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, 2000
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number: 0-28080
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UNITED FINANCIAL CORP.
----------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0507591
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2779; 120 1st Ave. North, Great Falls, Montana 59403
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(406) 727-6106
--------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the Issuer's
Classes of Common Stock, as of the latest date is:
Class: Common Stock, No par value; Outstanding at November 6, 2000
1,641,312 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, 2000 and December 31, 1999 (unaudited).................. 1
Consolidated Condensed Statements of Income - Three and Nine Months
Ended September 30, 2000 and September 30, 1999 (unaudited)........... 2
Consolidated Condensed Statements of Cash Flows - Nine Months Ended
September 30, 2000 and September 30, 1999 (unaudited)................. 3
Notes to Consolidated Condensed Financial Statements.................... 4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 7
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 18
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.................................................. 19
ITEM 2 CHANGE IN SECURITIES............................................... 19
ITEM 3 DEFAULTS ON SENIOR SECURITIES...................................... 19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.............. 19
ITEM 5 OTHER INFORMATION.................................................. 19
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K................................... 19
SIGNATURES................................................................... 20
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share and share data)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
-------------- -------------
2000 1999
-------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,110 $ 11,457
Investment securities available-for-sale, net 69,624 53,044
Loans receivable, net 251,930 186,348
Loans held for sale 1,879 1,191
Premises and equipment, net 6,277 4,873
Real estate and other personal property owned, net 987 14
Accrued interest receivable 3,557 2,259
Federal Home Loan Bank of Seattle stock, at cost 3,379 3,046
Investment in Valley Bancorp, Inc. -- 4,549
Goodwill, net of accumulated amortization of $478 and $336
at September 30, 2000, and December 31, 1999, respectively 3,181 1,289
Identifiable intangibles, net of accumulated amortization
of $152 and $100 at September 30, 2000, and December 31,
1999, respectively 485 537
Deferred income taxes, net 890 740
Other assets 1,125 879
------------ ------------
$ 354,424 $ 270,226
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts $ 75,369 $ 42,083
Savings deposits 48,948 48,296
Time deposits 122,933 89,503
------------ ------------
247,250 179,882
Federal Home Loan Bank advances 56,675 46,425
Securities sold under agreements to repurchase 10,701 11,546
Other borrowings 2,225 --
Accrued interest payable 2,389 1,528
Advances from borrowers for taxes and insurance 899 408
Income taxes payable 81 476
Other liabilities 1,173 602
------------ ------------
321,393 240,867
Minority interest 3,553 --
Stockholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized -- --
Common stock, no par value; 8,000,000 shares authorized;
1,698,312 shares issued 28,002 28,002
Retained earnings, substantially restricted 3,298 3,251
Treasury stock, at cost, 53,000 shares (1,037) (932)
Accumulated other comprehensive loss (785) (962)
------------ ------------
29,478 29,359
------------ ------------
$ 354,424 $ 270,226
============ ============
Equity/Assets 8.32% 10.86%
Book Value/Share $ 17.92 $ 17.77
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 1
<PAGE>
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,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 5,454 $ 3,671 $ 15,165 $ 10,074
Mortgage-backed securities 992 699 2,928 2,062
Investment securities 124 114 372 320
FHLB of Seattle stock dividends 54 47 153 104
Other interest earning assets 13 23 90 149
------------ ------------ ------------ ------------
Total interest income 6,637 4,554 18,708 12,709
INTEREST EXPENSE
Deposits 2,780 1,735 7,755 5,079
Other borrowings 1,239 812 3,162 1,863
------------ ------------ ------------ ------------
Total interest expense 4,019 2,547 10,917 6,942
------------ ------------ ------------ ------------
Net interest income 2,618 2,007 7,791 5,767
Provision for losses on loans 847 54 1,376 168
------------ ------------ ------------ ------------
Net interest income after provision for losses on loans 1,771 1,953 6,415 5,599
NON-INTEREST INCOME
Fees and discounts 924 789 2,590 2,323
Other income 160 80 349 282
------------ ------------ ------------ ------------
Total non-interest income 1,084 869 2,939 2,605
NON-INTEREST EXPENSE
Salaries and employee benefits 1,433 968 3,902 2,804
Net occupancy and equipment expense 309 192 837 558
Data processing expense 168 89 498 303
Other expenses 655 512 1,813 1,544
------------ ------------ ------------ ------------
Total non-interest expense 2,565 1,761 7,050 5,209
------------ ------------ ------------ ------------
Income before income taxes 290 1,061 2,304 2,995
Provision for income tax expense 107 417 853 1,154
------------ ------------ ------------ ------------
Income before minority interest 183 644 1,451 1,841
Minority interest (15) -- (117) --
------------ ------------ ------------ ------------
Net income $ 168 $ 644 $ 1,334 $ 1,841
============ ============ ============ ============
Net income per share $ 0.10 $ 0.38 $ 0.81 $ 1.09
------------ ------------ ------------ ------------
Weighted average shares outstanding 1,645 1,681 1,650 1,692
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 2
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,334 $ 1,841
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,376 168
Amortization of goodwill and identifiable intangibles 194 135
Depreciation 357 219
Loss on disposal of equipment 3 --
Equity in income of Valley Bancorp Inc. -- (86)
Amortization of discounts and premiums on investment securities 101 221
Gain on sale of investment securities -- (30)
Gain on sale of real estate owned -- (5)
Mortgage loans originated and held for sale (86,425) (87,368)
Proceeds from sales of mortgage loans held for sale 85,737 91,899
Federal Home Loan Bank stock dividends (153) (107)
Net change in accrued interest receivable (913) (677)
Net change in other assets (176) (64)
Net change in income taxes (480) 109
Net change in accrued interest payable 802 244
Net change in other liabilities 439 (289)
Net change in minority interest 172 --
------------ ------------
Net cash provided by operating activities 2,368 6,210
------------ ------------
INVESTING ACTIVITIES
Net increase in loans receivable (27,372) (41,631)
Purchases of securities available-for-sale (6,254) (33,922)
Proceeds from maturities, pay downs and sales of securities available-
for-sale 7,390 28,629
Proceeds from redemption of Federal Home Loan Bank stock 31 --
Purchase of Federal Home Loan Bank stock (211) (1,653)
Purchase of Valley Bancorp, Inc. stock (1,722) (180)
Cash paid to FDIC on failed bank -- (333)
Purchases of premises and equipment (2,085) (1,176)
Proceeds from sale of real estate and other personal property owned 71 375
Additions of real estate and other personal property owned (34) --
Acquired cash and cash equivalents of Valley 1,206 --
------------ ------------
Net cash used in investing activities (28,980) (49,891)
------------ ------------
FINANCING ACTIVITIES
Net increase(decrease) in deposits 17,286 (408)
Net increase in Federal Home Loan Bank advances 10,250 34,115
Net change in securities sold under agreements to repurchase (845) 419
Net change in federal funds purchased (400) --
Net change in advances from borrowers for taxes and insurance 491 425
Advances on long-term debt 1,105 --
Payments on long-term debt (230) --
Purchase of treasury stock (105) (694)
Dividends paid to stockholders (1,287) (1,320)
------------ ------------
Net cash provided by financing activities 26,265 32,537
------------ ------------
Decrease in cash and cash equivalents (347) (11,144)
Cash and cash equivalents at beginning of year 11,457 19,255
------------ ------------
Cash and cash equivalents at end of period $ 11,110 $ 8,111
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash payments for interest $ 10,103 $ 6,698
Cash payments for income taxes $ 1,272 $ 1,055
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 3
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
United Financial Corp. ("UFC") is a bank holding company headquartered
in Great Falls, Montana, with operations in 11 other Montana communities.
