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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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITY 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 twelve 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 voting 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 25, 2000, was $17,344,507.
The number of shares of Registrant's common stock outstanding on
February 25, 2000 was 1,652,312. Registrant's common stock is traded on the
Nasdaq National Market, symbol UBMT.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on May 23, 2000 are incorporated by reference into Part
III of this Form 10-K.
UNITED FINANCIAL CORP.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................................ 1
ITEM 2. PROPERTIES..........................................................14
ITEM 3. LEGAL PROCEEDINGS...................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................15
ITEM 6. SELECTED FINANCIAL DATA.............................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................35
ITEM 11. EXECUTIVE COMPENSATION..............................................35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................................35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.........................................................36
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PART I
ITEM 1. BUSINESS
GENERAL. United Financial Corp. ("United") is a bank holding company
headquartered in Great Falls, Montana, with operations in 12 other Montana
communities. In 1999, substantially all of United's banking business was
conducted through its wholly-owned subsidiaries Heritage Bank F.S.B. ("Heritage
Bank") and Heritage State Bank ("State Bank"), a banking subsidiary formed in
1998, collectively referred to herein as the "Banks". United had assets of
approximately $270 million, deposits of approximately $180 million and
stockholders' equity of approximately $29 million at December 31, 1999. United
is the result of the merger on February 3, 1998 (the "Heritage Merger") of two
Montana-based savings and loan holding companies of relatively comparable size:
United Financial Corp. (as it existed prior to the merger, "Old United") and
Heritage Bancorporation ("Heritage"). Heritage Bank is the result of the
subsequent merger in May 1998 of the savings bank subsidiaries of these two
holding companies: United Savings Bank, F.A., the savings bank subsidiary of Old
United ("United Bank"), and Heritage Bank, the savings bank subsidiary of
Heritage.
Heritage Bank is a federally chartered stock savings bank with full
service banking offices in Chester, Glendive, Great Falls, Havre and Shelby,
Montana, and loan production offices in Bozeman, Hamilton, Kalispell, Libby,
Missoula, and Polson, Montana. As of December 31, 1999, full service banking
offices are under construction in Missoula and Bozeman, which will replace the
loan production offices in those cities. State Bank is a state chartered bank
with full service banking operations in Fort Benton and Geraldine, Montana. The
Banks are engaged in the community banking business of attracting deposits from
the general public through their offices and using those deposits, together with
other available funds, to originate commercial (including lease financing),
commercial real estate, residential, agricultural and consumer loans primarily
in their market areas in Montana. A majority of United's banking business is
conducted in the Great Falls area. The Banks also invest in mortgage-backed
securities, U.S. Treasury obligations, other U.S. Government agency obligations
and other interest-earning assets.
The Banks' financial condition and results of operations, and therefore
the financial condition and results of operations of United, are dependent
primarily on net interest income and fee income. The Banks' financial condition
and results of operations are also significantly influenced by local and
national economic conditions, changes in market interest rates, governmental
policies, tax laws and the actions of various regulatory agencies.
United's principal offices are located at 120 First Avenue North, Great
Falls, Montana, and its telephone number is (406) 727-6106. Heritage Bank has a
wholly owned subsidiary, Community Service Corporation ("CSC"), which owned and
managed real estate held for investment during 1999, but which is inactive at
December 31, 1999. Heritage Bank holds an 11% ownership interest in Bankers'
Resource Center, a computer data center. United, Heritage Bank, State Bank and
CSC are collectively referred to herein as "United."
VALLEY BANCORP, INC. During 1999, United increased its ownership in
Valley Bancorp Inc. ("Valley") to 39.93% of Valley's outstanding shares at
December 31, 1999. On January 10, 2000, United increased its ownership to 50.6%
and combined with additional shares acquired thereafter United currently owns
54.03% of the outstanding shares of Valley as of March 8, 2000. Valley is a bank
holding company located in Phoenix, Arizona and is the parent company of Valley
Bank of Arizona, a state chartered commercial bank. Valley had assets of
approximately $59.5 million, deposits of approximately $50.1 million and
stockholders' equity of approximately $7.4 million at December 31, 1999. The
aggregate purchase price of the shares of Valley purchased to date is $6.1
million, including $1.7 million for shares acquired in 1999. As a result of
acquiring over 50% of the outstanding shares of Valley, United will consolidate
Valley with its financial statements effective January 1, 2000. See Part IV,
Item 20 - "Notes to Consolidated Financial Statements - Acquisition". In
December 1998, United purchased shares from various shareholders,
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including 150,000 shares from the Chairman of United. United owned approximately
25% of Valley at December 31, 1998.
STATE BANK. As a result of the formation of State Bank in August 1998,
United, which was formerly regulated by the Office of Thrift Supervision ("OTS")
as a savings and loan holding company, became a bank holding company subject to
supervision by the Federal Reserve Board. Heritage Bank, as a federally
chartered savings bank, remains subject to supervision by the OTS as its
principal regulator and both Heritage Bank and State Bank, as financial
institutions with deposits insured by the Federal Deposit Insurance Corporation
("FDIC"), remain subject to regulation by the FDIC.
HERITAGE MERGER. The new management of United changed Old United's
business strategy in 1998 and is engaging in a growth-oriented expansion
strategy by pursuing internal and external growth opportunities, when available.
United has expanded the customer base of Heritage Bank and State Bank by
emphasizing commercial, agricultural and consumer loans as well as the mortgage
business previously emphasized by United Bank. Management continues to pursue
external growth through opening new branches, possible acquisitions of other
financial institutions, and expansion of the geographic area currently served.
United's business strategy may subject United to a greater degree of
risk than that of Old United. Historically, Old United had concentrated on
residential lending, as home loans were believed to present the least amount of
risk. Commercial real estate loans, commercial loans and consumer loans, which
constituted a larger portion of Heritage's portfolio and lending activities, had
been made by Old United only on a limited basis. Risks associated with United's
business strategy include increased risk of losses on loans, provisions for loan
losses which exceed historical levels, difficulties in integrating or managing
new branches or acquired institutions, and problems relating to the management
of growth. There can be no assurance that United will be successful in
instituting this new business strategy or in managing growth.
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 $13.8 million, $10.5 million and $4.5 million, or
approximately 80%, 74% and 78% of total interest income, for the years ended
December 31, 1999, 1998 and 1997, respectively. To date, 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. In
1999, United used increased Federal Home Loan Bank ("FHLB") borrowings and
repurchase agreements, as well as cash equivalents and deposits, to expand its
loan portfolio. Accordingly, its interest income from loans receivable, as well
as the percentage of total income from loans receivable, increased in 1999.
In general, prior to the Heritage Merger, the lending operations of
Heritage more closely paralleled the lending activities of a commercial bank
than a savings bank. As a result of the Heritage Merger, United now uses the
lending policies, guidelines and procedures of Heritage and, accordingly, is
placing more emphasis on commercial and consumer lending and effective use of
its capital.
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The following table sets forth the composition of United's loans
receivable at December 31, 1999 and 1998 and at December 31, 1997 (on a pro
forma combined basis):
(Dollars in thousands) Pro Forma Combined
December 31, December 31, December 31,
------------------------ ------------------------ ------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ------------ ----------- ------------ -----------
Loans secured by real estate:
1 - 4 residential $ 34,097 18.1% $27,109 18.7% $43,156 45.4%
5 or more residential 5,237 2.8 6,601 4.6 6,705 7.1
Construction 10,564 5.6 9,224 6.4 5,476 5.8
Agricultural 16,210 8.6 10,275 7.1 2,980 3.1
Commercial 30,594 16.3 27,449 18.9 11,437 12.0
------------ ----------- ------------ ----------- ------------ -----------
Total loans secured by real
estate 96,702 51.4 80,658 55.7 69,754 73.4
Commercial non-real
estate 60,060 32.0 37,564 25.9 13,435 14.2
Municipal 1,428 .8 1,477 1.0 795 .8
Agricultural non-real
estate 9,805 5.2 8,191 5.7 2,968 3.1
Loans secured by deposits 957 .5 752 .5 616 .7
Consumer loans - real
estate secured 7,702 4.1 9,066 6.3 2,327 2.5
Other consumer 11,276 6.0 7,160 4.9 5,075 5.3
------------ ----------- ------------ ----------- ------------ -----------
Total loans receivable 187,930 100.0% 144,868 100.0% 94,970 100.0%
=========== =========== ===========
Less:
Unearned discount and
deferred loan
origination fees (4) 24 33
Allowance for loan losses 1,586 1,485 1,146
------------ ------------ ------------
Net loans receivable $186,348 $143,359 $93,791
============ ============ ============
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 seven banking offices and its six 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 all 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, United offers both fixed and adjustable rate
residential loans. United offers a variety of adjustable-rate mortgage loans
("ARMs"), the interest rates on which vary with the movement of the index upon
which the interest rates are based. If
3
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 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. United sold long-term fixed-rate mortgage loans to
the secondary market in aggregate amounts of $119.1 million in 1999. 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 was realized at sale. During 1999, United sold
portfolio loans in aggregate amounts of $11.3 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 six 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.
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 OTS regulations limit
the level of commercial real estate lending by a federally charted thrift
institution to 400% of its capital, this limitation has not had a material
impact on the lending activities of Heritage Bank to date.
NON-MORTGAGE COMMERCIAL AND AGRICULTURAL LENDING. In addition to real
estate lending, United offers commercial and agricultural non-mortgage loans.
OTS regulations limit the level of commercial non-mortgage lending by a
federally chartered thrift institution to 20% of total assets. In 1999,
increased commercial demand has caused Heritage Bank to exceed the 20% limit.
United is currently working with the OTS to rectify this matter. United is
concerned that offering only traditional thrift products is not sufficient in
it's highly competitive financial marketplace, especially in areas such as
Glendive, Havre, Shelby and Chester, Montana. Based on discussions with the
Federal Reserve Bank, OTS, and it's external advisors, United is considering
several alternatives to alleviate the 20% limitation for Heritage Bank.
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. These are generally purchased
from commercial banks and third party loan production offices. These purchased
participations allow United
4
to diversify its geographic risk and are purchased with a higher level of
underwriting standards since a direct customer relationship does not exist.
United has not had any credit losses on its participation portfolio to date.
Most of United's commercial non-mortgage loans are originated or purchased by
United's senior lending staff in Great Falls.
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. Although
some consumer lending is conducted through loan production offices, most of
United's consumer lending is conducted at branch offices and United's home
office in Great Falls. United requires fire, hazard and casualty insurance for
loans secured by home equity and casualty insurance for loans secured by autos
and recreational vehicles.
INVESTMENT ACTIVITIES
The investment activities of United are designed to provide an
investment alternative for funds not presently required to meet loan demand,
assist Heritage Bank and State Bank in meeting potential regulatory liquidity
requirements, assist in maximizing income consistent with quality and liquidity
requirements, supply collateral to secure public funds and retail repurchase
agreements, provide a means for balancing market and credit risks, and provide
consistent income and market value throughout changing economic times.
Historically, interest income from investment securities and
mortgage-backed securities was a major source of Old United's income. Interest
income from these two sources as a percentage of Old United's total interest
income for the year ended December 31, 1997 was approximately 52.1%. In
contrast, interest income from mortgage-backed and investment securities
constituted only 18.0% of the total interest income of Heritage during the year
ended December 31, 1997. Interest income from investment activities was $3.2
million and $3.1 million, or 18.3% and 21.8%, of United's total interest income
during 1999 and 1998, respectively, and $4.7 million, or 36.6%, of United's
total interest income during the year ended December 31, 1997, (on a pro forma
combined basis).
United's portfolio consists primarily of obligations of the U.S.
government and its agencies and mortgage-backed securities, state and local
governments, and agency collateralized obligation securities. United's
investment portfolio does not contain 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 the
United's investments are classified as available-for-sale.
(Dollars in thousands)
Pro Forma
Combined
--------------- --------------- --------------
December 31, December 31, December 31,
1999 1998 1997
--------------- --------------- --------------
U.S. government and agencies $9,794 $ 13,637 $ 22,993
Mortgage-backed securities 39,455 36,353 32,222
Municipal bonds 1,935 885 1,239
Kemper U.S. government bond mutual fund - - 5,260
Other investments 1,860 1,025 407
--------------- --------------- --------------
$ 53,044 $ 51,900 $ 62,121
=============== =============== ==============
During 1999, United held it's investment portfolio relatively constant.
United sold $10.1 million of U.S. Treasury notes and mortgage-backed securities,
received $14.7 million in mortgage-backed security principal payments and had
$6.1 million of calls and maturities of investment securities, while purchasing
$33.9 million in investment securities and mortgage-backed securities. United
also recorded an unrealized loss in market values of it's investment portfolio
of $1.6 million.
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SOURCES OF FUNDS
The primary sources of funds for United's lending and investment
activities are deposits, repurchase agreements, FHLB borrowings, loan and
mortgage-backed securities repayments, proceeds from loan sales, investment
securities interest payments and maturities, and net operating revenues. During
recent periods, United has funded a large portion of the increase in its loan
portfolio through additional FHLB borrowings and maturing of investment
securities, as well as new deposit liabilities and repurchase agreements.
DEPOSIT ACTIVITIES. Deposits are attracted from within United's market
area through the offering of a broad selection of deposit instruments, including
NOW accounts, money market accounts, regular savings accounts, certificates of
deposit and retirement savings plans. Deposit account terms vary, according to
the minimum balance required, the time 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, 1999 and 1998, and at December 31, 1997 (on a pro forma combined
basis):
Pro Forma Combined
(Dollars in thousands) December 31, December 31, December 31,
-------------------------- ------------------------- --------------------------
1999 1998 1997
-------------------------- ------------------------- --------------------------
Type: Amount Percent Amount Percent Amount Percent
------------- ------------ ------------ ------------ --------------------------
Non-interest bearing $ 18,751 10.4% $ 18,895 11.3% $ 15,560 11.0%
Interest bearing:
NOW & money market
demand accounts 23,333 13.0 22,907 13.7 17,025 12.1
Savings accounts 48,295 26.8 46,811 27.9 33,479 23.7
Time deposits 89,503 49.8 79,007 47.1 75,199 53.2
------------- ------------ ------------ ------------ ------------- ------------
Total $179,882 100.0% $167,620 100.0% $141,263 100.0%
============= ============ ============ ============ ============= ============
Scheduled maturities of certificates of deposit at December 31, 1999
are as follows:
Due within one year $65,289
Due within two to three years 21,803
Due within four to five years 2,303
Due after five years 108
------------
Totals $89,503
============
Time deposits of $100,000 or more were approximately $15.9 million and
$13.0 million at December 31, 1999 and 1998, respectively, and $9.1 million at
December 31, 1997 (on a proforma combined basis). Amounts in excess of $100,000
are not insured by a federal agency.
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 United's depositors have resided outside
Montana. As market demand generally dictates deposit maturities and rates,
United intends to continue to offer those types of accounts that it believes
have broad market appeal.
