ending September 30, 1998,
respectively, compared to the same periods in 1997. United believes that
any increase in interest rates is likely to result in a decreased
refinancing market and would negatively affect United's fee income.
Other non-interest income, including servicing fees on mortgage
loans, service charges and FHLB stock dividends, remained relatively
constant and are expected to remain relatively constant in future
periods.
On a pro forma combined basis the increase from the three and nine
months periods ending September 30, 1998 to the same periods in 1997 for
loan origination fees and discounts on the sale of mortgage loans were
approximately 98% and 106%, respectively, of the total increase in
non-interest income. Pro forma non-interest income increased $.4 million,
to $.9 million for the three month period ending September 30, 1998
compared to $.5 million for the same period in 1997 and increased $1.1
million, to $2.4 million for the nine month period ending September 30,
1998 compared to $1.3 million for the same period in 1997. United also
recognized a small amount of net gain on sale of investment securities
during the first nine months of 1998, while no investment securities were
sold in 1997.
NON-INTEREST EXPENSE - Non-interest expense increased $1.0
million, to $1.6 million during the three month period ending September
30, 1998 compared to $.6 million for the same period in 1997, and
increased $2.5 million, to $4.2 million for the first nine months of 1998
compared to $1.7 million for the same period in 1997.
Salary and employee benefit expense, which increased $.6 million
to $.9 million in the three month period ending September 30, 1998 from
$.3 million in the same period in 1997 and increased $1.4 million to $2.3
million for the first nine months of 1998 compared to $.9 million for the
same period in 1997, accounted for most of the increase in 1998. This
increase was due primarily to increased salary and commission expense
associated with the refinancing activity and growth in the size of
United's overall operations. To a lesser extent, this increase was also
due to one-time merger related charges of $85,000 and increased data
processing charges in the first quarter of 1998. On a pro forma combined
basis non-interest expense increased $.5 million, to $1.7 million for the
three month period ending September 30, 1998 compared to $1.1 million for
the same period in 1997 and increased $1.2 million, to $4.5 million for
the first nine months of 1998 compared to $3.3 million for the same
period in 1997.
INCOME TAXES - Income tax expense increased $247,000 to $365,000
for the three month period ending September 30, 1998 from $118,000 for
the same period of 1997, and increased $701,000 to $1,035,000 for the
first nine months of 1998 from $334,000 for the same period in 1997. The
principal reason for the increase in both periods was increased net
income, after adjustment for non-deductible goodwill amortization and
tax-free interest on municipal bonds and loans.
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").
Page 21
<PAGE>
INTEREST RATE RISK - United has established a formal IRR policy,
and Heritage Bank has an Asset/Liability Management Committee 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.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE - Interest rate
risk sensitivity of net portfolio value ("NPV") measurement seeks to
establish a methodology to measure the potential for the reduction of
earnings and stockholders' equity resulting from both lower net interest
income ("NII") and lower NPV caused by changes in market interest rates.
NPV thus provides a leading indicator of future potential changes in both
NII and stockholders' equity. Because of its asset size (less than $500
billion), Heritage Bank falls under an OTS exemption that allows
utilization of an asset/liability computer simulation program prepared
and distributed by the OTS. The OTS Thrift Financial Report includes
Schedule CMR that provides detailed information about the balances,
interest rates, repricing, and maturity characteristics of the Bank's
financial instruments. By utilizing the Bank's Schedule CMR data, the OTS
runs computer simulations (Net Portfolio Value Model) utilizing OTS
assumptions. Heritage Bank, per OTS requirements, has established maximum
percentage changes for NPV resulting from instantaneous changes in
interest rates of 100 to 400 basis points. A maximum change of -15% for
an instantaneous 200 basis point change in interest rate has been
established. A 200 basis point change is used by the OTS as the current
Interest Rate Sensitivity Measure by which thrifts are evaluated.
Heritage Bank periodically reviews and makes changes to established
limits for NPV changes due to mergers and other market factors.
The following table demonstrates Heritage Bank's June 30, 1998 NPV
and the present value of total assets, NPV ratio and basis point change
for four instantaneous increases and the four instantaneous decreases in
interest rates:
(In thousands)
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
Net Portfolio Value NPV as % of PV Assets
Instantaneous -----------------------------------------------------------
Changes Total
in Rates $ Amount $ Change % Change Assets NPV Ratio Change
-------------------------------------------------------------------------
+400 bp 18,205 -7,643 -30% 193,336 9.42% -319 bp
+300 bp 20,270 -5,578 -22% 196,390 10.32% -228 bp
+200 bp 22,302 -3,547 -14% 199,438 11.18% -142 bp
+100 bp 24,209 -1,639 - 6% 202,392 11.96% -64 bp
0 bp 25,848 -- --% 205,111 12.60% -- bp
-100 bp 27,768 1,920 + 7% 208,138 13.34% +74 bp
-200 bp 29,868 4,019 +16% 211,380 14.13% +153 bp
-300 bp 32,487 6,639 +26% 215,179 15.10% +250 bp
-400 bp 35,390 9,542 +37% 219,295 16.14% +354 bp
The preceding sensitivity analysis does not represent a forecast
and should not be relied upon as being indicative of expected operation
results. These hypothetical estimates are based upon numerous
assumptions, including the nature and timing of interest rate levels
including yield curve shape, prepayments on loans and securities, deposit
decay rates, pricing decisions on loans and deposits,
reinvestment/replacement of assets and liability cash flows and others.
Sensitivity analysis does not reflect actions that United might take in
responding to or anticipating changes in interest rates.