Substantially all of UFC's banking business is conducted through its
wholly-owned subsidiaries Heritage Bank F.S.B. ("Heritage Bank") and Heritage
State Bank ("State Bank"), a banking subsidiary formed in 1998, collectively
referred to herein as the "Banks". UFC is now the majority shareholder of Valley
Bancorp, Inc.("Valley") (See Note 2). UFC, Heritage Bank, State Bank and Valley
are collectively referred to herein as ("United"). UFC, Heritage Bank, State
Bank (excluding Valley) are collectively referred to herein as ("United only").
United had assets of approximately $354.4 million, deposits of approximately
$247.2 million and stockholders' equity of approximately $29.5 million at
September 30, 2000
Heritage Bank is a federally chartered stock savings bank with full
service banking offices in Bozeman, Chester, Glendive, Great Falls, Havre,
Missoula and Shelby, Montana, and loan production offices in Hamilton,
Kalispell, and Libby, Montana. The full service banking offices in Missoula and
Bozeman were opened in February and June, 2000, respectively. State Bank is a
state chartered bank with full service banking operations in Fort Benton and
Geraldine, Montana. The Banks are engaged in the community banking business of
attracting deposits from the general public through their offices and using
those deposits, together with other available funds, to originate commercial
(including lease financing), commercial real estate, residential, agricultural
and consumer loans primarily in their market areas in Montana. A majority of
UFC's banking business is conducted in the Great Falls area. The Banks also
invest in mortgage-backed securities, U.S. Treasury obligations, other U.S.
Government agency obligations and other interest-earning assets.
The Banks' financial condition and results of operations, and therefore
the financial condition and results of operations of United, are dependent
primarily on net interest income and fee income. The Banks' financial condition
and results of operations are also significantly influenced by local and
national economic conditions, changes in market interest rates, governmental
policies, tax laws and the actions of various regulatory agencies.
In June 2000, Heritage Bank and Heritage State Bank filed applications
to merge into Heritage State Bank's state banking charter. Heritage State Bank
will then change its name to Heritage Bank and will relocate its main office to
Great Falls, Montana. After the merger, Heritage Bank will be regulated by the
Federal Deposit Insurance Corporation ("FDIC") and the State of Montana.
Confirmation date for the merger is expected to be December 31, 2000. The FDIC,
the Office of Thrift Supervision ("OTS"), and the State of Montana have all
approved the merger applications.
UFC's principal offices are located at 120 First Avenue North, Great
Falls, Montana, and its telephone number is (406) 727-6106. Heritage Bank has a
wholly-owned subsidiary, Community Service Corporation ("CSC"), which owned and
managed real estate held for investment during 1999, but which is inactive at
September 30, 2000. Heritage Bank holds an 11% ownership interest in Bankers'
Resource Center, a computer data center.
2. VALLEY BANCORP, INC.
During 1999, UFC increased its ownership in Valley to 39.93% of
Valley's outstanding shares at December 31, 1999. On January 10, 2000, UFC
increased its ownership to 50.6% and combined with additional shares acquired
thereafter UFC currently owns 54.49% of the outstanding shares of Valley as of
September 30, 2000. Valley is a bank holding company located in Phoenix, Arizona
and is the parent company of Valley Bank of Arizona, a state chartered
commercial bank. Valley had assets of approximately $64.7 million, deposits of
approximately $55.4 million and stockholders' equity of approximately $7.8
million at September 30, 2000. The aggregate purchase price of the shares of
Valley purchased to date is $6.1 million, including $1.7 million for shares
acquired in 2000, $1.7 million for shares acquired in 1999, and $2.7 million for
shares acquired in 1998. As a result of acquiring over 50% of the outstanding
shares of Valley, UFC has consolidated Valley with its financial statements
effective January 1, 2000.
3. BASIS OF PRESENTATION
United's consolidated financial statements, included herein, have been
prepared in accordance with generally accepted accounting principles ("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
Page 4
<PAGE>
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 cash flows for the
periods disclosed. Operating results for the nine months ended September 30,
2000, are not necessarily indicative of the results anticipated for the year
ending December 31, 2000. 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, 1999.
4. STOCK INCENTIVE PLAN
On January 25, 2000, UFC's Board of Directors adopted the United
Financial Corp. 2000 Long-Term Incentive and Stock Option Plan (the "Plan"),
subject to approval by the Company's shareholders. The Plan was approved by the
Company's shareholders May 23, 2000.