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BORROWINGS. United relies to a significant extent on borrowings from
the FHLB of Seattle to finance its short-term, and increasingly its longer term,
financing needs. The FHLB of Seattle functions as the central reserve bank
providing credit for savings institutions and certain other member financial
institutions. In recent periods, borrowings from the FHLB of Seattle have been
available at rates that are as favorable, or more favorable, than the rates that
United would be required to pay on deposits. Further, borrowings from the FHLB
are available at various maturities, facilitating the accurate matching of asset
and liability maturity dates. United has used these available borrowings during
the past year in part to fund expansion of its lending activities.
As a member of the FHLB of Seattle, Heritage Bank and State Bank are
required to own capital stock in the FHLB of Seattle 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. Heritage Bank's currently established available
FHLB advance credit line is 30% of assets. State Bank's currently established
FHLB advance credit line is 10% of assets. The FHLB of Seattle is required to
review its credit limitations and standards at least annually. At December 31,
1999, 1998 and 1997, $46.4 million, $22.2 million and $6.4 million,
respectively, of FHLB advances were outstanding. Old United had no FHLB advances
at December 31, 1997.
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 year ended December 31,
1999, securities sold under agreements to repurchase averaged approximately
$10.3 million and the maximum outstanding at any month end during the year was
approximately $11.5 million. United had $11.5 million, $9.4 million and $3.2
million of securities sold under repurchase agreements at December 31, 1999,
1998 and 1997, respectively. Old United had no securities sold under repurchase
agreements at December 31, 1997.
OTHER ACTIVITIES
United has no direct subsidiaries other than Heritage Bank and State
Bank. Heritage Bank has a wholly owned service corporation, CSC, which owned and
managed a limited amount of real estate held for investment. Heritage Bank also
holds an 11% ownership interest in Bankers' Resource Center, a computer data
center, which provides certain data processing services to Heritage Bank.
MARKET AREA
Prior to the Heritage Merger, United's primary market area had been the
Great Falls, Montana metropolitan area and the areas surrounding its offices in
Glendive, Havre and Shelby, Montana. With the Heritage Merger, Chester, Montana
was added as a market area as well as market areas served by a loan production
office ("LPO") in Bozeman. Since the Heritage Merger, United has also added LPOs
in Hamilton, Kalispell, Libby, Missoula and Polson, Montana. The Polson office
was closed effective January 31, 2000.
Great Falls, the county seat of Cascade County and a regional trade
center, is one of the largest cities in Montana. The estimated 1999 Great Falls
and Cascade County populations were approximately 58,000 and 78,000,
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 4,800 people, is the largest employer in
Great Falls and Cascade County. Reduction in size or closure of MAFB could
adversely affect United.
The economies of Chester, Fort Benton, Glendive, Havre and Shelby,
Montana are dependent to a large extent on agricultural, livestock and railroad
activities. Areas served by United's LPOs are less dependent upon agriculture.
Areas such as Bozeman, Hamilton, Kalispell and Missoula are also supported in
part by tourism and higher
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education. Nevertheless, agriculture is the predominant activity in the State of
Montana and any adverse trends in agriculture could adversely affect United.
COMPETITION
Heritage Bank and State Bank, like other depository institutions, are
operating in a rapidly changing environment and, therefore, face considerable
competition in the attraction of deposits and the origination of loans.
Historically, the most direct competition for deposits has come from other
savings banks, credit unions and commercial banks. There are approximately 30
depository institutions, commercial banks, credit unions and savings banks with
offices in United's market areas. Non-depository financial service
organizations, primarily in the securities and insurance industries, have also
become competitors for retail savings and investment funds. United's deposit
programs compete with money market mutual funds, government securities and other
investment alternatives. United competes for deposits by offering a variety of
deposit accounts at interest rates based upon market conditions, convenient
business hours, quality service and convenient branch locations.
EMPLOYEES
At March 15, 2000, Heritage Bank employed 83 full-time employees and 23
part-time employees, and State Bank employed 6 full-time employees and 1
part-time employee. Management considers its relations with its employees to be
very good. 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 Plan."
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the
executive officers of United. All executive officers are elected annually by the
Board of Directors and serve at the discretion of the Board of Directors. There
are no arrangements or understandings between individual officers and any other
person pursuant to which he was elected as an officer.
Name Age Position Held
- ---- --- -------------
John M. Morrison 63 Chairman of United
Kurt R. Weise 43 Director, President and Chief Executive
Officer of United; Vice President of
Heritage Bank and State Bank
Kevin P. Clark 44 Director, Secretary and Senior Vice
President of United; President and Chief
Executive Officer of Heritage Bank and
State Bank
Steve L. Feurt 44 Director, Chief Credit Officer of United
and Senior Vice President and Chief Credit
Officer of Heritage Bank and State Bank
MR. MORRISON has served as Chairman of United since the Heritage
Merger. Mr. Morrison's term of office as a director of United expires at
United's annual shareholder meeting in 2000. Before the Heritage Merger, he
served as Chairman of Heritage since 1994. Mr. Morrison is the Chief Executive
Officer and sole shareholder of 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. Mr.
Morrison was the Chairman and majority shareholder of Bank of Montana System, a
bank holding company with approximately $800 million in assets ("BMS"), prior to
its sale to Norwest Corporation in 1994. He is involved in various other
businesses, and sits on a number of boards including University of St. Thomas,
Fairview Corporation, Fairview-University Medical Center and Fairview-University
of Minnesota.
8
MR. WEISE has served as President, Chief Executive Officer and a
director of United since the annual shareholder meeting in 1999. Mr. Weise had
served as President, Chief Operating Officer and a director of United and Vice
President of Heritage Bank since the Heritage Merger. Mr. Weise's term of office
as a director of United expires at United's annual shareholder meeting in 2000.
Before the Heritage Merger, he served as Vice President, Treasurer and a
director of Heritage. Mr. Weise also serves as President of CFS and President of
Central Bancshares. He has been involved with the Central Bank group of
companies since they were founded in 1988. He was the Chief Financial Officer of
BMS until its sale to Norwest Corporation.
MR. CLARK has served as Secretary of United and President and Chief
Executive Officer of Heritage Bank since the Heritage Merger. Mr. Clark was
elected as Vice President and a director of United in May 1998, and his term of
office as a director of United expires at United's annual shareholder meeting in
2001. Before the Heritage Merger, 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.
MR. FEURT has served as Chief Credit Officer of United and Senior Vice
President and Chief Credit Officer of Heritage Bank since the Heritage Merger.
Mr. Feurt was elected as a director of United in May 1998, and his term of
office as a director of United expires at United's annual shareholder meeting in
2002. Before the Heritage Merger, 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.
SUPERVISION AND REGULATION
UNITED. United became a registered bank holding company under the Bank
Holding Company Act ("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, 1999, United met all minimum capital requirements issued by the FRB.
9
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 has opted out of
the interstate branching by acquisition and consolidation until October 1, 2001.
Although the Interstate Act and Montana law prohibits interstate branching by
State Bank, neither statute applies to Heritage Bank. As a federal savings bank,
Heritage Bank has the ability, subject to the prior approval of the OTS, to
engage in interstate branching activities.
Under the Financial Services Modernization Act, bank holding companies
are authorized to affiliate with any financial company (for example, insurance
or securities companies) and to cross-sell an affiliates products. This permits
bank holding companies to expand their product mix to adapt to changing market
conditions.
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, United 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 STATE BANK.
Heritage Bank is a federally chartered stock savings bank regulated by the OTS.
State Bank is a Montana-chartered commercial bank. As such, State 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. The deposits of each of these banks are insured by the FDIC.
In addition to the federal banking agency statutes and regulation,
State Bank is subject to Montana statutes governing its respective activities
and regulations issued by the Montana Division. The Montana statutes and
regulations place limitations on the business and other activities of State Bank
which may be more restrictive than limitations applicable to depository
institutions that are not Montana-chartered commercial banks. In particular, and
among other limitations, the establishment and operation of new branch offices,
are limited by, and subject to approval by, the Montana Division. In addition,
Montana-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 may engage in such
activities without regard to Montana law.
By reason of FDIC insurance, both 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
10
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.
Both 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.
During the most recent OTS compliance examinations of Heritage Bank
(completed in July 1999), the OTS conducted a CRA performance evaluation and
Heritage Bank was rated as having had "an outstanding record of meeting
community credit needs". Being newly formed, FDIC has not yet conducted a CRA
performance evaluation for State Bank.
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, 1999, Heritage Bank and State Bank 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 it 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 the primary
market area and the broader economy. In addition to general economic conditions
affecting business generally, depository institutions such as Heritage Bank and
State Bank 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.
11
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. Neither Bank is currently 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 generally. It cannot be predicted
whether such legislation will be adopted or how such legislation would affect
the business of the banks.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has 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 is required to
file periodic reports with the OTS and is also subject to periodic examinations
by the OTS and the FDIC. The OTS and the FDIC have entered into an agreement
that provides for joint examinations by the FDIC and the OTS.
Under federal law, the aggregate amount of loans that Heritage Bank is
permitted to make to any one borrower ("LTOB") cannot exceed 15% of unimpaired
capital and surplus. Amounts up to an additional 10% of unimpaired capital and
surplus may 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.
The OTS has amended the LTOB limitation to permit savings associations
meeting certain requirements, including capital requirements, to extend loans to
one borrower in additional amounts under certain circumstances limited
essentially to loans to develop or complete residential housing units. At
December 31, 1999, Heritage Bank's LTOB limit was approximately $3,022,600. The
aggregate amount of loans outstanding to a single borrower at December 31, 1999
was approximately $1,644,030. At December 31, 1999, Heritage Bank was in
compliance with the LTOB limitations.
DEPOSIT INSURANCE AND FDIC REGULATION. Heritage Bank is a member of the
Savings Association Insurance Fund ("SAIF"), and State Bank is a member of Bank
Insurance Fund ("BIF"), both administered by the FDIC. 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 Heritage Bank. The FDIC may also prohibit
Heritage Bank 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 Heritage Bank, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance of Heritage Bank if it
determines that Heritage Bank has engaged or is engaging in any unsafe or
unsound practice, or is in an unsafe or unsound condition.
For 1999, Heritage Bank's SAIF assessment rate was 5.96 basis points
per $100 of insured deposits, compared to 1.19 basis points for State Bank. As a
result, Heritage Bank's and State Bank's 1999 FDIC deposit insurance premium was
$93,728. FDIC assessment rates for 2000 will be the same for Heritage Bank and
State Bank at 2.10 basis points per $100 of insured deposits.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require
federal savings institutions such as Heritage Bank 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
12
must not be less than 8.0% of "risk-adjusted" assets. Heritage Bank exceeded
these minimum standards at December 31, 1999.
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.
FDICIA 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 FDICIA are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Heritage Bank's capital
position substantially exceeds the definition of "well capitalized." FDICIA 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."
QUALIFIED THRIFT LENDER TEST. Unless a savings institution meets the
Qualified Thrift Lender ("QTL") test, it is classified and subject to regulation
as a national bank or becomes subject to a number of limitations on investment,
branching, advances, dividends and other activities. The QTL test generally
requires that an insured institution's Qualified Thrift Investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities and loans for education purposes, loans to small
businesses and loans made through credit cards or credit card accounts) equal or
exceed 65% of the institution's portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and qualifying liquid assets up to 20% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. Savings
associations may include shares of stock of the FHLBs, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation as QTIs. As of December
31, 1999, Heritage Bank met the test. Future QTL tests could be affected by
commercial non-mortgage lending activity which is discussed in Item 1-Lending
Activities.
LIQUIDITY. All 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 has exceeded liquidity
requirements for 1999. Being a state-chartered bank, State Bank is not subject
to the same liquidity requirements as Heritage Bank. However, a recent FDIC exam
found State Bank's liquidity to be satisfactory.
13
FEDERAL HOME LOAN BANK SYSTEM. Heritage Bank and State Bank are members
of the FHLB of Seattle, Washington, one of several regional banks that
administer the home financing credit function for savings associations. 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. Heritage Bank and State Bank
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, .3% of
total assets or 5% of FHLB advances outstanding.
TAXATION
GENERAL. United and its subsidiaries report their income on a calendar
year basis. The State of Montana allowed the filing of a combined Montana income
tax return for the first time in 1997. United, Heritage Bank and State Bank are
filing combined state income tax returns pursuant to a tax sharing agreement.
Generally, with some exceptions, including Heritage Bank's reserve for bad debts
discussed below, United is subject to federal 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 United.
TAX BAD DEBT RESERVES. For taxable years beginning prior to January 1,
1996, savings institutions, such as Heritage Bank, 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, have been 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,
1999, Heritage Bank's bad debt reserve for tax purposes was approximately
$3,477,000. At December 31, 1999, there was $43,000 remaining of post-1987
reserves which are being recaptured into taxable income over a period of two
years. For additional information regarding federal and state income taxes, see
Part IV, Item 12 - "Notes to Consolidated Financial statements - Income Taxes."
ITEM 2. PROPERTIES
The physical assets of United as of December 31, 1999 consist of a
modern banking facility located at 120 First Avenue North, Great Falls, Montana,
which is the location of the 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 United's
employees. Heritage Bank also leases a drive-up detached facility located at
10th Avenue South, Great Falls, Montana, and owns a facility located at 601
First Avenue North, Great Falls, Montana. Heritage Bank has four full-service
branches located in Chester, Glendive, Havre, and Shelby, Montana. These four
facilities are owned by Heritage Bank and have drive-up services. A full
14
service branch located in Missoula, Montana was opened in February 2000 and
replaced the loan production office in Missoula, which was previously leased. A
full service branch located in Bozeman, Montana is currently under construction
and is estimated to open in June 2000. This location will replace the previously
leased loan production office in Bozeman. Heritage Bank also leases three loan
production offices in Hamilton, Kalispell, and Libby, Montana. State Bank
facilities include two full service locations, owned by State Bank, located in
Fort Benton and Geraldine, Montana. There is no debt on any of the owned
facilities.
ITEM 3. LEGAL PROCEEDINGS
Although not involved in any material pending litigation as of February
29, 2000, United is engaged in litigation normal for its type of business from
time to time.
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, 1999.
PART II
ITEM 5. MARKET FOR UNITED COMMON EQUITY AND RELATED STOCKHOLER MATTERS
MARKET INFORMATION
United common stock is quoted on the Nasdaq National Market under the
symbol "UBMT." The closing sale price per share of United common stock on
February 25, 2000 was $17.375.
SHAREHOLDER DATA
As of February 7, 2000, there were approximately 213 owners of record
of United common stock and an estimated 934 additional beneficial holders whose
shares of United common stock were held in street name by brokerage houses.
COMMON STOCK MARKET PRICES
The Company's quarterly (high and low) stock prices for the past two
years are as follows:
UBMT Stock Price
------------------------
High Low
---------- ----------
1998 First Quarter $28.50 $25.13
Second Quarter 31.50 27.00
Third Quarter 29.00 23.50
Fourth Quarter 24.86 19.00
1999 First Quarter $24.125 $22.00
Second Quarter 23.00 21.00
Third Quarter 21.25 17.50
Fourth quarter 20.875 16.75
DIVIDEND PAYMENT HISTORY ON UNITED COMMON STOCK
The Board of Directors of Old United declared per share dividends of
$.235, $.24, $.245 and $.25 for the four quarters of 1997, for a total of $.97
per share. An additional $.25 per share dividend was declared by Old United in
January 1998 prior to the Heritage Merger. Heritage had not declared any
dividends prior to the Heritage Merger. The United Board declared dividends of
$.25 for each of the second, third and fourth quarters of 1998, for a total of
$.75 per share, and $.26 for each of the four quarters of 1999, for a total of
$1.04 per share.
