UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-28080
-------
UNITED FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
MINNESOTA 81-0507591
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
P.O. Box 2779, 120 1st Avenue North, Great Falls, Montana 59403
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (406) 727-6106
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 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
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates
of the Registrant, computed by reference to the closing price of such stock on
the Nasdaq National Market as of February 28, 2002, was $15,687,141.
The number of shares of Registrant's common stock outstanding on
February 28, 2002 was 1,478,152. Registrant's common stock is traded on the
Nasdaq National Market, under the symbol UBMT.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
UNITED FINANCIAL CORP.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................................. 1
ITEM 2. PROPERTIES...........................................................16
ITEM 3. LEGAL PROCEEDINGS....................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................................16
ITEM 6. SELECTED FINANCIAL DATA..............................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................38
ITEM 11. EXECUTIVE COMPENSATION...............................................38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K..........................................................39
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PART I
ITEM 1. BUSINESS
GENERAL. United Financial Corp. ("UFC") is a bank holding company
headquartered in Great Falls, Montana, with operations in 12 Montana communities
and Phoenix and Scottsdale, Arizona. UFC's banking business in Montana is
conducted through its wholly-owned subsidiary, Heritage Bank ("Heritage Bank"),
and in Arizona is conducted through Valley Bank of Arizona ("Valley Bank"), the
wholly-owned subsidiary of Valley Bancorp, Inc. ("Valley"), a majority-owned
subsidiary of UFC. Heritage Bank and Valley Bank are collectively referred to
herein as the "Banks". UFC's wholly-owned subsidiary, United Financial-Montana
Capital Trust I was established in 2001 to issue and administer $3.0 million of
Capital Trust Pass-Through Securities. (See Part IV, Item 14-"Notes to
Consolidated Financial Statements-Trust Preferred Securities"). UFC, Heritage
Bank and Valley are collectively referred to herein as ("United"). United had
assets of approximately $382.7 million, deposits of approximately $282.4 million
and stockholders' equity of approximately $28.6 million at December 31, 2001.
UFC owned approximately 65% of Valley at December 31, 2001. As a result
of acquiring over 50% of the outstanding shares of Valley in January 2000, UFC
has consolidated Valley in its financial statements effective January 1, 2000.
See Part IV, Item 14 - "Notes to Consolidated Financial Statements-Acquisition".
The aggregate purchase price of all shares of Valley purchased by UFC to date is
approximately $7.2 million. Valley had assets of approximately $70.3 million,
deposits of approximately $58.7 million and stockholders' equity of
approximately $8.2 million at December 31, 2001.
Heritage Bank is a state-chartered commercial bank with locations in
Bozeman, Chester, Fort Benton, Geraldine, Glendive, Great Falls, Havre,
Missoula, Shelby, Hamilton, Kalispell, and Libby, Montana. Valley Bank is a
state-chartered commercial bank with locations in Phoenix and Scottsdale,
Arizona. The Banks are engaged in the community banking business of attracting
deposits from the general public through their offices and using those deposits,
together with other available funds, to originate commercial (including lease
financing), commercial real estate, residential, agricultural and consumer loans
primarily in their market areas in Montana and Arizona. A majority of the Banks'
banking business is conducted in the Great Falls and Phoenix areas. The Banks
also invest in mortgage-backed securities, U.S. Treasury obligations, other U.S.
Government agency obligations and other interest-earning assets. Heritage Bank
also holds a 14% ownership interest in Bankers' Resource Center, a computer data
center.
During 1998, United formed Heritage State Bank("State Bank"), a
state-chartered commercial bank, to acquire a portion of the business of a
failed commercial bank in Fort Benton, Montana. State Bank had one branch office
in Geraldine, Montana. On the acquisition date, United, through State Bank,
acquired certain assets of approximately $1.6 million and assumed certain
liabilities of approximately $14 million. State Bank paid a $454,000 premium for
the right to acquire such assets and assume the bank's insured deposits. The
acquisition of State Bank was accounted for as a purchase. Effective January 1,
2001, State Bank merged with Heritage Bank.
The Banks' financial condition and results of operations, and therefore
the financial condition and results of operations of United, are dependent
primarily on net interest income and fee income. The Banks' financial condition
and results of operations are also significantly influenced by local and
national economic conditions, changes in market interest rates, governmental
policies, tax laws and the actions of various regulatory agencies.
UFC's principal offices are located at 120 First Avenue North, Great
Falls, Montana, and its telephone number is (406) 727-6106.
1
HERITAGE BANK AND STATE BANK MERGER. Effective January 1, 2001,
Heritage Bank F.S.B., a federally-chartered stock savings bank, merged into
State Bank's state banking charter. State Bank then changed its name to Heritage
Bank and relocated its main office to Great Falls, Montana. Since 2001, Heritage
Bank has been regulated by the FDIC and the State of Montana.
LENDING ACTIVITIES
GENERAL. Lending activities are United's primary source of both
interest income and fee income. United's interest income from loans receivable
was approximately $22.4 million, $20.9 million and $14.0 million, or
approximately 83%, 81% and 80% of total interest income, for the years ended
December 31, 2001, 2000 and 1999, respectively. Part of the increase in interest
income in 2000 resulted from the inclusion of $3.7 million from the
consolidation of Valley. United's principal lending activity has been the
origination of real estate loans, 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"), agricultural loans and commercial loans.
The following table sets forth the composition of United's loans
receivable at December 31, 2001, 2000, 1999, 1998 and on a pro forma combined
basis 1997:
(Dollars in thousands)
December 31, December 31, December 31,
-------------------- -------------------- --------------------
2001 2000 1999
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
Loans secured by real
estate:
1 - 4 residential $ 32,539 12.3% $ 33,855 13.3% $ 34,097 18.1%
5 or more residential 5,010 1.9 6,326 2.5 5,237 2.8
Construction 19,384 7.3 12,850 5.0 10,564 5.6
Agricultural 24,655 9.3 24,689 9.7 16,210 8.6
Commercial 77,628 29.5 65,268 25.7 30,594 16.3
-------- -------- -------- -------- -------- --------
Total loans secured by real
estate 159,216 60.3 142,988 56.2 96,702 51.4
Commercial loans 60,579 22.9 69,324 27.3 60,060 32.0
Tax exempt municipal loans 1,685 .6 1,489 .6 1,428 .8
Agricultural loans 11,607 4.4 10,469 4.1 9,805 5.2
Savings account and other
loans 1,532 .6 1,138 .5 961 .5
Second mortgage consumer
loans 5,438 2.1 4,745 1.9 7,702 4.1
Auto and other consumer loans 23,970 9.1 24,019 9.4 11,276 6.0
-------- -------- -------- -------- -------- --------
Total loans receivable 264,027 100.0% 254,172 100.0% 187,934 100.0%
======== ======== ========
Less:
Allowance for loan losses 3,503 2,526 1,586
-------- -------- --------
Net loans receivable $260,524 $251,646 $186,348
======== ======== ========
2
(Dollars in thousands) Pro Forma Combined (1)
December 31, December 31,
---------------------------------------------
1998 1997
-------------------- --------------------
Amount Percent Amount Percent
-------- -------- -------- --------
Loans secured by real
estate:
1 - 4 residential $ 27,109 18.7% $ 43,156 45.4%
5 or more residential 6,601 4.6 6,705 7.1
Construction 9,224 6.4 5,476 5.8
Agricultural 10,275 7.1 2,980 3.1
Commercial 27,449 18.9 11,437 12.0
-------- -------- -------- --------
Total loans secured by real
estate 80,658 55.7 69,754 73.4
Commercial loans 37,564 25.9 13,435 14.2
Tax exempt municipal loans 1,477 1.0 795 .8
Agricultural loans 8,191 5.7 2,951 3.1
Savings account and other loans 728 .5 616 0.7
Second mortgage consumer loans 9,066 6.3 2,311 2.5
Auto and other consumer loans 7,160 4.9 5,075 5.3
-------- -------- -------- --------
Total loans receivable 144,844 100.0% 94,937 100.0%
======== ========
Less:
Allowance for loan losses 1,485 1,146
-------- --------
Net loans receivable $143,359 $ 93,791
======== ========
(1) UFC is the result of the combination on February 3, 1998(the "Heritage
Merger") of two Montana-based savings and loan holding companies:
Heritage Bancorporation ("Heritage") and United Financial Corp. (as it
existed prior to the merger, "Old United"). The pro forma combined
financial data combines the historical consolidated financial data of
Heritage and Old United as of December 31, 1997 as if the Heritage
Merger, which was effective on February 3, 1998 (the "Heritage Merger
Effective Date"), had been effective on December 31, 1997. See Item
7.-"Selected United Financial Data-General."
RESIDENTIAL (NON-CONSTRUCTION) REAL ESTATE LENDING. Residential
mortgage lending constitutes a significant portion of United's lending
activities. United's residential loan originations are conducted by residential
loan production officers in its ten banking offices and its two loan production
offices in Montana. Virtually all of United's residential loan production is
secured by properties located in Montana.
Under United's residential lending policies, most loans originated
conform to Government National Mortgage Association/Federal National Mortgage
Association ("GNMA/FNMA") secondary mortgage market standards and are secured by
residential property with a value of not more than 80% (or 95% if private
mortgage insurance is obtained) of the principal amount of the loan. In
accordance with federal guidelines, an appraisal by an independent licensed or
certified appraiser is required for residential loans in excess of $250,000.
United generally also obtains appraisals or valuations on most residential loans
under $250,000. The terms of United's conventional real estate loans provide
that the loan can be prepaid without penalty and typically include a due-on-sale
clause that provides for acceleration of indebtedness upon the sale or other
disposition of secured property. Evidence of fire, casualty and hazard insurance
with a mortgagee clause in favor of United is required prior to settlement of
residential and commercial real estate loans. Title insurance is generally
required on properties securing such loans.
Most of United's residential loans are originated through personal
contacts of loan officers, including contacts with local realtors, and through
referrals from deposit customers. Although the majority of United's loans are
fixed rate loan products that are subsequently sold, United does offer a wide
variety of adjustable rate residential loans. The interest rates on variable
loans will vary with the movement of the index upon which the interest rates are
based. If the interest rates change, loan payments, balances or terms may be
adjusted. United's primary indexes are the 1, 3, 5 and 10-year constant maturity
Treasury indexes. Most of the ARMs currently originated by United have loan
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terms of 10 to 30 years with rate adjustments generally every 1, 3, 5 or 10
years during the term of the loan. Generally, interest rate adjustments on
United's ARMs are limited to changes of 2.5% - 3.25% per year and 6% - 10% for
the life of the loan.
The majority of United's total production of long-term (15 to 30-year
maturity) fixed rate residential loans is originated according to pre-arranged
underwriting standards that result in immediate sale to the secondary market,
primarily to mortgage bankers and pension funds. While origination and sale of
these loans produces fee income, the loans are carried at their outstanding
principal balance, which is the contracted purchase price, and therefore no gain
or loss is realized at sale, except for gains associated with recognizing any
retained mortgage servicing rights. United sold long-term fixed-rate mortgage
loans to the secondary market in aggregate amounts of approximately $167.5
million in 2001. United also sells long-term fixed-rate loans that are
refinances of existing portfolio loans or permanent financing of completed
construction loans to the secondary market or State of Montana housing agencies.
These loans are carried at their outstanding principal balance, which was the
contracted purchase price, and therefore no gain or loss is realized at sale.
During 2001, United sold portfolio loans in aggregate amounts of approximately
$.3 million. United retains a limited number of adjustable rate mortgages and
fixed rate mortgage loans up to 15-year maturities for its own portfolio.
REAL ESTATE CONSTRUCTION LOANS. In addition to permanent real estate
mortgage loans, United also provides interim financing for the construction of
single-family and multi-unit dwellings, commercial real estate and improvements
of real estate. Construction loans are generally made for periods of
approximately nine months, with interest paid at periodic intervals. Such loans
may be extended for several months due to adverse weather conditions or other
justifiable delays in construction. United provides financing primarily for a
limited number of contractors who have demonstrated an ability to complete
projects and financial responsibility in residential development and
construction and have operated in United's lending area for a number of years.
United also provides construction loans for clients who have made the decision
to construct a new home for their personal use and in that case the bank client
will choose their own contractor who is then approved by the Banks. The Banks
assure that permanent financing is in place prior to entering into a
construction loan for an individual client.
COMMERCIAL AND AGRICULTURAL REAL ESTATE LOANS. United engages in
commercial real estate lending secured by both commercial and agricultural
properties. Occasionally when making such loans, United participates in the U.S.
Small Business Administration's program for guaranteed commercial real estate
loans. United's loans on commercial and agricultural real estate are primarily
first lien loans with 10 to 15-year maturities and adjustable interest rates
based on U.S. Treasury indexes for 1, 3 and 5 years. While government
regulations limit the level of commercial real estate lending by a financial
institution to 400% of its capital, this limitation has not had a material
impact on the lending activities of the Banks to date.
NON-MORTGAGE COMMERCIAL AND AGRICULTURAL LENDING. In addition to real
estate lending, United offers commercial and agricultural non-mortgage loans.
United offers commercial lines of credit, equipment term loans, working
capital loans and loans guaranteed by the Small Business Administration to its
business customers. It also offers seasonal lines of credit and term equipment
loans to its agricultural borrowers and purchases, on a participation basis,
loans originated outside its normal market areas. Participaion loans are
generally purchased from commercial banks and third party loan production
offices. Generally, these purchased participations allow United to diversify its
geographic risk and are purchased with a higher level of underwriting standards
since a direct customer relationship does not exist.
CONSUMER LENDING. United's consumer loan portfolio includes home
equity, home improvement, line of credit, auto, deposit account, dealer loans
and credit card receivables. United has entered into agreements with certain
local merchants to purchase qualifying conditional sales contracts. United's
consumer lending is conducted at branch offices and United's home offices in
4
Great Falls and Phoenix. United requires fire, hazard and casualty insurance for
loans secured by home equity and casualty insurance for loans secured by autos
and recreational vehicles. The Banks also maintain an underlying vendors single
interest insurance policy to protect it in the event a loss is incurred to a
non-customer insured vehicle.
INVESTMENT ACTIVITIES
The investment activities of United are designed to provide an
investment alternative for funds not presently required to meet loan demand,
assist in maximizing income, 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.
Interest income from investment activities was approximately $3.9
million, $4.4 million, and $3.2 million, or approximately 14.4%, 17.1% and 18.2%
of United's total interest income for the years ended December 31, 2001, 2000,
and 1999, respectively.
United's portfolio consists primarily of obligations of the U.S.
government and its agencies, mortgage-backed securities, municipal bonds and
corporate bonds and equity securities. United's investment portfolio does not
contain a concentration of investments in any one issuer in excess of 10% of
United's total investment portfolio, except for securities of the U.S.
government and U.S. government agencies. All of United's investments are
classified as available-for-sale.
The following table sets forth the carrying values of United's
investments at December 31, 2001, 2000 and 1999:
(Dollars in thousands)
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
U.S. government and federal agencies $ 30,707 $ 23,872 $ 9,794
Mortgage-backed securities 39,282 41,536 39,455
Municipal bonds 1,745 2,717 1,935
Corporate bonds and equity securities 1,529 1,939 1,860
------------ ------------ ------------
$ 73,263 $ 70,064 $ 53,044
============ ============ ============
During 2001, United received $14.6 million in mortgage-backed security
principal payments and had $21.4 million of calls and maturities of investment
securities. United sold $7.8 million of investment securities and
mortgage-backed securities while purchasing $46.3 million in investment
securities and mortgage-backed securities. United recorded an unrealized gain in
market values of its investment portfolio of $.8 million, and a realized gain of
$.2 million, before taxes.
During 2000, United received $8.8 million in mortgage-backed security
principal payments and had $0.8 million of calls and maturities of investment
securities, while purchasing $7.8 million in investment securities and
mortgage-backed securities. United recorded an unrealized gain in market values
of its investment portfolio of $1.4 million. The remaining increase of $17.5
million was due to the consolidation of Valley.
SOURCES OF FUNDS
The primary sources of funds for United's lending and investment
activities are deposits, repurchase agreements, Federal Home Loan Bank ("FHLB")
borrowings, loan and mortgage-backed securities repayments, proceeds from loan
sales, investment securities, interest payments and maturities, and net
operating revenues. United has used the funds from additional deposits and FHLB
borrowings to fund growth in its real estate loan portfolio and to manage
interest rate risk.
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
5
deposit and retirement savings plans. Deposit account terms vary, according to
the minimum balance required, the time periods 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.
The following table sets forth the composition of United's deposits at
December 31, 2001, 2000 and 1999:
(Dollars in thousands) December 31, December 31, December 31,
-------------------- -------------------- --------------------
2001 2000 1999
-------------------- -------------------- --------------------
Type: Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
Non-interest bearing $ 46,689 16.5% $ 33,349 12.7% $ 18,751 10.4%
Interest bearing:
NOW & money market
demand accounts 50,990 18.1 52,018 20.0 23,333 13.0
Savings accounts 62,283 22.1 49,203 18.8 48,295 26.8
Time deposits 122,438 43.3 126,609 48.5 89,503 49.8
-------- -------- -------- -------- -------- --------
Total $282,400 100.0% $261,179 100.0% $179,882 100.0%
======== ======== ======== ======== ======== ========
Scheduled maturities of certificates of deposit at December 31, 2001
are as follows:
(Dollars in thousands)
Due within one year $ 88,625
Due within two to three years 28,276
Due within four to five years 5,537
---------
Totals $122,438
=========
Time deposits of $100,000 or more were approximately $34.0 million,
$30.8 million, and $15.9 million at December 31, 2001, 2000, and 1999,
respectively. Amounts in excess of $100,000 are not insured by a federal agency.
The maturity of time deposits of $100,000 or more at December 31, 2001
was as follows:
(Dollars in thousands)
Less than three months $ 10,097
Three to six months 6,370
Six to twelve months 9,636
Greater than twelve months 7,906
--------
Total $34,009
========
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 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,
historically, a small number of the Banks' depositors have resided outside
Montana and Arizona. As market demand generally dictates deposit maturities and
rates, United intends to continue to offer those types of accounts that it
believes have broad market appeal.
BORROWINGS. United relies to a significant extent on borrowings from
the FHLB to finance its short-term, and increasingly its longer term, financing
needs. The FHLB functions as the central reserve bank providing credit for
savings institutions and certain other member financial institutions. Borrowings
6
from the FHLB are available at various maturities, which facilitates the
accurate matching of asset and liability maturity dates. In 2001, United used
these available borrowings in part to fund expansion of its lending activities,
and to manage interest rate risk.
As members of the FHLB, the Banks are required to own capital stock in
the FHLB and are 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. Each of
Heritage Bank's and Valley Bank's established available FHLB advance credit
lines for 2001 was 25% of assets. The FHLB is required to review its credit
limitations and standards at least annually. At December 31, 2001, 2000 and
1999, $50.5 million, $52.2 million and $46.4 million, respectively, of FHLB
advances were outstanding.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. 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. For the years ended December 31,
2001, 2000 and 1999, securities sold under agreements to repurchase averaged
approximately $8.7 million, $11.5 million and $10.3 million, respectively. The
maximum outstanding at any month end during the years ended December 31, 2001,
2000 and 1999 was approximately $9.6 million, $13.9 million and $11.5 million,
respectively. United had $9.6 million, $11.4 million and $11.5 million of
securities sold under repurchase agreements at December 31, 2001, 2000 and 1999,
respectively.
TRUST PREFERRED SECURITIES. In July 2001, UFC issued junior
subordinated debentures, aggregating $3.0 million to United Financial-Montana
Capital Trust I (Trust). The Trust issued preferred securities, as part of a
pooled issue, with an aggregate liquidation amount of $3.0 million ($1,000 per
capital security) to third-party investors. The junior subordinated debentures
and cash are the sole assets of the Trust. The preferred securities are
includable as Tier I capital for regulatory capital purposes. The offering price
was $1,000 per capital security. The junior subordinated debentures and the
preferred securities pay interest and dividends, respectively, on a semi-annual
basis, which are included in interest expense. The Trust is a statutory business
trust formed under the laws of the State of Delaware and is wholly-owned by UFC.
The junior subordinated debentures and preferred securities will mature on July
25, 2031. The junior subordinated debentures and preferred securities can be
redeemed contemporaneously, in whole or in part, after five years at decreasing
premiums with the permission of the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). UFC has provided a full and unconditional
guarantee of the obligations of the Trust in the event of the occurrence of an
event of default, as defined. Debt issuance costs totaling $118,812 were
capitalized related to the debenture offering and are being amortized over the
10-year non-premium callable life of the preferred securities.
OTHER ACTIVITIES
Heritage Bank also holds a 14% ownership interest in Bankers' Resource
Center, a computer data center, which provides certain data processing services
to Heritage Bank and UFC. Heritage Bank had a wholly-owned service corporation,
CSC, which owned and managed a limited amount of real estate held for investment
during 1999, was inactive during 2000 and was dissolved in 2001.
MARKET AREA
Great Falls, the county seat of Cascade County and a regional trade
center, is one of the largest cities in Montana. The estimated 2001 Great Falls
and Cascade County populations were approximately 57,000 and 80,000,
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 approximately 4,600 people, is the largest employer in Great Falls
and Cascade County. Any significant reduction in size or closure of MAFB would
likely adversely affect United and its results of operations and financial
condition.
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The economies of Chester, Fort Benton, Geraldine, Glendive, Havre,
Libby and Shelby, Montana are dependent to a large extent on agricultural,
livestock and railroad activities. Areas such as Bozeman, Great Falls, Hamilton,
Kalispell, Libby and Missoula are supported in part by tourism and higher
education. Nevertheless, agriculture is the predominant activity in the State of
Montana and any adverse trends in agriculture could adversely affect United and
its results of operations and financial condition.
Phoenix is the largest metropolitan area in Arizona with a population
of approximately 3 million. Arizona is one of the fastest growing states in the
nation, according to the 2000 Census. Arizona's population grew to 5.1 million
or 40% over the past decade, more than triple the national rate. Major
employment industries are service industries, construction in Arizona and light
manufacturing. A slowdown in the real estate economy or manufacturing could
adversely affect United and its results of operations and financial condition.
COMPETITION
The Banks, 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 banks, credit unions
and commercial banks. There are approximately 35 depository institutions,
commercial banks, credit unions and savings banks with offices in United's
Montana market areas, and approximately 77 in its Arizona market area.
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.
EMPLOYEES
At February 28, 2002, Heritage Bank employed 96 full-time employees and
24 part-time employees, and Valley employed 17 full-time employees and 3
part-time employee. United maintains a comprehensive employee benefit program
providing, among other benefits, hospitalization and major medical insurance,
paid sick leave, disability, life insurance and 401K retirement plans. United's
employees are not represented by any collective bargaining group. See Part IV,
Item 14. - "Notes to Consolidated Financial Statements - Employee Benefit
Plans."