The Plan provides for a maximum of 120,000 shares of UFC's Common Stock
for issuance under options or other awards, subject to adjustment in certain
circumstances. Any employee, officer, director, consultant or independent
contractor of the Company and its subsidiaries is eligible to receive awards
under the Plan. Awards under the Plan will be available for grant until January
25, 2010. However, an option of the award granted may extend beyond such time.
UFC's existing stock appreciation rights plan was rescinded by the
Board of Directors upon its approval of this stock option plan.
5. COMPREHENSIVE INCOME
United's only significant element of comprehensive income is unrealized
gains and losses on available-for-sale securities.
<TABLE>
<CAPTION>
(In thousands)
(Unaudited)
THREE MONTHS ENDED Three Months Ended
SEPTEMBER 30, 2000 September 30, 1999
----------------------------- -------------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 275 $ 107 $ 168 $ 1,061 $ 417 $ 644
Unrealized and realized
Holding gains(losses) arising
During the period 768 292 476 (399) (153) (246)
Less: reclassification adjustment
For gains included in net income -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net unrealized gains(losses) on
Securities 768 292 476 (399) (153) (246)
------- ------- ------- ------- ------- -------
Total comprehensive income $ 1,043 $ 399 $ 644 $ 662 $ 264 $ 398
======= ======= ======= ======= ======= =======
<CAPTION>
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 2000 September 30, 1999
----------------------------- -------------------------------
BEFORE TAX AFTER Before Tax After
TAX EXPENSE TAX Tax Expense Tax
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 2,187 $ 853 $ 1,334 $ 2,995 $ 1,154 $ 1,841
Unrealized and realized
Holding gains(losses) arising
During the period 285 108 177 (1,044) (401) (643)
Less: reclassification adjustment
For gains included in net income -- -- -- (30) (12) (18)
------- ------- ------- ------- ------- -------
Net unrealized gains(losses) on
Securities 285 108 177 (1,074) (413) (661)
------- ------- ------- ------- ------- -------
Total comprehensive income $ 2,472 $ 961 $ 1,511 $ 1,921 $ 741 $ 1,180
======= ======= ======= ======= ======= =======
</TABLE>
Page 5
<PAGE>
6. CASH EQUIVALENTS
For purposes of the Consolidated Condensed Statements of Cash Flows,
United considers all cash, daily interest and non-interest bearing demand
deposits with banks with original maturities of three months or less to be cash
equivalents.
7. STOCKHOLDERS' EQUITY
On February 3, 1998, UFC 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 UFC.
8. COMPUTATION OF NET INCOME PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares used to compute basic EPS plus the incremental amount of potential
common stock determined by the treasury stock method. The potential common
shares are the warrants issued to D.A. Davidson, and the vested portion of the
shares included in the stock incentive plan. Basic and diluted EPS are the same,
as the potential common shares do not have a material impact.
9. DIVIDENDS DECLARED
On October 24, 2000, the Board of Directors of UFC declared a
fourth-quarter cash dividend of $.26 per share, payable November 20, 2000, to
shareholders of record on November 6, 2000.
10. 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 UFC's Chairman of the Board of Directors and largest
shareholder. CFS fees were $263,000, and $224,000 for the nine months ended
September 30, 2000 and 1999, respectively.
Page 6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
1. FORWARD LOOKING STATEMENTS
When used in this form 10-Q or future filings made by the Company with
the Securities and Exchange Commission, in the Company's press releases or other
public shareholder communications, or in oral statements made with the approval
of an authorized executive officer, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors-including regional and national economic conditions, changes in
levels of market interest rates, credit risks of lending activities and
competitive and regulatory factors-could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims, any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
2. MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF SEPTEMBER 30,
2000 TO DECEMBER 31, 1999.
<TABLE>
<CAPTION>
(In thousands) SELECTED FINANCIAL CONDITION RECAP
(Unaudited)
Valley Bancorp
Inc.
SEPT 30, Dec. 31, Consolidated Net
2000 1999 Change January 1, 2000 Change
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 11,110 $ 11,457 $ (347) $ 1,206 $ (1,553)
Investment securities, available-
for-sale, net 69,624 53,044 16,580 17,134 (554)
Loans receivable, net 251,930 186,348 65,582 39,863 25,719
Loans held for sale 1,879 1,191 688 -- 688
Premises and equipment, net 6,277 4,873 1,404 200 1,204
Real estate and other
personal property owned, net 987 14 973 211 762
Federal Home Loan Bank stock 3,379 3,046 333 -- 333
Investment in Valley -- 4,549 (4,549) -- (4,549)
Goodwill, net 3,181 1,289 1,892 -- 1,892
Identifiable intangibles, net 485 537 (52) -- (52)
All other assets 5,572 3,878 1,694 875 819
Total assets 354,424 270,226 84,198 59,489 24,709
Deposits 247,250 179,882 67,368 50,083 17,285
Federal Home Loan Bank advances 56,675 46,425 10,250 -- 10,250
Securities sold under
agreements to repurchase 10,701 11,546 (845) -- (845)
Other borrowings 2,225 -- 2,225 -- 2,225
All other liabilities 4,542 3,014 1,528 1,964 (436)
Total liabilities 321,393 240,867 80,526 52,047 28,479
</TABLE>
Page 7
<PAGE>
GENERAL - The various increases in financial statement amounts
discussed are primarily the result of consolidating Valley as of January 1,
2000. Financial statement changes strictly from United operations, without the
impact of the consolidation of Valley, will be identified and discussed
separately. Such changes include the changes of Valley since January 1, 2000.
Total assets increased $84.2 million to $354.4 million at September 30,
2000 from $270.2 million at December 31, 1999. The increase in assets was
primarily the result of the addition of $59.5 million of assets from the
consolidation of Valley and a $25.7 million increase in loans receivable.
INVESTMENT SECURITIES - Investment securities available-for-sale
increased $16.6 million to $69.6 million at September 30, 2000 from $53.0
million at December 31, 1999. The Valley consolidation accounted for an increase
of $17.1 million. The net decrease of $.5 million was the result of $6.3 million
of purchases, offset by $7.4 million of maturities, sales, and principal
repayments, $.1 million of amortization and a $.7 million decrease in unrealized
loss on securities.