15
The declaration and payment of future dividends by the United Board is
dependent upon the combined entity's net income, financial condition, economic
and market conditions, industry standards, certain regulatory and tax
considerations 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.
16
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
The following table includes 1999 and 1998 historical audited balances
for United and the comparative balances for 1997, 1996, and 1995 are historical
audited balances for Heritage.
(Dollars in thousands, except per
share data) Year ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------- ------------- ------------ -----------
OPERATING DATA:
Interest income $17,340 $14,249 $5,773 $4,520 $3,469
Interest expense 9,556 7,393 3,157 2,419 1,941
------------ ------------- ------------ ------------ ------------
Net interest income 7,784 6,856 2,616 2,101 1,528
Provision for loan losses 204 335 492 160 46
------------ ------------- ------------ ------------ ------------
Net interest income after provision
for loan losses 7,580 6,521 2,124 1,941 1,482
Non-interest income 3,530 3,292 1,103 1,059 631
Non-interest expense 7,102 6,147 2,361 2,251 1,505
------------ ------------- ------------ ------------ ------------
Income before income taxes 4,008 3,666 866 749 608
Provision for income taxes 1,539 1,399 324 263 214
------------ ------------- ------------ ------------ ------------
Net income $ 2,469 $ 2,267 $542 $ 486 $ 394
============ ============== =========== ============ ============
RESTATED PER SHARE DATA(1):
Income per share $1.47 $1.43 $1.14 $1.02 $ .83
Dividends per share 1.04 .75 -- -- --
Book value per share 17.77 17.98 5.78 4.59 3.57
Shares used to calculate per share
data (Book Value) 1,652 1,698 475 475 475
Shares used to calculate per share
data (Earnings) 1,684 1,588 475 475 475
FINANCIAL CONDITION DATA(2):
Assets $270,226 $232,561 $ 86,269 $ 71,280 $ 55,210
Net loans and loans held for sale 187,539 149,076 58,263 43,853 29,169
Investment securities 53,044 51,900 14,219 14,172 16,090
Deposits 179,882 167,620 70,386 57,641 42,742
FHLB advances 46,425 22,175 6,425 1,425 -
Long-term debt - - 2,350 2,550 2,650
Stockholders' equity 29,359 30,528 2,748 2,178 1,694
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
Return on average assets .98% 1.06% .73% .81% .83%
Return on average stockholders'
equity 8.52% 7.47% 21.45% 25.78% 27.81%
Net interest margin 3.32% 3.34% 3.83% 3.74% 3.45%
Efficiency ratio (3) 62.77% 60.58% 63.46% 63.67% 69.71%
Net charge-offs to average loans .06% .03% .06% .27% .18%
Nonperforming loans to total loans .18% .68% .47% .06% .02%
Allowance for loan losses to total
loans .84% 1.02% 1.43% .88% 1.10%
Nonperforming loans to allowance for
loan losses 21.88% 66.07% 31.56% 6.96% 1.84%
Average equity to average assets 11.51% 14.17% 3.19% 3.05% 3.07%
Dividend payout ratio 70.94% 56.18% - - -
(1) Share and per share amounts for Heritage 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 period end.
(3) Excludes September 1996 pretax charge for SAIF assessment of $239,000.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED UNITED AND PRO FORMA COMBINED FINANCIAL DATA OF HERITAGE AND OLD UNITED
GENERAL. Certain statements in this Report, including the following
section, constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which involve risks and uncertainties.
United's actual results may differ significantly from the results discussed in
such forwarding-looking statements. Factors that might cause such a difference
include, but are not limited to, economic conditions, competition and weather
conditions in the geographic and business areas in which United conducts its
operations, fluctuations in interest rates, credit quality and government
regulations.
United is the result of the combination on February 3, 1998 of two
savings and loan holding companies operating in Montana: Heritage and Old
United. Although United was the surviving corporation, the merger was treated as
a reverse merger for accounting purposed because the stockholders and management
of Heritage controlled the operation of United after the Heritage Merger. Using
purchase accounting, the historical financial statements of United 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.
The following unaudited pro forma combined financial information gives
effect to the Heritage Merger based on the purchase accounting adjustments,
estimates and other assumptions described in the accompanying notes. The
unaudited pro forma combined balance sheet and statements of income as of and
for the year ending December 31, 1997 are based upon the audited annual
consolidated balance sheets and statements of income of Heritage and Old United.
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheets of Heritage and Old United as if the Heritage Merger
had become effective as of December 31, 1997. The actual audited consolidated
balance sheets of United as of December 31, 1999 and 1998, the actual
consolidated statement of income for the year ended December 31, 1999, and the
unaudited pro forma combined statement of income for the year ended December 31,
1998 which combines United's results of operations for the year ended December
31, 1998 and the operations of Old United for the period from January 1, 1998 to
January 31, 1998, are also presented for comparative purposes. The unaudited pro
forma combined statements of income combines the historical consolidated
statements of income of Heritage and Old United as if the Heritage Merger had
become effective as of the beginning of the period presented. The selected pro
forma consolidated financial data is unaudited and is not necessarily indicative
of the results of operations that would have been achieved had the Heritage
Merger occurred on such dates or of the results of operations that may be
achieved in the future.
While the operations of United on a pro forma basis for the year ended
December 31, 1997 reflect the counterbalancing of operations of two different
financial institutions and their differing operating policies, the pro forma and
historical operations of United for the year ended December 31, 1998 reflect a
unified operating policy that more closely paralleled the historical policy of
Heritage. During 1998, United focused its attention on expanding commercial,
residential real estate, agricultural borrowings and some assets that were
formerly maintained by United Bank in investment securities to invest in
additional loans.
18
(In thousands) Historical Pro Forma Combined
December December
31, 31,
------------- ---------------------------
1999 1998 1997
------------- ------------- -------------
Total interest income $ 17,340 $ 14,730 $ 12,951
Total interest expense 9,556 7,649 6,445
------------- ------------- -------------
Net interest income 7,784 7,081 6,506
Provision for loan losses 204 340 717
------------- ------------- -------------
Net interest income after
provision for loan losses 7,580 6,741 5,789
Total non-interest income 3,530 3,450 1,779
Total non-interest expense 7,102 6,427 4,545
------------- ------------- -------------
Income before income taxes 4,008 3,764 3,023
Provision for income tax expense 1,539 1,434 1,131
------------- ------------- -------------
Net income $2,469 $ 2,330 $1,892
============= ============= =============
Net income per share $ 1.47 $ 1.37 $ 1.11
============= ============= =============
Weighted average shares
outstanding 1,684 1,698 1,698
============= ============= =============
See Notes to Pro Forma Combined Financial Data
19
(Dollars in thousands)
Pro Forma
Historical Combined
December December
31, 31,
---------------------------- -------------
1999 1998 1997
-------------- ------------- -------------
ASSETS
Cash and cash equivalents $11,457 $19,256 $17,396
Investment securities available-for-sale 53,044 51,900 62,121
Loans receivable, net 186,348 143,359 93,791
Loans held for sale 1,191 5,717 2,575
Premises and equipment, net 4,873 3,482 3,279
Real estate and other personal property
owned, net 14 304 827
Accrued interest receivable 2,259 1,918 1,597
Federal Home Loan Bank stock, at cost 3,046 1,232 939
Identifiable intangibles 537 606 -
Goodwill, net 1,289 1,400 571
Investment in Valley Bancorp, Inc. 4,549 2,684 -
Other assets 1,619 703 751
-------------- ------------- -------------
Total assets $ 270,226 $ 232,561 $ 183,847
============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 179,882 $ 167,620 $ 141,263
FHLB advances 46,425 22,175 6,425
Securities sold under agreements to
repurchase 11,546 9,451 3,173
Accrued interest payable and other
liabilities 3,014 2,787 3,183
-------------- ------------- -------------
Total liabilities 240,867 202,033 154,044
Stockholders' equity:
Common stock 28,002 28,002 28,116
Retained earnings 3,251 2,533 1,559
Treasury stock (932) - -
Accumulated other comprehensive income
(loss) (962) (7 ) 128
-------------- ------------- -------------
Total stockholders' equity 29,359 30,528 29,803
-------------- ------------- -------------
Total liabilities and stockholders'
equity $ 270,226 $ 232,561 $ 183,847
============== ============= =============
Tangible Equity/Assets 10.19% 12.26% 15.90%
Tangible Book Value Per Share $ 16.66 $ 16.79 $ 17.21
See Notes to Pro Forma Combined Financial Data
NOTES TO PRO FORMA COMBINED FINANCIAL DATA
BASIS OF PRESENTATION. The pro forma combined balance sheet combines
the historical consolidated balance sheets of Heritage and Old United as of
December 31, 1997 as if the Heritage Merger, which was effective February 3,
1998 (the "Heritage Merger Effective Date"), had become effective on December
31, 1997. The unaudited pro forma combined statements of income for the years
ended 1998 and 1997 combines the historical consolidated statements of income of
Heritage and Old United as if the Heritage Merger had become effective at the
beginning of the respective period. Certain amounts in the historical financial
statements of Old United have been reclassified in the pro forma combined
financial information to conform to Heritage's historical financial statements.
20
RESULTS OF OPERATIONS
In the year 2000, United intends to invest a significant portion of its
earnings in several new branches and people as well as in its Valley subsidiary.
As a result of the costs associated with opening branches in Bozeman and
Missoula, and a Valley Bank of Arizona branch being built in Scottsdale,
Arizona, United does not expect its earnings per share to increase in 2000.
Heritage Bank will have increased personnel and operating expenses associated
with its new branches, which will impact earnings per share growth for 2000.
However, management believes that growth potential in these markets is good. The
acquisition of Valley continues United's strategy of growth and geographic
diversification.
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.
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 (in each case on a pro forma combined basis):
(Dollars in thousands) Year Ended December 31, Year Ended December 31,
1999 (Actual) vs. 1998 1998 vs. 1997
(Pro Forma Combined) (Pro Forma Combined)
-------------------------------------------- --------------------------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------------------------- --------------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest earning assets:
Loans $3,434 $(294) $(94) $3,046 $4,161 $(710) $(385) $3,066
Investment securities 166 (71) (4) 91 (1,222) (281) 72 (1,431)
Other interest earning
assets (492) (151) 116 (527) 47 88 9 144
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest earning
assets 3,108 (516) 18 2,610 2,986 (903) (304) 1,779
Interest bearing
liabilities:
Interest bearing
checking (37) (11) 1 (47) 606 (245) (312) 49
Savings deposits 178 129 15 322 299 9 2 310
Time deposits 482 (213) (24) 245 25 31 1 57
Short-term borrowings 1,236 74 77 1,387 476 (40) 352 788
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities 1,859 (21) 69 1,907 1,406 (245) 43 1,204
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income $1,249 $(495) $ (51) $ 703 $1,580 $(658) $(347) $575
========= ========== ========== ========== ========== ========== ========== ==========
21
The following table sets 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
periods indicated:
Average Balance Sheet
(Dollars in thousands) Actual
-------------------------------------------------------------
Year Ended December 31, 1999
Average Average
Balance Interest Yield/Rate
------------------- ------------------- ---------------------
Interest earning assets:
Loans (1) $171,957 $ 13,825 8.04%
Investment securities 58,192 3,182 5.47%
Other interest earning assets 4,451 334 7.50%
------------------- ------------------- -------------------
Total interest earning assets 234,600 17,341 7.39%
Non-interest earning assets 17,221
-------------------
Total assets $251,821
===================
Interest bearing liabilities:
Interest bearing checking $ 36,754 479 1.30%
Savings deposits 47,851 1,838 3.84%
Time deposits 83,129 4,563 5.49%
Short-term borrowings 49,610 2,677 5.40%
------------------- ------------------- -------------------
Total interest bearing liabilities $217,344 9,557 4.40%
===================
-------------------
Net interest income $7,784
===================
Net interest spread 3.00%
Net interest margin(2) 3.32%
(1) Includes nonaccrual loans.
(2) Computed on a fully taxable basis, without regard to tax equivalent
yields.
Average Balance Sheet
(Dollars in thousands, unaudited) Pro Forma Combined
-------------------------------------------------------------
Year Ended December 31, 1998
Average Balance Average Yield/Rate
Interest
------------------- ------------------- ---------------------
Interest earning assets:
Loans (1) $130,307 $ 10,743 8.25%
Investment securities 55,440 3,348 6.04%
Other interest earning assets 9,765 639 6.54%
------------------- ------------------- -------------------
Total interest earning assets 195,512 14,730 7.53%
Non-interest earning assets 18,770
-------------------
Total assets $214,282
===================
Interest bearing liabilities:
Interest bearing checking $ 38,105 526 1.38%
Savings deposits 42,842 1,525 3.56%
Time deposits 74,767 4,309 5.76%
Short-term borrowings 25,625 1,289 5.03%
------------------- ------------------- -------------------
Total interest bearing liabilities $181,339 7,649 4.22%
===================
-------------------
Net interest income $7,081
===================
Net interest spread 3.32%
Net interest margin(2) 3.62%
(1) Includes nonaccrual loans.
(2) Computed on a fully taxable basis, without regard to tax equivalent yields.
22
Average Balance Sheet
(Dollars in thousands) Pro Forma Combined (2)
-------------------------------------------------------------
Year Ended December 31, 1997
Average Average
Balance Interest Yield/Rate
------------------- ------------------- ---------------------
Interest earning assets:
Loans (1) $ 84,505 $7,677 9.08%
Investment securities 74,493 4,779 6.42
Other interest earning assets 8,916 495 5.55
------------------- ------------------- -------------------
Total interest earning assets 167,914 12,951 7.71
Non-interest earning assets 8,637
-------------------
Total assets $176,551
===================
Interest bearing liabilities:
Interest bearing checking $16,790 477 2.84%
Savings deposits 34,381 1,215 3.53
Time deposits 74,332 4,252 5.72
Short-term borrowings 8,874 501 5.65
------------------- ------------------- -------------------
Total interest bearing liabilities $134,377 6,445 4.80%
===================
-------------------
Net interest income $6,506
===================
Net interest spread 2.91%
Net interest margin(3) 3.84%
(1) Includes nonaccrual loans.
(2) Includes average pro forma adjustments to loans, investments,
non-interest earning assets and time deposits.
(3) Computed on a fully taxable basis, without regard to tax equivalent
yields.
As illustrated in the preceding tables, the principal reason for the
increase in net interest income from 1997 to 1998, and 1998 to 1999, was an
increase in the volume of United's interest earning assets. The decrease in
interest income from a planned decrease in the volume of investment securities
held in portfolio was more than offset by a large positive contribution from
increased loan volumes, as funds from borrowings, deposits and repayments of
investment securities were applied to increase the volume of higher yielding
loan assets. This increased volume of loans was largely responsible for the $3.0
million increase in interest income due to volume from 1997 to 1998 and the $2.6
million increase in interest income due to volume from 1998 to 1999. Average
interest rates earned on loans declined during these periods as market interest
rates declined slightly. Rates earned on investment securities declined slightly
from 1997 to 1998 and also from 1998 to 1999.