8
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the
executive officers of UFC. All executive officers are elected annually by the
Board of Directors. There are no arrangements or understandings between
individual officers and any other person pursuant to which he or she was elected
as an officer.
Name Age Position Held
- ---- --- -------------
John M. Morrison 65 Chairman of UFC; Director of Heritage Bank
and Valley
Kurt R. Weise 45 Director, President and Chief Executive
Officer of UFC; Director and Vice President
of Heritage Bank; Vice President and
Director of Valley and Valley Bank
Kevin P. Clark 46 Director, Secretary and Senior Vice
President of UFC; Director, President and
Chief Executive Officer of Heritage Bank;
Director of Valley
Steve L. Feurt 46 Director, Senior Vice President and Chief
Credit Officer of UFC; Director, Executive
Vice President and Senior Lending Officer of
Heritage Bank
Paula J. Delaney 41 Chief Financial Officer of UFC; Director and
Vice President of Heritage Bank
MR. MORRISON has served as Chairman of UFC since February 1998. Mr.
Morrison's term of office as chairman of UFC expires at UFC's annual shareholder
meeting in 2003. Mr. Morrison was elected to the Valley and Valley Bank boards
in March 1996. Prior to February 1998, he served as Chairman of Heritage Bank
since 1994. Mr. Morrison is the Chief Executive Officer and sole shareholder of
Central Bancshares, Inc. ("Central Bancshares"), the parent company of Central
Bank, located in Stillwater, Minnesota, which was founded by Mr. Morrison in
1988. He is also the sole shareholder and Chairman of the Board of Directors of
Central Financial Services ("CFS"), a bank-consulting firm. In August 2001, Mr.
Morrison became Chairman of the Board of Directors and Chief Executive Officer
of Allina Health Systems, a non-profit organization in Minnesota that provides
healthcare services through hospitals and clinics in Minnesota and Wisconsin. To
avoid a conflict of interest, Mr. Morrison resigned from the boards of Fairview
Corporation, Fairview-University Medical Center and Fairview-University of
Minnesota upon taking the Allina position. He also resigned as a director of
Valley Bank in October but continues as a director at Valley. Mr. Morrison is
involved in various other businesses, and serves as Chairman of the Executive
Committee of the Board of Trustees of the University of St. Thomas, and is a
member of the board of the University of St. Thomas Law School.
MR. WEISE has served as Chief Executive Officer of UFC since the annual
shareholder meeting in 1999. Mr. Weise has served as President and director of
UFC, and director and Vice President of Heritage Bank since February 1998. Mr.
Weise's term of office as a director of UFC expires at UFC's annual shareholder
meeting in 2003. Mr. Weise was elected to the Valley and Valley Bank boards in
March 1999. Prior to February 1998, he served as Vice President, Treasurer and a
director of Heritage Bank. Mr. Weise also serves as President of CFS and
President of Central Bancshares. He has been involved in various capacities with
the Central Bank group of companies since they were founded in 1988. He was the
Chief Financial Officer of Bank of Montana Systems ("BMS") until its sale to
Norwest Corporation.
MR. CLARK has served as Senior Vice President and Secretary of UFC, and
director, President and Chief Executive Officer of Heritage Bank since February
1998. Mr. Clark was elected as Vice President and a director of UFC in May 1998,
and his term of office as a director of UFC expires at UFC's annual shareholder
meeting in 2003. Mr. Clark was elected to the Valley board in May 2000. Prior to
February 1998, he served as President, Chief Executive Officer and a director of
Heritage Bank since 1994. Mr. Clark served in various capacities with BMS until
its sale to Norwest Corporation, including President, Chief Executive Officer
and a director of Bank of Montana, a subsidiary of BMS, and Regional Vice
President of BMS.
9
MR. FEURT has served as Senior Vice President and Chief Credit Officer
of UFC, and director and Executive Vice President and Senior Lending Officer of
Heritage Bank since February 1998. Mr. Feurt was elected as a director of UFC in
May 1998, and his term of office as a director of UFC expires at UFC's annual
shareholder meeting in 2002. Prior to February 1998, he served as Senior Vice
President, Senior Credit Officer and a director of Heritage Bank since 1994. Mr.
Feurt served as Senior Vice President, Senior Credit Officer and a director of
BMS and Bank of Montana from 1984 until the sale of BMS to Norwest Corporation.
MS. DELANEY was elected to the Heritage Bank board in October 2000 and
has served as Chief Financial Officer of UFC since January 2001, and as Vice
President of Heritage Bank since December 1998. Previously, Ms. Delaney, a
certified public accountant, was employed in public accounting from 1984 to
1998, with Hamilton Misfeldt & Co. P.C., a Great Falls based public accounting
firm.
SUPERVISION AND REGULATION
UFC became a registered bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"), in 1998 by reason of its ownership of
State Bank.
Bank holding companies are subject to the general supervision and
regulation by the Federal Reserve Bank ("FRB"). Under the BHCA and FRB
regulations, a bank holding company may engage in banking, managing or
controlling banks, furnishing or performing services for banks it controls and
conducting activities that the FRB has determined to be closely related to
banking. Bank holding companies must also obtain the prior approval of the FRB
before acquiring 5% or more of the outstanding shares of another bank or bank
holding company and must provide notice to, and in some situations obtain the
prior approval of, the FRB in connection with the acquisition of 5% or more of
the outstanding shares of a company engaged in a "bank related" business.
Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner. In addition, it is the
FRB's policy that in serving as a source of strength to its subsidiary banks, a
bank holding company should stand ready to use available resources to provide
adequate capital to its subsidiary banks during periods of financial stress or
adversity. A bank holding company's failure to meet its obligations to serve as
a source of strength to its subsidiary banks will generally be considered by the
FRB to be an unsafe and unsound practice or a violation of FRB regulations, or
both.
Bank holding companies are subject to certain limitations on redemption
of common stock or other equity securities. In addition, the FRB has issued
regulations setting minimum capital standards for bank holding companies.
Depending on the capital classification of a bank holding company, it may be
restricted from engaging in certain non-bank activities or from acquiring
interests in additional banks or other depository institutions. As of December
31, 2001, UFC met the minimum capital requirements issued by the FRB.
Under the BHCA, as amended by the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"), a bank holding company
may acquire banks throughout the United States subject only to state or federal
deposit caps and state minimum age requirements. Effective June 1, 1997, the
Interstate Act authorized interstate branching by acquisition and consolidation
in those states that had not opted out by that date. Montana opted out of the
interstate branching by acquisition and consolidation until October 1, 2001. The
State of Arizona adopted the Interstate Act immediately and allows interstate
banking.
The Gramm-Leach-Bliley Act of 1999 (the "Financial Services
Modernization Act") came into effect on March 11, 2000. The Financial Services
Modernization Act repeals the two affiliation provisions of the Glass-Steagall
Act: Section 20, which restricted the affiliation of Federal Reserve member
banks with firms "engaged principally" in specified securities activities; and
Section 32, which restricts officer, director, or employee interlocks between a
member bank and any company or person "primarily engaged" in specified
10
securities activities. In addition, the Financial Services Modernization Act
contains provisions that expressly preempt any state law restricting the
establishment of financial affiliation, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliation among commercial banks, insurance companies, securities firms, and
other financial service providers by revising and expanding the bank holding
company framework to permit a holding company system to engage in a full range
of financial activities through a new entity known as a financial holding
company. To date, UFC has not elected to become a financial holding company.
Bank holding companies that elect to become a financial holding company
may affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature or are incidental or complementary to
activities that are financial in nature. "Financial in nature" activities
include securities underwriting, dealing, and market making, sponsoring mutual
funds and investment companies, insurance underwriting and agency, merchant
banking, and activities that the Federal Reserve, in consultation with the
Secretary of the Treasury, determines from time to time to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
United does not believe that the Financial Services Modernization Act
will negatively affect its operations in the near-term. However, to the extent
that the legislation permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The Financial Services Modernization Act is intended to grant to community banks
certain powers as a matter of right that larger institutions have accumulated on
and ad hoc basis. Nevertheless, this legislation may increase the amount of
competition from larger institutions and other types of companies with
substantially greater resources and a wider variety of financial products than
United currently offers.
Under the Financial Services Modernization Act, federal banking
regulators have adopted rules that limit the ability of banks and other
financial institutions to disclose non-public information about consumers to
nonaffiliated third parties. These limitations require disclosure of privacy
policies to consumers and, in some circumstances, allow consumers to prevent
disclosure of certain personal information to a nonaffiliated third party. The
rules were effective November 13, 2000, but compliance was optional until July
1, 2001. United has implemented procedures to comply with these rules and
believes that compliance has not adversely affected its operations.
United and its subsidiaries are deemed affiliates within the meaning of
the Federal Reserve Act, and transactions between the affiliates are subject to
certain restrictions. Accordingly, UFC and its respective subsidiaries must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA").
Generally, these sections restrict "covered transactions" (I.E., loans,
purchases of assets, guaranties and similar transactions) to a percentage of the
depository institution's capital and surplus, require that such transaction be
appropriately collateralized and require that such transactions be on terms as
favorable to the depository institution as transactions with non-affiliates.
Loans to insiders (officers, directors and 10% shareholders) of a depository
institution are subject to Sections 22(g) and (h) of the FRA and regulations
thereunder. Among other things, such loans must be made on terms substantially
the same as loans to non-insiders.
DEPOSITORY INSTITUTION SUBSIDIARIES--HERITAGE BANK AND VALLEY BANK.
Effective January 1, 2001, Heritage Bank became a Montana-chartered commercial
bank, having merged into State Bank's commercial bank charter. As such, Heritage
Bank is subject to regulation and supervision by the Montana Department of
Commerce, Division of Banking and Financial Institutions (the "Montana
Division") and the FDIC. Valley Bank is a Arizona-chartered commercial bank and
a member of the Federal Reserve Bank System. As such, Valley Bank is subject to
regulation and supervision by the Arizona State Banking Department (the "Arizona
Department") and the FRB. The Banks' deposits are insured by the FDIC.
11
The Montana and Arizona statutes and regulations place limitations on
the business and other activities of Heritage Bank and Valley Bank which may be
more restrictive than limitations applicable to depository institutions that are
not State-chartered commercial banks. In particular, and among other
limitations, the establishment and operation of new branch offices, is limited
by, and subject to approval by, the Montana Division and the Arizona Department.
In addition, State-chartered commercial banks are generally not authorized to
make investments in subsidiary companies or to make other investments in equity
securities or to engage in securities or insurance activities. Some federally
chartered depository institutions located in Montana and Arizona may engage in
such activities without regard to State law.
By reason of FDIC insurance, the Banks are insured depository
institutions for purposes of certain federal laws and regulations. The federal
laws that apply to the Banks regulate, among other things, the scope of their
businesses, their investments, the reserves against deposits, the timing and
availability of deposited funds and certain aspects of their lending activities.
These laws and regulations governing the depository institution activities have
generally been promulgated to protect depositors and not to protect stockholders
of such institutions or their holding companies. These laws and regulations are
designed to ensure that appropriate action is taken to address concerns
regarding the safe and sound operation of insured depository institutions and
generally relate to internal control and information systems, loan documentation
and credit underwriting, asset growth, management performance and earnings. If
an insured depository institution fails to meet the applicable standards and
regulatory requirements, an appropriate banking agency may require that the
institution prepare and submit to the agency an acceptable plan for addressing
the regulatory concern. If the plan submitted is deemed inadequate, or if the
institution fails to submit or comply with the required plan, a banking agency
may take further action with respect to the regulatory concerns, including
institution of an enforcement action with respect to the institution.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations in a number
of specific areas to insure depository institution safety and soundness,
including internal controls, credit underwriting, asset growth, management
compensation, asset quality and earnings performance. FDICIA also contains
provisions intended to change independent auditing requirements, to restrict the
activities of certain insured depository institutions, to change various
consumer banking laws and to limit the ability of "under-capitalized banks" to
borrow from the FRB's discount window or to acquire brokered deposits.
The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") significantly changed existing federal banking legislation and
regulation, including significant increases in FDIC insurance premiums,
separation of the FDIC insurance into two deposit insurance funds, authorizing
bank holding companies to own savings associations, increasing the federal
banking agencies' enforcement powers and increasing the civil and criminal
penalties for violations of federal banking laws and regulations.
The Banks are subject to certain federal consumer laws, including the
Community Reinvestment Act of 1977, as amended ("CRA"), and other fair lending
laws and regulations which impose nondiscriminatory lending requirements on
insured depository institutions. In recent periods, federal regulatory agencies
have sought a more rigorous enforcement of the CRA and other fair lending laws
and regulations. A successful challenge to a depository institution's
performance under the CRA and related fair lending laws and regulations could
result in a variety of sanctions, including the required payment of damages and
civil money penalties, prospective and retrospective injunctive relief and the
imposition of restrictions on mergers and acquisitions or other activities of
the depository institution or the holding companies controlling such depository
institutions. Private parties may also have the ability to challenge an
institution's performance under the fair lending laws in private class action
litigation.
12
The FDIC conducted a CRA performance evaluation in April 2000 and State
Bank was rated as having had "a satisfactory record in providing for the credit
needs of its assessment area". The OTS conducted a CRA performance evaluation in
July 1999 and Heritage Bank was rated as having had "an outstanding record of
meeting community credit needs".
Federal regulatory banking agencies have also established uniform
capital requirements for all insured depository institutions. An insured
depository institution that does not achieve and maintain required capital
levels may be subject to supervisory action through the issuance of capital
directives, cease and desist orders or other written orders or agreements with
the appropriate federal banking agency. Failure of an insured depository
institution to meet the required capital levels may also prohibit or limit the
ability of a bank holding company controlling such institution to engage in
merger and acquisition activities or other expansion activities. As of December
31, 2001, the Banks met the "well capitalized" requirements issued by the
applicable federal banking agency.
Depository institutions generally depend upon the difference between
the interest rate paid by them on deposits and other borrowings and the interest
rate received on loans extended to customers and on investment securities. The
interest rates are highly sensitive to many factors beyond the control of
depository institutions, including general economic conditions in their primary
market area and the broader economy. In addition to general economic conditions
affecting business generally, depository institutions such as the Banks are
affected by federal government policies and actions of regulatory agencies. In
particular, the FRB through its various operations and powers may affect
interest rates charged on loans or paid on deposits. Such changes in interest
rates affect the growth and quality of depository institution loans, investments
and deposits.
Federal banking regulatory agencies may institute enforcement actions
against depository institutions, their parent holding companies and other
institution-affiliated parties with respect to violations of any federal law or
regulation. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of cease and desist orders or other formal action,
termination of insurance of deposits and the imposition of civil money
penalties. The Banks are currently not subject to any such enforcement actions.
From time to time, various types of federal and state legislation have
been proposed that would result in additional regulation of, or restrictions on,
the business of depository institutions. It cannot be predicted whether such
legislation will be adopted or how such legislation would affect the business of
the Banks.
DEPOSIT INSURANCE AND FDIC REGULATION. As a result of the Heritage Bank
and State Bank merger, effective January 1, 2001, Heritage Bank is a member of
the Savings Association Insurance Fund ("SAIF"), and the Bank Insurance Fund
("BIF"), both administered by the FDIC. Section 5(d) of the Federal Deposit
Insurance Act ("FDI Act"), known as the Oakar Amendment, permits merger
transactions between SAIF- and BIF-member institutions resulting in an
institution with deposits that are proportionally insured by both SAIF and BIF.
Valley Bank is a member of the BIF.
Savings deposits are insured up to the applicable limits (generally
$100,000 per insured depositor) by the FDIC. The FDIC is empowered to impose
deposit insurance premiums, conduct examinations and require reporting by the
Banks. The FDIC may also prohibit the Banks from engaging in any activity the
FDIC determines by regulation or order to pose a serious risk to the FDIC. The
FDIC can also initiate enforcement actions against the Banks, after, in the case
of Heritage Bank, giving the OTS an opportunity to take such action, and may
terminate the deposit insurance of the Banks if it determines that the Banks
have engaged or are engaging in any unsafe or unsound practice, or are in an
unsafe or unsound condition.
For 2001, the FDIC assessment rate was 1.96 basis points per $100 of
insured deposits, for the Banks. As a result, the Banks' 2001 FDIC deposit
insurance premium was approximately $122,000. FDIC assessment rates for 2002
will be 1.82 basis points per $100 of insured deposits.
13
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. As of January 1, 2001,
Heritage Bank became subject to a State of Montana lending limit of 20% of
capital, and is no longer subject to the Office of Thrift Supervision ("OTS")
limits. The maximum aggregate amount of loans outstanding to a single borrower
at Heritage Bank at December 31, 2001 was approximately $2,213,000. At December
31, 2001 Heritage Bank was in compliance with the State of Montana lending
limit.
Prior to its merger with State Bank, the OTS had extensive authority
over the operations of Heritage Bank, including, among other things, the ability
to assess civil money penalties, to issue cease and desist orders or removal
orders, and to initiate injunctive actions for violations of laws and
regulations and for unsafe or unsound practices. Heritage Bank was required to
file periodic reports with the OTS and was also subject to periodic examinations
by the OTS and the FDIC.
Under federal law, the aggregate amount of loans that Heritage Bank was
permitted to make to any one borrower LTOB could not exceed 15% of unimpaired
capital and surplus. Amounts up to an additional 10% of unimpaired capital and
surplus could be extended for loans and extensions of credit fully secured by
readily marketable collateral, which is defined to include certain financial
instruments and bullion having a market value at least equal to the loan amount.
At December 31, 2000, Heritage Bank's LTOB limit was approximately $2,913,000,
and Heritage Bank was in compliance with the LTOB limitations.
REGULATORY CAPITAL REQUIREMENTS. FDIC places much greater emphasis on
capital as a measure of performance and establishes a rigid regulatory scheme
based almost entirely on capital levels. The five statutory capital categories
established by FDIC are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." The Banks' capital position exceeds the definition of "well
capitalized." FDIC also mandates that regulations be promulgated adding other
risk-based capital requirements covering (a) concentrations of credit risk, (b)
risks from nontraditional activities and (c) the capital impact of fair value
adjustments associated with FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." See Part IV, Item 14 - "Notes to
Consolidated Financial Statements - Regulatory Matters."
OTS capital regulations required federal savings institutions to
satisfy three capital requirements: (i) tangible capital must not be less than
1.5% of adjusted total assets, (ii) core capital must not be less than 3% of
adjusted total assets and (iii) risk-based capital must not be less than 8.0% of
"risk-adjusted" assets. Heritage Bank exceeded these minimum standards at
December 31, 2000.
Heritage Bank's tangible and core capital includes stockholders'
equity, less intangible assets and certain investments in subsidiaries that
conduct activities not permissible for a national bank. Purchased mortgage
servicing rights may be included in tangible capital at the lower of 90% of fair
market value, 90% of original cost, or 100% of current amortized book value.
Risk-based capital is determined by assigning a risk-weight, ranging
from 0% for government securities to 100% for certain equity investments, to
each of an institution's assets, including the credit-equivalent amount of
off-balance sheet assets. An institution is required to maintain total
regulatory capital (consisting of both "core capital" and supplementary capital;
primarily comprised of the allowance for loan losses) equal to the regulatory
mandated percentage (8%) of the sum of its assets multiplied by their respective
risk-weights. The OTS also requires institutions with more than a "normal" level
of interest-rate risk ("IRR") to maintain additional risk-based capital. A
savings institution with a greater than normal IRR is required to deduct from
total capital, for purposes of calculating its risk-based capital requirement,
an amount equal to one-half the difference between the institution's measured
IRR and the normal level of IRR, multiplied by the present value of its total
assets. Based on its current capital position, most recent OTS calculated IRR,
and proposed exemption criteria, Heritage Bank would not have an IRR capital
adjustment.
14
LIQUIDITY. In 2001, as a state-chartered bank, Heritage Bank was not
subject to the same liquidity requirements as the OTS requirements for savings
associations. However, a recent FDIC exam found Heritage Bank's liquidity to be
satisfactory. A June 1999 exam by the Arizona State Banking Commission found
Valley Bank's liquidity to be satisfactory. A December 2000 examination by the
FRB found Valley Bank's liquidity to be satisfactory. Savings associations are
required to maintain qualifying liquid assets equal to a percentage designated
by the Director of the OTS (currently 4%) of the balance of its withdrawable
deposit accounts and borrowings payable in one year or less. Liquid assets for
purposes of this ratio include specified short-term assets (E.G., cash, certain
time deposits, certain banker's acceptances and short-term United States
Government obligations), and long-term assets (E.G., United States Government
obligations and certain state agency obligations). Monetary penalties will be
imposed, unless waived, for failure to meet liquidity requirements. Heritage
Bank exceeded liquidity requirements for 2000.
FEDERAL HOME LOAN BANK SYSTEM. Heritage Bank is a member of the FHLB of
Seattle, Washington. Valley Bank is a member of the FHLB of San Francisco,
California. Each FHLB serves as a reserve or central bank for its members within
its assigned region, is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB system and makes loans (advances) to its
members in accordance with the policies and the procedures established by the
FHLB board of directors. All advances from the FHLB are required to be fully
secured by sufficient collateral as is determined by the FHLB. The Banks are
required to purchase and maintain FHLB stock in an amount equal to the greater
of 1% of the unpaid principal of residential mortgage loans, or 5% of FHLB
advances outstanding.
TAXATION
GENERAL. UFC files consolidated Federal and state income tax returns
pursuant to a tax sharing agreement. Valley files separate consolidated Federal
and State of Arizona income tax returns. Generally, with some exceptions,
including Heritage Bank's reserve for bad debts discussed below, the Banks are
subject to Federal and state income taxes in the same manner as other
corporations.
The following discussion of tax matters is intended solely as a summary
and does not purport to be a comprehensive description of all the tax rules
applicable to the Banks.
TAX BAD DEBT RESERVES. For taxable years beginning prior to January 1,
1996, savings institutions, which met certain definitional tests primarily
relating to their assets and the nature of their business ("qualifying
thrifts"), were permitted to establish a reserve for bad debts and to make
annual additions thereto, which additions may, within specified formula limits,
were deducted in arriving at their taxable income.