A comparison of the amortized cost and estimated fair value of the
consolidated available for sale investment portfolio at the dates indicated is
as follows:
<TABLE>
<CAPTION>
(In thousands)
(Unaudited)
SEPTEMBER 30, 2000
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND FEDERAL
AGENCIES $ 24,162 $ -- $ (459) $ 23,703
MORTGAGE-BACKED SECURITIES 42,020 86 (785) 41,321
MUNICIPAL BONDS 2,538 -- (90) 2,448
OTHER INVESTMENTS 2,316 -- (164) 2,152
---------- ---------- ---------- ----------
$ 71,036 $ 86 $ (1,498) $ 69,624
========== ========== ========== ==========
<CAPTION>
December 31, 1999
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agencies $ 10,210 $ -- $ (416) $ 9,794
Mortgage-backed securities 40,261 90 (896) 39,455
Municipal bonds 2,095 2 (162) 1,935
Other investments 2,041 -- (181) 1,860
---------- ---------- ---------- ----------
$ 54,607 $ 92 $ (1,655) $ 53,044
========== ========== ========== ==========
</TABLE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - Net loans receivable
increased $65.6 million to $251.9 million at September 30, 2000 from $186.4
million at December 31, 1999. The Valley consolidation accounted for $39.9
million of this increase. The remaining loans receivable increase of $25.7
million is a direct result of strong loan demand generated through officer call
programs, increased market area and continued purchase of participation loans
and lease financing loans. The diverse loan portfolio 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 $40.0 million of
participation and purchased loans as of September 30, 2000.
Heritage Bank sells and retains servicing for a portion of its
residential real estate loans to agencies of Montana such as the Montana Board
of Investments and the Montana Board of Housing. Heritage Bank recognizes
mortgage servicing rights as an asset regardless of whether the servicing rights
are acquired or retained on loans originated and subsequently sold. The mortgage
servicing rights are assessed for impairment based on the fair value of the
mortgage servicing rights. As of September 30, 2000 and December 31, 1999, the
carrying value of originated servicing rights was approximately $224,000 and
$102,000, respectively. Heritage Bank's servicing portfolio as of September 30,
2000 was $49.7 million and as of December 31, 1999 was $37.0 million.
Page 8
<PAGE>
During the nine months ended September 30, 2000, loans held for sale by
United increased $.7 million to $1.9 million at September 30, 2000 from
approximately $1.2 million at December 31, 1999. Approximately $86.4 million of
loans were originated for sale and $85.7 million of loans were sold to the
secondary market during the nine month period ending September 30, 2000.
ALLOWANCE FOR LOAN LOSSES - The loan loss reserve increased $1.5
million to $3.1 million at September 30, 2000 compared to $1.6 million at
December 31, 1999. The increase includes Valley's loan loss reserve at
consolidation of $.4 million. A special one-time addition to the loan loss
reserve was made primarily related to the deterioration of a single loan. The
special addition to the loan loss reserve totaled $.8 million. The remaining
change includes a $.6 million loan loss provision for the nine months ended
September 30, 2000, less loans in the amount of $.3 million which were
determined by United's management to be uncollectable and subsequently
charged-off. However, management pursues recoveries which totaled approximately
$11,000 for this same nine month period. The loan loss reserve at September 30,
2000 is an amount which management believes is adequate given the level of
non-performing assets and management's assessment of loan risk. The United
allowance for loan losses to total loans at September 30, 2000 was 1.20%.
NON-PERFORMING ASSETS - When a borrower fails to make a scheduled
payment on a loan and does not cure the delinquency within 15 days, United's
policy is to contact the borrower between the 15th and 30th day of delinquency
to establish a repayment schedule. If a loan is not current, or a realistic
repayment schedule is not being followed by the 90th day of delinquency, United
will generally proceed with legal action to foreclose the property after the
loan has become contractually delinquent 90 days. Loans contractually past due
90 days are classified as non-performing. However, not all loans past due 90
days automatically result in the non-accrual of interest income. If a 90 day
past due loan has adequate collateral, or is FHA insured or VA guaranteed,
leading to the conclusion that loss of principal and interest would likely not
be realized, then interest income will continue to be accrued.
United 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, 2000 United had
non-accrual loans totaling $2.0 million and loans totaling $.2 million past due
90 days and still accruing.
United is required to review, classify and report to its Board of
Directors its assets on a regular basis and classify them as "substandard"
(distinct possibility that some loss will be sustained), "doubtful" (high
likelihood of loss), or "loss" (uncollectible). Adequate valuation allowances
are required to be established for assets classified as substandard or doubtful
in accordance with generally accepted accounting principles. If an asset is
classified as a loss, the institution must either establish a specific valuation
allowance equal to the amount classified as loss or charge off such amount. At
September 30, 2000 and December 31, 1999, United had no assets classified as
loss. At September 30, 2000, United had $1.7 million of assets classified as
doubtful. At September 30, 2000 and December 31, 1999, United had $.4 million
and $.5 million of reported substandard assets, respectively. As a percent of
total assets, substandard assets were approximately .11%, and .19% at September
30, 2000 and December 31, 1999, respectively.
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED - The $973,000 increase
includes $211,000 in other real estate held by Valley as of January 1, 2000 and
$227,000 of repossessed personal property acquired by United during the first
nine months of 2000. The remaining increase includes $530,000 for the former
United Savings Bank property which was moved from premises and equipment to real
estate owned in June 2000, plus improvements of $15,000, less depreciation of
$9,500. The property is currently leased to a third party with an option to buy.
FEDERAL HOME LOAN BANK STOCK - Federal Home Loan Bank (FHLB) stock
increased approximately $.4 million to $3.4 million at September 30, 2000 from
$3.0 million at December 31, 1999. This increase was the result of $.2 million
of reinvested stock dividends, and $.2 million of stock purchases. FHLB stock
purchases are made as required for the increase in FHLB borrowings used to
support the increased scope of operations.
PREMISES AND EQUIPMENT - This category increased $1.4 million to $6.3
million at September 30, 2000 from $4.9 million at December 31, 1999. Valley
accounted for $.2 million of the increase. The balance of the increase of $1.2
million was primarily due to the
Page 9
<PAGE>
construction of the new branches in Bozeman and Missoula, Montana and
Scottsdale, Arizona of $1.6 million offset by the $.5 million in real estate
moved to real estate owned as discussed above. Heritage Bank invested
approximately $.4 million in fixed assets during the first nine months of 2000.