Rates paid on deposits remained relatively constant from 1997 to 1998
and from 1998 to 1999, resulting in only minimal changes in interest expense as
a result of changes in such rates. An $8.5 million increase in savings accounts
from 1997 to 1998 and a $16.7 million increase in short-term borrowings,
resulted in a $1.2 million increase in interest expense due to volume from 1997
to 1998. Further increases in borrowings from 1998 to 1999, particularly in
repurchase agreements and FHLB borrowings along with a $8.3 million increase in
time deposits, caused an increase of $1.9 million in interest expense in 1999 as
compared to 1998.
The increased interest expense was more than offset by the increased
interest income resulting from expansion of United's loan portfolio during both
1998 and 1997. United's net interest income increased $.7 million from $7.1
million for 1998 to $7.8 million for 1998 and increased $.6 million from $6.5
million for the year ended December 31, 1997 to $7.1 million for the year ended
December 31, 1998.
PROVISION FOR LOAN LOSS. United provided $204,000 for loan losses in
1999. United provided $340,000 for loan losses in 1998 as compared with $717,000
in 1997. The increase in the provision for loan losses for 1997 was in part
because of the increased average balance in loans receivable and in part because
of management's evaluation of overall economic conditions, both regionally and
nationally.
23
The provision for loan losses is determined by management as the amount
to be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio in accordance with GAAP. Future
additions to United's allowance for loan losses and any change in the related
ratio of the allowance for loan losses to non-performing assets are dependent
upon the performance and composition of United's loan portfolio, the economy,
inflation, changes in real estate values and interest rates and the view of the
regulatory authorities toward adequate reserve levels.
NON-INTEREST INCOME. In addition to net interest income, United
generates significant non-interest income from a range of retail banking
services, including mortgage banking activities and service charges for deposit
services. Non-interest income remained consistent in 1999 when compared to 1998
at $3.5 million. In contrast, non-interest income increased $1.7 million, or
94.0%, to $3.5 million for 1998 as compared to 1997. The principal reason for
this fluctuation was the strength of the home lending market, and particularly
the refinancing market during 1998, as interest rates were relatively low and
stable. The active refinancing market during this period resulted in a
substantial increase in loan origination fees and discounts on sale of mortgage
loans. United believes that future increases in interest rates are likely to
result in a decreased refinancing market which would negatively affect United's
fee income. Rates increased in the third quarter of 1999, which resulted in a
decrease in the volume of refinancing activity and therefore a decrease in loan
origination fees during 1999 of $.1 million. Other non-interest income,
including servicing fees on mortgage loans, service charges and FHLB stock
dividends, remained relatively constant from 1998 to 1999. Loan servicing fees
increased $.1 million in 1999 due to mortgage servicing rights recorded and also
$.1 million from equity in income of Valley. United also recognized a small
amount of gain on sale of investment securities in 1999 and 1998, while no
investment securities were sold in 1997.
NON-INTEREST EXPENSE. Non-interest expense increased $.7 million, or
10.5%, to $7.1 million in 1999, and increased $1.9 million, or 41.0%, to $6.4
million in 1998. Salary and employee benefit expense represented $.4 million of
the increase and was the result of additional staffing of loan originators and
rate increases for existing employees. Salary and employee benefit expense,
which increased $1.1 million to $3.5 million in 1998 from $2.4 million in 1997,
also accounted for most of the increase in 1998. This increase was due primarily
to increased salary and commission expense associated with the refinancing
activity and growth in the size of United's overall operations. To a lesser
extent, this increase was also due to one-time merger related charges of $85,000
and increased data processing charges in the first quarter of 1998.
INCOME TAXES. Income tax expense increased $.1 million to $1.5 million
for 1999 and increased $.3 million to $1.4 million for 1998 from $1.1 million
for 1997. The principal reason for the increase in both periods was increased
income, after adjustment for non-deductible goodwill amortization and tax-free
interest on municipal bonds and loans.
FINANCIAL CONDITION
GENERAL. United's total assets increased $37.7 million to $270.2
million at December 31, 1999 from $232.5 million at December 31, 1998, and
increased $48.7 million in 1998 from $183.8 million at December 31, 1997. The
principal reason for the increases in both periods was growth in United's loan
portfolio, which increased $43 million during 1999 and $49.5 million during
1998. The aggregate balance of mortgage-backed and investment securities
declined in 1998, but increased slightly in 1999 as United worked to apply some
of these resources in higher yielding assets.
LOANS. Net loans receivable increased $43 million during 1999 to $186.3
million at December 31, 1999. Nearly all loan categories continued to show
steady growth, although not at the same pace as 1998, due to increases in rates
later in 1999. Net loans increased $49.5 million during 1998 to $143.3 million
at December 31, 1998. Residential mortgage loans increased as United expanded
its loan production offices and added residential lending staff. Although
smaller in dollar amount,
24
United's construction, agricultural and commercial real estate loans, and its
non-real estate commercial and agricultural loans, grew even more rapidly during
1998. Substantial increases in commercial and agricultural loans, which are
consistent with new loan policies adopted after the Heritage Merger, resulted
from increased marketing through officer call programs, primarily through
United's Great Falls office.
MORTGAGE-BACKED AND INVESTMENT SECURITIES. United's mortgage-backed and
investment securities increased $1.1 million to $53 million during 1999 and
decreased $10.2 million to $51.9 million during the year ended December 31,
1998. In 1999, United's purchases were approximately $33.9 million while sales,
maturities and calls totaled $30.9 million. The net increase was also offset by
an unrealized loss in market values of approximately $1.6 million in 1999.
Declining balances of investment securities from calls and maturities, and from
the sale of $5.7 million of bonds and government mutual funds during 1998,
accounted for the majority of the decrease. Mortgage-backed securities increased
during 1998, as a result of net purchases of $8.4 million of mortgage-backed
securities.
OTHER ASSETS. Real estate owned decreased $523,000 during 1998 to
$304,000 at December 31, 1998, as United sold one of its two remaining apartment
complexes in Glendive, Montana for $360,000 (for no gain or loss) and recorded
depreciation of $15,500. Real estate owned decreased $290,000 during 1999 as the
result of the sale of the remaining Glendive apartment complex for $360,000, a
gain of $5,000 and recorded depreciation of $15,540.
United purchased $1,652,800 of additional FHLB stock during 1999 and
purchased $210,600 of FHLB stock during 1998, primarily as required to support
the increased scope of its operations. United received FHLB stock dividends of
$161,100 in 1999.
Premises and equipment increased $1.4 million during 1999, as the
result of the construction of the two new branches in Missoula and Bozeman as
well as computer purchases and upgrades for Y2K compliance, and increased $.2
million during 1998, primarily as a result of the purchase of additional
computer equipment and remodeling of United's home office.
Goodwill and identifiable intangibles decreased $180,000 during 1999
due to amortization. Goodwill and identifiable intangibles increased $1.4
million during 1998 as a result of the acquisition of Old United in the Heritage
Merger ($981,000), the purchase of two loan production offices ($184,000), and
the purchase premium paid on State Bank deposits ($454,000), offset by
amortization of $107,000 and changes to Old United's historical net assets of
$87,000.
DEPOSITS AND BORROWINGS. United experienced a net increase in deposits
of $12.3 million in 1999 and $26.4 million in 1998. The increase in deposits
during 1999 and 1998 resulted primarily from the application of competitive
rates on all deposit offerings by United as well as the offering of a greater
array of loan products to attract depositors.
Borrowings increased $26.4 million to $58.0 million at December 31,
1999, from $31.6 million at December 31, 1998, and increased $22.0 million
during 1998 from $9.6 million at December 31, 1997. The additional borrowings in
both years, comprised of a net increase of $24.3 million and $15.7 million in
FHLB advances and $2.1 million and $6.3 million in securities sold under
repurchase agreements in 1999 and 1998 respectively, were used to fund increases
in United's loan portfolio.
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
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
25
guaranteed, leading to the conclusion that loss of principal and interest would
likely not be realized, then interest income will continue to be accrued.
The 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
-------------- ----------------------------------
December 31, December 31, December 31,
1999 1998 1997
-------------- ---------------- ---------------
Principal Balances:
Accruing loans past due over 90 $117 $387 $437
days
Non-accrual loans 230 594 4
-------------- ---------------- ---------------
Total $347 $981 $441
-------------- ---------------- ----------------
Interest:
Due on non-accrual loans $ 14 $ 12 $ -
Included in income none none none
United is required to review, classify and report to its Board of
Directors its assets on a regular basis and classify them as "substandard"
(distinct possibility that some loss will be sustained), "doubtful" (high
likelihood of loss), or "loss" (uncollectible). Adequate valuation allowances
are required to be established for assets classified as substandard or doubtful
in accordance with generally accepted accounting principles. If an asset is
classified as a loss, the institution must either establish a specific valuation
allowance equal to the amount classified as loss or charge off such amount. At
December 31, 1999, United had $6,000 of reported doubtful assets and no assets
classified as loss. At December 31, 1998, United had $553,000 of reported
doubtful assets and no assets classified as loss. The doubtful balance
represented one loan to a company which originates and securitizes home equity
loans. In 1999, the loan was reclassified to substandard. As of March 31, 2000,
the loan was current with regard to principal and interest payments. As of
December 31, 1997 (on a pro forma combined basis), United had no assets
classified as doubtful or loss. At December 31, 1999, 1998 and 1997 (on a pro
forma combined basis), United had $506,000, $405,000 and $116,000, respectively,
of reported substandard assets. As a percent of total assets, substandard assets
were approximately .19%, .17% and .06% at December 31, 1999, 1998 and 1997,
respectively.
26
PROVISION FOR LOAN LOSSES. The following schedule details changes in
United's loan loss reserve at December 31 for each of the three years indicated:
(Dollars in thousands) Pro Forma
(Dollars in thousands) Combined
---------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
---------------- --------------- ----------------
Balance beginning of period $ 1,485 $ 1,146 $ 463
Provision for loan losses 204 340 717
Acquired from State Bank - 43 -
Charge-offs:
Residential (16) - -
Commercial (59) (4) (10)
Consumer (34) (52) (25)
---------------- --------------- ----------------
Total charge-offs (109) (56) (35)
Recoveries 7 12 1
---------------- --------------- ----------------
Net charge-offs (102) (44) (34)
---------------- --------------- ----------------
Balance end of period end $ 1,586 $ 1,485 $ 1,146
================ =============== ================
Allowance for loan losses to:
Total loans at period end .84% 1.03% 1.21%
================ =============== ================
Net charge-offs to average
loans .06% .04% .04%
================ =============== ================
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) Pro Forma Combined
December 31, 1999 December 31, 1998 December 31, 1997
---------------------------- --------------------------- ---------------------------
Allowance % to Allowance % to Allowance % to
------------- ------------- ------------- ------------ ------------- ------------
Real estate loans:
1 - 4 residential $ 128 18.1% $ 124 18.7% $ 387 45.4%
5 or more residential 52 2.8 66 4.6 67 7.1
Construction 84 5.6 92 6.4 55 5.8
Commercial and agricultural 488 24.9 462 26.0 217 15.1
Non-real estate loans:
Commercial and agricultural 712 37.2 601 31.6 259 17.3
Consumer 122 11.4 140 12.7 161 9.3
------------- ------------- ------------- ------------ ------------- ------------
Total $ 1,586 100.0% $ 1,485 100.0% $ 1,146 100.0%
============= ============= ============= ============ ============= ============
27
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED. Total real estate and
other personal property owned ("REO") of United was $14,000, $304,000 and
$827,000 at December 31, 1999, 1998 and 1997 (on a pro forma combined basis),
respectively. The schedule below details properties both held for sale and
investment) by United as of the dates indicated.
(Dollars in thousands) Pro Forma
Combined
December 31, 1999 December 31, 1998 December 31, 1997
------------------ ------------------ ------------------
REO held for sale $ - $ - $ -
Allowance for possible losses - - -
REO held for investment - 328 827
Accumulated depreciation - (24) -
------------------ ------------------ ------------------
Total REO held for investment - $304 $827
================== ================== ==================
As a percent of total assets .0% .13% .45%
================== ================== ==================
Other personal property
held for sale $ 14 $ - $ -
------------------ ------------------ ------------------
As a percent of total assets .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
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, United
has maintained the 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 the FHLB borrowings.
28
The following tables provide information regarding the maturity of
loans included in United's portfolio as of December 31, 1999. 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, 1999
------------------------------------------------------------
5 Years
Up to 1 - 5 and
1 Year Years Beyond Total
-------------- ------------- -------------- -------------
Loans:
Loans secured by real estate:
Adjustable rate (all
property types) $ 4,573 $10,869 $ 4,829 $20,271
1-4 family residential 6,611 12,341 20,677 39,629
Multi-family and commercial 3,298 15,416 11,497 30,211
Construction and undeveloped
land 10,480 - - 10,480
-------------- ------------- -------------- -------------
Loans secured by real
estate 24,962 38,626 37,003 100,591
Commercial non-real
estate(1) 11,064 39,921 8,173 59,158
Agricultural non-real estate 3,860 5,100 551 9,511
Consumer(2) 3,370 8,572 5,146 17,088
-------------- ------------- -------------- -------------
Net loans $43,256 $92,219 $50,873 $186,348
============== ============= ============== =============
Total loans due
after
December 31, 2000
--------------------
Fixed interest rates $127,394
Floating or adjustable rates
or balloon payments 15,698
--------------------
$143,092
====================
(1) Includes loans on commercial savings accounts
(2) Includes consumer loans secured by real estate
29
The following table sets forth the amortized cost, maturities and
weighted average yield of United's investment portfolio at the dates indicated:
(Dollars in thousands)
December 31, 1999
-------------------------------------------------------------------
10 years
Up to 1 - 5 5 - 10 and beyond
1 year years years Total
------------ ----------- ----------- ------------ ------------
U.S. government and agencies $200 $5,010 $5,000 $ - $10,210
Mortgage-backed securities 1,053 4,501 4,164 30,543 40,261
Municipal bonds 3 386 300 1,406 2,095
Other - 500 1,496 45 2,041
------------ ----------- ----------- ------------ ------------
Total investments $1,256 $10,397 $10,960 $31,994 $54,607
============ =========== =========== ============ ============
Weighted average yield 6.10% 6.14% 6.21% 6.15% 6.16%
December 31, 1998
-------------------------------------------------------------------
10 years
Up to 1 - 5 5 - 10 and beyond
1 year years years Total
------------ ----------- ----------- ------------ ------------
U.S. government and agencies $2,322 $6,201 $3,120 $2,001 $13,644
Mortgage-backed securities 1,567 10,477 550 23,776 36,370
Municipal bonds 10 192 605 52 859
Other 993 - - 45 1,038
------------ ----------- ----------- ------------ ------------
Total investments $4,892 $16,870 $4,275 $25,874 $51,911
============ =========== =========== ============ ============
Weighted average yield 6.41% 6.39% 6.25% 5.89% 6.20%
Pro Forma Combined
December 31, 1997
-------------------------------------------------------------------
10 years
Up to 1 - 5 5 - 10 and beyond
1 year years years Total
------------ ----------- ----------- ------------ ------------
U.S. government and agencies $6,037 $13,449 $3,507 - $22,993
Mortgage backed securities 2,393 17,244 6,138 6,447 32,222
Municipal bonds - 67 1,069 103 1,239
Kemper U.S. Gov't bond mutual
fund 5,260 - - - 5,260
Other - - 407 - 407
------------ ----------- ----------- ------------ ------------
Total investments $13,690 $30,760 $11,121 $6,550 $62,121
============ =========== =========== ============ ============
Weighted average yield 5.71% 6.61% 6.70% 6.93% 6.46%
Maturity of time deposits of $100,000 or more at the dates indicated
are as follows:
(Dollars in thousands) Pro Forma
Combined
---------------
December 31, December 31, December 31,
1999 1998 1997
--------------- --------------- ---------------
Less than three months $ 2,856 $ 2,578 $ 1,822
Three to six months 4,711 3,043 1,454
Six to twelve months 4,932 3,970 3,015
Greater than twelve months 3,395 3,407 2,833
--------------- --------------- ---------------
Total $15,894 $12,998 $ 9,124
=============== =============== ===============
STOCKHOLDERS' EQUITY. Stockholders' equity at December 31, 1999 was $29.4
million, or 10.86% of total assets, down slightly from $30.5 million, or 13.1%
of total assets, at December 31, 1998. At December 31, 1999, book value was
$17.77 per share. The
30
decrease in stockholders' equity is primarily due to net income of $2.5 million
for 1999, offset by the payment of $1.8 million in dividends on United's common
stock, the purchase of 46,000 shares of treasury stock for $.9 million, and an
increase in net unrealized losses on securities of $.9 million.