Federal legislation repealed the reserve method of accounting for bad
debt reserves for tax years beginning after December 31, 1995. As a result,
savings associations could no longer calculate their deduction for bad debts
using the percentage-of-taxable-income method. Instead, savings associations
were required to compute their deduction based on actual charge-offs during the
taxable year or, if the savings association or its controlled group had assets
of less than $500 million, based on actual loss experience over a period of
years. This legislation also required savings associations to recapture into
income over a six-year period their post-1987 additions to their bad debt tax
reserves, thereby generating additional current tax liability. At December 31,
2001, Heritage Bank's bad debt reserve for tax purposes was approximately $3.5
million. At December 31, 2001, approximately $6,000 remained of post-1987
reserves which are to be recaptured into taxable income in 2002. For additional
information regarding federal and state income taxes, see Part IV, Item 14 -
"Notes to Consolidated Financial Statements - Income Taxes."
15
ITEM 2. PROPERTIES
The physical assets of United as of December 31, 2001 consist of a
modern banking facility located at 120 First Avenue North, Great Falls, Montana,
which is the location of the UFC corporate offices as well as the main branch
location for Heritage Bank. This facility, which is owned by Heritage Bank,
includes a full service bank with 4 drive-up lanes, a real estate department,
accounting and loan servicing departments, and support staff for Heritage Bank
and UFC. Heritage Bank also leases a drive-up detached facility located at 505
10th Avenue South, Great Falls, Montana, and owns a facility located at 601
First Avenue North, Great Falls, Montana, which is currently being leased to a
third party. See Part IV, Item 14 - "Notes to Consolidated Financial Statements
- - Leases." Heritage Bank has nine full-service branches located in Bozeman,
Chester, Fort Benton, Geraldine, Glendive, Havre, Kalispell, Missoula and
Shelby, Montana. Eight of these facilities are owned by Heritage Bank and have
drive-up services. The remaining facility is leased as of February 2002 and has
drive-up services. Heritage Bank also leases two loan production offices in
Hamilton, and Libby, Montana. In December 2001, Heritage Bank purchased an
additional facility in Great Falls, which is currently being remodeled to open a
full-service branch in June 2002.
Valley Bank leases office space for its main branch location at 3550 N.
Central Avenue, Phoenix, Arizona, and land in Scottsdale, Arizona for its full
service branch location. The full service branch banking facility in Scottsdale
is owned by Valley Bank.
ITEM 3. LEGAL PROCEEDINGS
Although United was not involved in any material pending litigation as
of February 28, 2002, it is a defendant in various legal proceedings arising in
the normal course of business.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders though the
solicitation of proxies or otherwise during the quarter ended December 31, 2001.
PART II
ITEM 5. MARKET FOR UFC'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
UFC common stock is quoted on the Nasdaq National Market under the
symbol "UBMT." The closing sale price per share of UFC common stock on February
28, 2002 was $19.00.
SHAREHOLDER DATA
As of February 11, 2002 there were approximately 200 owners of record
of UFC common stock and an estimated 875 additional beneficial holders whose
shares of UFC common stock were held in street name by brokerage houses.
16
COMMON STOCK MARKET PRICES
The quarterly (high and low) sale prices for UFC's common stock on the
Nasdaq National Market the past two years were as follows:
UBMT Stock Price
------------------
High Low
------ ------
2000 First Quarter $17.00 $11.20
Second Quarter 15.10 12.40
Third Quarter 15.20 14.00
Fourth Quarter 16.20 13.50
2001 First Quarter $16.75 $15.07
Second Quarter 17.50 16.51
Third Quarter 19.23 17.01
Fourth quarter 18.98 16.96
DIVIDEND PAYMENT HISTORY ON UFC COMMON STOCK
The UFC Board declared cash dividends of $.26 for each of the four
quarters of 2000 and 2001, for a total of $1.04 per share in each year.
The declaration and payment of future dividends by the UFC Board is
dependent upon United's net income, financial condition, economic and market
conditions, industry standards, certain regulatory and tax considerations and
limitations and other conditions. See "Supervision and Regulation." No assurance
can be given, or should be assumed, as to the amount, timing or frequency of
future dividend payments.
17
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
As Of And For The Years Ended December 31,
(Dollars in thousands, --------------------------------------------------------------------
except per share data) 2001(3) 2000(3) 1999 1998 1997(4)
---------- ---------- ---------- ---------- ----------
OPERATING DATA:
Interest income $ 26,882 $ 25,740 $ 17,517 $ 14,249 $ 5,773
Interest expense 14,824 14,956 9,538 7,393 3,157
---------- ---------- ---------- ---------- ----------
Net interest income 12,058 10,784 7,979 6,856 2,616
Provision for loan losses 1,640 1,629 204 335 492
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 10,418 9,155 7,775 6,521 2,124
Non-interest income 4,914 3,837 3,335 3,292 1,103
Non-interest expense 11,168 9,550 7,102 6,147 2,361
---------- ---------- ---------- ---------- ----------
Income before income taxes 4,164 3,442 4,008 3,666 866
Provision for income taxes 1,633 1,287 1,539 1,399 324
---------- ---------- ---------- ---------- ----------
Net income before minority interest 2,531 2,155 2,469 2,267 542
Minority interest (156) (151) -- -- --
---------- ---------- ---------- ---------- ----------
Net income $ 2,375 $ 2,004 $ 2,469 $ 2,267 $ 542
========== ========== ========== ========== ==========
PER SHARE DATA(1):
Basic earnings per share $ 1.56 $ 1.22 $ 1.47 $ 1.43 $ 1.14
Diluted earnings per share $ 1.55 $ 1.22 $ 1.47 $ 1.43 $ 1.14
Cash dividends per share $ 1.04 $ 1.04 $ 1.04 $ .75 $ --
Book value per share $ 19.35 $ 18.54 $ 17.77 $ 17.98 $ 5.78
Shares used to calculate per share
data (Book Value) 1,478 1,615 1,652 1,698 475
Shares used to calculate per share
data (Earnings - basic) 1,525 1,647 1,684 1,588 475
Shares used to calculate per share
data (Earnings - diluted) 1,530 1,647 1,684 1,588 475
FINANCIAL CONDITION DATA(2):
Assets $ 382,730 $ 363,801 $ 270,226 $ 232,561 $ 86,269
Net loans and loans held for sale 268,238 254,627 187,539 149,076 58,263
Investment securities 73,263 70,064 53,044 51,900 14,219
Deposits 282,400 261,179 179,882 167,620 70,386
FHLB advances 50,500 52,175 46,425 22,175 6,425
Other borrowings and securities sold
under agreements to repurchase
11,604 12,616 11,546 9,451 5,523
Stockholders' equity 28,597 29,947 29,359 30,528 2,748
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
Return on average assets .64% .57% .98% 1.06% .73%
Return on average stockholders'
equity 8.21 6.87 8.44 7.47 21.45
Net interest margin 3.39 3.31 3.40 3.34 3.83
Efficiency ratio 65.80 65.32 62.77 60.58 63.46
Net charge-offs to average loans .25 .44 .06 .03 .04
Nonperforming loans to total loans .91 .46 .18 .68 .47
Allowance for loan losses to total
loans 1.33 .99 .84 1.03 1.21
Nonperforming loans to allowance for
loan losses 68.74 45.96 21.88 66.07 38.48
Average equity to average assets 7.74 8.37 11.62 14.17 3.19
Dividend payout ratio 67.10 85.25 70.94 56.18 --
(1) Share and per share amounts for Heritage in 1998 and 1997 have been
restated to retroactively reflect the issuance of 475,000 shares of
United common stock in exchange for all outstanding shares of common
stock of Heritage.
(2) At year end.
(3) Includes Valley Bancorp, Inc.
(4) Historical audited balances for Heritage.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED UNITED FINANCIAL DATA
FORWARD LOOKING STATEMENTS. This Annual Report on Form 10-K contains
forward-looking statements. Statements that are not historical or current facts,
including statements about beliefs and expectations, are forward-looking
statements. Forward-looking statements involve inherent risks and uncertainties,
and important factors could cause actual results to differ materially from those
anticipated, including the following. In addition to those contained in United's
reports on file with the SEC; (i) general economic or industry conditions could
be less favorable than expected, resulting in a deterioration in credit quality,
a change in the allowance for loan losses, or a reduced demand for United's
products and services (ii) changes in the domestic interest rate environment
could reduce net interest income and could increase loan losses; (iii) changes
in the extensive laws, regulations and policies governing financial services
companies could alter United's business environment or affect operations; (iv)
the potential need to adapt the industry changes in information technology
systems, on which United is highly dependent, could present operational issues
or require significant capital spending; (v) competitive pressures could
intensify and affect United's profitability, including as a result of continued
industry consolidation, the increased availability of financial services from
non-banks, technological developments, or bank regulatory reform; (vi) the
impact of weather conditions in the geographic markets and business areas in
which United conducts it business; and (vii) capital investments in United's
businesses may not produce expected growth in earnings anticipated at the time
of the expenditure. Forward-looking statements speak only as of the date they
are made, and United undertakes no obligation to update them in light of new
information of future events.
GENERAL. UFC is the result of the combination on February 3, 1998("the
Heritage Merger") of two Montana-based savings and loan holding companies:
Heritage Bancorporation ("Heritage") and United Financial Corp. (as it existed
prior to the merger, "Old United"). Although UFC was the surviving corporation,
the merger was treated as a reverse merger for accounting purposes because the
stockholders and management of Heritage controlled the operation of UFC after
the Heritage Merger. Using purchase accounting, the historical financial
statements of UFC included in this Report for periods preceding the Heritage
Merger reflect only the operations of Heritage, while the historical financial
statements for periods after the Heritage Merger reflect combined operations.
NOTES TO PRO FORMA COMBINED FINANCIAL DATA
The pro forma combined financial data combines the historical
consolidated financial data of Heritage and Old United as of December 31,1997 as
if the Heritage Merger, which was effective on February 3, 1998, had been
effective on December 31, 1997. The unaudited pro forma combined financial data
as of December 31, 1998 and 1997 is based upon the audited annual consolidated
balance sheets of Heritage and Old United, and is presented for comparative
purposes only.
19
The following "Historical United" for 2001, 2000 and 1999 is derived
from the audited consolidated financial statements. "Historical United" for 2001
and 2000 includes Valley. "Unaudited United Only", defined herein as UFC,
Heritage Bank, and State Bank, financial data for 2000 is presented for
comparative purposes only. See Part IV, Item 14 - "Notes to Consolidated
Financial Statements - Acquisition."
(In thousands, Historical Historical Unaudited Historical
except per share data) United United United Only United
December December December December
31, 31, 31, 31,
------------ ------------ ------------ ------------
2001 2000 2000 1999
------------ ------------ ------------ ------------
Total interest income $ 26,882 $ 25,740 $ 20,783 $ 17,517
Total interest expense 14,824 14,956 12,391 9,538
------------ ------------ ------------ ------------
Net interest income 12,058 10,784 8,392 7,979
Provision for loan losses 1,640 1,629 1,330 204
------------ ------------ ------------ ------------
Net interest income after
Provision for loan losses 10,418 9,155 7,062 7,775
Total non-interest income 4,914 3,837 3,565 3,335
Total non-interest expense 11,168 9,550 7,519 7,102
------------ ------------ ------------ ------------
Income before income taxes 4,164 3,442 3,108 4,008
Provision for income tax expense 1,633 1,287 1,104 1,539
------------ ------------ ------------ ------------
Net income before minority interest 2,531 2,155 2,004 2,469
------------ ------------ ------------ ------------
Minority interest (156) (151) -- --
------------ ------------ ------------ ------------
Net income $ 2,375 $ 2,004 $ 2,004 $ 2,469
============ ============ ============ ============
Net income per share - basic $ 1.56 $ 1.22 $ 1.22 $ 1.47
============ ============ ============ ============
Weighted average shares
Outstanding - basic 1,525 1,647 1,647 1,684
============ ============ ============ ============
Net income per share - diluted $ 1.55 $ 1.22 $ 1.22 $ 1.47
============ ============ ============ ============
Weighted average shares
Outstanding - diluted 1,530 1,647 1,647 1,684
============ ============ ============ ============
RESULTS OF OPERATIONS
Net income was $2.4 million in 2001 as compared to $2.0 million in
2000. Increased loan volumes in 2001 were the primary reason for increased
interest income. This was offset by additional interest expense due to deposit
growth and interest paid on trust preferred securities, resulting in an increase
in net interest income of 11.8%. Non-interest income increased 28.9% or $1.1
million in 2001 compared to 2000. Non-interest expense increased $1.6 million in
2001 as compared to 2000, or 16.7%.
Net income for 2000 was $2.0 million, a decrease of $.5 million from
1999. While net interest income for United Only increased 5.2%, additions to the
loan loss reserve in the third quarter of 2000 and expenses related to the
merger of Heritage Bank and State Bank contributed to a decrease in net income
for 2000. United also incurred additional personnel and operating costs related
to new branches opened in Bozeman and Missoula, Montana and Scottsdale, Arizona.
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 and expressed as a percentage. Net interest income and net interest
margin 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.
20
The following table illustrates the changes in United's net interest
income due to changes in volume and changes in net interest income due to
changes in rate:
(Dollars in thousands) Year Ended December 31, Year Ended December 31,
2001 vs. 2000 2000 vs. 1999
------------------------------------ -----------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------------ -----------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ------ ------ ------ ------ ------ ------ ------
Interest earning assets:
Loans $1,891 $ (427) $ (39) $1,425 $6,040 $ 635 $ 274 $6,949
Investment and mortgage
Backed securities (232) (316) 17 (531) 780 348 85 1,213
Other interest earning
Assets 678 (158) (271) 249 186 (81) (45) 60
------ ------ ------ ------ ------ ------ ------ ------
Total interest earning
Assets 2,337 (901) (293) 1,143 7,006 902 314 8,222
Interest bearing
Liabilities:
Interest bearing
Checking 287 (399) (78) (190) 443 281 260 984
Savings deposits 283 (170) (23) 90 51 195 5 251
Time deposits 721 (353) (36) 332 1,870 522 215 2,607
Borrowings (293) (191) 121 (363) 889 417 269 1,575
------ ------ ------ ------ ------ ------ ------ ------
Total interest bearing
Liabilities 998 (1,113) (16) (131) 3,253 1,415 749 5,417
------ ------ ------ ------ ------ ------ ------ ------
Net interest income $1,339 $ 212 $ (277) $1,274 $3,753 $ (513) $ (435) $2,805
====== ====== ====== ====== ====== ====== ====== ======
The following tables set forth average balances for interest-earning
assets and interest-bearing liabilities, the interest and yield on interest
earning assets, the interest and rate paid on interest bearing liabilities, the
net interest income and net interest spread, and the net interest margin for the
years indicated:
Average Balance Sheet
(Dollars in thousands)
Year Ended December 31, 2001
-----------------------------------------------
Average Average
Balance Interest Yield/Rate
------------ ------------ -----------
Interest earning assets:
Loans (1) $268,351 $ 22,376 8.34%
Investment and mortgage backed
securities 68,648 3,863 5.63%
Other interest earning assets 18,787 643 3.42%
------------ ------------ -----------
Total interest earning assets 355,786 26,882 7.56%
Non-interest earning assets 17,960
------------
Total assets $373,746
============
Interest bearing liabilities:
Interest bearing checking $ 85,570 1,271 1.49%
Savings deposits 55,817 2,190 3.92%
Time deposits 129,247 7,475 5.78%
Borrowings 64,203 3,888 6.06%
------------ ------------ -----------
Total interest bearing liabilities $334,837 14,824 4.43%
============
Stockholders' equity $ 28,935
============
------------
Net interest income $ 12,058
============
Net interest spread 3.13%
Net interest margin(2) 3.39%
21
Average Balance Sheet
(Dollars in thousands)
Year Ended December 31, 2000
-----------------------------------------------
Average Average
Balance Interest Yield/Rate
------------ ------------ -----------
Interest earning assets:
Loans (1) $246,137 $ 20,951 8.51%
Investment and mortgage backed
securities 72,469 4,394 6.06%
Other interest earning assets 6,920 395 5.71%
------------ ------------ -----------
Total interest earning assets 325,526 25,740 7.91%
Non-interest earning assets 23,116
------------
Total assets $348,642
============
Interest bearing liabilities:
Interest bearing checking $ 71,541 1,462 2.04%
Savings deposits 49,171 2,099 4.27%
Time deposits 117,402 7,143 6.08%
Borrowings 67,604 4,252 6.29%
------------ ------------ -----------
Total interest bearing liabilities $305,718 14,956 4.89%
============
Stockholders' equity $ 29,185
============
------------
Net interest income $ 10,784
============
Net interest spread 3.02%
Net interest margin(2) 3.31%
(1) Includes nonaccrual loans.
(2) Computed on a fully taxable basis, without regard to tax equivalent
yields.
Average Balance Sheet
(Dollars in thousands)
Year Ended December 31, 1999
-----------------------------------------------
Average Average
Balance Interest Yield/Rate
------------ ------------ -----------
Interest earning assets:
Loans (1) $171,957 $ 14,001 8.14%
Investment and mortgage backed
securities 58,192 3,182 5.47%
Other interest earning assets 4,451 334 7.50%
------------ ------------ -----------
Total interest earning assets 234,600 17,517 7.47%
Non-interest earning assets 17,221
------------
Total assets $251,821
============
Interest bearing liabilities:
Interest bearing checking $ 37,143 478 1.29%
Savings deposits 47,851 1,848 3.86%
Time deposits 83,129 4,535 5.46%
Borrowings 49,610 2,677 5.40%
------------ ------------ -----------
Total interest bearing liabilities $217,733 9,538 4.38%
============
Stockholders' equity $ 29,262
============
------------
Net interest income $ 7,979
------------
Net interest spread 3.09%
Net interest margin(2) 3.40%
(1) Includes nonaccrual loans.
(2) Computed on a fully taxable basis, without regard to tax equivalent
yields.
22
As illustrated in the preceding tables, the principal reason for the
increase in net interest income from 2000 to 2001 and 1999 to 2000, was an
increase in the volume of United's interest earning assets. Interest income
increased $1.1 million in 2001 as compared to 2000. Increased loan volumes,
offset by decreased rates, represented $1.4 million of this increase. Decreases
in volumes of investment securities and in rates partially offset the increases
from loans receivable. The increased volume of loans and the consolidation of
Valley were largely responsible for the $8.2 million increase in interest income
from 1999 to 2000. Average interest rates earned on loans increased during these
periods as market interest rates increased slightly. Rates earned on investment
securities increased slightly from 1999 to 2000.
Rates paid on deposits decreased dramatically from 2000 to 2001 due to
rate cuts by the FRB and increased slightly from 1999 to 2000. Decreases due to
rates in 2001 were $.9 million in time deposits and $.2 million in borrowings.
Increased volumes in deposits offset the rate decreases somewhat for a net
decrease of $.1 million in interest expense in 2001 compared with 2000. The $.1
million decrease in interest expense in 2001 and the $1.2 million increase in
interest income combined for a net interest income increase for United of $1.3
million from $10.8 million in 2000 to $12.1 million in 2001.
A $2.4 million increase in deposit accounts from 1999 to 2000 and a $.9
million increase in short-term borrowings, resulted in a $5.4 million increase
in interest expense from 1999 to 2000. The increased interest expense in 2000
was more than offset by the increased interest income resulting from expansion
of United's loan portfolio during 2000. United's net interest income increased
$2.8 million from $8.0 million in 1999 to $10.8 million in 2000. $2.4 million of
the increase in net interest income in 2000 was attributable to the
consolidation of Valley.
PROVISION FOR LOAN LOSS. United provided $1.6 million for loan losses
in both 2001 and 2000 compared to $0.2 million in 1999. The consolidation of
Valley accounted for $0.3 million of the increase in the provision from 1999 to
2000. The remainder of the increase was due to loan growth and to larger than
expected additions to the loan loss reserve primarily related to the
deterioration of a single loan. The loan was made to a private company in the
commercial construction industry. Collateral on the loan includes accounts
receivable and equipment, and collection efforts were concluded in March 2002.
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 accounting
principles generally accepted in the United States of America ("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.
United has identified its most critical accounting policy to be that
related to the allowance for loan losses. United's allowance for loan losses
methodology incorporates a variety of risk considerations in establishing an
allowance for loan losses that management believes is appropriate. Risk factors
include historical loss experience, delinquency and charge-off trends,
collateral values and an internal loan grading system adopted by the Banks.
Other factors include the general economic environment in United's markets and,
in particular, the state of certain industries. Changes in any of the above
factors could have a significant affect on the calculation of the allowance for
loan losses in any given period.
NON-INTEREST INCOME. In addition to net interest income, United
generates significant non-interest income from a range of retail banking
services, including mortgage banking activities and service charges for deposit
services. Non-interest income increased $1.1 million in 2001 to $4.9 million
compared to $3.8 million in 2000. This increase was directly the result of
record real estate loan production activity at the Banks during 2001.
Non-interest income increased by $.5 million in 2000 to $3.8 million compared to
$3.3 million in 1999, primarily due to the consolidation of Valley.
23
NON-INTEREST EXPENSE. Non-interest expense increased $1.6 million, or
16.9%, to $11.2 million in 2001, and increased $2.4 million, or 34.5%, to $9.5
million in 2000. Salary and employee benefit expense represented $.8 million of
the 2001 increase and was the result of additional staffing and salary increases
for existing employees. The remaining $.8 million increase in 2001 was primarily
due to higher occupancy expense due in part to significantly higher utility
costs in 2001 as well as additional costs at the new branch locations. The
consolidation of Valley accounted for $2.0 million of the 2000 increase. Salary
and employee benefit expense increased $.2 million to $5.2 million in 2000,
exclusive of the impact of the Valley consolidation.
INCOME TAXES. Income tax expense increased $.3 million to $1.6 million
for 2001 and decreased $.2 million to $1.3 million for 2000 from $1.5 million
for 1999. The principal reason for the increase in 2001 was increased income.
The principal reason for the decrease in 2000 was the additional loan loss
provision in the third quarter of 2000.
FINANCIAL CONDITION
GENERAL. United's total assets increased $18.9 million to $382.7 at
December 31, 2001 from $363.8 million at December 31, 2000. The 2001 increase in
assets included a $13.5 million increase in loans receivable and loans held for
sale and a $5.8 million increase in cash and investments. Other assets decreased
$.5 million in 2001.
LOANS RECEIVABLE AND LOANS HELD FOR SALE. Net loans receivable
increased $8.9 million during 2001 to $260.1 million at December 31, 2001.
Construction loans increased $6.5 million and offset by a $1.4 million decrease
in 1-4 family residential loans and a $1.3 million decrease in 5 or more
residential loans. Agricultural loans remained constant at $24.7 million and
commercial real estate loans increased $2.4 million.
The diverse loan portfolio includes: real estate residential mortgages,
commercial and agricultural mortgages, agricultural and commercial
non-mortgages, consumer loans secured by real estate, and various consumer
installment loans. The Banks also purchase and participate in commercial and
lease financing loans. The Banks had $44.4 million and $52.9 million of
participation and purchased loans as of December 31, 2001 and 2000,
respectively.