Page 22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Company is involved from time to time in litigation normal for its
type of business.
ITEM 2 CHANGE IN SECURITIES.
None
ITEM 3 DEFAULTS ON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5 OTHER INFORMATION.
On August 26, 1998, United announced that it had signed agreements
to acquire approximately 24.2% of Valley Bancorp. Valley Bancorp is a
bank holding company located in Phoenix, Arizona and is the parent
company of Valley Bank of Arizona, a state chartered commercial bank,
with assets of $45 million, deposits of $38 million and loans of $22
million as of September 30, 1998. United intends to acquire, for $6.25
per share, 267,705 shares of Valley Bancorp from various shareholders and
150,000 shares held by CFS. United currently owns 13,000 shares of Valley
Bancorp. United received approval from the Federal Reserve Board for the
acquisition of such shares on October 22, 1998.
On October 5, 1998, United announced that the board of directors
had terminated the definitive merger agreement with Chouteau County
Bancshares Inc. ("Chouteau") of Fort Benton, Montana as a result of the
depressed agricultural economy and other market conditions. United had
previously announced on July 8, 1998 that it and Chouteau had signed a
definitive merger agreement to acquire Chouteau, the parent of First
State Bank of Fort Benton and Fort Benton Insurance Agency Inc.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
A. The following exhibits are included herein:
Exhibit
Number Description of Exhibit
- ------- ------------------------------------------------------------------
2.1 Stock Purchase Agreement (Dated August 18, 1998 and entered into
by and among United Financial Corp., Great Falls, Montana and
Stockton Trust, Inc. and Stockton Trust Nominee Partnership,
Minneapolis, Minnesota)
2.2 Stock Purchase Agreement (Dated August 18, 1998 and entered into
by and among United Financial Corp., Great Falls, Montana and
Central Financial Services, Inc. Minneapolis, Minnesota)
10.1 United Financial Corp. Stock Appreciation Rights Plan (Adopted by
resolution of the Board of Directors of United on July 27, 1998,
effective as of July 1, 1998)
27.1 Financial Data Schedule
B. Reports on Form 8-K
The Company did not file a current Report on Form 8-K in the quarter
ended September 30, 1998.
Page 23
<PAGE>
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 16, 1998 /s/ John M. Morrison
----------------- ------------------------------
John M. Morrison
Chairman and Chief
Executive Officer
(Duly Authorized
Representative)
Date November 16, 1998 /s/ Kurt R. Weise
----------------- ------------------------------
Kurt R. Weise
President and Chief
Operating Officer
(Duly Authorized
Representative)
Page 24
Exhibit 2.1
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of August 18,
1998, is made by and between Stockton Trust, Inc. and Stockton Trust Nominee
Partnership (together, "Seller"), and United Financial Corp., a Minnesota
corporation (the "Company").
RECITALS
The background of this Agreement is as follows:
A. Seller has the power and authority to sell an aggregate of 267,705
shares (the "Subject Shares") of common stock, $.10 par value, of Valley
Bancorp, Inc. ("Valley Bancorp.") on behalf of certain of its customers;
B. Valley Bancorp is the sole shareholder of Valley Bank of Arizona
("Valley Bank"), an Arizona state-chartered bank;
C. Seller desires to sell the Subject Shares to the Company, and the
Company desires to purchase the Subject Shares from Seller, on the terms and
conditions set forth in this Agreement; and
D. Michael Pint is also intending to simultaneously purchase
approximately (strike-through text: 76,506 /s/A.S.) 45,082 Valley Bancorp shares
from Seller (on behalf of certain of its customers).
AGREEMENT
For good and valuable consideration, in money or money's worth, the
receipt and sufficiency of which is hereby acknowledged, the parties to this
Agreement hereby agree as follows:
1. Purchase and Sale of the Subject Shares. Seller hereby agrees to
sell, grant, assign and transfer the Subject Shares to the Company, and the
Company hereby agrees to purchase and acquire the Subject Shares from Seller, on
the terms and subject to the conditions set forth in this Agreement.
2. Purchase Price and Payment. The purchase price (the "Purchase
Price") to be paid by the Company to Seller for the Subject Shares shall be Six
Dollars and Twenty-Five Cents ($6.25) per share, to be paid in immediately
available funds or by certified check at Closing (as defined below).
3. Representations and Warranties of Seller. As an inducement to the
Company to enter into this Agreement and to complete the purchase of the Subject
Shares on the terms contemplated by this Agreement, Seller hereby represents and
warrants to the Company as follows:
Page E - 1
<PAGE>
(a) Seller has the power and authority to execute and deliver this
Agreement and to sell the Subject Shares on behalf of the
record or beneficial owners to be identified prior to the
Closing and has furnished or will furnish written evidence of
such power and authority to the Company;
(b) The Subject Shares will be transferred to the Company free and
clear of any and all liens, encumbrances or other restrictions
of any kind or nature, including without limitation security
interests, claims, pledges, options, charges, agreements,
voting trusts, proxies or other arrangements or limitations of
any kind;
(c) Seller has full power, capacity and authority to transfer,
assign and deliver the Subject Shares to the Company and there
are no rights of first refusal or shareholder agreements
relating to the Subject Shares;
(d) Seller has been advised by legal counsel with respect to all
terms and conditions of this Agreement; and
(e) This Agreement has been duly executed and delivered by Seller
and constitutes the valid and binding obligation of Seller,
enforceable in accordance with its terms.
