<PAGE>
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
UNITED FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, no par value per share
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
475,000
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursu-
ant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
$24.50 (= the average of the high and low prices on October 29, 1997)
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$11,637,500
-----------------------------------------------------------------------
(5) Total fee paid:
$2,327.50
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
UNITED FINANCIAL CORP.
601 FIRST AVENUE NORTH
GREAT FALLS, MT 59401
January 15, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
United Financial Corp. ("United") to be held at United's offices located at 601
First Avenue North, Great Falls, Montana, on February 3, 1998, at 9:00 a.m.,
local time.
At the Special Meeting, you will be asked to consider and approve the
Restated Agreement and Plan of Merger between United and Heritage Bancorporation
("Heritage"), dated as of August 25, 1997 (the "Merger Agreement"), and the
merger of United and Heritage (the "Merger"). If the Merger is consummated, each
outstanding share of Heritage Common Stock will be converted into 47.50 shares
of United Common Stock, no par value per share ("United Common Stock"). In the
Merger, United will issue 475,000 shares of United Common Stock to holders of
Heritage Common Stock ("Heritage Shareholders").
The Merger of United and Heritage will create a holding company with
approximately $183 million in assets and $30 million in stockholders' equity,
based on the September 30, 1997 financial statements. The combined entity will
be called United Financial Corp. Upon consummation of the Merger, the current
holders of United Common Stock ("United Shareholders") will own approximately
70% of the United Common Stock and Heritage Shareholders will own approximately
30% of the United Common Stock (including the 3.3% of United Common Stock
currently owned by Heritage Shareholders). At the time of the Merger, a majority
of the board of directors of the combined entity will be nominated by the
Heritage Shareholders and, as a condition of the Merger, will be elected to the
newly constituted United Board of Directors. This majority will be able to
select and control the management of United as well as the board of directors
and management of the combined entity's subsidiary banks. See "Risk Factors" and
"The Merger--Consequences of the Merger; Change of Control." Following the
Merger, the subsidiary banks of United and Heritage will be combined into one
bank called Heritage Bank, which will have approximately $88 million in loans
and $137 million in deposits, based on the September 30, 1997 financial
statements.
After the Merger, the newly constituted board of directors and management of
the combined entity intends to pursue a growth-oriented expansion strategy by
pursuing internal and external growth opportunities, when available. Management
will consider expanding the customer base of the combined banks by emphasizing
commercial and consumer loans as well as the mortgage business presently
emphasized by United Savings Bank. Management will consider pursuing external
growth through opening new branches, possible acquisitions of other financial
institutions, as well as expansion of the geographic area currently served. This
strategy is consistent with the growth-oriented expansion historically pursued
by Heritage. For more detailed information regarding the consequences of the
Merger to United, please read "The Merger--Consequences of the Merger; Change of
Control."
While this will represent a change from United's existing business strategy
of attracting deposits and emphasizing residential and commercial mortgage
loans, the Board of Directors of United believes the Merger will enhance the
position of the combined entity's banking subsidiaries by increasing the
diversification of the loan portfolios and expanding the deposit bases. In
addition, the combined entity will have a strong capital base to proceed with
expansion and growth strategies in the future.
The accompanying Joint Proxy Statement is a proxy statement for both the
Special Meeting of United Shareholders and a special meeting of Heritage
Shareholders. The Joint Proxy Statement and the copy of the Merger Agreement
attached hereto as Appendix A describe the proposed Merger more fully and
include detailed information about United and Heritage. Please read this
information carefully before voting on the proposed Merger. To take effect, the
Merger Agreement must be approved by the holders of a majority of United Common
Stock and by the holders of two-thirds of Heritage Common Stock.
<PAGE>
AFTER CAREFUL CONSIDERATION OF THE TERMS OF THE PROPOSED MERGER, YOUR BOARD
OF DIRECTORS HAS UNANIMOUSLY CONCLUDED THAT THE MERGER IS IN THE BEST INTERESTS
OF UNITED SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSAL.
We hope that you will be able to attend the Special Meeting. Whether or not
you plan to attend, we urge you to COMPLETE, SIGN, DATE AND RETURN the
accompanying proxy card in the enclosed business reply envelope to make certain
that your shares will be represented at the Special Meeting. If you decide to
attend the Special Meeting and wish to vote your shares personally, you may
revoke your proxy at any time.
Sincerely,
[SIGNATURE]
Bruce K. Weldele
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
HERITAGE BANCORPORATION
5500 WAYZATA BOULEVARD
SUITE 145
GOLDEN VALLEY, MN 55416
January 15, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Heritage Bancorporation ("Heritage") to be held at Heritage's offices located at
120 First Avenue North, Great Falls, Montana, on February 3, 1998 at 9:00 a.m.,
local time.
At the Special Meeting, you will be asked to consider and approve two
proposals. The first proposal is to approve the Restated Agreement and Plan of
Merger between Heritage and United Financial Corp. ("United"), dated as of
August 25, 1997 (the "Merger Agreement"), and the merger of Heritage and United
(the "Merger"). If the Merger is consummated, each outstanding share of Heritage
Common Stock, no par value per share ("Heritage Common Stock"), will be
converted into 47.50 shares of United Common Stock, no par value per share
("United Common Stock"). In the Merger, United will issue 475,000 shares of
United Common Stock to holders of Heritage Common Stock.
The second proposal is to nominate five directors to serve on the Board of
Directors of United following the consummation of the Merger. The Board of
Directors of Heritage has nominated John M. Morrison, Kurt R. Weise, Janice M.
Graser, Larry D. Albert and Jerome H. Hentges and now seeks your confirmation of
these nominees. If confirmed, the nominees will be elected by the Board of
Directors of United as directors at the time the Merger becomes effective.
The Merger of Heritage and United will create a holding company with
approximately $183 million in assets and $30 million in stockholders' equity,
based on the September 30, 1997 financial statements. The combined entity will
be called United Financial Corp. Upon consummation of the Merger, the current
holders of United Common Stock ("United Shareholders") will own approximately
70% of the United Common Stock and the shareholders of Heritage ("Heritage
Shareholders") will own approximately 30% of the United Common Stock (including
the 3.3% of United Common Stock currently owned by Heritage Shareholders). At
the time of the Merger, a majority of the board of directors of the combined
entity will be nominated by the Heritage Shareholders, as outlined in Proposal
Two, and, as a condition of the Merger, will be elected to the newly constituted
board of directors of the combined entity. This majority will be able to select
and control the management of United as well as the board of directors and
management of the combined entity's subsidiary banks. See "Risk Factors" and
"The Merger--Consequences of the Merger; Change of Control." Following the
Merger, the subsidiary banks of Heritage and United will be combined into one
bank called Heritage Bank, which will have approximately $88 million in loans
and $137 million in deposits, based on the September 30, 1997 financial
statements.
After the Merger, the newly constituted board of directors and management of
the combined entity intends to pursue a growth-oriented expansion strategy by
pursuing internal and external growth opportunities, when available. Management
will consider expanding the customer base of the combined banks by emphasizing
commercial and consumer loans and pursuing external growth through opening new
branches, possible acquisitions of other financial institutions, as well as
expansion of the geographic area currently served. This strategy is consistent
with the growth-oriented expansion historically pursued by Heritage. The
combined entity will also continue United's core business that emphasizes
attracting deposits and making residential and commercial mortgage loans. For
more detailed information regarding the consequences of the Merger, please read
"The Merger--Consequences of the Merger; Change of Control." We believe the
Merger will enhance the position of both Heritage and United, increase the
diversification of our loan portfolios, expand our deposit bases and will
provide a strong capital base to proceed with expansion and growth strategies in
the future.
Your Board believes that the Merger will, among other things, give Heritage
Shareholders a fair price for their Heritage Common Stock and the opportunity to
convert their shares of Heritage Common Stock
<PAGE>
on a tax-free basis into shares of United Common Stock, which is publicly
traded. The Board has received the opinion of its financial advisor, D.A.
Davidson & Co., that the consideration proposed to be paid to Heritage
Shareholders in the Merger is fair to such Shareholders, from a financial point
of view.
The accompanying Joint Proxy Statement is a proxy statement for both the
Special Meeting of Heritage Shareholders and a special meeting of United
Shareholders. The Joint Proxy Statement and the copy of the Merger Agreement
attached hereto as Appendix A describe the proposed Merger more fully and
include detailed information about Heritage and United. Please read this
information carefully before voting on the proposed Merger. To take effect, the
Merger Agreement must be approved by the holders of two-thirds of Heritage
Common Stock and by the holders of a majority of United Common Stock. The
director nominees must be approved by a vote of the holders of a majority of
Heritage Common Stock. John M. Morrison, the Chairman of the Board, owns
approximately 80% of the currently outstanding shares of Heritage Common Stock
and will, therefore, be able to control the outcome on both proposals.
AFTER CAREFUL CONSIDERATION OF THE TERMS OF THE PROPOSED MERGER, YOUR BOARD
OF DIRECTORS HAS CONCLUDED THAT THE MERGER AND THE APPROVAL OF THE DIRECTOR
NOMINEES ARE IN THE BEST INTERESTS OF HERITAGE AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF BOTH PROPOSALS.
You should consult your own tax advisor concerning the federal income tax
consequences and any applicable foreign, state, local or other tax consequences
of the Merger.
We hope that you will be able to attend the Special Meeting. Whether or not
you plan to attend, we urge you to COMPLETE, SIGN, DATE AND RETURN the
accompanying proxy card to make certain that your shares will be represented at
the Special Meeting. If you decide to attend the Special Meeting and wish to
vote your shares personally, you may revoke your proxy at any time.
Sincerely,
[SIGNATURE]
John M. Morrison
CHAIRMAN
<PAGE>
UNITED FINANCIAL CORP.
601 FIRST AVENUE NORTH
GREAT FALLS, MONTANA 59401
(406) 761-2200
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 3, 1998
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of United
Financial Corp. ("United") will be held at United's offices located at 601 First
Avenue North, Great Falls, Montana, on February 3, 1998, at 9:00 a.m., local
time, for the following purposes:
1. To consider and vote upon a proposal to approve the Restated Agreement
and Plan of Merger, dated as of August 25, 1997, between United and Heritage
Bancorporation ("Heritage"), a copy of which is attached to the accompanying
Joint Proxy Statement as Appendix A, pursuant to which United and Heritage will
be merged (the "Merger"). Upon consummation of the Merger, each outstanding
share of Heritage Common Stock will be converted into 47.50 shares of United
Common Stock, no par value per share ("United Common Stock"); and
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The affirmative vote of the holders of a majority of the outstanding shares
of United Common Stock is required to approve the Merger.
Only holders of record of outstanding shares of United Common Stock at the
close of business on January 8, 1998 will be entitled to notice of, and to vote
at, the Special Meeting or any adjournment thereof. Prior to the actual voting
thereof, a proxy may be revoked by the person executing such proxy by filing
with the Secretary of United an instrument of revocation, by a duly executed
proxy bearing a later date, or by voting in person at the Special Meeting.
By Order of the Board of Directors
[LOGO]
Bruce K. Weldele
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Great Falls, Montana
January 15, 1998
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
<PAGE>
HERITAGE BANCORPORATION
5500 WAYZATA BOULEVARD
SUITE 145
GOLDEN VALLEY, MN 55416
(612) 542-3001
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 3, 1998
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Heritage
Bancorporation ("Heritage") will be held at 120 First Avenue North, Great Falls,
Montana, on February 3, 1998, at 9:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve the Restated Agreement
and Plan of Merger, dated as of August 25, 1997, between Heritage and United
Financial Corp. ("United"), a copy of which is attached to the accompanying
Joint Proxy Statement as Appendix A, pursuant to which Heritage and United will
be merged (the "Merger"). Upon consummation of the Merger, each outstanding
share of Heritage Common Stock, no par value per share ("Heritage Common
Stock"), will be converted into 47.50 shares of United Common Stock.
2. To nominate John M. Morrison, Kurt R. Weise, Janice M. Graser, Larry D.
Albert and Jerome H. Hentges to be elected as directors of United upon the
consummation of the Merger; and
3. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The affirmative vote of the holders of two-thirds of Heritage Common Stock
is required to approve the Merger Agreement. The affirmative vote of the holders
of a majority of Heritage Common Stock is required to approve each director
nominee.
Only holders of record of outstanding shares of Heritage Common Stock at the
close of business on January 8, 1998 will be entitled to notice of, and to vote
at, the Special Meeting or any adjournment thereof. Shareholders will be able to
revoke their proxies by submitting a substitute proxy bearing a later date or by
attending the meeting, revoking their proxy and voting in person.
By Order of the Board of Directors
[SIGNATURE]
Sheila Becker
SECRETARY
Great Falls, Montana
January 15, 1998
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD. IF THE
MERGER IS CONSUMMATED, HERITAGE SHAREHOLDERS WILL BE SENT INSTRUCTIONS REGARDING
THE SURRENDER OF STOCK CERTIFICATES.
<PAGE>
JOINT PROXY STATEMENT
------------------
JOINT PROXY STATEMENT FOR SPECIAL MEETINGS
OF
SHAREHOLDERS OF UNITED FINANCIAL CORP.
TO BE HELD FEBRUARY 3, 1998
AND OF
SHAREHOLDERS OF HERITAGE BANCORPORATION
TO BE HELD FEBRUARY 3, 1998
------------------------
This Joint Proxy Statement constitutes the Joint Proxy Statement of United
("United") and Heritage Bancorporation ("Heritage") to be used in soliciting
proxies of the shareholders of United (the "United Shareholders") and
shareholders of Heritage (the "Heritage Shareholders") in connection with the
separate Special Meetings of United Shareholders and of Heritage Shareholders,
each to be held on February 3, 1998.
When the Merger becomes effective, each outstanding share of Heritage Common
Stock, no par value per share ("Heritage Common Stock") will be converted into
47.50 shares (the "Exchange Rate") of United Common Stock, no par value per
share, ("United Common Stock") (the "Merger Consideration"). See "The
Merger--Conversion of Heritage Common Stock."
The outstanding shares of United Common Stock are traded on the Nasdaq
National Market. The last reported sale price of United Common Stock on the
Nasdaq National Market on January 9, 1998 was $25.125 per share. Heritage Common
Stock is not publicly traded.
This Joint Proxy Statement and forms of proxy are first being mailed to
Heritage and United Shareholders on or about January 15, 1998. The cost of the
solicitation of proxies will be borne by each company with respect to its own
Shareholders. In addition to this solicitation, United and Heritage directors,
officers and employees may solicit proxies from Shareholders of their respective
companies by telephone or other means of communication. United and Heritage
directors, officers and employees will not receive additional compensation for
aiding in the solicitation.
THE UNITED COMMON STOCK TO BE ISSUED PURSUANT TO THE MERGER AND RECEIVED BY
HERITAGE SHAREHOLDERS AND THE MERGER INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
ON PAGE 17.
IN ORDER FOR ANY SHAREHOLDER TO EXERCISE DISSENTERS' RIGHTS, A NOTICE MUST
BE SENT BY SUCH SHAREHOLDER AND RECEIVED BY HERITAGE OR UNITED, AS THE CASE MAY
BE, ON OR BEFORE 9:00 A.M. ON FEBRUARY 3, 1998, AND ANY SUCH SHAREHOLDER MUST
VOTE AGAINST THE APPROVAL OF THE MERGER. SEE "THE MERGER--DISSENTERS' RIGHTS."
--------------------------
The date of this Joint Proxy Statement is January 15, 1998.
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS JOINT PROXY STATEMENT AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON. THIS JOINT PROXY
STATEMENT SHALL NOT CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISIDICTION
WHERE, OR TO ANY PERSON WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT AT ANY TIME, NOR ANY OFFER OR
SOLICITATION MADE HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
United is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by United can
be inspected and copies of such material can be obtained at prescribed rates
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048. The
Commission also maintains a Web site (http:// www.sec.gov) at which reports,
proxy and information statements and other information regarding United may be
accessed. In addition, such reports, proxy statements and other information can
also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006. United's Exchange Act file number is 0-28080.
INFORMATION PROVIDED BY UNITED AND HERITAGE
The information set forth in this Joint Proxy Statement concerning Heritage
and its subsidiary bank has been furnished by Heritage and has not been
independently investigated or verified by United. Similarly, the information set
forth in this Joint Proxy Statement concerning United and its subsidiaries has
been furnished by United and has not been independently investigated or verified
by Heritage.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information...................................................................................... 2
Information Provided by United and Heritage................................................................ 2
Summary.................................................................................................... 4
Comparative Unaudited per Share Data....................................................................... 16
Risk Factors............................................................................................... 17
General Information........................................................................................ 19
Market Prices and Dividend Payment History................................................................. 21
Proposal One for United and Heritage Shareholders: Approval of the Merger Agreement........................ 23
The Merger................................................................................................. 23
General.................................................................................................. 23
Background of the Merger................................................................................. 23
Purposes of the Merger................................................................................... 24
Reasons for the Merger--United........................................................................... 25
Reasons for the Merger--Heritage......................................................................... 26
Opinion of United's Financial Advisor.................................................................... 27
Opinion of Heritage's Financial Advisor.................................................................. 30
Effective Time of the Merger............................................................................. 34
Consequences of the Merger; Change of Control............................................................ 34
Conversion of Heritage Common Stock...................................................................... 36
Delivery of United Common Stock.......................................................................... 36
Certain Federal Income Tax Consequences.................................................................. 36
Dissenters' Rights....................................................................................... 38
Representations and Warranties........................................................................... 40
Covenants; Conduct of Business Pending the Merger........................................................ 40
Regulatory Approvals; Conditions to the Merger........................................................... 42
Amendment; Waiver; Termination........................................................................... 43
Effect on United Employee Benefit Plans.................................................................. 44
Expenses................................................................................................. 44
Accounting Treatment..................................................................................... 44
Interests of Certain Persons; Certain Transactions....................................................... 45
Resale of United Common Stock............................................................................ 47
Unaudited Pro Forma Combined Financial Information......................................................... 49
Information Regarding Heritage............................................................................. 56
Heritage Selected Financial Data........................................................................... 60
Unaudited Pro Forma Heritage Predecessor Financial Data.................................................... 62
Management's Discussion and Analysis of Financial Condition and Results of Operations of Heritage.......... 63
Heritage Shareholders and Security Ownership of Management................................................. 80
Description of Capital Stock and Comparison of Shareholder Rights.......................................... 80
Legal Matters.............................................................................................. 83
Experts.................................................................................................... 83
Proposal Two for Heritage Shareholders: Approval of Director Nominees...................................... 84
Information Regarding United............................................................................... 86
United Selected Financial Data............................................................................. 118
Management's Discussion and Analysis of Financial Condition and Results of Operations of United............ 119
Index to Financial Statements.............................................................................. F-1
Appendices:
Appendix A: Restated Agreement and Plan of Merger dated as of August 25, 1997 between Heritage and
United, as amended
Appendix B: Opinion of Columbia Financial Advisors, Inc.
Appendix C: Opinion of D.A. Davidson & Co.
Appendix D: Dissenters' Rights: Sections 302A.471 and 302A.473 of Minnesota Statutes
Appendix E: Dissenters' Rights: Sections 35-1-826 through 35-1-839 of Montana Statutes
</TABLE>
3
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS JOINT PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS CONTAINED IN THIS JOINT PROXY STATEMENT AND THE APPENDICES HERETO.
UNITED AND HERITAGE SHAREHOLDERS ARE URGED TO READ THIS JOINT PROXY STATEMENT
AND THE APPENDICES HERETO IN THEIR ENTIRETY. THIS JOINT PROXY STATEMENT CONTAINS
A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE CURRENT VIEWS OF UNITED
AND HERITAGE WITH RESPECT TO FUTURE EVENTS THAT MAY HAVE AN EFFECT ON THEIR
INDIVIDUAL OR COMBINED FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS
ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO,
THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE HEREIN, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY.
PARTIES TO THE MERGER:
<TABLE>
<S> <C>
Heritage Bancorporation...... Heritage is a savings and loan holding company within the
meaning of Section 10 of the Home Owners' Loan Act, as
amended ("HOLA"). Heritage was formed in 1993 as a Montana
corporation and conducts its principal business activities
through its bank subsidiary Heritage Bank, F.S.B. ("Heritage
Bank"), a federally chartered stock savings bank originally
chartered in 1923. Heritage has no significant operations
other than those conducted through Heritage Bank. Heritage
acquired Heritage Bank effective as of June 1, 1994. The
deposits of Heritage Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC")--Savings Association
Insurance Fund ("SAIF").
As of September 30, 1997, on a consolidated basis, Heritage
had assets of approximately $78.4 million, deposits of $65.0
million and loans of $54.2 million. Heritage Bank originates
primarily residential and commercial real estate,
commercial, agricultural and consumer loans. Heritage Bank
has one branch in each of Great Falls and Chester, Montana.
Heritage's principal executive offices are located at 5500
Wayzata Boulevard, Suite 145, Golden Valley, Minnesota
55416, and its telephone number is (612) 542-3001. Heritage
Bank is headquartered in Great Falls, Montana, its principal
executive offices are located at 120 First Avenue North,
Great Falls, Montana 59401, and its telephone number is
(406) 727-6106.
For additional information about Heritage and its business,
see "Information Regarding Heritage."
United Financial Corp........ United is a savings and loan holding company within the
meaning of Section 10 of HOLA. United was formed in 1996 as
a Minnesota corporation and conducts its principal business
activities through its bank subsidiary United Savings Bank,
F.A. ("United Bank"), a federally chartered stock savings
bank that has been in operation since 1923. The deposits of
United Bank are insured by the FDIC--SAIF. United Bank has
one non-bank subsidiary, Community Service Corporation, that
owns and manages real estate held for investment.
As of September 30, 1997, on a consolidated basis, United
had assets of approximately $103.1 million, deposits of
$72.1 million and loans of $34.2 million. United Bank
originates primarily residential and consumer loans and
loans secured by commercial real estate. United Bank has
full-service branches in four Montana locations. United and
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
United Bank are headquartered in Great Falls, Montana, their
executive offices are located at 601 First Avenue North,
Great Falls, Montana 59401, and their telephone number is
(406) 761-2200.
For additional information about United and its business,
see "Information Regarding United"
SPECIAL MEETING OF UNITED SHAREHOLDERS:
Time and Date................ 9:00 a.m., local time, on February 3, 1998.
Place........................ 601 First Avenue North, Great Falls, Montana 59401.
Purpose of Special Meeting... To consider and vote upon a proposal to approve the Restated
Agreement and Plan of Merger between United and Heritage
dated as of August 25, 1997 (the "Merger Agreement")
attached hereto as Appendix A, which provides for the merger
of Heritage and United (the "Merger"). Terms and provisions
related to the Merger are set forth in the Merger Agreement
and are summarized in part in this Joint Proxy Statement.
See "The Merger."
Required Vote For the Merger;
Record Date................ Only holders of record of shares of United Common Stock
outstanding as of the close of business on January 8, 1998
(the "Record Date") are entitled to notice of, and to vote
at, the United Special Meeting. Approval of the Merger will
require the affirmative vote of a majority of the shares of
United Common Stock outstanding as of the close of business
on the Record Date. See "General Information--Vote Required;
Shares Entitled to Vote." To vote upon the Merger, United
Shareholders should complete, sign and return the enclosed
proxy card or attend the Special Meeting to vote in person.
Each proxy may be revoked at any time before it is voted by
executing and returning a proxy bearing a later date, by
giving written notice of revocation to the Secretary of
United or by attending the Special Meeting and voting in
person. See "General Information--Voting and Revocation of
Proxies." The directors and executive officers of United and
United Bank own approximately 8% of the currently
outstanding shares of United Common Stock.
Risk Factors Regarding United
and the Merger............. For information regarding various risks and other
considerations associated with the Merger, see "Risk
Factors."
Opinion of United's Financial
Advisor Regarding
the Merger................. United's financial advisor, Columbia Financial Advisors,
Inc. ("Columbia"), has rendered an opinion (the "Columbia
Opinion") to the Board of Directors of United (the "United
Board") that, as of the date of its opinion, the Merger
Consideration to be paid by United to Heritage Shareholders
is fair to United Shareholders from a financial point of
view. See "The Merger--Opinion of United's Financial
Advisor" and the Columbia Opinion, setting forth the text of
the opinion, the limits of its review, assumptions made,
other matters considered and procedures followed, attached
hereto as Appendix B.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Board Recommendation......... THE UNITED BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE
MERGER.
SPECIAL MEETING OF HERITAGE SHAREHOLDERS:
Time and Date................ 9:00 a.m., local time, on February 3, 1998.
Place........................ 120 First Avenue North, Great Falls, Montana 59401.
Purposes of Special
Meeting.................... To consider and vote (i) upon a proposal to approve the
Merger Agreement attached hereto as Appendix A, which
provides for the merger of Heritage and United and (ii) upon
a proposal to nominate John M. Morrison, Kurt R. Weise,
Janice M. Graser, Larry D. Albert and Jerome H. Hentges to
be elected as directors of United upon consummation of the
Merger. Terms and provisions related to the Merger are set
forth in the Merger Agreement and are summarized in part in
this Joint Proxy Statement. See "The Merger."
Required Vote For the Merger;
Record Date................ Only holders of record of shares of Heritage Common Stock
outstanding as of the close of business on January 8, 1998
(the "Record Date") are entitled to notice of, and to vote
at, the Heritage Special Meeting. Approval of the Merger
will require the affirmative vote of the holders of
two-thirds of the shares of Heritage Common Stock and the
approval of the director nominees will require the
affirmative vote of the holders of a majority of the shares
of Heritage Common Stock outstanding as of the close of
business on the Record Date. See "General Information--Vote
Required; Shares Entitled to Vote." To vote upon the Merger,
Heritage Shareholders should complete, sign and return the
enclosed proxy card or attend the Special Meeting to vote in
person. Each proxy may be revoked at any time before it is
voted by executing and returning a proxy bearing a later
date, by giving written notice of revocation to the
Secretary of Heritage or by attending the Special Meeting
and voting in person. See "General Information--Voting and
Revocation of Proxies." The directors and officers of
Heritage and Heritage Bank own 100% of the currently
outstanding shares of Heritage Common Stock.
Risk Factors Regarding United
and the Merger............. For information regarding various risks and other
considerations associated with United Common Stock and the
Merger, see "Risk Factors."
Opinion of Heritage's
Financial Advisor Regarding
the Merger................. Heritage's financial advisor, D.A. Davidson & Co. ("D.A.
Davidson"), has rendered an opinion (the "Davidson Opinion"
and, together with the Columbia Opinion, each a "Fairness
Opinion") to the Board of Directors of Heritage (the
"Heritage Board") that, as of the date of its opinion, the
Merger Consideration to be received by Heritage Shareholders
is fair to such Shareholders from a financial point of view.
See "The Merger--Opinion of Heritage's Financial Advisor"
and the Davidson Opinion, setting forth the text of the
opinion, the limits of its review, assumptions made, other
matters considered and procedures followed, attached hereto
as Appendix C.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Board Recommendation......... THE HERITAGE BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE
MERGER.
TERMS AND CONSEQUENCES OF THE MERGER:
Conversion of Heritage
Shares..................... Upon consummation of the Merger, each outstanding share of
Heritage Common Stock will be converted into 47.50 shares of
United Common Stock.
Background of Merger......... The terms of the Merger were negotiated at arm's length by
the management personnel and the Boards of United and
Heritage during the period from May 1997 through August
1997. The United and Heritage Boards believe that the Merger
is in the best interests of their respective Shareholders.
In reaching that conclusion, each Board considered, among
other things, greater access to capital and opportunities
for continued growth of the combined entity, the economies
to be achieved by integrating the operations of Heritage
Bank with those of United Bank, the Heritage Shareholders'
right to nominate and have elected a majority of the United
Board, changing the existing business strategy of United to
engage in a growth-oriented expansion strategy and the
anticipated stronger competitive position of the combined
entity. See "The Merger--Background of the Merger,"
"--Purposes for the Merger," and "--Reasons for the Merger--
Heritage" and "--United."
Directors and
Executive Officers......... Upon consummation of the Merger, the United Board will
consist of nine directors. Four of the nine directors will
be current directors of United and five of the nine
directors will have been nominated by Heritage Shareholders
and elected by the United Board. No shareholder vote is
required for the election of the Heritage nominees by the
United Board. The current executive officers of United and
Heritage will resign upon consummation of the Merger. New
executive officers will be elected by the new United Board.
For more information on the anticipated composition of the
new United Board and management after the Merger, see "The
Merger--Consequences of the Merger; Change of Control--Board
of Directors" and "--Executive Officers."
Share Ownership After the
Merger..................... Upon consummation of the Merger, current Heritage
Shareholders will own approximately 30% (including the 3.3%
currently owned by Heritage Shareholders) and current United
Shareholders will own approximately 70% of United Common
Stock. In addition, John M. Morrison, who currently owns
approximately 80% of the outstanding shares of Heritage
Common Stock, has received rights of first refusal to
purchase additional shares of United Common Stock from
certain United Shareholders owning approximately 263,200 of
the currently outstanding shares of United Common Stock
which will represent approximately 15.5% of the United
Common Stock outstanding following the Merger. See "The
Merger--Interests of Certain Persons; Certain
Transactions--Right of First Refusal Agreements." The direc-
tors and officers of Heritage and the Heritage Bank own all
of the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
currently outstanding shares of Heritage Common Stock. See
"Heritage Shareholders and Security Ownership of
Management."
Organization After the
Merger; Change of
Control.................... United will be the surviving corporation after the Merger.
At the time of the Merger, the majority of the United Board
will be nominated by the Heritage Shareholders and elected
by the existing United Board. This majority will be able to
select and control the management of United as well as the
board of directors and management of the combined entity's
subsidiary banks.
It is expected that within six months of the consummation of
the Merger, the bank subsidiaries of United and Heritage
will be merged. Heritage Bank will be the surviving bank and
will be called Heritage Bank. The newly constituted United
Board will be able to elect the directors and officers of
the combined bank.
For more information on the anticipated organizational
structure of the combined entity, see "The
Merger--Consequences of the Merger; Change of Control."
Interests of Certain Persons;
Certain Transactions....... Certain members of the Heritage and United Boards and
management may be deemed to have certain interests in the
Merger, as described below. United has Executive Severance
Payment Agreements with several of its executive officers in
the event a "Change of Control" should occur. If the
executives of United were to be terminated immediately upon
the Effective Date of the Merger, the amount of severance
payment which each executive would be able to receive would
be as follows: Mr. Weldele, $320,400; Mr. Hallingstad,
$63,300; Mr. Kissee, $58,500; Mr. McCleary, $65,400; Mr.
Mart, $65,700; and Mr. Marvosh, $70,800. A United officer
who resigns and is reappointed will not be entitled to such
severance payment, except if such reappointment results in a
change of duties. Otherwise, the Merger will trigger the
severance payment obligations for terminated officers. For
further discussion of these agreements, see "The
Merger--Interests of Certain Persons; Certain
Transactions--Change of Control Agreements."
Certain United Shareholders (the "Right of First Refusal
Shareholders") owning 263,200 shares of the currently
outstanding shares of United Common Stock, or 15.5% of the
shares to be outstanding after the Merger, have entered into
Right of First Refusal Agreements with John M. Morrison, the
Chairman and majority shareholder of Heritage ("Right of
First Refusal Agreements"). Under these agreements, the
Right of First Refusal Shareholders have agreed not to sell
any shares of United Common Stock they own for a period of
two years from the Effective Time of the Merger, without
first offering such shares to Mr. Morrison. See "The
Merger--Interests of Certain Persons; Certain
Transactions--Right of First Refusal Agreements" for a
discussion of these agreements.
In connection with the issuance of United Common Stock to
Heritage Shareholders, United has granted to the Heritage
Shareholders certain demand registration rights to require
United to file a registration
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
statements in certain circumstances at United's expense to
register the shares issued to the Heritage Shareholders. See
"The Merger--Interests of Certain Persons; Certain
Transactions--Registration Rights."
At the time of the Merger, certain Heritage directors and
officers are expected to become directors and officers of
the combined entity. Five members of the United Board,
constituting a majority, will be nominated by Heritage
Shareholders. Of these five members, John M. Morrison, Kurt
R. Weise and Janice M. Graser are shareholders, directors
and officers of Heritage and Heritage Bank. Messrs. Morrison
and Weise and Ms. Graser will not be compensated for their
services as a director of the combined entity other than
pursuant to established policies of United regarding
director compensation. It is expected that Mr. Morrison will
be elected President and Chief Executive Officer and Mr.
Weise will be elected Chief Operating Officer of United. It
is also expected that Kevin P. Clark, currently the
President of Heritage Bank, and Steve L. Feurt, currently
Senior Vice President of Heritage Bank, will be elected
President and Senior Vice President of the combined bank
subsidiary, respectively, after the proposed merger of the
bank subsidiaries. While the compensation of the new United
officers has not been determined, it is expected that their
compensation as officers will initially be comparable to the
compensation currently paid by United to officers with
similar positions. Messrs. Morrison and Weise are expected
to provide their services to United through a service
corporation. See "The Merger-- Interests of Certain Persons;
Certain Transactions."
Conditions to the Merger..... The Merger is subject to the satisfaction of certain
conditions, including, among others, (i) certain regulatory
approvals; (ii) the approval and adoption of the Merger
Agreement and approval of the Merger by the holders of a
majority of the outstanding shares of United Common Stock
entitled to vote at the United Special Meeting and by the
holders of two-thirds of the outstanding shares of Heritage
Common Stock entitled to vote at the Heritage Special
Meeting; (iii) the election to the United Board of the five
nominees approved by the Heritage Shareholders; (iv)
percentages of shares of United and Heritage Common Stock as
to which dissenters' rights are asserted not exceeding
certain levels; and (v) conditions relating to the tax-free
status of the Merger and the accounting treatment of the
Merger. See "The Merger--Regulatory Approvals; Conditions to
the Merger."
Amendment; Waiver;
Termination................ United and Heritage may mutually amend any provision of the
Merger Agreement prior to the Effective Time.
The Merger Agreement may be terminated and the Merger aban-
doned (i) by mutual consent of United and Heritage; (ii) by
either United or Heritage, if the other party breaches any
of its material representations, warranties or covenants
contained in the Merger Agreement in any material respect,
which breach cannot be or has not been cured within 30 days
after the giving of written notice to the breaching party of
such breach; (iii) by either United or Heritage, in the
event that the Merger is not consummated by March 31, 1998,
by reason of the failure of any condition precedent, except
to the extent
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
that the failure of the Merger to be consummated arises out
of, or results from, a breach of any representation,
warranty or covenant contained in the Merger Agreement on
the part of the party seeking to terminate the Merger
Agreement; (iv) by either United or Heritage, if prior to
the Effective Time, the Fairness Opinion to be delivered by
its financial advisor is withdrawn; or (v) by either United
or Heritage if the required United or Heritage Shareholder
approval of the Merger and the Merger Agreement is not
received. See "The Merger--Amendment; Waiver; Termination."
Regulatory Approvals......... The Merger is subject to prior approval by the Office of
Thrift Supervision (the "OTS"). No approvals are required by
the banking authorities of any state. United filed the
required applications with the OTS on October 10, 1997, and
the application was accepted by the OTS for final processing
on November 25, 1997. There can be no assurance that the OTS
will approve the Merger, or as to timeliness of such
approval, or that such approval will not contain a condition
or requirement which causes such approval to fail to satisfy
the conditions to the consummation of the Merger. The merger
of the bank subsidiaries of United and Heritage, expected to
occur within six months after the consummation of the
Merger, will also require OTS approval. See "The
Merger--Regulatory Approvals; Conditions to the Merger."
Effective Time of the
Merger..................... Subject to the terms and conditions of the Merger Agreement,
the Merger will be effective at the time United and Heritage
file Articles of Merger with the Secretaries of State of
Minnesota and Montana, respectively (the "Effective Time" or
the "Effective Time of the Merger"). The parties expect the
Merger to become effective as soon as practicable following
shareholder approval of the Merger, but in any case no
earlier than January 1, 1998 and no later than June 30,
1998. See "The Merger--Effective Time of the Merger."
Certain Federal Income Tax
Consequences............... The obligations of Heritage and United to consummate the
Merger are conditioned on, among other things, the receipt
of an opinion, dated as of the Closing Date of the Merger
(the "Closing Date"), to be given to Heritage by Dorsey &
Whitney LLP, counsel to United, based on certain facts,
representations and assumptions set forth therein,
substantially to the effect that for federal income tax
purposes the Merger will qualify as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and that accordingly:
(i) no gain or loss will be recognized by Heritage or United
as a result of the Merger, (ii) no gain or loss will be
recognized by Heritage Shareholders who exchange their
Heritage Common Stock for United Common Stock in the Merger,
and (iii) the basis of the United Common Stock received by a
Heritage Shareholder will be the same as the basis of the
Heritage Common Stock surrendered. If such required tax
opinion is not received, the Merger will not be consummated
unless the conditions requiring their receipt are waived and
the approvals of Heritage and United Shareholders are
resolicited by means of an updated Joint Proxy Statement.
EACH HOLDER OF HERITAGE COMMON STOCK IS URGED TO
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
CONSULT HIS OR HER OWN TAX OR FINANCIAL ADVISORS AS TO THE
EFFECT OF SUCH FEDERAL INCOME TAX CONSEQUENCES ON HIS OR HER
OWN PARTICULAR FACTS AND CIRCUMSTANCES AND ALSO AS TO ANY
STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT
OF THE MERGER. See "The Merger--Certain Federal Income Tax
Consequences."
Accounting Treatment......... The Merger is expected to be accounted for as a purchase
under generally accepted accounting principles ("GAAP").
Heritage is being deemed the acquirer in the Merger for
accounting purposes, although the Merger is expected to
result in the former United Shareholders owning a majority
of the combined entity. Among other factors, this accounting
treatment results from the fact that the majority of the
United Board will have been nominated by the former Heritage
Shareholders. This majority will have effective control
regarding the business and management of the combined entity
and its subsidiaries. See "The Merger--Accounting
Treatment."
Resale of United Common
Stock...................... Issuance of the shares of United Common Stock to Heritage
Shareholders upon consummation of the Merger will be
completed as a private transaction and such shares will not
have been registered under the Securities Act of 1933, as
amended ("Securities Act"). If the shares of United Common
Stock are not subsequently registered for resale, they
cannot be resold for one year after the Effective Date in
any public transaction. Commencing one year after the
Effective Date, the shares can be resold subject to the
restrictions of Rule 144. United has agreed in the Merger
Agreement to use its best efforts to file up to two
registration statements on Form S-3 under the Securities
Act, if such form is available, to register the shares of
United Common Stock for resale. Form S-3 is not currently
available to United, and there is no assurance that it will
be available, although United has agreed to use its best
efforts to become eligible to use Form S-3. See "The
Merger--Resale of United Common Stock" and "--Interests of
Certain Persons; Certain Transactions--Registration Rights."
Certain Differences in Rights
of Shareholders............ Upon consummation of the Merger, the Heritage Shareholders
will become United Shareholders. As a result, their rights
as shareholders, which are now governed by Montana state law
and by the Articles of Incorporation and the Bylaws of
Heritage, will be governed by Minnesota state law and will
become subject to the provisions of the Articles of
Incorporation and the Bylaws of United, which is a Minnesota
corporation. See "Description of Capital Stock and
Comparison of Shareholder Rights" for a summary of certain
differences between the rights of holders of Heritage Common
Stock and the rights of holders of United Common Stock.
Market Prices................ Shares of United Common Stock are traded on the Nasdaq
National Market under the symbol "UBMT." The first public
announcement of the proposed Merger was made in the morning
of June 24, 1997. On the day immediately preceding the
announcement date and on January 9, 1998, closing sales
prices of the United Common Stock were
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
$20.00 and $25.125, respectively. Heritage Common Stock is
not publicly traded. See "Market Prices and Dividend Payment
History."
In considering the Merger, Heritage Shareholders are advised
to obtain current market quotations for United Common Stock.
The market price for United Common Stock may fluctuate
between the date of this Joint Proxy Statement and the
Effective Time of the Merger, which may be a period of
several weeks or months. As a result, the market value of
the United Common Stock ultimately received by Heritage
Shareholders in the Merger could be greater or less than its
market value on the date of this Joint Proxy Statement or
the date of the Heritage Special Meeting. No assurances can
be given concerning the market price of United Common Stock
before or after the Effective Time of the Merger.
Appraisal Rights............. Under the Montana Business Corporation Act, dissenting
Heritage Shareholders are entitled to certain appraisal
rights with respect to the Merger. Under the Minnesota
Business Corporation Act, dissenting United Shareholders are
also entitled to certain appraisal rights with respect to
the Merger. In order for any Shareholder to exercise
Dissenters' Rights, a notice must be sent by such
Shareholder and received by Heritage or United, as the case
may be, on or before the date of the Special Meetings, and
any such Shareholder must vote against the approval of the
Merger. Failure to send such notice and vote against the
Merger will result in a waiver of such Shareholder's
Dissenters' Rights. See "The Merger--Dissenters' Rights."
</TABLE>
12
<PAGE>
UNITED SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data
concerning United. The selected financial data as of December 31, 1996 and 1995
and for each of the three years ended December 31, 1996 have been derived from
the audited consolidated financial statements of United, included herein. The
selected financial data as of December 31, 1994, 1993 and 1992, and for each of
the years ended December 31, 1993 and 1992 have been derived from the audited
consolidated financial statements of United, which are not included herein. The
financial data as of and for the nine months ended September 30, 1997 and 1996
have been derived from United's unaudited financial statements, included herein.
The unaudited financial statements reflect, in the opinion of management, all
adjustments of a normal recurring nature necessary for a fair presentation of
financial condition and results of operations. The results for the nine months
ended September 30, 1997 are not necessarily indicative of the results to be
expected for the entire year. This information should be read in conjunction
with the consolidated financial statements of United, appearing elsewhere in
this Joint Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income................................................ $ 5,560 $ 5,402 $ 7,253 $ 7,394 $ 7,926 $ 8,253
Interest expense............................................... 2,652 2,674 3,565 3,420 3,616 4,046
--------- --------- --------- --------- --------- ---------
Net interest income............................................ 2,908 2,728 3,688 3,974 4,310 4,207
Provision for loan losses...................................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net interest income after provision for loan losses............ 2,908 2,728 3,688 3,974 4,310 4,207
Non-interest income............................................ 482 643 835 595 772 1,045
Non-interest expense........................................... 1,565 2,179 2,771 2,133 2,085 2,091
--------- --------- --------- --------- --------- ---------
Income before income taxes..................................... 1,825 1,192 1,752 2,436 2,997 3,161
Provision for income taxes..................................... 685 440 649 714 1,111 1,189
--------- --------- --------- --------- --------- ---------
Net income..................................................... $ 1,140 $ 752 $ 1,103 $ 1,722 $ 1,886 $ 1,972
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
PER SHARE DATA:
Net income per share........................................... $ .93 $ .62 $ .90 $ 1.41 $ 1.54 $ 1.61
Dividends per share............................................ .72 .66 .89 .81 .73 .65
Book value per share(1)........................................ 20.24 19.88 19.96 20.18 18.43 18.52
Tangible book value per share(1)............................... 20.24 19.88 19.96 20.18 18.43 18.52
Average common shares outstanding.............................. 1,223 1,223 1,223 1,223 1,223 1,223
FINANCIAL CONDITION DATA:
Assets......................................................... $ 103,082 $ 107,945 $ 103,837 $ 114,440 $ 112,506 $ 119,041
Net loans...................................................... 34,160 33,585 35,176 30,352 31,512 36,388
Investment securities.......................................... 58,649 68,419 61,013 78,378 74,843 71,971
Deposits....................................................... 72,111 78,292 78,697 78,291 89,086 95,292
Long-term debt................................................. -- -- -- -- -- --
Stockholders' equity........................................... 24,757 24,320 24,416 24,688 22,548 22,655
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets....................................... 1.44% .94% 1.03% 1.62% 1.58% 1.64%
Return on average stockholders' equity......................... 6.20% 4.08% 4.50% 7.21% 8.16% 8.89%
Net interest margin............................................ 3.81% 3.54% 3.59% 3.83% 3.72% 3.62%
Efficiency ratio(2)............................................ 46.17% 48.32% 49.10% 46.68% 41.03% 39.81%
Net charge-offs to average loans............................... -- -- -- -- -- --
Nonperforming loans to total loans............................. .24% -- .06% .12% .27% .11%
Allowance for loan losses to total loans....................... .21% .23% .21% .24% .24% .21%
Nonperforming loans to allowance for loan losses............... 113.61% .42% 23.94% 50.53% 119.68% 58.67%
Stockholders' equity to assets(1).............................. 24.02% 22.53% 23.51% 21.57% 20.04% 19.03%
<CAPTION>
1992
---------
<S> <C>
OPERATING DATA:
Interest income................................................ $ 8,318
Interest expense............................................... 4,678
---------
Net interest income............................................ 3,640
Provision for loan losses...................................... 27
---------
Net interest income after provision for loan losses............ 3,613
Non-interest income............................................ 903
Non-interest expense........................................... 2,010
---------
Income before income taxes..................................... 2,506
Provision for income taxes..................................... 926
---------
Net income..................................................... $ 1,580
---------
---------
PER SHARE DATA:
Net income per share........................................... $ 1.29
Dividends per share............................................ .57
Book value per share(1)........................................ 17.65
Tangible book value per share(1)............................... 17.65
Average common shares outstanding.............................. 1,223
FINANCIAL CONDITION DATA:
Assets......................................................... $ 116,598
Net loans...................................................... 43,211
Investment securities.......................................... 67,054
Deposits....................................................... 94,051
Long-term debt................................................. --
Stockholders' equity........................................... 21,589
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets....................................... 1.43%
Return on average stockholders' equity......................... 7.45%
Net interest margin............................................ 3.46%
Efficiency ratio(2)............................................ 44.24%
Net charge-offs to average loans............................... --
Nonperforming loans to total loans............................. .13%
Allowance for loan losses to total loans....................... .18%
Nonperforming loans to allowance for loan losses............... 72.66%
Stockholders' equity to assets(1).............................. 18.52%
</TABLE>
- ------------------------------
(1) At period end.