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. In November 2000, Heritage Bank entered into an
agreement with an unrelated third party to sell all of its servicing rights
associated with Montana Board of Housing loans existing at November 30, 2000
which had outstanding principal balances of approximately $49.6 million. The
sales price was 1.03% of the outstanding principal balance at close of business
November 30, 2000, or approximately $510,000. A gain on the sale of
approximately $.3 million is included in other non-interest income for the year
ended December 31, 2000. At December 31, 2000, Heritage Bank has a receivable
related to the sale of approximately $.3 million, which was collected in March
2001. The receivable is included in other assets in the consolidated statement
of financial condition. As of December 31, 2001 and 2000, the carrying value of
originated servicing rights was approximately $158,000 and $9,000, respectively.
Heritage Bank's servicing portfolio as of December 31, 2001 was $17.2 million
and as of December 31, 2000 was $53.9 million. Approximately $49.5 million of
the servicing portfolio at December 31, 2000 was being serviced under a
short-term sub-servicing agreement which expired in February 2001.
24
During 2001, loans held for sale by United increased $4.7 million to
$7.7 million at December 31, 2001 from approximately $3.0 million at December
31, 2000. Approximately $172.2 and $110.5 million of loans were originated for
sale and $167.5 and $108.7 million of loans were sold to the secondary market
during the year ending December 31, 2001 and 2000 respectively.
INVESTMENT SECURITIES AVAILABLE FOR SALE. United's investment
securities available for sale increased $3.2 million to $73.3 million during
2001 as compared to $70 million at December 31, 2000. In 2001, United's
purchases were approximately $46.3 million while sales, maturities and paydowns
totaled approximately $43.8 million. United also recorded an unrealized gain in
market values of approximately $.8 million in 2001.
OTHER ASSETS. Real estate and other personal property owned decreased
$.3 million during 2001 to $.7 million at December 31, 2001 from $1.0 million at
December 31, 2000. The decrease resulted from the sale of real estate owned in
2001, with a sales price of $.3 million and a gain of approximately $50,000. The
balance held at December 31, 2001 is primarily an idle facility which United was
required by its regulators to reclassify to real estate owned in 2000. At
December 31, 2001 this idle facility had a net carrying value of $.5 million.
Other personal property remained relatively constant during 2001.
Restricted Stock increased $.3 million during 2001, primarily due to
the receipt of FHLB stock dividends.
Premises and equipment increased $.2 million during 2001 due to the $.4
million purchase of land and a building in Great Falls, Montana for a new branch
location to be opened in 2002. Purchases of other premises and equipment
totaling $.4 million consisted of equipment and computer upgrades at the main
facilities and various branch locations. The purchases were offset by $.6
million in depreciation expense on existing premises and equipment.
Goodwill and identifiable intangibles decreased $.1 million in 2001 due
to amortization. Components of goodwill are currently being amortized over 15
and 25 years. Beginning January 1, 2002, approximately $3.4 million of net
goodwill will no longer be subject to amortization. See Part IV, Item 14-"Notes
to Consolidated Financial Statement-New Accounting Pronouncements."
DEPOSITS AND BORROWINGS. United experienced a net increase in deposits
of $21.2 million in 2001. The increase in deposits resulted from a combination
of competitive rates on all deposit offerings, and United's commitment to
community banking, both of which have attracted depositors.
FHLB advances and securities sold under agreements to repurchase
decreased $3.4 million in 2001. United was able to repay a net $1.7 million in
FHLB advances in 2001. Securities sold under agreement to repurchase decreased
$1.7 as lower interest rates decreased customer demand. Line of credit
borrowings and federal funds purchased had a net decrease of $.3 million.
CAPITAL RESOURCES. United has issued and outstanding $3.0 million of
Trust Preferred Securities. See Part IV, Item 14-"Notes to Consolidated
Financial Statements-Trust Preferred Securities."
NONPERFORMING 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 nonperforming. However, not all loans past due 90 days
25
automatically result in the non-accrual of interest income. If a 90 days past
due loan has adequate collateral, or is FHA insured or VA guaranteed, and
management concludes that loss of principal and interest would likely not be
realized, then interest income will continue to be accrued.
26
The following schedule details the amounts of United's nonperforming
assets, consisting of nonaccrual loans, accruing loans past due over 90 days and
restructured loans.
(Dollars in thousands) Pro Forma
Combined (1)
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Principal Balances:
Accruing loans past due
over 90 days $ 294 $ 258 $ 117 $ 387 $ 437
Non-accrual loans 2,114 903 230 594 4
------------ ------------ ------------ ------------ ------------
Total $ 2,408 $ 1,161 $ 347 $ 981 $ 441
------------ ------------ ------------ ------------ ------------
Interest:
Due on non-accrual loans $ 224 $ 264 $ 14 $ 12 $ --
Included in income none none none none none
(1) See notes to pro forma combined financial data.
United is required to review, classify and report to its Board of
Directors its assets on a regular basis and classify them as "substandard"
(distinct possibility that some loss will be sustained), "doubtful" (high
likelihood of loss), or "loss" (uncollectible). Adequate valuation allowances
are required to be established for assets classified as substandard or doubtful
in accordance with GAAP. If an asset is classified as a loss, the institution
must either establish a specific valuation allowance equal to the amount
classified as loss or charge off such amount. At December 31, 2001, United had
$.8 million of reported doubtful assets and no assets classified as loss. At
December 31, 2000, United had $.4 million of reported doubtful assets and no
assets classified as loss. At December 31, 2001, 2000 and 1999, United had $1.9
million, $.8 million and $.5 million, respectively, of reported substandard
assets. As a percent of total assets, substandard assets were approximately
.50%, .21% and .19% at December 31, 2001, 2000 and 1999, respectively.
PROVISION FOR LOAN LOSSES. The following schedule details changes in
United's loan loss reserve at December 31 for each of the five years indicated:
(Dollars in thousands) Pro Forma Combined (1)
---------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December
31, 2001 31, 2000 31, 1999 31, 1998 31, 1997
-------------- -------------- -------------- -------------- --------------
Balance beginning of year $ 2,526 $ 1,586 $ 1,485 $ 1,146 $ 463
Provision for loan losses 1,640 1,629 204 340 717
Acquired from State Bank -- -- -- 43 --
Acquired from Valley -- 393 -- -- --
Charge-offs:
Residential (5) (3) (16) -- --
Commercial (481) (1,073) (59) (4) (10)
Consumer (215) (62) (34) (52) (25)
-------------- -------------- -------------- -------------- --------------
Total charge-offs (701) (1,138) (109) (56) (35)
Recoveries 38 56 7 12 1
-------------- -------------- -------------- -------------- --------------
Net charge-offs (663) (1,082) (102) (44) (34)
-------------- -------------- -------------- -------------- --------------
Balance end of year end $ 3,503 $ 2,526 $ 1,586 $ 1,485 $ 1,146
============== ============== ============== ============== ==============
Allowance for loan losses to
total loans at year end 1.33% .99% .84% 1.03% 1.21%
============== ============== ============== ============== ==============
Net charge-offs to average
loans .25% .44% .06% .04% .04%
============== ============== ============== ============== ==============
(1) See notes to pro forma combined financial data.
27
The following schedule allocates the loan loss reserve based on
management's judgment of potential losses in the respective areas. While
management has allocated the reserve to various portfolio segments for purposes
of this table, the reserve is general in nature and is available for the
portfolio in its entirety.
(Dollars in thousands)
December 31, 2001 December 31, 2000 December 31, 1999
-------------------------- -------------------------- --------------------------
% of loans % of loans % of loans
in each in each in each
category to category to category to
Allowance total loans Allowance total loans Allowance total loans
------------ ------------ ------------ ------------ ------------ ------------
Real estate loans:
1 - 4 residential $ 112 3.2% $ 123 4.9% $ 128 18.1%
5 or more residential 66 1.9 63 2.5 52 2.8
Construction 256 7.3 126 5.0 84 5.6
Commercial and agricultural 1,678 47.9 1,107 43.8 488 24.9
Non-real estate loans:
Commercial and agricultural 956 27.3 793 31.4 712 37.2
Consumer 435 12.4 314 12.4 122 11.4
------------ ------------ ------------ ------------ ------------ ------------
Total $ 3,503 100.0% $ 2,526 100.0% $ 1,586 100.0%
============ ============ ============ ============ ============ ============
(Dollars in thousands)
Pro Forma Combined (1)
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
% of loans % of loans
in each in each
category to category to
Allowance total loans Allowance total loans
------------ ------------ ------------ ------------
Real estate loans:
1 - 4 residential $ 124 18.7% $ 387 45.4%
5 or more residential 66 4.6 67 7.1
Construction 92 6.4 55 5.8
Commercial and agricultural 462 26.0 217 15.1
Non-real estate loans:
Commercial and agricultural 601 31.6 259 17.3
Consumer 140 12.7 161 9.3
------------ ------------ ------------ ------------
Total $ 1,485 100.0% $ 1,146 100%
============ ============ ============ ============
(1) See notes to pro forma combined financial data.
28
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED. Total real estate and
other personal property owned ("REO") of United was $.7 million, $1.0 million
and $14,000 at December 31, 2001, 2000 and 1999, respectively. The schedule
below details properties both held for sale and investment by United as of the
dates indicated.
(Dollars in thousands)
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
REO held for sale $ 92 $ 332 $ --
Allowance for possible losses -- -- --
------------ ------------ ------------
Total REO held for sale $ 92 $ 332 $ --
============ ============ ============
REO held for investment $ 547 $ 547 $ --
Accumulated depreciation (35) (15) --
------------ ------------ ------------
Total REO held for investment $ 512 $ 532 $ --
============ ============ ============
As a percent of total assets .16% .24% .0%
============ ============ ============
Other personal property
held for sale $ 64 $ 158 $ 14
============ ============ ============
As a percent of total assets .02% .04% .01%
============ ============ ============
ASSET/LIABILITY MANAGEMENT. United's earnings depend to a large extent
on the level of its "net interest income." Net interest income depends upon the
difference (referred to as "interest rate spread") between the yield on United's
loan and investment portfolios and interest-earning cash balances
("interest-earning assets"), and the rates paid on its deposits and borrowings
("interest-bearing liabilities"). Net interest income is further affected by the
relative amounts of United's interest-earning assets and interest-bearing
liabilities. In recent years, United's interest-earning assets have exceeded
interest-bearing liabilities. However, when interest-earning assets decrease as
a result of non-accrual loans and investments in non-interest earning assets,
net interest income and interest rate spread also decrease and any continued
decrease in the level of interest-earning assets would generally result in a
negative impact on earnings.
One of the primary objectives of United's management has been to
restructure United's balance sheet to reduce its vulnerability to changes in
interest rates (Interest Rate Risk). Savings institutions historically have
suffered from a mismatch in the term to maturity of their assets and
liabilities, with mortgage loan assets tending to be of a much longer term than
deposits, the primary liabilities of savings institutions. In periods of rising
interest rates, this mismatch can render savings institutions vulnerable to
increases in costs of funds (deposits and borrowings) that can outstrip
increases in returns on longer-term fixed rate loans and investments, resulting
in a decrease in positive interest rate spread and lower earnings.
Several strategies have been employed by United to minimize the
mismatch of asset and liability maturities. For the past several years, Heritage
Bank has maintained a policy of selling the majority of newly-originated
long-term (15 to 30-year maturity) fixed-rate mortgage loans to the secondary
market. These loans are sold at their outstanding principal balance, which is
the prearranged contract purchase price, and therefore, no gain or loss is
realized at sale. United promotes the origination and retention of loans
providing for periodic interest rate adjustments, shorter terms to maturity or
balloon provisions. United also emphasizes investment in adjustable rate or
shorter-term mortgage-backed securities and other interest-earning investments.
When maturities of loans increase, United offsets the increased interest rate
risk with matching funds and maturities with FHLB borrowings.
29
The following tables provide information regarding the maturity of
loans included in United's portfolio as of December 31, 2001. The amounts
reflected in the following table give no effect to assumptions regarding loan
prepayments or payoffs. Loans with variable rates of interest are classified as
due when the loan principal balances are contractually due, not when the
interest rate reprices.
(Dollars in thousands)
December 31, 2001
-----------------------------------------------------------
5 Years
1 Year or 1 - 5 and
Less Years Beyond Total
------------- ------------ ------------- ------------
Loans:
Loans secured by real estate:
Adjustable rate (all
property types) $ 27,155 $ 42,291 $ 23,900 $ 93,346
1-4 family residential 3,964 8,416 19,809 32,189
Multi-family and commercial 2,208 7,837 21,172 31,217
Construction and undeveloped
land 16,619 4,266 2,892 23,777
------------- ------------ ------------- ------------
Loans secured by real
estate 49,946 62,810 67,773 180,529
Commercial non-real
estate(1) 10,429 33,352 5,228 49,009
Agricultural non-real estate 3,152 4,355 634 8,141
Consumer(2) 1,967 17,499 3,379 22,845
------------- ------------ ------------- ------------
Net loans $ 65,494 $118,016 $ 77,014 $260,524
============= ============ ============= ============
Total loans
due after
December 31,
2002
------------
Fixed interest rates $128,839
Floating or adjustable rates
or balloon payments 66,191
-------------
$195,030
=============
(1) Includes loans on commercial savings accounts
(2) Includes consumer loans secured by real estate
30
The following table sets forth the book value, maturities and weighted
average yield of United's investment portfolio at the dates indicated:
(Dollars in thousands)
December 31, 2001
--------------------------------------------------------
10 years
1 Year 1 - 5 5 - 10 and
or Less years years beyond Total
-------- -------- -------- -------- --------
U.S. government and agencies $ 12,482 $ 3,620 $ 11,596 $ 3,009 $ 30,707
Mortgage-backed securities 210 2,392 8,119 28,561 39,282
Municipal bonds -- 181 201 1,363 1,745
Other -- -- 1,487 42 1,529
-------- -------- -------- -------- --------
Total securities $ 12,692 $ 6,193 $ 21,403 $ 32,975 $ 73,263
======== ======== ======== ======== ========
Weighted average yield 2.39% 6.29% 6.04% 6.15% 5.49%
December 31, 2000
--------------------------------------------------------
10 years
1 Year 1 - 5 5 - 10 and
or Less years years beyond Total
-------- -------- -------- -------- --------
U.S. government and agencies $ 998 $ 16,978 $ 5,896 $ -- $ 23,872
Mortgage-backed securities -- 3,158 5,938 32,440 41,536
Municipal bonds -- 381 562 1,775 2,718
Other -- 495 1,415 28 1,938
-------- -------- -------- -------- --------
Total securities $ 998 $ 21,012 $ 13,811 $ 34,243 $ 70,064
======== ======== ======== ======== ========
Weighted average yield 6.67% 6.07% 6.51% 6.48% 6.43%
December 31, 1999
--------------------------------------------------------
10 years
1 Year 1 - 5 5 - 10 and
or Less years years beyond Total
-------- -------- -------- -------- --------
U.S. government and agencies $ 200 $ 4,809 $ 4,785 $ -- $ 9,794
Mortgage-backed securities 1,050 4,391 4,026 29,988 39,455
Municipal bonds 3 376 300 1,257 1,936
Other -- 478 1,350 31 1,859
-------- -------- -------- -------- --------
Total securities $ 1,253 $ 10,054 $ 10,461 $ 31,276 $ 53,044
======== ======== ======== ======== ========
Weighted average yield 6.98% 7.05% 7.14% 6.30% 6.62%
STOCKHOLDERS' EQUITY. Stockholders' equity at December 31, 2001 was
$28.6 million, or 7.47% of total assets, down $1.3 million from $29.9 million,
or 8.23% of total assets, at December 31, 2000. At December 31, 2001, book value
was $19.35 per share. The decrease in stockholders' equity is primarily due to
the payment of $1.6 million in dividends on UFC's common stock, the purchase of
137,400 shares of common stock for $2.5 million from unrelated third parties.
This decrease was offset by net income of $2.4 million for 2001 and a decrease
in net unrealized losses on securities of $.4 million.
BUSINESS SEGMENT RESULTS. United manages its operations and prepares
management reports with a primary focus on geographical areas. Operating segment
information, including earnings performance on an operating cash basis, is
presented in the following schedule. United allocates centrally provided
services to the business segments based upon estimated usage of those services.
The operating segment identified as other includes UFC and eliminations of
transactions between segments.
31
Heritage Bank includes United's commercial banking operations in twelve
Montana cities. The bank experienced steady growth in 2001 with loans increasing
$21.6 million or 11.2% over 2000 and deposits increasing $39.1 million or 21.1%.
The increase in deposits was primarily in the new Missoula and Bozeman branches.
Net income increased 34.4% to $2.6 million from $1.9 million in 2000. The
increase was primarily due to the increase in net interest income resulting from
FRB interest rate cuts. Net interest income increased 20.7% to $9.4 million in
2001, non-interest income increased 35.9% to $4.5 million, and non-interest
expense increased 25.0% to $8.3 million.
Valley experienced moderate growth in 2001 with loans increasing $1.4
million or 3.1% over 2000 and deposits decreasing $4.0 million or 6.4% over
2000. Net income increased 17.1% to $.4 million from $.3 million in 2000. Net
interest income increased $.4 million to $2.8 million in 2001, non-interest
income decreased 10.0% to $.4 million, and non-interest expense increased 16.9%
to $2.4 million.
The following table sets forth certain business operating segment
information for the years ended December 31, 2001, 2000 and 1999:
(In thousands) Heritage
Bank Valley Other Consolidated
------------ ------------ ------------ ------------
2001:
Net interest income $ 9,350 $ 2,828 $ (120) $ 12,058
Provision for loan
losses 1,387 253 -- 1,640
------------ ------------ ------------ ------------
Net interest income
after provision 7,963 2,575 (120) 10,418
Non-interest income 4,509 404 1 4,914
Non-interest expense 8,309 2,373 486 11,168
------------ ------------ ------------ ------------
Income before income
taxes 4,163 606 (605) 4,164
Income taxes (benefit) 1,593 222 (182) 1,633
------------ ------------ ------------ ------------
Income before minority
interest 2,570 384 (423) 2,531
Minority interest -- -- (156) (156)
------------ ------------ ------------ ------------
Net income (loss) $ 2,570 $ 384 $ (579) $ 2,375
============ ============ ============ ============
Total assets $ 309,253 $ 70,355 $ 3,122 $ 382,730
Loans receivable, net $ 214,661 $ 45,835 $ 28 $ 260,524
Total deposits $ 224,097 $ 58,697 $ (394) $ 282,400
Total stockholders'
equity $ 23,896 $ 8,203 $ (3,503) $ 28,597
32
(In thousands) Heritage State
Bank Bank Valley Other Consolidated
------------ ------------ ------------ ------------ ------------
2000:
Net interest income $ 7,748 $ 600 $ 2,391 $ 45 $ 10,784
Provision for loan
losses 1,330 -- 299 -- 1,629
------------ ------------ ------------ ------------ ------------
Net interest income
after provision 6,418 600 2,092 45 9,155
Non-interest income 3,319 67 449 2 3,837
Non-interest expense 6,649 470 2,030 401 9,550
------------ ------------ ------------ ------------ ------------
Income before income
taxes 3,088 197 511 (354) 3,442
Income taxes (benefit) 1,176 76 183 (148) 1,287
------------ ------------ ------------ ------------ ------------
Income before minority
interest 1,912 121 328 (206) 2,155
Minority interest -- -- -- (151) (151)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,912 $ 121 $ 328 $ (357) $ 2,004
============ ============ ============ ============ ============
Total assets $ 275,801 $ 17,587 $ 71,024 $ (611) $ 63,801
Loans receivable, net $ 193,079 $ 14,059 $ 44,476 $ 32 $ 51,646
Total deposits $ 185,046 $ 13,518 $ 62,679 $ (64) $ 61,179
Total stockholders'
equity $ 20,681 $ 2,124 $ 8,106 $ (964) $ 29,947
(In thousands) State
Heritage Bank Other Consolidated
------------ ------------ ------------ ------------
1999:
Net interest income $ 7,265 $ 444 $ 270 $ 7,979
Provision for loan
losses 110 93 -- 204
------------ ------------ ------------ ------------
Net interest income
after provision 7,155 351 270 7,775
Non-interest income 3,164 43 128 3,335
Non-interest expense 6,323 489 290 7,102
------------ ------------ ------------ ------------
Income (loss) before
income taxes 3,996 (95) 108 4,008
Income taxes (benefit) 1,537 (36) 39 1,539
------------ ------------ ------------ ------------
Net income (loss) $ 2,459 $ (59) $ 69 $ 2,469
============ ============ ============ ============
Total assets $ 249,074 $ 19,087 $ 2,065 $ 270,226
Loans receivable, net $ 171,204 $ 15,007 $ 136 $ 186,347
Total deposits $ 168,225 $ 12,045 $ (388) $ 179,882
Total stockholders'
equity $ 20,151 $ 1,986 $ 7,222 $ 29,359
33
LIQUIDITY AND CAPITAL RESOURCES. United's primary sources of funds are
deposits, repurchase agreements, FHLB borrowings, proceeds from loan sales, and
loan and mortgage-backed securities repayments. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, economic conditions and competition. In a period of declining
interest rates, it is anticipated that mortgage prepayments would increase. As a
result, these proceeds from mortgage prepayments generally would be invested in
lower yielding loans or other investments which have the effect of reducing
interest income. In a period of rising interest rates, it is anticipated that
mortgage prepayments would decrease and the proceeds from such prepayments
generally would be invested in higher yielding loans or investment which would
have the effect of increasing interest income.
United's liquidity, represented by cash and cash equivalents, is a
result of its operations, investing and financing activities. There activities
are summarized below for the years ended December 31, 2001, 2000 and 1999.
(Dollars in thousands) For the Year Ended December 31,
2001 2000 1999
----------------------------------------
Net Income $ 2,375 $ 2,004 $ 2,469
Adjustments to reconcile net income to net
cash provided (used) by operating activities (2,731) 839 4,981
---------- ---------- ----------
Net cash provided (used) by operating activities (356) 2,843 7,450
Net cash (used) by investing activities (14,191) (28,890) (51,238)
Net cash provided by financing activities 17,123 34,041 35,989
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,576 7,994 (7,799)
Cash and cash equivalents at beginning of year 19,451 11,457 19,256
---------- ---------- ----------
Cash and cash equivalents at end of year $ 22,027 $ 19,451 $ 11,457
========== ========== ==========
The primary investing activities of United are the origination of loans
held for sale and the purchase of investment and mortgage-backed securities.