4. Representations and Warranties of the Company. As an inducement to
Seller to enter into this Agreement and to complete the sale of the Subject
Shares on the terms contemplated by this Agreement, the Company represents and
warrants to Seller as follows:
(a) Proper corporate action has been taken by the Company to
authorize the execution, delivery and implementation of this
Agreement;
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the valid and binding obligation of
the Company, enforceable in accordance with its terms; and
(c) The Company has been advised by legal counsel with respect to
all terms and conditions of this Agreement.
5. Closing. The closing (the "Closing") of the sale and purchase
contemplated by this Agreement shall take place as soon as practicable (but no
later than 10 business days) after receipt of the regulatory approvals
contemplated by Section 12 hereof or at such other time, place, date or manner
as is mutually agreeable to Seller and the Company. At the Closing, the Company
shall pay Seller the Purchase Price as set forth in Section 2 hereof, and Seller
shall deliver to the Company the materials referenced in Section 6(b) hereof
(the "Closing Date").
6. Conditions to the Company's Obligations. The obligation of the
Company to consummate the transactions contemplated by this Agreement is subject
to the satisfaction of the following conditions:
Page E - 2
<PAGE>
(a) The representations and warranties set forth in Section 3
hereof shall be true and correct in all material respects at
and as of the Closing Date as though then made and as though
the Closing Date had been substituted for the date of this
Agreement throughout such representations and warranties.
(b) On the Closing Date, Seller shall deliver to the Company all
of the following:
(i) All stock certificates representing the Subject
Shares, duly endorsed for transfer or accompanied by
a duly executed stock power; and
(ii) such other certificates, documents and instruments as
the Company may reasonably request related to the
transactions contemplated hereby; and
(c) The regulatory approvals contemplated by Section 12 hereof
shall have been obtained and not have been withdrawn.
7. Conditions to Seller's Obligations. The obligations of Seller to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions:
(a) The representations and warranties set forth in Section 4
hereof will be true and correct in all material respects at
and as of the Closing Date as though then made and as though
the Closing Date had been substituted for the date of this
Agreement throughout such representations and warranties.
(b) On the Closing Date, the Company shall pay Seller the Purchase
Price as set forth in Section 2 hereof.
(c) The Company shall deliver to Seller such other certificates,
documents and instruments as Seller may reasonably request
related to the transactions contemplated hereby, including
board resolutions showing who is authorized to sign on behalf
of the Company.
8. Termination. This Agreement may be terminated at any time prior to
the Closing by the mutual written consent of the Company and Seller. In the
event of termination of this Agreement, this Agreement shall become void and
there shall be no liability on the part of either the Company or Seller. The
Agreement may also be terminated by the Company or Seller if the Closing has not
occurred by October 15, 1998; provided, however, that the Company may extend
such date up to 60 additional days if the Company is still waiting for the
regulatory approvals contemplated by Section 12 hereof.
9. Survival of Representations and Warranties. Notwithstanding any
investigation made by or on behalf of any of the parties hereto or the results
of any such investigation and notwithstanding the participation of such party in
the Closing, the representations and warranties contained in Sections 3 and 4
hereof shall survive the Closing.
Page E - 3
<PAGE>
10. Indemnification by the Company. The Company agrees to indemnify
Seller, and hold Seller harmless from and against any loss, liability,
deficiency, damage, expense or cost (including reasonable attorneys fees and
costs) which Seller may suffer, sustain or become subject to, as a result of (a)
any misrepresentation in any of the representations and warranties of the
Company contained in this Agreement, or (b) any breach of, or failure to
perform, any agreement of the Company contained in this Agreement.
11. Indemnification by Seller. Seller agrees to indemnify the Company
and hold the Company harmless from and against any loss, liability, deficiency,
damage, expense or cost (including reasonable attorneys fees and costs), which
the Company may suffer, sustain or become subject to, as a result of (a) any
misrepresentation in any of the representations and warranties of Seller
contained in this Agreement, or (b) any breach of, or failure to perform, any
agreement of Seller contained in this Agreement.
12. Regulatory Approvals. Regulatory approval for the consummation of
the transactions contemplated hereby shall have been obtained from (i)the Board
of Governors of the Federal Reserve System, (ii) the Arizona Superintendent of
Banking and (iii)any other governmental authority from whom approval is
required, and all other statutory or regulatory waiting periods shall have
lapsed. None of such approvals shall contain any conditions or restrictions that
the Company reasonably believes will materially restrict or limit the business
or activities of the Company, Valley Bancorp or Valley Bank or have a material
adverse effect on, or would be reasonably likely to have a material adverse
effect on, the business, operations or financial condition of the Company, on
the one hand, or Valley Bancorp and Valley Bank, taken as a whole, on the other
hand. The Company agrees to use its best efforts to file its required bank
regulatory applications within 10 days of the execution and delivery of this
Agreement.
13. Attorney Fees. If any action at law or in equity is necessary to
enforce this Agreement or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
14. Taxes. Seller shall pay any and all stamp and other taxes payable
or determined to be payable in connection with the execution and delivery of
this Agreement, the transfer of the Subject Shares pursuant to this Agreement,
the Subject Shares and other instruments and documents to be delivered hereunder
or thereunder and agrees to indemnify and hold the Company harmless from and
against any and all liabilities with respect to or resulting from any delay in
paying or omission to pay such taxes and filing fees.
15. Miscellaneous. This Agreement shall be binding upon and shall inure
to the benefit of and be enforceable against the parties hereto and their
respective successors and assigns and shall in all respects be governed by, and
enforced and interpreted in accordance with, the laws of the State of Arizona.