BUSINESS SEGMENT RESULTS. United manages its operations and prepares
management reports with a primary focus on geographical areas. Operating
segments information, including earnings performance on an operating cash basis,
is presented in the following schedule. United allocates centrally provided
services to the business segments based upon estimated usage of those services.
The operating segment identified as other includes the Parent company and
eliminations of transactions between segments.
Heritage Bank includes United's thrift banking operations in twelve
Montana cities. The bank experienced steady growth in 1999 with loans increasing
$27.7 million or 18.9% over 1998 and deposits increasing $8.8 million or 5.5%.
Operating cash earnings for 1999 increased $.2 million over 1998.
Net income increased 7.7% to $2.5 million from $2.3 million in 1998.
The increase was due to the continued growth in the loan portfolio and favorable
interest rates during the first three quarters of 1999. Net interest income
increased 11.3% to $7.1 million in 1999, non-interest income increased 3.3% to
$3.3 million, and non-interest expense on an operating cash basis increased
12.9% to $6.1 million. Heritage Bank's operating cash performance efficiency
ratio was 59.68% in 1999 as compared to 57.04% in 1998.
Heritage Bank had thirteen banking locations during 1999, but closed
one drive up location in Great Falls, Montana in 1999. Also, a loan production
office in Polson, Montana was closed in January 2000.
During 1998, United formed State Bank to acquire a portion of the
business of a failed commercial bank in Fort Benton, Montana. State Bank has one
branch office in Geraldine, Montana. The acquisition of State Bank was accounted
for as a purchase and results of operations prior to the acquisition date of
August 7, 1998 are not included in the segment information. Therefore the year
1998 is not comparable to 1999. 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.
State Bank experienced rapid growth in 1999 with loans increasing $11.4
million to $15.1 million and deposits increasing $2.1 million to $12 million.
Although operating cash earnings for 1999 were a loss of $28,000, State Bank is
expected to generate a profit in 2000. Net interest income for 1999 was $.4
million and non-interest income rose to $43,000. The operating cash efficiency
ratio for 1999 was 94.06% as compared to 134.78% for 1998.
31
The following table sets forth certain operating segment information for the
years ended December 31, 1999 and 1998 (in thousands). Operating information is
not presented for 1997 as it is not comparable as a result of Heritage Merger.
Heritage State
Heritage Bank Bank Other Consolidated
-------------------- -------------------- -------------------- ------------------------
1999 1998 1999 1998 1999 1998 1999 1998
Net interest income $ 7,085 6,364 444 87 270 420 7,799 6,871
Non-interest income 3,360 3,276 43 14 128 2 3,531 3,292
-------------------- -------------------- -------------------- ------------------------
Total revenue 10,445 9,640 487 101 398 422 11,330 10,163
Provision for loan
losses 110 335 94 - - - 204 335
Non-interest expense 6,174 5,499 458 136 290 407 6,922 6,042
-------------------- -------------------- -------------------- ------------------------
Pretax cash earnings
(loss) 4,161 3,806 (65) (35) 108 15 4,204 3,786
Income tax expense
(benefit) 1,537 1,413 (36) (17) 39 3 1,540 1,399
-------------------- -------------------- -------------------- ------------------------
Cash earnings(1) 2,624 2,393 (29) (18) 69 12 2,664 2,387
Amortization of
goodwill and CDI 165 110 30 10 - - 195 120
Net income $ 2,459 2,283 (59) (28) 69 12 2,469 2,267
==================== ==================== ==================== ========================
PER SHARE DATA
Cash earnings per share $1.58 1.50
Net income per share $1.47 1.43
Weighted average shares
outstanding 1,684 1,588
AVERAGE BALANCE SHEET DATA
Total assets $ 230,958 198,093 16,522 10,577 4,341 5,613 251,821 214,283
Net loans 159,340 126,902 11,992 2,936 625 469 171,957 130,307
Allowance for loan
losses 1,489 1,216 93 46 - - 1,582 1,262
Total deposits 157,819 147,843 10,303 9,168 (388) (1,297) 167,734 155,714
Equity 20,553 15,985 1,804 1,359 (6,619) (13,013) 28,976 30,358
PERFORMANCE RATIOS
Return on average
assets 1.06 1.15% -0.36% -0.26% - - 0.98% 1.06%
Return on average
equity 11.96% 14.28% -3.25% -2.05% - - 8.52% 7.47%
Efficiency ratio 60.63% 57.64% 100.27% 144.79% - - 62.77% 60.58%
OPERATING CASH
PERFORMANCE RATIOS
Return on average
assets 1.14% 1.21% -0.17% -0.17% - - 1.06% 1.11%
Return on average
equity 12.77% 14.97% -1.57% -1.31% - - 9.20% 7.86%
Efficiency ratio 59.68% 57.04% 94.06% 134.78% - - 61.10% 59.45%
(1) Before amortization of goodwill
and core deposit intangible.
32
YEAR 2000
Many previously installed computer systems and software were coded to
accept only two-digit entries in the date code fields. These date code fields
needed to be reformatted to accept four-digit entries to distinguish 21st
century dates from 20th century dates. This problem could have resulted in
system failures or miscalculations causing disruptions of business operations,
including production of erroneous data, inability to process transactions, and
other operational problems. As a result, many companies' computer systems and
software needed to be upgraded or replaced in order to comply with Year 2000
requirements.
United undertook efforts, prior to December 31, 1999, to address Year
2000 computer issues. United formed a project team and contracted with a
computer consulting firm, to evaluate the Year 2000 impact on United's
mission-critical computer hardware and software and embedded technologies in its
physical plant and automated equipment (such as ATMs, proof machines, vaults and
security systems). United has replaced, modified or reprogrammed certain
systems, requires that new purchased hardware and software be Year 2000
compliant, and continues to test its systems. To date United has not experienced
any significant Y2K related computer disruptions. United will continue to
monitor the Y2K issue throughout the year 2000.
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
Heritage Bank has an Asset/Liability Management Committee and an Investment
Committee, which meet at least quarterly to review and report on management's
efforts to minimize IRR. Several asset/liability management strategies have been
employed by United to minimize its exposure to IRR. These include selling most
newly-originated long-term fixed-rate mortgages, promoting the origination and
retention of loans providing for periodic interest rate adjustments, shorter
terms to maturity or balloon provisions, and investing in adjustable rate or
shorter-term mortgage-backed securities and other interest-earning investments.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE. Interest rate risk
sensitivity of net portfolio value ("NPV") measurement seeks to establish a
methodology to measure the potential for the reduction of earnings and
stockholders' equity resulting from both lower net interest income ("NII") and
lower NPV caused by changes in market interest rates. NPV is the difference
between Heritage Bank's depository portfolio value and its loans receivable
portfolio value. NPV thus provides a leading indicator of future potential
changes in both NII and stockholders' equity. Because of its asset size (less
than $500 million), Heritage Bank falls under an OTS exemption that allows
utilization of an asset/liability computer simulation program prepared and
distributed by the OTS. The OTS Thrift Financial Report includes Schedule CMR
that provides detailed information about the balances, interest rates,
repricing, and maturity characteristics of Heritage Bank's financial
instruments. By utilizing Heritage Bank's Schedule CMR data, the OTS runs
computer simulations ("Net Portfolio Value Model") utilizing OTS assumptions.
Heritage Bank, per OTS requirements, has established maximum percentage changes
for NPV resulting from instantaneous changes in interest rates of 100 to 400
basis points. A maximum change of -15% for an instantaneous 200 basis point
change in interest rate has been established by United. A 200 basis point change
is used by the OTS as the current Interest Rate Sensitivity Measure by which
thrifts are evaluated. Heritage Bank periodically reviews and makes changes to
established limits for NPV changes due to mergers and other market factors.
33
The following table demonstrates Heritage Bank's December 31, 1999 NPV
and the $ present value of total assets, NPV ratio and basis point change for
three instantaneous increases and the three instantaneous decreases in interest
rates:
Interest Rate Sensitivity of Net Portfolio Value
(Dollars in thousands)
Instanta Net Portfolio Value NPV as % of PV of Assets
neous ---------------------------------------------------------------------------------------------------
Change in Rates $ Amount $ Change % Change Total Assets NPV Ratio Change
- ---------------- -------------- ---------------- --------------- ------------------ --------------- ----------------
+300 bp 13,355 -8,687 -39% 238,101 5.61% -320 bp
+200 bp 16,307 -5,735 -26% 242,206 6.73% -207 bp
+100 bp 19,231 -2,811 -13% 246,304 7.81% -100 bp
0 bp 22,042 - -% 250,317 8.81% -
-100 bp 24,581 2,539 +12% 254,093 9.67% +87 bp
-200 bp 27,289 5,247 +24% 258,072 10.57% +177 bp
-300 bp 30,183 8,141 +37% 262,262 11.51% +270 bp
The following table demonstrates Heritage Bank's December 31, 1998 NPV
and the $ present value of total assets, NPV ratio and basis point change for
four instantaneous increases and the four instantaneous decreases in interest
rates:
Interest Rate Sensitivity of Net Portfolio Value
(Dollars in thousands)
Instantane Net Portfolio Value NPV as % of PV of Assets
ous ---------------------------------------------------------------------------------------------------
Change in Rates $ Amount $ Change % Change Total Assets NPV Ratio Change
- ---------------- -------------- ---------------- --------------- ------------------ --------------- ------------
+400 bp 17,799 -6,240 -26% 207,356 8.58% -245 bp
+300 bp 19,517 -4,521 -19% 210,123 9.29% -174 bp
+200 bp 21,173 -2,866 -12% 212,850 9.95% -108 bp
+100 bp 22,662 -1,376 -6% 215,443 10.52% -51 bp
0 bp 24,039 - -% 217,948 11.03% -
-100 bp 25,593 1,554 +6% 220,664 11.60% +57 bp
-200 bp 27,362 3,324 +14% 223,626 12.24% +121 bp
-300 bp 29,604 5,566 +23% 227,092 13.04% +201 bp
-400 bp 31,617 7,578 +32% 230,361 13.73% +270 bp
The preceding tables for 1999 and 1998 would indicate a decrease in NPV
based on three instantaneous increases and three instantaneous decreases. This
would be consistent with increasing interest rates during 1999. Total $ present
value of total assets has increased based on asset growth in 1999. However,
based on the three increases and decreases in rates, the value of total assets
would also decrease based on increasing interest rates.
The preceding sensitivity analysis does not represent a forecast and
should not be relied upon as being indicative of expected operation results.
These hypothetical estimates are based upon numerous assumptions, including the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of assets and liability cash flows
and others. Sensitivity analysis does not reflect actions that United might take
in responding to or anticipating changes in interest rates.
34
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 generally accepted accounting principles applied on a
consistent basis.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 2000 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission on or about April 20, 2000
(the Proxy Statement 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.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
List of Documents filed by Company as part of this Report.
(a) (1) FINANCIAL STATEMENTS:
The following financial statements of United Financial are included herein
as follows:
Page Number
-----------
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, F-2
December 31, 1999 and 1998
CONSOLIDATED STATEMENTS OF INCOME - YEARS ENDED F-3
December 31, 1999, 1998, and 1997
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME - YEARS ENDED F-4
December 31, 1999, 1998, and 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED F-5
December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
(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.
The exhibits listed in the accompanying index are filed as part of this
Report or incorporated by reference as indicated therein.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 1999
None
36
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
United Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of United Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
February 17, 2000
F-1
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
DECEMBER 31,
--------------------------------
ASSETS 1999 1998
------------- -------------
Cash and cash equivalents $ 11,456,801 19,255,570
Securities available-for-sale 53,044,472 51,899,657
Loans receivable, net 186,347,794 143,359,113
Loans held for sale 1,191,111 5,716,976
Stock in Federal Home Loan Bank of Seattle, at cost 3,046,200 1,232,300
Accrued interest receivable 2,258,662 1,918,365
Premises and equipment, net 4,872,670 3,482,411
Real estate and other personal property owned 13,657 304,224
Deferred income taxes, net 740,107 101,780
Investment in Valley Bancorp, Inc. 4,548,949 2,683,791
Goodwill, net of accumulated amortization of $335,900 and
$225,573 at December 31, 1999 and 1998, respectively 1,289,456 1,399,783
Identifiable intangibles, net of accumulated amortization
of $99,904 and $30,554 at December 31, 1999 and 1998, 537,412 606,762
respectively
Other assets 878,604 600,477
------------- -------------
$ 270,225,895 232,561,209
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 18,750,554 18,895,349
Interest bearing deposits 161,130,984 148,724,735
Federal Home Loan Bank advances 46,425,000 22,175,000
Securities sold under agreements to repurchase 11,545,959 9,450,572
Advances from borrowers for taxes and insurance 408,161 342,607
Income taxes payable 476,273 115,634
Accrued interest payable 1,528,035 1,267,108
Accrued expenses and other liabilities 601,973 1,062,237
------------- -------------
Total liabilities 240,866,939 202,033,242
------------- -------------
Stockholders' equity:
Preferred stock, no par value; authorized 2,000,000
shares; no shares issued -- --
Common stock, no par value; authorized 8,000,000
shares; 1,698,312 shares issued 28,001,579 28,001,579
Retained earnings, substantially restricted 3,250,876 2,533,289
Treasury stock, at cost, 46,000 shares (931,649) --
Accumulated other comprehensive loss (961,850) (6,901)
------------- -------------
Total stockholders' equity 29,358,956 30,527,967
------------- -------------
Commitments and contingencies
$ 270,225,895 232,561,209
============= =============
See accompanying notes to consolidated financial statements.