During the years ended December 31, 2001, 2000 and 1999, United's loan
originations totaled $172.2 million, $110.5 million and $114.6 million,
respectively. Purchase of securities available for sale totaled $46.3 million,
$7.8 million and $33.9 million for the years ended December 31, 2001, 2000 and
1999, respectively. During 2000 a net $.7 million of cash ($1.9 million paid in
cash consideration less $1.2 million in cash and cash equivalents purchased) was
used to acquire shares of Valley.
During 2001, 2000 and 1999, investing activities were funded primarily
by principal repayments on loans and securities available for sale, the maturity
of securities available for sale, and the sales of loans and securities
available for sale totaling $211.3 million, $118.3 million, and $150.1 million,
respectively.
The major sources of cash flows from financing activities are deposits
into savings accounts and additional borrowings. The major uses of cash flows
from financing activities are withdrawals from savings accounts, payments on
borrowings, purchases of common stock, and payment of dividends to stockholders.
For the years ended December 31, 2001, 2000, and 1999 the net increase in cash
flows from financing activities was $17.1 million, $34.0 million and $36.0
million, respectively.
The Banks' most liquid assets are cash and cash in banks and highly
liquid, short-term investments. The levels of these assets are dependent on the
Banks' operating, financing, lending, and investing activities during any given
period.
Liquidity management of the Banks is both a daily and long-term
function of United's management strategy. Excess funds are generally invested in
FHLB overnight funds. If the Banks should require funds beyond their ability to
generate them internally, additional sources of funds are available through the
use of FHLB advances. At December 31, 2001 the Banks had outstanding borrowings
of $62.1 million which included $50.5 million of FHLB advances, $9.6 million of
repurchase agreements and $2.0 million of other borrowed money.
34
At December 31, 2001, the Banks had outstanding commitments to
originate loans of $8.8 million, on 1-4 family mortgages at fixed interest
rates. These loans are to be secured by properties located in the Bank's primary
market areas. Other outstanding commitments at December 31, 2001 for the Banks
include $35.9 million in unused lines of credit, $1.0 million in variable rate
loan commitments, $2.6 million in unfunded Bankcard arrangements, and $.2
million in letters of credit. The Banks anticipate that they will have
sufficient funds available to meet current loan commitments. Certificates of
deposit scheduled to mature in less than one year from December 31, 2001 totaled
$88.6 million.
RELATED PARTIES. Central Financial Services ("CFS") provides various
management services for United, including accounting, tax and insurance advisory
services, and investment, personnel and regulatory consulting. CFS is owned by
UFC's Chairman of the Board of Directors and largest shareholder. The charges
for their services were $.4 million, $.3 million and $.3 million for the years
ended December 31, 2001, 2000, and 1999, respectively.
The Banks acquire loan participations from a bank controlled by UFC's
Chairman of the Board of Directors. At December 31, 2001 and 2000, the
outstanding balances of loans purchased from this bank were $5.1 million and
$5.8 million, respectively.
Banker's Resource Center ("BRC") provides data processing services for
UFC and Heritage Bank. Heritage Bank has a 14% ownership interest in BRC, a
computer data center. The charges for BRC's services were $.5 million, $.5
million and $.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
As of December 31, 2001 and 2000, the Board of Directors and officers
of United had approximately $2.9 million and $2.6 million, respectively, on
deposit with subsidiary banks.
At December 31, 2001 and 2000, the Board of Directors and executive
officers of United had $1.7 million and $1.8 million, respectively, in
outstanding loans with subsidiary banks. These loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable loans with equivalent risk of collectibility.
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 fails to make three monthly payments
within 120 days after the sale of the loan. The balance of loans sold with
repurchase provisions remaining at December 31, 2001 is approximately $7.6
million. There were no loans repurchased during 2001 and 2000.
In December 2001, Heritage Bank entered into a five-year service
contract for data processing services with BRC. In October 1995, Valley entered
into a seven-year service contract for data processing services with an
independent third party. In the event of early termination of either of these
service contracts by the Banks, the Banks have 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.
United is a defendant in legal proceedings arising in the normal course
of business. In the opinion of management, the disposition of pending litigation
will not have a material effect on United's consolidated financial position,
results of operations, or liquidity.
At December 31, 2001, Heritage Bank had loan commitments outstanding on
1-4 family fixed rate mortgages totaling approximately $8.8 million. These loans
were approved prior to December 31, 2001 to be closed and funded in 2002.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. Market risk is the risk of loss in a financial instrument
arising from adverse changes in market rates/prices such as interest rates,
foreign currency exchange rates, commodity prices and equity prices. Since
United's earnings depend on its level of interest rate spread, its primary
market risk exposure is interest rate risk ("IRR").
INTEREST RATE RISK. United has established a formal IRR policy, and the
Banks have an Asset/Liability Management Committee ("ALCO") and an Investment
Committee, which meet at least quarterly to review and report on management's
efforts to minimize IRR. Several asset/liability management strategies have been
employed by United to minimize its exposure to IRR. These include selling most
newly-originated long-term fixed-rate mortgages, promoting the origination and
retention of loans providing for periodic interest rate adjustments, shorter
terms to maturity or balloon provisions, and investing in adjustable rate or
shorter-term mortgage-backed securities and other interest-earning investments.
The Asset/Liability Management Committee utilizes an institutional
funds management service detailed simulation model to quantify the estimated
exposure of net interest income ("NII") to sustained interest rate changes. The
model predicts the impact of changing interest rates on the interest income
received and interest expense paid on assets and liabilities. This sensitivity
analysis is compared to ALCO policy limits which specify a maximum tolerance
level for NII given a 100 basis point (bp) rise or decline in interest rates.
The following summarizes the sensitivity analysis for the Banks as of
December 31, 2001, the most recent information available. Management believes
there has been no material change in interest rate risk since December 31, 2001.
For additional information, see Management's Discussion and Analysis of
Financial Condition and Results of Operations included herein in Item 7.
HERITAGE BANK
Estimated increase (decrease)
in net interest income: +100 bp Maximum -100 bp
------- ------- -------
0-90 days $ (15,294) $ (30,805)
91-365 days (186,053) (500,000) 29,317
2 years (465,296) 90,668
3 years (644,135) (1,500,000) 121,426
VALLEY BANK
Estimated increase (decrease)
in net interest income: +100 bp Maximum -100 bp
------- ------- -------
0-90 days $ 1,909 $ (11,176)
91-365 days 2,476 (146,000) (33,984)
2 years 3,421 (62,493)
3 years 36,760 (439,000) (123,632)
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.
36
INTEREST RATE SENSITIVITY OF THE ECONOMIC VALUE OF EQUITY. Mismatches
of interest rate repricing between assets and liabilities create interest rate
risk. Interest rate risk affects the market value of equity, also called the
economic value of equity ("EVE"). Measurement of the EVE is an attempt to
establish a methodology to gauge the potential for the reduction of future
earnings and stockholders' equity resulting from both lower net interest income
("NII") and lower EVE caused by changes in market interest rates. EVE is the
difference between United's depository portfolio value and its loans receivable
portfolio value. EVE thus provides a leading indicator of future potential
changes in both NII and stockholders' equity.
Heritage Bank and Valley Bank have both established maximum percentage
changes for EVE at 1.5% of total assets, given an 100 basis point change in
interest rates. The change in EVE at year end was as follows:
Heritage Bank Valley Bank
EVE change in $:
2001 (3,738) (1,086)
2000 (3,093) Not available
Percent to Total Assets:
2001 1.21% 1.55%
2000 1.12% Not available
Heritage Bank periodically reviews and makes changes to established
limits for EVE changes due to mergers and other market factors. Though Valley
Bank is slightly over 1.5% of assets, management considers this to be within
prudent standards.
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operation results.
These hypothetical estimates are based upon numerous assumptions, including the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of assets and liability cash flows
and others. The EVE analysis does not reflect actions that Heritage Bank or
Valley Bank might take in responding to or anticipating changes in interest
rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The management of United has prepared and is responsible for the
consolidated financial statements of United. These statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America applied on a consistent basis.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 17, 2001, UFC dismissed KPMG LLP as UFC's independent
accountants and engaged Moss Adams LLP as its new independent accountants. The
decision to change UFC's accounting firm was approved by UFC's Audit Committee
of the Board of Directors as empowered by the Board of Directors. KPMG LLP
reports on UFC's financial statements as of and for the years ended December 31,
2000 and December 31, 1999 contained no adverse opinion or a disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
During UFC's fiscal years ended December 31, 2000 and 1999 and the
subsequent interim period through August 17, 2001, there were no disagreements
between UFC and KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG LLP, would have
caused them to make reference to the subject matter of the disagreements in
connection with their reports on the financial statements.
37
On August 17, 2001, UFC engaged the accounting firm Moss Adams LLP.
Prior to August 17, 2001, UFC had not consulted with Moss Adams LLP regarding:
(i) the application of accounting principles to a specified transaction either
completed or proposed; (ii) the type of audit opinion that might be rendered on
the UFC's financial statements; or (iii) any matter that was the subject of a
disagreement with UFC's former accountant or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in United's
definitive Proxy Statement for its 2002 Annual Meeting of Shareholders is
incorporated herein by reference. Information regarding executive officers is
set forth in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation and
Other Information," "Compensation of Directors" and "Stock Price Performance
Graph" in the Proxy Statement is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Securities Ownership of
Certain Beneficial Owners" and "Securities Ownership of Management" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions between Management and the Company" in the Proxy Statement
is incorporated herein by reference.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS:
The following consolidated financial statements of United Financial Corp.
are included herein as follows:
Pages in Annual Report
----------------------
INDEPENDENT AUDITORS' REPORTS F-1
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION F-3
December 31, 2001 and 2000
CONSOLIDATED STATEMENTS OF INCOME - YEARS ENDED F-4
December 31, 2001, 2000, and 1999
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME - YEARS ENDED F-5
December 31, 2001, 2000, and 1999
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED F-6
December 31, 2001, 2000, and 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
(2) FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted because they are
inapplicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(3) EXHIBITS.
Exhibit number 21.1 Subsidiaries of the Company
Exhibit number 23.1 Consent of Moss Adams LLP
Exhibit number 23.2 Consent of KPMG LLP
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2001
None
39
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
United Financial Corp. and Subsidiaries
Great Falls, Montana
We have audited the accompanying consolidated statement of financial condition
of United Financial Corp. and subsidiaries as of December 31, 2001, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of United
Financial Corp. and subsidiaries as of December 31, 2000 and 1999, were audited
by other auditors whose report dated February 16, 2001, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Financial
Corp. and subsidiaries as of December 31, 2001, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Moss Adams LLP
Spokane, Washington
February 21, 2002
F-1
KPMG LLP
Independent Auditors' Report
The Board of Directors and Stockholders
United Financial Corp.:
We have audited the accompanying consolidated statement of financial condition
of United Financial Corp. and subsidiaries as of December 31, 2000, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Financial
Corp. and subsidiaries as of December 31, 2000, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
February 16, 2001
F-2
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
DECEMBER 31,
-------------------------------
ASSETS 2001 2000
------ ------------- -------------
Cash and cash equivalents $ 22,026,493 19,450,725
Securities available-for-sale 73,262,867 70,063,913
Loans held for sale 7,713,306 2,980,839
Loans receivable, net 260,524,282 251,646,258
Restricted stock, at cost 3,993,600 3,708,650
Accrued interest receivable 2,768,684 3,350,862
Premises and equipment, net 6,609,322 6,386,714
Real estate and other personal property owned 667,528 1,021,651
Deferred tax asset, net 553,534 443,858
Goodwill, net of accumulated amortization of $723,615 and
$533,545 at December 31, 2001 and 2000, respectively 3,076,065 3,170,686
Identifiable intangibles, net of accumulated amortization
of $238,606 and $169,255 at December 31, 2001 and 2000,
respectively 398,710 468,061
Other assets 1,135,675 1,108,686
------------- -------------
$ 382,730,066 363,800,903
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Non-interest bearing deposits $ 46,688,634 33,348,678
Interest bearing deposits 235,711,604 227,830,608
Federal Home Loan Bank advances 50,500,000 52,175,000
Securities sold under agreements to repurchase 9,603,651 11,365,699
Line of credit 1,000,000 1,250,000
Federal funds purchased 1,000,000 --
Advances from borrowers for taxes and insurance 163,668 462,069
Income taxes payable 503,308 308,630
Accrued interest payable 1,928,736 2,474,944
Trust preferred securities 3,000,000 --
Accrued expenses and other liabilities 1,188,303 1,113,104
------------- -------------
Total liabilities 351,287,904 330,328,732
------------- -------------
Minority interest 2,844,947 3,524,691
------------- -------------
Commitments and contingencies (Note 23)
Stockholders' equity:
Preferred stock, no par value; authorized 2,000,000
shares; no shares issued and outstanding -- --
Common stock, no par value; authorized 8,000,000
shares; 1,698,552 and 1,698,312 shares issued
at December 31, 2001 and 2000, respectively 28,005,149 28,001,579
Retained earnings, substantially restricted 4,339,060 3,541,106
Treasury stock, at cost, 220,400 and 83,000 shares
at December 31, 2001 and 2000, respectively (4,054,712) (1,515,250)
Accumulated other comprehensive gain (loss),
net of taxes 307,718 (79,955)
------------- -------------
Total stockholders' equity 28,597,215 29,947,480
------------- -------------
$ 382,730,066 363,800,903
============= =============
See accompanying notes to consolidated financial statements.
F-3
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
YEARS ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Interest income:
Loans receivable $ 22,375,775 20,950,657 14,001,573
Mortgage-backed securities 2,910,051 3,898,950 2,747,649
Other investment securities 953,251 495,207 432,987
Other interest-earning assets 643,033 395,117 335,258
------------ ------------ ------------
Total interest income 26,882,110 25,739,931 17,517,467
------------ ------------ ------------
Interest expense:
Deposits 10,936,144 10,703,543 6,861,135
Federal Home Loan Bank advances 3,198,764 3,444,117 2,171,681
Securities sold under agreements to repurchase 487,822 672,773 505,199
Other borrowings 95,738 135,222 --
Trust preferred securities 105,980 -- --
------------ ------------ ------------
Total interest expense 14,824,448 14,955,655 9,538,015
------------ ------------ ------------
Net interest income 12,057,662 10,784,276 7,979,452
Provision for loan losses 1,640,125 1,628,569 203,500
------------ ------------ ------------
Net interest income after provision for
loan losses 10,417,537 9,155,707 7,775,952
------------ ------------ ------------
Non-interest income:
Gain on sale of loans 3,426,147 2,269,504 2,347,358
Loan servicing fees 222,955 296,474 211,732
Customer service charges 788,310 569,246 402,070
Gain on sale of securities 157,916 -- 30,357
Equity in income of Valley Bancorp, Inc. -- -- 126,367
Other 319,070 701,295 217,042
------------ ------------ ------------
Total non-interest income 4,914,398 3,836,519 3,334,926
------------ ------------ ------------
Non-interest expense:
Compensation and benefits 6,004,634 5,165,880 3,895,030
Occupancy and equipment 1,432,772 1,139,624 742,331
Deposit insurance premiums 121,930 102,241 121,088
Data processing fees 761,517 671,237 398,022
Other 2,846,986 2,470,642 1,945,896
------------ ------------ ------------
Total non-interest expense 11,167,839 9,549,624 7,102,367
------------ ------------ ------------
Income before income taxes and minority interest 4,164,096 3,442,602 4,008,511
Income taxes 1,633,306 1,287,477 1,539,239
------------ ------------ ------------
Income before minority interest 2,530,790 2,155,125 2,469,272
Minority interest (156,065) (151,171) --
------------ ------------ ------------
Net income $ 2,374,725 2,003,954 2,469,272
============ ============ ============
Basic earnings per share $ 1.56 1.22 1.47
============ ============ ============
Diluted earnings per share $ 1.55 1.22 1.47
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2001, 2000 and 1999
ACCUMULATED
OTHER TOTAL
COMMON RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK EARNINGS STOCK INCOME (LOSS) EQUITY
----------- ----------- ----------- ------------- ------------
Balances at December 31, 1998 $28,001,579 2,533,289 -- (6,901) 30,527,967
Comprehensive income:
Net income -- 2,469,272 -- -- 2,469,272
Increase in net unrealized losses on securities
available-for-sale, net of reclassification
adjustment -- -- -- (954,949) (954,949)
-----------
Total comprehensive income 1,514,323
-----------
Dividends declared ($1.04 per share) -- (1,751,685) -- -- (1,751,685)
Treasury shares purchased at cost
(46,000 shares) -- -- (931,649) -- (931,649)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 28,001,579 3,250,876 (931,649) (961,850) 29,358,956
Comprehensive income:
Net income -- 2,003,954 -- -- 2,003,954
Decrease in net unrealized losses on securities
available-for-sale, net of reclassification
adjustment -- -- -- 881,895 881,895
-----------
Total comprehensive income 2,885,849
-----------
Dividends declared ($1.04 per share) -- (1,713,724) -- -- (1,713,724)
Treasury shares purchased at cost
(37,000 shares) -- -- (583,601) -- (583,601)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 28,001,579 3,541,106 (1,515,250) (79,955) 29,947,480
Comprehensive income:
Net income -- 2,374,725 -- -- 2,374,725
Decrease in net unrealized losses on securities
available-for-sale, net of reclassification
adjustment -- -- -- 387,673 387,673
-----------
Total comprehensive income 2,762,398
-----------
Issuance of 240 shares; employee stock options 3,570 -- -- -- 3,570
Dividends declared ($1.04 per share) -- (1,576,771) -- -- (1,576,771)
Treasury shares purchased at cost
(137,400 shares) -- -- (2,539,462) -- (2,539,462)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 2001 $28,005,149 4,339,060 (4,054,712) 307,718 28,597,215
=========== =========== =========== =========== ===========
Years Ended December 31,
-----------------------------------------
Disclosure of reclassification amount: 2001 2000 1999
- -------------------------------------- -----------------------------------------
Unrealized holding gains (losses) arising during the period 844,521 1,437,089 (1,582,029)
Tax (expense) benefit (321,514) (552,488) 609,043
---------- ---------- ----------
Net after tax 523,007 884,601 (972,986)
---------- ---------- ----------
Reclassification adjustment for gains included in net income (157,916) -- (30,357)
Tax expense 60,008 -- 12,320
---------- ---------- ----------
Net after tax (97,908) -- (18,037)
Portion of unrealized gain allocated to minority interest (37,426) (2,706) --
---------- ---------- ----------
Net change in unrealized gain (loss) on availiable-for-sale securities 387,673 881,895 (954,949)
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 2,374,725 2,003,954 2,469,272
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,640,125 1,628,569 203,500
Amortization of goodwill and identifiable intangibles 259,421 259,196 187,477
Depreciation 604,668 500,167 287,083
Net gain on sale of premises and equipment (1,292) (5,807) --
Deferred income tax expense (benefit) (371,182) (33,814) (41,604)
Equity in income of Valley Bancorp, Inc. -- -- (126,367)
Amortization of premiums and discounts on
securities and loans 61,647 133,253 265,178
Gain on sale of investment securities (157,916) -- (30,357)
Gain on sale of real estate owned (46,456) -- (4,970)
Mortgage loans originated and held for sale (172,228,007) (110,510,643) (114,591,857)
Proceeds from sales of mortgage loans held for sale 167,495,540 108,720,915 119,117,722
FHLB stock dividends (242,100) (208,100) (161,100)
Decrease (increase) in accrued interest receivable 582,178 (707,302) (340,297)
Decrease (increase) in other assets (26,989) (159,793) (278,127)
Increase (decrease) in income taxes payable 194,678 (197,232) 360,639
Increase (decrease) in accrued interest payable (546,208) 888,315 260,927
Increase (decrease) in accrued expenses
and other liabilities 32,517 380,058 (127,019)
Net change in minority interest 18,633 151,171 --
------------- ------------- -------------
Net cash provided (used) by operating
activities (356,018) 2,842,907 7,450,100
------------- ------------- -------------
Cash flows from investing activities:
Net increase in loans receivable (10,816,854) (27,393,985) (43,534,649)
Purchases of securities available-for-sale (46,263,354) (7,834,019) (33,921,870)
Proceeds from maturities, paydowns and sales of securities
available-for-sale 43,847,274 9,570,153 30,990,562
Proceeds from redemption of FHLB stock -- 31,300 --
Purchases of restricted stock (42,850) (271,300) (1,652,800)
Purchase of Valley Bancorp, Inc. stock (831,251) (1,923,050) (1,746,591)
Cash paid to FDIC on failed bank -- -- (333,245)
Purchases of premises and equipment (800,251) (2,350,777) (1,661,802)
Proceeds from sale of premises and equipment 37,050 26,100 --
Proceeds from sale of real estate and other personal
property owned 706,059 105,045 662,213
Additions of real estate and other personal
property owned (26,877) (55,476) (39,748)
Acquired cash and cash equivalents of Valley
Bancorp, Inc. -- 1,205,576 --
------------- ------------- -------------
Net cash used by investing activities (14,191,054) (28,890,433) (51,237,930)
------------- ------------- -------------
Cash flows from financing activities:
Net increase in deposits 21,220,952 31,215,127 12,261,454
Net increase (decrease) in FHLB advances (1,675,000) 5,750,000 24,250,000
Advances on line of credit 1,750,000 1,555,000 --
Payments on line of credit (2,000,000) (305,000) --
Net increase (decrease) in securities sold under
repurchase agreements (1,762,048) (180,260) 2,095,387
Net increase (decrease) in federal funds purchased 1,000,000 (1,750,000) --
Net increase (decrease) in advances from borrowers
for taxes and insurance (298,401) 53,908 65,554
Issuance of trust preferred securities 3,000,000 -- --
Proceeds from issuance of common stock 3,570 -- --
Purchase of treasury stock (2,539,462) (583,601) (931,649)
Dividends paid to stockholders (1,576,771) (1,713,724) (1,751,685)
------------- ------------- -------------
Net cash provided by financing activities 17,122,840 34,041,450 35,989,061
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 2,575,768 7,993,924 (7,798,769)
Cash and cash equivalents at beginning of year 19,450,725 11,456,801 19,255,570
------------- ------------- -------------
Cash and cash equivalents at end of year $ 22,026,493 19,450,725 11,456,801
============= ============= =============
Cash paid during the year for:
Interest, approximately $ 15,369,000 14,074,000 9,280,000
Income taxes, approximately 1,810,000 1,519,000 1,220,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-6
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
The accompanying consolidated financial statements include the
accounts of United Financial Corp. (UFC) and UFC's wholly-owned
subsidiary, Heritage Bank (Heritage) and, effective January 1, 2000
(see Note 25), UFC's majority-owned subsidiary Valley Bancorp, Inc.