All legal actions to settle any disputes regarding
Page E - 4
<PAGE>
the subject matter of this Agreement shall be brought in courts in the State of
Arizona. This Agreement embodies the entire agreement between Seller and the
Company with respect to the redemption and sale of the Subject Shares and
supersedes all prior agreements and understandings, whether written or oral,
between them with respect to such redemption and sale. This Agreement may not be
amended or waived except in a writing executed by the party against whom such
amendment or waiver is sought to be enforced. No course of dealing between or
among any persons having an interest in this Agreement will be deemed effective
to modify or amend any part of this Agreement or any rights or obligations of
any person under or by reason of this Agreement. Neither this Agreement, nor any
of the rights, interests or obligations hereunder, shall be assigned by either
party hereto without the prior written consent of the other party, except that
the Company may assign this Agreement to a wholly-owned subsidiary of the
Company without the consent of Seller. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent that such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement. This
Agreement may be executed in one or more counterparts, including facsimiles, any
one of which need not contain the signatures of more than one party, but all
such counterparts taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Seller have executed this agreement
as of the date set forth above.
UNITED FINANCIAL CORP.
By: /s/ Kurt R. Weise
-----------------------------------
STOCKTON TRUST, INC.
By: /s/ Art Stockton
-----------------------------------
STOCK TRUST NOMINEE
PARTNERSHIP
By: /s/ Art Stockton
-----------------------------------
Page E - 5
Exhibit 2.2
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of August 18,
1998, is made by and between Central Financial Services, Inc., a Florida
corporation ("Seller"), and United Financial Corp., a Minnesota corporation (the
"Company").
RECITALS
The background of this Agreement is as follows:
A. Seller is the record and beneficial owner of 150,000 shares (the
"Subject Shares") of common stock, $.10 par value, of Valley Bancorp, Inc.
("Valley Bancorp.") and is a director of Valley Bancorp.;
B. Valley Bancorp is the sole shareholder of Valley Bank of Arizona
("Valley Bank"), an Arizona state-chartered bank;
C. Seller desires to sell the Subject Shares to the Company, and the
Company desires to purchase the Subject Shares from Seller, on the terms and
conditions set forth in this Agreement; and
D. The Company is also intending to simultaneously purchase 267,705
Valley Bancorp shares from one or more third parties unrelated to Seller.
AGREEMENT
For good and valuable consideration, in money or money's worth, the
receipt and sufficiency of which is hereby acknowledged, the parties to this
Agreement hereby agree as follows:
1. Purchase and Sale of the Subject Shares. Seller hereby agrees to
sell, grant, assign and transfer the Subject Shares to the Company, and the
Company hereby agrees to purchase and acquire the Subject Shares from Seller, on
the terms and subject to the conditions set forth in this Agreement.
2. Purchase Price and Payment. The purchase price (the "Purchase
Price") to be paid by the Company to Seller for the Subject Shares shall be Six
Dollars and Twenty-Five Cents ($6.25) per share, to be paid in immediately
available funds or by certified check at Closing (as defined below).
3. Representations and Warranties of Seller. As an inducement to the
Company to enter into this Agreement and to complete the purchase of the Subject
Shares on the terms contemplated by this Agreement, Seller hereby represents and
warrants to the Company as follows:
(a) Seller has the power and authority to execute and deliver this
Agreement and to sell the Subject Shares;
Page E - 6
<PAGE>
(b) The Subject Shares will be transferred to the Company free and
clear of any and all liens, encumbrances or other restrictions
of any kind or nature, including without limitation security
interests, claims, pledges, options, charges, agreements,
voting trusts, proxies or other arrangements or limitations of
any kind;
(c) Seller has full power, capacity and authority to transfer,
assign and deliver the Subject Shares to the Company and there
are no rights of first refusal or shareholder agreements
relating to the Subject Shares;
(d) This Agreement has been duly executed and delivered by Seller
and constitutes the valid and binding obligation of Seller,
enforceable in accordance with its terms;
(e) To my knowledge, since the date of the latest Valley Bancorp.
financial statements furnished to the Company, there has been
no material adverse change in the assets, financial condition,
operating results, business condition or prospects of Valley
Bancorp.;
(f) I am not aware of any material contingent liabilities,
including material litigation or threats thereof, of Valley
Bancorp., (i) except as disclosed in the latest Valley
Bancorp. financial statements furnished to United or (ii)
other than contingent liabilities which may have been incurred
in the ordinary course of business of Valley Bancorp.; and
(g) I am not aware that Valley Bancorp. has received any
materially adverse rulings, letters or communications from, or
entered into any restrictive agreements (including memoranda
of understanding or cease and desist orders) with, any bank
regulatory authorities.
4. Representations and Warranties of the Company. As an inducement to
Seller to enter into this Agreement and to complete the sale of the Subject
Shares on the terms contemplated by this Agreement, the Company represents and
warrants to Seller as follows:
(a) Proper corporate action has been taken by the Company to
authorize the execution, delivery and implementation of this
Agreement; and
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the valid and binding obligation of
the Company, enforceable in accordance with its terms.
5. Closing. The closing (the "Closing") of the sale and purchase
contemplated by this Agreement shall take place as soon as practicable (but no
later than 10 business days) after receipt of the regulatory approvals
contemplated by Section 12 hereof or at such other time, place, date or manner
as is mutually agreeable to Seller and the Company. At the Closing,
Page E - 7
<PAGE>
the Company shall pay Seller the Purchase Price as set forth in Section 2
hereof, and Seller shall deliver to the Company the materials referenced in
Section 6(b) hereof (the "Closing Date").