This increase was primarily due to (1) the purchase of a computer upgrade for
all branches, and (2) furniture and fixtures for the new Bozeman and Missoula
offices. The purchases of premises and equipment were offset by approximately
$.3 million of depreciation.
GOODWILL - Goodwill increased $1.9 million from the increased ownership
percentage and resulting consolidation of Valley to $3.2 million at September
30, 2000 from $1.3 at December 31, 1999. Goodwill decreased $142,000 due to
amortization during the nine months ending September 30, 2000. Components of
goodwill are currently being amortized over 15 and 25 years.
DEPOSITS - Deposits increased $67.4 million to $247.3 million at
September 30, 2000 from $179.9 million at December 31, 1999, which includes a
$50.1 million increase from consolidating Valley. The net increase in deposits
was $17.3 million. The increase in deposits resulted from a combination of the
application of competitive rates on all deposit offerings, and United's
commitment to community banking, both of which have attracted depositors.
BORROWED FUNDS - FHLB advances increased $10.3 million from December
31, 1999 to September 30, 2000. Securities sold under agreements to repurchase
decreased $.8 million to $10.7 million at September 30, 2000 from $11.5 million
at December 31, 1999. The additional borrowings in the first nine months of 2000
were used to fund increases in United's real estate loan portfolio, as well as
to manage interest rate risk. Other borrowings increased $2.2 million. This
increase included $1.3 million in federal funds purchased by Valley and $.9
million of net borrowings by UFC to fund treasury stock purchases and purchases
of Valley stock.
STOCKHOLDERS' EQUITY - Stockholders' equity increased $.1 million to
$29.5 million at September 30, 2000 from $29.4 million at December 31, 1999.
This change includes $1.3 million of net income for the nine months ended
September 30, 2000 less cash dividends declared of $1.3 million. In addition,
there was also a $.2 million decrease in unrealized losses net of tax effects,
associated with assets classified as available-for-sale being adjusted to market
value and a $.1 million purchase of treasury stock.
3. MATERIAL CHANGES IN RESULTS OF OPERATIONS-COMPARISON OF THE THREE
MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999.
<TABLE>
<CAPTION>
(In thousands) INCOME RECAP
(Unaudited)
-----------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
CONSOLIDATED
WITH United
VALLEY Only United Only
---------------------------------- --------------------- --------
2000 1999 Change 2000 1999 Change
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 6,637 $ 4,554 $ 2,083 $ 5,378 $ 4,554 $ 824
Interest expense 4,019 2,547 1,472 3,345 2,547 798
--------- -------- -------- -------- -------- --------
Net interest income 2,618 2,007 611 2,033 2,007 26
Provision for losses on loans 847 54 793 687 54 633
--------- -------- -------- -------- -------- --------
Net interest income after
Provision for losses on loans 1,771 1,953 (182) 1,346 1,953 (607)
Non-interest income 1,084 869 215 950 869 81
Non-interest expense 2,565 1,761 804 2,036 1,761 275
--------- -------- -------- -------- -------- --------
Income before income taxes
and minority interest 290 1,061 (771) 260 1,061 (801)
Provision for income tax expense 107 417 (310) 92 417 (325)
--------- -------- -------- -------- -------- --------
Net income before minority
Interest $ 183 $ 644 $ (461) $ 168 $ 644 $ (476)
========= ======== ======== ======== ======== ========
</TABLE>
GENERAL - The table above includes the 1999 operating results of United
only compared to the 2000 operating results consolidated with Valley as well as
a comparison of United only operating results for both three month periods ended
September 30, 2000 and 1999.
Page 10
<PAGE>
NET INTEREST INCOME - Like most financial institutions, the most
significant component of both the Banks' and Valley's earnings is net interest
income, which is the difference between the interest earned on interest-earning
assets (loans, investment securities, mortgage-backed securities and other
interest-earning assets), and the interest paid on deposits and borrowings. This
amount, when divided by average interest-earning assets, is referred to as the
net interest margin, expressed as a percentage. Net interest income and net
interest margins are affected by changes in interest rates, the volume and the
mix of interest-earning assets and interest-bearing liabilities, and the level
of non-performing assets. The difference between the yield on interest-earning
assets and the cost of interest-bearing liabilities expressed as a percentage is
referred to as the net interest-rate spread. Net interest income increased $.6
million from $2.0 million for the three months ended September 30, 1999 to $2.6
million for the three months ended September 30, 2000. Net interest margin
decreased .09% from 3.24% for the three month period ended September 30, 1999 to
3.15% for the three month period ended September 30, 2000. Net interest spread
increased .74% from 2.14% for the three month period ended September 30, 1999 to
2.88% for the three month period ended September 30, 2000. Although net interest
income increased, higher funding rates at FHLB and increased competition for
loan rates resulted in a slight decrease in net interest margin. United has used
the funds from additional deposits and borrowings to fund growth in its real
estate loan portfolio and to manage interest rate risk.
INTEREST INCOME - The principal reason for the increase in United's net
interest income from the three month period ended September 30, 1999 compared to
the three month period ended September 30, 2000 was an increase in
interest-earning assets from the Valley consolidation. Interest income increased
$2.0 million from $4.6 million for the three month period ended September 30,
1999 to $6.6 million for the three month period ended September 30, 2000.
For the three month period ended September 30, 2000, compared to the
three month period ended September 30, 1999, interest on loans receivable
increased $1.7 million, interest on mortgage-backed securities and investments
increased $.3 million and interest on other interest-earning assets decreased
only slightly.
INTEREST EXPENSE - The principal reason for the increase in United's
net interest expense from the three month period ended September 30, 1999 to the
three month period ended September 30, 2000 was an increase in interest-bearing
liabilities due to the consolidation of Valley. Interest expense increased $1.5
million from $2.5 million for the three month period ended September 30, 1999 to
$4.0 million for the three month period ended September 30, 2000.