(Valley). UFC owns 65.32% of the outstanding stock of Valley at
December 31, 2001 compared to 56.52% at December 31, 2000 and 39.93%
at December 31, 1999. UFC, Heritage, and Valley are herein referred to
collectively as "the Company." UFC's wholly-owned subsidiary, United
Financial-Montana Capital Trust I administers the $3.0 million of
Capital Trust Pass-Through Securities (See Note 11). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The Company, through its subsidiary banks, provides a full range of
banking services to individual and corporate customers in central and
western Montana and Phoenix and Scottsdale, Arizona. The subsidiary
banks are subject to competition from other financial service
providers. The Company and its subsidiary banks are also subject to
the regulations of certain government agencies and undergo periodic
examinations by those regulatory authorities.
The financial statements for 2000 and 1999 included the accounts of
Heritage State Bank (Heritage State) a commercial bank formed in
August 1998 to acquire a portion of the business of a failed bank in
Fort Benton, Montana. Effective January 1, 2001, Heritage merged into
Heritage State's state banking charter. Effective at the time of the
merger, Heritage State changed its name to Heritage Bank and relocated
its main office to Great Falls, Montana.
A former wholly-owned subsidiary of Heritage, Community Service
Copororation (CSC), was inactive in 2000 and the corporation was
dissolved in 2001.
(b) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the
statement of financial condition and income and expenses for the
period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses. Management believes the allowance for loan losses is
adequate, however, future additions to the allowance may be necessary
based on changes in factors affecting the borrowers' ability to repay.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan
losses. Such agencies may require the Company to recognize additions
to the allowance based on their judgments about information available
to them at the time of their examination.
F-7
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(c) CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all cash, daily interest demand deposits, amounts due from
banks and interest-bearing deposits with banks with original
maturities of three months or less to be cash equivalents.
(d) SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale include all investment and
mortgage-backed securities that management intends to use as part of
its overall asset/liability management strategy and that may be sold
in response to changes in interest rates and resultant prepayment risk
and other related factors. Securities available-for-sale are carried
at fair value and unrealized gains and losses (net of related tax
effects) are excluded from earnings and reported as a separate
component of stockholders' equity.
Declines in the fair value of available-for-sale securities below
carrying value that are other than temporary are charged to expense as
realized losses and the related carrying value is reduced to fair
value. The cost of any investment, if sold, is determined by the
specific identification method.
Premiums and discounts on investment securities are amortized or
accreted into income using a method which approximates the level-yield
interest method.
(e) LOANS RECEIVABLE AND LOAN FEES
Loans receivable are stated at unpaid principal balances, less
unearned discounts and net of deferred loan origination fees. Interest
on loans is credited to income as earned. Interest receivable is
accrued only if deemed collectible. Discounts on purchased loans are
amortized into interest income using the level-yield method over the
remaining period to contractual maturity, adjusted for anticipated
prepayments.
Loans are placed on nonaccrual status when collection of principal or
interest is considered doubtful. Interest income previously accrued on
these loans, but not yet received, is reversed in the current period.
Interest subsequently recovered is credited to income in the period
collected.
Material loan origination fees and related direct origination costs
are deferred and the net fee or cost is recognized as interest income
using the level-yield method over the contractual life of the loans,
adjusted for prepayments. Origination fees on loans sold to the
secondary market are recognized when the loan is sold. Amortization of
deferred loan origination fees and costs and the accretion of unearned
discounts are suspended during periods in which the related loan is on
nonaccrual status.
F-8
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(f) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation of
the adequacy of the allowance, including an assessment of the
Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, current
economic conditions and independent appraisals.
Additions to the allowance arise from charges to operations through
the provision for loan losses or from the recovery of amounts
previously charged off. The allowance is reduced by loans charged off.
Loans are charged off when management believes the loan's principal
balance, or a portion thereof, is no longer collectable.
The Company also provides an allowance for losses on specific loans
which are deemed to be impaired. Groups of small balance homogeneous
loans (generally consumer loans) are evaluated for impairment
collectively. A loan is considered impaired when, based upon current
information and events, it is probable that the Company will be unable
to collect, on a timely basis, all principal and interest according to
the contractual terms of the loan's original agreement. When a
specific loan is determined to be impaired, the allowance for loan
losses is increased through a charge to expense for the amount of the
impairment. The amount of the impairment is measured using cash flows
discounted at the loan's effective interest rate, except when it is
determined that the sole source of repayment for the loan is the
operation or liquidation of the underlying collateral. In such cases,
the current value of the collateral, reduced by anticipated selling
costs, is used in place of discounted cash flows. Generally, when a
loan is deemed impaired, current period interest previously accrued
but not collected is reversed against current period interest income.
Income on such impaired loans is then recognized only to the extent
that cash in excess of any amounts charged off to the allowance for
loan losses is received and where the future collection of principal
is probable. Interest accruals are resumed on such loans only when
they are brought fully current with respect to interest and principal
and when, in the judgment of management, the loans are estimated to be
fully collectible as to both principal and interest.
(g) LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or fair value. The Company
expects the loans to be sold with no gain or loss, in the short-term.
(h) GOODWILL AND IDENTIFIABLE INTANGIBLES
Goodwill and identifiable intangibles represent the excess of cost
over the fair value of the net assets at the date of acquisition.
Goodwill is amortized to expense using the straight-line method over
15 to 25 years. Identifiable intangibles are amortized to expense
using the straight-line method over 5 to 15 years. UFC recorded
$95,449 and $493,567 of goodwill in 2001 and 2000, respectively,
related to the acquisition of Valley shares. No goodwill was recorded
in 1999.
F-9
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The Company assesses the recoverability of intangible assets by
determining whether the amortization of the goodwill and identifiable
intangible balances over their remaining lives can be recovered
through undiscounted future operating cash flows of the acquired
operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill and identifiable intangibles will be
impacted if estimated future operating cash flows are not achieved.
(i) RESTRICTED STOCK INVESTMENTS
Federal Home Loan Bank stock is a required investment of institutions
that are members of the Federal Home Loan Bank system. The required
investment in the common stock is based on a predetermined formula and
is carried at cost on the balance sheet. Both stock and cash dividends
may be received on FHLB stock. In addition to FHLB stock, Valley also
holds Federal Reserve Bank (FRB) stock. FHLB and FRB stocks are
restricted as they may only be sold to another member institution or
the FHLB or FRB at their par values. FRB stock is also carried at cost
on the balance sheet.
(j) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed by straight-line and
accelerated methods over the estimated useful lives of 39 years for
buildings, 5 to 40 years for improvements, and 3 to 10 years for
furniture, fixtures and equipment.
(k) REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED
Real estate owned represents real estate assets acquired through
foreclosure or deed in lieu of foreclosure and is comprised of
properties held for sale and held for investment. Foreclosed assets
held for sale are carried at the lower of fair value less estimated
costs to sell, or cost. Fair value is determined as the amount that
could be reasonably expected in a current sale (other than a forced or
liquidation sale) between a willing buyer and a willing seller.
(l) STOCK-BASED COMPENSATION
Compensation cost for stock-based compensation to employees is
measured at the grant date using the intrinsic value method. Under the
intrinsic value method, compensation cost is the excess of the market
price of the stock at the grant date over the amount an employee must
pay to ultimately acquire the stock and is recognized on a
straight-line basis over any related service period.
(m) INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated
future consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their
respective tax bases. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in tax expense in
the period that includes the enactment date.
F-10
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(n) EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income by
the weighted average number of common shares outstanding during 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.
(o) LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of the asset may not
be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows is less than the carrying amount of the
asset. The amount of the impairment loss, if any, is based on the
asset's fair value, which may be estimated by discounting the expected
future cash flows. At December 31, 2001 and 2000, there were no assets
that were considered impaired. There were no impairment losses
recognized during 2001, 2000 or 1999.
(p) MORTGAGE SERVICING RIGHTS
The Company recognizes as assets the rights to service mortgage loans
for others, whether acquired or internally originated. Servicing
assets are initially recorded at fair value based on comparable market
quotes and are amortized in proportion to and over the period of
estimated net servicing income. Servicing assets are periodically
evaluated for impairment by stratifying the servicing assets based on
predominant risk characteristics of the underlying loans including
loan type, note rate and loan term. Servicing assets are included in
other assets on the accompanying consolidated statements of financial
condition.
(q) COMPREHENSIVE INCOME
The Company is required to report its comprehensive income, which
includes net income as well as other changes in stockholders' equity
that result from transactions and economic events other than those
with stockholders, in a separate statement. The Company's only
significant element of other comprehensive income is unrealized gains
and losses on securities available-for-sale, net of tax effects.
(r) RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 and 1999 amounts
to conform to the 2001 presentation.
(s) NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS Nos. 133 and 138 establish accounting and reporting
standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value. SFAS Nos. 133 and 138 require that changes in the derivative's
F-11
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. As of December 31, 2001, the Company was
not engaged in hedging activities nor did it hold any derivative
instruments which required adjustments to carrying values under SFAS
Nos. 133 or 138. Therefore, the adoption had no impact on the
consolidated financial statements of the Company.
In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a Replacement of
FASB Statement No. 125." SFAS No. 140 revises accounting standards for
securitizations and transfers of financial assets and collateral and
requires certain disclosures, but carries forward most of SFAS No.
125's provisions without change. SFAS No. 140 is effective for
recognition and reclassification of collateral and disclosures
relating to securitization transactions and collateral for fiscal
years ended after December 15, 2000. Adoption of these provisions did
not have a material effect on the consolidated financial statements,
results of operations or liquidity of the Company. SFAS No. 140 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001.
In July 2001, the FASB issued Statement No. 141, "Business
Combinations", and Statement No. 142, "Goodwill and Other Intangible
Assets." Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as
well as all purchase method business combinations completed after June
30, 2001. Statement 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but be
tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore,
any goodwill and any intangible asset determined to have an indefinite
useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue
to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting standards. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were
acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria
in Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization
F-12
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
period adjustments by the end of the first interim period after
adoption. In addition, to the extent an intangible asset is identified
as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the
provisions of Statement 142 within the first interim period. Any
impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting
principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the
date of adoption. To accomplish this the Company must identify its
reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit
and compare it to the reporting unit's carrying amount. To the extent
a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired
and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with Statement 141, to its
carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as
possible, but no later than December 31, 2002.
As of the date of adoption, the Company had unamortized goodwill in
the amount of $3,076,065 and unamortized identifiable intangible
assets in the amount of $398,710, both of which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was $190,070 and $189,845 for the years ended
December 31, 2001 and 2000, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is
not practicable to reasonably estimate the impact of adopting these
Statements on the Company's financial statements at the date of this
report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in
accounting principle.
(2) CASH ON HAND AND IN BANKS
The subsidiary banks are required to maintain an average reserve balance
with the FRB, or maintain such reserve in cash on hand. The amount of this
required reserve balance at December 31, 2001 and 2000 was approximately
$1,289,000 and $817,000, respectively. An additional $25,000 compensating
balance is required to be maintained with the FRB for check clearing
services.
The Company places its cash with high credit quality institutions. The
amount on deposit fluctuates, and at times exceeds the insured limit by the
Federal Deposit Insurance Corporation, which potentially subjects the
Company to credit risk.
F-13
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(3) SECURITIES AVAILABLE-FOR-SALE
The amortized cost, unrealized gains and losses, and estimated fair values
of investment and mortgage-backed securities available-for-sale at December
31 are as follows:
2001
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
U.S. Government and
federal agencies $ 30,438,554 338,269 (70,022) 30,706,801
Mortgage-backed
securities 38,937,680 399,674 (55,724) 39,281,630
Municipal bonds 1,783,502 7,527 (45,825) 1,745,204
Corporate bonds and
equity securities 1,542,276 731 (13,775) 1,529,232
-------------- -------------- -------------- --------------
$ 72,702,012 746,201 (185,346) 73,262,867
============== ============== ============== ==============
2000
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
U.S. Government and
federal agencies $ 23,783,367 111,558 (23,030) 23,871,895
Mortgage-backed
securities 41,622,251 108,899 (195,457) 41,535,693
Municipal bonds 2,742,322 -- (24,634) 2,717,688
Corporate bonds and
equity securities 2,041,723 -- (103,086) 1,938,637
-------------- -------------- -------------- --------------
$ 70,189,663 220,457 (346,207) 70,063,913
============== ============== ============== ==============
F-14
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Maturities of securities available-for-sale by contractual maturity at
December 31, 2001 are shown below. Maturities of securities do not reflect
repricing opportunities present in many adjustable rate securities. At
December 31, 2001 and 2000, $12,398,040 and $16,093,390, respectively, of
variable rate securities are included in securities available-for-sale.
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
Due within one year $ 12,444,790 12,481,638
Due after one year through five years 3,673,332 3,801,212
Due after five years through ten years 13,192,259 13,283,841
Due after ten years 4,453,951 4,414,546
-------------- --------------
33,764,332 33,981,237
Mortgage-backed securities 38,937,680 39,281,630
-------------- --------------
$ 72,702,012 73,262,867
============== ==============
The Company has not entered into any swaps, options, or futures contracts.
Included in the municipal bonds and U.S. Government and federal agencies
security amounts are investments which have call features. At December 31,
2001, the Company had securities callable within one year with amortized
cost and estimated fair value of $9,272,547 and $9,353,452, respectively.
The securities are primarily included in the due after five years through
ten years category in the table above.
There were no sales of securities available-for-sale during the year ended
December 31, 2000. Gross proceeds from sales of securities were $6,804,564
and $10,123,123 for the years ended December 31, 2001 and 1999,
respectively, resulting in gross gains of $157,916 in 2001 and $30,357 in
1999.
There are no significant concentrations of investments at December 31, 2001
(greater than 10% of stockholders' equity) in any individual security
issuer, except for U.S. Government or agency-backed securities.
At December 31, 2001 and 2000, investment securities were pledged as
follows:
2001 2000
-------------------------------- --------------------------------
ESTIMATED FAIR ESTIMATED FAIR
PLEDGED TO SECURE: AMORTIZED COST VALUE AMORTIZED COST VALUE
- ---------------------------------- -------------- -------------- -------------- --------------
Repurchase agreements $ 15,777,168 15,906,997 15,977,825 15,937,470
FHLB advances 21,002,294 21,004,805 20,987,233 20,953,294
Public and nonpublic deposits, fed
fund borrowings and other 23,700,280 24,040,538 19,594,810 19,584,031
-------------- -------------- -------------- --------------
60,479,742 60,952,340 56,559,868 56,474,795
Unpledged 12,222,270 12,310,527 13,629,795 13,589,118
-------------- -------------- -------------- --------------
$ 72,702,012 73,262,867 70,189,663 70,063,913
============== ============== ============== ==============
F-15
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(4) LOANS RECEIVABLE, NET
Loans receivable, net of unamortized net deferred loan fees, at December 31
are summarized as follows:
2001 2000
-------------- --------------
First mortgage loans and contracts secured by real estate $ 81,588,470 77,719,571
Commercial real estate loans 77,627,030 65,268,196
Commercial loans 60,578,808 69,323,799
Auto and other consumer loans 23,970,037 24,018,527
Second mortgage consumer loans 5,438,463 4,744,815
Agricultural loans 11,606,658 10,469,480
Tax exempt municipal loans 1,684,846 1,489,128
Savings account and other loans 1,532,563 1,138,287
-------------- --------------
264,026,875 254,171,803
Less: Allowance for loan losses 3,502,593 2,525,545
-------------- --------------
$ 260,524,282 251,646,258
============== ==============
A summary of activity in the allowance for loan losses for the years ended
December 31 follows:
2001 2000 1999
-------------- -------------- --------------
Balance, beginning of year $ 2,525,545 1,585,819 1,484,680
Balance acquired -- 392,857 --
Provision for loan losses 1,640,125 1,628,569 203,500
Losses charged off (700,614) (1,137,661) (109,472)
Recoveries 37,537 55,961 7,111
-------------- -------------- --------------
Balance, end of year $ 3,502,593 2,525,545 1,585,819
============== ============== ==============
Loans receivable include approximately $93,381,000 and $88,882,000 in
adjustable rate loans at December 31, 2001 and 2000, respectively.
Nonaccrual loans amounted to approximately $2,114,000 and $903,000 at
December 31, 2001 and 2000, respectively. If interest on nonaccrual loans
had been accrued, such income would have approximated $224,000 and
$264,000, respectively. Loans contractually past due ninety days or more
aggregating approximately $294,000 and $258,000 as of December 31, 2001 and
2000, respectively, were on accrual status. Such loans are deemed
adequately secured and in the process of collection.
Impaired loans at December 31, 2001 and 2000 were approximately $2,724,000
and $1,200,000, respectively. The allowance associated with impaired loans
included in the allowance for loan losses at December 31, 2001 and 2000
were approximately $640,000 and $324,000, respectively. The average
recorded investment in impaired loans for the years ended December 31,
2001, 2000 and 1999 was approximately $1,962,000, $850,000 and $70,000,
respectively. Interest income recognized on impaired loans during 2001,
2000 and 1999 was approximately $13,000, $128,000 and $41,000,
respectively.
F-16
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
At December 31, 2001, the Company had no concentrations of loans which
exceeded 10% of total loans other than the categories disclosed above.
At December 31, 2001 and 2000 approximately $44,423,000 and $52,852,000,
respectively, of the Company's loans receivable are obligations of
customers located outside of the Company's market area.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and letters of credit and involve, to varying degrees, elements of credit
risk. The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Financial instruments outstanding at December 31 whose contract amounts
represent credit risk include:
2001 2000
------------ ------------
Unused lines of credit $ 35,931,000 33,328,000
Commitments outstanding - variable rate 1,028,000 795,000
Unfunded commitments under Bankcard arrangements 2,643,000 2,597,000
Letters of credit 169,000 176,000
The majority of the Bank's loans, commitments, and standby letters of
credit have been granted to customers in the Bank's market area, primarily
in central and western Montana and Phoenix and Scottsdale, Arizona.
Substantially all such customers are also depositors of the Bank. The
concentrations of credit by type of loan are set forth above. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Outstanding commitments and standby letters of credit
were granted primarily to commercial borrowers as of December 31, 2001.
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31 is summarized as follows:
2001 2000
------------ ------------
Loans receivable $ 2,259,470 2,592,371
Mortgage-backed securities 200,687 298,325
Investment securities 285,192 434,038
Time deposits in banks and other interest-earning assets 23,335 26,128
------------ ------------
$ 2,768,684 3,350,862
============ ============
F-17
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(6) PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
2001 2000
-------------- --------------
Land $ 1,180,331 1,180,331
Building and improvements 4,399,859 4,345,386
Furniture, fixtures and equipment 3,107,864 2,811,132
Construction in progress 410,396 --
-------------- --------------
9,098,450 8,336,849
Accumulated depreciation (2,489,128) (1,950,135)
-------------- --------------
$ 6,609,322 6,386,714
============== ==============
(7) REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED
During 2000, the Company was required by its regulators to reclassify to
real estate owned an asset held for the production of income which was
previously classified in premises and equipment. The asset is being carried
at cost, less accumulated depreciation. Depreciation is being computed
using the straight-line method over the estimated useful life of the asset.
The asset is currently being leased (see Note 15).
During 2001, the Company sold real estate and other personal property
acquired through foreclosure with an aggregate book value of approximately
$660,000 and reported a gain of approximately $46,000 on the sales. During
2000, the Company sold real estate and other personal property acquired
through foreclosure with an aggregate book value of approximately $105,000
and reported no gain or loss.
The Company transferred loans of $474,466 and $330,365 to real estate and
other personal property owned during the years ended December 31, 2001 and
2000, respectively.
F-18
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(8) DEPOSITS
Deposits at December 31 are summarized as follows:
2001 2000
------------------------------------------- --------------------------
WEIGHTED
AVERAGE RATE AMOUNT % AMOUNT %
-------------- -------------- ------- -------------- -------
Demand accounts 0.00% $ 46,688,634 16.5% 33,348,678 12.7%
NOW and money market accounts 1.70% 50,990,350 18.1 52,018,226 20.0
Savings accounts 2.97% 62,283,044 22.1 49,203,249 18.8
Certificates of deposit: 2.00 to 3.99% 27,673,765 9.8 5,820 --
4.00 to 4.99% 36,536,052 12.9 409,215 .1
5.00 to 5.99% 33,096,347 11.7 35,991,330 13.8
6.00 to 6.99% 19,128,821 6.8 76,711,121 29.4
7.00 to 7.99% 6,003,225 2.1 13,491,647 5.2
-------------- ------- -------------- -------
Total certificates of deposit 4.87% 122,438,210 43.3 126,609,133 48.5
-------------- ------- -------------- -------
Total interest-bearing deposits 3.68% 235,711,604 83.5 227,830,608 87.3
-------------- ------- -------------- -------
3.07% $ 282,400,238 100.0% 261,179,286 100.0%
============== ======= ============== =======
Scheduled maturities of certificates of deposit at December 31, 2001 are as
follows:
Due within one year $ 88,625,044
Due within two to three years 28,276,118
Due within four to five years 5,537,048
--------------
$ 122,438,210
==============
Certificates of deposit of $100,000 or more are approximately $34,009,000
and $30,752,000 at December 31, 2001 and 2000, respectively. Amounts in
excess of $100,000 are not insured by a federal agency.
Interest expense on deposits for the years ended December 31 is summarized
as follows:
2001 2000 1999
-------------- -------------- --------------
NOW and money market accounts $ 1,271,307 1,461,675 479,045
Savings accounts 2,189,779 2,099,262 1,837,886
Certificates of deposit 7,475,058 7,142,606 4,544,204
-------------- -------------- --------------
$ 10,936,144 10,703,543 6,861,135
============== ============== ==============
F-19
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(9) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31 are summarized as follows:
2001 2000
-------------- --------------
3.88% to 7.23% fixed rate advances, interest payable monthly $ 46,500,000 46,175,000
5.52% to 6.12% putable advances, put options exercisable
quarterly, interest payable monthly 4,000,000 4,000,000
6.81% guaranteed spread advance, interest payable monthly -- 2,000,000
-------------- --------------
$ 50,500,000 52,175,000
============== ==============
The weighted average interest rate on these advances was 5.65% and 6.57% at
December 31, 2001 and 2000, respectively.
Contractual principal repayments on advances from the Federal Home Loan
Bank subsequent to December 31, 2001 are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2002 $ 18,500,000
2003 18,000,000
2004 5,000,000
2005 5,000,000
2006 2,000,000
Thereafter 2,000,000
--------------
$ 50,500,000
==============
Advances from the FHLB are secured by pledges of FHLB stock and a blanket
assignment of Heritage's unpledged, qualifying mortgage loans,
mortgage-backed securities and U.S. Government and federal agency
securities.