6. Conditions to the Company's Obligations. The obligation of the
Company to consummate the transactions contemplated by this Agreement is subject
to the satisfaction of the following conditions:
(a) The representations and warranties set forth in Section 3
hereof shall be true and correct in all material respects at
and as of the Closing Date as though then made and as though
the Closing Date had been substituted for the date of this
Agreement throughout such representations and warranties.
(b) On the Closing Date, Seller shall deliver to the Company all
of the following:
(i) All stock certificates representing the Subject
Shares, duly endorsed for transfer or accompanied by
a duly executed stock power; and
(ii) such other certificates, documents and instruments as
the Company may reasonably request related to the
transactions contemplated hereby.
(c) The regulatory approvals contemplated by Section 12 hereof
shall have been obtained and not have been withdrawn.
(d) The 267,705 Valley Bancorp. shares to be purchased by the
Company from or through Stockton Trust shall be purchased
simultaneously.
7. Conditions to Seller's Obligations. The obligations of Seller to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions:
(a) The representations and warranties set forth in Section 4
hereof will be true and correct in all material respects at
and as of the Closing Date as though then made and as though
the Closing Date had been substituted for the date of this
Agreement throughout such representations and warranties.
(b) On the Closing Date, the Company shall pay Seller the Purchase
Price as set forth in Section 2 hereof.
(c) The Company shall deliver to Seller such other certificates,
documents and instruments as Seller may reasonably request
related to the transactions contemplated hereby, including
board resolutions showing who is authorized to sign on behalf
of the Company.
8. Termination. This Agreement may be terminated at any time prior to
the Closing by the mutual written consent of the Company and Seller. In the
event of termination of this Agreement, this Agreement
Page E - 8
<PAGE>
shall become void and there shall be no liability on the part of either the
Company or Seller. The Agreement may also be terminated by the Company or Seller
if the Closing has not occurred by October 15, 1998; provided, however, that the
Company may extend such date up to 60 additional days if the Company is still
waiting for the regulatory approvals contemplated by Section 12 hereof.
9. Survival of Representations and Warranties. Notwithstanding any
investigation made by or on behalf of any of the parties hereto or the results
of any such investigation and notwithstanding the participation of such party in
the Closing, the representations and warranties contained in Sections 3 and 4
hereof shall survive the Closing.
10. Indemnification by the Company. The Company agrees to indemnify
Seller, and hold Seller harmless from and against any loss, liability,
deficiency, damage, expense or cost (including reasonable attorneys fees and
costs) which Seller may suffer, sustain or become subject to, as a result of (a)
any misrepresentation in any of the representations and warranties of the
Company contained in this Agreement, or (b) any breach of, or failure to
perform, any agreement of the Company contained in this Agreement.
11. Indemnification by Seller. Seller agrees to indemnify the Company
and hold the Company harmless from and against any loss, liability, deficiency,
damage, expense or cost (including reasonable attorneys fees and costs), which
the Company may suffer, sustain or become subject to, as a result of (a) any
misrepresentation in any of the representations and warranties of Seller
contained in this Agreement, or (b) any breach of, or failure to perform, any
agreement of Seller contained in this Agreement.
12. Regulatory Approvals. Regulatory approval for the consummation of
the transactions contemplated hereby shall have been obtained from (i)the Board
of Governors of the Federal Reserve System, (ii) the Arizona Superintendent of
Banking and (iii)any other governmental authority from whom approval is
required, and all other statutory or regulatory waiting periods shall have
lapsed. None of such approvals shall contain any conditions or restrictions that
the Company reasonably believes will materially restrict or limit the business
or activities of the Company, Valley Bancorp or Valley Bank or have a material
adverse effect on, or would be reasonably likely to have a material adverse
effect on, the business, operations or financial condition of the Company, on
the one hand, or Valley Bancorp and Valley Bank, taken as a whole, on the other
hand. The Company agrees to use its best efforts to file its required bank
regulatory applications within 10 days of the execution and delivery of this
Agreement.
13. Attorney Fees. If any action at law or in equity is necessary to
enforce this Agreement or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
14. Taxes. Seller shall pay any and all stamp and other taxes payable
or determined to be payable in connection with the execution and delivery of
this Agreement, the transfer of the Subject Shares pursuant to
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<PAGE>
this Agreement, the Subject Shares and other instruments and documents to be
delivered hereunder or thereunder and agrees to indemnify and hold the Company
harmless from and against any and all liabilities with respect to or resulting
from any delay in paying or omission to pay such taxes and filing fees.
15. Miscellaneous. This Agreement shall be binding upon and shall inure
to the benefit of and be enforceable against the parties hereto and their
respective successors and assigns and shall in all respects be governed by, and
enforced and interpreted in accordance with, the laws of the State of Minnesota.
This Agreement embodies the entire agreement between Seller and the Company with
respect to the sale of the Subject Shares and supersedes all prior agreements
and understandings, whether written or oral, between them with respect to such
sale. This Agreement may not be amended or waived except in a writing executed
by the party against whom such amendment or waiver is sought to be enforced. No
course of dealing between or among any persons having an interest in this
Agreement will be deemed effective to modify or amend any part of this Agreement
or any rights or obligations of any person under or by reason of this Agreement.