F-2
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
Interest income:
Loans receivable $13,824,741 10,515,655 4,529,566
Mortgage-backed securities 2,747,649 2,189,305 832,182
Investment securities 432,987 914,676 209,263
Time deposits in banks 1,607 6,709 6,860
Other interest-earning assets 333,651 622,694 195,579
----------- ----------- -----------
Total interest income 17,340,635 14,249,039 5,773,450
----------- ----------- -----------
Interest expense:
Deposits 6,879,588 6,090,923 2,635,234
Long-term debt -- 11,917 189,657
Federal Home Loan Bank advances 2,171,681 898,446 253,407
Securities sold under agreements to repurchase 505,199 391,281 79,035
----------- ----------- -----------
Total interest expense 9,556,468 7,392,567 3,157,333
----------- ----------- -----------
Net interest income 7,784,167 6,856,472 2,616,117
Provision for loan losses 203,500 335,000 492,400
----------- ----------- -----------
Net interest income after provision for
loan losses 7,580,667 6,521,472 2,123,717
----------- ----------- -----------
Non-interest income:
Loan origination fees on loans sold 2,524,190 2,606,436 649,354
Loan servicing fees 211,732 78,600 65,739
Customer service charges 420,523 336,684 275,509
Gain on sale of investment securities 30,357 43,162 --
Equity in income of Valley Bancorp, Inc. 126,367 1,550 --
Other 217,042 225,603 112,992
----------- ----------- -----------
Total non-interest income 3,530,211 3,292,035 1,103,594
----------- ----------- -----------
Non-interest expense:
Compensation and benefits 3,895,030 3,369,524 1,206,812
Occupancy and equipment 742,331 625,110 227,861
Deposit insurance premiums 121,088 82,873 27,389
Data processing fees 398,022 349,251 199,263
Other 1,945,896 1,720,734 699,604
----------- ----------- -----------
Total non-interest expense 7,102,367 6,147,492 2,360,929
----------- ----------- -----------
Income before income taxes 4,008,511 3,666,015 866,382
Income taxes 1,539,239 1,398,595 324,161
----------- ----------- -----------
Net income $ 2,469,272 2,267,420 542,221
=========== =========== ===========
Net income per share $ 1.47 1.43 1.14
=========== =========== ===========
Weighted average shares outstanding 1,684,246 1,587,711 475,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
ACCUMULATED
OTHER
COMMON ADDITIONAL RETAINED TREASURY COMPREHENSIVE
STOCK PAID-IN CAPITAL EARNINGS STOCK INCOME (LOSS)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 $ 100 1,080,028 997,384 -- 100,189
Comprehensive income:
Net income -- -- 542,221 -- --
Increase in net unrealized gains on securities
available-for-sale -- -- -- -- 27,993
Total comprehensive income
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 100 1,080,028 1,539,605 -- 128,182
Comprehensive income:
Net income -- -- 2,267,420 -- --
Decrease in net unrealized gains on securities
available-for-sale, net of reclassification
adjustment -- -- -- -- (135,083)
Total comprehensive income
Issuance of 1,223,312 shares, net of issuance costs
of $125,617 24,646,451 -- -- -- --
Change in par value of stock to no par 1,080,028 (1,080,028) -- -- --
Capital contribution 2,275,000 -- -- -- --
Dividends declared ($.75 per share) -- -- (1,273,736) -- --
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 28,001,579 -- 2,533,289 -- (6,901)
Comprehensive income:
Net income -- -- 2,469,272 -- --
Increase in net unrealized losses on securities
available-for-sale, net of reclassification
adjustment -- -- -- -- (954,949)
Total comprehensive income
Dividends declared ($1.04 per share) -- -- (1,751,685) -- --
Treasury shares purchased at cost -- -- -- (931,649) --
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 $28,001,579 -- 3,250,876 (931,649) (961,850)
=========== =========== =========== =========== ===========
[WIDE TABLE CONTINUED FROM ABOVE]
TOTAL
STOCKHOLDERS'
EQUITY
-----------
Balances at December 31, 1996 2,177,701
Comprehensive income:
Net income 542,221
Increase in net unrealized gains on securities
available-for-sale 27,993
-----------
Total comprehensive income 570,214
-----------
Balances at December 31, 1997 2,747,915
Comprehensive income:
Net income 2,267,420
Decrease in net unrealized gains on securities
available-for-sale, net of reclassification
adjustment (135,083)
-----------
Total comprehensive income 2,132,337
-----------
Issuance of 1,223,312 shares, net of issuance costs
of $125,617 24,646,451
Change in par value of stock to no par --
Capital contribution 2,275,000
Dividends declared ($.75 per share) (1,273,736)
-----------
Balances at December 31, 1998 30,527,967
Comprehensive income:
Net income 2,469,272
Increase in net unrealized losses on securities
available-for-sale, net of reclassification
adjustment (954,949)
-----------
Total comprehensive income 1,514,323
-----------
Dividends declared ($1.04 per share) (1,751,685)
Treasury shares purchased at cost (931,649)
-----------
Balances at December 31, 1999 29,358,956
===========
See accompanying notes to consolidated financial statements.
F-4
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 2,469,272 2,267,420 542,221
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Provision for loan losses 203,500 335,000 492,400
Amortization of goodwill and identifiable intangibles 187,477 105,683 42,984
Depreciation 287,083 320,080 110,329
Equity in income of Valley Bancorp, Inc. (126,367) (1,550) --
Amortization of loan origination fees -- 3,292 (54,037)
Amortization of premiums and discounts on
investment securities and loans 265,178 (30,636) (2,040)
Gain on sale of investment securities (30,357) (43,162) --
Gain on sale of real estate owned (4,970) -- --
Mortgage loans originated and held for sale (114,591,857) (85,999,406) (30,718,295)
Proceeds from sales of mortgage loans held for sale 119,117,722 81,749,817 31,649,850
FHLB stock dividends (161,100) (82,800) (26,800)
Increase in accrued interest receivable (340,297) (404,023) (207,127)
Decrease (increase) in deferred income taxes (41,604) 117,440 (133,003)
Decrease (increase) in other assets (278,127) 2,185,394 (32,448)
Increase (decrease) in income taxes payable 360,639 (168,053) 102,349
Increase in accrued interest payable 260,927 129,408 233,664
Decrease in accrued expenses
and other liabilities (127,019) (2,568,482) (172,248)
------------- ------------- -------------
Net cash provided by (used in) operating
activities 7,450,100 (2,084,578) 1,827,799
------------- ------------- -------------
Cash flows from investing activities:
Net decrease in time deposits in banks -- 98,000 --
Net increase in loans receivable (43,534,649) (46,501,033) (15,777,452)
Purchases of securities available-for-sale (33,921,870) (37,033,497) (6,872,431)
Proceeds from maturities, paydowns and sales of securities
available-for-sale 30,990,562 44,300,431 6,869,640
Purchases of Federal Home Loan Bank stock (1,652,800) (210,600) (49,100)
Purchase of Valley Bancorp, Inc. stock (1,746,591) (2,682,241) --
Cash paid to FDIC on failed bank (333,245) -- --
Purchases of premises and equipment (1,661,802) (940,655) (556,554)
Proceeds from sale of real estate and other personal
property owned 662,213 360,000 --
Additions of real estate and other personal
property owned (39,748) (4,756) --
Acquisition of identifiable intangibles -- (183,316) --
Decrease in minority interest -- -- (451)
Acquired cash and cash equivalents in merger -- 8,112,629 --
Acquired cash and cash equivalents of failed bank -- 11,553,977 --
------------- ------------- -------------
Net cash used in investing activities (51,237,930) (23,131,061) (16,386,348)
------------- ------------- -------------
Cash flows from financing activities:
Net increase in deposits 12,261,454 13,982,987 12,745,405
Net increase in FHLB advances 24,250,000 15,750,000 5,000,000
Payments on long-term debt -- (2,350,000) (200,000)
Net increase (decrease) in securities sold under
repurchase agreements 2,095,387 6,277,423 (3,201,637)
Increase (decrease) in advances from borrowers for
taxes and insurance 65,554 (59,450) (5,437)
Capital contribution -- 2,275,000 --
Purchase of treasury stock (931,649) -- --
Dividends paid to stockholders (1,751,685) (1,273,736) --
------------- ------------- -------------
Net cash provided by financing activities 35,989,061 34,602,224 14,338,331
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (7,798,769) 9,386,585 (220,218)
Cash and cash equivalents at beginning of year 19,255,570 9,868,985 10,089,203
------------- ------------- -------------
Cash and cash equivalents at end of year $ 11,456,801 19,255,570 9,868,985
============= ============= =============
Cash paid during the year for:
Interest $ 9,280,000 6,933,000 2,924,000
Income taxes 1,220,000 1,449,000 355,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-5
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
The accompanying consolidated financial statements include the
accounts of United Financial Corp. (UFC) and its wholly-owned
subsidiaries, Heritage Bank (Heritage) and Heritage State Bank
(Heritage State). The consolidated financial statements also
include Community Service Corporation (CSC), a wholly-owned
subsidiary of Heritage. UFC, Heritage, Heritage State and CSC are
herein referred to collectively as "the Company." 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. 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.
On February 3, 1998, Heritage Bancorporation merged with United
Financial Corp. ("United"). Heritage Bancorporation was the parent
company of Heritage Bank (acquired by Heritage Bancorporation in
June 1994) and United Financial Corp. was the parent company of
United Savings Bank. The merger resulted in a combined entity,
United Financial Corp., owning these two subsidiary banks. The
subsidiary banks were combined into one bank called Heritage Bank
in May 1998.
The merger was treated as a reverse acquisition accounted for as a
purchase of United by Heritage Bancorporation. Consistent with
Heritage Bancorporation being the acquiring corporation, the
historical statements of operations of the combined entity only
reflect the operations of United commencing on and after the
closing date of the merger.
In August 1998, the Company formed Heritage State to acquire a
portion of the business of a failed commercial bank in Fort
Benton, Montana.
(b) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. 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.
F-6
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
(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) INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities available-for-sale
include 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. All investment and
mortgage-backed securities acquired are classified as
available-for-sale.
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 reduced
to fair value. The cost of any investment, if sold, is determined
by specific identification.
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 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.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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) 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 there
has been permanent impairment of their carrying values.
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, will be 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.
At December 31, 1999 and 1998, the amount of impaired loans was
not material.
(g) LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value.
Net unrealized losses are recognized by charges to income.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 acquired.
Goodwill is being amortized against income using the straight-line
method over 15 to 25 years. Identifiable intangibles are being
amortized against income using the straight-line method over 5
years.
(i) STOCK IN FEDERAL HOME LOAN BANK
Member institutions of the Federal Home Loan Bank (FHLB) are
required to hold stock of its district FHLB according to
predetermined formulas. This investment is carried at cost.
(j) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on straight-line and
accelerated methods over the estimated useful lives of 39 years
for the building, 5 to 15 years for improvements, and 5 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 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 minus 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. At
December 31, 1998, foreclosed assets held for the production of
income were held by CSC and carried at cost, less accumulated
depreciation, which is computed using the straight-line method
over the estimated useful lives of the assets. During 1999, the
Company sold real estate held for investment with a book value of
$325,000 and recorded a gain of approximately $5,000 on the sale.
Also during 1999, the Company sold real estate and other personal
property acquired through foreclosure with an aggregate book value
of $342,000 and reported no gain or loss. During 1998, the Company
sold real estate held for investment with a book value of $360,000
and recorded no gain or loss.
(l) 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.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(m) NET INCOME 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. The Company had no
dilutive potential common stock during the years ended December
31, 1999, 1998 or 1997.
Net income per share for the year ended December 31, 1997 is
calculated by dividing net income by the pro forma weighted
average Heritage Bancorporation common shares outstanding. Pro
forma weighted average shares outstanding is based on the 475,000
shares assumed to be outstanding after the February 3, 1998
assumed recapitalization effected in conjunction with the
acquisition of United.
(n) LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles 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. At
December 31, 1999 and 1998, there were no assets that were
considered impaired.
(o) MORTGAGE SERVICING RIGHTS
The Company recognizes mortgage servicing rights as an asset
regardless of whether the servicing rights are acquired or
retained on loans originated and subsequently sold. The mortgage
servicing rights are assessed for impairment based on the fair
value of the mortgage servicing rights. As of December 31, 1999
the carrying value of originated servicing rights was
approximately $102,000. There were no capitalized mortgage
servicing rights at December 31, 1998.
(p) COMPREHENSIVE INCOME
The Company is required to report it's 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 available-for-sale securities.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(q) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" was issued. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative
instrument (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 No. 133
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria
are met. Management of the Company is currently assessing the
effect, if any, on its financial statements of implementing SFAS
No. 133. In June 1999, SFAS No. 133 was amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No.
133," which extended the required adoption date of SFAS No. 133
for the Company from January 1, 2000 to January 1, 2001.
(2) CASH ON HAND AND IN BANKS
The subsidiary banks are required to maintain an average reserve balance
with the Federal Reserve Bank, or maintain such reserve in cash on hand.
The amount of this required reserve balance at December 31, 1999 was
approximately $621,000. An additional $225,000 compensating balance is
required to be maintained with the Federal Reserve Bank for wire
transfers.
(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:
1999
---------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------- -------------------- -------------------- -------------------
U.S. Government and
Federal agencies $ 10,210,411 - (416,163) 9,794,218
Mortgage-backed securities
40,260,666 89,533 (895,451) 39,454,748
Municipal bonds 2,094,961 2,414 (162,041) 1,935,334
Other 2,041,273 - (181,101) 1,860,172
------------------- -------------------- -------------------- -------------------
$ 54,607,311 91,947 (1,654,786) 53,044,472
=================== ==================== ==================== ===================
1998
---------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------- -------------------- -------------------- -------------------
U.S. Government and
Federal agencies $ 13,643,490 26,394 (33,159) 13,636,725
Mortgage-backed securities
36,369,874 76,794 (93,923) 36,352,745
Municipal bonds 858,660 30,641 (4,510) 884,791
Other 1,038,800 - (13,404) 1,025,396
------------------- -------------------- -------------------- -------------------
$ 51,910,824 133,829 (144,996) 51,899,657
=================== ==================== ==================== ===================
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has not entered into any swaps, options, or futures contracts.
Included in the municipal bonds, U.S. Government and Federal agencies security
amounts are investments which have call features.
Maturities of securities available-for-sale by contractual maturity at December
31, 1999 are shown below. Maturities of securities do not reflect repricing
opportunities present in many adjustable rate securities.