(2) Excludes September 1996 pre-tax charge for SAIF assessment of $550,000.
13
<PAGE>
HERITAGE SELECTED FINANCIAL DATA
The following table sets forth certain financial data concerning Heritage
and its predecessor. The historical selected financial data as of and for the
three years ended December 31, 1996 have been derived from the audited
consolidated financial statements of Heritage, included herein. The financial
data of Heritage for the year ended December 31, 1994, which includes seven
months of Heritage Bank subsequent to its acquisition by Heritage, and the
financial information of Heritage Bank prior to its acquisition by Heritage (the
"Predecessor Bank") for the five months ended May 31, 1994, have been combined
to present on a pro forma basis a full year of operations of Heritage and
Predecessor Bank for the year ended December 31, 1994. See "Unaudited Pro Forma
Predecessor Financial Data." The financial data as of March 31, 1994 and 1993
and for the years then ended have been derived from the audited financial
statements of Heritage Bank, which are not included herein. The financial data
as of and for the nine months ended September 30, 1997 and 1996 have been
derived from Heritage's unaudited financial data, included herein. The unaudited
financial statements reflect, in the opinion of management, all adjustments of a
normal recurring nature necessary for a fair presentation of financial condition
and results of operations. The results for the nine months ended September 30,
1997 are not necessarily indicative of the results to be expected for the entire
year. This information should be read in conjunction with the consolidated
financial statements of Heritage appearing elsewhere in this Joint Proxy
Statement.
<TABLE>
<CAPTION>
HERITAGE PRO FORMA PREDECESSOR
------------------------------------------- COMBINED BANK(2)
---------- ----------------
NINE MONTHS
ENDED SEPTEMBER YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED MARCH
30, DEC. 31, 31,
---------------- ------------------------- ---------- ----------------
1997 1996 1996 1995 1994(1) 1994 1994 1993
------- ------- ------- ------- ------- ---------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income................................... $ 4,211 $ 3,269 $ 4,520 $ 3,469 $1,528 $ 2,476 $ 2,426 $ 2,685
Interest expense.................................. 2,255 1,750 2,419 1,941 830 1,355 1,221 1,507
------- ------- ------- ------- ------- ---------- ------- -------
Net interest income............................... 1,956 1,519 2,101 1,528 698 1,121 1,205 1,178
Provision for loan losses......................... 193 135 160 46 -- -- 8 64
------- ------- ------- ------- ------- ---------- ------- -------
Net interest income after provision for loan
losses.......................................... 1,763 1,384 1,941 1,482 698 1,121 1,197 1,113
Non-interest income............................... 808 807 1,059 631 282 550 797 696
Non-interest expense.............................. 1,698 1,686 2,251 1,505 775 1,389 1,219 1,101
------- ------- ------- ------- ------- ---------- ------- -------
Income before income taxes........................ 873 505 749 608 205 282 775 708
Provision for income taxes........................ 334 195 263 214 87 128 297 276
------- ------- ------- ------- ------- ---------- ------- -------
Net income........................................ $ 539 $ 310 $ 486 $ 394 $ 118 $ 154 $ 478 $ 432(7)
------- ------- ------- ------- ------- ---------- ------- -------
------- ------- ------- ------- ------- ---------- ------- -------
RESTATED PER SHARE DATA(3):
Income per share.................................. $ 1.13 $ .65 $ 1.02 $ .83 $ .25 $ .32
Dividends per share -- -- -- -- -- --
Book value per share(4)........................... 5.76 4.01 4.59 3.57 2.48 2.56
Tangible book value per share(4).................. 4.69 2.86 3.45 2.35 1.17 1.25
Pro forma income per share(5)..................... 1.33 .84 1.27 1.12 .41 .55
Pro forma book value per share(5)(4).............. 10.91 9.38 9.95 9.15 8.22 8.29
Shares used to calculate per share data........... 475 475 475 475 475 475
FINANCIAL CONDITION DATA:
Assets............................................ $78,355 $64,571 $71,347 $55,210 $42,514 $42,514 $33,332 $34,556
Net loans and loans held for sale................. 54,188 39,667 43,853 29,169 21,609 21,609 17,510 20,884
Investment securities............................. 14,950 14,729 14,172 16,090 12,365 12,365 7,871 7,670
Deposits.......................................... 65,045 54,839 57,641 42,742 37,936 37,936 29,452 30,756
Long-term debt.................................... 2,450 2,550 2,550 2,650 2,725 2,725 -- --
Stockholders' equity.............................. 2,734 1,907 2,178 1,694 1,179 1,215 3,023 2,545
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
HERITAGE PRO FORMA PREDECESSOR
------------------------------------------- COMBINED BANK(2)
---------- ----------------
NINE MONTHS
ENDED SEPTEMBER YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED MARCH
30, DEC. 31, 31,
---------------- ------------------------- ---------- ----------------
1997 1996 1996 1995 1994(1) 1994 1994 1993
------- ------- ------- ------- ------- ---------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets.......................... .99% .71% .81% .83% .55%
Return on average stockholders' equity............ 29.31% 22.14% 25.78% 27.81% 18.39%
Net interest margin............................... 3.77% 3.69% 3.74% 3.45% 3.57%
Efficiency ratio(6)............................... 61.43% 72.48% 63.67% 69.71% 79.08%
Net charge-offs to average loans.................. .04% .28% .27% .18% .01%
Nonperforming loans to total loans................ .04% .07% .06% .02% .42%
Allowance for loan losses to total loans.......... 1.03% .90% .88% 1.10% 1.46%
Nonperforming loans to allowance for loan
losses.......................................... 4.09% 7.99% 6.96% 1.84% 27.78%
Stockholders' equity to assets(4)................. 3.49% 2.95% 3.05% 3.07% 2.77%
</TABLE>
- ------------------------------
(1) Represents only seven months of operations of Heritage Bank which was
acquired by Heritage effective as of June 1, 1994.
(2) The financial information of Heritage Bank for periods prior to June 1,
1994 is not comparable in all respects with the historical financial
information of Heritage. Purchase accounting was used by Heritage for its
acquisition of Heritage Bank effective June 1, 1994, which resulted in
changes to the historical carrying value of Heritage Bank's net assets and
the recognition of goodwill. Heritage also incurred significant acquisition
debt in connection with the acquisition and incurred the resulting interest
expense. In addition, Heritage Bank's fiscal year end prior to its
acquisition was March 31.
(3) 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 Heritage Common Stock.
(4) At period end.
(5) Pro forma per share amounts are presented as if the contribution of capital
to retire outstanding long-term debt had been made as of or at the
beginning of the period presented. The pro forma reduction in interest
expense, net of tax effects at 38%, for the nine months ended September 30,
1997 and 1996 was $93,000 and $87,000, respectively, and for the years
ended December 31, 1996, 1995 and 1994 was $118,000, $137,000 and $76,000,
respectively.
(6) Excludes September 1996 pre-tax charge for SAIF assessment of $239,000.
(7) Before cumulative effect of change in method of accounting for income taxes
of $84,986. Net income for the year ended March 31, 1993 was $516,940.
15
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table presents separate unaudited comparative per share data
for Heritage and United Common Stock on an historical basis, and unaudited pro
forma comparative per share data, giving effect to the Merger. The Merger is a
business combination accounted for under the purchase method of accounting, with
Heritage considered the acquiring company.
<TABLE>
<CAPTION>
RESTATED HISTORICAL PRO FORMA
HERITAGE(1) UNITED(2) COMBINED(3)
------------- ------------- -------------
<S> <C> <C> <C>
BOOK VALUE PER SHARE AT:
September 30, 1997..................................................... $ 5.76 $ 20.24 $ 17.61
December 31, 1996...................................................... 4.59 19.96 NM(4)
CASH DIVIDENDS DECLARED PER SHARE FOR:
Nine months ended September 30, 1997 -- .72 -- (5)
Year ended December 31, 1996........................................... -- .89 -- (5)
INCOME PER SHARE FOR:
Nine months ended September 30, 1997................................... 1.13 .93 1.03
Year ended December 31, 1996........................................... 1.02 .90 .98
</TABLE>
- ------------------------
(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 Heritage Common Stock.
(2) For financial reporting purposes, the Merger will be reported as if Heritage
was recapitalized at the Effective Time with 475,000 common shares
outstanding and United was acquired immediately thereafter through the
issuance to United Shareholders of 1,223,312 shares of United Common Stock.
As a result, pro forma equivalent per share data would be the same as the
pro forma combined data and, therefore, has not been separately presented.
(3) Based on the combined stockholders' equity and operating results of Heritage
and United, including the effect of pro forma purchase accounting
adjustments. The pro forma per share information is based on the estimated
number of shares to be outstanding after the Merger for the periods
indicated which is 1,698,312 shares.
(4) Not meaningful.
(5) See "Market Prices and Dividend Payment History--United's and Heritage's
Common Stock Dividend Payment History and Restrictions."
The information presented above should be read in conjunction with the
historical consolidated financial statements of both Heritage and United and
related notes thereto, which are presented elsewhere herein and the unaudited
pro forma financial data included herein. See "Unaudited Pro Forma Combined
Financial Information" for a description of the assumptions and adjustments used
in preparing the unaudited pro forma financial data. The pro forma comparative
per share data has been included for comparative purposes only and does not
purport to be indicative of the results of operations that actually would have
been obtained if the Merger had been effected on the dates indicated or of those
results that may be obtained in the future.
16
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS JOINT PROXY STATEMENT, HERITAGE
AND UNITED SHAREHOLDERS SHOULD CONSIDER THE FOLLOWING RISK FACTORS REGARDING
UNITED, HERITAGE AND THE MERGER. THIS JOINT PROXY STATEMENT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD DIFFER
SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT, IN PART, OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
DOCUMENT. SHAREHOLDERS SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH BELOW
IN CONJUNCTION WITH THE OTHER INFORMATION INCLUDED HEREIN.
RISKS RELATING TO THE MERGER
CHANGE OF CONTROL. At the time of the Merger, a majority of the United
Board will be nominated by the Heritage Shareholders and elected by the United
Board. This majority will be able to select and control the management of United
as well as the board of directors and management of the combined entity's
subsidiary banks. The Heritage nominated directors will have terms that do not
expire until the annual shareholder meetings in 1999 and 2000. As a result,
control of the decisions regarding the business of United and its subsidiaries
will effectively shift from the current management and United Shareholders to
John M. Morrison, the current Chairman and majority shareholder of Heritage, and
the other directors nominated by the Heritage Shareholders. See "The
Merger--Consequences of the Merger; Change of Control."
NEW BUSINESS STRATEGY AND MANAGEMENT OF GROWTH. After the Merger, the newly
constituted United Board and management intends to change United's existing
business strategy and engage in a growth-oriented expansion strategy by pursuing
internal and external growth opportunities, when available. See "The
Merger--Consequences of the Merger; Change of Control--Changed Business
Strategy." Historically, United has had a more conservative business strategy.
Heritage, on the other hand, has historically pursued a growth-oriented
expansion strategy and has experienced growth of loans, deposits and assets.
United's new business strategy may subject United to a greater degree of risk.
These risks 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. If it is successful in implementing its growth strategy, United will
need to maintain adequate management personnel and systems to oversee such
growth, maintain adequate internal audit, loan review and compliance functions,
and implement additional policies, procedures and operating systems required to
support such growth. If United is successful in opening new branches or making
acquisitions, there is no assurance that such locations will achieve deposit
levels, loan balances or other operating results necessary to avoid losses or
produce profitability. Such growth and expansion plans may also be affected or
impaired by economic developments or other events beyond the control of United.
There can be no assurance that United will be successful in instituting this
new business strategy or in managing growth. Failure of United to successfully
address any of these issues could have a material adverse effect on United's
business, results of operations, financial condition or dividend policy.
INTEGRATION OF OPERATIONS. The success of the Merger depends in part on the
ability of Heritage and United to integrate their respective operations in an
efficient and effective manner, both on the bank subsidiary level and the
holding company level. While significant changes in operations, products and
marketing are not planned, the two companies nevertheless will be required,
among other things, to integrate their respective products and data processing
systems and to coordinate their sales and marketing of products to both customer
bases. See also "Risk Factors--New Business Strategy and Management of Growth."
The integration of Heritage and United will require the dedication of management
resources which may temporarily distract attention from the day-to-day business
of the combined entity. The managements of Heritage and United have entered into
the Merger Agreement with the expectation that the Merger will result in
beneficial operational efficiencies. These efficiencies, however, are expected
to
17
<PAGE>
result in only limited cost savings. Even if Heritage and United are able to
integrate their operations and economic conditions remain stable, there can be
no assurance that the anticipated efficiencies will be achieved. No assurance
can be given that difficulties will not be encountered in integrating the
operations of United and Heritage or that the benefits expected from such
integration will be realized.
FIXED EXCHANGE RATIO. Under the terms of the Merger Agreement, each share
of Heritage Common Stock issued and outstanding at the Effective Time will be
converted into the right to receive 47.50 shares of United Common Stock. The
Merger Agreement does not contain any provisions for adjustment of the Exchange
Ratio or termination of the Merger Agreement based solely on fluctuations in the
price of United Common Stock. There can be no assurance that the market price of
United Common Stock upon and after the consummation of the Merger will not be
different than the market price of such stock on the date of the execution of
the Merger Agreement or the current market price. See "Market Prices and
Dividend Payment History."
FEDERAL INCOME TAX TREATMENT OF THE MERGER. The Internal Revenue Service
("IRS") has not been and will not be asked to rule upon the tax consequences of
the Merger. Instead, Heritage will rely upon the opinion of Dorsey & Whitney
LLP, counsel to United, that the Merger will constitute a tax-free transaction
to the Heritage Shareholders for Federal income tax purposes. This opinion will
be based upon the accuracy of certain representations made by Heritage
Shareholders and on certain assumptions. See "The Merger--Certain Federal Income
Tax Consequences" for a discussion of assumptions binding on the IRS and for
further discussion of the tax consequences of the Merger. The IRS could contend
that the Merger does not constitute a "reorganization" within the meaning of
Section 368(a)(1)(A) of the Code, and that the Merger should therefore be
treated as a taxable transaction to Heritage Shareholders.
RISKS RELATING TO UNITED, HERITAGE AND THE COMBINED ENTITY
COMPETITION. United's and Heritage's bank subsidiaries, like other
depository institutions, operate in a rapidly changing environment and,
therefore, face considerable competition, both in the attraction of deposits and
the making of real estate, commercial, agricultural, consumer and other loans.
See "Information Regarding Heritage--Competition."
ECONOMIC CONDITIONS; LIMITED GEOGRAPHIC DIVERSIFICATION. The combined
entity's operations will be located in Montana. As a result of the geographic
concentration of its operations, the combined entity's results will depend
largely upon economic conditions in this area. Management believes the primary
industries in Montana include agriculture, tourism, government services,
defense, energy, mining, timber processing, education, and medical services. A
deterioration in economic conditions in the combined entity's market areas could
adversely impact the quality of the combined entity's loan portfolio and the
demand for its products and services, and accordingly, could have a material
adverse effect on the combined entity's business, financial condition and
results of operations See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Heritage--Results of Operations--
Provision for Loan Losses" and "Information Regarding United--Business--Lending
Activities--Asset Quality and Reserve for Common Losses."
ASSET QUALITY. A significant source of risk for the combined entity arises
from the possibility that losses will be sustained by the combined entity's bank
subsidiaries because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. The bank subsidiaries have
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to mitigate this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
credit portfolios of the banks. Such policies and procedures, however, may not
prevent unexpected losses that could have a material adverse effect on the
combined entity's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Heritage--Results of Operations--Provision for Loan Losses" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of United--Material Changes in Financial Condition--Asset Quality and
Loss Reserves."
18
<PAGE>
GENERAL INFORMATION
This Joint Proxy Statement is being furnished to United and Heritage
Shareholders in connection with the solicitations by the United and Heritage
Boards of proxies to be voted at the United Special Meeting to be held on
February 3, 1998 at 9:00, local time, and at any and all adjournments thereof,
and at the Heritage Special Meeting to be held on February 3, 1998 at 9:00,
local time, and at any and all adjournments thereof. This Joint Proxy Statement
and the enclosed form of proxy are first being sent to United and Heritage
Shareholders on or about January 15, 1998.
PURPOSES OF THE SPECIAL MEETINGS
At the Special Meetings, United and Heritage Shareholders will be asked to
consider and vote upon a proposal to approve the Merger Agreement and Plan of
Merger providing for the Merger. A copy of the Merger Agreement is attached
hereto as Appendix A. Pursuant to the Merger Agreement, each Heritage
Shareholder will be entitled to receive, for each share of Heritage Common Stock
held at the Effective Time of the Merger (other than shares held by dissenting
Shareholders), forty-seven and one-half (47.50) shares of United Common Stock.
See "The Merger--Conversion of Heritage Common Stock", "The Merger--Dissenters'
Rights," Sections 302A.471 and 302A.473 of the Minnesota Business Corporation
Act attached hereto as Appendix D, and Sections 35-1-826 through 35-1-839 of the
Montana Business Corporation Act attached hereto as Appendix E. After the
Merger, current Heritage Shareholders will own approximately 30% (including 3.3%
of the shares of United Common Stock currently owned by Heritage Shareholders)
and current United Shareholders will own approximately 70% of the shares of the
combined entity. See "The Merger."
Heritage Shareholders will also be asked to consider and vote upon a
proposal to nominate John M. Morrison, Kurt R. Weise, Janice M. Graser, Larry D.
Albert and Jerome H. Hentges to be elected by the United Board to be directors
of United upon consummation of the Merger (the "Heritage Nominees"). The
Heritage Nominees will constitute the majority of the United Board upon
consummation of the Merger. See "The Merger--Consequences of the Merger; Change
of Control."
It is not expected that any other matter other than as described herein will
be brought before either of the Special Meetings. If, however, other matters are
properly brought before either Special Meeting, persons appointed as proxies
will have discretion to vote or act thereon in their best judgement. See
"--Voting and Revocation of Proxies."
VOTE REQUIRED; SHARES ENTITLED TO VOTE
The presence in person or by proxy of the holders of a majority of the
outstanding shares of United and Heritage Common Stock will constitute a quorum
for the transaction of business at the United and Heritage Special Meetings,
respectively. APPROVAL OF THE MERGER WILL REQUIRE THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF UNITED COMMON STOCK AND OF
THE HOLDERS OF TWO-THIRDS OF THE HERITAGE COMMON STOCK, RESPECTIVELY. APPROVAL
OF THE HERITAGE NOMINEES BY HERITAGE SHAREHOLDERS WILL REQUIRE THE AFFIRMATIVE
VOTE OF A MAJORITY OF THE OUTSTANDING SHARES OF HERITAGE COMMON STOCK. Holders
of record of United and Heritage Common Stock at the close of business on
January 8, 1998 (the "Record Date") are entitled to receive notice of, and to
vote at, the United and Heritage Special Meetings, respectively. At the close of
business on January 8, 1998, there were 1,223,312 shares of United Common Stock
outstanding and 10,000 shares of Heritage Common Stock outstanding. Each share
of United Common Stock and Heritage Common Stock will be entitled to one vote.
Heritage Shareholders have cumulative voting rights.
As of the Record Date, executive officers and directors of United, United
Bank and their affiliates were entitled to vote approximately 8.0% of the shares
of United Common Stock then outstanding. In
19
<PAGE>
addition, 3.3% of the shares of United Common Stock were held by Heritage
Shareholders as of the Record Date.
As of the Record Date, executive officers and directors of Heritage,
Heritage Bank and their affiliates were entitled to vote all of the 10,000
shares of Heritage Common Stock then outstanding. John M. Morrison, Chairman of
Heritage, owns approximately 80% of the outstanding shares of Heritage Common
Stock and, therefore, will be able to control the outcome of the vote on each
proposal presented at the Heritage Special Meeting.
VOTING AND REVOCATION OF PROXIES
The United and Heritage Boards have unanimously approved the Merger. United
and Heritage Shareholders are solicited on behalf of the respective Boards to
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING ENVELOPE. No
postage is required if mailed within the United States. Shares represented by
proxies properly signed, dated and returned will be voted at the applicable
Special Meeting in accordance with the instructions set forth therein. If a
proxy is properly signed but contains no such instructions, the shares
represented thereby will be voted FOR the Merger at the United and Heritage
Special Meetings, and FOR each Heritage Nominee at the Heritage Special Meeting,
and at the discretion of the proxyholders as to any other matters which may
properly come before the Special Meeting. All proxies voted "FOR" such matters,
including proxies for which no instructions are indicated, may, at the
discretion of the proxy holder, be voted "FOR" a motion to adjourn or postpone
the Special Meeting to another time and/or place for the purpose of soliciting
additional proxies or otherwise; PROVIDED, HOWEVER, that no proxy which is voted
against approval of the Merger or for which the relevant shareholder
specifically abstains from voting with respect to such approval will be voted in
favor of any such adjournment or postponement. If an executed proxy card is
returned by a broker holding shares of United Common Stock in street name which
indicates that the broker does not have discretionary authority as to certain
shares to vote on any matter, or if a United or Heritage Shareholder abstains
from voting on any proposal, the shares represented by such proxy will be
considered present at the respective Special Meeting for purposes of determining
a quorum and for purposes of calculating the vote, but will not be voted with
respect to such matter. Therefore, abstentions and "broker non-votes" will have
the same effect as votes against the proposals.
Each proxy may be revoked at any time before it is voted by executing and
returning a proxy bearing a later date, by giving written notice of revocation
to the Secretary of United or Heritage, as the case may be, or by attending the
Special Meeting and voting in person.
HERITAGE SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR
PROXY CARDS. See "The Merger--Delivery of United Common Stock."
SOLICITATION OF PROXIES
Following the mailing of proxy soliciting materials, directors, officers and
employees of United and Heritage (who will not be specifically compensated for
such services) may solicit proxies by mail, telephone, telegraph and personal
interviews. United has retained D.F. King & Co., Inc. to assist in the
solicitation of the United Shareholders for a fee estimated at $5,000. United
and Heritage will bear their respective expenses of proxy solicitation,
including reimbursement of reasonable out-of-pocket expenses incurred by
brokerage houses and other custodians, nominees and fiduciaries in forwarding
proxy soliciting material to the beneficial owners of stock held of record by
such persons.
20
<PAGE>
MARKET PRICES AND DIVIDEND PAYMENT HISTORY
MARKET FOR UNITED COMMON STOCK
United Common Stock is quoted on the Nasdaq National Market System under the
symbol "UBMT." The first public announcement of the proposed Merger was made
prior to the start of trading on June 24, 1997. On the day preceding the
announcement and on January 9, 1998, the closing sales price per share of United
Common Stock as quoted on the Nasdaq National Market was $20.00 and $25.125,
respectively.
MARKET FOR HERITAGE COMMON STOCK
There is no established trading market for the Heritage Common Stock.
Heritage is aware of each transaction involving Heritage Common Stock since it
was formed. The prices for Heritage Common Stock in such transactions may not be
indicative of prices that could be attained on an active market involving a
substantial number of shares. In the most recent arms-length sale of Heritage
Common Stock in March 1997, the price per share was $441.
SHAREHOLDER DATA
As of January 8, 1998, there were approximately 260 owners of record of
United Common Stock and an estimated 1,100 additional beneficial United
Shareholders whose stock was held in street name by brokerage houses. At that
same date, there were eight owners of record of Heritage Common Stock and no
beneficial Heritage Shareholders whose stock is held in street name by brokerage
houses.
UNITED'S AND HERITAGE'S COMMON STOCK DIVIDEND PAYMENT HISTORY AND RESTRICTIONS
The United Board declared dividends of $.215, $.22, $.225 and $.23 for the
four quarters of 1996, for a total of $.89 per share; declared dividends of
$.195, $.20, $.205 and $.21 for the four quarters of 1995, for a total of $.81
per share; and declared dividends of $.235, $.24, $.245 and $.25 for the four
quarters of 1997, for a total of $.97 per share. The Heritage Board has not paid
cash dividends on Heritage Common Stock.
The declaration and payment of future dividends by the board of directors of
the combined entity is dependent upon the combined entity's net income,
financial condition, economic and market conditions, industry standards, certain
regulatory and tax considerations described below and other conditions. No
assurance can be given, or should be assumed, as to the amount, timing or
frequency of future dividend payments. See "The Merger--Consequences of the
Merger; Change of Control--Changed Business Strategy."
The OTS utilizes a three-tiered approach to permit savings associations,
based upon their capital level and supervisory condition, to make capital
distributions, which includes dividends, stock redemptions or repurchases,
cash-out mergers and other transactions charged to a bank's capital account.
Generally, a Tier 1 institution, such as United or Heritage Bank, meeting its
fully-phased-in capital requirement according to the capital standards effective
January 1, 1995, may automatically make capital distributions up to 100% of net
income to date during the calendar year, "plus an amount that would reduce by
one-half its surplus capital ratio as of the beginning of the calendar year."
"Surplus capital ratio" means the percentage by which an institution's
capital-to-assets ratio exceeds the ratio of its fully-phased-in capital
requirements to assets. Also, the rule is applied on a pro forma basis: that is,
the institution must still meet its fully-phased-in capital requirements after
the proposed capital distribution. Tier 2 institutions (those which meet the
current minimum capital requirement on a pro forma basis, but not meeting
capital rules applicable January 1, 1995) can pay dividends from 25% to 75% of
net income, determined on a GAAP basis, depending on how close they are to
meeting their fully-phased-in, risk-based component of the capital standards.
Tier 3 institutions, which do not meet their current regulatory capital
requirements, may pay dividends with prior regulatory approval.
21
<PAGE>
Under current federal income tax laws, any dividend distribution of property
(cash or in-kind) by a "tax-qualified" thrift will be taxable as income to the
recipient and not deductible by the issuer. Such nondeductible distributions are
deemed under the Code Section 593(e) to come from first: (a) the accumulated
"earnings and profits" of the institution amassed since the onset of federal
taxation in 1952, then (b) the tax bad-debt reserves on qualifying real property
loans of the institution then (c) the supplemental reserve for losses on loans,
and (d) other capital accounts.
Any dividend by a thrift deemed to come from the tax bad debt reserves must,
under the Code, be included in taxable income (because of the required recapture
of the original tax benefit of the thrift percentage of taxable income bad-debt
method) to the extent of the lesser of the tax bad debt reserves or the amount
of the distribution grossed up for taxes attributable to the distribution.
22
<PAGE>
PROPOSAL ONE
FOR UNITED AND HERITAGE SHAREHOLDERS
APPROVAL OF THE MERGER AGREEMENT
------------------------
THE MERGER
THE FOLLOWING DESCRIPTION CONTAINS, AMONG OTHER INFORMATION, SUMMARIES OF
CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT THEREOF, A COPY OF WHICH IS REPRODUCED AS APPENDIX A
TO THIS JOINT PROXY STATEMENT AND INCORPORATED HEREIN BY REFERENCE.
GENERAL
United and Heritage have entered into the Merger Agreement, which provides
for the merger of Heritage and United. At the Effective Time of the Merger, each
outstanding share of Heritage Common Stock will be converted into 47.50 shares
of United Common Stock. See "The Merger--Conversion of Heritage Common Stock."
Subject to the terms and conditions of the Merger Agreement, the Effective Time
of the Merger will be on the date Articles of Merger are filed with the
Secretaries of State of the States of Minnesota and Montana. It is presently
contemplated that the Effective Time of the Merger will be as soon as
practicable after Shareholder approvals of the Merger, but shall be no sooner
than January 1, 1998 or later than June 30, 1998.
BACKGROUND OF THE MERGER
The terms and conditions of the Merger Agreement were determined through
arm's length negotiations between the managements and the Boards of United and
Heritage. The following is a brief summary of those negotiations.
In May 1997, Heritage authorized its financial advisor, D.A. Davidson, to
inquire whether United would be interested in conducting discussions regarding a
possible merger of the two companies. Representatives of D.A. Davidson
approached Bruce K. Weldele, United's Chairman, President and Chief Executive
Officer, on May 6, 1997, to determine the interest level of United in examining
a potential merger with Heritage. In this meeting, Mr. Weldele expressed his
interest in pursuing further discussions regarding a possible merger after he
had an opportunity to consult with the United Board.
At a regular meeting of the United Board on May 19, 1997, D.A. Davidson made
a presentation regarding the possibility of a merger with Heritage. Discussion
at the meeting centered on background information of Heritage, possible
alternatives of United to increase shareholder value, the potential impact of
alternative structures for a combination of the companies and the merits of a
potential merger with Heritage. The United Board authorized continued
discussions with Heritage regarding a potential merger.
Over the next several weeks, representatives of D.A. Davidson continued
discussions with Mr. Weldele regarding relative values, potential transaction
structures and related matters. In addition, representatives of Heritage,
including John M. Morrison, majority shareholder of Heritage and Chairman of the
Heritage Board, Kurt R. Weise, Vice President of Heritage, Kevin P. Clark,
Heritage Bank's President and Chief Executive Officer, and Steve L. Feurt,
Heritage Bank's Senior Vice President, representatives of United, including Mr.
Weldele and Dean Mart, United's Senior Vice President, and representatives of
D.A. Davidson met several times to discuss a potential merger. Discussion at
these meetings focused on background information of the two companies,
management values and strategies, organizational philosophies, relative value of
the two companies, potential transaction structures and shareholder value.
23
<PAGE>
During the week of June 16, 1997, the key terms of the proposed merger,
including the composition of the initial board of directors, management
positions and related issues, were discussed by the United and Heritage
representatives. Based on the substance of these discussions, a proposal was
prepared by D.A. Davidson, on behalf of Heritage, and presented to the United
Board at its regular meeting on June 23, 1997. The United Board authorized the
preparation of a letter of intent reflecting an agreement in principle with
respect to the basic terms of the Merger, together with the understandings
reached as to confidentiality, due diligence proceedings and related matters.
The final terms and conditions of the Merger are not materially different from
those set forth in the letter of intent. The United Board and the Heritage Board
each held meetings on June 23, 1997, at which time the Boards authorized
execution of the letter of intent and release of a public announcement. A press
release announcing the signing of the letter of intent was issued prior to the
commencement of trading on June 24, 1997.
Over the next eight weeks, United retained Columbia as its financial advisor
for the Merger, the parties and their advisors preformed due diligence and
engaged in negotiations regarding the terms of the definitive Merger Agreement.
On August 25, 1997, Heritage and United each held Board meetings, at which the
Merger Agreement was voted upon and approved. The Merger Agreement was
subsequently amended and restated, effective as of August 25, 1997, to reflect
the private issuance of the United Shares and to provide registration rights to
the Heritage Shareholders.
The directors of Heritage and United have approved the Merger Agreement,
concluded that the Merger is in the best interests of their respective
Shareholders and have authorized the consummation of the Merger subject to the
approval of the Heritage and United Shareholders and the fulfillment of certain
conditions set forth in the Merger Agreement.
PURPOSES OF THE MERGER
Heritage and United primarily focus on individual and small-to-medium sized
businesses in their markets by offering products and services which meet the
needs of these customers and maintaining a significant level of involvement in
the communities they serve. The existing banking environment is rapidly
changing. Large regional, super-regional and national banks have increased their
acquisition activity at the local level, seeking to achieve enhanced
efficiencies and economies of scale. Both Heritage and United believe that this
environment presents significant opportunities for a locally-based bank to
capture market share from these larger institutions by adhering to a
community-based service philosophy.
Heritage and United believe that the Merger will enable the combined entity
to more effectively serve its customers through increased product and service
offerings, to compete more effectively in the present banking environment, and
to enhance their banks' existing local identification. The core market area for
both companies is Great Falls, Montana, and the surrounding area. Great Falls is
the second largest city in Montana and serves as a regional hub for trade,
agriculture, tourism and medical services. The parties believe that the Merger
will enhance their position within their core market through a larger customer
base, enhanced cross-selling opportunities and greater financial strength. In
addition, the branch offices of Heritage and United, particularly those in
Shelby, Havre, and Chester, are expected to complement each other through a
greater market presence, increased marketing capabilities and greater capital
and human resources.
United's primary business involves attracting customer deposits (primarily
certificates of deposits and savings accounts) and using the deposits and other
borrowings to fund residential real estate loans and investing in
mortgaged-backed securities, U.S. Treasury and agency obligations and other
investment grade securities. Heritage's primary business involves attracting
customer deposits (primarily checking, money market and certificates of deposit)
and using the deposits and other borrowings to fund residential and commercial
real estate, commercial, agricultural and consumer loans. As such, the deposit
and lending activities of the parties complement each other. In addition, each
party is perceived as emphasizing products or services which are not emphasized
by the other. For example, Heritage is actively involved in
24
<PAGE>
commercial, consumer and agricultural lending not emphasized by United. United
emphasizes residential mortgage loans to a greater degree than Heritage.
Heritage and United believe that opportunities are available to leverage each
party's products and services into the other's existing customer base. In
addition, the parties believe that the combined entity, through its greater
size, financial capability and marketing capacity, will be able to selectively
add products and services to meet the needs of its customers base and market
area.
Both parties believe the Merger will enhance shareholder value through
increased liquidity, opportunities for increased revenues, a strengthened
competitive position and improved prospects for expansion from both internal and
external growth. Internal growth is anticipated to be derived from the
diversification of business activities. External growth is expected to be
derived from increased services in the geographic area served and the
possibility of acquisitions when such opportunities become available. Both
parties also believe the Merger will result in operating synergies, although
potential cost savings, which have not been quantified or analyzed by Heritage
or United, are not expected to be significant. See "--Consequences of the
Merger; Change of Control--Changed Business Strategy."
REASONS FOR THE MERGER--UNITED
At its August 25, 1997 meeting, the United Board determined that the Merger
is fair to and in the best interests of United and its Shareholders. The United
Board's determination was based upon an analysis of the terms of the Merger, an
assessment of its potential economic and corporate governance impact upon United
Shareholders, an analysis of the potential benefits and detriments of the Merger
and a review of the financial condition and performance of Heritage and United.
In reaching its decision to approve the Merger Agreement and recommend the
approval of the Merger to United Shareholders, the United Board considered a
number of factors, none of which were assigned any specific relative value or
weight. The factors considered include the following:
- The financial condition, results of operation and business operations and
prospects of Heritage as well as United.
- The likely compatibility between the market approach and philosophies of
Heritage and United through the similar emphasis on community based
lending and involvement.
- The competitive position of United and Heritage in the areas served,
opportunities to expand within those areas and the ability of United to
position itself competitively in light of its current operations and
recent developments, including consolidations, in the banking industry.
- The likelihood that the combined entity could increase market share in
United's existing markets and would be positioned to more effectively
expand its market areas.
- The fact that the business mix of Heritage with respect to commercial and
consumer lending would provide an immediate portfolio of loans and
services which are currently not a significant part of United's business
and would offer immediate diversification of United's current loan
portfolio.
- The ability of the management of Heritage to offer capabilities in
addition to those held by United's current management for expanding
United's current business.
- The change of control resulting from Heritage Shareholders' right to
nominate and have elected a majority of the initial Board of Directors of
the combined entity.
- The dilution to United Shareholders resulting from the issuance of
additional shares.
- The fairness opinion of its financial advisor regarding the economic
impact of the Merger on United Shareholders.
- Other developments in the banking industry, United's position in the
marketplace and the ability to expand its business without undertaking a
merger.
25
<PAGE>
In addition, the United Board also considered the likelihood of the
following consequences of pursuing a merger with Heritage: the costs of
negotiating and consummating the Merger and the possibility that the costs could
not be recouped if the conditions to the Merger could not be met, as well as the
potential impact on productivity of personnel during the Merger negotiations and
the effect of the Merger on personnel.
The foregoing discussion of the information and factors considered by the
United Board is not intended to be exhaustive but is believed to encompass all
material factors considered by the United Board. On the basis of the foregoing
factors, the United Board concluded that the terms of the Merger are fair to and
in the best interests of United and its Shareholders.
THE UNITED BOARD UNANIMOUSLY RECOMMENDS THAT UNITED SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER.
REASONS FOR THE MERGER--HERITAGE
The Heritage Board determined at its August 25, 1997 special meeting that
the Merger is fair to and in the best interests of Heritage and its
Shareholders. In reaching that conclusion, the Heritage Board determined that
the Merger would allow it to increase its market share and presence, strengthen
its balance sheet and capital position and continue to pursue its
growth-oriented business strategy. Since the current management team of Heritage
acquired control of Heritage Bank in 1994, Heritage Bank has more than doubled
its assets, from $32 million to over $78 million as of September 1997. Of
primary importance to the Heritage Board was the continuation of this growth and
the funding of Heritage's loan portfolio. The Merger presented a number of
opportunities to immediately address these issues and enhance its competitive
position.
Heritage determined that the Merger would combine two financially sound
companies and would increase the growth potential for the combined entity. The
combined entity would have the ability to (i) continue to serve its customers
and markets with a high degree of personal attention, (ii) realize the benefits
of complementary strengths at both organizations, (iii) increase its market
share in its core Great Falls, Montana, market and in markets served by its
branches, (iv) increase the products and services offered to its customers, (v)
cross-sell products and services, such as commercial and consumer loans, into a
larger customer base, (vi) increase service levels to its customers and (vii)
with its stronger capital base, continue Heritage's growth-oriented strategy of
pursuing internal and external growth opportunities, when available. The
Heritage Board also believed that the Merger would allow the combined entity to
more effectively compete in the rapidly changing banking and financial services
marketplace.
In reaching its decision to approve the Merger Agreement and recommend the
approval of the Merger to Heritage Shareholders, the Heritage Board considered a
number of factors, none of which were assigned any specific relative value or
weight. The factors considered included the following:
- The financial condition, results of operation and business operations and
prospects of United;
- The current banking industry environment, including the rapid
consolidation and the need to effectively and proactively position itself
competitively;
- The right to nominate and have elected a majority of the initial Board of
Directors of the combined entity and to have effective control of
management to implement a revised business strategy;
- The prospect that the combined entity would garner increasing market share
in Heritage's existing markets and would be positioned to more effectively
expand its market areas;
- The prospect that the Merger would allow the combined entity's branches to
more effectively serve their communities due to overlapping service areas
and the greater financial strength of the combined entity;
26
<PAGE>
- The prospect that the Merger would allow for revenue enhancement and
operating synergies;
- The prospect that significant cross-selling opportunities would be created
by the Merger, including the ability to provide Heritage's commercial
banking products to United's substantial customer base;
- The advantages of the liquidity and attractive quarterly dividend
resulting from United's publicly traded securities which would be
exchanged for the stock of Heritage Shareholders;
- The prospect for further growth through acquisition by using the combined
entity's publicly traded securities;
- The expectation that the Merger would be a tax-free transaction to
Heritage Shareholders;
- Evaluation of the financial terms of the Merger and their effect on
Heritage and the Heritage Board's belief that such terms are fair to
Heritage and its Shareholders, based in part on the financial
presentations of D.A. Davidson regarding Heritage and United and the
expression of D.A. Davidson's opinion as to the fairness to Heritage of
the consideration to be received in the Merger (see "--Opinion of
Heritage's Financial Advisor"); and
- Belief, after consultation with its legal counsel, that the required
regulatory approvals could be obtained to consummate the Merger.
The foregoing discussion of the information and factors considered by the
Heritage Board is not intended to be exhaustive but is believed to encompass all
material factors considered by the Heritage Board. On the basis of the foregoing
factors, the Heritage Board concluded that the terms of the Merger are fair to
and in the best interests of Heritage and its Shareholders.
THE HERITAGE BOARD UNANIMOUSLY RECOMMENDS THAT HERITAGE SHAREHOLDERS VOTE
FOR APPROVAL OF THE MERGER.
OPINION OF UNITED'S FINANCIAL ADVISOR
United retained Columbia to provide financial advice and assistance to
United in connection with the Merger and to render an opinion as to the
fairness, from a financial point of view, of the consideration to be paid by
United to Heritage Shareholders pursuant to the Merger Agreement. Columbia is a
regional investment banking firm that provides valuations of businesses and
securities in connection with mergers and acquisitions. The United Board
selected Columbia as its financial advisor based upon its experience in mergers
and acquisitions and in valuation services related to the banking and thrift
industry. United did not impose any limitations on the scope of the
investigation by Columbia or the procedures Columbia followed in evaluating
Heritage and rendering its fairness opinion. Because much of the information
relevant to the valuation was required to be derived from Heritage, Columbia has
advised United that Heritage did not impose any limitations or restrictions
affecting the scope of its investigation. United has been further advised that
Columbia has not provided investment banking or valuation services to Heritage.
On August 25, 1997, Columbia delivered to the United Board its opinion, as
investment bankers, that the consideration to be paid by United to Heritage
Shareholders pursuant to the terms of the Merger Agreement is fair, from a
financial point of view, to United Shareholders. Columbia will issue a revised
opinion as of the date of the mailing of this Joint Proxy Statement that will
reflect the current price of United Common Stock and the consideration based
upon the current price of United Common Stock. The consideration to be paid
Heritage Shareholders by United was determined through negotiations between the
respective managements of United and Heritage. THE FULL TEXT OF THE WRITTEN
OPINION OF COLUMBIA IS SET FORTH IN APPENDIX B TO THIS JOINT PROXY STATEMENT AND
DESCRIBES THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN. THE FOLLOWING SUMMARY OF COLUMBIA'S OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION ATTACHED HERETO AS
APPENDIX B. UNITED SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
27
<PAGE>
Columbia's opinion addresses only the fairness, from a financial point of
view, of the consideration to be paid by United to the Heritage Shareholders and
does not constitute a recommendation to any United Shareholder as to how such
Shareholder should vote at the United Special Meeting. In the determination of
value for Heritage and United, Columbia noted that, under the terms of the
Merger, Heritage Shareholders would receive shares of United worth $11.3 million
and existing United Common Stock was worth $29.2 million as of August 25, 1997.
In connection with its fairness opinion, Columbia reviewed, analyzed and
relied upon, among other materials, the Merger Agreement, certain internal
financial data and assumptions of Heritage prepared for financial planning and
budgeting purposes and, to the extent publicly available, the financial terms of
certain change in control transactions involving community banks in the
northwestern United States. Columbia discussed the financial condition, current
operating results and business outlook of Heritage with the management of
Heritage. In addition, Columbia reviewed certain publicly available information
concerning United and certain financial and securities data of United and
companies similar to United and discussed the financial condition, current
operating results and business outlook for United and United's plans relating to
Heritage with the management of United. In conducting its review and in arriving
at its opinion, Columbia relied upon and assumed the accuracy and completeness
of the financial and other information reviewed by it and did not attempt to
verify or make any independent evaluation or appraisal of the assets of United
or Heritage, nor was it supplied with any such appraisals.
Columbia analyzed the total consideration to be paid Heritage Shareholders
on a cash equivalent fair market value basis using standard evaluation
techniques (as summarized below), including comparable sales multiples, net
present value analysis and net asset value. Columbia's evaluations were based
upon certain assumptions regarding projected growth, earnings and dividends and
a range of discount rates from 16 percent to 18 percent. All material studies
and analyses performed by Columbia are summarized below.
NET ASSET VALUE ANALYSIS. Columbia analyzed the value of the net equity of
Heritage, including every kind of property and value. This review assumed the
liquidation on the appraisal date of all property and assets of Heritage, with
the recognition of gains or losses on investment securities, real estate
appreciation or depreciation, adjustments to loan loss reserve, discounts to
loan portfolio and changes in the net value of other assets. For purposes of
Columbia's analysis, little weight was given to net asset valuation because this
approach fails to account for the values attributable to a going concern, such
as the value of customer relations, market presence, image and reputation, staff
tenure and expertise and the interrelationship among Heritage's assets and
liabilities and because net asset valuation is based upon historical costs and
varying accounting methods. As of June 30, 1997, Columbia determined a net asset
value of Heritage of $7,968,143, or a per share value of $796.81. Columbia
placed little weight on this liquidation value estimate and believes it is not a
true estimate of the value of Heritage.
MARKET VALUE
Columbia analyzed the market value of Heritage as a going concern, which is
generally defined as the price at which knowledgeable, unrelated buyers and
sellers would agree when dealing at an "arm's length" basis. The "hypothetical"
market value for a small bank with a thin market for its common stock is
normally determined by comparison to the average price to shareholders' equity,
average price to earnings and average price to total assets, with adjustments
for significant differences in financial performance criteria and for any lack
of marketability or liquidity of the buyer. When sufficient comparable trade
data are available, the market value approach deserves greater weight than the
net asset value approach and similar weight to the investment value approach
discussed below.
Columbia determined the market value of Heritage by comparing previous sales
of small banks in the northwestern United States. Columbia maintains a
comprehensive data base concerning prices paid for banking institutions in
Montana, Utah, Oregon and Washington from 1988 through 1997. This data base,
organized by different peer groups, provides comparable pricing and financial
performance data for banking institutions acquired or sold. In analyzing the
market value of Heritage, Columbia focused on
28
<PAGE>
transactions involving community banking organizations in Montana, Idaho, Utah,
Oregon and Washington with total assets of less than $100 million that occurred
during the period January 1988 through August 1997. All of such transactions had
100 percent common stock of the acquiring entity as the form of consideration.