Neither this Agreement, nor any of the rights, interests or obligations
hereunder, shall be assigned by either party hereto without the prior written
consent of the other party, except that the Company may assign this Agreement to
a wholly-owned subsidiary of the Company without the consent of Seller. Whenever
possible, each provision of this Agreement will be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Agreement is held to be prohibited by or invalid under applicable law, such
provision will be ineffective only to the extent that such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement. This Agreement may be executed in one or
more counterparts, including facsimiles, any one of which need not contain the
signatures of more than one party, but all such counterparts taken together
shall constitute one and the same instrument.
Page E - 10
<PAGE>
IN WITNESS WHEREOF, the Company and Seller have executed this agreement
as of the date set forth above.
UNITED FINANCIAL CORP.
By: /s/ Kevin P. Clark
-----------------------------------
CENTRAL FINANCIAL SERVICES, INC.
By: /s/ John M. Morrison
-----------------------------------
John Morrison
Page E - 11
Exhibit 10.1
UNITED FINANCIAL CORP.
STOCK APPRECIATION RIGHTS PLAN
ARTICLE 1.
PURPOSE.
This Stock Appreciation Rights plan (the "Plan") is intended to
promote the interests of United Financial Corp., a Minnesota corporation
("United"), including its subsidiaries, whether now or hereafter established or
acquired (collectively, United and such subsidiaries will be referred to as the
"Companies" and, individually, as a "Company"), and its shareholders by
providing an incentive to key employees of the Companies.
ARTICLE 2.
ADMINISTRATION OF THE PLAN.
2.1. The Committee.
The Plan shall be administered by the Board of Directors of United or
a committee of one or more persons designated by the Board of Directors (the
person or group administering the Plan shall hereinafter be referred to as the
"Committee"). The Committee shall from time to time designate key employees of
one or more of the Companies who shall be granted Stock Appreciation Rights and
the right to receive Cash Bonus Awards (hereinafter referred to collectively as
"Awards") pursuant to Article 5. Awards granted pursuant to the Plan shall be
evidenced in writing by a "Stock Appreciation Rights Plan-Cash Bonus Award and
Agreement" (the "Agreement" or "Agreements" as the case may be) in such form and
containing such terms and conditions as the Committee shall from time to time
approve in its sole and absolute discretion.
2.2. Authority of Committee.
Subject to the terms and conditions of this Plan, the Committee shall
have full authority to administer the Plan and the Agreements, including
authority to interpret and construe any provisions of the Plan and the
Agreements and to adopt such rules and regulations as it may deem necessary.
Decisions of the Committee shall be final and binding on all parties who have an
interest in the Plan or any Agreement.
Page E - 12
<PAGE>
ARTICLE 3.
ELIGIBILITY FOR PARTICIPATION IN THE PLAN.
The persons who shall be eligible to receive Awards pursuant to this
Plan shall be such key employees of one or more of the Companies as the
Committee shall select from time to time in its sole and absolute discretion. In
selecting key employees for such Awards, the Committee may take into account the
nature of services rendered by the employees, their past, present and potential
contributions to the success of the Companies, and such other factors as the
Committee in its sole and absolute discretion shall deem relevant.
ARTICLE 4.
TIMING OF AWARDS.
Awards made under this Plan shall be made at such times as deemed
appropriate in the sole and absolute discretion of the Committee.
ARTICLE 5.
AWARDS.
5.1. Stock Appreciation Rights.
Stock Appreciation Rights ("SARs") are the unfunded and unsecured
promise of the Company employing the employee to provide a Cash Bonus Award in
the future in accordance with this Plan. The Committee may grant any eligible
employee any number of SARs deemed appropriate in its sole and absolute
discretion. In determining the number of SARs to be granted hereunder, the
Committee may take into account the nature of services rendered by the
employees, their past, present and potential contribution to the success of the
Companies, and such other factors as the Committee in its sole and absolute
discretion shall deem relevant.
5.2. Computation of Cash Bonus Award.
Each Cash Bonus Award payable pursuant to this Plan shall equal the
number of SARs awarded to an employee multiplied by the employee's Vesting
Percentage (as defined in Article 6) multiplied by the excess of the Average
Stock Price of one share of United Stock (as defined in Section 5.4) determined
as of the Measurement Date (as defined in Section 5.5) over the Average Stock
Price of one share of United Stock on the date of the grant of the SARs (the
"Base Price"). The Base Price may be set forth in each Agreement.
5.3. United Stock.
"United Stock" means all authorized and outstanding common stock of
United.
5.4. Determination of Average Stock Price of One Share of United
Stock.
The term "Average Stock Price" means the average closing price for
United Stock on the NASDAQ National Market ("NMS") in the U.S. Midwest edition
of
Page E - 13
<PAGE>
THE WALL STREET JOURNAL for the 10 consecutive NMS trading days preceding the
Measurement Date during which at least an aggregate of 25,000 shares of United
Stock were traded or, if an aggregate of 25,000 shares were not traded during
such preceding 10 consecutive days, then for that number of consecutive NMS
trading days preceding the Measurement Date during which at least an aggregate
of 25,000 shares of United Stock were traded.