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------------- -------------------
Due within one year $ 202,567 202,438
Due after one year through five years 5,896,288 5,663,064
Due after five years through ten years 6,795,866 6,435,641
Due after ten years 1,451,925 1,288,581
-------------------- -------------------
14,346,646 13,589,724
Mortgage-backed securities 40,260,666 39,454,748
-------------------- -------------------
$ 54,607,312 53,044,472
==================== ===================
Gross proceeds from sales of investment securities were $10,123,123 and
$7,594,567 for the years ended December 31, 1999 and 1998 respectively,
resulting in gross gains of $30,357 and gross losses of $0 in 1999, and gross
gains of $63,880 and gross losses of $20,718 in 1998. There were no sales of
investment securities available-for-sale during the year ended December 31,
1997.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) COMPREHENSIVE INCOME
The Company's only significant element of other comprehensive income is
unrealized gains and losses on available-for-sale securities.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999
---------------------------------------------------
BEFORE TAX AFTER
TAX EXPENSE TAX
----------------- -------------- ---------------
Unrealized and realized
holding losses arising during period $(1,582,029) (609,043) (972,936)
Less: reclassification adjustment for gains
included in net income 30,357 12,320 17,987
----------------- --------------- ---------------
Net unrealized losses on securities $(1,551,672) (596,723) (954,949)
================= =============== ===============
1998
-------------------------------------------------
Before Tax After
Tax Expense Tax
---------------- -------------- ---------------
Unrealized and realized
holding losses arising during period $ (257,794) (96,166) (161,628)
Less: reclassification adjustment for gains
included in net income 43,162 16,617 26,545
---------------- -------------- ---------------
Net unrealized losses on securities $ (214,632) (79,549) (135,083)
================ ============== ===============
1997
-------------------------------------------------
Before Tax After
Tax Expense Tax
---------------- -------------- ---------------
Unrealized and realized
holding losses arising during period $ 44,417 16,424 27,993
Less: reclassification adjustment for gains
included in net income - - -
---------------- -------------- ---------------
Net unrealized gains on securities $ 44,417 16,424 27,993
================ ============== ===============
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) LOANS RECEIVABLE, NET
Loans receivable, net at December 31 are summarized as follows:
1999 1998
-------------------- -------------------
First mortgage loans and contracts secured by real estate $ 66,107,637 53,208,295
Commercial real estate loans 30,594,201 27,449,222
Commercial loans 60,060,456 37,564,411
Second mortgage consumer loans 7,702,056 9,065,655
Auto and other consumer loans 11,275,882 7,159,864
Agricultural loans 9,804,791 8,191,121
Savings account loans 957,364 752,320
Tax exempt municipal loans 1,427,646 1,476,736
-------------------- -------------------
187,930,033 144,867,624
Less:
Unearned discount and deferred loan origination fees (3,580) 23,831
Allowance for loan losses 1,585,819 1,484,680
-------------------- -------------------
$ 186,347,794 143,359,113
==================== ===================
A summary of activity in the allowance for loan losses for the years
ended December 31 follows:
1999 1998 1997
-------------------- -------------------- -------------------
Balance, beginning of year $ 1,484,680 845,905 387,656
Balance acquired in merger -- 347,900 -
Provision for loan losses 203,500 335,000 492,400
Losses charged off, net of recoveries (102,361) (44,125) (34,151)
-------------------- -------------------- -------------------
Balance, end of year $ 1,585,819 1,484,680 845,905
==================== ==================== ===================
Loans receivable include approximately $44,984,000 and $37,163,000 in
adjustable rate loans at December 31, 1999 and 1998, respectively.
Real estate loans serviced for others totaled approximately $39,742,000
and $23,021,000 at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998 approximately $55,691,000 and $36,117,000,
respectively, of the Company's loans receivable are obligations of
customers located outside of the Company's trade 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
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1999 whose contract
amounts represent credit risk include:
Letters of credit $ 77,219
===================
Commitment outstanding - fixed rate $ 3,609,000
===================
Unused lines of credit $ 12,910,000
===================
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31 is summarized as follows:
1999 1998
-------------------- -------------------
Loans receivable $ 1,752,476 1,483,478
Mortgage-backed securities 229,682 190,691
Investment securities 265,404 207,105
Time deposits in banks and other interest-earning assets 11,100 37,091
-------------------- -------------------
$ 2,258,662 1,918,365
==================== ===================
(7) PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
1999 1998
-------------------- -------------------
Land $ 714,913 384,912
Building and improvements 2,677,611 2,538,110
Construction in progress 936,812 -
Furniture, fixtures and equipment 1,665,768 1,442,947
-------------------- -------------------
5,995,104 4,365,969
Accumulated depreciation (1,122,434) (883,558)
-------------------- -------------------
$ 4,872,670 3,482,411
==================== ===================
Included in building and improvements is approximately $530,000 related
to a duplicate facility acquired in the merger which is currently held
for sale.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) DEPOSITS
Deposits at December 31 are summarized as follows:
1999 1998
--------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE RATE AMOUNT % AMOUNT %
------------------ ------------------ --------- ------------------ ---------
Demand accounts 0.00% $ 18,750,554 10.4% $ 18,895,349 11.3%
NOW and money market accounts 1.74% 23,332,776 13.0 22,906,877 13.7
Savings accounts 4.04% 48,295,547 26.8 46,810,631 27.9
Certificates of deposit: 2.00 to 2.99% 311 - 147 -
3.00 to 3.99% 8,346 - 6,229 -
4.00 to 4.99% 15,772,283 8.8 4,981,241 3.0
5.00 to 5.99% 59,323,533 33.0 53,790,598 32.1
6.00 to 6.99% 14,398,188 8.0 20,108,513 12.0
7.00 to 7.99% - - 120,499 -
------------------ --------- ------------------ ---------
Total certificates of deposit 5.46% 89,502,661 49.8 79,007,227 47.1
------------------ --------- ------------------ ---------
Total interest-bearing deposits 4.50% 161,130,984 89.6 148,724,735 88.7
---------
4.03% $ 179,881,538 100.0% $ 167,620,084 100.0%
================== ========= ================== =========
Scheduled maturities of certificates of deposit at December 31, 1999 are
as follows:
Due within one year $ 65,288,455
Due within two to three years 21,803,047
Due within four to five years 2,303,026
Due after five years 108,133
-------------------
$ 89,502,661
===================
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certificates of deposit of $100,000 or more are approximately $15,894,000
and $12,998,000 at December 31, 1999 and 1998, 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:
1999 1998 1997
-------------------- -------------------- -------------------
Savings accounts $ 1,837,886 1,610,134 468,392
NOW and money market accounts 479,045 267,275 229,475
Certificates of deposit 4,562,657 4,213,514 1,937,367
-------------------- -------------------- -------------------
$ 6,879,588 6,090,923 2,635,234
==================== ==================== ===================
(9) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31 are summarized as follows:
1999 1998
-------------------- -------------------
4.79% to 6.55% fixed rate advances, interest payable monthly $ 40,425,000 19,175,000
4.82% to 5.52% putable advances, put options exercisable quarterly,
interest payable monthly 6,000,000 3,000,000
-------------------- -------------------
$ 46,425,000 22,175,000
==================== ===================
Contractual principal repayments on advances from the Federal Home Loan
Bank subsequent to December 31, 1999 are as follows:
YEARS ENDING DECEMBER 31,
2000 $ 24,750,000
2001 9,675,000
2002 1,000,000
2003 5,000,000
2004 4,000,000
Thereafter 2,000,000
--------------------
$ 46,425,000
====================
These advances are collateralized by the Federal Home Loan Bank of
Seattle stock held by the Company, unpledged investment and
mortgage-backed securities and qualifying real estate loans totaling
$64,214,000 at December 31, 1999.
The weighted average interest rate on these advances was 5.77% and 5.65%
at December 31, 1999 and 1998, respectively.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1999, the Company had a Cash Management Advance (CMA)
note with a maximum allowable advance of $47,066,400. There were no
outstanding advances on the CMA note as of December 31, 1999.
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31 consist of
the following:
1999
---------------------------------------------------------------------------------------
WEIGHTED BOOK VALUE MARKET VALUE
REPURCHASE AVERAGE OF UNDERLYING OF UNDERLYING
AMOUNT RATE SECURITIES SECURITIES
------------------- -------------------- -------------------- -------------------
To repurchase within:
1 - 30 days $ 1,646,328 5.38% $ 2,368,390 2,313,161
31 - 90 days 854,827 5.18 2,268,389 2,191,401
Greater than 90 days 9,044,804 5.66 11,022,544 11,688,380
------------------- -------------------- -------------------- -------------------
$ 11,545,959 5.58% $ 15,659,323 16,192,942
=================== ==================== ==================== ===================
1998
---------------------------------------------------------------------------------------
WEIGHTED BOOK VALUE MARKET VALUE
REPURCHASE AVERAGE OF UNDERLYING OF UNDERLYING
AMOUNT RATE SECURITIES SECURITIES
------------------- -------------------- -------------------- -------------------
To repurchase within:
1 - 30 days $ 3,615,604 4.69% $ 3,826,972 3,862,197
31 - 90 days 1,863,000 5.31 1,987,526 2,009,188
Greater than 90 days
3,971,968 5.02 5,253,786 5,300,364
------------------- -------------------- -------------------- -------------------
$ 9,450,572 4.95% $ 11,068,284 11,171,749
=================== ==================== ==================== ===================
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 year ended December 31, 1999, securities sold under
agreements to repurchase averaged approximately $10,299,000 and the
maximum outstanding at any month end during the year was approximately
$11,546,000.
(11) LINES OF CREDIT
To comply with OTS Year 2000 readiness guidelines, Heritage Bank
established a Federal Funds line at Norwest Bank Minnesota/Wells Fargo
(Norwest). The total line was for $10,000,000 with a daily interest rate
equal to the Norwest federal funds rate, which was 5.5% at December 31,
1999, secured by investment securities. There was no balance outstanding
at December 31, 1999, and there were no borrowings advanced during 1999.
Heritage also participated in the Century Date Change Special Liquidity
Facility, a program established by the Federal Reserve Bank of
Minneapolis. The amount available to Heritage is $10,019,383, with an
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
interest rate at 150 basis points above the Federal Open Market
Committee's intended federal funds rate (6.80% at December 31, 1999.) The
line is secured by investment securities. There was no balance
outstanding at December 31, 1999, and there were no borrowings advanced
during 1999. As of January 2000, this agreement was cancelled.
United also has a line of credit of $3,000,000 with Norwest at December
31, 1999, with an interest rate of 175 basis points over the Norwest
federal funds rate, or 7.25%. This line is secured by United's Heritage
stock and expires October 30, 2000. There were no advances on this line
in 1999.
(12) INCOME TAXES
Income tax expense for the years ended December 31 is summarized as
follows:
FEDERAL STATE TOTAL
-------------------- -------------------- -------------------
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
==================== ==================== ===================
1998:
Current $ 1,057,210 223,945 1,281,155
Deferred 92,662 24,778 117,440
-------------------- -------------------- -------------------
$ 1,149,872 248,723 1,398,595
==================== ==================== ===================
1997:
Current $ 417,425 39,739 457,164
Deferred (112,368) (20,635) (133,003)
-------------------- -------------------- -------------------
$ 305,057 19,104 324,161
==================== ==================== ===================
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:
1999 1998 1997
-------------------- -------------------- -------------------
Computed "expected" tax expense $ 1,362,894 1,246,445 294,570
Increase (decrease) resulting from:
State taxes, net of Federal income tax
effects 178,674 166,483 40,159
Goodwill amortization 40,164 25,544 14,615
Tax-exempt interest (45,085) (18,307) (24,286)
Equity in undistributed earnings of
Valley Bancorp., Inc. (42,965) (527) -
Decrease in valuation allowance - - (41,743)
Other, net 45,557 (21,043) 40,846
-------------------- -------------------- -------------------
$ 1,539,239 1,398,595 324,161
==================== ==================== ===================
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
1999 1998
-------------------- -------------------
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 629,487 549,976
Investments, due to difference in basis 107,594 136,388
Premises and equipment and real estate owned, due to difference
in basis 59,159 8,293
Basis differences, due to purchase accounting 7,568 16,782
Unrealized losses on securities available-for-sale 600,989 4,266
Other 81,226 52,012
-------------------- -------------------
Total gross deferred tax assets 1,486,023 767,717
-------------------- -------------------
Deferred tax liabilities:
Loans, due to difference in basis 221,633 222,946
Stock in Federal Home Loan Bank of Seattle, principally due to
stock dividends not recognized for tax purposes 267,782 205,823
Premises and equipment, principally due to differences in
depreciation 249,968 218,777
Prepaid SAIF assessment 6,533 18,391
-------------------- -------------------
Total gross deferred tax liabilities 745,916 665,937
-------------------- -------------------
Net deferred tax asset $ 740,107 101,780
==================== ===================
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, 1999 and 1998 management believes it is more likely than not
that the Company will realize the benefits of these deductible
differences.
Retained earnings at December 31, 1999 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.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) RELATED PARTIES
Central Financial Services (CFS) provides various management services to
the Company, including accounting, tax and insurance advisory services,
and investment, personnel and regulatory consulting. CFS is owned by the
Company's Chairman of the Board of Directors and largest shareholder. The
charges were $308,691, $209,335 and $81,347 for the years ended December
31, 1999, 1998 and 1997, respectively.
(14) EMPLOYEE BENEFIT PLAN
The Company has a savings plan under Section 401(k) of the Internal
Revenue Code. The Company allows eligible employees to contribute up to
15% of their monthly wages. The Company matched an amount equal to 75%,
75% and 50% of the employee's contribution, up to 6% of total wages, for
the years ended December 31, 1999, 1998 and 1997, respectively.
Participants are at all times fully vested in their contributions and are
immediately vested in the Company's contributions. The Company's 401(k)
contributions and administrative costs were approximately $107,000,
$104,000 and $36,000 during the years ended December 31, 1999, 1998 and
1997, respectively.
The Company 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 $3,300 for each of the three years ended December 31, 1999,
1998 and 1997. The Company 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 statements of financial condition, of
approximately $282,000 and $267,500 at December 31, 1999 and 1998,
respectively.
In October 1999, the Company 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 is 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 using all
available accrued amounts. The amount expensed under this agreement was
approximately $970 for the year ended December 31, 1999.
(15) STOCK OPTION PLAN
In January 2000, an incentive Stock Option Plan was approved by the Board
of Directors which provides for the grant of incentive stock options
(ISO's) and non-qualified stock options to certain full and part-time
employees and directors of the Company up to 120,000 shares of Company
common stock. Vesting is five years for each award. The term of the
options is 10 years for ISO's and 15 years for non-qualified options. The
option price for all ISO's granted under the plan shall be determined by
the compensation committee of the Board of Directors, 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 be based upon 110% of market value
and can not be exercised before five years. A change in control provision
will immediately vest all options upon completion of a change in control.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In January 2000, the Board of Directors granted option to acquire 31,800
shares of common stock. The grant of these options is subject to
ratification and adoption of the Stock Option Plan by a vote of the
Company's shareholders.
The Company's existing stock appreciation rights plan was rescinded by
the Board of Directors upon its approval of this stock option plan.
(16) REGULATORY MATTERS
UFC, Heritage and Heritage State are 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, Heritage and Heritage State 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. Heritage's and
Heritage State's 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 Heritage and Heritage State to maintain minimum amounts
and ratios (set forth in the tables below). Management believes, as of
December 31, 1999, that Heritage and Heritage State meet all capital
adequacy requirements to which they are subject.