For the three month period ended September 30, 2000, compared to the
three month period ended September 30, 1999, interest on deposits increased $1.1
million, and interest on short-term borrowings increased $.4 million.
PROVISION FOR LOAN LOSSES - United provided $847,000 for loan losses
for the three months ended September 30, 2000, as compared to $54,000 for the
same period last year. The three month provision of $847,000 included a one-time
special provision of $810,000 related to the deterioration of a single loan.
Heritage Bank made a one-time special provision for this single loan of
$675,000, while the remaining balance of $135,000 was made by Valley.
The provision for loan losses is determined by management as the amount
to be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio in accordance with GAAP. Future
additions to United's allowance for loan losses and any change in the related
ratio of the allowance for loan losses to non-performing assets are dependent
upon the performance and composition of United's loan portfolio, the economy,
inflation, changes in real estate values and interest rates and the view of the
regulatory authorities toward adequate reserve levels.
NON-INTEREST INCOME - In addition to net interest income, United
generates significant non-interest income from a range of retail banking
services, including mortgage banking activities and service charges for deposit
services. Non-interest income increased $.2 million from $.9 million for the
three month period ended September 30, 1999 to $1.1 million for the three month
period ended September 30, 2000. United experienced a slight increase in the
home lending market, as interest rates stabilized during the three month period
ended September 30, 2000. Mortgage servicing rights income in the three month
period ended September 30, 2000 was consistent as compared to the three month
period ended September 30, 1999.
Page 11
<PAGE>
NON-INTEREST EXPENSE - United's non-interest expense increased $.8
million during the three month period ending September 30, 2000 as compared to
the same period in 1999. This increase was principally due to the consolidation
of Valley, and additional costs for opening the three new branches as well as
the upcoming merger of Heritage and Heritage State Banks.
INCOME TAXES - Income tax expense decreased $.3 million to $107,000 for
the three month period ending September 30, 2000 from $417,000 for the same
period of 1999. This was a result of lower earnings in the current quarter due
to the one-time special loan loss provisions discussed above.
BUSINESS SEGMENT RESULTS - United manages its operations and prepares
management reports with a primary focus on geographical areas. Operating
segments information, including earnings performance on an operating cash basis,
is presented in the following schedule. United allocates centrally provided
services to the business segments based upon estimated usage of those services.
The operating segment identified as other includes the Parent Company and
elimination of transactions between segments.
The following table sets forth certain operating segment information
for the three month periods ended September 30, 2000 and 1999 and certain
balance sheet data as of September 30, 2000 and 1999 (in thousands). Operating
segment information is not presented for Valley as of September 30, 1999 as its
statements were not consolidated with United at that time.
<TABLE>
<CAPTION>
Heritage Heritage
2000: Bank State Bank Valley Other Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net interest income(1) $ 1,885 144 $ 585 $ 8 $ 2,622
Non-interest income 915 16 152 1 1,084
------------ ------------ ------------ ------------ ------------
Total revenue 2,800 160 737 9 3,706
Provision for loan losses 687 -- 160 -- 847
Non-interest expense(1) 1,749 103 529 80 2,461
------------ ------------ ------------ ------------ ------------
Pretax cash earnings(loss) 364 57 48 (71) 398
------------ ------------ ------------ ------------ ------------
Income tax expense(benefit) 107 19 15 (34) 107
Minority interest -- -- -- (15) (15)
------------ ------------ ------------ ------------ ------------
Cash earnings(loss)(1) 257 38 33 (52) 276
------------ ------------ ------------ ------------ ------------
Amortization of goodwill and
CDI 42 8 -- 20 70
Amortization of purchase
Valuations 35 -- -- 3 38
------------ ------------ ------------ ------------ ------------
Net income(loss) $ 180 $ 30 $ 33 $ (75) $ 168
============ ============ ============ ============ ============
PER SHARE DATA
Cash earnings per share $ 0.17
Cash earnings per share before
special charge $ 0.45
Net income per share $ 0.10
Net income per share before
special charge
Weighted average shares $ 0.38
Outstanding 1,645
BALANCE SHEET DATA AS OF
SEPTEMBER 30, 2000
Assets $ 272,293 $ 18,421 $ 64,734 $ (1,024) $ 354,424
Loans receivable, net 195,319 14,809 41,769 33 251,930
Deposits 179,494 12,429 55,445 (118) 247,250
Stockholders' equity 20,022 2,084 7,808 (436) 29,478
</TABLE>
(1)Before amortization of
goodwill, core deposit
intangible, and purchase valuations
Page 12
<PAGE>
<TABLE>
<CAPTION>
Heritage Heritage
1999: Bank State Bank Valley Other Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net interest income(1) $ 1,817 $ 123 $ -- $ 71 $ 2,011