5.5 Measurement Date.
"Measurement Date" shall mean the earlier of the following events:
(a) the date the Company employing the employee receives a written notice
(the "Election Notice") from such employee requesting that he or she
be paid a Cash Bonus Award which Election Notice (i) shall specify the
number of SARs with respect to which such employee is requesting
payment (which number may be less than all SARs which are 100% vested
in such employee), and (ii) may be given on one or more occasions,
provided that an employee shall not be entitled to give a Election
Notice pursuant to this subparagraph (a) if either (iii) such employee
is not 100% vested in his or her SARs pursuant to Article 6, or (iv)
such employee has been given a notice that his or her employment by a
Company is or will be terminated for cause or a notice that he or she
is being placed on probation and such employee is subsequently
discharged for cause; or
(b) the date an employee's employment with a Company terminates other than
by reason of the Company employing the employee terminating the
employment for cause (as defined in Section 6.3), including
termination by reason of death, disability or retirement; or
(c) the date there is a Change of Control (as defined in Section 6.3) with
respect to United, provided that a Change in Control shall be a
Measurement Date only for those employees holding SARs with respect to
whom the Board of Directors of United elects (by written notice to
such employees) that the Change in Control shall be a Measurement
Date.
5.6. No Restriction on Company's Accounting.
This Plan shall not in any way interfere with the right of the
Companies to select among, adopt or change (i) accounting practices and
procedures, whether or not such accounting practices or procedures have not been
or are not as of the date of any Award so employed by the Companies, or (ii) any
business investments, acquisitions, divestitures or any other policies or plans,
at any time or from time to time in the Companies' sole and absolute discretion.
ARTICLE 6.
VESTING.
6.1. General Vesting Schedule.
Except as provided in Sections 6.2 and 6.3, SARs granted pursuant to
this Plan shall vest in accordance with the following schedule:
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<PAGE>
Years of Service Vesting Percentage
-----------------------------------------------------------
Less than 1 year 0%
1 year, but less than 2 years 33.33%
2 years, but less than 3 years 66.67%
3 years or more 100%
An employee's years of service shall begin as follows:
(a) for those employees whom a Company employs on the date of the adoption
of this Plan, on the later of the date of the employee's initial
employment by a Company or July 1, 1997; and
(b) for employees who are employed after the date of the adoption of this
Plan, the date of the employee's initial employment by a Company.
The Committee, in its sole and absolute discretion, shall decide all questions
concerning an employee's years of service, and the decision of the Committee
shall be final and binding. The Committee may decide, in its sole and absolute
discretion, upon a different vesting schedule which different vesting schedule
shall be set forth in the employee's Agreement. Vesting schedules need not be
identical with respect to all employees eligible to receive Awards pursuant to
the Plan. The Committee hereby reserves the right to waive or accelerate the
general vesting schedule for SARs as it deems necessary or appropriate in its
sole and absolute discretion.
6.2 Death, Disability, Approved Retirement or Change in Control.
Notwithstanding Section 6.1, any SARs granted pursuant to this Plan
shall fully vest in an employee in the event of his or her death, permanent
disability (as it or the comparable term is defined in the group disability
policy of the Company employing the employee), retirement after age 65,
retirement after an earlier age if the Committee in its sole and absolute
discretion approves such earlier retirement in writing for purposes of full
vesting under this Plan, or there is a Change in Control with respect to United.
For purpose of the preceding sentence "Change in Control" means:
(a) a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or a successor provision thereto, whether or not United is then
subject to such reporting requirements; or
(b) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 promulgated under the Exchange Act), directly or indirectly, of
securities of United representing 50% or more of the combined voting
power of the United's then outstanding securities;
(c) the time at which there shall cease to be a majority of the Board of
Directors of United comprised as follows: individuals who at the date
of United's adoption of this Plan constitute the Board of Directors of
United and any new director(s) whose election by the
Page E - 15
<PAGE>
Board of Directors of United or nomination for election by United's
stockholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the
date of United's adoption of this Plan or whose election or nomination
for election was previously so approved; or
(d) the majority of the Board of Directors of United determine in their
sole and absolute discretion that there has been a change in control
of United.
6.3. Forfeiture of Vested SARs. Notwithstanding Section6.1, any SARs
granted pursuant to this Plan that have vested in the employee shall be
forfeited in full if the employee is involuntarily terminated from employment
for cause at any time, as determined by the Committee in its sole and absolute
discretion. For purposes of this Plan, "cause" means fraud, misappropriation or
embezzlement, alcoholism, drug use, revealing confidential information,
indictment for a felony, diverting business opportunities from any Company or
other actions which are materially detrimental to any Company's reputation,
business operations or relations with its employees, suppliers or customers.
ARTICLE 7.
PAYMENT OF CASH BONUS AWARDS.
7.1. General Payment Schedule.
Except as otherwise provided in Section 7.2, the total Cash Bonus
Award shall be paid to the employee on the later of: (i) January 1st of the year
following the year in which the Measurement Date occurs, or (ii) thirty (30)
days after the Measurement Date occurs. The Committee hereby reserves the right
to accelerate payment as deemed necessary or appropriate in its sole and
absolute discretion.
7.2. Forfeiture of Payment.
Notwithstanding any other provision of this Plan, any amounts
remaining payable to any employee on any Cash Bonus Award arising out of this
Plan shall be forfeited in full to the Company in the event that the employee is
involuntarily terminated from employment for cause at any time, as determined by
the Committee in its sole and absolute discretion. "Cause" shall be defined for
purposes of this Section 7.2 by reference to the definition in Section 6.3.
ARTICLE 8.
ANTIDILUTION ADJUSTMENTS.