In evaluating the market value of Heritage, Columbia evaluated the total
purchase price relative to shareholders' equity, earnings and total assets.
COMPARABLE SALES MULTIPLES. Columbia calculated a "Merger
Consideration-Adjusted Book Value" for Heritage's June 30, 1997 shareholders'
equity and its estimated December 31, 1997 shareholders' equity. Both adjusted
book value numbers were compared to the price to shareholders' equity ratios for
a sample of (1) Montana, Idaho, Utah, Oregon and Washington thrift institutions
with total assets of less than $100 million, which sold between January 1988 and
August 1997; (2) a sample of thrift institutions located in Idaho, Utah, Oregon
and Washington, which sold between January 1990 and August 1997; and (3) a
sample of Montana, Oregon and Eastern Washington banking institutions with total
assets of less than $125 million, which sold between January 1990 and August
1997. Based on Heritage's June 30, 1997 shareholders' equity of $4,780,061, the
calculations, using the three samples' median ratios, resulted in a dollar price
per share for Heritage Common Stock of $717.01, $717.01 and $850.85,
respectively. Based on Heritage's estimated December 31, 1997 shareholders'
equity of $4,412,529, the calculations result in a dollar price per share for
Heritage Common Stock of $661.88, $661.88 and $785.43, respectively.
PURCHASE PRICE TO EARNINGS (OR NET INCOME). Columbia calculated the
price to earnings (or net income) multiple for the Heritage transaction as well
as for the three sample sets. Based on Heritage's 1996 net income of $486,029,
the price to earnings multiple for the three samples resulted in a dollar price
per share for Heritage Common Stock of $675.58, $622.12 and $617.26,
respectively. Based on Heritage's 1996 twelve months of net income prior to June
30, 1997 of $827,698, the price to earnings multiple for the three samples
resulted in a dollar price per share for Heritage Common Stock of $1,150.50,
$1,059.45 and $1,051.18, respectively.
TRANSACTION VALUE AS A PERCENTAGE OF TOTAL ASSETS. Columbia calculated
the percentage of total assets that the transaction represents as a price level
indicator. The transaction value as a percentage of total assets facilitates a
truer price level comparison with comparable banking transactions, regardless of
the differing levels of shareholders' equity and earnings. In this instance, a
transaction value of $965.83 per share results in a transaction value as a
percentage of total assets of 12.34%. The median price as a percentage of total
assets for a sample of Montana, Idaho, Utah, Oregon and Washington, thrift
institutions with total assets of less than $100 million, which sold between
January 1988 and August 1997 was 11 percent, the median price as a percentage of
total assets for a sample of thrift institutions located in Idaho, Utah, Oregon
and Washington which sold between January 1990 and August 1997 was 13%, and the
median price as a percentage of total assets for a sample of banking
institutions with total assets of less than $125 million located in Montana,
Oregon and Eastern Washington, which sold between 1990 and 1997 was 16%.
INVESTMENT VALUE
Columbia also analyzed the investment or earnings value of Heritage.
Columbia calculated Heritage's investment or earnings value by estimating the
present value of Heritage's future earnings or cash flow.
NET PRESENT VALUE ANALYSIS. The investment or earnings value of any
banking organization is an estimate of the present value of future benefits,
usually earnings, dividends or cash flow, that will accrue to the stock. The
earnings value is calculated using an annual future earnings stream over a
period of time of not less than five years and the residual value of the
earnings stream after five years. Such earnings stream is calculated using
Heritage's estimates of future growth and an appropriate capitalization or
discount rate. Columbia's calculations were based upon an analysis of the
banking industry, Heritage's earnings estimates for 1997 through 2001,
Heritage's historical levels of growth and earnings and the competitive
situation in Heritage's market area. Using discount rates of 16% and 18%,
acceptable discount rates considering the risk-return relationship most
investors would demand for an investment of this type, as of the valuation date,
the "Net Present Value of Future Earnings" provided a valuation range for
Heritage Common Stock of $1,005.00 to $1,202.90 per share.
29
<PAGE>
When the net asset value, market value and investment value approaches are
subjectively weighed, using the appraiser's experience and judgment, it is
Columbia's opinion that the proposed transaction is fair, from a financial point
of view, to United Shareholders.
The foregoing is a summary of the financial analyses used by Columbia in
connection with rendering its opinion. The preparation of a fairness opinion is
a complex process and is not necessarily susceptible to partial analysis or
summary description. Selecting portions of the analyses or the summary set forth
above, without considering the analyses as a whole, could create an incomplete
view of the processes underlying Columbia's opinion. In arriving at its opinion,
Columbia considered the results of all such analyses. The analyses were prepared
solely for the purposes of Columbia providing its opinion as to the fairness of
the consideration to be paid by United to Heritage Shareholders, from a
financial point of view, and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold. With
respect to the comparison of selected companies and the analysis of selected
bank merger transactions summarized above, no company utilized as a comparison
is identical to United or Heritage. Any analysis of the fairness of the Merger
to United Shareholders, from a financial point of view, involves complex
considerations and judgments concerning differences in the potential financial
and operating characteristics of the comparable companies and transactions and
other factors in relation to the trading and acquisitions values of the
comparable companies. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than those suggested by such analyses. As described above,
Columbia's opinion was one of many factors taken into consideration by the
United Board in making its determination to approve the Merger Agreement.
The terms of the engagement of Columbia by United are set forth in a letter
agreement dated July 22, 1997 between United and Columbia (the "Engagement
Letter"). Pursuant to the terms of the Engagement Letter, United agreed to pay
Columbia a fee of $20,000 as compensation for rendering its financial advisory
services and its opinion. In addition, United agreed to reimburse Columbia for
its reasonable out of pocket expenses in connection with its engagement,
including, but not limited to, the fees and disbursements of its legal counsel,
and to indemnify Columbia against certain liabilities.
OPINION OF HERITAGE'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated June 12, 1997, Heritage engaged D.A.
Davidson to provide certain investment banking advice and services in relation
to the Merger. D.A. Davidson attended the special meeting of the Heritage Board
held on August 25, 1997, at which the Heritage Board approved the Merger
Agreement. The Heritage Board retained D.A. Davidson based upon its experience,
expertise and familiarity with Heritage and with financial institutions in the
northern Rocky Mountain region. D.A. Davidson is a recognized regional
investment firm which, as part of its business, is engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
underwritings, private placements, investment research and other purposes.
D.A. Davidson has delivered its written opinion dated August 25, 1997, and
dated the date of this Joint Proxy Statement, to the effect that, based upon and
subject to the factors and assumptions set forth in such written opinions, and
as of the date of each such opinion, the consideration to be paid to Heritage in
the Merger was fair to Heritage Shareholders from a financial point of view.
THE FULL TEXT OF D.A. DAVIDSON'S WRITTEN OPINION TO THE HERITAGE BOARD,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX C AND IS
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY OF D.A. DAVIDSON'S
OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION, WHICH SHOULD BE READ CAREFULLY AND IN ITS ENTIRETY. D.A. DAVIDSON'S
OPINION WAS DIRECTED TO THE HERITAGE BOARD, ADDRESSES ONLY THE FAIRNESS TO
HERITAGE SHAREHOLDERS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO
BE RECEIVED BY HERITAGE PURSUANT TO THE MERGER AGREEMENT, AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HERITAGE SHAREHOLDER AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE.
30
<PAGE>
In arriving at its written opinions, D.A. Davidson (i) reviewed the audited
financial statements and related financial reports of Heritage for the three
fiscal years ended December 31, 1994 through 1996; (ii) reviewed the interim
financial reports of Heritage dated June 30, 1996 and 1997; (iii) reviewed
United's Annual Reports, Forms 10-K and related financial information for the
five fiscal years ended December 31, 1992 through 1996; (iv) reviewed United's
Form 10-Q for the period ending June 30, 1996 and 1997; (v) reviewed certain
other information, including financial forecasts, relating to the respective
businesses, earnings, assets and prospects for Heritage and United furnished to
it by Heritage and United; (vi) conducted discussions with members of management
of Heritage and United concerning their respective business and prospects; (vii)
considered certain financial and common stock performance information with
respect to United; (viii) considered securities data of certain publicly traded
financial institutions in businesses similar to those of Heritage and United;
(ix) compared the proposed financial terms of the transaction contemplated by
the Merger with financial terms of certain other mergers and acquisitions which
it deemed to be relevant; (x) considered the pro forma effect of the Merger on
Heritage's capitalization ratios, assets, loans, deposits, earnings, book value,
and tangible book value per share; (xi) reviewed the Merger Agreement; and (xii)
considered such other information financial studies, analyses and investigations
and financial, economic and market criteria which D.A. Davidson deemed relevant.
D.A. Davidson has relied, without independent verification, upon the
accuracy and completeness of all financial and other information publicly
available or provided to it for the purpose of its opinion. D.A. Davidson also
relied upon the management of Heritage and United as to the reasonableness and
achievability of the financial and operating forecasts (and the assumptions and
bases therefor) provided to it. D.A. Davidson is not an expert in the evaluation
of allowances for loan losses and it has not made an independent evaluation of
the adequacy of the allowance for loan losses of Heritage or United nor has it
reviewed any individual credit files. In addition, D.A. Davidson has not made an
independent evaluation or appraisal of the assets and liabilities of Heritage
and United or any of their subsidiaries, and has not been furnished with any
such evaluation or appraisal.
The following is a summary of the analyses D.A. Davidson utilized in
arriving at its opinions as to the fairness of the consideration to be received
by Heritage in the Merger and that D.A. Davidson discussed with the Heritage
Board on August 25, 1997. D.A. Davidson arrived at its ultimate opinion based on
the results of all of the analyses described below assessed as a whole and did
not reach any specific conclusions from or with regard to any one method of
analysis. The analyses performed by D.A. Davidson are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses.
GENERAL. Through the various analyses which are summarized below and were
presented to the Heritage Board on August 25, 1997, D.A. Davidson attempted to
determine the going concern value of both Heritage and United. In the
determination of value for Heritage and United, D.A. Davidson noted that, under
the terms of the Merger, Heritage Shareholders would receive shares of United
worth $11.3 million and existing United Common Stock was worth $29.2 million as
of August 25, 1997. In the analyses of the value of United, D.A. Davidson
applied the various valuation multiples, discount rates and terminal values
after an assumed special distribution of approximately $11 million to reflect
the excess capital levels at United. This assumed distribution brought United's
equity to capital ratio down to 12.9%, which is the average ratio for the group
of ten comparable thrifts discussed below. D.A. Davidson noted that this assumed
distribution was exclusively for the purposes of producing a more comparable
analysis of United, relative to its peers, and was not a condition to, or an
expectation of, the Merger. This distribution affected the capital, assets and
earnings figures for United, against which the various valuation multiples,
discount rates and terminal values were applied. D.A. Davidson then added back
the $11 million special distribution to the implied valuation derived from the
various analyses to compute a total value of United. This total value is
mentioned in each of the analyses below.
31
<PAGE>
PRO FORMA MERGER ANALYSIS. D.A. Davidson analyzed certain pro forma effects
resulting from the Merger. The analysis indicated that the transaction would
result in book value and tangible book value accretion per Heritage share at
June 30, 1997 of approximately 74% and 90%, respectively. The analysis also
indicated that the Merger would result in earnings dilution per Heritage share
for the latest twelve months ended June 30, 1997 of approximately 24%. On a pro
forma basis, at June 30, 1997, Heritage's total assets would increase from $80
million to $186 million, its deposits would increase from $66 million to $141
million, and its stockholders equity would increase from $5 million to $30
million. The analysis also indicated that for the twelve months ended June 30,
1997, Heritage's net earnings would increase from $825,000 to $2.2 million, its
return on average assets would increase from 1.17% to 1.27%, and its return on
average equity would decrease from 18.2% to 7.6%. D.A. Davidson also observed
that under the terms of the Merger, former Heritage Shareholders would own
approximately 30% (including shares of United Common Stock owned by Heritage
Shareholders prior to the Merger), and current United Shareholders would own
approximately 70% of the combined entity after giving effect for the Merger.
D.A. Davidson noted that these relative ownership positions compared to the
relative contributions of Heritage and United to the combined entity's pro forma
financial results for the twelve months ended June 30, 1997 and pro forma
financial condition at June 30, 1997 are as follows: 16.3% and 83.7%,
respectively, of book value, 14.4% and 85.6%, respectively, of tangible book
value, 36.2% and 63.8%, respectively, of earnings, 43.0% and 57.0%,
respectively, of assets, and 47.1% and 52.9%, respectively, of deposits.
D.A. Davidson also noted that under the terms of the Merger Agreement,
current Heritage Shareholders will have the right to elect five of the nine
members of the Board of Directors of the combined entity and Mr. John M.
Morrison, majority Shareholder of Heritage, has received rights of first refusal
on 263,200 shares of United Common Stock, or approximately 15.5% of the shares
outstanding of the combined entity.
DISCOUNTED DIVIDEND STREAM ANALYSIS. Using a discounted dividend stream
analysis, D.A. Davidson estimated the present value of the future streams of
after tax cash flows that Heritage and United could produce through 2001 and
distribute to Shareholders ("dividendable net income"). In this analysis, D.A.
Davidson assumed that Heritage and United performed in accordance with the
earnings growth rate estimates provided to D.A. Davidson by the management's of
Heritage and United, and that both could pay out up to 100% of their net income
with the constraint that their tangible equity to assets ratio be maintained at
a minimum 7% level. D.A. Davidson estimated the terminal value for the Heritage
and United Common Stock at 10.0 times estimated 2001 net income. The
dividendable net income streams and terminal values were then discounted to
present values using differing discount rates (14% to 16% for Heritage and 12%
to 14% for United) chosen to reflect different assumptions regarding the
required rates of return of holders or prospective buyers of Heritage or United
Common Stock. This analysis indicated a reference range of between $8.2 million
and $8.9 million in aggregate value for Heritage and a reference range of
between $22.7 million and $23.6 million in aggregate value for United. This
analysis was based upon the projections and assumptions of Heritage's and
United's management. Management's projections are based upon many factors and
assumptions, many of which are beyond the control of Heritage and United. This
analysis is not necessarily indicative of actual values or actual future results
and does not purport to reflect the price at which any securities may trade at
the present or at any time in the future.
ANALYSIS OF ACQUISITION TRANSACTIONS. D.A. Davidson reviewed the pricing
multiples paid in recently announced or completed thrift merger or acquisition
transactions as a basis for comparison of the financial terms contemplated in
the Merger Agreement. D.A. Davidson noted that according to data compiled from
Bank Mergers & Acquisitions "Scoreboard", 48 thrift merger or acquisition
transactions have been announced or completed in the first six months of 1997.
The reported average valuation multiples involved with these transactions were:
price to latest twelve month earnings of 19.0x, price to book of 1.66x, and
price to assets of .159x. This analysis yielded an average implied value based
upon a broad compilation of recent thrift merger and acquisition transactions of
approximately $12.0 million and $31.9 million for Heritage and United,
respectively.
32
<PAGE>
In addition to its analysis of pricing multiples paid in announced or
completed thrift merger or acquisition transactions generally, D.A. Davidson
also examined five transactions involving bank and thrift acquisitions in the
Rocky Mountain region of the U.S. which had characteristics relevant to the
Merger. Those merger transactions included First Interstate BancSystem of
Montana, Inc.'s acquisition of Citizen's Bancshares, Inc., Glacier Bancorp,
Inc.'s acquisition of Missoula Bancshares, Inc, First Interstate BancSystem of
Montana, Inc.'s acquisition of First Interstate's Montana and Wyoming branches,
WesterFed Financial Corp.'s acquisition of Security Bancorp, Inc., and First
Colorado Bancorp, Inc.'s acquisition of Delta Federal Savings Bank. D.A.
Davidson noted that the average valuation multiples involved with these
transactions were: price to latest twelve month earnings of 12.6x, price to book
of 1.82x, price to assets of .156x, and price to deposits of .186x. This
analysis yielded an average implied value of $9.9 million and $28.9 million for
Heritage and United, respectively.
No company or transaction used in the above analysis as a comparison is
identical to Heritage, United or the Merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and transactions analyzed.
COMPARISON OF SELECTED PUBLIC COMPANIES. D.A. Davidson reviewed and
compared certain financial, operating and market information of Heritage and
United with the following ten thrifts that it believed to be appropriate for
comparison: WesterFed Financial Corp., Sterling Financial Corp., Glacier
Bancorp, Inc., First Colorado Bancorp, Inc., InterWest Bancorp, Inc., Klamath
First Bancorp, Inc., United Financial Corp., First Savings Bank of Washington,
First Mutual Savings Bank, and Horizon Financial Corp. (collectively
"Composite"). Such information included market valuation, profitability, asset
quality, reserve coverage and capital ratios. Among the market information
compared were market price to latest twelve months earnings (actual) ("LTM
earnings"), to estimated 1997 earnings, and to book value, assets and deposits.
D.A. Davidson noted that the average price to LTM earnings of the Composite was
18.4x, the price to estimated 1997 earnings was 15.4x, the price to book value
was 1.53x, the price to assets was .204x, and the price to deposits was .265x.
In applying these valuation multiples to Heritage and United, D.A. Davidson
derived average market values of $10.2 million and $30.4 million, respectively.
In addition, D.A. Davidson examined an index of 133 thrifts from across the
U.S. ("Thrift Index") and noted that the average price to LTM earnings was
16.2x, the price to estimated 1997 earnings was 14.1x, the price to book was
2.39x, the price to assets was .150x, and the price to deposits was .229x. In
applying these multiples to Heritage and United, D.A. Davidson derived average
values for Heritage and United of $10.8 million and $33.9 million, respectively.
D.A. Davidson noted that, in the aggregate, neither the Composite nor the
Thrift Index is identical to Heritage or United, and that various adjustments
could be applied to the comparison multiples in consideration of the varying
size, financial, and operating characteristics of the compared entities.
In connection with its opinion dated as of the date of this Joint Proxy
Statement, D.A. Davidson performed procedures to update certain of the analyses
and reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
The summary of the analyses set forth above provides a description of the
main elements of D.A. Davidson's presentation to the Heritage Board on August
25, 1997. It does not purport to be a complete description of the presentation
by D.A. Davidson to the Heritage Board or of the analyses performed by D.A.
Davidson. The preparation of a fairness opinion is not necessarily susceptible
to partial analysis or summary description. D.A. Davidson believes that its
analyses and the summary set forth above must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, or
selecting part of the above summary, without considering all factors, analyses
and circumstances, would create an incomplete view of the procedures underlying
the analyses set forth in the D.A. Davidson presentation and opinion.
33
<PAGE>
In performing its analyses, D.A. Davidson made or relied upon certain
assumptions with respect to industry performance, general business and economic
conditions, and other matters, many of which are beyond the control of Heritage
and United. The analyses summarized above were prepared solely as part of D.A.
Davidson's analysis of the fairness, from a financial point of view, of the
consideration to be received by Heritage in the Merger and were provided to the
Heritage Board in connection with the delivery of D.A. Davidson's opinions. In
addition, as described above, D.A. Davidson's opinion and presentation to the
Heritage Board is just one of many factors taken into consideration by the
Heritage Board.
Under the terms of a letter agreement dated June 12, 1997 between D.A.
Davidson and Heritage, Heritage will pay D.A. Davidson a fee on the Closing Date
of the Merger of $250,000. The letter agreement with D.A. Davidson also provides
that Heritage will reimburse D.A. Davidson for its reasonable out-of-pocket
expenses and will indemnify D.A. Davidson against certain liabilities, including
liabilities under securities laws, incurred in connection with its services.
EFFECTIVE TIME OF THE MERGER
Subject to the terms and conditions of the Merger Agreement, the Effective
Time of the Merger will be on the date Articles of Merger are filed with the
Secretaries of State of the States of Minnesota and Montana. The parties expect
the Merger to become effective as soon as practicable following (i) approval of
the Merger by United and Heritage Shareholders; (ii) receipt of all necessary
approvals from the OTS and (iii) the fulfillment of certain closing conditions
but in any case no earlier than January 1, 1998 and no later than June 1, 1998.
See "--Regulatory Approvals; Conditions to the Merger."
CONSEQUENCES OF THE MERGER; CHANGE OF CONTROL
BOARD OF DIRECTORS. The current United Board consists of seven members
divided into three separate classes with members in each class serving
three-year terms. The terms of each class are staggered so that only members of
one class stand for election at any annual meeting.
At the time of the Merger, four members of the current United Board will
resign. Following the resignations, the three remaining directors will expand
the number of the United Board to nine by creating two new vacancies. As a
result, each class will consist of three directors. The remaining directors will
then elect persons to fill the vacancies on the United Board created by the
resignations and the newly created positions. One of the vacancies will be
filled by William L. Madison, a current United Board member, who will resign but
be elected to the vacancy created for the class of directors whose terms expire
in 1998. The remaining five directors will be nominated by Heritage Shareholders
at the Heritage Special Meeting (see Proposal Two for Heritage Shareholders).
The Heritage Nominees will constitute a majority of the United Board after the
Merger.
Three of the Heritage Nominees are Heritage Shareholders while the other two
are executive officers of non-Heritage banks controlled by John M. Morrison. The
election of the Heritage Nominees by the United Board is a condition to the
consummation of the Merger. A vote of United Shareholders to elect the five
Heritage Nominees is not required. There are no contractual or other
requirements for the United Shareholders to select or vote for the Heritage
Nominees at any annual meeting in the future.
34
<PAGE>
After the Merger, the United Board will consist of the following persons
whose term of office expires at the annual meeting in the year shown:
<TABLE>
<CAPTION>
TERM
DIRECTOR EXPIRES
- ------------------------------------------------------------------------------------- -----------
<S> <C>
HERITAGE NOMINEES:
John M. Morrison..................................................................... 2000
Kurt R. Weise........................................................................ 2000
Janice M. Graser..................................................................... 2000
Larry D. Albert...................................................................... 1999
Jerome H. Hentges.................................................................... 1999
CURRENT UNITED DIRECTORS:
Bruce K. Weldele..................................................................... 1999
William L. Madison................................................................... 1998
Dr. J. William Bloemendaal........................................................... 1998
Elliott L. Dybdal.................................................................... 1998
</TABLE>
For information regarding the Heritage Nominees, see "--Proposal Two for
Heritage Shareholders."
EXECUTIVE OFFICERS. The Heritage Nominees, representing a majority of the
United Board, will be able to select and control the management of United as
well as the board of directors and management of the combined entity's
subsidiary banks. While the new executive officers cannot be identified with
certainty at this time, it is anticipated that John M. Morrison will be elected
President and Chief Executive Officer, Kurt R. Weise will be elected Chief
Operating Officer and Bruce K. Weldele will be elected Chairman. It is also
anticipated that Kevin P. Clark will be elected President and Steve L. Feurt
will be elected Senior Vice President of the combined bank subsidiary, both of
whom are currently Heritage Bank officers.
ORGANIZATION AFTER THE MERGER. It is expected that the bank subsidiaries of
United and Heritage will merge within approximately six months after the Merger.
The United Bank subsidiary will merge into the Heritage Bank subsidiary and the
separate existence of the United Bank subsidiary will cease. The resulting bank
will be called the Heritage Bank. As the sole shareholder of the combined bank,
the new United Board will be able to control the election of the Board of
Directors of the combined bank. In addition to the changes in the Board
composition and executive officers of the combined entity, United's operations
will be converted to Heritage's current data processing system. Heritage's
historical financial statements will be the historical financial statements of
the combined entity going forward.
SHARE OWNERSHIP AFTER THE MERGER. Current United Shareholders will own
approximately 70% and current Heritage Shareholders will own approximately 30%
(including the 3.3% of United Common Stock currently owned by Heritage
Shareholders) of the combined equity. In addition, United Shareholders currently
holding an aggregate of 21.5% of United Common Stock (15.5% of United Common
Stock following the Merger) have entered into Right of First Refusal Agreements
with John M. Morrison whereby such United Shareholders will not be able to sell
their United Common Stock for a period of two years without first offering such
Common Stock to Mr. Morrison. See "The Merger--Interests of Certain Persons;
Certain Transactions--Right of First Refusal Agreements."
CHANGED BUSINESS STRATEGY. After the Merger, the newly constituted United
Board and management intends to change United's existing business strategy and
engage in a growth-oriented expansion strategy by pursuing internal and external
growth opportunities, when available. United will attempt to expand its customer
base by emphasizing commercial and consumer loans, in addition to mortgage
loans, and offering new products. United will consider opening new branches or
acquiring other financial institutions and will consider expansion of the
geographic area currently served. Historically, United has had a more
conservative strategy of attracting deposits, emphasizing mortgage loans and
investing in mortgaged-backed
35
<PAGE>
securities, U.S. Treasury and agency obligations and other investment grade
securities. Heritage, on the other hand, has historically pursued a
growth-oriented expansion strategy and has experienced growth of loans, deposits
and assets. The results achieved to date by Heritage, however, may not be
indicative of future results of United after the Merger. United's new business
strategy may also subject United to a greater degree of risk. See "Risk
Factors--New Business Strategy and Management of Growth."
CONVERSION OF HERITAGE COMMON STOCK
At the Effective Time of the Merger, each share of Heritage Common Stock
will be converted into the right to receive 47.50 shares of United Common Stock.
Under the Merger Agreement, no fractional shares will be issued.
The Merger Agreement provides that the Exchange Rate will be equitably
adjusted in the event of any stock split, stock dividend, reverse stock split,
or other change in the number of shares of Heritage Common Stock outstanding
occurring between the date of the Merger Agreement and the Effective Time of the
Merger. Each dissenting share, if any, will be converted into the right to
receive payment from the combined entity in accordance with the provisions of
the Montana or Minnesota Business Corporation Law, as applicable. See
"--Dissenters' Rights."
DELIVERY OF UNITED COMMON STOCK
After the Effective Time of the Merger, letters of transmittal will be
mailed to each Heritage Shareholder. Each Heritage Shareholder will be requested
to complete the letter of transmittal and return it, together with the stock
certificates representing all of the shares of Heritage Common Stock owned by
such holder, to TrustCorp, a Montana Trust Company, that will serve as an
exchange agent (the "Exchange Agent"). The letter will also include instructions
for surrendering the Heritage Common Stock certificates in exchange for a
certificate representing shares of United Common Stock. Certificates for United
Common Stock will be delivered to or for the account of a holder of Heritage
Common Stock only after the holder has surrendered to the Exchange Agent the old
certificates for such holder's Heritage Common Stock, accompanied by a duly
executed letter of transmittal in proper form.
United will not pay any dividend or make any distribution on shares of
United Common Stock (with a record date at or after the Effective Time) to any
record holder of outstanding shares of Heritage Common Stock until the holder
surrenders for exchange his or its certificates which represented shares of
Heritage Common Stock. Holders of unsurrendered Heritage Common Stock
certificates shall not be entitled to vote after the Effective Date at any
meeting of United Shareholders until they have exchanged their Heritage Common
Stock certificates.
At the Effective Time of the Merger, the stock transfer books of Heritage
will be closed and no transfer of Heritage Common Stock will thereafter be made
on such books.
HERITAGE SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES TO EXCHANGE FOR
SHARES OF UNITED COMMON STOCK UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM
AND INSTRUCTIONS.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Heritage expects that the Merger will be treated as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Code and that
for federal income tax purposes no gain or loss will be recognized by any
Heritage Shareholder upon the receipt solely of United Common Stock for Heritage
Common Stock pursuant to the Merger, except upon the receipt of cash by
dissenters. The IRS has not been and will not be asked to rule upon the tax
consequences of the Merger. Instead, Heritage will rely upon the opinion of
Dorsey & Whitney LLP, counsel for United, given to both Heritage and United, as
to certain federal income tax consequences of the Merger. It is a condition of
the consummation of the
36
<PAGE>
Merger that Heritage receive such opinion from Dorsey & Whitney LLP. The opinion
of Dorsey & Whitney LLP will be based upon facts described herein and upon
certain representations made by Heritage, United and certain principal Heritage
Shareholders. The opinion of Dorsey & Whitney LLP will also be based upon the
Code, regulations now in effect thereunder, current administrative rulings and
practice, and judicial authority, all of which are subject to change. An opinion
of counsel is not binding on the IRS and there can be no assurance, and none is
hereby given, that the IRS will not take a position contrary to one or more
positions reflected herein or that the opinion will be upheld by the courts if
challenged by the IRS. EACH HOLDER OF HERITAGE COMMON STOCK IS URGED TO CONSULT
HIS OR HER OWN TAX AND FINANCIAL ADVISORS AS TO THE EFFECT OF SUCH FEDERAL
INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES AND
ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF
THE MERGER.
Based upon the facts and representations provided to it, and subject to
various assumptions and qualifications, Dorsey & Whitney LLP will opine that the
following federal income tax consequences will result from the Merger:
(i) The Merger will qualify as a "reorganization" under Section 368(a) of
the Code;
(ii) No gain or loss will be recognized by Heritage or United as a result of
the Merger;
(iii) No gain or loss will be recognized by any Heritage Shareholder (except
in connection with the receipt of cash) upon the exchange of Heritage
Common Stock for United Common Stock in the Merger;
(iv) The basis of the United Common Stock received by a Heritage Shareholder
who exchanges Heritage Common Stock for United Common Stock will be the
same as the basis of the Heritage Common Stock surrendered in exchange
therefor; and
(v) The holding period of the United Common Stock received by a Heritage
Shareholder receiving United Common Stock will include the period during
which the Heritage Common Stock surrendered in exchange therefor was
held (provided that the Heritage Common Stock of such Heritage
Shareholder was held as a capital asset at the Effective Time).
The opinion described above will be based upon certain assumptions,
including the assumption that Heritage Shareholders do not have any plan or
intention to dispose, sell, exchange or otherwise dispose of a number of shares
of United Common Stock received pursuant to the Merger that would reduce the
ownership by such Heritage Shareholders of United Common Stock to a number of
shares having a value, as of the date of the Merger, which is less than 50
percent of the value of all of the formerly outstanding Heritage Common Stock
held by such Heritage Shareholders as of the same date.
In the event that Heritage is unable to obtain such opinion of counsel,
dated as of the Closing Date, the Merger will not be consummated unless the
condition requiring its receipt is waived and the approvals of Heritage and
United Shareholders are resolicited by means of an updated Joint Proxy
Statement.
The foregoing is only a general description of certain anticipated federal
income tax consequences of the Merger, without regard to the particular facts
and circumstances of the tax situation of each Heritage Shareholder. It does not
discuss all of the consequences that may be relevant to Heritage Shareholders
entitled to special treatment under the Code (such as insurance companies,
dealers in securities, exempt organizations or foreign persons) or to Heritage
Shareholders who acquired their Heritage Common Stock pursuant to the exercise
of employee stock options or otherwise as compensation. The summary set forth
above does not purport to be a complete analysis of all potential tax effects of
the transactions contemplated by the Merger Agreement or the Merger itself. No
information is provided herein with respect to the tax consequences, if any, of
the Merger under state, local, foreign or other tax laws.
37
<PAGE>
DISSENTERS' RIGHTS
Under the Montana Business Corporation Act ("MtBCA") and the Minnesota
Business Corporation Act ("MBCA"), the holders of Heritage and United Common
Stock are entitled to certain dissenters' and appraisal rights with respect to
the Merger. The following is a summary of the rights of Heritage and United
Shareholders who dissent from the Merger. It does not purport to be complete and
is qualified in its entirety by reference to Sections 35-1-826 through 35-1-839
of the MtBCA (the "Montana Dissenters' Rights Statute," a copy of which is
attached as Appendix E to this Joint Proxy Statement) and to Sections 302A.471
and 302A.473 of the MBCA (the "Minnesota Dissenters' Rights Statute," a copy of
which is attached as Appendix D hereto).
MONTANA DISSENTERS' RIGHTS STATUTE. Any Heritage Shareholder may, as an
alternative to receiving a consideration specified in the Merger Agreement,
dissent from the Merger and obtain payment of the fair value of such
Shareholder's Heritage Common Stock pursuant to the Montana Dissenters' Rights
Statute. Heritage Shareholders will be bound by the terms of the Merger unless
they dissent by complying with all of the requirements of the Montana
Dissenters' Rights Statute. Any Heritage Shareholder contemplating exercising
the right to demand such payment should carefully review the Montana Dissenters'
Rights Statute, a copy of which is included as Appendix E to this Joint Proxy
Statement, and in particular the required procedural steps. A HERITAGE
SHAREHOLDER WHO FAILS TO COMPLY WITH THESE PROCEDURAL REQUIREMENTS MAY LOSE THE
RIGHT TO DISSENT.
Set forth below, to be read in conjunction with the full text of the Montana
Dissenters' Rights Statute, is a summary of the procedures relating to the
exercise of dissenters' rights by Heritage Shareholders.
Any Heritage Shareholder who wishes to dissent must deliver to Heritage,
prior to the vote on the Merger Agreement, a written notice of intent to demand
payment for such Shareholder's shares if the Merger is effectuated. In addition,
such Shareholder must not vote their shares of Heritage Common Stock in favor of
the Merger Agreement. A Heritage Shareholder who fails to deliver the notice on
time or who votes in favor of the Merger Agreement will not have any dissenters'
rights. If a Heritage Shareholder returns a signed proxy but does not specify a
vote AGAINST approval of the Merger Agreement or a direction to abstain, the
proxy will be voted for approval of the Merger Agreement, which will have the
effect of waiving such Shareholder's dissenters' rights.
If the Merger Agreement is approved by Heritage Shareholders, Heritage is
required to deliver a written dissenters' notice to all Heritage Shareholders
who gave a timely notice of intent to demand payment and who did not vote in
favor of the Merger Agreement. The notice must be sent no later than 10 days
after the Merger Agreement is approved and must (i) state where the payment
demand must be sent and where and when certificates for certificated shares must
be deposited, (ii) inform Shareholders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment is received, (iii)
supply a form for demanding payment that includes the date of the first
announcement to the news media or to Shareholders of the terms of the proposed
corporate action and that requires the person asserting dissenters' rights to
certify whether or not such Shareholder acquired beneficial ownership of the
shares before that date, (iv) set a date by which Heritage must receive the
payment demand, which may not be fewer than 30 nor more than 60 days after the
date the required dissenters' notice is delivered, and (v) be accompanied by a
copy of the Montana Dissenters' Rights Statute.
A Shareholder who is sent the dissenters' notice described above must demand
payment, certify whether the Shareholder acquired beneficial ownership of the
shares before the date required to be set forth in the dissenters' notice, and
deposit such Shareholder's certificates in accordance with the terms of the
notice. A Shareholder who demands payment and deposits the Shareholder's
certificates of Heritage Common Stock as requested by the dissenters' notice
retains all other rights of a Heritage Shareholder until such rights are
canceled by the consummation of the Merger. A Shareholder who does not demand
payment or deposit the Shareholder's certificates of Heritage Common Stock where
required, each by the date set forth in the dissenters' notice, is not entitled
to payment. Heritage may restrict the transfer of
38
<PAGE>
uncertificated shares from the date of the demand for payment until the Merger
is consummated; however, the holder of uncertificated shares retains all other
rights of a Shareholder until those rights are canceled by the consummation of
the Merger.
Except for shares of Heritage Common Stock acquired by a dissenter after the
date set forth in the dissenters' notice as the date of first announcement to
Shareholders or the news media of the terms of the Merger, as soon as the Merger
is effectuated or upon receipt of the payment demand, Heritage must pay each
dissenter who complied with the foregoing requirements the amount Heritage
estimates to be the fair value of the dissenters' shares of Heritage Common
Stock plus accrued interest. The payment must be accompanied by certain
financial information concerning Heritage, a statement of Heritage's estimate of
the fair value of the shares, an explanation of how the interest was calculated,
a statement of the dissenter's right to demand payment if the dissenter is
dissatisfied with the payment offer, and a copy of the Montana Dissenters'
Rights Statute.
A dissenter may notify Heritage in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and the amount of interest due with
respect thereto and may demand payment of the dissenter's estimate, by following
the procedures set forth in the Montana Dissenters' Rights Statute.
Heritage Shareholders considering exercising dissenters' rights should bear
in mind that the fair value of their Heritage Common Shares determined under the
Montana Dissenters' Rights Statute could be more than, the same as or less than
the value of the consideration they will receive pursuant to the Merger
Agreement if they do not exercise dissenters' rights.
Any Heritage Shareholder contemplating the exercise of dissenters' rights is
urged to review the full text of the Montana Dissenters' Rights Statute.
MINNESOTA DISSENTERS' RIGHTS STATUTE. Under the MBCA, United Shareholders
have the right to dissent from the Merger and, subject to certain conditions
provided for under Minnesota law, are entitled to receive payment of the fair
value of their Common Stock. United Shareholders will be bound by the terms of
the Merger unless they dissent by complying with all of the requirements of the
Minnesota Dissenters' Rights Statute. Any United Shareholder contemplating
exercising the right to demand such payment should carefully review the
Minnesota Dissenters' Rights Statute, a copy of which is included as Appendix D
to this Joint Proxy Statement, and in particular the procedural steps. A UNITED
SHAREHOLDER WHO FAILS TO COMPLY WITH THESE PROCEDURAL REQUIREMENTS MAY LOSE THE
RIGHT TO DISSENT.
Set forth below, to be read in conjunction with the full text of the
Minnesota Dissenters' Rights Statute, is a summary of the procedures relating to
the exercise of dissenters' rights by United Shareholders.
Any United Shareholder who wishes to dissent must deliver to United, prior
to the vote on the Merger Agreement, a written notice of intent to demand
payment for such Shareholder's shares if the Merger is effectuated. In addition,
such Shareholder must not vote their shares of United Common Stock in favor of
the Merger. A United Shareholder who fails to deliver the notice on time or who
votes in favor of the Merger Agreement will not have any dissenters' rights. If
a United Shareholder returns a signed proxy but does not specify a vote AGAINST
approval of the Merger Agreement or a direction to abstain, the proxy will be
voted for approval of the Merger Agreement, which will have the effect of
waiving such Shareholders' dissenters' rights.
If the Merger Agreement is approved by United Shareholders, United is
required to deliver a written dissenters' notice to all United Shareholders who
gave timely notice of intent to demand payment and who did not vote in favor of
the Merger Agreement. The notice must (i) state where the payment demand and
certificates of certificated shares must be sent in order to obtain payment and
the date by which they must be received; (ii) inform Shareholders of
uncertificated shares to what extent transfer of the shares will be restricted
after the payment demand is received; (iii) supply a form for demanding payment
and requiring
39
<PAGE>
the dissenting Shareholder to certify the date on which such Shareholder
acquired the shares of United Common Stock; and (iv) be accompanied by a copy of
the Minnesota Dissenters' Rights Statute.
A Shareholder who is sent the dissenters' notice described above must demand
payment, deposit such Shareholder's certificates of United Common Stock and
complete other information as required by such notice. A Shareholder who demands
payment and deposits their certificates of United Common Stock as requested by
the dissenters' notice retains all other rights of a United Shareholder until
such rights are canceled by the consummation of the Merger. United may restrict
the transfer of uncertificated shares from the date of the demand for payment
until the Merger is consummated; however, the holder of uncertificated shares
retains all other rights of a Shareholder until those rights are canceled by the
consummation of the Merger.
Except for shares of United Common Stock acquired by a dissenter after the
date of the first announcement to the public of the Merger, upon the
consummation of the Merger or upon receipt of the payment demand (whichever is
later), United must pay each dissenter who complies with the foregoing
requirements the amount United estimates to be the fair value of the dissenter's
shares of United Common Stock plus accrued interest. The payment must be
accompanied by certain financial information concerning United, a statement of
United's estimate of the fair value of the shares, an explanation of the method
used to reach the estimate, a brief description of the procedure to be followed
to demand supplemental payment and a copy of the Minnesota Dissenters' Rights
Statute.
A dissenter may notify United in writing of the dissenter's own estimate of
the fair value of the dissenter's shares and the amount of interest due, if
different from United's estimate, and may demand payment of the dissenter's
estimate, by following the procedures set forth in the Minnesota Dissenters'
Rights Statute.
Any United Shareholder contemplating the exercise of dissenters' rights is
urged to review the full text of the Minnesota Dissenters' Rights Statute.
REPRESENTATIONS AND WARRANTIES
Heritage and United have made customary warranties and representations to
each other regarding, among other things, their businesses, assets, liabilities,
financial condition and results of operations.
COVENANTS; CONDUCT OF BUSINESS PENDING THE MERGER
Heritage and United have agreed to use their reasonable best efforts to take
all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by the Merger
Agreement, including giving any notices required of them or their respective
subsidiaries to third parties and obtaining certain third party consents that
may reasonably be requested by one party of the other.
Heritage and United have also agreed to give any notices to, make any
filings with, and use their reasonable best efforts to obtain any
authorizations, consents and approvals of governments and governmental agencies
required in connection with the Merger, as explained below. Heritage and United
have prepared and filed with the Commission proxy materials under the Exchange
Act relating to the United Special Meeting.
United has filed an application on Form H-(e)3 with the OTS and will make
any further filings pursuant thereto and with such other government agencies and
departments that may be necessary.
Heritage will deliver to United on or before the date this Joint Proxy
Statement is mailed to Heritage Shareholders (i) the Davidson Opinion and (ii) a
letter of KPMG Peat Marwick LLP stating their conclusions as to the accuracy of
certain information derived from the financial records of Heritage and its
subsidiary and included within the pro forma financial information contained in
this Joint Proxy Statement
40
<PAGE>
(the "Heritage Comfort Letter"). Each of the Davidson Opinion and Heritage
Comfort Letter must be reasonably satisfactory to United in form and substance.
United will deliver to Heritage on or before the date this Joint Proxy Statement
is mailed to United Shareholders (i) the Columbia Opinion and (ii) a letter of
KPMG Peat Marwick LLP stating their conclusions as to the accuracy of certain
information derived from the financial records of United and its subsidiaries
and the appropriateness under GAAP of the purchase method accounting treatment
applied to the pro forma financial information contained in the Joint Proxy
Statement (the "United Comfort Letter"). Each of the Columbia Opinion and United
Comfort Letter must be reasonably satisfactory to Heritage in form and
substance.
United has agreed to give Heritage Shareholders certain demand registration
rights with respect to the shares of United Common Stock received by them. See
"The Merger--Interests of Certain Persons; Certain Transactions--Registration
Rights."
Each of Heritage and United has agreed not to (and will not cause or permit
any of their respective subsidiaries to) engage in any practice, take any action
or enter into any transaction outside the ordinary course of business consistent
with past custom and practice, except as may be required to fulfill an
obligation or covenant undertaken pursuant to the Merger Agreement. Without
limiting the generality of the foregoing, none of United, Heritage or any of
their respective subsidiaries may:
(i) authorize or effect any change in their respective charter or bylaws;
(ii) grant any options, warrants or other rights to purchase or obtain any
capital stock or issue, sell or otherwise dispose of any capital stock
(except upon the conversion or exercise of options, warrants, and other
rights currently outstanding);
(iii) declare, set aside or pay any dividend or distribution with respect to
capital stock (whether in cash or in kind), or redeem, repurchase or
otherwise acquire any of their respective capital stock, in either case
outside the ordinary course of business consistent with past custom and
practice;
(iv) issue any note, bond or other debt security or create, incur, assume or
guarantee any indebtedness for borrowed money or capitalized lease
obligation outside the ordinary course of business consistent with past
custom and practice;
(v) impose any security interest upon any assets outside the ordinary course
of business consistent with past custom and practice;
(vi) make any capital investment in, make any loan to or acquire the
securities or assets of any other person outside the ordinary course of
business consistent with past custom and practice;
(vii) make any change in employment terms for any of its directors, officers
and employees outside the ordinary course of business consistent with
past custom and practice; or
(viii) commit to any of the foregoing.
Heritage has agreed to (and it will cause Heritage Bank to) permit
representatives of United to have full access to all premises, properties,
personnel, books, records (including tax records), contracts and documents of,
or pertaining to, each of Heritage and Heritage Bank. United will (and it will
cause each of its subsidiaries to) permit representatives of Heritage to have
full access to all premises, properties, personnel, books, records (including
tax records), contracts and documents of, or pertaining to, each of United and
its subsidiaries.
Heritage and United have agreed to give the other party prompt written
notice of any material adverse development causing a breach of any of their
respective representations and warranties in the Merger Agreement.
Heritage and United have each agreed not to (and will not cause or permit
any of their respective subsidiaries to) solicit, initiate or encourage the
submission of any proposal or offer from any person or
41
<PAGE>
entity relating to the acquisition of all or substantially all of its capital
stock or assets (including any acquisition structured as a merger, consolidation
or share exchange); PROVIDED, HOWEVER, that Heritage and United and their
respective subsidiaries, and their respective directors and officers will remain
free to participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any person or entity to do or seek any of
the foregoing to the extent their fiduciary duties may require. Heritage and
United shall notify each other immediately if any person or entity makes any
proposal, offer, inquiry or contact with respect to any of the foregoing.
United has agreed to provide each individual who served as a director or
officer of Heritage at any time prior to the Effective Time with liability
insurance for a period of 48 months after the Effective Time no less favorable
in coverage and amount than any applicable insurance in effect immediately prior
to the Effective Time; PROVIDED, HOWEVER, that United may reduce the coverage
and amount of liability insurance to the extent the cost of liability insurance
having the full coverage and amount would exceed $20,000 per annum. United has
also agreed to observe any indemnification provisions now existing in the
Certificate of Incorporation or Bylaws of Heritage for the benefit of any
individual who served as a director or officer of Heritage at any time prior to
the Effective Time.
United has agreed to continue at least one significant historic business
line of Heritage, or use at least a significant portion of Heritage's historic
business assets in a business, in each case within the meaning of IRS Reg.