At December 31, 2001, the Company had a Cash Management Advance (CMA)
credit facility with a maximum allowable advance of $72,819,000, subject to
available collateral limits. The CMA credit facility expires May 29, 2002.
There were no outstanding advances on the CMA credit facility as of
December 31, 2001.
At December 31, 2001, the current established available FHLB advance credit
line was 25% of assets.
F-20
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31 consist of
the following:
2001
----------------------------------------------------------------------
ESTIMATED FAIR
WEIGHTED BOOK VALUE VALUE
REPURCHASE AVERAGE OF UNDERLYING OF UNDERLYING
AMOUNT RATE SECURITIES SECURITIES
-------------- -------------- -------------- --------------
To repurchase within:
1 - 30 days $ 2,847,558 4.02 % 3,674,611 3,718,569
31 - 90 days 1,486,716 3.85% 2,497,990 2,488,855
Greater than 90 days 5,269,377 3.45% 9,604,567 9,699,575
-------------- -------------- --------------
$ 9,603,651 3.68% 15,777,168 15,906,999
============== ============== ==============
2000
----------------------------------------------------------------------
ESTIMATED FAIR
WEIGHTED BOOK VALUE VALUE
REPURCHASE AVERAGE OF UNDERLYING OF UNDERLYING
AMOUNT RATE SECURITIES SECURITIES
-------------- -------------- -------------- --------------
To repurchase within:
1 - 30 days $ 3,524,942 5.83% 6,240,689 6,232,199
31 - 90 days 1,298,675 6.33% 658,582 662,892
Greater than 90 days 6,542,082 6.30% 9,078,554 9,042,379
-------------- -------------- --------------
$ 11,365,699 6.16% 15,977,825 15,937,470
============== ============== ==============
Securities underlying the agreements to repurchase are for the same
securities originally sold and are held in a custodial account by a third
party. For the year ended December 31, 2001 and 2000, securities sold under
agreements to repurchase averaged approximately $8,745,000 and $11,485,000,
respectively, and the maximum outstanding at any month end during the year
was approximately $9,604,000 and $13,863,000, respectively.
(11) TRUST PREFERRED SECURITIES
In July 2001, UFC issued junior subordinated debentures, aggregating
$3,000,000 to United Financial-Montana Capital Trust I (Trust). The Trust
issued preferred securities, as part of a pooled issue, with an aggregate
liquidation amount of $3,000,000 ($1,000 per capital security) to
third-party investors. The junior subordinated debentures and cash are the
F-21
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
sole assets of the Trust. The preferred securities are includable as Tier I
capital for regulatory capital purposes. The offering price was $1,000 per
capital security. The junior subordinated debentures and the preferred
securities pay interest and dividends, respectively, on a semi-annual
basis, which are included in interest expense. The Trust is a statutory
business trust formed under the laws of the State of Delaware and is
wholly-owned by UFC. The junior subordinated debentures and preferred
securities will mature on July 25, 2031. The junior subordinated debentures
and preferred securities can be redeemed contemporaneously, in whole or in
part, after five years at decreasing premiums with the permission of the
Board of Governors of the Federal Reserve System (the "Federal Reserve").
UFC has provided a full and unconditional guarantee of the obligations of
the Trust in the event of the occurrence of an event of default, as
defined. Debt issuance costs totaling $118,812 were capitalized related to
the debenture offering and are being amortized over the 10-year non-premium
callable life of the preferred securities.
(12) LINES OF CREDIT
UFC has a line of credit of $3,000,000 with Wells Fargo with an interest
rate of 1.75% over the Wells Fargo federal funds rate, which was 3.37% and
8.25% at December 31, 2001 and 2000. This line is secured by UFC's Heritage
stock and expires October 30, 2002. Interest is payable quarterly.
Principal is payable at maturity. The principal balance outstanding at
December 31, 2001 and 2000 was $1,000,000 and $1,250,000, respectively.
Heritage also has established a federal funds line with Wells Fargo. The
total line is $10,000,000 with a daily interest rate equal to the Wells
Fargo federal funds rate, which was 1.625% and 6.50% at December 31, 2001
and 2000. Advances up to $5,000,000 are unsecured, and advances over
$5,000,000 are secured by investment securities. There were no amounts
outstanding at December 31, 2001 or 2000; however, borrowings were advanced
during 2000.
Valley has a federal funds line of $3,000,000 at Wells Fargo at December
31, 2001 and 2000, with a daily interest rate equal to the Wells Fargo
federal funds rate, which was 1.625% and 6.50% at December 31, 2001 and
2000. There were no amounts outstanding at December 31, 2001 and 2000;
however, borrowings were advanced during both years. All outstanding
principal and unpaid accrued interest is due and payable the next business
day. Borrowings are secured by securities available-for-sale.
In addition, Valley has a federal funds line of $3,000,000 at M & I
Thunderbird Bank (M & I) as of December 31, 2001 and 2000, with an interest
rate equal to the M & I federal funds rate, which was 1.875% and 6.31% at
December 31, 2001 and 2000, respectively. The principal balance outstanding
at December 31, 2001 was $1,000,000. No balance was outstanding at December
31, 2000; however, borrowings were advanced in 2000. All outstanding
principal and unpaid accrued interest is due and payable two business days
from the date of advance. Borrowings are secured by securities
available-for-sale.
F-22
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(13) INCOME TAXES
Income tax expense for the years ended December 31 is summarized as
follows:
FEDERAL STATE TOTAL
-------------- -------------- --------------
2001:
Current $ 1,701,327 303,161 2,004,488
Deferred (320,863) (50,319) (371,182)
-------------- -------------- --------------
$ 1,380,464 252,842 1,633,306
============== ============== ==============
2000:
Current $ 1,128,159 193,132 1,321,291
Deferred (71,352) 37,538 (33,814)
-------------- -------------- --------------
$ 1,056,807 230,670 1,287,477
============== ============== ==============
1999:
Current $ 1,301,647 279,196 1,580,843
Deferred (40,571) (1,033) (41,604)
-------------- -------------- --------------
$ 1,261,076 278,163 1,539,239
============== ============== ==============
Income tax expense for the years ended December 31 differs from "expected"
income tax expense (computed by applying the Federal corporate income tax
rate of 34% to income before income taxes) as follows:
2001 2000 1999
-------------- -------------- --------------
Computed "expected" tax expense $ 1,415,792 1,170,485 1,362,894
Increase (decrease) resulting from:
State taxes, net of Federal income
tax effects 199,068 152,242 183,588
Goodwill amortization 64,624 64,548 40,164
Tax-exempt interest (50,646) (55,867) (45,085)
Equity in undistributed earnings of
Valley Bancorp, Inc. -- -- (42,965)
Other, net 4,468 (43,931) 40,643
-------------- -------------- --------------
$ 1,633,306 1,287,477 1,539,239
============== ============== ==============
F-23
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Differences between the financial statement carrying amounts and the tax
bases of assets and liabilities that give rise to significant portions of
deferred tax assets and liabilities at December 31 are as follows:
2001 2000
------------ ------------
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 1,313,528 914,244
Investments, due to difference in basis 121,046 118,975
Premises and equipment and real estate owned, due to difference
in basis 59,152 59,152
Purchase accounting basis differences 34,552 23,726
Unrealized losses on securities available-for-sale -- 48,501
Other 127,596 36,632
------------ ------------
Total gross deferred tax assets 1,655,874 1,201,230
------------ ------------
Deferred tax liabilities:
Loans, due to difference in basis 162,913 195,091
Stock in FHLB, principally due to stock dividends not recognized
for tax purposes 440,872 347,772
Premises and equipment, principally due to differences in
depreciation 222,699 207,760
Prepaid SAIF assessment 7,453 6,749
Unrealized losses on securities available-for-sale 213,005 --
Other 55,398 --
------------ ------------
Total gross deferred tax liabilities 1,102,340 757,372
------------ ------------
Net deferred tax asset $ 553,534 443,858
============ ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the existence of, or generation of, taxable income
in the periods which those temporary differences are deductible. Management
considers the scheduled reversal of deferred tax liabilities, taxes paid in
carryback years, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical
taxable income and estimates of future taxable income over the periods
which the deferred tax assets are deductible, at December 31, 2001 and 2000
management believes it is more likely than not that the Company will
realize the benefits of these deductible differences.
Retained earnings at December 31, 2001 includes approximately $3,477,000
for which no provision for Federal income tax has been made. This amount
represents the base year income tax bad debt reserve. This amount is
treated as a permanent difference and deferred taxes are not recognized
unless it appears this reserve will be reduced and thereby result in
taxable income in the foreseeable future. The Company is not currently
contemplating any changes to its business or operations which would result
in a recapture of the base year bad debt reserve into taxable income.
F-24
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(14) MORTGAGE SERVICING RIGHTS
Total mortgage servicing rights, net of accumulated amortization, were
approximately $158,000 and $9,000 at December 31, 2001 and 2000,
respectively. Servicing rights of $162,000 and $169,000 were capitalized in
2001 and 2000, respectively. Amortization expense of $12,183, $29,141 and
$2,679 was recognized in 2001, 2000, and 1999, respectively. There were no
impairment losses recognized in 2001, 2000, and 1999. At December 31, 2001,
the estimated fair value of the Company's servicing assets approximates its
carrying value.
In November 2000, Heritage entered into an agreement with an unrelated
third party to sell all of its mortgage servicing rights associated with
Montana Board of Housing loans existing at November 30, 2000 which had
outstanding principal balances of approximately $49,600,000. The sales
price was 1.03% of the outstanding principal balance at close of business
November 30, 2000, or approximately $510,000. A gain on the sale of
approximately $255,000 is included in other non-interest income for the
year ended December 31, 2000. At December 31, 2000, Heritage had a
receivable related to the sale of approximately $258,000 which was
collected in March 2001. The receivable was included in other assets in the
accompanying consolidated statement of financial condition.
Real estate loans serviced for others, which are not included in the
accompanying consolidated financial statements, totaled approximately
$17,239,000 and $53,933,000 at December 31, 2001 and 2000, respectively.
Approximately $49,547,000 of the real estate loans serviced for others at
December 31, 2000 were being serviced under a short-term sub-servicing
agreement which expired in February 2001.
(15) LEASES
The Company as Lessor:
In April 2000, Heritage entered into an operating lease to rent a duplicate
facility which had been held for sale in 1999. The lease is for a period of
three years, terminating in April 2003, with one three-year option to
renew. Monthly rentals are $8,500, with an increase upon renewal not to
exceed 6%. The lease includes a purchase option for a price of $650,000,
with 25% of all lease payments applied to the purchase price.
At December 31, 2001, the cost of the asset under lease was approximately
$546,500 and accumulated depreciation was $34,655. The net carrying value
of approximately $512,000 is included in real estate and other personal
property owned on the accompanying December 31, 2001 consolidated statement
of financial condition.
Future minimum rental income under this lease are as follows:
YEAR ENDING DECEMBER 31,
2002 $ 102,000
2003 34,000
--------------
$ 136,000
==============
F-25
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
For the year ended December 31, 2001 and 2000, rental income included in
the accompanying consolidated statement of income was $95,880 and $76,500,
respectively.
The Company as Lessee:
The Company leases certain land and office space under noncancelable
operating leases. Total rental expense for the years ended December 31,
2001, 2000 and 1999 was $256,230, $194,120 and $31,440, respectively.
The total future minimum lease payments required under operating leases
which have initial or remaining noncancelable lease terms in excess of one
year at December 31, 2001 are as follows:
YEAR ENDING DECEMBER 31,
2002 $ 241,286
2003 238,631
2004 238,631
2005 236,358
2006 145,656
Thereafter 985,000
-------------
$ 2,085,562
=============
(16) RELATED PARTIES
Central Financial Services (CFS) provides various management services for
the Company, including accounting, tax and insurance advisory services, and
investment, personnel and regulatory consulting. CFS is owned by UFC's
Chairman of the Board of Directors and largest shareholder. The charges for
their services were $378,828, $348,053 and $308,691 for the years ended
December 31, 2001, 2000, and 1999, respectively.
The Company acquires loan participations from a bank controlled by UFC's
Chairman of the Board of Directors. At December 31, 2001 and 2000, the
outstanding balances of loans purchased from this bank were $5,067,810 and
$5,794,343, respectively.
Banker's Resource Center (BRC) provides data processing services for the
Company. The Company has a 14% ownership interest in BRC, a computer data
center. The charges for BRC's services were $539,392, $499,077 and $398,022
for the years ended December 31, 2001, 2000 and 1999, respectively.
As of December 31, 2001 and 2000, the Board of Directors and officers of
the Company had approximately $2,890,000 and $2,614,000, respectively, on
deposit with subsidiary banks.
At December 31, 2001 and 2000, the Board of Directors and executive
officers of the Company had $1,718,998 and $1,765,413, respectively, in
outstanding loans with subsidiary banks. These loans were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable loans with equivalent risk of
collectibility.
F-26
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
A summary of activity with respect to aggregate loans to related parties
for the year ended December 31, 2001 and 2000 follows:
2001 2000
------------ ------------
Balance, beginning of year $ 1,765,413 $ 1,372,227
New loans 1,131,439 670,145
Repayments (1,177,854) (276,959)
------------ ------------
Balance, end of year $ 1,718,998 $ 1,765,413
============ ============
(17) EMPLOYEE BENEFIT PLANS
Heritage has a savings plan under Section 401(k) of the Internal Revenue
Code. Eligible employees can contribute up to 15% of their monthly wages.
Heritage matches an amount equal to 75% of the employee's contribution, up
to 6% of total wages. Participants are at all times fully vested in their
contributions and are immediately vested in the employer's contributions.
Heritage 401(k) contributions and administrative costs were approximately
$128,000, $115,000 and $107,000 during the years ended December 31, 2001,
2000 and 1999, respectively.
Valley has a savings and profit sharing plan for employees meeting certain
service requirements. This plan qualifies under Section 401(k) of the
Internal Revenue Code. The plan allows each employee to contribute up to
20% of his or her annual compensation. At the discretion of the Board of
Directors, Valley may also make additional contributions, dependent on
profits, but not to exceed 25% of the employee's annual compensation after
taking into consideration Valley's previous matching contributions. Valley
contributed approximately $21,000 and $20,000 to the plan during the years
ended December 31, 2001 and 2000.
Heritage has a deferred compensation agreement with an employee that
provides for predetermined periodic payments over 15 years upon retirement
or death. In the event of acquisition of the Company by a third party,
disability or early retirement, the predetermined payments are based on
years of service. Amounts expensed under this agreement were approximately
$6,400, $8,500 and $3,300, respectively, for the years ended December 31,
2001, 2000 and 1999. Heritage owns two single premium insurance policies in
connection with this agreement. The policies have a cash value, which is
included in other assets on the accompanying consolidated statements of
financial condition, of approximately $313,000 and $297,000 at December 31,
2001 and 2000, respectively.
In October 1999, Heritage adopted a supplemental retirement agreement with
an employee that provides for salary continuation benefits upon retirement,
disability, or death. The employee is vested in the plan 10% for every plan
year of employment and 100% vested after 10 plan years. The effective date
for vesting was January 1, 1997. The employee is considered 100% vested
upon determination of full or partial disability, death, or change of
control, with payment made in a lump sum within 60 days. The normal
retirement benefit will be paid in either a lump sum or at the election of
the employee an annuity shall be purchased for the amount of the Company's
obligation. The amount expensed under this agreement was approximately
$7,400, $4,900 and $970, respectively, for the years ended December 31,
2001, 2000 and 1999.
F-27
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(18) STOCK OPTION PLANS
In January 2000, the United Financial Corp. 2000 Long-Term Incentive and
Stock Option Plan (the Plan) was approved by the Company's Board of
Directors. The adoption of the Plan was ratified by a vote of the Company's
shareholders at the annual meeting in May 2000. The Company's existing
stock appreciation rights plan, pursuant to which no stock appreciation
rights were granted, was rescinded by the Board of Directors upon approval
of the Plan. The Plan provides for the grant of incentive stock options
(ISOs) and non-qualified stock options to certain full and part-time
employees and directors of the Company. The plan provides for award of
options for a maximum of 120,000 shares of Company common stock. Vesting
for each award is at the discretion of the compensation committee of the
Board of Directors. The term of the options is 10 years for ISOs and for
non-qualified stock options. The option price for all ISOs granted under
the Plan shall be determined by the compensation committee, but shall not
be less than 100% of the fair market value of the common stock at the date
of grant of such option. The option price for all non-qualified options
shall also be determined by the compensation committee. Options granted to
10% or greater shareholders will have exercise prices equal to 110% of
market value and can not be exercised after five years. A change in
control, as defined in the Plan, will immediately vest all options upon
completion of such a change in control.
In May 2001 and 2000, the Board of Directors granted options under the Plan
to acquire 37,716 and 34,785 shares of the Company's common stock,
respectively.
At December 31, 2001, total shares available for option grants under the
Plan were 47,499. Changes in shares issuable under options granted by the
Company for the years ended December 31, 2001 and 2000, are summarized as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ -------------- ------------ --------------
Balance at January 1, 2000 -- $ -- -- --
Granted 34,785 15.09 -- --
Canceled (3,319) 14.875 -- --
Became exercisable -- -- -- --
Exercised -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 31,466 15.11 -- --
Granted 37,716 17.81 -- --
Canceled (1,982) 16.59 -- --
Became exercisable -- -- 7,677 15.11
Exercised (240) 14.875 (240) 14.875
------------ ------------ ------------ ------------
Balance at December 31, 2001 66,960 $ 16.59 7,437 15.11
============ ============
F-28
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The stock options outstanding at December 31, 2001 consist of the
following:
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS
SHARES EXERCISE PRICE REMAINING LIFE EXERCISABLE
-------------------- -------------------- -------------------- ------------------
36,494 $17.82 9.5 years --
30,466 $15.12 8.5 years 7,437
-------------------- -------------------- ------------------
66,690 $16.59 7,437
==================== ==================== ==================
Valley has a stock option plan for officers and directors (the 1995 Plan).
Options are granted at the discretion of Valley's Board of Directors. The
option price for all options granted under the 1995 Plan shall not be less
than 100% of the fair market value of the common stock on the date of grant
of such option. The options granted are available to be exercised at the
rate of 20% per year from the date of grant and expire ten years from date
of grant. Valley has reserved 200,000 shares of common stock for exercise
of options under the 1995 Plan.
At December 31, 2001, total shares available for option grants under the
1995 Plan were 105,750. The following table is presented to summarize stock
option activity:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ -------------- ------------ --------------
Balance at January 1, 2000 94,250 $ 5.00 47,650 5.00
Granted --
Canceled --
Became exercisable -- 17,650 5.00
Exercised --
------------ ------------ ------------ ------------
Balance at December 31, 2000 94,250 5.00 65,300 5.00
Granted -- -- -- --
Canceled -- -- -- --
Became exercisable -- -- 15,000 5.00
Exercised -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2001 94,250 $ 5.00 80,300 5.00
============ ============
The stock options outstanding at December 31, 2001 consist of the
following:
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS
SHARES EXERCISE PRICE REMAINING LIFE EXERCISABLE
-------------------- -------------------- -------------------- ------------------
94,250 $5.00 5.3 years 80,300
==================== ==================== ==================== ==================
F-29
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes pricing model with the following weighted-average
assumptions:
2001 2000
----------------------------
Risk-free interest rate 5.39% 6.74%
Expected life 5 years 5 years
Expected volatility 23.12% 23.35%
Expected dividend yield 6.40% 6.40%
The Company expects all options to be exercised.
Based on the intrinsic value method, no compensation cost has been
recognized for any stock option grants in the accompanying financial
statements. Had the Company determined compensation cost based on the
estimated fair value at the grant date for its stock options, the Company's
net income and net income per share for the years ended December 31, 2001
and 2000 would have been as follows:
2001 2000
-------------- --------------
Net income: As reported $ 2,374,725 $ 2,003,954
Pro forma 2,337,111 1,978,199
Basic earnings per share: As reported $ 1.56 $ 1.22
Pro forma 1.53 1.20
Diluted earnings per share: As reported $ 1.55 $ 1.22
Pro forma 1.53 1.20
F-30
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(19) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31:
2001 2000 1999
-------------- -------------- --------------
Weighted average shares outstanding during
the year on which basic earnings per
share is calculated 1,524,917 1,646,545 1,684,246
Add: incremental shares under stock option
plans 4,945 154 --
-------------- -------------- --------------
Average outstanding shares on which diluted
earnings per share is calculated 1,529,862 1,646,699 1,684,246
============== ============== ==============
Net income applicable to common stockholders,
basic $ 2,374,725 2,003,954 2,469,272
Less: reduction of proportionate share of
Valley net income assuming option
exercises (1,776) (3,126) --
-------------- -------------- --------------
Net income applicable to common stockholders,
diluted $ 2,372,949 2,000,828 2,469,272
============== ============== ==============
Basic earnings per share $ 1.56 1.22 1.47
============== ============== ==============
Diluted earnings per share $ 1.55 1.22 1.47
============== ============== ==============
The Company had no common stock equivalent that would have been
antidilutive for the year ended December 31, 2001.