In the event that the outstanding shares of United Stock, of whatever
class or series, are hereinafter increased, decreased or changed into or
exchanged for a different number or kind of shares or other securities of United
or of another corporation by reason of any reorganization, merger,
consolidation, recapitalization, reclassification, stock split-up, combination
of shares, stock dividends or otherwise, then the number of SARs granted under
all Agreements under this Plan shall be adjusted so that the resulting number of
SARs shall be in the same ratio to the original number of SARs as the number of
shares of United Stock, of whatever class or series, outstanding immediately
after the transaction
Page E - 16
<PAGE>
described above giving rise to an adjustment hereunder as the number of shares
of United Stock, of whatever class or series, outstanding immediately prior
thereto. Appropriate adjustments shall be made to the Base Prices. Further
adjustments shall be made hereunder as are necessary to prevent dilution or
enlargement of the benefits granted pursuant to the Plan.
ARTICLE 9.
BENEFICIARIES.
At the time of Awards made hereunder, the employee may designate one
or more beneficiaries who, upon the employee's death are to receive the Cash
Bonus Award payments that are otherwise payable to the employee, and such
designation may be changed or revoked from time to time thereunder. No such
designation, change or revocation shall be effective unless or until executed in
writing by the employee and delivered during the employee's lifetime to either
(i) the secretary of United, (ii) the Committee or (iii) the other persons or
officers the Committee may designate from time to time.
If an employee does not designate a beneficiary or beneficiaries
pursuant to this paragraph, or for any reasons any such designation is
ineffective, in whole or in part, then the payments that otherwise would have
been made to such employee (or the part thereof to which the designation is
ineffective, as the case may be) shall be made to such employee's estate and, in
such event, the term "beneficiary" shall include such estate.
ARTICLE 10.
MISCELLANEOUS.
10.1. Tax Withholding.
The Company employing the employee shall have the right to deduct from
all payments made under this Plan any federal, state, or local taxes required by
law to be withheld with respect to such payments.
10.2. Expenses.
The cost of payment under this Plan and expense of administering the
Plan shall be borne by United.
10.3. Unsecured Interest.
It is intended that the Company is only under a contractual obligation
to make payments to such key employees who have executed Agreements pursuant to
this Plan, as provided under such Agreements. The payment of any amount by the
Company employing the employee pursuant to such Agreement shall not be financed
through a trust fund, insurance contracts, or otherwise, and all such payments
shall be made out of the general funds of the Company employing the employee,
but only if and to the extent such funds are legally available therefore. No
employee who has executed an Agreement, or any beneficiary thereof, shall have
any interest whatsoever in any specific assets of any Company and all rights of
such person shall be no greater than the right of any other unsecured general
creditor of the Company employing the employee.
Page E - 17
<PAGE>
10.4. Nontransferability.
The Company employing the employee shall not make any payment under
this Plan or any Agreement entered into hereunder to any assignee or creditor of
either an employee or any beneficiary thereof who has been awarded or has an
interest in such an Agreement. Agreements are not transferable, and no party
shall have any rights by way of anticipation or otherwise to assign or otherwise
dispose of any interest under this Plan or any Agreement executed hereunder, nor
shall such rights be assigned or transferred by operation of law.
10.5. No Vested Rights.
This Plan and all Agreements awarded hereunder shall not be deemed or
construed (i) to be a written contract of employment between any employee and
any Company, (ii) to restrict the right of the Company employing the employee to
discharge any employee, or (iii) to grant to an employee the right to receive
any guaranteed base compensation, bonus awards, commissions, fees for
professional services or any other payments of any nature whatsoever.
10.6. Applicability to Successors.
If United or any Company becomes a party to any merger, consolidation,
acquisition, or reorganization, this Plan and any Agreements entered into
hereunder shall remain in full force and effect as an obligation of the Company
employing the employee or its successors in interests, subject to the rights and
limitations set forth in Section 10.8 hereof.
10.7. Governing Law.
This Plan and all Agreements awarded hereunder shall be governed and
construed in accordance with the laws of the State of Montana.
10.8. Amendment of the Plan.
This Plan is entirely discretionary. In the exercise of its sole and
absolute discretion, the Board of Directors of United may, therefore, amend,
revise, suspend or discontinue this Plan or any Agreements entered into
hereunder in any respect whatsoever at any time; provided, however, that no such
action shall result in the loss of any rights already vested as provided in
Article 6 hereof or of any rights under Agreements already in place at the date
of such action.
10.9. Effective Date and Termination of Plan.
The Plan was adopted by resolution of the Board of Directors of United
on July 27, 1998, effective as of July 1, 1998.
Page E - 18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT
REPORT ON FORM 10Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,270
<INT-BEARING-DEPOSITS> 5,622
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 55,105
<INVESTMENTS-MARKET> 55,354
<LOANS> 138,993
<ALLOWANCE> 1,485
<TOTAL-ASSETS> 222,097
<DEPOSITS> 161,602
<SHORT-TERM> 27,344
<LIABILITIES-OTHER> 2,642
<LONG-TERM> 0
0
0
<COMMON> 28,002
<OTHER-SE> 2,507
<TOTAL-LIABILITIES-AND-EQUITY> 222,097
<INTEREST-LOAN> 7,410
<INTEREST-INVEST> 2,324
<INTEREST-OTHER> 445
<INTEREST-TOTAL> 10,179
<INTEREST-DEPOSIT> 4,399
<INTEREST-EXPENSE> 5,280
<INTEREST-INCOME-NET> 4,899
<LOAN-LOSSES> 335
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 4,194
<INCOME-PRETAX> 2,698
<INCOME-PRE-EXTRAORDINARY> 2,698
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,663
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 3.27
<LOANS-NON> 65
<LOANS-PAST> 468
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 101
<ALLOWANCE-OPEN> 846
<CHARGE-OFFS> 29
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</TABLE>