Section 1.368-1(d). Each subsidiary of United and Heritage engaged in banking
activities shall permit officers of the other subsidiary to review any loans
proposed to be made to customers in excess of $100,000 prior to the Effective
Time.
REGULATORY APPROVALS; CONDITIONS TO THE MERGER
The Merger must be approved by the OTS. United submitted its application for
approval of the Merger to the OTS on October 10, 1997 and the application was
accepted by the OTS for final processing on November 25, 1997. There is no
assurance that the application will be approved as proposed or without adverse
conditions. Any such approval is not to be interpreted as an opinion by the OTS
that the Merger is favorable to United and Heritage Shareholders, from a
financial point of view, or that the regulators have considered the adequacy of
the Exchange Rate. Such regulatory approval in no way constitutes an endorsement
or recommendation of the Merger by such regulators. The merger of the bank
subsidiaries of United and Heritage, expected to occur within six months of the
consummation of the Merger, will also require OTS approval.
The obligations of each of the parties to consummate the Merger are further
conditioned upon the satisfaction of each of the following: (1) approval and
adoption of the Merger Agreement and approval of the Merger by the requisite
vote of the holders of United Common Stock and the requisite vote of the holders
of Heritage Common Stock; (2) United shall have received certain representations
regarding investment intent from the Heritage Shareholders; (3) no action, suit
or proceeding shall be pending or threatened before any court or quasi-judicial
or administrative agency of any federal, state, local or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling or charge would (A) prevent consummation of any of the
transactions contemplated by the Merger Agreement, (B) cause any of the
transactions contemplated by the Merger Agreement to be rescinded following
consummation, (C) affect adversely the right of the combined entity to own the
former assets, to operate the former businesses and to control the former
subsidiaries of Heritage, or (D) affect adversely the right of any of the former
subsidiaries of Heritage to own its assets and to operate its businesses (and no
such injunction, judgment, order, decree, ruling or charge shall be in effect);
(4) all authorizations, consents and approvals of governments and governmental
agencies required to consummate the Merger shall have been received; (5) all
requisite approvals from all applicable regulatory agencies having jurisdiction
over the transactions contemplated by the Merger Agreement and the accounting
methods to be used have been obtained and there is no objection by KPMG Peat
Marwick LLP to the treatment of Heritage as the
42
<PAGE>
accounting acquirer of United under GAAP as applied to the purchase method of
accounting; (6) with respect to the obligations of United, (i) Heritage and its
subsidiaries shall have procured all third party consents or approvals required
for the consummation of the Merger, (ii) the number of shares of Heritage Common
Stock for which dissenters' rights are exercised is not greater than six percent
(6%) of the outstanding shares of Heritage Common Stock, (iii) all applicable
waiting periods required by the OTS shall have expired or otherwise been
terminated, (iv) United shall have received from Norwest Bank Minnesota, N.A.
("Norwest") a certificate to the effect that a certain loan agreement between
Heritage and Norwest has been satisfied in full by the Heritage Shareholders as
of the Closing Date and (v) certain other filings have been made in connection
with the Merger and consolidation of the United subsidiaries and Heritage
subsidiaries engaged in the banking business; (7) with respect to the
obligations of Heritage, (i) all necessary approvals shall have been obtained
from the OTS pursuant to HOLA, (ii) the number of shares of United Common Stock
for which dissenters' rights are exercised is not greater than ten percent (10%)
of the outstanding shares of United Common Stock, (iii) Heritage shall have
received an opinion from Dorsey & Whitney LLP, counsel to United, to the effect
that the Merger will constitute a tax-free reorganization pursuant to Section
368(a)(1)(A) of the Code (See "The Merger--Certain Federal Income Tax
Consequences"), (iv) Heritage shall have received the resignations, effective as
of the Effective Time, of the directors and officers of United and its
subsidiaries as provided in the Merger Agreement and (v) Heritage or the
Heritage Shareholder owning or controlling a majority of the shares of Heritage
Common Stock shall have received Rights of First Refusal from United
Shareholders representing not less than 250,000 shares of the outstanding United
Common Stock as of August 25, 1997; and (8) with respect to the obligations of
each party, (i) the representations and warranties of the other party contained
in the Merger Agreement will be true and correct as of the time of the Merger
Agreement and the Closing Date (except for any representations or warranties
made as of a specified date, which shall be true and correct as of such date),
(ii) each of the covenants to be performed and complied with by the other party
pursuant to the Merger Agreement on or prior to the closing shall have been duly
performed and complied with in all material respects, (iii) all actions taken by
each party in connection with the consummation of the transactions contemplated
by the Merger Agreement and all certificates, opinions, instruments and other
documents required to effect the transactions contemplated by the Merger
Agreement will be reasonably satisfactory in form and substance to the other
party and (iii) each party shall have supplied the other party with (A) title
insurance or title opinions covering all real property owned by such supplying
party and its subsidiaries and (B) a Phase I environmental audit with respect to
such real property.
AMENDMENT; WAIVER; TERMINATION
Heritage and United may mutually amend any provision of the Merger Agreement
at any time prior to the Effective Time with the prior authorization of their
respective Boards of Directors; provided, however, that any amendment effected
subsequent to shareholder approval will be subject to the restrictions contained
in the Minnesota Business Corporation Act. No amendment of any provision of the
Merger Agreement is valid unless the same shall be in writing and signed on
behalf of both Heritage and United.
The Merger Agreement may be terminated and the Merger abandoned (i) by
mutual consent of United and Heritage; (ii) by either United or Heritage, if the
other party breaches any of its material representations, warranties or
covenants contained in the Merger Agreement in any material respect, which
breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach; (iii) by either United or
Heritage, in the event that the Merger is not consummated by March 31, 1998, by
reason of the failure of any condition precedent, except to the extent that the
failure of the Merger to be consummated arises out of, or results from, a breach
of any representation, warranty or covenant contained in the Merger Agreement on
the part of the party seeking to terminate the Merger Agreement; (iv) by either
United or Heritage, if prior to the Effective Time, the Fairness Opinion to be
delivered by its financial advisor is withdrawn; or (v) by either United or
Heritage if
43
<PAGE>
the required United or Heritage Shareholder approval of the Merger and the
Merger Agreement is not received.
EFFECT ON UNITED EMPLOYEE BENEFIT PLANS
United maintains for the benefit of its eligible employees the Financial
Institutions Retirement Fund (the "Retirement Fund"), which is a multiple
employer defined benefit plan and the Financial Institutions Thrift Plan (the
"Thrift Plan"), which is also a multiple employee profit sharing plan that
contains a cash or deferred arrangement. Both the Retirement Fund and the Thrift
Plan are intended to qualify for favorable tax treatment under the Code, and
regulations issued thereunder. Subject to certain conditions contained in the
Retirement Fund, participants become entitled to a benefit for life, payable
beginning at the participant's age 65, equal to the annual amount of 2.25% of
the highest 5 year average compensation times each year of service with United.
United is required, under the terms of the Retirement Fund, to make an annual
contribution sufficient to provide for the benefits. Under the Thrift Plan,
eligible employees may elect to contribute up to 15% of their compensation
before tax withholding, and United makes a matching contribution of 50% of the
first 6% an employee contributes to the Thrift Plan each year. In addition,
United maintains certain welfare benefits (health, life and disability) for its
eligible employees.
Heritage maintains a 401(k) Plan for its employees whereby its employees may
defer up to 12% of their pre-tax income, and Heritage matches 75% of the first
6% of such contributions. Under the Merger Agreement, employees of United will
be eligible to participate in the welfare benefit plans sponsored by Heritage on
the same terms and conditions as Heritage employees from and after the date of
Merger. In November 1997, the United Board voted to terminate the Retirement
Fund effective December 31, 1997 and amended the Thrift Plan. The Thrift Plan is
now consistent with the Heritage 401(k) Plan in matching 75% of the first 6% of
employee contributions. Following the Merger, the combined entity's board of
directors will have the discretion whether to continue to participate in the
Thrift Plan. It is contemplated that the interests of United employees in the
Thrift Plan will be transferred to the Heritage 401(k) Plan and that eligible
participants in the Thrift Plan would continue to be eligible to make pre-tax
salary deferral contributions under the Heritage 401(k) Plan. Heritage may make
a separate contribution to the Heritage 401(k) Plan on behalf of certain former
Retirement Fund participants to the extent that the retirement benefits
available through the Heritage 401(k) Plan are less than the benefit the
participants would have received under the Retirement Fund had it continued in
existence for a limited transition after the Merger period.
EXPENSES
United and Heritage will pay their own expenses in connection with the
Merger and the transactions contemplated thereby, including professional fees.
ACCOUNTING TREATMENT
The Merger, if completed as proposed, will be treated as a purchase in
accordance with GAAP. Heritage will be considered the acquirer because due to
the change in control and other related consequences of the Merger, Heritage is
effectively acquiring the operations of United, including its assets and
liabilities. See "The Merger--Consequences of the Merger; Change of Control."
Accordingly, the assets and liabilities of United will be recorded at their
respective fair values at the Effective Time. Any excess of the purchase
consideration over the fair value of identifiable tangible and intangible net
assets will be assigned to goodwill. Due to the difficulty and practicality in
determining the value of United Bank's core deposit relationships and the value
of United Bank's non-Great Falls markets being served, any such intangible
values are necessarily included in the amount of goodwill recorded. As such,
goodwill is expected to be amortized on a straight line basis over a short
period, currently not expected to exceed 10 years.
44
<PAGE>
The determination of the acquirer in a business combination accounted for as
a purchase is established from the results of the negotiations of the
combination terms. Although Heritage Shareholders will not receive the majority
of the shares of Common Stock in the combined entity, control of the Board of
the combined entity will pass to Heritage if the Merger is approved. An
affirmative vote by United Shareholders to approve the Merger also effectively
approves United being acquired by Heritage. Those United Shareholders who do not
approve of this change in control may additionally exercise their dissenters'
rights and receive a cash payment for their shares. Such payments will also be
accounted for using the purchase method of accounting.
At the time of the Merger, Heritage Shareholders will nominate a majority of
the members of the combined entity's Board and as a condition of the Merger have
those nominees elected. The directors nominated by Heritage Shareholders will be
elected to terms expiring in 1999 and 2000. As such, Heritage Shareholders will
have the ability to control the combined entity's strategic direction, the
selection of management and its basic operating philosophies for an extended
period of time. In addition, (i) the rights of first refusal granted by United
Shareholders currently owning 21.5% of United Common Stock (15.5% after the
Merger), including the two largest United Shareholders and certain members of
the United Board, and (ii) the anti-takeover protection afforded by the
Minnesota Business Corporation Act which will govern the combined entity, may
serve to inhibit any future change in control.
As required by the Merger Agreement, it is expected that United Bank will be
merged into Heritage Bank within approximately six months following the
Effective Time of the Merger, with the resulting bank being called Heritage
Bank. Heritage Bank management has also indicated that the combined bank's main
office will be located at the current Heritage Bank offices, and that the
Heritage Bank management will be evaluating the viability of retaining United's
major facility located in Great Falls.
Consistent with these anticipated changes and Heritage being the acquiring
corporation, the historical financial statements of the combined entity will be
those of Heritage. Accordingly, the statement of operations of the combined
entity will only reflect the operations of United commencing on and after the
Effective Time.
In accordance with the Merger Agreement, receipt of a letter from KPMG Peat
Marwick LLP that there is no objection to the respective management's
conclusions that the Merger will be accounted for as an acquisition of United by
Heritage using the purchase method of accounting is a condition to the
obligation of the parties to consummate the Merger.
INTERESTS OF CERTAIN PERSONS; CERTAIN TRANSACTIONS
United and Heritage Boards are aware of the agreements and interests of
certain persons in the Merger described below and considered them, among other
matters, in recommending approval of the Merger and the transactions
contemplated thereby to their respective Shareholders.
CHANGE OF CONTROL AGREEMENTS. United has previously entered into Executive
Severance Payment Agreements with several of the executive officers of its bank
subsidiary in the event of a "Change in Control" (the "Severance Agreements").
The Severance Agreements provide that, in the event of an involuntary
termination of employment by United or the applicable bank subsidiary within
twenty-four (24) months after the month in which such Change in Control occurs
(other than involuntary termination for cause or as a result of such person's
death, disability or retirement), the terminating executive will be paid a lump
sum equal to his or her annual base salary, plus his or her annual target bonus
potential (except in the case of Mr. Weldele, who will be paid two times his
annual base salary and his annual target bonus potential). In addition, the
executive will also be entitled to receive the full amount of any long term
incentive award for any plan periods that are in progress and will be entitled
to receive up to twelve (12) months (in the case of Mr. Weldele, 24 months) of
health insurance benefits, perquisites and other employee benefits of
substantially the same design and costs as in effect immediately prior to the
termination such welfare benefits perquisites and other employee benefits to be
reduced to the extent the
45
<PAGE>
executive receives comparable benefits during such 12 month (or in the case of
Mr. Weldele, 24 month) periods. A Change in Control under the Severance
Agreement generally means that an acquirer has been deemed to have acquired
control of the company as determined under 12 C.F.R. Section 574.4(a), as
amended. The Merger will be deemed a Change in Control under the Severance
Agreements.
The Severance Agreements also provide that the executive may voluntarily
terminate his or her employment within twenty-four (24) months following the
Change of Control and will be entitled to receive the severance payments
described above if any of the following change of duties or events has occurred:
(1) an adverse change in responsibility or scope or the executive's authority,
duties, powers or functions or the conditions of employment from those
applicable immediately prior to the change in control; (2) a reduction of the
executive's total compensation from that provided immediately prior to the
change in control or diminution in eligibility or benefits provided under any
bonus or other compensation plan or employee benefit plan; (3) a change of
location of the executive's principal place of employment by more than 30 miles
from the location immediately prior to the change in control; (4) failure by
United to obtain the satisfactory agreement from its successor to assume the
Severance Agreement and to perform the Severance Agreement; or (5) a termination
that was not in accordance with the provisions of the Severance Agreement
requiring written notice at least thirty (30) days prior to the termination
indicating the specific termination provision in the agreement and in reasonable
detail the facts and circumstances which provide for the basis for termination
under the Severance Agreement.
Executives will not receive severance payments under the Severance
Agreements to the extent that such payments, together with any other amounts
payable to such employees upon the Change in Control of United, constitute
"excess parachute payments" under Section 280G of the Code. An "excess parachute
payment" means any payment in the nature of compensation to certain
"disqualified persons" (generally officers comprising 10% of all employees and
the highest paid 1% of all employees) that is contingent on a change in control
if the present value of all "parachute payments" equals or exceeds three times
the average taxable compensation of such person for the immediately preceding
five (5) years (or such shorter period for which the person has been employed).
If the executives of United were to be terminated other than for cause, death,
disability or retirement, or voluntarily terminated for good reasons (as defined
above), immediately upon the Effective Date, the amount of base salary and
annual target bonus to which each executive would be entitled to receive
(exclusive of the value of any employee benefit plans or other long term
incentive plans) would be as follows: Mr. Weldele, $320,400; Mr. Hallingstad,
$63,300; Mr. Kissee, $58,500; Mr. McCleary, $65,400; Mr. Mart, $65,700; and Mr.
Marvosh, $70,800.
In connection with the Merger, all existing officers of United will resign
and new executive officers of the combined entity will be appointed by the board
of directors of the combined entity. See "The Merger-- Consequences of the
Merger; Change of Control." Pursuant to the terms of the Merger Agreement, a
United officer who resigns and is reappointed is deemed to have been engaged in
continuous service and no termination of service will have deemed to occur. Such
reappointed officers will not be entitled to severance payments pursuant to the
terms of their Severance Agreement, as a result of such resignation; however,
may be eligible for payments in the event of voluntary termination resulting
from a change of duties or other events, as specified in the Severance
Agreements.
RIGHT OF FIRST REFUSAL AGREEMENTS. Pursuant to certain Right of First
Refusal Agreements, United Shareholders owning an aggregate of 263,200 shares of
United Common Stock have granted a right of first refusal to John M. Morrison,
Chairman of Heritage, with respect to the shares of United Common Stock owned by
them. The Right of First Refusal Shareholders currently own 21.5% of United
Common Stock which would represent 15.5% of United Common Stock after the
Merger.
Pursuant to the terms of the Right of First Refusal Agreements, the Right of
First Refusal Shareholders have agreed not to sell their shares of United Common
Stock to a third person during the period of two years following the Effective
Time without first offering such shares to John M. Morrison. Mr. Morrison will
own 416,930 shares, or 24.5%, of United Common Stock after the Merger. If all of
the Right of First
46
<PAGE>
Refusal Agreements were triggered during the two-year period following the
Merger and if Mr. Morrison elected to exercise such rights in full, Mr. Morrison
would own 40% of the United Common Stock.
REGISTRATION RIGHTS. The issuance of shares of United Common Stock to
Heritage Shareholders will be completed as a private transaction. In that
connection, United has in the Merger Agreement granted to the Heritage
Shareholders certain demand registration rights to require United to file a
registration statement at United's expense to register the shares of United
Common Stock issued to the Heritage Shareholders. It is expected that Heritage
Shareholders will receive the right to demand two registrations of their shares
of United Common Stock on Form S-3 Registration Statement at United's expense.
United will be obligated to use its best efforts to become eligible to use a
Form S-3 Registration Statement and to maintain such eligibility. See "--Resale
of United Common Stock" below.
DIRECTORS AND OFFICERS. At the time of the Merger, certain Heritage
directors and officers are expected to become directors and officers of the
combined entity. Five members of the United Board, constituting a majority, will
be nominated by Heritage Shareholders. Of these five members, John M. Morrison,
Kurt R. Weise and Janice M. Graser are shareholders, directors and officers of
Heritage and Heritage Bank. Messrs. Morrison and Weise and Ms. Graser will not
be compensated for their services as a director of the combined entity other
than pursuant to established policies of United regarding director compensation.
It is expected that Mr. Morrison will be elected President and Chief Executive
Officer and Mr. Weise will be elected Chief Operating Officer of United. It is
also expected that Kevin P. Clark, currently the President of Heritage Bank, and
Steve L. Feurt, currently Senior Vice President of Heritage Bank, will be
elected President and Senior Vice President of the combined bank subsidiary,
respectively, after the proposed merger of the bank subsidiaries. While the
compensation of the new United officers has not been determined, it is expected
that their compensation as officers will initially be comparable to the
compensation currently paid by United to officers with similar positions.
Messrs. Morrison and Weise are expected to provide their services to United
through Central Financial Services, Inc. ("CFS"), of which Mr. Morrison is the
sole shareholder and Chairman and Mr. Weise is the President. CFS has provided
to Heritage Bank various management services, including accounting and tax
services, investment consulting, personnel consulting, insurance advisory
services and regulatory consulting. Fees for these services totaled $70,009 and
$63,942 for the years ended December 31, 1996 and 1995, respectively. It is
expected that CFS will continue to provide similar management services to the
combined entity, with fees that are expected to exceed previous levels.
RESALE OF UNITED COMMON STOCK
Issuance of the shares of United Common Stock to Heritage Shareholders upon
consummation of the Merger will be completed as a private transaction and will
not have been registered under the Securities Act. If the shares of United
Common Stock are not subsequently registered for resale, they cannot be resold
for one year after the Effective Date, except in a private transaction.
Commencing one year after the Effective Date, the shares can be resold subject
to the restrictions of Rule 144. United has agreed in the Merger Agreement to
use its best efforts to file up to two registration statements on Form S-3 under
the Securities Act, if such form is available, to register the shares of United
Common Stock for resale. This obligation terminates on the second anniversary of
the Effective Date. Form S-3 is not currently available to United, and there is
no assurance that it will be available, although United has agreed to use its
best efforts to become eligible to use Form S-3. All Heritage Shareholders are
"affiliates" of Heritage. "Affiliates" are generally defined as persons who
control, are controlled by or are under common control with Heritage or United
at the time of the determination. Assuming United continues to be subject to,
and complies with, the Exchange Act reporting requirements, Rule 144 allows
limited resales by Heritage Shareholders of their United Common Stock without
registration after a one-year holding period if (i) within a three-month period,
the holder does not sell the greater of one percent of the United shares
outstanding or the average weekly reported volume of trading of the United
Shares during a four-week period as detailed in Rule 144(e)(1) and (ii) the
holder sells the shares in a Rule 144 brokers transaction in
47
<PAGE>
the manner prescribed by Rule 144(f) and (g). If a Heritage Shareholder ceases
to be an "affiliate" and has not been an affiliate for a period of three months,
such Shareholder may sell without the above resale restrictions if at least two
years have elapsed from the Effective Time of the Merger. This Joint Proxy
Statement does not cover any resales of United Common Stock received by
affiliates of Heritage, their family members or related interests. United Common
Stock is quoted on the Nasdaq National Market under the symbol "UBMT." EACH
HERITAGE SHAREHOLDER IS URGED TO CONSULT INDEPENDENT COUNSEL CONCERNING
APPLICABLE RESTRICTIONS ON RESALE.
48
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information gives
effect to the Merger of Heritage and United pursuant to the Merger Agreement
based on the purchase accounting adjustments, estimates and other assumptions
described in the accompanying notes. The unaudited pro forma combined balance
sheet and statement of income as of and for the nine months ended September 30,
1997 are based upon the unaudited quarterly consolidated balance sheets and
statements of income of Heritage and United. The unaudited pro forma combined
statement of income for the year ended December 31, 1996 is based upon the
audited annual consolidated statements of income of Heritage and United. The
unaudited pro forma combined balance sheet combines the historical consolidated
balance sheets of Heritage and United as if the Merger had become effective on
September 30, 1997. The unaudited pro forma combined statements of income for
the nine months ended September 30, 1997, and the year ended December 31, 1996,
combine the historical consolidated statements of income of Heritage and United
as if the Merger had become effective on January 1, 1996. Certain amounts in the
historical financial statements of United have been reclassified in the
unaudited pro forma combined financial information to conform to Heritage's
historical financial statements.
PRO FORMA COMBINED BALANCE SHEET--HERITAGE AND UNITED
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 (UNAUDITED)
--------------------------------------------
PRO FORMA PRO FORMA
HERITAGE UNITED ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks............................................... $ 2,421 $ 715 $ -- $ 3,136
Interest earning deposits with banks.......................................... 3,626 5,028 -- 8,654
-------- -------- ----------- ---------
6,047 5,743 -- 11,790
Investments:
Securities held-to-maturity................................................... -- 32,300 192(D) 32,492
Securities available-for-sale................................................. 14,950 26,349 -- 41,299
-------- -------- ----------- ---------
14,950 58,649 192 73,791
Loans receivable, net........................................................... 54,188 34,160 (225)(D) 88,123
Premises and equipment, net..................................................... 1,198 1,363 1,000(D) 3,561
Real estate owned............................................................... -- 357 -- 357
Goodwill........................................................................ 505 -- 107(D) 612
Accrued interest receivable..................................................... 621 1,052 -- 1,673
FHLB stock, at cost............................................................. 361 524 -- 885
Other assets.................................................................... 485 1,234 -- 1,719
-------- -------- ----------- ---------
$78,355 $103,082 $ 1,074 $182,511
-------- -------- ----------- ---------
-------- -------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, NOW and money market accounts......................................... $20,161 $ 7,753 $ -- $ 27,914
Savings deposits.............................................................. 7,652 26,477 -- 34,129
Time deposits................................................................. 37,232 37,881 -- 75,113
-------- -------- ----------- ---------
65,045 72,111 -- 137,156
FHLB advances................................................................... 5,925 5,000 -- 10,925
Repurchase agreements........................................................... 969 -- -- 969
Long-term debt.................................................................. 2,450 -- (2,450)(D) --
Other liabilities............................................................... 1,232 1,214 630(D) 3,561
-- -- 300(B) --
-- -- 185(D)
-------- -------- ----------- ---------
75,621 78,325 (1,335) 152,611
Stockholders' equity:
Common stock and paid-in capital.............................................. 1,080 8,849 2,450(D)
(8,849)(A)
24,716(B) 28,246
Retained earnings-partially restricted........................................ 1,537 16,319 (16,319)(A) 1,537
Unrealized gain (loss) on securities available-for-sale....................... 117 (411) 411(A) 117
-------- -------- ----------- ---------
2,734 24,757 2,409 29,900
-------- -------- ----------- ---------
$78,355 $103,082 $ 1,074 $182,511
-------- -------- ----------- ---------
-------- -------- ----------- ---------
</TABLE>
See accompanying notes to pro forma financial information
49
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME--HERITAGE AND UNITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
------------------------------------------
PRO FORMA PRO FORMA
HERITAGE UNITED ADJUSTMENTS COMBINED
-------- ------ ----------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C>
Interest Income:
Loans......................................................................... $3,267 $2,419 $ 56(D) $ 5,742
Investment securities and interest earning deposits........................... 944 3,141 (48)(D) 4,037
-------- ------ ----- ---------
4,211 5,560 8 9,779
Interest Expense:
Deposits...................................................................... 1,930 2,497 -- 4,427
Short-term borrowings......................................................... 175 155 -- 330
Long-term debt................................................................ 150 -- (150)(D) --
-------- ------ ----- ---------
2,255 2,652 (150) 4,757
-------- ------ ----- ---------
Net interest income......................................................... 1,956 2,908 158 5,022
Provision for losses on loans................................................... 193 -- -- 193
-------- ------ ----- ---------
Net interest income after provision for losses on loans..................... 1,763 2,908 158 4,829
Non-interest Income:
Fees and discounts............................................................ 712 307 -- 1,019
Other income.................................................................. 96 175 -- 271
-------- ------ ----- ---------
808 482 -- 1,290
Non-interest Expense:
Salaries and employee benefits................................................ 876 908 -- 1,784
Net occupancy and equipment expense........................................... 169 195 38(D) 402
Data processing expense....................................................... 144 66 -- 210
FDIC/SAIF deposit insurance................................................... 17 38 -- 55
Other expenses................................................................ 492 358 11(D) 861
-------- ------ ----- ---------
1,698 1,565 49 3,312
-------- ------ ----- ---------
Income before income taxes.................................................. 873 1,825 109 2,807
Provision for income taxes...................................................... 334 685 46(D) 1,065
-------- ------ ----- ---------
Net income.................................................................. $ 539 $1,140 $ 63 $ 1,742
-------- ------ ----- ---------
-------- ------ ----- ---------
Net income per share............................................................ $ 1.03
---------
---------
Weighted average shares outstanding (E)......................................... 1,698,312
---------
---------
</TABLE>
See accompanying notes to pro forma financial information
50
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME--HERITAGE AND UNITED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
HERITAGE UNITED (UNAUDITED) (UNAUDITED)
-------- ------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C>
Interest Income:
Loans......................................................................... $3,226 $2,956 $ 75(D) $ 6,257
Investment securities and interest earning deposits........................... 1,294 4,297 (64)(D) 5,527
-------- ------ ----- -----------
4,520 7,253 11 11,784
Interest Expense:
Deposits...................................................................... 2,059 3,473 -- 5,532
Short-term borrowings......................................................... 169 92 -- 261
Long-term debt................................................................ 191 -- (191)(D) --
-------- ------ ----- -----------
2,419 3,565 (191) 5,793
-------- ------ ----- -----------
Net interest income......................................................... 2,101 3,688 202 5,991
Provision for losses on loans................................................... 160 -- -- 160
-------- ------ ----- -----------
Net interest income after provision for losses on loans....................... 1,941 3,688 202 5,831
Non-interest Income:
Fees and discounts............................................................ 970 444 -- 1,414
Investment securities sales, net gain......................................... -- 150 -- 150
Other income.................................................................. 89 241 -- 330
-------- ------ ----- -----------
1,059 835 -- 1,894
Non-interest Expense:
Salaries and employee benefits................................................ 1,007 1,172 -- 2,179
Net occupancy and equipment expense........................................... 192 248 50(D) 490
Data processing expense....................................................... 157 93 -- 250
FDIC/SAIF deposit insurance................................................... 104 170 -- 274
FDIC/SAIF deposit insurance special assessment................................ 239 550 -- 789
Other expenses................................................................ 552 538 15(D) 1,105
-------- ------ ----- -----------
2,251 2,771 65 5,087
-------- ------ ----- -----------
Income before income taxes.................................................. 749 1,752 137 2,638
Provision for income taxes...................................................... 263 649 58(D) 970
-------- ------ ----- -----------
Net income.................................................................. $ 486 $1,103 $ 79 $ 1,668
-------- ------ ----- -----------
-------- ------ ----- -----------
Net income per share............................................................ $ 0.98
-----------
-----------
Weighted average shares outstanding(E).......................................... 1,698,312
-----------
-----------
</TABLE>
See accompanying notes to pro forma financial information
51
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
NOTE A: BASIS OF PRESENTATION
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheets of Heritage and United as if the Merger had become
effective on September 30, 1997. The unaudited pro forma combined statements of
income for the nine months ended September 30, 1997, and the year ended December
31, 1996, combine the historical consolidated statements of income of Heritage
and United as if the Merger had become effective on January 1, 1996. Certain
amounts in the historical financial statements of United have been reclassified
in the unaudited pro forma combined financial information to conform to
Heritage's historical financial statements.
At the Effective Date, Heritage Shareholders will receive 475,000 shares of
United Common Stock for all of the issued and outstanding common stock of
Heritage. Heritage will merge with United and Heritage Bank will become a
wholly-owned subsidiary of United. Heritage is being deemed the acquirer in the
Merger for accounting purposes, although the Merger is expected to result in the
former United Shareholders owning a majority of the combined entity. Among other
factors, this accounting treatment results from the fact that both the Board of
Directors and the ongoing management of the combined entity (including the bank
subsidiaries) will be controlled by the former Heritage Shareholders.
The Merger will be accounted for using the purchase method of accounting.
Under this method of accounting, assets and liabilities of United are adjusted
to their estimated fair value and combined with the historical recorded book
values of the assets and liabilities of Heritage. Applicable income tax effects
of such adjustments are included as a component of net deferred taxes with a
corresponding offset to goodwill. Additionally, United's unrealized loss on
securities-available-for-sale and retained earnings are eliminated.
Accordingly, for financial reporting purposes, the Merger will be reported
as if Heritage was recapitalized at the Effective Time with 475,000 common
shares outstanding and United thereafter acquired through the issuance of
1,223,312 shares of United Common Stock to United Shareholders. The total
purchase price consideration of United is calculated based on an average of the
market price of United Shares immediately prior to and after the announcement of
the Merger times the number of shares deemed issued to United Shareholders plus
direct acquisition costs. The difference between the purchase price so
determined and the fair value of identifiable tangible and intangible net assets
of United at the Effective Time will be recorded as goodwill.
Any transactions conducted in the ordinary course of business between
Heritage and United would be immaterial and, accordingly, have not been
eliminated.
Following the Merger and subject to regulatory approvals, Heritage Bank and
United Bank will be merged. The impact of such merger is not expected to be
material. Heritage also expects to achieve certain operating cost savings as a
result of the Merger, however, no pro forma adjustment has been included in the
unaudited pro forma combined financial information for operating cost savings.
52
<PAGE>
NOTE B: PURCHASE PRICE
For financial reporting purposes, the purchase price to be paid to United
Shareholders is calculated based on a valuation of $20.25 per share. The total
number of United Shares assumed to be issued is 1,223,312.
<TABLE>
<S> <C>
Total pro forma acquisition consideration is calculated as follows
(in thousands):
Fair value of United Common Stock deemed issued.................... $ 24,766
Less estimated common stock issuance costs......................... (50)
---------
Total purchase price consideration of stock issued............... 24,716
Estimated direct acquisition costs................................. 300
---------
Total acquisition consideration.................................. $ 25,016
---------
---------
</TABLE>
NOTE C: ALLOCATION OF PURCHASE PRICE
The actual revaluation of United's net assets acquired is subject to the
completion of studies and evaluations by management and will be based on the
estimated fair value of the net assets acquired at the Effective Time.
Accordingly, the actual allocation of the purchase price can not be finalized
and the portion of the purchase price allocated to fair value adjustments,
identifiable intangibles and goodwill is therefore subject to change.
Subject to the foregoing, the purchase price has been allocated as estimated
below (in thousands):
<TABLE>
<S> <C>
United's historical net assets at September 30, 1997............... $ 24,757
Increase (decrease) to United's net asset values
as a result of estimated fair value adjustments:
Investment securities.............................................. 192
Loans receivable, net.............................................. (225)
Premises and equipment............................................. 1,000
Accrued expenses(1)................................................ (630)
---------
337
Applicable income tax effects(2)................................... (185)
---------
Net fair value adjustments......................................... 152
---------
Estimated fair value of identifiable tangible and intangible net
assets........................................................... 24,909
Goodwill........................................................... 107
---------
Total purchase price consideration................................. $ 25,016
---------
---------
</TABLE>
- ------------------------
(1) Includes $150,000 of non-deductible merger costs to be incurred by United.
(2) Estimated marginal tax rate of 38%.
NOTE D: PRO FORMA ADJUSTMENTS
UNITED. For the unaudited pro forma statements of income, the pro forma
adjustments are based on the allocated purchase price of the net assets acquired
based on the fair value estimates at September 30, 1997 described above applied
as if the Merger had occurred on January 1, 1996.
53
<PAGE>
The fair values at the Effective Time will be determined and the related
amortization will be calculated as follows:
Investment securities will be adjusted to fair value based on current
investment securities yields and the fair value adjustment will be amortized to
interest income as a yield adjustment using the level yield method over the
average estimated life of the underlying securities, currently estimated to be
three years.
Loans receivable will be adjusted to fair value based on current loan
interest rates and the fair value adjustment will be amortized to interest
income as a yield adjustment using the level yield method over the average
estimated life of the underlying loan receivable, currently estimated to be
three years. Additional individual loans and concentrations of credit in
homogeneous loans will be evaluated for specific valuation adjustments at the
Effective Time.
Premises and equipment will be adjusted to fair value based on current
market value evaluations and the fair value adjustment will be depreciated on a
straight line basis over the remaining estimated economic life of the related
assets, currently estimated at 20 years.
Interest bearing time deposits will be adjusted to fair value based on
current time deposit interest rates and any fair value adjustment will be
amortized into interest expense using the interest method over the estimated
duration of the related deposits, currently estimated to be two years. Such fair
value adjustment is not significant at September 30, 1997.
Borrowed funds will be adjusted to fair value based on current borrowing
interest rates and the fair value adjustment will be amortized to interest
expense using the interest method over the contractual duration of the related
borrowings, currently estimated to be three years. Such fair value adjustment is
not significant at September 30, 1997.
The adjustments to accrued expenses include estimated severance costs under
existing United employment agreements, a data processing contract termination
fee and United's direct Merger related expenses.
For purposes of calculating pro forma adjustments, straight line
amortization has been used as any differences between the interest method and
the straight line method should not be significant. Goodwill resulting from the
Merger is expected to be amortized over seven years. The separate intangible
value of core deposit relationships has been included in the value attributed to
goodwill, but separate valuation is not considered cost beneficial and the
effect on results of operations of the related amortization would not differ
significantly from that of the goodwill amortization.
HERITAGE. Prior to the Effective Date, Heritage is required to pay off all
outstanding long-term debt through a corresponding contribution of capital.
Heritage stockholders' equity, outstanding indebtedness and interest expense
related to this indebtedness has been eliminated based on the historical amount
incurred for the pro forma periods presented.
NOTE E: PRO FORMA INCOME PER SHARE
Pro forma combined weighted average shares outstanding is based on 475,000
shares assumed to be held by Heritage Shareholders after the recapitalization as
described above combined with 1,223,312 shares deemed to be issued to United
Shareholders.
NOTE F: PRO FORMA FUTURE AMORTIZATION
The incremental effect of the amortization of the pro forma purchase
accounting adjustments for the nine months ended September 30, 1997, the year
ended December 31, 1996 and the five 12-month periods
54
<PAGE>
subsequent to the year ending December 31, 1996 is estimated to be an after-tax
decrease in net income as follows:
<TABLE>
<CAPTION>
PRO FORMA
AMORTIZATION FOR THE
FOR THE YEAR ENDED DECEMBER
PRO FORMA AMORTIZATION ANNUAL 31,
ADJUSTMENT PERIOD IN AMORTIZATION ----------------------------
FAIR VALUE ADJUSTMENTS: AMOUNT YEARS AMOUNT 1997 1998 1999 2000 2001
---------- ------------ ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities.................................. $ 192 3 $(64) $(64) $(64) $-- $-- $--
Loans receivable....................................... (225) 3 75 75 75 -- -- --
Premises and equipment................................. 1,000 20 (50) (50 ) (50 ) (50 ) (50 ) (50 )
Accrued expenses....................................... (630) -- -- -- -- -- -- --
---------- --- ---- ---- ---- ---- ----
Total tangible adjustments............................. 337 (39) (39 ) (39 ) (50 ) (50 ) (50 )
Income taxes on adjustments............................ (185) 15 15 15 19 19 19
---------- --- ---- ---- ---- ---- ----
152 (24) (24 ) (24 ) (31 ) (31 ) (31 )
Goodwill............................................... 107 7 (15) (15 ) (15 ) (15 ) (15 ) (15 )
--- ---- ---- ---- ---- ----
Increase (decrease) in pro forma combined net income... $(39) $(39) $(39) $(46) $(46) $(46)
---------- --- ---- ---- ---- ---- ----
--- ---- ---- ---- ---- ----
Total purchase price adjustments....................... $ 259
----------
----------
</TABLE>
Applicable income tax effects have been recorded using an estimated marginal tax
rate of 38%.
55
<PAGE>
INFORMATION REGARDING HERITAGE
BUSINESS
Heritage is a savings and loan holding company within the meaning of Section
10 of HOLA. Heritage was formed in 1993 as a Montana corporation and conducts
its principal business activities through its bank subsidiary Heritage Bank, a
federally chartered stock savings bank originally chartered in 1923. Heritage
has no significant operations other than those conducted through Heritage Bank.
Heritage acquired Heritage Bank effective as of June 1, 1994. The deposits of
Heritage Bank are insured by the FDIC.
The principal offices of Heritage are located at 5500 Wayzata Boulevard,
Suite 145, Golden Valley, Minnesota, and the principal offices of Heritage Bank
are located at 120 First Avenue North, Great Falls, Montana.
Heritage Bank delivers a comprehensive range of consumer and commercial
banking services to individual and business customers. These services include
personal and business checking and savings accounts, time deposits and the
origination of real estate, commercial, agricultural, personal and consumer
loans. While Heritage has diversified into commercial and consumer lending
activities over the last several years, the origination, selling and servicing
of residential real estate loans remains a primary business activity. Heritage
Bank operates under a community banking philosophy, which emphasizes providing
customers with quick and flexible decision making, offering products and
services which meet the needs of its communities, and maintaining a significant
level of involvement in the community it serves.
As of September 30, 1997, Heritage and Heritage Bank had assets of
approximately $78.4 million, deposits of $65.0 million and loans of $54.2
million.
Heritage Bank has one branch in each of Great Falls and Chester, Montana and
a loan production office in Bozeman, Montana. Great Falls is the second largest
city in Montana and serves as a regional center for trade, agriculture, tourism
and medical services, and has an air force base employing over 4,000 people.
Chester is predominantly an agricultural community.
COMPETITION
The banking and financial services business in Heritage's primary market
area is highly competitive. Heritage Bank competes for loans and deposits with
other savings and loan associations, commercial banks, securities companies,
credit unions and other financial service providers. Competition in Heritage's
primary market area is characterized by well-established branches of large banks
with headquarters located outside the primary market area and in some cases
outside the State of Montana. Specific competitors include Norwest Bank Montana,
N.A., U.S. Bancorp (formerly First Bank System, Inc.), Mountain West Bank of
Great Falls, First Interstate BancSystem of Montana, Western Federal Savings
Bank, United and others. Several of these institutions are larger super-regional
banking organizations that have larger deposit bases, greater access to capital
markets and offer a broader array of financial services. Heritage Bank competes
on the basis of its community-oriented banking philosophy, quick and responsive
customer service and community involvement.
EMPLOYEES
Heritage Bank has 39 employees; 32 full time equivalent, consisting of 8
officers and 31 non-officers. Most of the employees have been associated with
the bank for two years or more.
PROPERTIES
The physical assets of Heritage Bank consist of a modern banking facility
located at 120 First Avenue North, Great Falls, Montana. The facility consists
of a main level with 5,500 square feet, a basement which
56
<PAGE>
also has 5,500 square feet and a four-lane drive-up. In addition, Heritage Bank
has a drive-up detached facility located on 10th Avenue South, in Great Falls.
The drive-up is leased (300 sq ft) at an annual cost of $3,000. In Chester,
Montana, the Bank owns a facility with a one-lane drive-up, and 1,300 square
feet, a newly remodeled lobby and teller area. The bank also leases an office of
600 square feet in Bozeman, Montana which functions as a Loan Production Office.
The annual lease cost is $9,000. There is no debt on any of the owned
facilities.
MARKET PRICE OF AND DIVIDENDS ON HERITAGE COMMON STOCK
There is no established trading market for the Heritage Common Stock.
Heritage is aware of each transaction involving Heritage Common Stock since it
was formed. The prices for Heritage Common Stock in such transactions may not be
indicative of prices that could be attained on an active market involving a
substantial number of shares. In the most recent arm's length sale of Heritage
Common Stock in March 1997, the price per share was $441. There are eight
Shareholders of record of Heritage Common Stock, all of whom are insiders or
affiliated with Heritage. See "Heritage Shareholders and Security Ownership of
Management." Heritage has never paid a dividend.
LEGAL PROCEEDINGS
Neither Heritage nor Heritage Bank is presently involved in any material
pending litigation.
INVESTMENT ACTIVITIES
Heritage relies on investment securities for a portion of its earning
assets. These investments are concentrated in federal agencies, mortgage-backed
securities and, to a lesser degree, corporate and municipal bonds. Heritage and
Heritage Bank maintain a strong liquidity position through federal funds sold
and cash flow from mortgage-backed securities.
DIRECTORS AND OFFICERS
The following table sets forth certain information concerning the current
directors and officers of Heritage and Heritage Bank:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
- ------------------------------ --- ----------------------------------------------------------------------------
<S> <C> <C>
John M. Morrison.............. 60 Chairman and Director of Heritage
Kurt R. Weise................. 40 Vice President, Secretary, Treasurer and Director of Heritage
Janice M. Graser.............. 43 Director of Heritage Bank
Kevin P. Clark................ 42 President, Chief Executive Officer and Director of Heritage Bank
Steve L. Feurt................ 41 Senior Vice President and Director of Heritage Bank
Dee Ann Nieder................ 37 Vice President/Operations Officer of Heritage Bank
Laura Palagi.................. 42 Vice President/Real Estate Department Manager of Heritage Bank
Michael Walstad............... 40 Vice President/Manager, Chester Branch of Heritage Bank
Todd Strending................ 35 Vice President/Commercial Loan Officer of Heritage Bank
Amy Ward...................... 31 Vice President/Consumer Loan Officer of Heritage Bank
Diane Redd.................... 40 Assistant Operations Officer
</TABLE>
For information regarding the directors and officers of the combined entity,
see "The Merger-- Consequences of the Merger; Change of Control."
SUPERVISION AND REGULATION
To the extent the information below consists of summaries of certain
statutory provisions, it is qualified in its entirety by reference to the
statutory provisions so described.
57
<PAGE>
HOLDING COMPANY. Heritage is subject to provisions of HOLA, which requires
a savings and loan holding company to register with the OTS, and be subject to
its supervision. As a savings and loan holding company, Heritage's activities
are subject to certain limitations under HOLA and transactions between Heritage
and Heritage Bank are subject to certain restrictions under HOLA, and certain
other banking statutes.
As a savings and loan holding company, the acquisition of control of
Heritage by an individual or company is subject to the prior approval of the
OTS. The term "company" is broadly defined to include any corporation,
partnership, association or trust or similar organization, while the definition
of "control" for these purposes may be met by (i) the ownership or control or
power to vote 25% or more of the outstanding shares of any class of voting stock
of Heritage, directly or indirectly, (ii) control over the election of a
majority of the directors of Heritage, or (iii) the power to exercise directly
or indirectly a controlling influence over the management or policies of
Heritage. In addition, under certain circumstances, the ownership, control or
power to vote in excess of 10%, but less than 25% of the shares of any class of
voting securities, of Heritage, directly or indirectly, may require prior notice
to the OTS.
HOLA requires prior approval by the OTS of the acquisition by a savings and
loan holding company of more than 5% of the voting stock or substantially all of
the assets of any bank, but does not require prior approval before acquisition
of any additional shares in banks, the majority of the shares of which are
already controlled by such bank holding company. A bank holding company is
prohibited, with certain limited exceptions, from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank and from engaging in activities other than banking or managing or
controlling banks and other authorized subsidiaries and providing services to
its subsidiaries. One of the exceptions to this prohibition permits ownership of
the shares of a company, the activities of which the OTS determines to be so
closely related to the business of banking or of managing or controlling banks
as to be a proper incident thereto.
Heritage is required to file periodic reports with the OTS and such other
information as may be required to keep the OTS informed regarding Heritage's
compliance with the provisions of HOLA and the rules, regulations and orders
issued thereunder, and the OTS examines Heritage periodically.
HERITAGE BANK. Heritage Bank, as a federally chartered savings bank, is
subject to the supervision and regulation of, and is regularly examined by the
OTS. Among the requirements and restrictions imposed upon thrifts are the
requirements to maintain reserves against deposits, restrictions of nature and
amounts of loans that may be made, restrictions relating to investments, opening
of bank offices and other activities. Without prior approval, federal law limits
the payment of dividends if (i) such dividends would impair Heritage Bank's
capital, (ii) surplus is not equal to its common capital, or (iii) dividends
declared in any year exceed the total of net profits for that year combined with
retained net profits for the preceding two years.