F-31
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(20) CONDENSED QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
The Company's condensed quarterly income statements for the years ended
December 31, 2001 and 2000 are summarized as follows:
YEAR ENDED DECEMBER 31, 2001
----------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Interest income $ 6,538,726 6,760,441 6,820,965 6,761,978
Interest expense 3,262,820 3,674,638 3,901,062 3,985,928
------------ ------------ ------------ ------------
Net interest income 3,275,906 3,085,803 2,919,903 2,776,050
Provision for loan losses (750,125) (431,250) (249,375) (209,375)
Non-interest income 1,415,612 1,284,306 1,208,073 1,006,407
Non-interest expense (2,976,243) (2,871,750) (2,771,934) (2,547,912)
------------ ------------ ------------ ------------
Income before income taxes
and minority interest 965,150 1,067,109 1,106,667 1,025,170
Income tax expense (395,169) (413,434) (428,647) (396,056)
------------ ------------ ------------ ------------
Net income before minority interest 569,981 653,675 678,020 629,114
Minority interest (20,379) (42,148) (47,214) (46,324)
------------ ------------ ------------ ------------
Net income $ 549,602 611,527 630,806 582,790
============ ============ ============ ============
Net income per share:
Basic $ 0.38 0.41 0.41 0.36
============ ============ ============ ============
Diluted $ 0.37 0.41 0.41 0.36
============ ============ ============ ============
F-32
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
YEAR ENDED DECEMBER 31, 2000
----------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Interest income $ 6,857,751 6,699,673 6,274,203 5,908,304
Interest expense 4,058,021 4,012,338 3,601,998 3,283,298
------------ ------------ ------------ ------------
Net interest income 2,799,730 2,687,335 2,672,205 2,625,006
Provision for loan losses (252,819) (847,125) (364,250) (164,375)
Non-interest income 1,091,237 1,014,673 972,105 758,504
Non-interest expense (2,499,479) (2,564,950) (2,277,828) (2,207,367)
------------ ------------ ------------ ------------
Income before income taxes
and minority interest 1,138,669 289,933 1,002,232 1,011,768
Income tax expense (434,568) (107,213) (347,994) (397,702)
------------ ------------ ------------ ------------
Net income before minority interest 704,101 182,720 654,238 614,066
Minority interest (34,078) (14,907) (46,976) (55,210)
------------ ------------ ------------ ------------
Net income $ 670,023 167,813 607,262 558,856
============ ============ ============ ============
Net income per share:
Basic $ 0.41 0.10 0.37 0.34
============ ============ ============ ============
Diluted $ 0.41 0.10 0.37 0.34
============ ============ ============ ============
YEAR ENDED DECEMBER 31, 1999
----------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Interest income $ 4,691,765 4,596,787 4,250,534 3,978,381
Interest expense 2,608,783 2,542,046 2,288,640 2,098,546
------------ ------------ ------------ ------------
Net interest income 2,082,982 2,054,741 1,961,894 1,879,835
Provision for loan losses (35,000) (53,500) (75,000) (40,000)
Non-interest income 859,038 820,875 875,851 779,162
Non-interest expense (1,893,963) (1,761,713) (1,765,524) (1,681,167)
------------ ------------ ------------ ------------
Income before income taxes 1,013,057 1,060,403 997,221 937,830
Income tax expense (385,135) (416,415) (373,305) (364,384)
------------ ------------ ------------ ------------
Net income $ 627,922 643,988 623,916 573,446
============ ============ ============ ============
Net income per share:
Basic $ 0.38 0.38 0.37 0.34
============ ============ ============ ============
Diluted $ 0.38 0.38 0.37 0.34
============ ============ ============ ============
F-33
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(21) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Company's operations. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
guidelines. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in
the tables below). As of December 31, 2001, the Company met all capital
adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notifications from the federal
banking agencies categorized Heritage and Valley as "well capitalized"
under the regulatory framework for prompt corrective action (PCA). To be
categorized as "well capitalized" the banks must maintain minimum ratios as
set forth in the following tables. There are no conditions or events that
management believes have changed the institutions' PCA category.
MINIMUM TO BE "WELL
MINIMUM FOR CAPITAL CAPITALIZED" UNDER PCA
ACTUAL ADEQUACY PURPOSES PROVISIONS
-------------------- -------------------- --------------------
CONSOLIDATED: (IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------- -------- -------- -------- -------- -------- --------
December 31, 2001:
Total capital $ 34,143 11.90% 22,947 8.0% N/A --
Tier I capital 30,640 10.68 -- -- N/A --
Tier I leverage 30,640 8.08 15,165 4.0 N/A --
December 31, 2000:
Total capital 32,437 12.15 21,345 8.0 N/A --
Tier I capital 29,912 11.21 -- -- N/A --
Tier I leverage 29,912 8.47 14,119 4.0 N/A --
Tangible capital 29,912 8.30 14,412 4.0 N/A --
HERITAGE:
---------
December 31, 2001:
Total capital 24,973 10.65 18,761 8.0 23,451 10.0%
Tier I capital 22,179 9.46 9,381 4.0 14,071 6.0
Tier I leverage 22,179 7.34 12,083 4.0 15,104 5.0
December 31, 2000:
Total capital 21,373 11.39 15,014 8.0 18,768 10.0
Tier I capital 19,496 10.39 -- -- 11,261 6.0
Tier I leverage 19,496 7.09 8,246 3.0 13,744 5.0
Tangible capital 19,496 7.09 4,123 1.5 -- --
F-34
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
MINIMUM TO BE "WELL
MINIMUM FOR CAPITAL CAPITALIZED" UNDER PCA
ACTUAL ADEQUACY PURPOSES PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
HERITAGE STATE:
---------------
December 31, 2000:
Total capital $ 1,859 12.60% 1,181 8.0% 1,476 10.0%
Tier I capital 1,725 11.69 590 4.0 885 6.0
Tier I leverage 1,725 9.76 707 4.0 883 5.0
VALLEY:
-------
December 31, 2001:
Total capital 8,223 15.94 4,126 8.0 5,158 10.0
Tier I capital 7,578 14.69 2,063 4.0 3,095 6.0
Tier I leverage 7,578 10.39 2,918 4.0 3,648 5.0
December 31, 2000:
Total capital 8,220 12.31 5,341 8.0 6,676 10.0
Tier I capital 7,705 11.54 2,671 4.0 4,006 6.0
Tier I leverage 7,705 11.38 2,707 4.0 3,384 5.0
The total capital and Tier I capital ratios are determined based on
risk-weighted assets. The Tier I leverage and tangible capital ratios are
determined based on tangible assets.
State banks, such as Heritage and Valley, may pay dividends up to the total
of the prior two years earnings without permission of State regulators.
(22) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value for financial
instruments, whether or not recognized in the statements of financial
condition. A financial instrument is defined as cash, evidence of an
ownership interest in an entity, or a contract that both imposes a
contractual obligation on one entity to deliver cash or another financial
instrument to a second entity.
The following assumptions and methods were used by the Company in
estimating the fair value of its financial instruments:
FINANCIAL ASSETS. Due to the liquid nature of the instruments, the
carrying value of cash and cash equivalents and time deposits in banks
approximates fair value. For all securities available-for-sale, the
fair value is based upon quoted market prices. The fair value of loans
receivable was estimated by discounting future cash flow using current
rates at which similar loans would be made. The fair value of loans
receivable for Valley for 2001 and 2000, Heritage State for 2000 and
Heritage for 2001 was obtained from an internally generated fair value
model which primarily employs the discounted cash flow method which
estimates fair value by discounting the cash flows the instruments are
expected to generate by the yields currently available to investors on
instruments of comparable risk and duration. Therefore, to calculate
present value, the model uses assumptions about the size and timing of
expected cash flows and appropriate discount rates. The fair value of
loans receivable held by Heritage for 2000 was obtained from the
F-35
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Office of Thrift Supervision Risk Management Division Analysis (OTS
Analysis). The OTS Analysis primarily employs the discounted cash flow
method which estimates fair value by discounting the cash flows the
instruments are expected to generate by the yields currently available
to investors on instruments of comparable risk and duration.
Therefore, to calculate present value, the OTS model uses assumptions
about the size and timing of expected cash flows and appropriate
discount rates. The fair value of loans held for sale approximates
carrying fair, as the carrying value is the lower of cost or fair
value, and the Company expects the loans to be sold, with no gain or
loss, in the short-term. The fair value of restricted stock
approximates redemption value. The fair value of accrued interest
receivable approximates book value as the Company expects contractual
receipt in the near-term.
FINANCIAL LIABILITIES. The fair value of NOW, money market accounts,
demand accounts and non-term savings deposits approximates book values
as rates are periodically adjusted to market rates. The fair value of
time deposits held by Valley for 2001 and 2000, Heritage State for
2000 and Heritage for 2001 was obtained from an internally generated
fair value model. The fair value of time deposits held by Valley was
estimated by discounting future cash flow using current rates at which
deposits would be acquired. The fair value of time deposits held by
Heritage for 2000 was obtained from the OTS Analysis. The fair value
of time deposits was estimated by discounting the future cash flows
using current rates for similar deposits. Because the interest rate on
the line of credit, fed funds line, and trust preferred securities
approximates the Company's current long-term borrowing rate, the fair
value of these liabilities approximates the carrying value. The fair
value of FHLB advances and securities sold under agreements to
repurchase was obtained from an internally generated fair value model
for 2001 and the OTS Analysis for 2000. The fair value of accrued
interest payable approximates book value due to contractual payment in
the near-term.
OFF-BALANCE SHEET. Commitments made to extend credit represent
commitments for loan originations, the majority of which are
contracted for immediate sale and, therefore, fair value approximates
the commitment amount.
LIMITATIONS. Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
comparable market interest rates, future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax effect of
the difference between the fair value and carrying value of financial
instruments can have a significant effect on fair value estimates and have
not been considered in the estimates presented herein.
F-36
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The approximate book value and fair value of the Company's financial
instruments as of December 31 are as follows:
2001 2000
-------------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- -------------- -------------- --------------
Financial assets:
Cash and cash equivalents $ 22,026,000 22,026,000 19,451,000 19,451,000
Securities available-for-sale 73,263,000 73,263,000 70,064,000 70,064,000
Loans receivable, net 260,524,000 265,818,000 251,646,000 249,495,000
Loans held for sale 7,713,000 7,713,000 2,981,000 2,981,000
Restricted stock 3,994,000 3,994,000 3,709,000 3,709,000
Accrued interest receivable 2,769,000 2,769,000 3,351,000 3,351,000
Financial liabilities:
Deposits 282,400,000 284,989,000 261,179,000 261,878,000
FHLB advances and securities sold under
agreements to repurchase 60,104,000 61,356,000 63,541,000 63,458,000
Line of credit 1,000,000 1,000,000 1,250,000 1,250,000
Accrued interest payable 1,929,000 1,929,000 2,475,000 2,475,000
Federal funds purchased 1,000,000 1,000,000 -- --
Trust preferred securities 3,000,000 3,000,000 -- --
(23) COMMITMENTS AND CONTINGENCIES
Heritage has sold loans to various investors in the secondary market under
sales agreements which contain repurchase provisions. Under the repurchase
provisions, Heritage may be required to repurchase a loan if a borrower
fails to make three monthly payments within 120 days after the sale of the
loan. The balance of loans sold with repurchase provisions remaining at
December 31, 2001 is approximately $7,628,000. There were no loans
repurchased during 2001 and 2000.
In December 2001, Heritage entered into a five-year service contract for
data processing services with BRC. In October 1995, Valley entered into a
seven-year service contract for data processing services with an
independent third party. In the event of early termination of either of
these service contracts by the Company, the Company 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.
The Company is a defendant in legal proceedings arising in the normal
course of business. In the opinion of management, the disposition of
pending litigation will not have a material effect on the Company's
consolidated financial position, results of operations, or liquidity.
At December 31, 2001, Heritage had loan commitments outstanding on 1-4
family fixed rate mortgages totaling approximately $8,800,000. These loans
were approved prior to December 31, 2001 to be closed and funded in 2002.
F-37
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(24) PARENT COMPANY INFORMATION (CONDENSED)
The summarized financial information for United Financial Corp. is
presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31,
---------------------------------
ASSETS 2001 2000
------ -------------- --------------
Cash and cash equivalents ($394,005 and $63,458, respectively, deposited
with Heritage) $ 575,673 98,430
Securities available-for-sale 750,479 1,862,040
Investment in subsidiary banks 23,896,133 22,804,688
Investment in Valley Bancorp, Inc. 5,358,501 4,581,774
Loans receivable 28,442 31,533
Accrued interest receivable 3,957 22,584
Goodwill, net 2,007,265 1,991,558
Other assets 165,317 57,161
-------------- --------------
Total assets $ 32,785,767 31,449,768
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Line of credit $ 1,000,000 1,250,000
Other liabilities 188,552 252,288
Trust preferred securities 3,000,000 --
-------------- --------------
Total liabilities 4,188,552 1,502,288
-------------- --------------
Common stock 28,005,149 28,001,579
Retained earnings 4,339,060 3,541,106
Treasury stock (4,054,712) (1,515,250)
Accumulated other comprehensive gain (loss) 307,718 (79,955)
-------------- --------------
Total stockholders' equity 28,597,215 29,947,480
-------------- --------------
Total liabilities and stockholders' equity $ 32,785,767 31,449,768
============== ==============
CONDENSED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Revenues:
Cash dividends from bank subsidiaries $ 2,033,817 2,200,000 2,760,000
Interest income 77,447 124,073 270,270
Other income 1,259 1,263 127,526
-------------- -------------- --------------
2,112,523 2,325,336 3,157,796
-------------- -------------- --------------
Expenses:
Interest expense 198,232 78,461 --
Other operating expenses 485,828 400,320 290,213
-------------- -------------- --------------
684,060 478,781 290,213
-------------- -------------- --------------
Income before equity in undistributed earnings
of subsidiaries and income taxes 1,428,463 1,846,555 2,867,583
Dividends in excess of earnings of subsidiaries -- -- (359,635)
Equity in undistributed earnings of subsidiaries 764,189 10,084 --
-------------- -------------- --------------
Income before income taxes 2,192,652 1,856,639 2,507,948
Income tax expense (benefit) (182,073) (147,315) 38,676
-------------- -------------- --------------
Net income $ 2,374,725 2,003,954 2,469,272
============== ============== ==============
F-38
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 2,374,725 2,003,954 2,469,272
Adjustments to reconcile net income to net
cash provided by operating activities:
Dividends in excess of earnings of
subsidiaries -- -- 359,635
Equity in undistributed earnings of
subsidiaries (764,190) (10,084) --
Equity in income of Valley -- -- (126,367)
Amortization of goodwill 79,742 79,517 --
Amortization of securities premiums and
discounts, net -- -- 28,480
Increase (decrease) in other assets and
liabilities, net (165,447) 236,485 51,391
-------------- -------------- --------------
Net cash provided by operating
activities 1,524,830 2,309,872 2,782,411
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of securities available-for-sale -- -- (2,004,167)
Proceeds from sales and maturities of
securities available-for-sale 1,143,238 97,990 2,050,430
Purchase of Valley stock (735,804) -- (1,746,591)
Acquisition of minority interest in Valley (95,449) (1,923,050) --
Net decrease in loans receivable 3,091 104,351 562,122
Capital contribution to Heritage State -- -- (700,000)
-------------- -------------- --------------
Net cash provided by (used in) investing
activities 315,076 (1,720,709) (1,838,206)
-------------- -------------- --------------
Cash flows from financing activities:
Advances on line of credit 1,750,000 1,555,000 --
Payments on line of credit (2,000,000) (305,000) --
Purchase of treasury stock (2,539,462) (583,601) (931,649)
Issuance of trust preferred securities 3,000,000 -- --
Proceeds from issuance of common stock 3,570 -- --
Dividends paid to stockholders (1,576,771) (1,713,724) (1,751,685)
-------------- -------------- --------------
Net cash used in financing activities (1,362,663) (1,047,325) (2,683,334)
-------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents 477,243 (458,162) (1,739,129)
Cash and cash equivalents at beginning of year 98,430 556,592 2,295,721
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 575,673 98,430 556,592
============== ============== ==============
F-39
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(25) ACQUISITION
UFC's investment in Valley was accounted for by the equity method in 1999.
On January 10, 2000, UFC's ownership percentage increased to 50.6%.
Therefore, effective January 1, 2000, the Company began to consolidate
Valley in its financial statements. The following presents a pro forma
condensed statement of income of the Company for the year ended December
31, 1999 as if Valley were consolidated during that period:
(Unaudited)
Interest income $ 21,787,994
Interest expense 11,527,296
--------------
Net interest income 10,260,698
Provision for loan losses 322,000
--------------
Net interest income after provision for loan losses 9,938,698
Non-interest income 3,769,283
Non-interest expense 8,970,033
--------------
Income before income taxes 4,737,948
Income taxes 1,817,964
--------------
Income before minority interest 2,919,984
Minority interest (270,743)
--------------
Net income $ 2,649,241
==============
Basic earnings per share $ 1.57
==============
Diluted earnings per share $ 1.57
==============
(26) OPERATING SEGMENT INFORMATION
The Company evaluates segment performance internally based on individual
bank charter, and thus the operating segments are so defined. All segments,
except for the segment defined as "other," are based on commercial banking
operations. The operating segment defined as "other" includes UFC and
elimination of transactions between segments.
The accounting policies of the individual operating segments are the same
as those of the Company described in note 1. Transactions between operating
segments are primarily conducted at fair value, resulting in profits that
are eliminated for reporting consolidated results of operations. Expenses
for centrally provided services are allocated based on the estimated usage
of those services.
F-40
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The following is a summary of selected operating segment information for
the years ended December 31, 2001, 2000 and 1999.
HERITAGE
BANK VALLEY OTHER CONSOLIDATED
-------------- -------------- -------------- --------------
2001:
Net interest income $ 9,350,332 2,828,114 (120,784) 12,057,662
Provision for loan
losses 1,387,000 253,125 -- 1,640,125
-------------- -------------- -------------- --------------
Net interest income
after provision 7,963,332 2,574,989 (120,784) 10,417,537
Non-interest income 4,508,804 404,336 1,258 4,914,398
Non-interest expense 8,309,082 2,372,928 485,829 11,167,839
-------------- -------------- -------------- --------------
Income before income
taxes 4,163,054 606,397 (605,355) 4,164,096
Income taxes (benefit) 1,592,717 222,663 (182,074) 1,633,306
-------------- -------------- -------------- --------------
Income before minority
interest 2,570,337 383,734 (423,281) 2,530,790
Minority interest -- -- (156,065) (156,065)
-------------- -------------- -------------- --------------
Net income (loss) $ 2,570,337 383,734 (579,346) 2,374,725
============== ============== ============== ==============
Total assets $ 309,253,120 70,355,330 3,121,616 382,730,066
Loans receivable, net $ 214,660,536 45,835,304 28,442 260,524,282
Total deposits $ 224,097,304 58,696,939 (394,005) 282,400,238
Total stockholders'
equity $ 23,896,133 8,203,448 (3,502,366) 28,597,215
F-41
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
HERITAGE HERITAGE
BANK STATE VALLEY OTHER CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
2000:
Net interest income $ 7,748,036 599,506 2,391,122 45,612 10,784,276
Provision for loan
losses 1,330,000 -- 298,569 -- 1,628,569
-------------- -------------- -------------- -------------- --------------
Net interest income
after provision 6,418,036 599,506 2,092,553 45,612 9,155,707
Non-interest income 3,318,595 67,254 449,407 1,263 3,836,519
Non-interest expense 6,648,634 470,388 2,030,281 400,321 9,549,624
-------------- -------------- -------------- -------------- --------------
Income before income
taxes 3,087,997 196,372 511,679 (353,446) 3,442,602
Income taxes (benefit) 1,175,882 75,734 183,176 (147,315) 1,287,477
-------------- -------------- -------------- -------------- --------------
Income before minority
interest 1,912,115 120,638 328,503 (206,131) 2,155,125
Minority interest -- -- -- (151,171) (151,171)
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 1,912,115 120,638 328,503 (357,302) 2,003,954
============== ============== ============== ============== ==============
Total assets $ 275,800,965 17,586,972 71,024,165 (611,199) 363,800,903
Loans receivable, net $ 193,079,468 14,059,321 44,475,936 31,533 251,646,258
Total deposits $ 185,046,156 13,517,695 62,679,085 (63, 650) 261,179,286
Total stockholders'
equity $ 20,680,863 2,123,825 8,106,465 (963,673) 29,947,480
HERITAGE
HERITAGE STATE OTHER CONSOLIDATED
-------------- -------------- -------------- --------------
1999:
Net interest income $ 7,264,989 444,193 270,270 7,979,452
Provision for loan
losses 110,000 93,500 -- 203,500
-------------- -------------- -------------- --------------
Net interest income
after provision 7,154,989 350,693 270,270 7,775,952
Non-interest income 3,164,162 43,238 127,526 3,334,926
Non-interest expense 6,323,404 488,750 290,213 7,102,367
-------------- -------------- -------------- --------------
Income (loss) before
income taxes 3,995,747 (94,819) 107,583 4,008,511
Income taxes (benefit) 1,536,735 (36,172) 38,676 1,539,239
-------------- -------------- -------------- --------------
Net income (loss) $ 2,459,012 (58,647) 68,907 2,469,272
============== ============== ============== ==============
Total assets $ 249,073,839 19,087,125 2,064,931 270,225,895
Loans receivable, net $ 171,204,354 15,007,555 135,885 186,347,794
Total deposits $ 168,224,959 12,044,923 (388,344) 179,881,538
Total stockholders'
equity $ 20,150,527 1,986,159 7,222,270 29,358,956
F-42
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(27) GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF STATEMENT 142
As discussed in Note 1, the Company adopts Statement 142 effective January
1, 2002. The following schedule presents reported net income for all
periods presented exclusive of amortization expense recognized in those
periods related to goodwill and identifiable intangibles. Beginning in
January 2002, the Company is no longer required to expense its amortization
of goodwill. Certain identifiable intangible assets will continue to be
amortized.
FOR THE YEAR ENDED DECEMBER 31,
2001 2000(1) 1999 (1)
-------------- -------------- --------------
Reported net income $ 2,374,725 2,003,954 2,469,272
Add back: Goodwill amortization (net of tax effects) 208,698 208,473 136,756
-------------- -------------- --------------
Adjusted net income $ 2,583,423 2,212,427 2,606,028
============== ============== ==============
Basic earnings per share:
Reported net income $ 1.56 1.22 1.47
Goodwill amortization 0.13 0.12 0.08
Adjusted net income $ 1.69 1.34 1.55
Diluted earnings per share:
Reported net income $ 1.55 1.22 1.47
Goodwill amortization 0.14 0.12 0.08
Adjusted net income $ 1.69 1.34 1.55
(1) Prior year information for 2000 and 1999 is unaudited.
F-43
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By: /s/ Kurt R. Weise By: /s/ Paula J. Delaney
---------------------------------- -----------------------------------
Kurt R. Weise Paula J. Delaney
President and Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Date: March 29, 2002 Date: March 29, 2002
-------------------------------- ---------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
By: /s/ John M. Morrison By: /s/ Kurt R. Weise
---------------------------------- -----------------------------------
John M. Morrison Kurt R. Weise
Director Director
Date: March 29, 2002 Date: March 29, 2002
-------------------------------- ---------------------------------
By: /s/ Larry D. Albert By: /s/ Dr. J. William Bloemendaal
---------------------------------- -----------------------------------
Larry D. Albert Dr. J. William Bloemendaal
Director Director
Date: March 29, 2002 Date: March 29, 2002
-------------------------------- ---------------------------------
By: /s/ Elliott L. Dybdal By: /s/ Jerome H. Hentges
---------------------------------- -----------------------------------
Elliott L. Dybdal Jerome H. Hentges
Director Director
Date: March 29, 2002 Date: March 29, 2002
-------------------------------- ---------------------------------
By: /s/ William L. Madison By: /s/ Kevin P. Clark
---------------------------------- -----------------------------------
William L. Madison Kevin P. Clark
Director Director
Date: March 29, 2002 Date: March 29, 2002
-------------------------------- ---------------------------------
By: /s/ Steve L. Feurt
----------------------------------
Steve L. Feurt
Director
Date: March 29, 2002
--------------------------------