Non-interest income 830 12 -- 27 869
------------ ------------ ------------ ------------ ------------
Total revenue 2,647 135 -- 98 2,880
Provision for loan losses 5 49 -- -- 54
Non-interest expense(1) 1,495 115 -- 69 1,679
------------ ------------ ------------ ------------ ------------
Pretax cash earnings(loss) 1,147 (29) -- 29 1,147
------------ ------------ ------------ ------------ ------------
Income tax expense(benefit) 421 (14) -- 10 417
------------ ------------ ------------ ------------ ------------
Cash earnings(1) 726 (15) -- 19 730
------------ ------------ ------------ ------------ ------------
Amortization of goodwill and
CDI 41 8 -- -- 49
Amortization of purchase
Valuations 35 -- 2 37
------------ ------------ ------------ ------------ ------------
Net income(loss) $ 650 $ (23) $ -- $ 17 $ 644
============ ============ ============ ============ ============
PER SHARE DATA
Cash earnings per share $ 0.43
Net income per share $ 0.38
Weighted average shares
Outstanding 1,681
BALANCE SHEET DATA AS OF
SEPTEMBER 30, 1999
Assets $ 247,180 $ 18,535 $ -- $ 92 $ 265,807
Loans receivable, net 169,182 14,606 -- 652 184,440
Deposits 158,284 10,294 -- (1,366) 167,212
Stockholders' equity 20,259 1,972 -- 7,463 29,694
</TABLE>
(1)Before amortization of
goodwill, core deposit
intangible, and purchase valuations
Page 13
<PAGE>
4. MATERIAL CHANGES IN RESULTS OF OPERATIONS-COMPARISON OF THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999.
<TABLE>
<CAPTION>
(In thousands) INCOME RECAP
(Unaudited)
----------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
CONSOLIDATED
WITH United
VALLEY Only United Only
--------------------------------------- ------------------------ ----------
2000 1999 Change 2000 1999 Change
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 18,708 $ 12,709 $ 5,999 $ 15,138 $ 12,709 $ 2,429
Interest expense 10,917 6,942 3,975 9,093 6,942 2,151
---------- ---------- ---------- ---------- ---------- ----------
Net interest income 7,791 5,767 2,024 6,045 5,767 278
Provision for losses on loans 1,376 168 1,208 1,130 168 962
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for losses on loans 6,415 5,599 816 4,915 5,599 (684)
Non-interest income 2,939 2,605 334 2,714 2,605 109
Non-interest expense 7,050 5,209 1,841 5,590 5,209 381
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes
and minority interest 2,304 2,995 (691) 2,039 2,995 (956)
Provision for income tax expense 853 1,154 (301) 705 1,154 (449)
---------- ---------- ---------- ---------- ---------- ----------
Net income before minority
Interest $ 1,451 $ 1,841 (390) $ 1,334 $ 1,841 $ (507)
========== ========== ========== ========== ========== ==========
</TABLE>
GENERAL - The table above includes the 1999 operating results of United
only compared to the 2000 operating results consolidated with Valley as well as
a comparison of United only operating results for both nine month periods ended
September 30, 2000 and 1999.
NET INTEREST INCOME - Net interest income increased $2.0 million from
$5.8 million for the nine months ended September 30, 1999 to $7.8 million for
the nine months ended September 30, 2000. Net interest margin decreased .03% to
3.26% for the nine month period ended September 30, 2000 from 3.29% for the same
period last year. Net interest spread increased .11% to 2.98% for the nine month
period ended September 30, 2000 from 2.87% for the same period last year.
Although net interest income increased, higher funding rates at FHLB and
increased competition for loan rates resulted in a decrease in net interest
margin. United has used the funds from additional deposits and borrowings to
fund growth in its real estate loan portfolio, as well as to manage interest
rate risk.
INTEREST INCOME - The principal reason for the increase in United's net
interest income from the nine month period ended September 30, 1999 compared to
the nine month period ended September 30, 2000 was an increase in
interest-earning assets from the Valley consolidation. Interest income increased
$6.0 million from $12.7 million for the nine month period ended September 30,
1999 to $18.7 million for the nine month period ended September 30, 2000.
For the nine month period ended September 30, 2000, compared to the
nine month period ended September 30, 1999, interest on loans receivable
increased $5.1 million, interest on mortgage-backed securities and investments
increased $.9 million and interest on other interest-earning assets remained
constant.
INTEREST EXPENSE - The principal reason for the increase in United's
net interest expense from the nine month period ended September 30, 1999 to the
nine month period ended September 30, 2000 was an increase in interest-bearing
liabilities due to the consolidation of Valley. Interest expense increased $4.0
million from $6.9 million for the nine month period ended September 30, 1999 to
$10.9 million for the nine month period ended September 30, 2000.
For the nine month period ended September 30, 2000, compared to the
nine month period ended September 30, 1999, interest on deposits increased $2.7
million, and interest on short-term borrowings increased $1.3 million.
PROVISION FOR LOAN LOSSES - United provided $1.4 million for loan
losses for the nine months ended September 30, 2000, as compared to $.2 million
in the first nine months of 1999. The nine month provision of $1.4 million
included a one-time special provision of $.8 million related to the
deterioration of a single loan. Heritage Bank made a one-time special
Page 14
<PAGE>
provision for this single loan of $.7 million, while the remaining balance of
$.1 million was made by Valley. The regular nine month loan loss reserve of $.6
million was made by United as a result of strong loan demand and increased
non-performing assets.
NON-INTEREST INCOME - In addition to net interest income, United
generates significant non-interest income from a range of retail banking
services, including mortgage banking activities and service charges for deposit
services. Non-interest income increased $.3 million from $2.6 million for the
nine months ended September 30, 1999 to $2.9 million for the nine months ended
September 30, 2000. United did experience a decline in the home lending market
as compared to 1999, and particularly the refinancing market during the first
nine months of 2000, as interest rates were higher than the same period last
year. This decrease was offset by an increase in customer service charges and
mortgage servicing rights income in the first nine months of 2000.
NON-INTEREST EXPENSE - United's non-interest expense increased $1.8
million during the nine month period ending September 30, 2000 as compared to
the same period in 1999. This increase was principally due to the consolidation
of Valley and additional costs for opening three new branches as well as the
upcoming merger of Heritage and Heritage State Banks.
INCOME TAXES - Income tax expense decreased $.3 million for the nine
month period ended September 30, 2000 as compared to the same period in 1999.
This is the result of a decrease in income before income taxes (adjusted for
minority interest) of $.7 million due to the one-time special loan loss reserve
charge discussed above.
Page 15
<PAGE>
BUSINESS SEGMENT RESULTS - United manages its operations and prepares
management reports with a primary focus on geographical areas. Operating
segments information, including earnings performance on an operating cash basis,
is presented in the following schedule. United allocates centrally provided
services to the business segments based upon estimated usage of those services.
The operating segment identified as other includes the Parent Company and
elimination of transactions between segments.
The following table sets forth certain operating segment information
for the nine month periods ended September 30, 2000 and 1999 and certain balance
sheet data as of September 30, 2000 and 1999 (in thousands). Operating
information is not presented for Valley as of September 30, 1999 as its
statements were not consolidated with United at that time.