Heritage Bank is required to comply with capital adequacy standards. There
are two basic measures of capital adequacy: a risk-based measure and a tier-one
leverage measure.
The risk-based capital measure was adopted to assist in the assessment of
capital adequacy of financial institutions by (i) making regulatory capital
requirements more sensitive to differences in risk portfolios among
organizations, (ii) introducing off-balance sheet items into the assessment of
capital adequacy, (iii) reducing disincentives to holding liquid, low-risk
assets, and (iv) achieving greater consistency in evaluation of capital adequacy
of major banking organizations throughout the world. The risk-based measures
include both a definition of capital and a framework for calculating
weighted-risk assets by assigning assets and off-balance sheet items to
broad-risk categories. An institution's risk-based capital ratio is calculated
by dividing its qualifying capital by its weighted-risk assets.
An important component of qualifying capital is the core capital or tier-one
capital. Tier-one capital for a thrift generally consists of (i) common
shareholders equity, (ii) non-cumulative perpetual preferred
58
<PAGE>
stock and related surplus, and (iii) minority interest in the equity accounts of
consolidated subsidiaries, less good will. The tier-one component of an
institution's qualifying capital must represent at least 50% of the qualifying
total capital. Supplementary capital (tier-two capital) consists of such
additional capital elements as (i) allowance for loan losses (subject to
limitations); (ii) cumulative perpetual preferred stock, convertible preferred
stock, and (iv) any related surplus (subject to certain conditions); (iii)
high-bred capital instruments and mandatory convertible debt securities; and
(iv) term subordinated debt and intermediate term preferred stock (subject to
limitations). The maximum amount of tier-two capital that may be included in
qualifying total capital is limited to 100% of tier-one capital (net of good
will). Under current capital adequacy standards, financial institutions must
meet a minimum ratio of qualifying capital to weight-risked assets of 8%.
Risk-based capital ratios are reviewed by a bank's primary federal
regulatory agency in the inspection and supervisory process as well as the
analysis of applications. Although the risk-based capital ratio focuses on broad
categories of credit risk and, to a lesser extent, interest rate and market
risk, the risk-based ratio does not incorporate other factors that can affect an
organizations financial condition. These factors include overall interest rate
exposure, liquidity, funding, and market risks; the quality and level of
earnings; investment or loan portfolio concentration; the quality of loans and
investments; the effectiveness of loan and investment policy; and management's
ability to monitor and control financial and other operational risks.
The primary federal regulatory agencies have also adopted a minimum leverage
ratio, defined as a ratio of tier-one capital to total assets, which is intended
to be used as a supplement to the risk-based capital measure. An institution
must meet both capital adequacy standards to be in compliance. Banking
organizations considered to be among the most highly rated, based upon
examination results, must maintain a minimum leverage ratio of 3%. Organizations
that do not meet these characteristics are expected to maintain capital ratios
of at least 100 to 200 basis points above the minimum levels.
Heritage Bank is in compliance with all capital standards currently
applicable to it.
The deposits of Heritage Bank are insured under the provisions of the
Federal Deposit Insurance Act. Heritage Bank is also subject to the supervision
and examination by the FDIC. Heritage Bank is subject to assessments by the
FDIC.
59
<PAGE>
HERITAGE SELECTED FINANCIAL DATA
The following table sets forth certain financial data concerning Heritage
and its predecessor. The historical selected financial data as of and for the
three years ended December 31, 1996 have been derived from the audited
consolidated financial statements of Heritage, included herein. The financial
data of Heritage for the year ended December 31, 1994, which includes seven
months of Heritage Bank subsequent to its acquisition by Heritage, and the
financial information of Heritage Bank prior to its acquisition by Heritage (the
"Predecessor Bank") for the five months ended May 31, 1994, have been combined
to present on a pro forma basis a full year of operations of Heritage and
Predecessor Bank for the year ended December 31, 1994. See "Unaudited Pro Forma
Heritage Predecessor Financial Data." The financial data as of March 31, 1994
and 1993 and for the years then ended have been derived from the audited
financial statements of Heritage Bank, which are not included herein. The
financial data as of and for the nine months ended September 30, 1997 and 1996
have been derived from Heritage's unaudited financial data, included herein. The
unaudited financial statements reflect, in the opinion of management, all
adjustments of a normal recurring nature necessary for a fair presentation of
financial condition and results of operations. The results for the nine months
ended September 30, 1997 are not necessarily
60
<PAGE>
indicative of the results to be expected for the entire year. This information
should be read in conjunction with the consolidated financial statements of
Heritage appearing elsewhere in this Joint Proxy Statement.
<TABLE>
<CAPTION>
HERITAGE PRO FORMA PREDECESSOR
------------------------------------------- COMBINED BANK(2)
---------- ----------------
NINE MONTHS
ENDED SEPTEMBER YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED MARCH
30, DEC. 31, 31,
---------------- ------------------------- ---------- ----------------
1997 1996 1996 1995 1994(1) 1994 1994 1993
------- ------- ------- ------- ------- ---------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income................................... $ 4,211 $ 3,269 $ 4,520 $ 3,469 $1,528 $ 2,476 $ 2,426 $ 2,685
Interest expense.................................. 2,255 1,750 2,419 1,941 830 1,355 1,221 1,507
------- ------- ------- ------- ------- ---------- ------- -------
Net interest income............................... 1,956 1,519 2,101 1,528 698 1,121 1,205 1,178
Provision for loan losses......................... 193 135 160 46 -- -- 8 64
------- ------- ------- ------- ------- ---------- ------- -------
Net interest income after provision for loan
losses.......................................... 1,763 1,384 1,941 1,482 698 1,121 1,197 1,113
Non-interest income............................... 808 807 1,059 631 282 550 797 696
Non-interest expense.............................. 1,698 1,686 2,251 1,505 775 1,389 1,219 1,101
------- ------- ------- ------- ------- ---------- ------- -------
Income before income taxes........................ 873 505 749 608 205 282 775 708
Provision for income taxes........................ 334 195 263 214 87 128 297 276
------- ------- ------- ------- ------- ---------- ------- -------
Net income........................................ $ 539 $ 310 $ 486 $ 394 $ 118 $ 154 $ 478 $ 432(7)
------- ------- ------- ------- ------- ---------- ------- -------
------- ------- ------- ------- ------- ---------- ------- -------
RESTATED PER SHARE DATA(3):
Income per share.................................. $ 1.13 $ .65 $ 1.02 $ .83 $ .25 $ .32
Dividends per share............................... -- -- -- -- -- --
Book value per share(4)........................... 5.76 4.01 4.59 3.57 2.48 2.56
Tangible book value per share(4).................. 4.69 2.86 3.45 2.35 1.17 1.25
Pro forma income per share(5)..................... 1.33 .84 1.27 1.12 .41 .55
Pro forma book value per share(5)(4).............. 10.91 9.38 9.95 9.15 8.22 8.29
Shares used to calculate per share data........... 475 475 475 475 475 475
FINANCIAL CONDITION DATA:
Assets............................................ $78,355 $84,571 $71,347 $55,210 $42,514 $42,514 $33,332 $34,556
Net loans and loans held for sale................. 54,188 39,667 43,853 29,169 21,609 21,609 17,510 20,884
Investment securities............................. 14,950 14,729 14,172 16,090 12,365 12,365 7,871 7,670
Deposits.......................................... 65,045 54,839 57,641 42,742 37,936 37,936 29,452 30,756
Long-term debt.................................... 2,450 2,550 2,550 2,650 2,725 2,725 -- --
Stockholders' equity.............................. 2,734 1,907 2,178 1,694 1,179 1,215 3,023 2,545
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets.......................... .99% .71% .81% .83% .55%
Return on average stockholders' equity............ 29.31% 22.14% 25.78% 27.81% 18.39%
Net interest margin............................... 3.77% 3.69% 3.74% 3.45% 3.57%
Efficiency ratio(6)............................... 61.43% 72.48% 63.67% 69.71% 79.08%
Net charge-offs to average loans.................. .04% .28% .27% .18% .01%
Nonperforming loans to total loans................ .04% .07% .06% .02% .42%
Allowance for loan losses to total loans.......... 1.03% .90% .88% 1.10% 1.46%
Nonperforming loans to allowance for loan
losses.......................................... 4.09% 7.99% 6.96% 1.84% 27.78%
Stockholders' equity to assets(4)................. 3.49% 2.95% 3.05% 3.07% 2.77%
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
61
<PAGE>
(FOOTNOTES FROM PRECEEDING PAGE)
- ------------------------------
(1) Represents only seven months of operations of Heritage Bank which was
acquired by Heritage effective as of June 1, 1994.
(2) The financial information of Heritage Bank for periods prior to June 1, 1994
is not comparable in all respects with the historical financial information
of Heritage. Purchase accounting was used by Heritage for its acquisition of
Heritage Bank effective June 1, 1994, which resulted in changes to the
historical carrying value of Heritage Bank's net assets and the recognition
of goodwill. Heritage also incurred significant acquisition debt in
connection with the acquisition and incurred the resulting interest expense.
In addition, Heritage Bank's fiscal year end prior to its acquisition was
March 31.
(3) 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 Heritage Common Stock.
(4) At period end.
(5) Pro forma per share amounts are presented as if the contribution of capital
to retire outstanding long-term debt had been made as of or at the beginning
of the period presented. The pro forma reduction in interest expense, net of
tax effects at 38%, for the nine months ended September 30, 1997 and 1996
was $93,000 and $87,000, respectively, and for the years ended December 31,
1996, 1995 and 1994 was $118,000, $137,000 and $76,000, respectively.
(6) Excludes September 1996 pre-tax charge for SAIF assessment of $239,000.
(7) Before cumulative effect of change in method of accounting for income taxes
of $84,986. Net income for the year ended March 31, 1993 was $516,940.
62
<PAGE>
UNAUDITED PRO FORMA HERITAGE PREDECESSOR FINANCIAL DATA
(YEAR ENDED DECEMBER 31, 1994 AS ADJUSTED TO GIVE EFFECT TO
PREDECESSOR BANK ACQUISITION)
Heritage Bank was acquired by Heritage effective June 1, 1994 (the
"Predecessor Bank Acquisition"). Accordingly, the financial statements of
Heritage include the operations of Heritage Bank only since June 1, 1994. Prior
to its acquisition by Heritage, Heritage Bank's (as the "Predecessor Bank")
fiscal year for financial reporting purposes was March 31. The following
unaudited pro forma statement of income is intended to present consolidated
results of operations for Heritage and subsidiary for the full year ended
December 31, 1994. The unaudited pro forma statement of income combines the
results of operations of the Predecessor Bank for the five months ended May 31,
1994 and the results of operations of Heritage and subsidiary for the seven
months ended December 31, 1994 and gives effect to the Predecessor Bank
Acquisition as though it occurred on January 1, 1994. The unaudited pro forma
statement of income, which is based upon assumptions and includes adjustments as
described in the notes which follow, should be read in conjunction with the
historical financial statements and notes thereto included elsewhere in this
Joint Proxy Statement. The unaudited pro forma information does not purport to
represent the results that actually would have occurred if such transactions had
in fact occurred on such date.
<TABLE>
<CAPTION>
PREDECESSOR BANK HERITAGE
------------------------- ------------
THREE MONTHS TWO MONTHS YEAR
ENDED ENDED ENDED
MARCH 31, MAY 31, DECEMBER 31, PRO FORMA
1994(1) 1994(2) 1994(3) ADJUSTMENTS
------------ ---------- ------------ -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME:
Interest income(4)............................................ $552 $371 $1,528 $ 25
Interest expense(5)........................................... 287 187 830 51
----- ----- ------ ---
Net interest income........................................... 265 184 698 (26)
Provision for losses on loans................................. -- -- -- --
Net interest income after provision for losses on loans....... 265 184 698 (26)
Non-interest income........................................... 191 77 282 --
Non-interest expense(6)....................................... 368 228 775 18
----- ----- ------ ---
Income before income taxes.................................... 88 33 205 (44)
Income taxes(7)............................................... 40 11 87 (10)
----- ----- ------ ---
Net income.................................................... $ 48 $ 22 $ 118 $(34)
----- ----- ------ ---
----- ----- ------ ---
Net income per share(8).......................................
Shares used to calculate
Per share data(8)...........................................
<CAPTION>
PRO FORMA
COMBINED
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
STATEMENT OF INCOME:
Interest income(4)............................................ $ 2,476
Interest expense(5)........................................... 1,355
------------
Net interest income........................................... 1,121
Provision for losses on loans................................. --
Net interest income after provision for losses on loans....... 1,121
Non-interest income........................................... 550
Non-interest expense(6)....................................... 1,389
------------
Income before income taxes.................................... 282
Income taxes(7)............................................... 128
------------
Net income.................................................... $ 154
------------
------------
Net income per share(8)....................................... $ 0.32
------------
------------
Shares used to calculate
Per share data(8)........................................... 475,000
------------
------------
</TABLE>
- ------------------------
(1) Unaudited; derived from the Predecessor Bank statement of income for the
year ended March 31, 1994.
(2) Unaudited, derived from the Predecessor Bank statement of income for the two
months ended May 31, 1994.
(3) Based on the audited consolidated financial statements of Heritage for the
year ended December 31, 1994. The acquisition of the Predecessor Bank was
accounted for as a purchase and, accordingly, the statement of income for
the year ended December 31, 1994 includes the results of operations of
Heritage Bank only since June 1, 1994.
(4) Reflects $25,000 net increase in interest income due to additional purchase
accounting adjustment/amortization.
(5) Reflects $51,000 of additional interest expense on debt which was incurred
for the Predecessor Bank Acquisition.
(6) Reflects $18,000 in additional amortization of goodwill.
(7) Reflects a $10,000 decrease in tax expense based on an estimated effective
tax rate of 38%.
(8) 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 Heritage Common Stock.
62
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HERITAGE
BASIS OF PRESENTATION
The following is Heritage management's discussion and analysis of the
results of operations and the historical financial condition of Heritage and its
consolidated subsidiary. Heritage began operations in 1993 and purchased
Heritage Bank effective as of June 1, 1994. Results for the year ended December
31, 1994 presented in the consolidated financial statements of Heritage included
herein, and in the table below, effectively represent seven months of operation
of Heritage Bank from June 1, 1994 through December 31, 1994. Pro forma
financial information for 1994, including twelve months of operation of Heritage
Bank, is presented under "Unaudited Pro Forma Heritage Predecessor Financial
Data" included elsewhere in this Joint Proxy Statement.
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of Heritage and Heritage
Bank. The following discussion should be read in conjunction with the
information under "Heritage Selected Financial Data" and Heritage's consolidated
financial statements and notes thereto and other financial data included
elsewhere in this Joint Proxy Statement. Certain statements under this caption
constitute "forward-looking statements" which involve risks and uncertainties.
Heritage's actual results may differ significantly from the results discussed in
such forward-looking statements. Factors that might cause such a difference
include, but are not limited to, economic conditions, competition in the
geographic and business areas in which Heritage conducts its operations,
fluctuations in interest rates, credit quality and government regulation. For
additional information concerning these and other factors, see "Risk Factors."
RESULTS OF OPERATIONS
NET INCOME. Net income increased by 73.9% from $310,000 in the first nine
months of 1996 to $539,000 in the same period in 1997. The increase is a result
of a larger asset base at Heritage Bank and an increase in net interest income.
Also, in September 1996, the Bank was assessed a pretax charge of $239,000 by
the Savings Association Insurance Fund ("SAIF"), as a result of legislation
enacted to capitalize the SAIF to the statutory prescribed level of 1.25% of
insured deposits. The assessment was 65.7 basis points per $100 of the Bank's
insured deposits on March 31, 1995. The after tax effect of the charge was
$148,000. Excluding this assessment, net income in the first nine months of 1996
would have been $458,000. Net income increased by 23.4% from $394,000 in fiscal
1995 to $486,000 in fiscal 1996, primarily due to growth in loans, increased
margins in a decreasing interest rate environment and increased mortgage loan
fees. Excluding the SAIF assessment, net income for 1996 would have been
$634,000, an increase of 60.9% over 1995. Net income increased by 233.9% from
$118,000 in fiscal 1994 to $394,000 in fiscal 1995, primarily because fiscal
1994 reflects operations of Heritage Bank only from June through December 1994.
In addition, the increase reflects the growth in assets, primarily loans, and
improved margins in a decreasing interest rate environment.
63
<PAGE>
The following is a condensed summary of the consolidated statement of
operations, along with selected profitability ratios:
ANALYSIS OF NET INCOME
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994(1)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Net interest income.............................................. $ 1,956 $ 1,519 $ 2,101 $ 1,528 $ 698
Provision for loan losses........................................ 193 135 160 46 --
Other operating income........................................... 808 807 1,059 631 282
Other operating expense.......................................... 1,698 1,686 2,251 1,505 775
Net income....................................................... 539 310 486 394 118
Return on average assets......................................... .99% .71% .81% .83% .55%
Return on average equity......................................... 29.31% 22.14% 25.78% 27.81% 18.39%
</TABLE>
- ------------------------
(1) Represents operations of the Heritage Bank from June 1, 1994 through
December 31, 1994.
NET INTEREST INCOME. Net interest income increased by 28.8% from $1.5
million for the nine months ended September 30, 1996 to $2.0 million for the
same period in 1997 due to an increase in the interest earning asset base as
well as improved margins on most interest earning assets. Net interest income
increased by 37.5% from $1.5 million for fiscal 1995 to $2.1 million for fiscal
1996, similarly due to an increase in earning assets and improved margins. Net
interest income is affected by changes in both interest rates and the volume of
average earning assets and interest-bearing liabilities. Net interest income
increased by 118.9% from $698,000 for fiscal 1994 to $1.5 million for fiscal
1995, primarily because fiscal 1994 represents only seven months of operations
of Heritage Bank. This factor was partially offset by a decline in net interest
margin from 1994 to 1995, principally resulting from a decline in average yield
achieved on the investment portfolio and an increase in the interest rate paid
on time deposits. The following table presents Heritage's average balance
sheets, interest earned or paid, and the related yields and rates on major
categories of Heritage's interest earning assets and interest-bearing
liabilities for the periods indicated:
64
<PAGE>
ANALYSIS OF AVERAGE RATES AND BALANCES
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
----------- --------- ----------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans......................................... $ 48,863 $ 3,267 8.91% $ 34,446 $ 2,293 8.88%
Investment securities......................... 17,519 814 6.20% 17,191 822 6.38%
Other interest earning assets................. 2,711 130 6.39% 3,239 154 6.34%
----------- --------- ----------- ---------
Total interest earning assets............... 69,093 4,211 8.13% 54,876 3,269 7.94%
Non-interest earning assets................... 3,250 -- -- 3,058 -- --
----------- -----------
Total assets................................ $ 72,343 -- $ 57,934 --
----------- -----------
----------- -----------
INTEREST BEARING LIABILITIES:
Savings/interest bearing checking............. $ 15,300 $ 340 2.96% $ 14,150 $ 296 2.79%
Time deposits................................. 35,189 1,590 6.02% 25,797 1,177 6.08%
Short-term borrowings......................... 5,187 175 4.50% 3,699 135 4.87%
Long-term borrowings.......................... 2,517 150 7.95% 2,575 142 7.35%
----------- --------- ----------- ---------
Total interest bearing liabilities.......... 58,193 2,255 5.17% 46,221 1,750 5.05%
Non-interest bearing liabilities.............. 11,698 -- -- 9,846 -- --
Common stockholders' equity................... 2,452 -- -- 1,867 -- --
----------- -----------
Total liabilities and equity................ $ 72,343 -- $ 57,934 --
----------- --------- ----------- ---------
----------- -----------
Net interest income........................... $ 1,956 $ 1,519
--------- ---------
--------- ---------
Net interest spread........................... -- -- 2.96% -- -- 2.89%
Net interest margin(2)........................ -- -- 3.77% -- -- 3.69%
</TABLE>
- ------------------------
(1) Includes nonaccrual loans.
(2) Computed on a fully taxable basis, without regard to tax equivalent yields.
65
<PAGE>
ANALYSIS OF AVERAGE RATES AND BALANCES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE BALANCE(1) INTEREST(3) RATE
---------- -------- ------- ---------- -------- ------- ---------- ----------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans..................... $35,890 $3,226 8.99% $24,137 $2,226 9.22% $18,907 $ 988 8.96%
Investment securities..... 17,022 1,079 6.34% 16,079 992 6.17% 9,454 356 6.46%
Other interest earning
assets.................. 3,249 215 6.62% 4,041 251 6.21% 5,142 184 6.13%
---------- -------- ---------- -------- ---------- -----------
Total interest earning
assets................ 56,161 4,520 8.05% 44,257 3,469 7.84% 33,503 1,528 7.82%
Non-interest earning
assets.................. 3,511 -- -- 3,208 -- -- 3,087 -- --
---------- ---------- ----------
Total assets............ $59,672 -- $47,465 -- $36,590 --
---------- ----------
---------- ----------
INTEREST BEARING
LIABILITIES:
Savings/interest bearing
checking................ $14,253 $ 399 2.80% $12,171 $ 352 2.89% $12,650 $ 204 2.76%
Time deposits............. 27,369 1,660 6.07% 20,382 1,224 6.01% 14,823 494 5.71%
Short-term borrowings..... 3,504 169 4.82% 2,614 144 5.51% 248 10 6.91%
Long-term borrowings...... 2,569 191 7.43% 2,681 221 8.24% 2,725 122 7.67%
---------- -------- ---------- -------- ---------- -----------
Total interest bearing
liabilities........... 47,695 2,419 5.07% 37,848 1,941 5.13% 30,446 830 4.67%
Non-interest bearing
liabilities............. 10,092 -- -- 8,200 -- -- 5,044 -- --
Common stockholders'
equity.................. 1,885 -- -- 1,417 -- -- 1,100 -- --
---------- ---------- ----------
Total liabilities and
equity................ $59,672 -- $47,465 -- 36,590 --
---------- -------- ---------- -------- -----------
---------- ----------
Net interest income....... $2,101 $1,528 $ 698
-------- -------- -----------
-------- -------- -----------
Net interest spread....... -- -- 2.98% -- -- 2.71% -- -- 3.15%
Net interest margin(2).... -- -- 3.74% -- -- 3.45% -- -- 3.57%
</TABLE>
- ------------------------------
(1) Includes nonaccrual loans.
(2) Computed on a fully taxable basis, without regard to tax equivalent yields.
(3) Represents operations of the Heritage Bank from June 1, 1994 through
December 31, 1994.
The most significant impact on Heritage's net interest income between
periods is derived from changes in the volume of and rates earned or paid on
interest earning assets and interest bearing liabilities. The volume of average
interest earning assets increased 25.9% from $54.9 million for the nine months
ended September 30, 1996 to $69.1 million for the same period in 1997.
Additionally, non-interest bearing liabilities increased, as did the yield on
earning assets, producing an increase in net margin of 8 basis points, from
3.69% for the nine months ended September 30, 1996 to 3.77% for the 1997 period.
Average equity to average assets for the periods ended September 30, 1997 and
September 30, 1996 were 3.39% and 3.22% respectively. For the years ended
December 31, 1996, and 1995 average equity to average assets was 3.16% and 2.99%
respectively.
66
<PAGE>
The following table reflects changes in interest income and expense
attributable to changes in the volume and interest rates of significant interest
earning assets and interest bearing liabilities. Comparison of 1995 to 1994 is
not meaningful because Heritage Bank was not purchased by Heritage until June
1994.
ANALYSIS OF VOLUME AND INTEREST RATES
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
FAVORABLE/(UNFAVORABLE) FAVORABLE/(UNFAVORABLE)
--------------------------------- -------------------------------
VOLUME RATE NET VOLUME RATE NET
----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans.......................................................... $ 964 $ 10 $ 974 $ 1,056 $ (56) $ 1,000
Investment securities.......................................... 15 (23) (8) 60 27 87
Other interest earning assets.................................. (26) 2 (24) (52) 16 (36)
----- --- --------- --------- --- ---------
Total interest income...................................... 953 (11) 942 1,064 (13) 1,051
INTEREST EXPENSE:
Savings/interest bearing deposits.............................. 26 18 44 58 (11) 47
Time deposits.................................................. 424 (11) 413 424 12 436
Short term borrowings.......................................... 50 (10) 40 43 (18) 25
Long term borrowings........................................... (3) 11 8 (8) (22) (30)
----- --- --------- --------- --- ---------
Total interest expense..................................... 497 8 505 517 (39) 478
Increase (decrease) in net interest income..................... $ 456 $ (19) $ 437 $ 547 $ 26 $ 573
----- --- --------- --------- --- ---------
----- --- --------- --------- --- ---------
</TABLE>
The change in interest income and expense attributable to volume reflects
the change in volume times the current year's rate and the change in interest
income and expense attributable to rate reflects the change in rates times the
prior year's volume.
For the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996, the increase in interest income is primarily caused by
volume increases. Net interest income for the same periods increased $437,000,
of which $456,000 was a result of volume increase and ($19,000) was due to rate
decrease. Net interest income for fiscal 1996 compared to fiscal 1995 increased
$573,000, of which $547,000 was due to volume and $26,000 was due to rate. Both
comparisons are consistent with Heritage's continued growth of earning assets
and its improvement in net interest margins since 1995.
PROVISION FOR LOAN LOSSES. Heritage made a provision to its loan loss
reserve in 1996 and 1995 of $160,000 and $46,000, respectively. The provisions
were determined based on management's assessment of an adequate reserve for
possible loan losses. Heritage made a provision to its loan loss reserve of
$193,000 for the nine months ended September 30, 1997 compared to $135,000 for
the same period in 1996. The increase in 1997 from 1996 reflects management's
view of potential loan losses inherent in the increased loan portfolio.
The provision for loan losses creates an allowance for future losses. The
loan loss provision for each year is dependent on many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in Heritage's market area. Heritage Bank performs a monthly
assessment of the risk inherent in its loan portfolio, as well as a detailed
review of each asset determined to have identified weaknesses. Based on this
analysis, which includes reviewing historical loss trends, current economic
conditions, industry concentrations and specific
67
<PAGE>
reviews of assets classified with identified weaknesses, Heritage Bank makes
provision for potential loan losses. Specific allocations are made for loans
where the probability of a loss can be defined and reasonably determined, while
the balance of the provision for loan losses are based on historical data,
delinquency trends, economic conditions in the market area and industry
averages. Annual fluctuations in the provision for loan losses result from
management's assessment of the adequacy of the allowance for loan losses.
Heritage has historically pursued a growth-oriented expansion strategy and
has experienced growth of loans, deposits and assets. This strategy reflects a
transition from a traditional thrift to activities resembling that of a
commercial bank. This business strategy is subject to a greater degree of risk,
including the increased risk of losses on loans.
Heritage's market is concentrated in Montana increasing its exposure to loan
losses for a deterioration in economic conditions in Heritage's market area. In
addition, Heritage has lease financing and commercial loan participations which
were originated out of Heritage's market area. Those loans have differing risks
in terms of loan monitoring and higher exposure due to economic conditions and
markets outside of Heritage's traditional market area.
Montana has experienced a deterioration in consumer credit quality
consistent with those experienced on a national level. The instances of personal
bankruptcies in Montana have doubled in recent years. Based on the average for
all insured commercial banks in the state of Montana, the net loss to average
total loans has increased 300% in 1995 and increased nearly 100% in 1996. The
corresponding average loan loss reserve for commercial banks in Montana at
December 31, 1996 was 1.65% of total loans. Heritage's loan loss reserve at
September 30, 1997 was 1.03% and .88% at December 31, 1996.
The continued growth of Heritage's loan portfolio combined with the apparent
deterioration in economic trends, both on a national and state-wide basis, and
the difference in Heritage's loan loss reserve coverage compared to state-wide
commercial bank averages, indicate that additional provisions to the loan loss
reserve should be expected to be recorded until such factors are mitigated or
stabilize. The provision to the loan loss reserve for the quarter ended December
31, 1997 will be $300,000.
NON-INTEREST INCOME. The following table presents a summary of non-interest
income:
ANALYSIS OF NON-INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- ---------------------------
1997 1996 1996 1995 1994(1)
---- ---- ------ ---- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges.................. $196 $182 $ 245 $209 $ 96
Loan origination fees............ 466 527 679 300 110
Loan servicing fees.............. 50 35 46 45 28
Other............................ 96 63 89 77 48
---- ---- ------ ---- -------
Total........................ $808 $807 $1,059 $631 $282
---- ---- ------ ---- -------
---- ---- ------ ---- -------
</TABLE>
- ------------------------
(1) Represents operations of the Heritage Bank from June 1, 1994 through
December 31, 1994.
Non-interest income continues to be a significant source of revenue for
Heritage and remained flat, for the nine months ended September 30, 1997
compared to the same period in 1996. Decreases in loan origination fees in the
1997 period were partially offset by increases in other non-interest income.
Non-interest income increased by 67.8% from $631,000 in fiscal 1995 to $1.1
million in fiscal 1996. Non-interest income increased by 123.8% from $282,000 in
fiscal 1994 to $631,000 in fiscal 1995. The increase in 1996 over 1995 resulted
from increased mortgage activity resulting from the addition of more mortgage
68
<PAGE>
originators and fees associated with sold mortgages. The increase in 1995 over
1994 is largely due to the short period of combined operations in 1994.
NON-INTEREST EXPENSE. The following table presents a summary of
non-interest expense:
ANALYSIS OF NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------
1997 1996 1996 1995 1994(1)
--------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and benefits............................................ $ 876 $ 722 $ 1,007 $ 706 $ 354
Premises and equipment........................................... 169 128 192 124 67
Other expenses................................................... 653 836 1,052 675 354
--------- --------- --------- --------- -----
Total........................................................ $ 1,698 $ 1,686 $ 2,251 $ 1,505 $ 775
--------- --------- --------- --------- -----
--------- --------- --------- --------- -----
</TABLE>
- ------------------------
(1) Represents operations of the Heritage Bank from June 1, 1994 through
December 31, 1994.
Non-interest expense increased .7% from $1,686,000 for the nine months ended
September 30, 1996 to $1.7 million for the same period in 1997. The increase
primarily resulted from the opening of the new branch in Chester, Montana, and
costs associated with its startup, including premises and equipment expenses as
well as salaries. Included in the 1996 other expense is the SAIF assessment of
$239,000 (pretax). Excluding this charge, non-interest expense would have been
$1.45 million for the first nine months in 1996. The increase in 1997 over 1996
of non-interest expense would have been 17.3%, excluding the SAIF assessment.
Total non-interest expense increased by 49.6% from $1.5 million for fiscal 1995
to $2.3 million for fiscal 1996. The increase in 1996 is largely attributable to
salaries, wages and commission on sales of mortgage products and the one-time
assessment by the SAIF of approximately $239,000 on a pretax basis. Excluding
that charge, non-interest expense would have been $2.0 million in fiscal 1996,
an increase of 33.7% over fiscal 1995. The increase in non-interest expense can
be generally tied to the increase in the size of Heritage Bank and the
additional overhead required to operate a larger bank. Non-interest expense
increased by 94.2% from $775,000 in fiscal 1994 to $1.5 million in fiscal 1995,
principally due to the short period of combined operations in 1994.
INCOME TAXES. Heritage's income tax provision for fiscal 1996 was $263,000
compared with $214,000 in fiscal 1995, and $87,000 in fiscal 1994. The effective
tax rates were 35.0% in fiscal 1996, 35.2% in fiscal 1995 and 42.4% in fiscal
1994. The effective tax rate differs from the federal statutory rate primarily
as a result of tax-exempt interest income and state tax benefits in 1996
attributable to operating loss carry-forwards.
HERITAGE FINANCIAL CONDITION
OVERVIEW. Heritage's total consolidated assets increased by 29.2% from
$55.2 million at December 31, 1995 to $71.3 million at December 31, 1996; and by
29.9% from $42.5 million at December 31, 1994 to $55.2 million at December 31,
1995. The increases primarily resulted from increased loans and deposits. The
growth of bank assets has continued into 1997. Total assets increased by 9.8%
from $71.3 million at December 31, 1996 to $78.4 million at September 30, 1997.
LOANS. The following table presents the balance of each major category of
loans at the dates indicated. Commercial loans include loans to service, retail
and wholesale businesses. The majority of Heritage's real estate loan portfolio
consists of local residential first mortgages. The majority of these mortgages
are fixed-rate mortgages with short-term balloon payments or adjustable rate
term mortgages.
69
<PAGE>
Heritage has typically sold a majority of real estate mortgages into the
secondary market, with select mortgages that fit Heritage's underwriting
standards retained for its portfolio. Mortgages sold into the secondary market
totaled $23.8 million for the nine months ended September 30, 1997, $22.7
million for the nine months ended September 30, 1996, and $29.4 million, $10.2
million, and $6.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively (with 1994 representing a seven-month period of consolidated
operations). The increase in 1996 over 1995 resulted from increased mortgage
activity resulting from the addition of more mortgage originators and fees
associated with sold mortgages. Loans classified as agricultural loans primarily
include operating and equipment loans to local farmers. Loans secured by
farmland are listed in the real estate classification. Loans classified as
consumer and other include automobile, home improvement and dealer paper.
ANALYSIS OF LOANS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------------------------- -----------------------------------
1997 1996 1996 1995
---------------------- ---------------------- ---------------------- -----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT
----------- --------- ----------- --------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
LOAN CATEGORY:
Commercial and Agricultural............... $ 22,873 41.7% $ 16,090 40.1% $ 17,861 40.3% $ 11,639
Real Estate:
Residential............................. 12,687 23.2% 10,501 26.1% 10,570 23.8% 9,042
Construction............................ 2,133 3.9% 1,640 4.1% 1,444 3.3% 261
Farmland................................ 1,905 3.5% -- 0.0% 785 1.8% --
Other................................... 1,850 3.4% 1,592 4.0% 2,399 5.4% 1,395
Consumer/other............................ 13,338 24.3% 10,329 25.7% 11,269 25.4% 7,379
----------- --------- ----------- --------- ----------- --------- -----------
Total Loans........................... 54,786 100.0% 40,152 100.0% 44,328 100.0% 29,716
--------- --------- ---------
--------- --------- ---------
Less Unearned Discounts and Fees.......... 36 122 87 221
Less Allowance for Loan Losses............ 562 363 388 326
----------- ----------- ----------- -----------
Total Net Loans....................... $ 54,188 $ 39,667 $ 43,853 $ 29,169
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
1994
----------------------
% AMOUNT %
--------- ----------- ---------
<S> <C> <C> <C>
LOAN CATEGORY:
Commercial and Agricultural............... 39.2% $ 8,064 36.4%
Real Estate:
Residential............................. 30.4% 7,924 35.7%
Construction............................ 0.9% 177 .8%
Farmland................................ -- -- --
Other................................... 4.7% 295 1.3%
Consumer/other............................ 24.8% 5,725 25.8%
--------- ----------- ---------
Total Loans........................... 100.0% 22,185 100.0%
--------- ---------
--------- ---------
Less Unearned Discounts and Fees.......... 252
Less Allowance for Loan Losses............ 324
-----------
Total Net Loans....................... $ 21,609
-----------
-----------
</TABLE>
A principal component of Heritage's earning assets is its loan portfolio.
Total loans increased by 36.4% from $40.2 million at September 30, 1996 to $54.8
million at September 30, 1997. Total loans increased by 49.2% from $29.7 million
at December 31, 1995 to $44.3 million at year-end December 31, 1996; and
increased by 33.9% from $22.1 million at December 31, 1994 to $29.7 million at
year-end December 31, 1995. These increases are a direct result of strong loan
demand generated through officer call programs and the establishment of the
Bank's new branch in Chester, Montana.
NON-PERFORMING ASSETS. Heritage follows regulatory guidelines with respect
to placing loans on non-accrual status. When a loan is placed on non-accrual
status, all previously accrued and uncollected interest is reversed. Certain
non-performing assets of Heritage are summarized in the following table.
70
<PAGE>
NONACCRUAL, RESTRUCTURED AND PAST DUE LOANS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans....................................................... $ -- $ -- $ -- $ -- $ 90
Restructured loans..................................................... -- -- -- -- --
Loans past due 90 days or more......................................... 23 29 27 6 --
--------- --------- --------- --------- ---------
Total non-performing loans......................................... 23 29 27 6 90
Total OREO............................................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Total non-performing assets........................................ $ 23 $ 29 $ 27 $ 6 $ 90
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Non-performing assets to loans and OREO................................ .04% .07% .06% .02% .42%
</TABLE>
ALLOWANCE FOR LOAN LOSSES. Heritage Bank's loan loss reserve is available
to absorb future loan losses. The current level of the loan loss reserve is a
result of management's assessment of the risk within the loan portfolio based on
the information revealed in the credit reporting processes. Heritage utilizes a
risk-rating system on loans and a monthly credit review and reporting process
which results in the calculation of the guideline reserves based on the risk
within the portfolio. This assessment of risk takes into account the composition
of the loan portfolio, previous loan experience, current economic conditions and
other factors that, in management's judgment, deserve recognition.
71
<PAGE>
The following table sets forth changes in Heritage Bank's loan loss reserve
as of the dates indicated:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------- -----------------------------
1997 1996 1996 1995 1994
---- ---- ------ ---- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Balance beginning of period.................. $388 $326 $ 326 $324 $--
Balance acquired from Predecessor Bank(1).... -- -- -- -- 325
Provision for loan losses.................... 193 135 160 46 --
Charge-offs:
Commercial................................. 10 98 98 46 --
Consumer................................... -- -- -- -- 2
Real estate................................ -- -- -- -- --
Other...................................... 9 -- -- -- --
---- ---- ------ ---- -------
Total charge-offs........................ 19 98 98 46 2
Recoveries:
Commercial................................. -- -- -- -- --
Consumer................................... -- -- -- 2 1
Real estate................................ -- -- -- -- --
Other...................................... -- -- -- -- --
---- ---- ------ ---- -------
Total loan recoveries.................... -- -- -- 2 1
---- ---- ------ ---- -------
Net charge-offs.......................... 19 98 98 44 1
---- ---- ------ ---- -------
Balance end of year.......................... $562 $363 $ 388 $326 $324
---- ---- ------ ---- -------
---- ---- ------ ---- -------
Allowance for loan losses to total loans..... 1.03% .90% .88% 1.10% 1.46%
Net charge-offs to average loans............. .04% .28% .27% .18% .01%
</TABLE>
- ------------------------
(1) The balance of $325,000 was acquired from Heritage Bank when it was acquired
effective as of June 1, 1994.
The loan loss reserve at September 30, 1997 was $562,000 compared to
$363,000 at September 30, 1996. The allowance for loan losses was $388,000 at
December 31, 1996, and $326,000 at December 31, 1995. Activity with the
allowance for loan losses primarily reflected charge-offs of loans determined by
management to be uncollectible. However, management aggressively pursues
recoveries. However, management recognizes the need to monitor the reserve and
make adjustments based upon overall asset quality as well as economic and other
market factors which can influence the need for additional reserves.
The continued growth of Heritage's loan portfolio combined with the apparent
deterioration in economic trends, both on a national and state-wide basis,
indicate that additional provisions to the loan loss reserve should be expected
to be recorded until such factors are mitigated or stabilize. The provision to
the loan loss reserve for the quarter ended December 31, 1997 will be $300,000.
72
<PAGE>
The following table allocates the loan loss reserve based on management's
judgment of potential losses in the respective areas. While management has
allocated reserves to various portfolio segments for purposes of this table, the
reserve is general in nature and is available for the portfolio in its entirety:
ALLOCATION OF ALLOWANCE OF LOAN LOSSES
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------ -----------------------------------------
1997 1996 1996 1995
-------------------------- -------------------------- -------------------------- -------------
ALLOWANCE % TO ALLOWANCE % TO ALLOWANCE % TO ALLOWANCE
FOR LOANS IN FOR LOANS IN FOR LOANS IN FOR
LOAN LOSSES CATEGORY LOAN LOSSES CATEGORY LOAN LOSSES CATEGORY LOAN LOSSES
------------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Agricultural....... $ 418 1.83% $ 270 1.68% $ 277 1.55% $ 176
Real estate.......... 95 .51% 70 .51% 72 .47% 54
Consumer............. 47 .35% 23 .22% 28 .25% 18
Unallocated.......... 2 -- -- -- 11 -- 78
----- ----- ----- -----
Total............ $ 562 1.03% $ 363 .90% $ 388 .88% $ 326
----- ----- ----- -----
----- ----- ----- -----
<CAPTION>
1994
--------------------------
% TO ALLOWANCE % TO
LOANS IN FOR LOANS IN
CATEGORY LOAN LOSSES CATEGORY
----------- ------------- -----------
<S> <C> <C> <C>
Commercial and
Agricultural....... 1.51% $ 121 1.50%
Real estate.......... .50% 42 .50%
Consumer............. .24% 14 .25%
Unallocated.......... -- 147 --
-----
Total............ 1.10% $ 324 1.46%
-----
-----
</TABLE>
INVESTMENT PORTFOLIO. The investment activities of Heritage are designed to
provide an investment alternative for funds not presently required to meet loan
demand, assist Heritage Bank in meeting potential 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.
Heritage's portfolio consists primarily of obligations of U.S. government
and its agencies and mortgage backed securities, state and local governments,
and agency collateralized obligation securities. Heritage's investment portfolio
does not contain concentration of investments in any one issuer in excess of 10%
of Heritage's total investment portfolio. Exempt from this calculation are
securities of the U.S. government and U.S. government agencies. All Heritage's
investments are classified as available for sale.
The following table sets forth the composition of Heritage's investment
portfolio at the dates indicated:
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. government and agencies............................... $ 1,888 $ 2,248 $ 759 $ 3,575 $ 3,260
Mortgage backed securities................................. 11,462 11,382 12,306 11,994 8,986
Municipal.................................................. 1,213 864 864 521 119
Other...................................................... 387 235 243 -- --
--------- --------- --------- --------- ---------
Total investments...................................... $ 14,950 $ 14,729 $ 14,172 $ 16,090 $ 12,365
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
73
<PAGE>
For the investment portfolio as of September 30, 1997, the following tables
set forth a summary of yield and maturities:
ANALYSIS OF INVESTMENT YIELDS AND MATURITIES
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
UP TO 1 YEAR 1-5 YEARS 5-10 YEARS 10 YEARS AND BEYOND TOTAL
------------- ----------- ----------- ------------------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
U.S. government and agencies.................. $ -- $ 1,390 $ 498 $ -- $ 1,888
Mortgage backed............................... 1,467 4,274 1,696 4,025 11,462
Municipals.................................... -- 65 1,048 100 1,213
Other securities.............................. -- -- 387 -- 387
------ ----------- ----------- ------ ---------
Total..................................... $ 1,467 $ 5,729 $ 3,629 $ 4,125 $ 14,950
------ ----------- ----------- ------ ---------
------ ----------- ----------- ------ ---------
Weighted average yield........................ 5.86% 6.68% 6.38% 7.47% 6.75%
</TABLE>
For the investment portfolio as of December 31, 1996, the following tables
set forth a summary of yield and maturities:
ANALYSIS OF INVESTMENT YIELDS AND MATURITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
UP TO 1 YEAR 1-5 YEARS 5-10 YEARS 10 YEARS AND BEYOND TOTAL
------------- ----------- ----------- ------------------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
U.S. government and agencies.................. $ -- $ 509 $ 250 $ -- $ 759
Mortgage backed............................... 1,213 5,531 1,347 4,215 12,306
Municipals.................................... -- 64 499 301 864
Other securities.............................. -- -- 243 -- 243
------ ----------- ----------- ------ ---------
Total..................................... $ 1,213 $ 6,104 $ 2,339 $ 4,516 $ 14,172
------ ----------- ----------- ------ ---------
------ ----------- ----------- ------ ---------
Weighted average yield........................ 6.99% 6.34% 6.26% 7.08% 6.62%
</TABLE>
DEPOSITS. The following table sets forth a summary of Heritage's deposits
as of the dates indicated:
ANALYSIS OF DEPOSITS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-interest bearing....................................... $ 11,492 $ 9,848 $ 10,001 $ 7,448 $ 8,273
Interest bearing:
Savings and NOW............................................ 16,321 14,487 14,212 11,354 11,568
Time deposits < $100M.................................... 31,946 26,481 28,973 22,072 16,976
Time deposits > $100M.................................... 5,286 4,023 4,455 1,868 1,119
--------- --------- --------- --------- ---------
Total deposits......................................... $ 65,045 $ 54,839 $ 57,641 $ 42,742 $ 37,936
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
74
<PAGE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
< 3 MONTHS 3-6 MONTHS 6-12 MONTHS > 12 MONTHS TOTAL
----------- ----------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
September 30, 1997................................ $ 1,010 $ 517 $ 2,102 $ 1,657 $ 5,286
December 31, 1996................................. $ 893 $ 600 $ 1,727 $ 803 $ 4,023
</TABLE>
Deposits increased by 18.6% from $54.8 million at September 30, 1996 to
$65.0 million at September 30, 1997. Deposits increased by 34.9% from $42.7
million at December 31, 1995 to $57.6 million at year-end December 31, 1996.
Deposits also increased by 12.7% from $37.9 million at December 31, 1994 to
$42.7 million at year-end December 31, 1995. These increases are attributable to
marketing efforts implemented by Heritage Bank and the following of consumer
deposits with new loan relationships that have been established in Heritage
Bank.