As of December 31, 1999, Heritage and Heritage State were categorized 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.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Minimum to be "well
Minimum for capital capitalized" under PCA
Actual adequacy purposes provisions
----------------------------- ------------------------- -------------------------
United: (in thousands) Amount Ratio Amount Ratio Amount Ratio
----------------------- ------------- ------------- ------------- -------- ------------- --------
December 31, 1999:
Total capital $ 25,429 14.10 $ 14,477 8.0 $ N/A -
Tier I capital 28,392 15.75 - - N/A -
Tier I leverage 28,392 10.54 10,776 4.0 N/A -
Tangible capital 28,392 10.52 10,799 4.0 N/A -
December 31, 1998:
Total capital 27,365 20.81 10,544 8.0 N/A -
Tier I capital 28,564 21.72 - - N/A -
Tier I leverage 28,564 12.56 9,098 4.0 N/A -
Tangible capital 28,564 12.39 9,223 4.0 N/A -
Heritage:
December 31, 1999:
Total capital 21,087 13.17 12,813 8.0 16,016 10.0
Tier I capital 19,634 12.26 - - 9,610 6.0
Tier I leverage 19,634 7.86 7,492 3.0 12,486 5.0
Tangible capital 19,634 7.86 3,746 1.5 - -
December 31, 1998:
Total capital 20,956 16.78 9,989 8.0 12,486 10.0
Tier I capital 19,517 15.63 - - 7,492 6.0
Tier I leverage 19,517 9.17 6,386 3.0 10,643 5.0
Tangible capital 19,517 9.17 3,193 1.5 - -
Heritage State:
December 31, 1999:
Total 1,706 12.77 1,069 8.0 134 10.0
Tier I 1,573 11.78 534 4.0 801 6.0
Tier I leverage 1,573 8.60 731 4.0 914 5.0
December 31, 1998:
Total 948 20.66 367 8.0 459 10.0
Tier I 902 19.66 184 4.0 275 6.0
Tier I leverage 902 8.84 408 4.0 510 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.
Savings banks, such as Heritage, that meet or exceed their capital
requirements may make capital distributions during any one year up to an
amount that would reduce its surplus capital ratio to no less than
one-half of its surplus capital ratio at the beginning of the calendar
year. State banks, such as Heritage State, may pay dividends up to the
total of the prior two years earnings without permission of the State
regulator.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) 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 investment and mortgage-backed
securities available-for-sale, the fair value is based upon quoted
market prices. The fair value of loans receivable 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 has
assumptions about the size and timing of expected cash flows and
appropriate discount rates. 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 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 FHLB stock
approximates redemption value. The fair value of accrued interest
receivable approximates book value as the Company expects contractual
receipt in the near-term. The fair value of the investment in Valley
Bancorp, Inc. was based on the current market value of Valley stock
at December 31, 1999. At December 31, 1998, the fair value
approximated the book value due to the purchase of the stock
occurring near December 31, 1998.
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 Heritage was obtained from the FHLB
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 long-term debt
approximates the Company's current long-term borrowing rate, the fair
value of long-term debt approximates the carrying value. The fair
value of Federal Home Loan Bank advances and securities sold under
agreements to repurchase was obtained from the FHLB Analysis. 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 no fair value adjustment
is necessary.
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
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
The approximate book value and fair value of the Company's financial
instruments as of December 31 are as follows:
1999 1998
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- -------------- -------------- --------------
Financial assets:
Cash and cash equivalents $ 11,457,000 11,457,000 19,256,000 19,256,000
Securities available-for-sale 53,044,000 53,044,000 51,900,000 51,900,000
Loans receivable, net 186,348,000 187,500,000 143,359,000 150,300,000
Loans held for sale 1,191,000 1,191,000 5,717,000 5,717,000
Stock in FHLB of Seattle 3,046,000 3,046,000 1,232,000 1,232,000
Investment in Valley Bancorp, Inc. 4,549,000 4,815,000 2,684,000 2,684,000
Accrued interest receivable 2,259,000 2,259,000 1,918,000 1,918,000
Financial liabilities:
Deposits 179,882,000 179,384,000 167,620,000 168,410,000
FHLB advances and securities sold under
agreements to repurchase 57,971,000 57,244,000 31,626,000 31,544,000
Accrued interest payable 1,528,000 1,528,000 1,267,000 1,267,000
(18) 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, 1999 is approximately $14,395,000. There were
no loans repurchased during 1999. Total loans sold during 1999 were
approximately $119,118,000.
In June 1997, the Company entered into a five-year service contract for
data processing services. In the event of early termination of the
service contract 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.
At December 31, 1999, the Company had entered into various construction
contracts for construction of its Bozeman and Missoula branches. The
major contracts aggregated approximately $1,638,000 and are expected to
be completed by June 2000. Total costs incurred on these contracts as of
December 31, 1999 were approximately $937,000.
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) PARENT COMPANY INFORMATION (CONDENSED)
The summarized financial information for United Financial Corp. is
presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31,
------------------------------------------
ASSETS 1999 1998
------ -------------------- -------------------
Cash and cash equivalents ($373,232 and $103,401 deposited $ 556,592 2,295,721
with Heritage, respectively)
Investment securities available-for-sale 1,889,957 2,063,775
Investment in subsidiary banks 22,136,685 22,690,294
Investment in Valley Bancorp, Inc. 4,548,949 2,683,791
Loans receivable 135,884 698,006
Accrued interest receivable 24,414 74,271
Other assets 248,657 133,454
-------------------- -------------------
Total assets $ 29,541,138 30,639,312
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 182,182 111,345
-------------------- -------------------
Total liabilities 182,182 111,345
-------------------- -------------------
Common stock 28,001,579 28,001,579
Retained earnings 3,250,876 2,533,289
Treasury stock (931,649) -
Accumulated other comprehensive loss (961,850) (6,901)
-------------------- -------------------
Total stockholders' equity 29,358,956 30,527,967
-------------------- -------------------
Total liabilities stockholders' equity $ 29,541,138 30,639,312
==================== ===================
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CONDENSED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
Revenues:
Cash dividends from bank subsidiaries $ 2,760,000 1,225,828 320,000
Interest income 270,270 432,153 4,323
Other income 127,526 1,988 -
-------------------- -------------------- -------------------
3,157,796 1,659,969 324,323
-------------------- -------------------- -------------------
Expenses:
Interest expense - 11,917 189,657
Other operating expenses 290,213 407,075 81,850
-------------------- -------------------- -------------------
290,213 418,992 271,507
-------------------- -------------------- -------------------
Income before equity in undistributed
earnings of subsidiaries and income
taxes 2,867,583 1,240,977 52,816
Dividends in excess of earnings of subsidiaries
(359,635) - -
Equity in undistributed earnings of subsidiaries
- 1,028,932 388,461
-------------------- -------------------- -------------------
Income before income taxes 2,507,948 2,269,909 441,277
Income tax expense (benefit) 38,676 2,489 (100,944)
-------------------- -------------------- -------------------
Net income $ 2,469,272 2,267,420 542,221
==================== ==================== ===================
CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
Cash flows from operating activities:
Net income $ 2,469,272 2,267,420 542,221
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 (1,028,932) (388,461)
Equity in income of Valley Bancorp, Inc.
(126,367) (1,550) -
Amortization of investment securities
premiums and discounts, net
28,480 3,649 -
Increase (decrease) in other assets and
liabilities, net 51,391 (76,098) 15,839
-------------------- -------------------- -------------------
Net cash provided by operating
activities 2,782,411 1,164,489 169,599
-------------------- -------------------- -------------------
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
Cash flows from investing activities:
Purchases of securities available-for-sale (2,004,167) (45,192) -
Proceeds from sales and maturities of
securities available-for-sale 2,050,430 3,000,000 -
Purchases of Valley Bancorp, Inc. stock (1,746,591) (2,682,241) -
Net decrease in loans receivable 562,122 52,006 -
Capital contribution to Heritage State Bank
(700,000) (1,374,000) -
Acquired cash and cash equivalents in merger
- 3,468,600 -
-------------------- -------------------- -------------------
Net cash provided by (used in) investing
activities (1,838,206) 2,419,173 -
-------------------- -------------------- -------------------
Cash flows from financing activities:
Payments on long-term debt - (2,350,000) (200,000)
Purchase of treasury stock (931,649)
Capital contribution - 2,275,000 -
Dividends paid to stockholders (1,751,685) (1,273,736) -
-------------------- -------------------- -------------------
Net cash used in financing activities (2,683,334) (1,348,736) (200,000)
-------------------- -------------------- -------------------
Net increase (decrease) in cash and cash
equivalents (1,739,129) 2,234,926 (30,401)
Cash and cash equivalents at beginning of year
2,295,721 60,795 91,196
-------------------- -------------------- -------------------
Cash and cash equivalents at end of year $ 556,592 2,295,721 60,795
==================== ==================== ===================
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) ACQUISITION
During 1999, the Company increased its ownership percentage of Valley
Bancorp, Inc. (Valley) to 39.93% at December 31, 1999 from 25% at
December 31, 1998. The Company's investment in Valley was being accounted
for by the equity method in 1999 and 1998. Valley is a bank holding
company located in Phoenix, Arizona and is the parent company of Valley
Bank of Arizona, a state chartered commercial bank. Summary unaudited
financial information (in thousands) of Valley as of and for the years
ended December 31, 1999 and 1998 follows (in thousands):
1999 1998
---- ----
Total assets $59,464 49,102
Total liabilities (52,022) (41,751)
-------- --------
Stockholders' equity $ 7,442 7,351
======= =======
Interest income $ 4,447 3,447
Interest expense 1,971 1,610
-------- --------
Net interest income $ 2,476 1,837
======== =======
Net income $ 451 708
======== =======
A reconciliation of the investment in Valley at December 31, 1999 is as
follows (in thousands):
Stockholders' equity of Valley $ 7,442
Ownership percentage 39.93%
--------
UFC's equity in Valley 2,972
Excess purchase price 1,577
--------
Investment in Valley $ 4,549
========
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On January 10, 2000, the Company's ownership percentage increased to
50.6%, and additional interests were acquired thereafter. Effective
January 1, 2000 the Company will consolidate Valley with its financial
statements. The following presents proforma condensed statements of
financial condition for the Company at January 1, 2000 as if Valley were
consolidated as of that date.
Assets January 1, 2000
------ -------------
(unaudited)
Cash and cash equivalents $ 12,180,423
Investment securities available-for-sale 70,178,121
Loans receivable - net 226,211,207
Loans held for sale 1,191,111
Premises and equipment - net 5,072,768
Real estate owned 224,484
Accrued interest receivable 2,643,560
Goodwill, net 3,356,385
Other assets 5,692,637
-----------
Total assets $326,750,696
===========
Liabilities and Stockholders' Equity
Deposits $229,964,160
Federal Home Loan Bank advances 46,425,000
Securities sold under agreements to repurchase 11,545,959
Federal funds purchased 1,750,000
Other borrowed funds 800,000
Accrued interest payable 1,586,629
Other liabilities 1,642.341
----------
Total liabilities 293,714,089
-----------
Minority interest 3,677,651
-----------
Total stockholders' equity 29,358,956
----------
Total liabilities and stockholders' equity $326,750,696
===========
Ownership percentage 50.60%
======
(21) OPERATING SEGMENT INFORMATION
As of December 31, 1998, the Company adopted FASB Statement No. 131,
Financial Reporting for Segments of a Business Enterprise. This statement
requires that a public business enterprise report financial and
descriptive information about its reportable operating segments.
According to the statement, operating segments are defined as components
of an enterprise about which separate financial information
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The Company evaluates segment performance internally based on geography,
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 the Parent
company and eliminations 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.
The following is a summary of selected operating segment information for
the years ended December 31, 1999 and 1998. Operating information is not
presented for 1997 as it is not comparable as a result of merger.
HERITAGE
HERITAGE BANK STATE BANK OTHER CONSOLIDATED
--------------------- --------------------- -------------------- --------------------
1999:
Net interest income $ 7,069,704 444,193 270,270 7,784,167
Provision for loan
losses 110,000 93,500 - 203,500
--------------------- --------------------- -------------------- --------------------
Net interest income
after provision 6,959,704 350,693 270,270 7,580,667
Non-interest income 3,359,447 43,238 127,526 3,530,211
Non-interest expense 6,323,404 488,750 290,213 7,102,367
Income 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
===================== ===================== ==================== ====================
Assets $ 249,073,839 19,087,125 2,064,931 270,225,895
Loans receivable, net 171,204,354 15,007,555 135,884 186,347,794
Deposits 168,224,959 12,044,923 (388,344) 179,881,538
Stockholders' equity 20,150,527 1,986,159 7,222,270 29,358,956
UNITED FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
HERITAGE
HERITAGE BANK STATE BANK OTHER CONSOLIDATED
-------------------- ---------------------------------------------------------------
1998:
Net interest income $ 6,349,622 86,615 420,235 6,856,472
Provision for loan
losses 335,000 - - 335,000
-------------------- ---------------------------------------------------------------
Net interest income
after provision 6,014,622 86,615 420,235 6,521,472
Non-interest income 3,275,871 14,176 1,988 3,292,035
Non-interest expense 5,594,481 145,937 407,074 6,147,492
Income before income
taxes 3,696,012 (45,146) 15,149 3,666,015
Income taxes (benefit) 1,413,391 (17,285) 2,489 1,398,595
-------------------- ---------------------------------------------------------------
Net income (loss) $ 2,282,621 (27,861) 12,660 2,267,420
==================== ===============================================================
Assets $ 214,763,551 11,394,328 6,403,330 232,561,209
Loans receivable, net 138,992,675 3,668,432 698,006 143,359,113
Deposits 159,287,569 9,629,918 (1,297,403) 167,620,084
Stockholders' equity 21,352,771 1,337,523 7,837,673 30,527,967
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/John M. Morrison By: /s/Kurt R. Weise
------------------------------ --------------------------------
John M. Morrison Kurt R. Weise
Chairman of the Board President and Chief Executive Officer
(Duly Authorized Representative) (Duly Authorized Representative)
Date: March 30, 2000 Date: March 30, 2000
------------------------------ --------------------------------
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 30, 2000 Date: March 30, 2000
---------------------------- ------------------------------
By: /s/ Larry D. Albert By: /s/Dr. J. William Bloemendaal
------------------------------ --------------------------------
Larry D. Albert Dr. J. William Bloemendaal
Director Director
Date: March 30, 2000 Date: March 30, 2000
---------------------------- ------------------------------
By: /s/Elliott L. Dybdal By: /s/Janice. M. Graser
------------------------------ --------------------------------
Elliott L. Dybdal Janice M. Graser
Director Director
Date: March 30, 2000 Date: March 30, 2000
---------------------------- ------------------------------
By: /s/Jerome H. Hentges By: /s/ William L. Madison
------------------------------ --------------------------------
Jerome H. Hentges William L. Madison
Director Director
Date: March 30, 2000 Date: March 30, 2000
---------------------------- ------------------------------
By: /s/Kevin P. Clark By: /s/ Steve Feurt
------------------------------ --------------------------------
Kevin P. Clark Steve Feurt
Director Director
Date: March 30, 2000 Date: March 30, 2000
---------------------------- ------------------------------
EXHIBITS INDEX.
Exhibit Number Description
- -------------- -----------
22.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.