<TABLE>
<CAPTION>
Heritage Heritage
2000: Bank State Bank Valley Other Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net interest income(1) $ 5,573 448 $ 1,745 $ 37 $ 7,803
Non-interest income 2,526 51 362 -- 2,939
------------ ------------ ------------ ------------ ------------
Total revenue 8,099 499 2,107 37 10,742
Provision for loan losses 1,130 -- 246 -- 1,376
Non-interest expense(1) 4,733 323 1,460 226 6,742
------------ ------------ ------------ ------------ ------------
Pretax cash earnings(loss)(1) 2,236 176 401 (189) 2,624
------------ ------------ ------------ ------------ ------------
Income tax expense 764 59 148 (118) 853
Minority interest -- -- -- (117) (117)
------------ ------------ ------------ ------------ ------------
Cash earnings(loss)(1) 1,472 117 253 (188) 1,654
------------ ------------ ------------ ------------ ------------
Amortization of goodwill and
CDI 124 23 -- 60 207
Amortization of purchase
valuations 105 -- -- 8 113
------------ ------------ ------------ ------------ ------------
Net income(loss) $ 1,243 $ 94 $ 253 $ (256) $ 1,334
============ ============ ============ ============ ============
PER SHARE DATA
Cash earnings per share $ 1.00
Cash earnings per share before
special charge $ 1.28
Net income per share $ 0.81
Net income per share before
special charge $ 1.09
Weighted average shares 1,650
outstanding
BALANCE SHEET DATA AS OF
SEPTEMBER 30, 2000
Assets $ 272,293 $ 18,421 $ 64,734 $ (1,024) $ 354,424
Loans receivable, net 195,319 14,809 41,769 33 251,930
Deposits 179,494 12,429 55,445 (118) 247,250
Stockholders' equity 20,022 2,084 7,808 (436) 29,478
</TABLE>
(1)Before amortization of
goodwill, core deposit
intangible, and purchase valuations
Page 16
<PAGE>
<TABLE>
<CAPTION>
Heritage Heritage
1999: Bank State Bank Valley Other Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net interest income(1) $ 5,243 $ 319 $ -- $ 217 $ 5,779
Non-interest income 2,486 31 -- 88 2,605
------------ ------------ ------------ ------------ ------------
Total revenue 7,729 350 -- 305 8,384
Provision for loan losses 75 93 -- -- 168
Non-interest expense(1) 4,432 352 -- 206 4,990
------------ ------------ ------------ ------------ ------------
Pretax cash earnings(loss)(1) 3,222 (95) -- 99 3,226
------------ ------------ ------------ ------------ ------------
Income tax expense(benefit) 1,163 (45) -- 36 1,154
------------ ------------ ------------ ------------ ------------
Cash earnings(loss)(1) 2,059 (50) -- 63 2,072
------------ ------------ ------------ ------------ ------------
Amortization of goodwill and
CDI 124 23 -- -- 147
Amortization of purchase
valuations 84 -- -- -- 84
------------ ------------ ------------ ------------ ------------
Net income(loss) $ 1,851 $ (73) $ -- $ 63 $ 1,841
============ ============ ============ ============ ============
PER SHARE DATA
Cash earnings per share $ 1.22
Net income per share $ 1.09
Weighted average shares 1,692
outstanding
BALANCE SHEET DATA AS OF
SEPTEMBER 30, 1999
Assets $ 247,180 $ 18,535 $ -- $ 92 $ 265,807
Loans receivable, net 169,182 14,606 -- 652 184,440
Deposits 158,284 10,294 -- (1,366) 167,212
Stockholders' equity 20,259 1,972 -- 7,463 29,694
</TABLE>
(1)Before amortization of
goodwill, core deposit
intangible, and purchase valuations
Page 17
<PAGE>
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. Market risk is the risk of loss in a financial instrument
arising from adverse changes in market rates/prices such as interest rates,
foreign currency exchange rates, commodity prices and equity prices. Since
United's earnings depend on its level of interest rate spread, its primary
market risk exposure is interest rate risk ("IRR").
INTEREST RATE RISK. United has established a formal IRR policy, and the
Banks have an Asset/Liability Management Committee 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 is the difference
between the Bank's depository portfolio value and its loans receivable portfolio
value. NPV thus provides a leading indicator of future potential changes in both
NII and stockholders' equity. Because of its asset size (less than $500
million), Heritage Bank falls under an OTS exemption that allows utilization of
an asset/liability computer simulation program prepared and distributed by the
OTS. The OTS Thrift Financial Report includes Schedule CMR that provides
detailed information about the balances, interest rates, repricing, and maturity
characteristics of 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 300 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, 2000 NPV and
the present value of total assets, NPV ratio and basis point change for three
instantaneous increases and the three instantaneous decreases in interest rates:
Interest Rate Sensitivity of Net Portfolio Value
<TABLE>
<CAPTION>
(Dollars in thousands)
Instantaneous Net Portfolio Value NPV as % of PV of Assets
------------------------------------------------------------------------
Change in Rates $ Amount $ Change % Change Total Assets NPV Ratio Change
--------------- -------- -------- -------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
+300 bp 14,771 -9,957 -40 % 260,989 5.66 % -333 bp
+200 bp 18,033 -6,694 -27 % 265,575 6.79 % -220 bp
+100 bp 21,389 -3,339 -14 % 270,273 7.91 % -108 bp
0 bp 24,727 274,983 8.99 %
-100 bp 27,876 3,148 +13 % 279,539 9.97 % + 98 bp
-200 bp 30,670 5,942 +24 % 283,765 10.81 % +182 bp
-300 bp 33,825 9,097 +37 % 288,386 11.73 % +274 bp
</TABLE>
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions, including the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of assets and liability cash flows
and others. Sensitivity analysis does not reflect actions that United might take
in responding to or anticipating changes in interest rates.
Page 18
<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, none of which is considered by management to be material.
ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5 OTHER INFORMATION.
In November 2000, UFC purchased 4,000 shares of treasury stock at a
price of $15.25 per share.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
A. The following exhibits are included herein:
Exhibit
Number Description of Exhibit
--------- ------------------------------------------------------------------
27.1 Financial Data Schedule
B. Reports on Form 8-K
None
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<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 15, 2000 /s/ John M. Morrison
--------------------------- -----------------------------------
John M. Morrison
Chairman of the Board
(Duly Authorized
Representative)
Date November 15, 2000 /s/ Kurt R. Weise
--------------------------- -----------------------------------
Kurt R. Weise
President and Chief
Executive Officer
(Duly Authorized
Representative)
Page 20