REGULATORY CAPITAL. As required by the Financial Institutions Reform
Recovery and Enforcement Act of 1989 ("FIRREA"), the Office of Thrift
Supervision requires that Heritage Bank maintain minimum levels of capital under
three separate standards: a tangible capital requirement (stockholders' equity
adjusted for the effects of intangibles, investments and advances to
"nonincludable" subsidiaries and other factors) equal to not less than 1.5% of
tangible assets (as defined in the regulations); a core capital requirement,
comprised of tangible capital adjusted for any supervisory goodwill and other
defined factors equal to not less than 3% of tangible assets; and a risk-based
capital requirement equal to at least 8% of all risk-weighted assets. For
risk-weighting, selected assets are given a risk assignment of 0% to 100%. As an
example, cash and securities backed by the full faith and credit of the U.S.
Government are risk-weighted at 0% or book value, while repossessed assets and
delinquent loans over 90 days past due are assigned a 100% factor, or a
risk-weighting equal to their book value.
The following table demonstrates as of September 30, 1997 and December 31,
1996, the extent to which the Heritage Bank exceeds in dollars and in percent,
the three FIRREA minimum capital requirements:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------------------------- -----------------------------------
ACTUAL REQUIREMENT EXCESS ACTUAL REQUIREMENT EXCESS
--------- ------------- --------- --------- ------------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
TANGIBLE CAPITAL:
Amount....................................... $ 4,368 $ 1,167 $ 3,201 $ 3,879 $ 1,060 $ 2,819
% of tangible assets......................... 5.6% 1.5% 4.1% 5.5% 1.5% 4.0%
CORE CAPITAL:
Amount....................................... $ 4,368 $ 2,336 $ 2,032 $ 3,879 $ 2,119 $ 1,760
% of tangible assets......................... 5.6% 3.0% 2.6% 5.5% 3.0% 2.5%
RISK-BASED CAPITAL:
Amount....................................... $ 4,930 $ 3,674 $ 1,256 $ 4,266 $ 3,248 $ 1,018
% of risk-weighted assets.................... 10.7% 8.0% 2.7% 10.5% 8.0% 2.5%
</TABLE>
LIQUIDITY AND FUNDS MANAGEMENT. Liquidity management requires Heritage to
meet, in a timely fashion, contractual commitments and to respond to other
requirements for funds. Heritage Bank has an Asset/Liability Management
Committee (ALCO) responsible for managing balance sheet and off-balance sheet
commitments to meet the needs of customers while achieving financial objectives.
Heritage Bank's ALCO meets regularly to review funding capacities, current and
forecasted loan demand and investment opportunities.
Asset liquidity is provided by regular maturities of loans and by
maintaining relatively liquid marketable investment securities and federal
funds. Heritage's investment securities due within one year, cash flow
75
<PAGE>
from mortgage backed securities, and federal funds sold have historically been
adequate for funding needs. Heritage Bank has a stable core deposit base with a
relatively small percentage of volatile funding. Jumbo CDS over $100,000 of $5.3
million at September 30, 1997 comprised only 8.1% of total deposits. Interest-
bearing deposits accounted for the majority of the funds. Interest-bearing
deposits increased by $12.3 million, or 35.0%, from December 31, 1995 to 1996
and increased by $5.6 million, or 19.0%, from December 31, 1994 to 1995. These
increases were due primarily to successful, increased marketing efforts. If
funding requirements increase substantially, Heritage has in place liquidity
contingency plans, which include the ability to borrow federal funds, borrow
from the Federal Home Loan Bank, sell loan participations or liquidate
short-term marketable investment securities held in its investment portfolios.
INTEREST RATE SENSITIVITY. Significant changes in interest rates affect the
composition, yield and cost of balance sheet components. The rate sensitivity of
these assets and liabilities is monitored and matched to control the risk
associated with movements in rates. The ALCO for Heritage Bank meets regularly
to monitor and formulate strategies and policies to provide sufficient levels of
net interest income while maintaining acceptable levels of interest rate
sensitivity, risk and liquidity. The primary object of rate sensitivity
management is to ensure earnings stability by minimizing the sensitivity of net
interest income to fluctuations in interest rates. Heritage Bank uses gap and
other systems to measure, monitor and adapt to changing interest rate
environments.
The following table sets forth Heritage's interest rate sensitivity analysis
by contractual repricing or maturity at September 30, 1997:
INTEREST RATE SENSITIVITY
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
--------------------------------------
1 TO 5 5-10 YEARS
UP TO 1 YEAR YEARS AND BEYOND TOTAL
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Total loans................................................... $ 29,296 $ 21,754 $ 3,736 $ 54,786
Investment securities......................................... 5,446 7,069 2,435 14,950
Other interest earning assets................................. 3,528 98 -- 3,626
------------ ----------- ----------- ---------
Total rate sensitive assets................................. $ 38,270 $ 28,921 $ 6,171 $ 73,362
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
RATE SENSITIVE LIABILITIES:
Savings/interest bearing checking............................. $ 9,595 $ 6,726 $ -- $ 16,321
Time deposits................................................. 25,201 12,031 -- 37,232
Short term borrowings......................................... 6,469 425 -- 6,894
Long term borrowings.......................................... 2,450 -- -- 2,450
------------ ----------- ----------- ---------
Total rate sensitive liabilities............................ $ 43,715 $ 19,182 $ -- $ 62,897
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
Rate sensitive gap.............................................. $ (5,445) $ 9,739 $ 6,171 $ 10,465
Cumulative rate sensitive gap................................... $ (5,445) $ 4,294 $ 10,465 $ 10,465
Rate sensitive gap %............................................ (6.82)% 12.19% 7.72% 13.10%
Cumulative rate sensitive gap %................................. (6.82)% 5.37% 13.10% 13.10%
</TABLE>
- ------------------------
Data taken from the Federal Home Loan Bank Rate Shock Analysis, for September
30, 1997.
76
<PAGE>
The following table sets forth Heritage's interest rate sensitivity analysis
by contractual repricing or maturity at December 31, 1996:
INTEREST RATE SENSITIVITY
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
--------------------------------------
1 TO 5 5-10 YEARS
UP TO 1 YEAR YEARS AND BEYOND TOTAL
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Total loans................................................... $ 19,942 $ 19,782 $ 4,604 $ 44,328
Investment securities......................................... 5,335 5,768 3,069 14,172
Other interest-earning assets................................. 5,587 98 -- 5,685
------------ ----------- ----------- ---------
Total rate sensitive assets................................. $ 30,864 $ 25,648 $ 7,673 $ 64,185
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
RATE SENSITIVE LIABILITIES:
Savings/interest bearing checking............................. $ 8,529 $ 5,683 $ -- $ 14,212
Time deposits................................................. 24,948 8,480 -- 33,428
Short term borrowings......................................... 7,375 425 -- 7,800
Long term borrowings.......................................... 2,550 -- -- 2,550
------------ ----------- ----------- ---------
Total rate sensitive liabilities............................ $ 43,402 $ 14,588 $ -- $ 57,990
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
Rate sensitive gap.............................................. $ (12,538) $ 11,060 $ 7,673 $ 6,195
Cumulative rate sensitive gap................................... $ (12,538) $ (1,478) $ 6,195 $ 6,195
Rate sensitive gap %............................................ (17.57)% 15.50% 10.75% 8.68%
Cumulative rate sensitive gap %................................. (17.57)% (2.07)% 8.68% 8.68%
</TABLE>
- ------------------------
Data taken from the Federal Home Loan Bank Rate Shock Analysis, for December 31,
1996.
The following tables set forth Heritage's interest rate sensitivity analysis
at the dates indicated with respect to individual categories of loans and
provides separate analyses with respect to fixed interest rate loans and
floating interest rate loans:
LOAN REPRICING OR MATURING
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
--------------------------------------
1 TO 5 5-10 YEARS
UP TO 1 YEAR YEARS AND BEYOND TOTAL
------------ ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN CATEGORY:
Commercial and agricultural................................... $ 11,878 $ 10,527 $ 468 $ 22,873
Real estate................................................... 11,411 4,991 2,173 18,575
Consumer and other............................................ 6,007 6,236 1,095 13,338
------------ ----------- ----------- ---------
Total loan.................................................. $ 29,296 $ 21,754 $ 3,736 $ 54,786
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
RATE SENSITIVE LOANS:
Fixed interest rate loan...................................... $ 8,612 $ 13,047 $ 2,412 $ 24,071
Floating interest rate loans.................................. 20,684 8,707 1,324 30,715
------------ ----------- ----------- ---------
Total loan.................................................. $ 29,296 $ 21,754 $ 3,736 $ 54,786
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
</TABLE>
77
<PAGE>
LOAN REPRICING OR MATURING
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
--------------------------------------
1 TO 5 5-10 YEARS
UP TO 1 YEAR YEARS AND BEYOND TOTAL
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
LOAN CATEGORY:
Commercial and agricultural................................... $ 7,797 $ 9,754 $ 310 $ 17,861
Real estate................................................... 8,525 4,526 2,147 15,198
Consumer and other............................................ 3,620 5,502 2,147 11,269
------------ ----------- ----------- ---------
Total loan.................................................. $ 19,942 $ 19,782 $ 4,604 $ 44,328
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
RATE SENSITIVE LOANS:
Fixed interest rate loan...................................... $ 5,716 $ 16,787 $ 3,764 $ 26,267
Floating interest rate loans.................................. 14,226 2,995 840 18,061
------------ ----------- ----------- ---------
Total loan.................................................. $ 19,942 $ 19,782 $ 4,604 $ 44,328
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1996, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The provisions of SFAS No. 125 apply to
transactions occurring after December 31, 1996. This adoption has not had a
material effect on the consolidated financial position or results of operations
of either Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
statement simplifies the standards for computing earnings per share ("EPS") by
replacing the presentation of primary and fully diluted EPS with a presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures. SFAS No. 128 also requires a reconciliation of
the numerator and the denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The provisions of SFAS No. 128
apply to financial statements issued for periods ending after December 15, 1997.
Earlier adoption is not permitted. Adoption will not have a material effect on
reported EPS of Heritage or United.
YEAR 2000 COMPLIANCE. At the time of the OTS merger application filing,
both Heritage Bank and United Bank filed with the OTS a required "Year 2000
Project Management Awareness Assessment." Each company is addressing Year 2000
risk and assessing its impact on the availability and integrity of financial
systems and the reliability of their respective operational systems. Each
company has made an initial inquiry to, and received written responses, from
their data processing centers regarding their Year 2000 compliance status. Each
company has made an inventory of and received written responses from each of
their software vendors as to their Year 2000 compliance. Each company is now
monitoring and will continue to monitor and evaluate the responses received from
their data centers and software vendors. The institutions have initiated mutual
preliminary discussions of post-Merger Year 2000 issues. Following regulatory
and shareholder approval of the Merger, additional meetings will be held to
further discuss Year 2000 issues on a merged operational basis. Data center
operations of the banks will be consolidated, with United Bank converting to
Heritage Bank's data processing center, which is anticipated to be completed by
June 30, 1998. Heritage Bank has recently been advised by their data processing
provider that a new generation of software, to be implemented by early 1998,
will be Year 2000 certified.
78
<PAGE>
A follow up report will be submitted to the OTS outlining specific Year 2000
compliance and the merged Banks' readiness. Until that time, each company will
continue to monitor its data center and software vendors for their specific Year
2000 testing and ongoing certification progress.
As of the date of this Joint Proxy Statement, based on the initial responses
from both data centers and software vendors, Heritage Bank and United Bank
believe that the costs to be incurred as a result of Year 2000 issues will not
have a material impact on their financial position or results of operations.
CHANGES IN ACCOUNTANTS
For the fiscal years ended December 31, 1994 and 1995, KPMG Peat Marwick LLP
served as auditors of Heritage. As of June 25, 1996, Heritage, with the approval
of the Board of Directors, engaged Douglas Wilson & Co. as auditors to replace
KPMG Peat Marwick LLP, due to the fact that Douglas Wilson's offices are located
in the same city as Heritage Bank and, therefore, Heritage was able to eliminate
travel and other out-of-pocket costs. During 1997, KPMG Peat Marwick LLP
consulted with the managements of United and Heritage regarding the accounting
treatment of the Merger. The preliminary conclusions that were expressed by KPMG
Peat Marwick LLP to the managements of United and Heritage are summarized under
"The Merger--Accounting Treatment." As of January 1, 1998, Heritage, with the
approval of the Board of Directors, once again engaged KPMG Peat Marwick LLP to
be Heritage's auditors to replace Douglas Wilson & Co. for purposes of the audit
for the year ended December 31, 1997 and subsequent years. Heritage made this
decision in light of the proposed Merger, recognizing that KPMG Peat Marwick LLP
has greater experience than Douglas Wilson & Co. in providing accounting
services to publicly held corporations. In the case of each of the changes in
accountants described above, there were no disagreements between Heritage and
the previous accounting firm, and the accountant's reports on the financial
statements of Heritage prior to the change in firms did not contain an adverse
opinion, disclaimer of opinion, or modification or qualification as to
uncertainty, audit scope or accounting principles.
79
<PAGE>
HERITAGE SHAREHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
As of the Record Date, the officers and directors of Heritage and Heritage
Bank beneficially owned all of the outstanding shares of Heritage Common Stock.
The following table sets forth the beneficial ownership of Heritage Common Stock
prior to the Merger and the beneficial ownership of United Common Stock by
Heritage Shareholders after the consummation of the Merger.
<TABLE>
<CAPTION>
SECURITY OWNERSHIP SECURITY OWNERSHIP
IN HERITAGE PRIOR TO IN UNITED AFTER THE
THE MERGER MERGER
---------------------- ----------------------
NUMBER NUMBER
NAME AND ADDRESS OF SHARES PERCENT OF SHARES PERCENT
- ------------------------------------------------------------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
John M. Morrison................................................... 7,988(1) 79.88% 416,930 24.55%
5500 Wayzata Blvd.
Suite 145
Golden Valley, MN 55416
Kurt R. Weise...................................................... 600 6.00% 29,000 1.71%
5500 Wayzata Blvd.
Suite 145
Golden Valley, MN 55416
Kevin P. Clark..................................................... 500 5.00% 25,050 1.47%
120 First Avenue North
Great Falls, MT 59401
Steve L. Feurt..................................................... 500(2) 5.00% 24,750 1.46%
120 First Avenue North
Great Falls, MT 59401
Janice M. Graser................................................... 412 4.12% 19,570 1.15%
5500 Wayzata Blvd.
Suite 145
Golden Valley, MN 55416
Total............................................................ 10,000 100% 515,300 30.34%
</TABLE>
- ------------------------
(1) Includes 1,236 shares owned by three trusts (412 each) for the benefit of
Mr. Morrison's three daughters; Susan Morrison, Mr. Morrison's spouse, is
the trustee for each trust.
(2) Includes 100 shares held by Individual Retirement Account of Steve L. Feurt.
(3) Includes United Common Stock issuable pursuant to the Merger and United
Common Stock, if any, owned by the named individuals prior to the Merger.
DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS
The rights of Heritage Shareholders are governed by the Articles of
Incorporation (the "Heritage Articles") and Bylaws (the "Heritage Bylaws") of
Heritage and the laws of the State of Montana. The rights of United Shareholders
are governed by the Articles of Incorporation (the "United Articles") and Bylaws
(the "United Bylaws") of United and the laws of the State of Minnesota. After
the Merger becomes effective, the rights of Heritage Shareholders who become
United Shareholders will be governed by the United Articles, the United Bylaws
and the laws of the State of Minnesota. In certain respects, rights of Heritage
Shareholders and United Shareholders are similar. While it is not practical to
describe all changes in the rights of Heritage Shareholders that will result
from the differences between the Heritage Articles and Bylaws and the United
Articles and Bylaws, the following is a summary of certain significant
differences.
80
<PAGE>
CAPITAL STOCK
The Heritage Articles authorize the issuance of 50,000 shares of Common
Stock, no par value per share. Heritage currently has outstanding only one class
of Common Stock. Accordingly, all Heritage Shareholders have equal rights and
preferences with respect to dividends and distributions upon liquidation.
The United Articles authorize the issuance of 10,000,000 shares of capital
stock, consisting of 8,000,000 shares of no par value common stock and 2,000,000
shares of no par value preferred stock. As of January 8, 1998, 1,223,312 shares
of United Common Stock were outstanding.
SPECIAL MEETING OF SHAREHOLDERS
Montana law, as well as Heritage Bylaws, provide that special meetings of
shareholders may be called by the President or the Board of Directors and must
be called by the President at the request of holders of not less than 10% of all
outstanding shares entitled to vote at the meeting.
Minnesota law provides that special meetings of shareholders may be called
by the chief executive officer, chief financial officer, two or more directors,
a shareholder holding at least 10% of the outstanding voting power or if the
purpose of the meeting is to consider a business combination, including an
action to change the composition of the Board, a shareholder holding at least
25% of the outstanding voting power, or by such person or persons as may be
authorized by the articles of incorporation or by the bylaws. United's Bylaws
authorize the President, the Board of Directors or a shareholder holding at
least 10% or if the purpose of the meeting is to consider a business
combination, including an action to change the composition of the Board, a
shareholder holding at least 25% of the outstanding voting power, to call a
special meeting of shareholders.
CUMULATIVE VOTING
Under Montana law and Heritage Bylaws, Heritage Shareholders have cumulative
voting rights.
Under Minnesota law, shareholders have cumulative voting rights unless the
rights are denied to them in the corporation's articles of incorporation. United
Articles deny cumulative voting to United Shareholders.
DISSENTERS' RIGHTS
Under both Montana Business Corporation Act (the "MtBCA") and Minnesota
Business Corporation Act (the "MBCA"), dissenting United and Heritage
Shareholders are entitled to certain dissenters' rights. See "The
Merger--Dissenters' Rights" for a detailed explanation of these rights.
DIVIDENDS AND DISTRIBUTIONS
Heritage and United are subject to the policies of federal regulatory
authorities regarding payment of dividends, which generally limit dividends to
operating earnings.
Distributions to shareholders of a Montana as well as a Minnesota
corporation, including redemptions, repurchases and dividends, may not be made
if any such distribution would render the corporation unable to meet its
liabilities in the ordinary course of business or, if as a result of such
distribution, the excess of the corporation's assets over its liabilities would
be less than the liquidation preference of all shares having a preference on
liquidation over the class or series to which the distribution is made.
ANTI-TAKEOVER PROVISIONS
MONTANA. Montana does not have an anti-takeover statute.
MINNESOTA. Section 302A.671 of the MBCA provides that, unless the
acquisition of certain new percentages of voting control of the corporation (in
excess of 20%, 33 1/3% or 50%) by an existing shareholder or other person is
approved by a majority of the shareholders of the corporation other than
81
<PAGE>
the acquirer (if already a shareholder) and officers and directors who are also
employees of the corporation, the shares acquired above such new percentage
level of voting control will not be entitled to voting rights. The corporation
is required to hold a special shareholders' meeting to vote on any such
acquisition within 55 days after the delivery to the corporation by the acquirer
of an information statement describing, among other things, the acquirer and any
plans of the acquirer to liquidate or dissolve the corporation and copies of
definitive financing agreements for any financing of the acquisition not to be
provided by funds of the acquirer. If any acquirer does not submit an
information statement to the corporation within 10 days after acquiring shares
representing a new threshold percentage of voting control of the corporation, or
if the disinterested shareholders vote not to approve such an acquisition, the
corporation may redeem the shares so acquired by the acquirer at their market
value. Section 302A.671 generally does not apply to a cash offer to purchase all
shares of voting stock of the issuing corporation if such offer has been
approved by a majority vote of disinterested board members of the issuing
corporation.
Section 302A.673 of the MBCA restricts certain transactions between the
corporation and a shareholder who becomes the beneficial holder of 10% or more
of the corporation's outstanding voting stock (an "interested shareholder")
unless a majority of the disinterested directors of the corporation have
approved, prior to the date on which the shareholder acquired a 10% interest,
either the business combination transaction suggested by such a shareholder or
the acquisition of shares that made such a shareholder a statutory interested
shareholder. If such prior approval is not obtained, the statute imposes a
four-year prohibition from the interested shareholder's share acquisition date
on mergers, sales of substantial assets, loans, substantial issuances of stock
and various other transactions involving the corporation and the statutory
interested shareholder or its affiliates.
In the event of certain tender offers for stock of the corporation, Section
302A.675 of the MBCA precludes the tender offeror from acquiring additional
shares of stock (including acquisitions pursuant to mergers, consolidations or
statutory share exchanges) within two years following the completion of such an
offer unless the selling shareholders are given the opportunity to sell the
shares on terms that are substantially equivalent to those contained in the
earlier tender offer. The Section does not apply if a committee of the Board
consisting of all of its disinterested directors (excluding present and former
officers of the corporation) approves the subsequent acquisition before shares
are acquired pursuant to the earlier tender offer.
These statutory provisions could also have the effect in certain
circumstances of delaying or preventing a change in control of United.
CHARTER AMENDMENTS
MONTANA. Under the MtBCA, the Board of Directors can establish conditions
for the amendment of the Articles of Incorporation (e.g., super-majority vote,
no more than a given percentage dissent, etc.) The Board of Directors is
required to make a recommendation on the desirability of any amendment (unless a
conflict of interest prohibits them from doing so). The MtBCA provides that
certain significant amendments to articles of incorporation, but not all
amendments, must be approved by the shareholders. Pursuant to Section 35-1-227
of the MtBCA, the vote of shareholders needed to approve an amendment depends in
part on the voting groups entitled to vote separately on the amendment and in
part on whether any of those voting groups would be entitled to dissenters'
rights if the amendment were adopted. Generally, if dissenter's rights would not
arise in connection with the amendment, Section 35-1-528 of the MtBCA provides
that if a quorum exists, action on a matter other than the election of directors
is approved if the votes cast within the voting group favoring the action exceed
the votes cast opposing the action, unless the articles of incorporation or the
MtBCA require a greater number of affirmative votes. If the amendment would give
rise to dissenters' rights under the MtBCA, the amendment must be approved by
the holders of a majority of the outstanding shares of each voting group that
will have dissenters' rights if the amendment were adopted, unless the articles
of incorporation, the board of directors or the MtBCA specifies a greater quorum
or voting requirement for a voting group to approve an amendment of any type.
82
<PAGE>
MINNESOTA. Under Minnesota law, a resolution approved by the affirmative
vote of a majority of the directors, or proposed by shareholders holding three
percent or more of the voting power of the shares entitled to vote, that sets
forth the proposed amendment must be submitted to a vote at the next regular or
special meeting of the shareholders of which notice has not yet been given but
still can be timely given. Any number of amendments may be submitted to the
shareholders and voted upon at one meeting, but the same or substantially the
same amendment proposed by a shareholder need not be submitted to the
shareholders or be voted upon at more than one meeting during a 15-month period.
The resolution may amend the articles in their entirety to restate and supersede
the original articles and all amendments to them. However, to the extent that
Minnesota law is in conflict with the federal securities laws or rules
promulgated thereunder, the federal securities laws or rules promulgated
thereunder shall govern.
Written notice of the shareholders' meeting setting forth the substance of
the proposed amendment shall be given to each shareholder entitled to vote.
The proposed amendment is adopted when approved by the affirmative vote of
the shareholders of the greater of (1) a majority of the voting power of the
shares present and entitled to vote on the amendment or (2) a majority of the
voting power of the minimum number of shares entitled to vote that would
constitute a quorum for the transaction of business at the meeting.
If the articles provide for a larger proportion or number to transact a
specified type of business at a meeting, the affirmative vote of that larger
proportion or number is necessary to amend the articles to decrease the
proportion or number necessary to transact the business.
LEGAL MATTERS
The validity of the United Common Stock to be issued to the Heritage
Shareholders in connection with the Merger will be passed upon for United by
Dorsey & Whitney LLP, in Minneapolis, Minnesota, and Great Falls, Montana.
Certain matters in connection with the Merger and this Joint Proxy Statement, as
well as federal income tax consequences in connection with this Merger, will
also be passed upon by Dorsey & Whitney LLP.
EXPERTS
The consolidated financial statements of Heritage Bancorporation and
subsidiary as of December 31, 1994 and 1995 and for each of the years then ended
have been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Heritage Bancorporation and
subsidiary as of December 31, 1996 and for the year then ended have been
included herein and in the Registration Statement in reliance upon the report of
Douglas Wilson & Company, PC, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of United Financial Corp. and
subsidiaries as of December 31, 1996 and 1995 and for each of years in the
three-year period ended December 31, 1996 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in auditing and accounting. The report
refers to a change in the method of accounting for investment securities.
83
<PAGE>
PROPOSAL TWO
FOR HERITAGE SHAREHOLDERS:
APPROVAL OF DIRECTOR NOMINEES
------------------------
At the time of the Merger, four members of the current United Board will
resign. Following the resignations, the three remaining directors will expand
the number of the United Board to nine by creating two new vacancies. As a
result, each class will consist of three directors. The remaining directors will
then elect persons to fill the vacancies on the United Board created by the
resignations and the newly created positions. One of the vacancies will be
filled by William L. Madison, a current United Board member, who will resign but
be elected to the vacancy created for the class of directors whose terms expire
in 1998. As part of the Heritage Special Meeting, Heritage Shareholders are
asked to approve the nomination of five members to the United Board. The
election of the Heritage Nominees by the United Board is a pre-condition to the
consummation of the Merger.
The Heritage Board has nominated the persons named below. It is intended
that proxies will be voted for such nominees. Heritage believes that each
nominee named below will be able to serve; but should any such nominee be unable
to serve as a director of United, the persons named in the proxies have advised
that they will vote for the election of such substitute nominee as the Heritage
Board may propose.
<TABLE>
<CAPTION>
FOR TERM
NOMINEE: EXPIRING:
- ----------------------------------------------------------------------------------- -----------
<S> <C>
John M. Morrison................................................................... 2000
Kurt R. Weise...................................................................... 2000
Janice M. Graser................................................................... 2000
Larry D. Albert.................................................................... 1999
Jerome H. Hentges.................................................................. 1999
</TABLE>
Pursuant to the United Articles, the United Board is divided into three
classes of directors, each director serving a three-year term. Each year only
one class of directors is subject to a shareholder vote, and, generally,
one-third of the directors belong to each class. The Heritage Nominees will be
placed among the classes of directors of the United Board as reflected in the
table above.
The names and ages of the nominees and their principal occupations are set
forth below, based upon information furnished to Heritage by each Heritage
Nominee. Also set forth below are the names and principal occupations of those
current United directors who are expected to remain on the United Board after
the Merger.
HERITAGE NOMINEES:
JOHN M. MORRISON, 60, has served as Chairman of Heritage since 1994. He is
the majority Shareholder of Heritage. He is also the Chief Executive Officer and
sole shareholder of Central Bancshares, Inc., the parent company of Central Bank
located in Stillwater, Minnesota, which he founded in 1988. He was the Chairman
and majority shareholder of Bank of Montana System, a bank holding company with
approximately $800 million in assets, prior to its sale to Norwest Corp. He is
currently involved as a shareholder in businesses such as cellular phone
service, fastener manufacturing and precision parts manufacturing.
KURT R. WEISE, 40, has served as director of Heritage since 1995. He is also
Vice President, Treasurer and a Shareholder of Heritage. He also serves as
President of Central Financial Services Inc., a bank consulting firm, and
President of Central Bancshares Inc. He has been involved with the Central Bank
group of companies since they were founded in 1988. He was the Chief Financial
Officer of Bank of
84
<PAGE>
Montana System until its sale to Norwest Corp in 1994. He has over 18 years of
experience in the finance and banking industries.
JANICE M. GRASER, 43, has served as director of Heritage Bank since 1996.
She is also a Shareholder of Heritage. She is Executive Vice President of
Central Bancshares, Inc. and of Central Financial Services Inc. She also serves
as a director of Central Bancshares Inc. She has held various titles in
companies owned or controlled by John M. Morrison since 1986.
LARRY D. ALBERT, 46, has served as President and Chief Executive Officer of
Central Bank since 1996. Before joining Central Bank, he served as President of
AmeriBank, a $150 million in assets community bank located in the
Minneapolis/St. Paul area. He has over 23 years of experience in banking.
JEROME H. HENTGES, 55, is the President of Central Bank--Eden Prairie, and
has been with Central Bank since 1989. Before joining Central Bank, he held
various senior management positions in banks such as Firstar Bank Minnesota and
Metro Bank Bloomington. He has over 30 years of experience in banking in the
Minneapolis/St. Paul area.
CURRENT UNITED DIRECTORS:
BRUCE K. WELDELE, 51, joined United in 1983 as Executive Vice President. He
has served as President and Chief Executive Officer of United since October
1983. Mr. Weldele was first elected to the Board of Directors of United in July
1983 and has served as Chairman of the United Board since United's formation in
1996 and before that of United Bank since January 1984.
WILLIAM L. MADISON, 41, has served as a director of United since 1996. He is
President and owner of Johnson Madison Lumber Co., Inc., a retail building
materials business located in Great Falls, Montana, since 1984.
DR. J. WILLIAM BLOEMENDAAL, 67, has served as a director of United since
1976. He is a full-time physician specializing in orthopaedic surgery. He has
practiced medicine since 1961 and has been associated since 1975 with Great
Falls Orthopaedic Associates, a five-person group actively practicing
orthopaedic surgery. Dr. Bloemendaal currently serves as President of Great
Falls Orthopaedic Associates.
ELLIOTT L. DYBDAL, 66, has served as a director of United since 1980. He has
been employed by Talcott Building Company in Great Falls, Montana, for over 34
years, serving for the last 21 years as its President and Chief Executive
Officer. He also serves as a director of Talcott Building Company.
- ------------------------
VOTE REQUIRED. The afirmative vote of a majority of the shares of Heritage
Common Stock represented at the meeting in person or by proxy is required for
the approval of each nominee.
THE HERITAGE BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF EACH NOMINEE.
85
<PAGE>
INFORMATION REGARDING UNITED
BUSINESS
GENERAL. United is a savings and loan holding company within the meaning of
Section 10 of HOLA. United was formed in 1996 as a Minnesota corporation and
conducts its principal business activities through its bank subsidiary United
Bank, a federally chartered stock savings bank that has been in operation since
1923. The deposits of United Bank are insured by the Federal Deposit Insurance
Corporation FDIC--SAIF. United Bank has one non-bank subsidiary, Community
Service Corporation, that owns and manages real estate held for investment.
United, United Bank, and United Bank's subsidiary are collectively referred to
as the Company. United Bank's Great Falls, Montana headquarters serves its
primary market, the Great Falls metropolitan area. Full service branches are
located in Shelby, Glendive, and Havre, Montana. In 1932, United Bank was the
first Montana building and loan to be accepted for membership in the Federal
Home Loan Bank ("FHLB") System. United Bank converted into a federally chartered
mutual savings and loan in 1951, a federally chartered mutual savings bank in
June 1983, and a federally chartered stock savings bank in September 1986.
United Bank is a member of the FHLB of Seattle, Washington, and is subject to
comprehensive supervision, regulation, and examination by the OTS and the FDIC.
United Bank is also subject to the regulations of the Board of Governors of the
Federal Reserve System.
The Company's principal business is attracting deposits from the general
public through its offices and, using those deposits together with other
available funds, to originate primarily loans secured by residential and
commercial real estate and consumer loans. The Company also invests in
mortgage-backed securities, U.S. Treasury obligations, other U.S. Government
agency obligations and interest-earning deposits.
The Company's financial condition and results of operations are dependent
primarily on net interest income and fee income. Net interest income is the
difference between the interest income earned on loans, mortgage-backed
securities, other investment securities, and interest-earning deposits, less its
cost of funds, consisting of interest paid on deposits and borrowed money. The
Company's financial condition and results of operations are also significantly
influenced by local and national economic conditions, changes in market interest
rates, governmental policies, tax laws and the actions of various regulatory
agencies.
MARKET AREA. The Company's primary market area includes the Great Falls,
Montana metropolitan area, as well as the areas surrounding its offices in
Shelby, Glendive and Havre, Montana. United Bank engages in a very limited
amount of lending outside the State of Montana. Great Falls, the county seat of
Cascade County, is one of the largest cities in Montana. The estimated 1996
Great Falls and Cascade County populations were approximately 58,000 and 81,000,
respectively. The economy of Great Falls and the surrounding area depends
heavily on agricultural and livestock activities for which Great Falls serves as
the retail and commercial center. Two hospitals in Great Falls have recently
merged. This combined medical service serves as a regional medical center
providing open heart surgery and cancer treatment facilities. The merger could
ultimately result in the elimination of approximately 200 jobs. Great Falls also
attracts tourists due to the C.M. Russell Museum and its location en route to
Glacier National Park, the Bob Marshall Wilderness Area in northwestern Montana
and Yellowstone National Park. Also, with its proximity to the Canadian border,
Great Falls benefits from Canadians utilizing its retailing facilities.
Located in Great Falls is an international airport, the Montana Air National
Guard, an F-16 fighter facility and Malmstrom Air Force Base ("MAFB"),
consisting of a Minuteman ICBM missile wing. Implemented in mid-1994 was a
reduction at MAFB consisting of the transfer of eight KC135 tankers. Also, the
Montana Air National Guard mission was reduced in 1994 by three F-16 fighters
and approximately 50 full-time guardsmen. These cut-backs left MAFB in 1995 with
its 200 Minuteman missile silo mission and a KC135 tanker group. The Montana Air
National Guard mission is now comprised of fifteen F-16 fighters, and
approximately 350 full-time and 650 part-time personnel.
86
<PAGE>
In 1995, the Base Closure and Realignment Commission adopted Defense
Department recommendations that resulted in the 1996 transfer of the remaining
MAFB KC135 tanker group to a Florida base. The MAFB mission now consists of its
200 Minuteman missile silo mission, with approximately 3,900 active-duty
military personnel and their 4,700 dependents, 460 appropriated fund civilian
employees, and 820 non-appropriated fund contract civilian and private business
employees. The Base Closure and Realignment Commission also followed Defense
Department recommendations that will enhance MAFB's missile mission. MAFB, by
the end of 1998, will receive upgraded Minuteman III missiles transferred from
other Air Force bases. MAFB will not receive any additional missile personnel
due to a fully staffed missile wing now monitoring and maintaining its existing
200 silos, some of which are empty or contain older Minuteman IIs. There can be
no assurance that future Defense Department cut-backs will not continue to
adversely influence military operations and thus the economy in the Company's
primary market area.
The economies of Shelby, Glendive and Havre, Montana, the locations of the
other United Bank branch offices, are also dependent to a large extent on
agricultural, livestock and railroad activities. The now merged Burlington
Northern and Sante Fe railroad is a significant employer in Shelby, Glendive and
Havre. In addition, Amtrak, which provides passenger service across Montana to
the Havre and Shelby markets, has reduced the number of days of service. Future
Amtrak curtailments of passenger service and/ or reductions in Montana freight
service could have adverse economic consequences for some of United Bank's
market areas. For the past several years there has been decreased activity in
the oil and gas industry, which affects the economies of the Shelby and Glendive
areas. There can be no assurance that the economic conditions of United Bank's
market areas will not have an adverse impact on the Company's future revenues
and earnings.
COMPETITION. United Bank, like other depository institutions, is operating
in a rapidly changing environment and, therefore, faces considerable
competition, both in the attraction of deposits and the making of real estate
and consumer loans. Historically, the most direct competition for deposits has
come from other savings institutions, credit unions and commercial banks. There
are approximately thirty depository institutions, commercial banks, credit
unions and savings institutions with offices in United Bank's market areas.
Nondepository financial service organizations, primarily in the securities and
insurance industries, have also become competitors for retail savings and
investment funds. United Bank's deposit programs compete with money market
mutual funds, government securities and other investment alternatives. Since
passage of the Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA"), the impact of competing brokered funds from "troubled" institutions
has significantly decreased. United Bank competes for deposits by offering a
variety of deposit accounts at interest rates based upon market conditions,
convenient business hours, quality of service and convenient branch locations.
United Bank's competition for real estate loans comes principally from
mortgage bankers, other savings institutions, commercial banks, insurance
companies and other institutional lenders. United Bank competes for loans mainly
through the interest rates and loan fees it charges on its loan programs.
Further, United Bank believes it offers a high degree of professionalism and
quality in the services it provides borrowers. United Bank's competition for
loans varies from time to time, depending upon numerous factors, including the
general availability of funds and credit, economic conditions, current interest
rate levels, volatility in the mortgage markets, and other factors which are not
readily predictable or controllable.
The FIRREA has resulted in the beginning of the consolidation of the
industry, and is reducing the distinctions between the regulatory structures
applicable to savings institutions and commercial banks. Legislation being
proposed in the United States Congress would further consolidate the regulatory
environment for most financial institutions. In many instances, the FIRREA
expressly requires that regulations of the OTS applicable to savings
institutions be comparable to regulations of the Office of Comptroller of the
Currency ("OCC") applicable to national banks. Many of the specific provisions
included in the FIRREA have had little or no direct impact on United Bank
because United Bank already met or exceeded the requirements imposed pursuant to
such provisions. Passed into law in late 1991, the
87
<PAGE>
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), significantly
expanded the scope of operating regulations and regulatory guidelines over
United Bank's operations. The current and potential long-term impact the FDICIA
and future legislation has and will have on the costs of operations and
competitive environment in which United Bank operates, however, is of major
concern to United Bank. See "--Regulation--United Bank."
LENDING ACTIVITIES
GENERAL. One of the Company's primary sources of income is its lending
activities. The Company's interest income from loans receivable as a percentage
of total interest income for the years ending December 31, 1996, 1995 and 1994,
was approximately 40.8%, 39.0% and 39.4%, respectively. The Company's principal
lending activity is the origination of residential loans on existing real
estate, including conventional residential real estate loans (loans which are
neither insured nor partially guaranteed by government agencies) and residential
real estate loans insured by the Federal Housing Administration ("FHA") or
partially guaranteed by the Veterans Administration ("VA").
FIXED VS ADJUSTABLE RATE LENDING. Generally, fixed rate loans are
considered to have a greater interest rate risk than adjustable rate loans.
However, borrowers have learned to take advantage of discounted and below market
adjustable starting rates by making early prepayments and refinancing adjustable
rate loans when the adjustment is not favorable to the borrower. United Bank
does not offer discounted first year or starting rates for adjustable rate
loans. Instead fixed rate loans of varying terms out to 15 years are offered
where the loan half-life approximates seven years. (i.e. 15-year loan with
7-year half-life.)
If and when mortgage loans with longer half-lives than seven to eight years
are to be retained for loan portfolio, United Bank intends to become more
aggressive in providing adjustable rate loan products. Also, as mortgage loan
fixed rates increase, the rate differential between adjustable rates and fixed
rates will make adjustable rates more attractive without the first year rate
discounts which presently result in low yields when adjustable rate loans are
paid off early.
Adjustable rate loans have been available to United Bank's mortgage
customers since 1981, however, all adjustable rate mortgage loans produced in
1995 and 1996 were sold in the secondary market. In 1994, $.3 million of
adjustable rate loans were retained in United Bank's portfolio.
United Bank's policy has been to continue to offer both fixed rate and
adjustable rate mortgage loan products enabling United Bank to provide borrowers
an alternative when fixed rates are rising.
United Bank's mortgage portfolio contained adjustable rate loans at December
31, 1996, 1995 and 1994, totaling $1.8 million, $2.2 million, and $3.2 million,
respectively. The percentage of adjustable rate loans to United Bank's net loans
receivable at the above dates was approximately 5%, 7% and 10%, respectively.
LENDING RISKS. In addition to the aforementioned rate risks, there are
a number of specific risks inherent in both mortgage and consumer lending.
Generally, shorter term loans with payments that pay off the entire principal
balance over the term have less risk than loans with balloon balances at the end
of the payment term. United Bank concentrates on residential lending as home
loans are believed to present the least amount of risk because of their 20% or
more down payments, the sale of loans with terms exceeding 15 years, and the
availability of government or private insurance coverage to protect against
losses on loans with small or no down payments and up to 30 years repayment
terms. Commercial real estate loans have been made where United Bank believed
sizable equity and cash flow positions reduced the risks. Residential
construction loans do require greater expertise and have greater risk; however,
United Bank believes its experienced staff has adequately managed these risks.
Consumer loans usually have more risk than real estate loans and are therefore
underwritten to manage the collateral and payment risks by having shorter
repayment terms, a required down payment and a good credit history.
88
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table shows the composition
of the Company's loans receivable as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single family................. $19,263 52.2% $19,209 60.0% $20,503 62.3%
2-4 units..................... 1,712 4.6 1,302 4.1 1,130 3.4
5 or more units............... 4,497 12.2 3,986 12.4 3,931 11.9
Construction.................. 4,620 12.5 3,373 10.5 2,455 7.5
Commercial real estate........ 3,077 8.4 2,517 7.9 3,193 9.7
------- ----- ------- ----- ------- -----
Total real estate loans..... 33,169 89.9% 30,387 94.9% 31,212 94.8%
Non-mortgage loans:
Consumer:
Home equity loans........... 1,132 3.1% 1,136 3.5% 1,257 3.8%
Recreational vehicle and
auto...................... 1,239 3.3 31 .1 40 .1
Other consumer loans........ 104 .3 199 .6 227 .7
Commercial:
Floor plan.................. 884 2.4 -- -- -- --
Lines of credit and other... 355 1.0 282 .9 197 .6
------- ----- ------- ----- ------- -----
Total non-mortgage loans...... 3,714 10.1% 1,648 5.1% 1,721 5.2%
------- ----- ------- ----- ------- -----
Total loans receivable...... 36,883 100.0% 32,035 100.0% 32,933 100.0%
----- ----- -----
----- ----- -----
Less:
Unearned fees and discounts... 4 8 11
Undisbursed loan funds........ 1,628 1,600 1,335
Reserve for losses............ 75 75 75
------- ------- -------
Net loans receivable........ $35,176 $30,352 $31,512
------- ------- -------
------- ------- -------
</TABLE>
89
<PAGE>
LOAN ACTIVITY. The table below shows the loan activity of the Company
for the years indicated.
<TABLE>
<CAPTION>
FOR YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans originated:
Single family............................................................... $ 16,780 $ 11,422 $ 14,787
2-4 units................................................................... 180 596 --
5 or more units............................................................. 289 125 --
Construction................................................................ 7,103 5,190 7,189
Commercial real estate...................................................... 1,167 45 33
Non-mortgage loans originated................................................. 5,807 1,842 1,997
---------- ---------- ----------
Total loans originated.................................................... 31,326 19,220 24,006
Loans purchased............................................................... -- -- --
---------- ---------- ----------
Total originations and purchases.......................................... 31,326 19,220 24,006
Secondary market loan sales................................................... (11,996) (8,425) (12,632)
Portfolio loan sales.......................................................... (3,031) (2,748) (3,679)
Loan repayments--real estate.................................................. (7,643) (7,029) (10,631)
Loan repayments--non-mortgage................................................. (3,741) (1,916) (1,817)
---------- ---------- ----------
Total sales and repayments................................................ (26,411) (20,118) (28,759)
Other net changes:
Loans in process and discounts.............................................. (24) (262) (122)
Reserve for loan losses..................................................... -- -- --
Real estate owned transfers................................................. (67) -- --
---------- ---------- ----------
Total other net changes................................................... (91) (262) (122)
Net loan activity......................................................... $ 4,824 $ (1,160) $ (4,875)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Total loans originated in 1996 were $31.3 million an increase of $12.1
million, or 63%, from the $19.2 million of loan volume generated in 1995. This
increase was primarily due to a continuing low interest rate environment, an
improved real estate economy in the Great Falls area and the placing of
additional emphasis on the origination and retention for portfolio of
multi-family residential, commercial real estate, non-mortgage commercial and
non-mortgage consumer loans.
RESIDENTIAL (NONCONSTRUCTION) REAL ESTATE LENDING. At December 31,
1996, approximately $25.5 million, or 69%, of the Company's $36.9 million total
loans receivable consisted of loans secured by first liens on single-family and
multi-family residential properties. At that date, nonconstruction mortgage
loans on single-family residences were approximately $19.3 million, or 52%, of
the Company's portfolio. At December 31, 1996, approximately $5.8 million, or
16%, of the Company's total loans receivable consisted of FHA-insured and
VA-guaranteed loans. During 1996, the increased emphasis on multi-family lending
resulted in an approximate $.9 million, or 17%, increase in multi-family
residential loans receivable. This increase in multi-family lending was
primarily due to two 1995 construction loans totaling $1.0 million that received
permanent financing in 1996.
Fifty-four percent, or $16.8 million, of the Company's total loan
originations during 1996 and 59%, or $11.4 million, of total loan originations
during 1995 were secured by single-family dwellings. Of the $12.1 million
increase in total 1996 loan production, approximately $5.1 million, or 42%, was
attributable to nonconstruction residential lending.
SECONDARY MARKET LOAN ORIGINATIONS AND SALES. For the past several
years, the Company's total production of long-term (15 to 30-year maturity)
fixed rate residential loans have been originated
90
<PAGE>
according to prearranged 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. Retaining long-term,
fixed-rate loan production for portfolio in the low market interest rate cycle
of the past few years would expose the Company to declines in market values
should interest rates rise. This origination and sale policy is a component of
the Company's overall "Asset/Liability Management" program. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
United--Asset/Liability Management."
Twelve million dollars, or 38%, of the Company's total $31.3 million 1996
loan production and approximately $8.4 million, or 44%, of the Company's total
$19.2 million 1995 loan production was comprised of long-term fixed-rate
mortgage loans originated for sale to the secondary market. The Company sold
long-term fixed-rate mortgage loans to the secondary market in aggregate amounts
of $11.5 million in 1996 and $8.7 million and $12.7 million during 1995 and
1994, respectively. At December 31, 1996 and 1995, the other assets component of
the Company's "Consolidated Statements of Financial Condition" included $1.2
million and $.7 million respectively of loans contracted for sale to the
secondary market.
PORTFOLIO LOAN SALES. During 1996, 1995 and 1994 the Company sold
portfolio loans in aggregate amounts of $3.0 million, $2.7 million and $3.7
million, respectively. These long-term fixed-rate loans were refinances of
existing portfolio loans or permanent financing of completed construction loans
sold to the secondary market or to Montana State 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.
REAL ESTATE CONSTRUCTION LOANS. In addition to first-lien mortgage
loans, United Bank also provides interim financing for construction of
single-family and multi-unit dwellings and improvement of real estate to be used
for the construction of such dwellings. Construction loans are generally made
for periods of six months, with interest paid at quarterly or six-month
intervals. Such loans may be extended for several months due to adverse weather
conditions or other justifiable delays in construction. United Bank provides
financing primarily for a small number of contractors who have demonstrated an
ability to complete projects and financial responsibility in residential
development and construction and have operated in United Bank's lending area for
a number of years. Approximately 16%, or $1.9 million, of the Company's $12.1
million dollar increase in 1996 loan originations was attributable to real
estate construction loans. United Bank originated approximately $7.1 million,
$5.2 million, and $7.2 million in primarily residential construction loans
during 1996, 1995 and 1994, respectively. As of December 31, 1996, construction
loans outstanding were approximately $4.6 million, or 13%, of the Company's
total loans receivable. Ninety-three percent of construction loans outstanding
at December 31, 1996, were residential properties. Of the $1.6 million of
undisbursed loan funds outstanding at December 31, 1996, virtually all was
attributable to construction loans.
COMMERCIAL REAL ESTATE LOANS. United Bank also engages in commercial
real estate lending. Whenever possible in making such loans, United Bank
participates in the United States Small Business Administration's program for
guaranteed commercial real estate loans. United Bank's loans on commercial 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.
At December 31, 1996 and 1995, commercial real estate loans receivable were
approximately 8% of total loans receivable, and totaled approximately $3.1
million and $2.5 million, respectively. Commercial real estate loans totaling
approximately $1.2 million were originated during 1996, compared to less than
$.1 million in 1995. This increase in commercial real estate loan production was
due primarily to a $.9 million commercial real estate loan for a local medical
office building. United Bank sold 90% of this $.9 million loan to its parent
company. The remaining $.3 million in commercial real estate loan originations
during 1996 represents five loans to local businesses. The FIRREA generally
limits the amount that any federal savings institution can invest in
nonresidential real
91
<PAGE>
estate loans, and the limitation does not have a material impact on United
Bank's commercial lending activities. United Bank is not an agricultural lender
and its portfolio does not contain agricultural loans.
NON-MORTGAGE LOANS. In addition to real estate lending, United Bank
also offers consumer and commercial non-mortgage loans. Prior to 1996, United
Bank's consumer loan portfolio included home equity, home improvement, auto, and
deposit account loans. During 1996, United Bank entered into an agreement with a
local merchant to purchase qualifying recreational vehicle ("RV") loans. United
Bank requires fire, hazard and casualty insurance for loans secured by home
equity and casualty insurance for loans secured by autos and RV units. At
December 31, 1996, consumer non-mortgage loans receivable were approximately
$2.5 million, or less than 7%, of the Company's total loans receivable. United
Bank originated $2.4 million in non-mortgage consumer loans in 1996 of which
$1.4 million, or 58%, was represented by RV loans. Approximately $1.6 million,
or 13% of the Company's $12.1 million increase in 1996 loan originations was
attributable to consumer non-mortgage loans. United Bank makes and retains
consumer loans in its portfolio to better match the maturities of its assets and
liabilities because the term of consumer loans is relatively short (generally 1
to 15 years).
United Bank also offers commercial borrowers lines of credit and fixed rate
commercial loans. At December 31, 1996, the commercial non-mortgage loan
portfolio was approximately $1.2 million, or 3%, of the Company's total loans
receivable. During 1996, United Bank originated approximately $3.4 million in
commercial non-mortgage loans. Approximately 19%, or $2.3 million, of the
Company's $12.1 million increase in loan production was attributable to
non-mortgage commercial loans. In 1996, United Bank entered into a floor plan
line of credit agreement with a local merchant. This loan is secured by the
merchant's new inventory. United Bank pays the manufacturers directly for
inventory and holds the original Manufacturer's Statement of Origin and invoice
on purchases until paid for by the borrower. At December 31, 1996, United Bank
had one floor plan line of credit loan with an outstanding balance of
approximately $.9 million, or 2%, of the Company's total loans receivable.
As of December 31, 1996, United Bank had provided commercial lines of credit
loans to ten borrowers aggregating $1.1 million with a total outstanding balance
at December 31, 1996 of approximately $.3 million. The largest of these ten
loans is an approximate $.5 million secured line of credit that had an
outstanding balance of $.2 million at December 31, 1996. United Bank also
originates a limited number of commercial loans not secured by real estate. At
December 31, 1996, United Bank had one such commercial loan outstanding, with
principal owing of less than $.1 million.
United Bank originates loans through its loan officers, other staff members
and referrals and does not utilize loan brokers or loan consultants. United
Bank's existing customer base generates many of the loans it originates.
On November 4, 1994, the four federal financial institutions regulators
issued inter-agency guidelines to explain changes made in the final rule 12 CFR,
part 564, published June 7, 1994, regarding the use of appraisals for all
federally related transactions. This rule continues the licensing requirements
and requires the use of licensed and/or certified appraisers for real
estate-related financial transactions where the value exceeds $250,000. All
transactions of $1,000,000 or more, nonresidential and residential over 4 units
where the transaction is $250,000 or more and complex residential transactions
of $250,000 or more require a State Certified Appraiser. United Bank requires
independent appraisals and/or evaluations for all real estate loans prior to the
closing of the loan, with all appraisals conducted in accordance with applicable
OTS or FDIC regulations and United Bank's written appraisal policy statement. At
a minimum, appraisals utilized by the Bank must be performed in accordance with
generally accepted appraisal standards as evidenced by the standards promulgated
by the Appraisal Standards Board of the Appraisal Foundation. In addition, as
part of the loan approval process, United Bank's loan officers generally conduct
on-site inspections of properties securing real estate loans which are to be
held in its portfolio.
All loans made by United Bank must be approved by the Officers' Loan
Committee, which consists of certain officers of United Bank. Loans of principal
amounts in excess of $250,000 must also be approved by
92
<PAGE>
the Directors Loan Committee. All members of the Board of Directors are
authorized to serve on the Directors Loan Committee.
Under United Bank's underwriting policies, conventional, owner-occupied,
single-family residential loans can be made up to a 95% loan-to-appraised-value
("LTV") percentage. For these same loans, where the LTV exceeds 80%, United Bank
has the additional requirement of private mortgage insurance. Borrowers
generally may refinance or prepay loans at their option. The terms of United
Bank's conventional real estate loans 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 Bank is required prior to settlement
of residential and commercial real estate loans. Title insurance is also
required on properties securing such loans to protect United Bank against prior
liens on the property or other claims against the title.
Pursuant to OTS loan policy regulations, United Bank has established lending
policies, loan portfolio diversification standards, prudent underwriting
standards, including LTV procedures for the institution's real estate loan
portfolio, and established documentation, approval and reporting requirements so
that compliance with the institution's real estate lending policies can be
monitored. United Bank's Board of Directors reviews real estate lending policies
at least once a year.
The regulatory LTV maximums are as follows:
<TABLE>
<CAPTION>
LOAN TYPE MAXIMUM LTV RATIO
- ------------------------------------------------------------------------- -------------------------
<S> <C>
Raw land................................................................. 65%
Land development......................................................... 75%
Construction:
Commercial, multifamily* and other nonresidential...................... 80%
1-4 family residential................................................. 85%
Improved property...................................................... 85%
</TABLE>
- ------------------------
*Multifamily construction includes condominiums and cooperatives.
The guidelines stress that LTV ratios are only one of a number of credit
factors that must be considered to prudently underwrite a real estate loan.
Exceptions to the general lending policy may be made on a case-by-case basis;
however, each institution is responsible for establishing an internal process
for the review and approval of any loan that does not conform to its lending
standards and maximum LTV ratios. Such exceptions must be supported by written
justification kept in the permanent loan file. These exceptions must also be
reported to the institution's board of directors. The total of all loans that
exceed the regulatory LTV limits is limited to 100% of the institution's total
capital. United Bank has a written loan policy which includes LTV ratios which
are more conservative than the new regulatory ratios. The guidelines have not
had any material effect on the lending posture or procedures of United Bank.
United Bank is also subject to laws and regulations that could impose
liability on lenders and owners for cleanup expenses and other costs resulting
from hazardous waste located on property securing real estate loans made by
United Bank, or on real estate that is owned by United Bank, following a
foreclosure. Recent court decisions have continued to expand the circumstances
under which lenders have been held liable for hazardous wastes. Although United
Bank's lending procedures include measures designed to limit lender liability
for hazardous waste cleanup and other related liability, there can be no
assurance that United Bank will not become subject to such liability in the
future.
Under federal law, the aggregate amount of loans that United 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
93
<PAGE>
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 loans to one borrower limitation to permit savings
associations meeting certain requirements, including capital requirements, to
extend loans to one borrower in additional amounts under certain circumstance
limited essentially to loans to develop or complete residential housing units.
At December 31, 1996, United Bank's LTOB limit was approximately $2.3 million.
The largest aggregate loans outstanding to one borrower at December 31, 1996,
was approximately $1.8 million and represented twelve loans. At December 31,
1996, United Bank was in compliance with the LTOB limitations.
Until 1981, United Bank historically made residential mortgage loans on a
long-term (generally 30-year), fixed-rate basis. In accordance with then
applicable regulations, United Bank's single-family residential mortgage loans
provided for fixed rates of interest and for repayment of principal for up to 30
years. Since 1981, United Bank has also offered 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 the interest rates change,
loan payments, balances or terms may be adjusted. Thru 1994, United Bank's
primary index was the cost of funds for the Twelfth FHLB District. Beginning
February 22, 1995, United Bank's primary indexes are now the 1, 3 and 5-year
constant maturity Treasury indexes. Most of the ARMs currently originated by
United Bank have loan terms of 15 to 20 years with rate adjustments generally
every 1, 3 or 5 years during the term of the loan. Generally, interest rate
adjustments on United Bank's ARMs are now limited to caps of 2% per year and 6%
for the life of the loan. At December 31, 1996, ARMs constituted approximately
$1.8 million, or 5%, of the Company's net loans receivable.
In addition to charging interest on loans, United Bank charges fees for
originating and servicing loans. These fees are for the inspection of property,
payment of invoices during construction and other miscellaneous services. Loan
origination fee income recognition is subject to Financial Accounting Standards
Board (FASB) Statement No. 91. See "United Financial Corp. Audited Consolidated
Financial Statements--Notes to Consolidated Financial Statements--Loan
origination fees."
For those institutions with significant for-portfolio loan production, the
adoption of FASB No. 91 continues to have a major effect upon the reported
amounts of interest on loans, loan origination fees, compensation and other
employee expenses. Its application, however, has no direct effect upon actual
cash flows but, rather, affects only the timing of their recognition as income
and expense.
The average maturity of United Bank's loan portfolio has decreased as
borrowers continue to make principal payments. This decrease in average maturity
is also due to United Bank's policy of selling long-term, fixed-rate loans and
retaining short-term loans in its portfolio. Additionally, with the exception of
the FHA-insured and VA-guaranteed loans it originates, the terms of United
Bank's mortgage loans contain due-on-sale clauses which generally result in a
payoff of the subject loan at the time of sale of the property securing the
loan. Although assumptions of loans containing such clauses are generally not
permitted, United Bank will permit assumption of certain conventional loans,
provided that the assuming party agrees to either a reduction in the term of the
loan being assumed or an increase in the interest rate on the loan, or both.
Because due-on-sale clauses cause acceleration of indebtedness or may result in
assumption of renegotiated loans with reduced terms, the effect of due-on-sale
clauses is a decrease in the average maturity of United Bank's loan portfolio.
Due to changes in loan origination policies and continuing repayment of
loans and loan payoffs, the percentage of long-term, (greater than 15-year
maturity) fixed-rate loans in the Company's portfolio continues to decline. The
following table provides information regarding the maturity of all loans
included in the Company's loan portfolio as of December 31, 1996. 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.
94
<PAGE>
<TABLE>
<CAPTION>
LOAN DUE DATES
AS OF DECEMBER 31, 1996
------------------------------------------------------------------------------------------
1 YR >1 YR >2 YRS >3 YRS >5 YRS >10 YRS
OR THRU THRU THRU THRU THRU >15
LESS 2 YRS 3 YRS 5 YRS 10 YRS 15 YRS YRS TOTAL
--------- ----------- --------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate first--
mortgage loans:
Adjustable rate (all property
types.......................... $ 2 $ 34 $ 6 $ 96 $ 659 $ 479 $ 442 $ 1,718
Fixed rate:
1-4 dwelling units............. 212 91 644 671 4,602 11,904 322 18,446
Other residential and
all nonresidential........... 322 12 814 283 3,312 2,103 -- 6,846
Construction:
Residential.................... 2,649 -- -- -- -- -- -- 2,649
Land development............... 343 -- -- -- -- -- -- 343
Second trust deed................ 2 84 -- 479 651 244 -- 1,460
Non-mortgage loans:
Consumer....................... 364 54 139 455 856 607 -- 2,475
Commercial..................... 1,216 -- 23 -- -- -- -- 1,239
--------- ----- --------- --------- --------- --------- ----- ---------
$ 5,110 $ 275 $ 1,626 $ 1,984 $ 10,080 $ 15,337 $ 764 $ 35,176
--------- ----- --------- --------- --------- --------- ----- ---------
--------- ----- --------- --------- --------- --------- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOANS DUE
AFTER
DECEMBER 31, 1997
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Fixed interest rates.................................................... $ 28,350
Floating or adjustable rates or balloon payments........................ 1,716
-------
$ 30,066
-------
-------
</TABLE>
For additional information regarding loans see "United Financial Corp.
Audited Consolidated Financial Statements--Notes to Consolidated Financial
Statements."
CLASSIFICATION OF ASSETS
GENERAL. When a borrower fails to make a scheduled payment on a loan
and does not cure the delinquency within 15 days, United Bank's policy is to
contact the borrower between the 15th and 45th day of delinquency to establish a
repayment schedule. If a conventional loan is not current, or a realistic
repayment schedule is not being followed by the 90th day of delinquency, United
Bank will 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 guaranteed, leading to
the conclusion that loss of principal and interest would likely not be realized,
then interest income will continue to be accrued.
United Bank, pursuant to Federal regulations, 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. As of December 31, 1996 and 1995, United Bank
had no asset classified as doubtful or loss, and reported
95
<PAGE>
$40,125 of substandard assets. As a percent of total assets, substandard assets
were .04% and .03% at December 31, 1996 and 1995, respectively.
A savings institution is also required to set aside adequate valuation
allowances to the extent that any affiliate possesses assets which pose a risk
to the savings institution. The institution's OTS District Director has the
authority to approve, disapprove or modify any asset classification and amount
established as an allowance pursuant to such classification. In addition, a
savings institution is required to record as liabilities reserves for
off-balance-sheet items, such as letters of credit, when a loss becomes probable
or estimable. Pursuant to federal regulations, United Bank has established
written board-approved valuation and loss reserve policies as well as an
Internal Asset Review Committee. Delinquent loans are reported to the Board of
Directors monthly, and classified assets are reported to the Board of Directors
quarterly.
ASSET QUALITY AND RESERVE FOR LOAN LOSSES
The following schedule details the amounts of the Company's nonperforming
assets consisting of nonaccrual uninsured loans, loans past due over 90 days,
restructured loans and all real estate owned-- held for sale ("REO/HFS") as of
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Principal Balances:
Accruing loans past due over 90 days................................ $ 18 $ 38
Non-accrual uninsured loans......................................... -- --
Troubled debt restructurings........................................ -- --
REO/HFS............................................................. 40 40
--- ---
$ 58 $ 78
--- ---
--- ---
As a percent of total assets........................................ .06% .07%
--- ---
--- ---
Interest:
Due on non-accrual loans............................................ -- --
Included in income.................................................. -- --
</TABLE>
At December 31, 1996, 1995 and 1994, total loan loss reserves were $75,179.
Loan loss reserves as a percentage of nonperforming assets at December 31, 1996,
1995 and 1994, were 130%, 96% and 58%, respectively. Loan loss reserves as a
percentage of all uninsured loans and REO/HFS at December 31, 1996, 1995 and
1994 were approximately .25%, .32% and .33%, respectively.
United Bank's operating years ending December 31, 1996 and 1995 began and
ended with a loan loss reserve of $75,179. During this two-year period, there
were no loan charge-offs, recoveries, or additions to the loan loss reserve. At
December 31, 1996 and 1995, the $75,179 loan loss reserve was a general reserve
allocated to United Bank's loan portfolio as a whole, rather than to specific
categories. The reason for this general loss allocation was the very low balance
of nonperforming loans and delinquencies with the loan portfolio comprised
primarily of secured residential mortgage loans.
United has recently embarked on a growth-oriented expansion strategy and
expect the results of this strategy to be a growth in loans and assets. This
strategy reflects a transition from a traditional thrift to activities
resembling that of a commercial bank. This business strategy is subject to a
greater degree of risk, including the increased risk of losses on loans.
United's market is concentrated in Montana, increasing its exposure to loan
losses for a deterioration in economic conditions in United's market area. In
addition, United has begun to originate agricultural and commercial loans. In
addition, United has begun purchasing lease financing and commercial and
96
<PAGE>
agricultural loan participations which were originated out of United's market
area. Those loans have differing risks in terms of loan monitoring and higher
exposure due to economic conditions and markets outside of United's traditional
market area.
Montana has experienced a deterioration in consumer credit quality
consistent with those experienced on a national level. The instances of personal
bankruptcies in Montana have doubled in recent years. Based on the average for
all insured commercial banks in the state of Montana, the net loss to average
total loans has increased 300% in 1995 and increased nearly 100% in 1996. The
corresponding average loan loss reserve for commercial banks in Montana at
December 31, 1996 was 1.65% of total loans. United's allowance for loan losses
as a percentage of total loans at September 30, 1997 and December 31, 1996 was
.21%. Nonperforming loans as a percentage of the allowance for loan losses
increased from 23.94% at December 31, 1996 to 113.61% at September 30, 1997.
Given the continuing low level of nonperforming and classified assets and
the sale of a large percentage of new loan production, no loan loss provision
expense was deemed necessary (i.e. both probable and estimable) for the years
ended December 31, 1996, and 1995. During 1996, United Bank originated
approximately $1.2 million of new recreational vehicle (RV) consumer loans.
United Bank believes that nationally the delinquent and loss rates on RV loans
are generally among the lowest for secured consumer non-mortgage lending. In
addition, United Bank maintains high credit underwriting standards for RV loans.
However, the risk of losses for RV loans is greater than historically
experienced for United Bank's portfolio of predominantly secured residential
loans. As a result, it is likely that future loan loss provisions will be
necessary for United Bank's portfolio of RV loans. The initial growth of
United's loan portfolio combined with the apparent deterioration in economic
trends, both on a national and state-wide basis, and apparent deficiency in
United's loan loss reserve coverage compared to state-wide averages, indicate
that additional provisions to the allowance for loan losses should be expected
to be recorded until such factors are mitigated or stabilize.
CHANGING LOAN PORTFOLIO COMPOSITION AND LOAN LOSS PROVISION
POLICIES. United Bank has recently recruited and employed two experienced
agricultural and commercial loan originators. These new employees are
originating agricultural and commercial loans for United Bank's loan portfolio.
In addition, United Bank is purchasing financing lease, commercial and
agricultural loan participations from Heritage Bank. As a result of the
foregoing, together with the existing RV loans, United Bank's loan portfolio
will be exposed in future periods to greater risk than has historically been
experienced with a portfolio comprised primarily of secured residential loans.
United Bank will be adopting Heritage Bank's loan loss reserve methodology and
commercial and agricultural loan expertise with additional loan loss provisions
likely to be incurred by the end of 1997 and in future periods. The provision
for loan losses for the quarter ended December 31, 1997 will be $225,000.
For additional information regarding loss reserve policy see "United
Financial Corp. Audited Consolidated Financial Statements--Notes to Consolidated
Financial Statements--Reserve for possible loan losses."
TROUBLED DEBT RESTRUCTURING. The OTS regulations provide that
institutions may, in certain instances, use FASB No. 5, "Accounting for
Contingencies," and FASB No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructuring." United Bank did not have a loan in this category
at year-end 1996 or 1995.
97
<PAGE>
REAL ESTATE OWNED
The schedule below details real estate owned ("REO") both held for sale and
investment by United Bank as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
REO held for sale.............................. $ 40 $ 40
Allowance for possible losses.................. -- --
REO held for investment........................ 755 792
Accumulated depreciation....................... (370) (341)
--------- ---------
385 451
$ 425 $ 491
--------- ---------
--------- ---------
As a percent of total assets................... .41% .43%
</TABLE>
REO HELD FOR SALE. At December 31, 1996 and 1995, United Bank had a
single REO property classified as held for sale. This $40,125 property consisted
of two Great Falls commercial lots acquired in partial satisfaction of a
judgment and held for over five years.
United Bank believes that sufficient loss allowances have been recognized in
that REO held for sale at December 31, 1996, reflects the lower of (1) fair
value minus estimated cost to sell or (2) cost. For additional information
regarding REO and REO loss reserves, see "United Financial Corp. Audited
Consolidated Financial Statements--Notes to Consolidated Financial
Statements--Real estate owned."
REO HELD FOR INVESTMENT. This category at December 31, 1996, consisted
of two 24-unit apartment complexes located in Glendive, Montana, foreclosed by
United Bank and sold to its subsidiary, the Community Service Corporation
("CSC"). The CSC purchased one apartment complex in 1985 for $480,176, and after
twelve years of depreciation, the December 31, 1996 net book value was $199,160.
The second complex was sold to the CSC in 1990 for $274,475 and after seven
years of depreciation, the December 31, 1996 net book value was $185,435. Real
estate held for investment accounted for approximately 91% of United Bank's real
estate owned at December 31, 1996. The decrease in REO held for investment
between December 31, 1996 and 1995, reflects additional depreciation and the
sale of a $33,168 book value residence to an individual in exchange for cash.
There was a $13,832 gain recognized on the sale.
For additional information regarding real estate held for sale and loss
reserve policy and reserves, see "United Financial Corp. Audited Consolidated
Financial Statements--Notes to Consolidated Financial Statements--Real estate
owned."
SOURCES OF FUNDS. The primary sources of funds are deposits, FHLB
borrowings, loan and mortgage-backed securities repayments, proceeds from loan
sales, investment securities interest payments and maturities, and net operating
revenues. The principal uses of funds are loan originations, mortgage-backed
securities and other investment securities purchases, maturing savings
certificates and deposit withdrawals, repayment of FHLB borrowings, cash
dividends, maintaining liquidity and meeting operating expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of United--Liquidity and Capital Resources," and "United Financial
Corp. Audited Consolidated Financial Statements--Consolidated Statements of Cash
Flows." As demonstrated by the referenced Statements of Cash Flows, $12.6
million of net cash provided by investing activities was utilized to repay $10.5
million of FHLB advances outstanding at the end of 1995, and pay $1.1 million of
cash dividends to shareholders. During 1996, unlike 1995 or 1994, United Bank
experienced deposits as a source, rather than a use of
98
<PAGE>
funds. In addition, during 1996, the mix of investing activities changed with
increased loans originated for, and retained for portfolio in 1996 compared to
1995 or 1994. United Bank's borrowing limit from the FHLB is 25% of assets and
there were no FHLB advances outstanding at December 31, 1996.
DEPOSIT ACTIVITIES. Deposits are attracted from within United Bank'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 Bank considers current market interest rates,
profitability to United Bank, matching deposit and loan products offered by its
competition and its customer preferences and concerns. United Bank reviews its
deposit mix and pricing weekly.
The principal types of deposit accounts offered by United Bank at December
31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVG.
TYPE TERM INTEREST RATE AMOUNT PERCENT
- -------------------------------------------- ----------- --------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NOW Accounts................................ 2.86% $ 6,250 7.94%
MMDA........................................ 3.49% 2,419 3.07%
Savings Deposits............................ 3.56% 29,918 38.02%
Time Deposits............................... 91-Day 4.13% 297 .38%
182-Day 4.99% 7,135 9.07%
1-Year 5.29% 10,425 13.25%
1 1/2-Year 5.11% 32 .04%
2-Year 5.74% 7,831 9.95%
2 1/2-Year 5.88% 1,577 2.00%
4-Year 5.55% 12,248 15.56%
6-Year 4.79% 39 .05%
8-Year 5.99% 526 .67%
--- --------- ---------
5.43% 40,110 50.97%
4.45% $ 78,697 100.00%
--- --------- ---------
--- --------- ---------
</TABLE>
IRA/Keogh retirement account balances, of all types, at December 31, 1996
were approximately $6.0 million or 7.65% of all deposits. At December 31, 1996,
there were no jumbo time deposits (minimum balance of $.1 million).
Early withdrawal from certificate 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.
Traditionally, a relatively small number of United Bank's depositors have
resided outside Montana. Deposits are not solicited outside of Montana. At
December 31, 1996, accounts held by out-of-state depositors were approximately
$3.4 million, or 4% of total deposits.
United Bank experienced a net increase in deposits of $.4 million for the
year ended December 31, 1996, a net decrease in deposits of $10.8 million for
the year ended December 31, 1995, and a net decrease of $6.2 million for the
year ended December 31, 1994. United Bank's 1995 $10.8 million decrease in
deposits and the 1994 $6.2 million decrease in deposits was the direct result of
an improving U.S. economy and an increase in market interest rates. Depositors,
who had "parked" funds in daily savings deposits
99
<PAGE>
during the historical low interest rate cycle, withdrew funds to higher rate
competing alternative investments. In addition, United Bank experienced
increased competition and higher rates offered by some competing financial
institutions. During 1996, market interest rates declined and United Bank, to
stem the outflow of deposits, adopted a more aggressive pricing policy. As a
result, many daily savings depositors elected higher rate United Bank time
deposits rather than withdrawal and total deposits increased $.4 million.
Inasmuch as market demand generally dictates deposit maturities and rates,
United Bank intends to continue to offer those types of accounts that have broad
market appeal. It is United Bank's policy not to accept or place brokered
deposits. See "--Regulation--United Bank."
The following table sets forth the net change in deposits for the periods
shown.
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
No Minimum Term
NOW Accounts............................................... $ 517 $ (111) $ 392
Money Market Demand Accounts............................... (15) (394) (323)
--------- ---------- ---------
502 (505) 69
Savings Deposits............................................. (2,543) (12,373) (5,788)
Fixed-Term
Time Deposits with inital maturities of:
6 months and under....................................... 6 56 (715)
Over 6 months to 18 months............................... 1,943 1,994 146
Over 18 months to 30 months.............................. 887 (120) 86
Over 30 months........................................... 31 333 (604)
Jumbo Certificates*........................................ (420) (180) 600
--------- ---------- ---------
2,447 2,083 (487)
Net Change............................................... $ 406 $ (10,795) $ (6,206)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
- ------------------------
* Minimum $.1 million term 30 days to 1 year.
The following table presents, by various weighted average interest rate
categories, the amounts of United Bank's time deposits at December 31, 1996,
which mature within the periods indicated.
<TABLE>
<CAPTION>
WEIGHTED AVG. WITHIN WITHIN WITHIN
INTEREST RATE 1 YEAR 2 YEARS 3 YEARS THEREAFTER TOTAL
- ---------------------------------------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
3.25 - 4.99%............................ $ 7,432 -- $ 36 $ 3 $ 7,471
5.50 - 5.99%............................ 19,583 $ 5,500 3,073 4,420 32,576
6.00 - 7.99%............................ -- -- -- 63 63
--------- --------- --------- ----------- ---------
Total................................. $ 27,015 $ 5,500 $ 3,109 $ 4,486 $ 40,110
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
100
<PAGE>
The following table presents, by various weighted average interest rate
categories, the amounts of United Bank's time deposits at December 31, 1995,
which mature within the periods indicated.
<TABLE>
<CAPTION>
WEIGHTED AVG. WITHIN WITHIN WITHIN
INTEREST RATE 1 YEAR 2 YEARS 3 YEARS THEREAFTER TOTAL
- ---------------------------------------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
3.25 - 4.99%............................ $ 916 $ 467 -- $ 58 $ 1,441
5.50 - 5.99%............................ 21,287 8,304 $ 1,737 1,780 33,108
6.00 - 7.99%............................ 746 455 464 1,449 3,114
--------- --------- --------- ----------- ---------
Total................................. $ 22,949 $ 9,226 $ 2,201 $ 3,287 $ 37,663
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
For additional information regarding deposits see "United Financial Corp.
Audited Consolidated Financial Statements--Notes to Consolidated Financial
Statements--Deposits."
BORROWINGS. The FHLB of Seattle functions as the central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB of Seattle, United Bank is required to own
capital stock in the FHLB of Seattle, and is authorized to apply for advances on
the security of specified collateral. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. United Bank's currently established available FHLB advance
credit line is 25% of assets. The FHLB of Seattle is required to review its
credit limitations and standards at least annually. Also see
"--Regulation--United Bank."
Historically, United Bank has relied upon deposits, loan repayments and
investment securities cash flows as its major source of funds, and consequently
has made limited use of FHLB advances. At December 31, 1996, no FHLB advances
were outstanding. At December 31, 1995, United Bank had outstanding $10.5
million of overnight and fixed rate FHLB advances. For additional information
regarding borrowings, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of United" and "United Financial Corp.
Audited Consolidated Financial Statements--Notes to Consolidated Financial
Statements--Federal Home Loan Bank Advances".
INVESTMENT ACTIVITIES. The Company's primary source of income is from
mortgage-backed securities and other investment securities. Interest income from
these two sources as a percentage of total interest income for the years ending
December 31, 1996, 1995 and 1994 was approximately 57.1%, 57.6% and 58.4%,
respectively.
Mortgage-backed securities and investment securities income has replaced
loan portfolio income as the Company's primary source of revenue for reasons of
asset liability management. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of United--Asset/Liability
Management" and "United Financial Corp. Audited Consolidated Financial
Statements--Consolidated Statements of Cash Flows--Years Ended December 31,
1996, 1995, and 1994." In addition, mortgage-backed securities were purchased as
they are "qualifying loans" for thrift tax purposes. See "--Taxation" and
"United Financial Corp. Audited Consolidated Financial Statements--Notes to
Consolidated Financial Statements--Income Taxes."
Pursuant to OTS regulatory requirements (including Thrift Bulletin No. 52),
the Company has established an Investment Committee and has developed
comprehensive, Board of Directors' approved, written investment policies
relating to the investment in income producing assets other than loan
originations. The Company's stated investment policy is to purchase only
held-to-maturity or available-for-sale investments and not for trading. The
Company reports monthly to its Board of Directors all investment activity,
including purchases, sales, maturities and book-vs-market-value comparisons. The
Company reports quarterly to its Board of Directors minutes of Investment
Committee meetings, recapping past activities, forecasting expected cash flows,
interest rate projections and investment strategies for the upcoming quarter.
For additional information regarding investment securities, see "United
Financial
101
<PAGE>
Corp. Audited Consolidated Financial Statements--Notes to Consolidated Financial
Statements--Investments" "Investment Securities," "Fair Value of Financial
Instruments" and "Derivative financial instruments."
Federally chartered savings institutions are authorized to invest in various
types of liquid assets, including U.S. Treasuries and securities of various U.S.
Government agencies, certificates of deposit at insured banks and thrift
institutions, bankers' acceptances, federal funds and mortgage-backed
securities. Subject to various restrictions, federally chartered savings
institutions may also invest a portion of their assets in commercial paper,
corporate debt securities and in mutual funds (the assets of which conform to
the investments that such an institution is authorized to make directly). As of
December 31, 1996, the Company had approximately $61.0 million of investments
comprised of $35.8 million, and $25.2 million of securities classified as
held-to-maturity and available-for-sale, respectively.
The following table sets forth the book value, maturities and weighted
average yields of the Company's investment portfolio at December 31, 1996.
Mortgage-backed securities due dates are maturity dates for non-REMIC securities
and expected average lives for REMIC certificates. The Kemper U.S. Government
bond mutual fund yield is based on cost.
<TABLE>
<CAPTION>
MORTGAGE- KEMPER
U.S. TREASURIES/ BACKED U.S. GOV'T BOND
U.S. GOV'T AGENCIES SECURITIES MUTUAL FUND TOTALS
-------------------- -------------------- -------------------- --------------------
BOOK BOOK BOOK BOOK
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 1 yr.................. $ 16,006 5.40% $ 5,811 5.81% $ 5,182 6.36% $ 26,999 5.67%
After 1 yr through 2 yrs........ 6,571 5.59% 885 6.36% -- -- 7,456 5.68%
After 2 yrs through 5 yrs....... 6,026 6.37% 12,653 6.35% -- -- 18,679 6.36%
After 5 yrs through 10 yrs...... -- -- 6,006 6.32% -- -- 6,006 6.32%
After 10 yrs.................... -- -- 1,873 6.92% -- -- 1,873 6.92%
--------- --------- --------- --------- --------- --------- --------- ---------
$ 28,603 5.65% $ 27,228 6.27% $ 5,182 6.36% $ 61,013 5.99%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
SERVICE CORPORATION ACTIVITIES. United has no direct subsidiaries other
than United Bank. United Bank has a wholly-owned service corporation, the
Community Service Corporation, which owns and manages real estate held for
investment. At December 31, 1996, United Bank had an investment of approximately
$385,000 in its service corporation. A federal savings institution's aggregate
outstanding investment to its service corporation cannot exceed 3% of the
institution's assets. United Bank is in compliance with the subsidiary
investment limits.
EMPLOYEES. At December 31, 1996, the Company employed twenty six full-time
employees and six part-time employees. Management considers its relations with
its employees to be excellent. The Company maintains a comprehensive employee
benefit program providing, among other benefits, hospitalization and major
medical insurance, paid sick leave and retirement plans. The Company's employees
are not represented by any collective bargaining group. See "United Financial
Corp. Audited Consolidated Financial Statements--Notes to Consolidated Financial
Statements--Retirement plans" and "Post-retirement benefits".
REGULATION--UNITED
GENERAL. United Financial Corp. is a savings and loan holding company
within the meaning of Section 10 of the Home Owners Loan Act, as amended
("HOLA"). As such, United is subject to OTS examination and supervision as well
as certain reporting requirements. As a SAIF-insured subsidiary of a savings
institution holding company, United Bank is subject to certain restrictions in
dealing with United and with other persons from time to time affiliated with
United Bank which continues to be subject to
102
<PAGE>
examination and supervision by the OTS. In addition, the OTS has enforcement
authority over United and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are deemed to be a risk
to the safety and soundness of the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of United Bank and not for shareholders of United.
As a unitary savings and loan holding company, United generally is not
subject to activity restrictions, provided United Bank satisfies the Qualified
Thrift Lender ("QTL") test described below under "--Regulation--United
Bank--Qualified Thrift Lender Test". If United acquires control of another
savings association as a separate entity, it would become a multiple savings and
loan holding company, and the activities of United and any of its subsidiaries
(other than United Bank or any other SAIF-insured savings association) would
become subject to such restrictions unless such other associations each qualify
as a QTL or were acquired in a supervisory acquisition.
United must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 day's written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interest of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
The common stock of United is registered as a class with the Commission
under the Exchange Act. Thus, United is subject to the periodic reporting
requirements, proxy solicitation requirements and the insider-trading
restrictions of the Exchange Act. The periodic reports, proxy statements, and
other information filed by United can be inspected, copied or obtained from the
Washington D.C. office of the SEC.
United is a "registered company" under Minnesota law and is subject certain
provisions governing mergers, take-overs, business combinations, and other
similar transactions.
TRANSACTIONS WITH AFFILIATES. Section 11 of the HOLA, as amended by
FIRREA, provides that transactions between an insured subsidiary of a holding
company and an affiliate thereof will be subject to the restrictions that apply
to transactions between banks that are members of the Federal Reserve System and
their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act.
Generally, Sections 23A and 23B (i) limit the extend to which the financial
institution or its subsidiaries may engage in "covered transactions" with an
affiliate, as defined, to an amount equal to 10% of such institution's capital
and surplus and an aggregate limit on all such transactions with all affiliates
to an amount equal to 20% of such capital and surplus, and (ii) require that all
transactions with an affiliate, whether or not "covered transactions," be on
terms substantially the same, or at least as favorable to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee or
similar other types of transactions. In addition to the restrictions that apply
to member banks pursuant to Sections 23A and 23B, three other restrictions apply
to savings associations, including those that are part of a holding company
organization. First, savings associations may not make any loan or extension of
credit to an affiliate unless that affiliate is engaged only in activities
permissible for bank holding companies. Second, savings associations may not
purchase or invest in
103
<PAGE>
affiliate securities except those of a subsidiary. Finally, the Director of the
OTS is granted the authority to impose more stringent restrictions when
justifiable for reasons of safety and soundness.
Extensions of credit by United Bank to its executive officers, directors and
principal shareholders are subject to Section 22(h) of the Federal Reserve Act,
which among other things, generally prohibits loans to any such individual where
the aggregate amount exceeds an amount equal to 15% of a bank's unimpaired
capital and surplus, plus an additional 10% of unimpaired capital and surplus in
case of loans that are fully secured by readily marketable collateral. As of
December 31, 1996, United Bank was in compliance with this extension of credit
regulation.
REGULATION--UNITED BANK
GENERAL. United Bank is a federally chartered stock savings bank, the
deposits of which are insured and backed by the full faith and credit of the
United States Government. As a result, United Bank is subject to broad federal
regulation and oversight applicable to all of its operations. United Bank is a
member of the FHLB of Seattle, Washington, and is also subject to certain
limited regulations by the Federal Reserve Board. United Bank is a member of the
SAIF and the deposits of the Bank are insured by the FDIC. As a result, the FDIC
has certain regulatory and examination authority over United Bank.
Some of these regulatory requirements and restrictions are discussed below
and elsewhere.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of United Bank. Accordingly, United Bank is
required to file periodic reports with the OTS and is also subject to periodic
examinations by the OTS and the FDIC. The last regular OTS and FDIC examinations
of United Bank were completed January 1997 and April 1990, respectively. The OTS
and the FDIC have entered into an agreement that provides for joint examinations
by the FDIC with the OTS, unless compelling reasons otherwise are warranted.
Federal examiners can require United Bank to provide higher general or specific
loan loss reserves or write down assets. During its most recent examinations,
United Bank was not required to take any of these actions.
The OTS also has extensive enforcement authority over United Bank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders or removal orders, and to
initiate injunctive actions. Generally, these enforcement actions can be
initiated for violations of laws and regulations and for unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required. In addition, the lending and investment authority of United
Bank is prescribed by such laws and regulations.
In order to fund its operations, the OTS has established a schedule for the
assessment of fees upon all savings associations. This general assessment,
currently paid on a semiannual basis, is levied based upon United Bank's asset
size, including consolidated subsidiaries, as reported in its quarterly Thrift
Financial Report, with "troubled" institutions paying a "premium rate" on the
same asset total, and all other institutions like United Bank paying a "general
rate." United Bank paid "general rate" assessments totaling $33,162 in 1996,
$35,649 in 1995 and $37,544 in 1994.
The 1989 passage of the FIRREA provides for a major restructuring of the
federal regulatory scheme applicable to financial institutions and their holding
companies. The FIRREA abolished the Federal Home Loan Bank Board and the Federal
Savings and Loan Insurance Corporation, with many of the previous regulatory
functions transferred to the OTS. Regulatory functions relating to deposit
insurance and to conservatorships and receiverships of federally insured
financial institutions, including both savings institutions and banks, are
generally exercised by the FDIC. The FIRREA contains provisions affecting
numerous aspects of the operation and regulation of federally insured savings
institutions and empowers the OTS Director and the FDIC to promulgate
regulations implementing the provisions of FIRREA.
104
<PAGE>
The 1991 passage of the FDICIA continues to have far reaching effects on the
management and operation of banks and savings associations, as well as their
relationship with federal regulators. The FDICIA provides for the
recapitalization of the Bank Insurance Fund ("BIF"), but does not contain
financial restructuring provisions that would allow affiliation with securities
and insurance firms or permit commercial firms to own banks, nor does it provide
for a new holding company structure, nor does it authorize nationwide interstate
banking and branching, nor does it restructure or consolidate the bank and
thrift regulatory agencies. The FDICIA authorizes a new era of intensified
regulation with explicit rules replacing the more informal and at times flexible
supervisory policies previously followed by federal regulators. The nexus of the
FDICIA is the continuation of the reregulation of the banking and savings
industry which began with the FIRREA.
The description of the FIRREA, the FDICIA and other federal legislation
rules and regulations as set forth in this document does not purport to be a
complete recital of all laws or their impact on United Bank.
As a creditor and a financial institution, United Bank is subject to various
regulations promulgated by the Federal Reserve Board, including, without
limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves),
Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending) and
Regulation CC (Availability of Funds). As creditors of loans secured by real
property, and as owners of real property, financial institutions, including
United Bank, may be subject to potential liability under various statutes and
regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of the property and
bankruptcy laws.
DEPOSIT INSURANCE AND FDIC REGULATION. United Bank is a member of the
SAIF which is administered by the FDIC. Savings deposits are insured up to the
applicable limits (generally $100,000 pursuant to insured depositor) by the FDIC
and backed by the full faith and credit of the United States Government. The
FDIC is empowered to impose deposit insurance premiums, conduct examinations and
require reporting by United Bank. The FDIC may also prohibit United 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
United Bank, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance of United Bank if it determines that United Bank
has engaged or is engaging in any unsafe or unsound practice, or is in an unsafe
or unsound condition.
The FDIC has been mandated by Congress to reach a level of insurance reserve
amounting to 1.25% of bank and thrift industry deposits. In addition, under the
FDICIA, the FDIC may impose special assessments on its SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC. The FDICIA also is authorized by the FDIC to implement a risk-based
deposit insurance assessment system. To that end a Risk Related Premium System
now assigns each insured institution to 1 of 3 capital groups, and to 1 of 3
supervisory sub-groups. Capital groups are assigned based upon capital ratios:
"well-capitalized," "adequately-capitalized," and "under-capitalized." Within
each capital group, institutions are further divided into sub-groups based upon
their potential "risk" to the insurance fund: "A" healthy, "B" supervisory
concern, "C" substantial supervisory concern. Under the risk-based regulations,
FDIC insurance premiums prior to 1997 ranged from a low of $.23 to a high of
$.31 pursuant to $100 of deposits. See "--Regulatory Capital Requirements."
For the past several years, United Bank's risk-based insurance designation
has been the most favorable, "well-capitalized" and "A" healthy and thus the
Bank has incurred FDIC/SAIF deposit insurance premiums at the lowest available
rate, $.23 pursuant to $100 of deposits. For the past three years, United Bank
has incurred non-special assessment FDIC/SAIF deposit insurance premium expense
as follows: 1996, $170,286; 1995, $199,068; and 1994, $220,780.
Enacted into law in 1996 was legislation providing for a special assessment
against FDIC/SAIF member institutions which capitalized the SAIF insurance
reserve to the prescribed 1.25% of insured deposits level. For United Bank, this
one-time special assessment was $549,700, or 65.7 basis points
105
<PAGE>
pursuant to $100 of United Bank's insured deposit base on March 31, 1995. The
Company's 1996 consolidated financial statements reflect the expense and payment
of this $549,700 special assessment.
Based upon United Bank's 1996 year-end "1A" FDIC risk classification, United
Bank's FDIC/SAIF assessment rate, beginning January 1, 1997 decreased from 23
basis points to 6.48 basis points pursuant to $100 of insured deposits. Most
commercial banks, insured under the FDIC/Bank Insurance Fund (BIF) will,
beginning January 1, 1997, be assessed 1.296 basis points pursuant to $100 of
insured deposits. In addition, 1996 legislation provides for the merger of the
SAIF and BIF insurance funds on January 1, 1999, provided the bank and savings
association charters have been merged by that date.
BROKERED DEPOSITS. United Bank, due to its capital position, is
empowered to, but by policy does not accept, place or solicit brokered deposits.
REGULATORY CAPITAL REQUIREMENTS. The FIRREA established capital
standards for savings institutions, requiring the OTS to promulgate capital
regulations no less stringent than those applicable to national banks. To that
end, the OTS issued regulations resulting in three different minimum capital
requirements, a "tangible capital requirement," a "core capital or leverage
limit requirement" and a "risk-based capital requirement." For further
information on these capital requirements and the extent to which United Bank
substantially exceeds all three requirements, see "United Financial Corp.
Audited Consolidated Financial Statements--Notes to Consolidated Financial
Statements--Regulatory Capital." United Bank, at December 31, 1996, had no
intangible assets, such as purchased mortgage servicing rights or goodwill.
For the risk-based capital component, savings institution assets are
assigned to one of the following four risk-weighted categories based upon the
degree of risk associated: (1) zero percent for cash and securities backed by
the full faith and credit of the U.S. Government and for notes and obligations
of the FSLIC and the FDIC; (2) twenty percent for high-quality, mortgage-backed
securities (typically Federal National Mortgage Association or Federal Home Loan
Mortgage Corporation), all claims on FHLBs, general obligations of state and
local governments and claims on domestic depository institutions; (3) fifty
percent for qualifying single-family, residential mortgage loans, qualifying
multi-family, residential loans and other mortgage-backed securities backed by
qualifying home mortgage loans; and (4) one-hundred percent for all other loans
and investments, including consumer loans, commercial loans, home equity loans,
non-qualifying mortgage loans, residential construction loans, repossessed
assets, real estate loans more than ninety days delinquent, and certain equity
investments.
Long proposed by the OTS, and authorized by the FIRREA, has been an
"interest-rate-risk" ("IRR") component of regulatory capital. This IRR capital
component is expected to become effective in 1997. For further information see
the "Management's Discussion and Analysis of Financial Condition and Results of
Operation of United--Asset/Liability Management--IRR Exposure Measurement." This
IRR capital component will be expressed as the change in net portfolio value-NPV
(i.e. the present value of all expected cash flows from assets less the present
value of all expected cash flows from liabilities) as the result of a
hypothetical 200 basis points instantaneous increase or decrease in interest
rates divided by the present value of an institution's assets. An institution
with a normal level of IRR is defined by the OTS as having a measured IRR of
less than 2%. Only institutions where the measured IRR exceeds 2% will be
required to maintain an IRR capital component.
Based on its current capital position, most recent OTS calculated IRR, and
proposed exemption criteria, United Bank would not have an IRR capital
adjustment.
The 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
106
<PAGE>
Investments in Debt and Equity Securities". United Bank's significant capital
position and the extent to which it already exceeds current minimum capital
requirements leads management to believe United Bank will maintain compliance
with any new capital requirements.
The FDICIA places much greater emphasis on capital as a measure of
performance and establishes a rigid regulatory scheme based almost entirely on
capital levels. Under the FIRREA, failure to meet capital standards can result
in the use of gross restrictions, cease and desist orders, civil monetary
penalties, capital directives to enforce requirements and required written
capital plans. The FDICIA does not eliminate previous enforcement powers, but
severely limits regulators' discretion in the exercise, timing and choice of
regulatory actions. The FDICIA does so by limiting regulators' discretion not to
impose regulatory restrictions that are, in most cases, available under current
law.
The five statutory capital categories established by the FDICIA are: "well
capitalized"--institutions with capital that significantly exceeds the required
minimum level for each relevant capital measurement; "adequately
capitalized"--institutions with capital that meets the required minimum level
for each relevant capital measure; "undercapitalized"--institutions with capital
that fails to meet the required minimum level for any relevant capital measure;
"significantly undercapitalized"--institutions with capital significantly below
the required minimum level for any relevant capital measure; and "critically
undercapitalized"--institutions that fall below a critical capital level set by
the appropriate federal banking agency. United Bank's capital position
substantially exceeds the definition of "well capitalized."
QUALIFIED THRIFT LENDER TEST. The HOLA requires savings institutions to
meet a QTL test. If United Bank maintains an appropriate level of Qualified
Thrift Investments ("QTIs") (primarily residential mortgages and related
investments, including certain mortgage-related securities), it will continue to
enjoy full borrowing privileges from the FHLB of Seattle, Washington. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, Federal National
Mortgage Association, and Federal Home Loan Mortgage Corporation as qualifying
QTIs. Compliance with the QTL test is determined on a monthly basis in nine out
of every 12 months. As of December 31, 1996, United Bank was in compliance with
its QTL requirement with 92% of its assets invested in QTIs.
A savings association that does not meet a QTL test must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
SAFETY AND SOUNDNESS STANDARDS. Prior to the FDICIA, the phrase "unsafe
or unsound practice" was a generic term dependent upon the facts and
circumstances to be established by the appropriate banking regulatory agency.
The FDICIA now requires the federal banking regulatory agencies to prescribe by
regulation explicit standards for safety and soundness, including: (a)
operational and managerial standards; (b) asset quality, earnings and stock
valuation standards; (c) compensation standards for executive officers,
employees, directors, etc.; and (d) any other standards deemed appropriate by
the regulatory agencies. United Bank's management believes that its operations
meet or exceed current safety and soundness regulations.
107
<PAGE>
CONSUMER ISSUES. The FDICIA mandates a number of pro-consumer measures,
including one entitled "The Truth in Savings Act," ("TISA"). The TISA contains
mandatory disclosure requirements for interest-bearing deposit accounts at
insured institutions with the goal of standardizing the types of information
presented in deposit advertisements so consumers can make meaningful comparisons
between competing claims for deposits. United Bank has implemented ongoing TISA
mandates and believes that its operations are in compliance.
The Community Reinvestment Act ("CRA") requires an insured financial
institution to help meet the credit needs of its community, including low- and
moderate-income borrowers and neighborhoods, consistent with the safe and sound
operation of the institution. Regulators are authorized to evaluate and rate the
CRA activities of insured institutions. The FIRREA mandated the CRA to require
public disclosure of the regulators' evaluation and rating of each insured
depository institution. Previously, the public disclosure section of the
regulators' evaluations merely stated the institution's rating and the agencies'
conclusions on each assessment factor and discussed the facts supporting these
conclusions. The FDICIA now adds an additional requirement that regulators
disclose the data used in assessing a depository institution's performance.
During the most recent OTS compliance exam completed in November 1995, the OTS
conducted CRA performance evaluations and United Bank was rated as having had
"an outstanding record of helping to meet the credit needs of its entire local
community in a manner consistent with its resources and capabilities."
LIQUIDITY. All savings associations such as United Bank are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%.
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 of more than one and less than five years and state
agency obligations with a minimum term of 18 months). Short-term liquid assets
currently must constitute at least 1% of United Bank's average daily balance of
net withdrawable deposit accounts and current borrowings. Monetary penalties may
be imposed upon associations for violations of liquidity requirements.
For additional information regarding liquidity requirements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of United--Liquidity and Capital Resources."
FEDERAL HOME LOAN BANK. United Bank is a member of the FHLB of Seattle,
Washington which is 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 areas. Each FHLB is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB system. Each FHLB makes loans (advances) to its members in
accordance with the policies and the procedures established by the FHLB board of
directors. All policies and procedures are subject to the regulation and
oversight of the Federal Housing Finance Board. All advances from the FHLB are
required to be fully secured by sufficient collateral as determined by the FHLB.
Federal law requires the FHLBs to transfer a significant amount of their
reserves and undivided profits to the government agency established to resolve
troubled thrift cases and to contribute to low and moderately priced housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low and moderate income housing projects (Affordable
Housing Program). These requirements have and will continue to adversely affect
the amount of FHLB dividends. These contributions could also have an adverse
effect on the future value of FHLB stock. A loss in value of United Bank's FHLB
stock investment could result in a reduction of United Bank's capital.
108
<PAGE>
United Bank is required to purchase and maintain FHLB stock with minimum
annual requirements of the greater of: 1% of residential mortgage loans, .3% of
total assets, or 5% of FHLB advances outstanding. At December 31, 1996, United
Bank was in compliance with the minimum stock requirement with $379,000 invested
in FHLB stock.
During the fiscal years 1996, 1995 and 1994, United Bank received FHLB stock
dividend income of $31,035, $23,230 and $28,639, respectively. The 1996 dividend
provided United Bank with an annual return of 7.80%, the 1995 dividend annual
return was 6.59%, while the 1994 dividend was 6.84%.
FEDERAL RESERVE SYSTEM. The regulations of the Federal Reserve Board
can require savings institutions to maintain non-interest-earning reserves
against certain of their transaction accounts (primarily deposit accounts that
may be accessed by writing checks) and nonpersonal time deposits with maturities
of less than 18 months. For the calculation period including December 31, 1996
and 1995, United Bank was in compliance, but did not have a non-interest-earning
reserve requirement.
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require the Bank to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
PROPOSED LEGISLATION. Several bills have been introduced in the United
State Congress that would, if adopted, significantly change laws and regulations
applicable to savings and loans and savings and loan holding companies. The
general tenor of this type of legislation is that the OTS will be combined with
the Office of the Comptroller of the Currency as a single agency overseeing the
operations of federal financial institutions and that the savings institution
charter will eventually be eliminated. If such legislation were adopted, federal
savings institutions would become national banks, and savings and loan holding
companies, such as United, would become subject to regulation and oversight by
the Federal Reserve Board as bank holding companies. The permitted activities of
bank holding companies are more limited than the activities of a savings and
loan holding company. In general, a bank holding company may engage, either
directly or through one of its subsidiaries, only in activities that the Federal
Reserve Board concludes are directly related to banking activities. Some
versions of this type of legislation provide that savings and loan holding
company activities would be "grandfathered" and not further restricted by
Federal Reserve Board regulation. If this kind of legislation were adopted, and
savings and loan holding companies became subject to regulation as bank holding
companies and no provision to grandfather savings and loan holding company
activities was included or the date on which such grandfathered activities have
to be commenced predates the date of organization of United, some of the
operating flexibility at the holding company level that the reorganization was
intended to provide would not be available.
For more information regarding legislation see "Management Discussion and
Analysis of Financial Condition and Results of Operations of
United--Legislation."
The full impact that current, proposed and future legislative rules and
regulations will have on United Bank and other financial institutions are not
known at this time and cannot be predicted.
TAXATION
GENERAL. United and United Bank report their income on a calendar year
basis and have elected to file a consolidated federal income tax return. Montana
state statue prevents filing of a consolidated Montana income tax return, and
thus separate returns are filed by United and United Bank. A Tax Sharing
Agreement provides that the United and United Bank"...pay their respective
federal and state taxes as separate corporations on a stand alone basis."
Generally with some exceptions, including United Bank's reserve for bad debts
discussed below, United, United Bank and its subsidiary are subject to federal
income taxes in the same manner as other corporations.
109
<PAGE>
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, United Bank or its subsidiary.
TAX BAD DEBT RESERVES. For taxable years beginning prior to January 1,
1996, savings institutions, such as United 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. United Bank's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interests in real property, including various types of
mortgage-backed securities, may have been computed using an amount based on
United Bank's actual loss experience or a percentage equal to 8% of United
Bank's taxable income, computed with certain modifications and reduced by the
amount of any permitted additions to the nonqualifying reserve. United Bank's
deduction with respect to nonqualifying loans was computed under the experience
method, which essentially allows a deduction based on United Bank's actual loss
experience over a period of several years. Each year United Bank selected the
most favorable way to calculate the deduction attributable to an addition to the
tax bad debt reserve.
Recently enacted 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 can no longer calculate their deduction
for bad debts using the percentage-of-taxable-income method. Instead, savings
associations are required to compute their deduction based on specific
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 requires 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, 1996, United Bank's bad debt reserve for tax
purposes was approximately $3.2 million. At December 31, 1996, there were no
post-1987 reserves.
Under prior law, if United Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, United Bank would be required to deduct bad debts
as they occur and would additionally be required to recapture its bad debt
reserve deductions ratably over a multi-year period. Among other things, the
qualifying thrift definitional tests required United Bank to hold at least 60%
of its assets as "qualifying assets." Qualifying assets generally include cash,
obligations of the United States or any agency or instrumentality thereof,
certain obligations of a state or political subdivision thereof, loans secured
by interests in improved residential real property or by savings accounts,
student loans and property used by United Bank in the conduct of its banking
business. Under current law, a savings association will not be required to
recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying
thrift definitional tests.
CORPORATE ALTERNATIVE MINIMUM TAX. Federal tax law imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which United Bank's
adjusted current earnings exceed its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modification) over $2.0 million
was imposed on corporations, including the Company, whether or not an
alternative minimum tax is paid.
DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS. United may exclude from
its income 100% of dividends received from United Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which United and United Bank will not file a consolidated tax return,
except that if
110
<PAGE>
United of United Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
There have not been any IRS audits of the Company's federal income tax
returns during the past five years.
STATE TAXATION. Under Montana tax law, savings institutions are subject
to a corporation license tax, which incorporates or is substantially similar to
applicable provisions of the Federal Code. The corporation license tax was
imposed on federal taxable income, subject to certain adjustments, at a rate of
6.75% for 1996, 1995 and 1994.
There have not been any Montana Department of Revenue audits of the
Company's state tax returns during the past five years.
For additional information regarding federal and state income taxes, see
"United Financial Corp. Audited Consolidated Financial Statements--Notes to
Consolidated Financial Statements--Income Taxes."
PROPERTIES
On December 31, 1996, the Company owned all of its land, buildings and
improvements having an aggregate cost of $2,520,890, less accumulated
depreciation of $1,303,631, for a net book value of $1,217,259. Office
locations:
<TABLE>
<S> <C> <C>
Home Office
United Financial Corp./United Savings Bank, F.A.
601 1st Avenue North
Great Falls, MT 59401
Shelby Bank Branch Glendive Bank Branch Havre Bank Branch
201 Main Street 123 W. Bell Street 410 3rd Avenue
Shelby, MT 59474 Glendive, MT 59330 Havre, MT 59601
</TABLE>
DATA PROCESSING EQUIPMENT. The Company's data processing is contracted
through an outside service bureau, FISERV of Milwaukee, Wisconsin. The Company
owns only the minimal equipment necessary to process transactions and
communicate with the FISERV service center.
LEGAL PROCEEDINGS
The Company is not involved in any pending material legal proceedings.
MARKET FOR UNITED'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of United is traded in the over-the-counter market and is
listed with the National Association of Securities Dealers Automated Quotation
System ("Nasdaq") National Market System. The trading symbol is UBMT. On June
23, 1997, the last full day of trading before announcement of the proposed
Merger, the closing price per share of United Common Stock was $20.00, and on
January 9, 1998, the closing price per share of United Common Stock was $25.125.
STOCKHOLDERS. As of January 8, 1998, there were approximately 260
shareholders of record, and approximately 1,100 beneficial owners, for a total
estimated 1,360 shareholders.
111
<PAGE>
COMMON STOCK MARKET PRICES. The Company's quarterly (high and low) stock
prices for the past three years are as follows:
<TABLE>
<CAPTION>
UBMT STOCK PRICE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C> <C>
1995 First quarter....................................................... $ 17.25 $ 15.50
Second quarter...................................................... 18.00 16.25
Third quarter....................................................... 18.00 17.00
Fourth quarter...................................................... 18.25 17.00
1996 First quarter....................................................... $ 18.50 $ 17.50
Second quarter...................................................... 18.75 17.75
Third quarter....................................................... 19.25 18.00
Fourth quarter...................................................... 19.75 18.50
1997 First quarter....................................................... $ 19.75 $ 18.75
Second quarter...................................................... 22.25 18.94
Third quarter....................................................... 24.25 21.75
Fourth quarter...................................................... 27.00 23.75
</TABLE>
DIVIDENDS. For a discussion of United's past dividend payments, the
combined entity's future approach to dividend payments and restrictions upon the
combined entity's ability to declare and pay future dividends, see "Market
Prices and Dividend Policy--United's and Heritage's Common Stock Dividend
Payment History."
SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. Except as set forth below,
no person is known to the Company to own beneficially more than 5% of the
outstanding shares of the Company's common stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------------------------------------------------ -------------------- ---------
<S> <C> <C>
Eighteen Seventy Financial Inc.............................. 120,000 9.8%(1)
Two Manhattanville Road
Purchase, NY 10577
</TABLE>
- ------------------------
(1) As reported by Schedule 13D dated August 30, 1996, filed by Eighteen Seventy
Financial Inc. and its parent corporation, Eighteen Seventy Corporation.
SECURITY OWNERSHIP OF MANAGEMENT. The following table sets forth certain
information concerning the directors of the Company. The information includes as
of September 1, 1997, the shares of the Company's Common Stock beneficially
owned by each director, and by all directors and executive officers as a group.
Where beneficial ownership is less than one percent (*), the percentage is not
reflected in the table. Except
112
<PAGE>
as otherwise noted, each beneficial owner listed has sole investment and voting
power with respect to the common stock indicated.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
TERM OF COMMON STOCK
DIRECTOR OFFICE BENEFICIALLY PERCENT
DIRECTOR/AGE SINCE EXPIRES POSITION OWNED OF CLASS
- --------------------------------------------- -------- ------- --------------------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Bruce K. Weldele............................. 1983 1999 Chairman, President, 30,000(1) 2.5%
Age 51 CEO and Director
Dean J. Mart................................. 1988 1999 Senior Vice President- 5,000 *
Age 56 Loan Admin. Director
J. William Bloemendaal....................... 1976 1998 Director 25,750(2)(3) 2.1%
Age 67
Elliott L. Dybdal............................ 1980 1998 Director 18,750(3) 1.5%
Age 66
William L. Madison........................... 1996 1999 Director 100(3) *
Age 41
Rudy Tramelli................................ 1971 2000 Director 100(3) *
Age 69
All directors and executive officers as a
group (10 persons)......................... 98,030 8.0%
</TABLE>
- ------------------------
(1) Includes 5,000 shares held by Bruce K. Weldele in an Individual Retirement
Account.
(2) Includes 4,000 shares held by Dr. Bloemendaal in an Individual Retirement
Account and 10,000 shares held by Great Falls Orthopaedic Associates Profit
Sharing and Pension Plans of which Dr. Bloemendaal is trustee.
(3) Voting and investment power is shared with spouse with whom shares are held
jointly.
113
<PAGE>
MANAGEMENT
The executive officers and directors of United as of September 1, 1997,
together with their ages and business experience, are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Bruce K. Weldele............ 51 Chairman, President, CEO and Director
Dean J. Mart................ 56 Senior Vice President--Loan Admin. and Director
Charles J. Hallingstad...... 47 Vice President--Marketing and Human Resources
Vice President--Branch and Savings Adminstration,
Loyall Kissee............... 55 Secretary and Branch Manager
G. Brent Marvosh............ 50 Vice President--Finance/Treasurer
Michael J. McCleary......... 49 Vice President--Loan Servicing and Operations
J. William Bloemendaal...... 67 Director
Elliott L. Dybdal........... 66 Director
William L. Madison.......... 41 Director
Rudy Tramelli............... 69 Director
</TABLE>
Bruce K. Weldele has held the position of President and Chairman of the
Board of Directors of United Financial Corp. since its inception. Mr. Weldele
joined United Bank in 1983 as Executive Vice President. He has served as United
Bank's President and Chief Executive Officer since October 1983. Mr. Weldele was
first elected to United Bank's Board of Directors in July 1983 and has served as
Chairman of the Board of United since its formation in 1996 and before that
United Bank since January 1984.
DEAN J. MART has held the position of Senior Vice President of United
Financial Corp. since its inception. Mr. Mart joined United Bank in July 1984 as
Senior Vice President. Since that time, he has been responsible for loan
administration. Before joining the Company, he was employed for over 20 years by
Norwest Bank Great Falls, N.A., and served during a period of that time as Vice
President--Commercial Loan Officer. Mr. Mart has been a director of United since
its formation in 1996 and before that a director of United Bank since 1988.
MR. HALLINGSTAD joined United Bank in 1972 and has served in various
capacities since that time. In January 1981 he was named Vice President in
charge of Marketing. Since January 1984, he has served as Vice President in
charge of Marketing and Human Resources.
MR. KISSEE joined United Bank in 1974 and has held various positions since
that time. In March 1980 he was elected Vice President in charge of Branch and
Savings Administration. In 1981, Mr. Kissee was elected Secretary of United and
has served in that capacity since that time. Since February 1986, he has served
as branch Manager of United's branch office in Havre.
MR. MARVOSH, a Certified Public Accountant, joined United in October 1980
and has served United in various capacities since that time. Commencing January
1983, he served as Assistant Controller and in November 1983 was elected
Treasurer/Controller. In October 1985, he was elected Vice President of Finance
in addition to his position as Treasurer.
MR. MCCLEARY joined United in 1977 and has acted in several different
capacities since that time. In January 1981, he became Assistant Vice President
having responsibilities as Treasurer/Controller until January 1983 when he
became Assistant Vice President in charge of Operations. In October 1985, he was
elected Vice President in charge of Operations.
DR. J. WILLIAM BLOEMENDAAL is a full-time physician specializing in
orthopaedic surgery. He has practiced medicine since 1961 and has been
associated since 1975 with Great Falls Orthopaedic Associates, a five-person
group actively practicing orthopaedic surgery. Dr. Bloemendaal currently serves
as President
114
<PAGE>
of Great Falls Orthopaedic Associates. Dr. Bloemendaal has been a director of
United since its formation in 1996 and before that a director of United Bank
since 1976.
ELLIOTT L. DYBDAL has been employed by Talcott Building Company in Great
Falls for over 34 years, serving for the last 21 years as its President and
Chief Executive Officer. He also serves as a director of Talcott Building
Company. Mr. Dybdal has been a director of United since its formation in 1996
and before that a director of United Bank since 1980.
WILLIAM L MADISON has served as President/Owner of Johnson Madison Lumber
Co., Inc., a retail building materials business, since 1984. Mr. Madison has
been a director of United since 1996.
RUDY TRAMELLI is self-employed and engages in real estate management and
development. He has been actively employed in these business activities for over
32 years. Mr. Tramelli has been a director of United since its formation in 1996
and before that a director of United Bank since 1971.
The Board of Directors of United is divided into three classes. The members
of each class are elected to serve three-year terms with the term of each class
ending on successive years. The terms of Messrs. Bloemendaal and Dybdal will
expire at the time of the United Annual Shareholders Meeting to be held in 1998;
the terms of Messrs. Weldele, Mart and Madison will expire at the time of the
United Annual Shareholders Meeting to be held in 1999; and the term of Mr.
Tramelli will expire at the time of the United Annual Shareholders Meeting to be
held in 2000. For a discussion of the expected managment of the combined entity
after the Effective Time, see "The Merger--Consequences of the Merger; Change of
Control."
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows the cash compensation paid by the Company for
services rendered during the past three (3) years ended December 31, 1996, to
its President and Chief Executive Officer. No other executive officer received
total cash compensation during the period exceeding $100,000.
NAME AND PRINCIPAL POSITIONS: Bruce K. Weldele, Chairman of the Board,
President, Chief Executive Officer and Director
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION -----------------------------------
- ------------------------------------------- RESTRICTED OPTIONS LTIP ALL OTHER
YEAR SALARY(1) BONUS OTHER STOCK(2) SARS(2) PAYOUTS COMP.(3)
- --------- ---------- --------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 155,100 -- -- -- -- -- $ 1,900
1995 150,000 -- -- -- -- -- 3,080
1994 144,000 -- -- -- -- -- 3,080
</TABLE>
- ------------------------
(1) Includes earnings reductions contributions made by Bruce K. Weldele to the
Company's 401(k) Plan (or that of United Bank prior to the formation of
United).
(2) Neither the Company nor United Bank maintains any plan pursuant to which it
has granted or issued options, SARs, restricted stock, or other stock based
compensation to executives.
(3) Represents the Company's or United Bank's contributions on behalf of Bruce
K. Weldele to the 401(k) Thrift Retirement Plan.
EXECUTIVE OFFICER SEVERANCE AGREEMENTS. During fiscal year 1993, the Board
of Directors approved change of control severance agreements for each of the
executive officers of the Company and United Bank. The agreements provide for
severance compensation for each of the executive officers in the event any
company or person acquires control of United Bank, as determined in accordance
with applicable federal regulations. Pursuant to his agreement, upon change of
control, Mr. Weldele would be entitled to lump-sum compensation equal to two
times his annual base salary plus any target bonuses, and 24 months
115
<PAGE>
of continued welfare and employee benefits. The agreements with all other
executive officers provide for payment upon a change of control of lump-sum
compensation equal to the annual base salary, plus any target bonuses, and 12
months of continued welfare and employee benefits.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION. The Board of Directors
had furnished the following report on executive compensation:
All directors not employed by the Company annually review salary
recommendations made by the Chief Executive Officer which cover all officers
(other than the Chief Executive Officer). The specific recommendations reflect
the job responsibilities assigned to each officer, the manner in which those
duties have been performed, and the prevailing market conditions relative to
each position.
Compensation of the Chief Executive Officer for 1996 was reviewed by the
directors and increased at approximately the inflation rate.
PENSION PLAN. The Company has a noncontributory defined benefit pension
plan (the "Pension Plan") which is administered by the Financial Institutions
Retirement Fund (the "Fund"). The Fund is a nonprofit, tax-qualified pension
plan and trust through which Federal Home Loan Banks, savings and loan
associations and similar institutions may cooperate in providing for the
retirement of their employees.
After becoming eligible for membership in the Pension Plan, employees who
complete 1,000 hours of service each calendar year will be enrolled as active
members and will be entitled to accrue retirement benefits under the Pension
Plan. The monthly pension amount to be received by an employee under the Pension
Plan upon retirement is based on an employee's benefit service and salary.
Benefit service includes the period of employment as an active member in the
Pension Plan in addition to any previous employment prior to the date the
Company joined the Fund and for which it has purchased credit. Salary for
purposes of the Company's contribution to the Pension Plan includes an
employee's basic annual salary rate as of each January 1, exclusive of any
special payments.
Whether an employee has a vested right to receive retirement benefits under
the Pension Plan depends upon the employee's age and years of vesting service.
Vesting service includes the period of time beginning from the first day of the
month in which an employee was hired and the last day of the month in which the
employee terminates his or her employment. Vesting service specifically excludes
service performed after an employee has attained the age of 65 and does not
include any period of employment that precedes the earliest date that the
Company provided the employee with credit under any pension plan. An active
member employee who has performed 5 years of vesting service, is fully vested
and is entitled to receive 100% of his retirement benefits under the Pension
Plan upon attaining the age of 65, whether or not such employee has terminated
employment with the Company prior to attaining the age of 65. Any employee who
has completed fewer than 5 years of vesting service will not be eligible to
receive retirement benefits if such employee terminates service with the Company
prior to becoming fully vested.
Retirement benefits under the Pension Plan will be paid when an employee
entitled to such benefits attains the normal retirement age of 65. In certain
circumstances, some individuals may be entitled to receive early retirement
benefits upon attaining the age of 45, although such benefits will be reduced on
the basis of an early retirement factor that is applied to the full amount the
employee would be entitled to receive at the normal retirement age of 65.
The following table sets forth, in straight life annuity amounts, the
estimated benefits payable upon retirement to active member participants in the
Pension Plan. The estimated annual benefits set forth in the table do not
reflect, however, refunds of contributions that members made and elected to
receive while the Company participated on a contributory basis. Salary is
calculated on the basis of the employee's average salary in the five highest
consecutive years of compensation; provided, however, if an employee has fewer
than five years of service at the time of his retirement, salary is based on the
employee's previous
116
<PAGE>
year's salary and, assuming salaries increase at 5% per annum, the estimated
pension benefits are approximately 15% lower than those reflected in the table
based on the 5-year highest salary average.
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------
SALARY 15 20 25 30 35
- ---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
$ 30,000 $ 10,125 $ 13,500 $ 16,875 $ 20,250 $ 23,625
40,000 13,500 18,000 22,500 27,000 31,500
50,000 16,875 22,500 28,125 33,750 39,375
60,000 20,250 27,000 33,750 40,500 47,250
70,000 23,625 31,500 39,375 47,250 55,125
80,000 27,000 36,000 45,000 54,000 63,000
90,000 30,375 40,500 50,625 60,750 70,875
100,000 33,750 45,000 56,250 67,500 78,750
110,000 37,125 49,500 61,875 74,250 86,625
120,000 40,500 54,000 67,500 81,000 94,500
130,000 43,875 58,500 73,125 87,750 102,375
</TABLE>
During the fiscal year ended December 31, 1996, no funds were paid or
distributed pursuant to the Pension Plan to Mr. Weldele, the most highly
compensated executive officer named above. At December 31, 1996, Mr. Weldele had
twelve years of credited service under the Pension Plan and his defined
compensation for purposes of the Pension Plan as of December 31, 1996, was
$127,800.
SECTION 401(K) PLAN. The Company has an employees' savings plan under
Section 401(k) of the Internal Revenue Code (the Code). The Company allows
eligible employees to contribute up to 15% of their monthly wages. Subject to
Code limitation, the Company matches an amount equal to 50% of the employee's
contribution, up to 6% of total wages. Participants are at all times fully
vested in their contributions and are immediately vested in the Company's
contributions.
For further information, see "United Financial Corp. Audited Consolidated
Financial Statements-- Notes to Consolidated Financial Statements--Retirement
Plans."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
United is a holding company for United Bank. United Bank is a federally
chartered savings bank. The Company makes mortgage and consumer loans to its
directors, officers and employees in accordance with regulations promulgated by
the OTS and other applicable statutes and regulations. These loans are currently
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with nonaffiliated persons and, in the judgment of
management, do not involve more than the normal risk of collectibility or
present other unfavorable features.
117
<PAGE>
UNITED SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data
concerning United. The selected financial data as of December 31, 1996 and 1995
and for each of the three years ended December 31, 1996 have been derived from
the audited consolidated financial statements of United, included herein. The
selected financial data as of December 31, 1994, 1993 and 1992, and for each of
the years ended December 31, 1993 and 1992 have been derived from the audited
consolidated financial statements of United, which are not included herein. The
financial data as of and for the nine months ended September 30, 1997 and 1996
have been derived from United's unaudited financial statements, included herein.
The unaudited financial statements reflect, in the opinion of management, all
adjustments of a normal recurring nature necessary for a fair presentation of
financial condition and results of operations. The results for the nine months
ended September 30, 1997 are not necessarily indicative of the results to be
expected for the entire year. This information should be read in conjunction
with the consolidated financial statements of United, appearing elsewhere in
this Joint Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest Income.......................... $ 5,560 $ 5,402 $ 7,253 $ 7,394 $ 7,926 $ 8,253 $ 8,318
Interest expense......................... 2,652 2,674 3,565 3,420 3,616 4,046 4,678
--------- --------- --------- --------- --------- --------- ---------
Net interest income...................... 2,908 2,728 3,688 3,974 4,310 4,207 3,640
Provision for loan losses................ -- -- -- -- -- -- 27
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan losses............................ 2,908 2,728 3,688 3,974 4,310 4,207 3,613
Non-interest income...................... 482 643 835 595 772 1,045 903
Non-interest expense..................... 1,565 2,179 2,771 2,133 2,085 2,091 2,010
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes............... 1,825 1,192 1,752 2,436 2,997 3,161 2,506
Provision for income taxes............... 685 440 649 714 1,111 1,189 926
--------- --------- --------- --------- --------- --------- ---------
Net income............................... $ 1,140 $ 752 $ 1,103 $ 1,722 $ 1,886 $ 1,972 $ 1,580
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PER SHARE DATA:
Net income per share..................... $ .93 $ .62 $ .90 $ 1.41 $ 1.54 $ 1.61 $ 1.29
Dividends per share...................... .72 .66 .89 .81 .73 .65 .57
Book value per share(1).................. 20.24 19.88 19.96 20.18 18.43 18.52 17.65
Tangible book value per share(1)......... 20.24 19.88 19.96 20.18 18.43 18.52 17.65
Average common shares outstanding........ 1,223 1,223 1,223 1,223 1,223 1,223 1,223
FINANCIAL CONDITION DATA:
Assets................................... $ 103,082 $ 107,945 $ 103,837 $ 114,440 $ 112,506 $ 119,041 $ 116,598
Net loans................................ 34,160 33,585 35,176 30,352 31,512 36,388 43,211
Investment securities.................... 58,649 68,419 61,013 78,378 74,843 71,971 67,054
Deposits................................. 72,111 78,292 78,697 78,291 89,086 95,292 94,051
Long-term debt........................... -- -- -- -- -- -- --
Stockholders' equity..................... 24,757 24,320 24,416 24,688 22,548 22,655 21,589
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets................. 1.44% .94% 1.03% 1.62% 1.58% 1.64% 1.43%
Return on average stockholders' equity... 6.20% 4.08% 4.50% 7.21% 8.16% 8.89% 7.45%
Net interest margin...................... 3.81% 3.54% 3.59% 3.83% 3.72% 3.62% 3.46%
Efficiency ratio(2)...................... 46.17% 48.32% 49.10% 46.68% 41.03% 39.81% 44.24%
Net charge-offs to average loans......... -- -- -- -- -- -- --
Nonperforming loans to total loss........ .24% -- .06% .12% .27% .11% .13%
Allowance for loan losses to total
loans.................................. .21% .23% .21% .24% .24% .21% .18%
Nonperforming loans to allowance for loan
losses................................. 113.61% .42% 23.94% 50.53% 119.68% 58.67% 72.66%
Stockholders' equity to assets(1)........ 24.02% 22.53% 23.51% 21.57% 20.04% 19.03% 18.52%
</TABLE>
- ------------------------------
(1) At period end.
(2) Excludes September 1996 pre-tax charge for SAIF assessment of $550,000.
118
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF UNITED
MATERIAL CHANGES IN FINANCIAL CONDITION
COMPARISON OF THE NINE-MONTH PERIOD FROM DECEMBER 31, 1996, TO SEPTEMBER 30,
1997
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION RECAP
--------------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996 CHANGE
------------- ------------ ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED, EXCEPT DECEMBER 31, 1996)
<S> <C> <C> <C>
Total assets......................................... $ 103,082 $ 103,837 $ (755)
Cash and cash equivalents............................ 5,743 2,934 2,809
Investments (held-to-maturity)....................... 32,300 35,828 (3,528)
Investments (available-for-sale)..................... 26,349 25,185 1,164
Loans receivable, net................................ 34,160 35,176 (1,016)
Real estate owned.................................... 357 425 (68)
FHLB stock........................................... 524 379 145
All other assets..................................... 3,649 3,910 (261)
Deposits............................................. 72,111 78,697 (6,586)
FHLB advances........................................ 5,000 -- 5,000
All other liabilities................................ 1,214 724 490
Total liabilities.................................... 78,325 79,421 (1,096)
Stockholders' equity, net............................ 24,757 24,416 341
</TABLE>
GENERAL. Assets decreased $.8 million, or less than 1%, to $103.1
million. A $5.0 million FHLB advance due in mid-October 1997 was incurred with
the proceeds utilized to purchase investment securities. In addition, deposits
decreased $6.6 million, or 8.4%, to $72.1 million.
INVESTMENTS. During the first nine months of 1997, securities
held-to-maturity (HTM) decreased $3.5 million, or 9.8%, to $32.3 million. HTM
securities totalling $17.4 million were purchased, proceeds from called and
matured HTM securities were $14.9 million, and $6.0 million of mortgage-backed
securities principal payments were received. The majority of the HTM purchases
were medium-term five-seven year maturity, callable FHLB notes.
Available-for-sale (AFS) investment securities increased $1.2 million, or 4.6%,
to $26.3 million. Purchases of AFS securities were $4.0 million, while proceeds
from matured and called AFS securities were $3.0 million. In addition, due to
lower market interest rates the AFS unrealized loss adjustment improved $.2
million. The AFS securities purchased were 3 1/2 to 4 year maturity, callable
FHLB notes.
LOANS RECEIVABLE. For the nine months ended September 30, 1997, net
loans receivable decreased $1.0 million, or 2.9%, as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Loans originated for portfolio.............................................. $ 12.0 million
Sales of portfolio loans.................................................... (1.9) million
Payments and payoffs........................................................ (10.9) million
Other changes............................................................... (.2) million
----------------
Net decrease.......................................................... $ (1.0) million
----------------
----------------
</TABLE>
During the nine months ended September 30, 1997, $8.0 million of loans were
originated for sale and $8.4 million of loans were sold to the secondary market.
119
<PAGE>
Loans receivable at the dates indicated consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1997 1996 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED, EXCEPT DECEMBER 31,
1996)
<S> <C> <C> <C>
Conventional:
1-4 family residential units........................... $ 15,717 $ 14,389 $ 15,445
5 or more family residential units..................... 5,729 4,607 4,497
Construction........................................... 4,559 5,492 4,620
Commercial and other................................... 2,766 2,289 3,077
FHA insured or VA guaranteed loans....................... 4,783 5,875 5,530
Home equity loans........................................ 706 1,211 1,132
Loans to depositors, savings secured..................... 66 184 92
Recreational vehicle and auto loans...................... 972 1,253 1,239
Other non-mortgage loans................................. 833 872 1,251
--------- --------- ------------
36,131 36,172 36,883
Less:
Discounts on loans..................................... 3 5 4
Reserve for possible loan losses....................... 75 75 75
Loans in process....................................... 1,893 2,507 1,628
--------- --------- ------------
$ 34,160 $ 33,585 $ 35,176
--------- --------- ------------
--------- --------- ------------
</TABLE>
REAL ESTATE OWNED. The $68,000, or 16.0%, decrease was due to
additional depreciation for properties held for investment and the sale at no
loss of a $40,100 held-for-sale Great Falls commercial lot. At September 30,
1997 real estate owned was comprised of two 24-unit apartment complexes in
Glendive, Montana, owned as depreciating investments by United Bank's
wholly-owned subsidiary.
FHLB STOCK. FHLB stock increased $145,000, or 38.3%, to $524,000. In
addition to $27,000 in dividends, an additional $118,000 stock purchase was
required by the FHLB due to the increase in United Bank's loans during 1996.
ALL OTHER ASSETS. This combined category decreased $.3 million, or
6.7%, to $3.6 million. Loans receivable contracted for sale to the secondary
market decreased $.4 million from $1.2 million to $.8 million.
DEPOSITS. Deposits decreased $6.6 million, or 8.4%, to $72.1 million.
United Bank's average cost of deposits for the first nine months of 1997 was
4.42%, compared to an average cost of 4.41% for the same nine months in 1996.
United Bank's cost of deposits was 4.48% at September 30, 1997, 4.45% at
December 31, 1996, and 4.44% at September 30, 1996.
120
<PAGE>
The following table indicates the amounts and maturities of time
certificates of deposit of $100,000 or more outstanding as of September 30,
1997:
<TABLE>
<CAPTION>
AMOUNT
-----------
(DOLLARS IN
THOUSANDS)
MATURITY (UNAUDITED)
- ---------------------------------------------------------------------------------
<S> <C>
3 months or less................................................................. $ 523
>3 months through 6 months....................................................... 864
>6 months through 1 year......................................................... 697
>1 year.......................................................................... 1,662
-----------
$ 3,746
-----------
-----------
</TABLE>
FHLB ADVANCES. At the end of the first quarter of 1997, United Bank
incurred a $5.0 million, 5.90% fixed rate advance due in mid-October 1997.
ALL OTHER LIABILITIES. This combined category totalled $1.2 million on
September 30, 1997, compared to $.7 million at December 31, 1996. The $.5
million, or 67.7%, change was primarily due to increases in both accrued
interest payable and advance payments by borrowers for taxes and insurance.
STOCKHOLDERS' EQUITY. The $341,000, or 1.4%, increase in stockholders'
equity was comprised of $1.1 million of net income, $.9 million of cash
dividends paid, and an approximate $.1 million improvement in the unrealized
loss adjustment for available-for-sale securities. Book value per share was
$20.24 at September 30, 1997, and $19.96 per share at December 31, 1996.
Stockholders' equity ratio (stockholders' equity divided by assets) was 24% at
September 30, 1997, compared to 23.5% at December 31, 1996.
ASSET QUALITY AND LOSS RESERVES. At September 30, 1997 and December 31,
1996, total loan loss reserves were $75,200. The two nine-month periods ending
September 30, 1997 and 1996 began and ended with the general loan loss reserve
of $75,200. During these two nine-month periods there were no loan charge-offs,
recoveries, or additions to the reserve. At September 30, 1997 and December 31,
1996, the $75,200 loan loss reserve was a general reserve allocated to United
Bank's loan portfolio as a whole, rather than to specific categories. The reason
for this general loss allocation was the very low balance of non-performing
loans and delinquencies with the loan portfolio comprised primarily of secured
residential mortgage loans. Non-performing assets consisting of non-accrual
uninsured loans, accruing loans past due over 90 days, restructured loans, other
repossessed assets and real estate owned held-for-sale ("REO/ HFS") were
$136,000 at September 30, 1997 and $57,700 at December 31, 1996. Loan loss
reserves as a percentage of all uninsured loans and REO/HFS were .26% at
September 30, 1997, and .25% at December 31, 1996.
Federal regulations require United Bank to classify its assets as
substandard (distinct possibility that some loss will be sustained), doubtful
(high likelihood of loss), and loss (uncollectible). At September 30, 1997,
United Bank's substandard assets were $50,500 and no asset was classified as
doubtful or loss. At December 31, 1996, United Bank's substandard assets were
$40,100 and no asset was classified as doubtful or loss.
Given the continuing low level of nonperforming and classified assets and
the sale of a large percentage of new loan production, no loss provision expense
was deemed necessary (i.e. both probable and estimable) for the nine months
ended September 30, 1997 and September 30, 1996. In 1996, loans receivable
increased approximately $1.2 million as a result of new recreational vehicle
(RV) consumer loans. During the first nine months of 1997 less than $.2 million
of RV loans were made, and due primarily to payments and pay-offs, the Bank's RV
portfolio at September 30, 1997, was less than $.9 million. United Bank believes
that, nationally, the delinquent and loss rates on RV loans are generally among
the lowest for secured consumer non-mortgage lending. In addition, United Bank
maintains high credit underwriting
121
<PAGE>
standards for RV loans. However, the risk of losses for RV loans is greater than
historically experienced for United Bank's portfolio of predominantly secured
residential loans. As a result, it is likely that future loan loss provisions
will be necessary for United Bank's portfolio of RV loans.
CHANGING LOAN PORTFOLIO COMPOSITION AND LOAN LOSS PROVISION POLICIES.
United Bank has recently recruited and employed two experienced agricultural and
commercial loan originators. These new employees are originating agricultural
and commercial loans for United Bank's loan portfolio. In addition, United Bank
is purchasing lease financing, commercial and agricultural loan participations
from Heritage Bank. As a result of the foregoing, together with the existing RV
loans, United Bank's loan portfolio will be exposed in future periods to greater
risk than has historically been experienced with a portfolio comprised primarily
of secured residential loans. United Bank will be adopting Heritage Bank's loan
loss reserve methodology and commercial and agricultural loan expertise with
additional loan loss provisions likely to be incurred by the end of 1997 and in
future periods. The provision for loan losses for the quarter ended December 31,
1997 will be $225,000.
CHANGES IN FINANCIAL CONDITION DURING 1996
During 1996, total assets decreased $10.6 million, or 9%, to $103.8 million,
investment securities decreased $17.4 million, or 22%, to $61.0 million, loans
receivable increased $4.8 million, or 16%, to $35.2 million, deposits increased
$.4 million, or less than 1%, to $78.7 million, FHLB advances decreased $10.5
million to none outstanding, and stockholders' equity decreased $.3 million, or
1%, to $24.4 million.
The 1996 repayments of FHLB advances, and the net increase in loans
receivable were funded primarily by mortgage-backed securities principal
collections, matured and called investment securities, and sales of investment
securities classified as available-for-sale.
Total 1996 loan production was $31.3 million, a $12.1 million, or 63%,
increase when compared to 1995. Twelve million dollars, or 38%, of the total
1996 loan production was comprised of long-term fixed-rate mortgage loans
originated for sale to the secondary market.
The $.3 million decrease in stockholders' equity was comprised of $1.1
million of net income, less $1.1 million of cash dividends paid to shareholders,
a $.2 million increase in the unrealized loss adjustment for available-for-sale
investment securities, and a $37,000 decrease for capitalized holding company
formation costs. Stockholders' equity at December 31, 1996, was 23.5% of assets,
and book value was $19.96 per share.
The following table summarizes the major components of United's net income
for the three years ended December 31, 1996, as well as the changes which
occurred between the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ---------
AMOUNT CHANGE AMOUNT CHANGE AMOUNT
--------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income............................... $ 7,253 $ (141) $ 7,394 $ (532) $ 7,926
Interest expense.............................. 3,565 145 3,420 (196) 3,616
--------- ----- --------- ----- ---------
Net interest income......................... 3,688 (286) 3,974 (336) 4,310
Noninterest income............................ 835 240 595 (177) 772
Noninterest expense........................... 2,771 638 2,133 48 2,085
--------- ----- --------- ----- ---------
Income before income taxes.................. 1,752 (684) 2,436 (561) 2,997
Provision for income taxes.................... 649 (65) 714 (397) 1,111
--------- ----- --------- ----- ---------
Net income.................................. $ 1,103 $ (619) $ 1,722 $ (164) $ 1,886
--------- ----- --------- ----- ---------
--------- ----- --------- ----- ---------
</TABLE>
122
<PAGE>
RESULTS OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS--COMPARISON OF THE NINE MONTHS
ENDED SEPTEMBER 30, 1997, AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
INCOME RECAP
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1996 CHANGE
--------- --------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Interest income.................................................. $ 5,560 $ 5,402 $ 158
Interest expense................................................. 2,652 2,674 (22)
--------- --------- -----
Net interest income............................................ 2,908 2,728 180
Noninterest income............................................... 482 643 (161)
Noninterest expense.............................................. 1,565 2,179 (614)
--------- --------- -----
Income before income taxes..................................... 1,825 1,192 633
Provision for income taxes....................................... 685 440 245
--------- --------- -----
Net income..................................................... $ 1,140 $ 752 $ 388
--------- --------- -----
--------- --------- -----
</TABLE>
GENERAL. Net income for the first nine months of 1997 was $1,139,700, a
$387,500, or 51.5% improvement compared to $752,200 earned in the same nine
months in 1996. Included in last year's earnings was a $132,400 pre-tax gain on
the sale of an available-for-sale investment and an additional $549,700 of
pre-tax noninterest expense for the one-time FDIC special assessment. Without
the after tax $81,500 net income benefit from the investment sale and the after
tax $338,300 reduction in earnings due to the special assessment, net income for
the first nine months of 1997 was up $130,700, or 13.0%. The primary reason for
this improvement was increased 1997 net interest income. The cash flows from
mortgage-backed securities repayments and an FHLB advance were utilized to fund
higher yielding portfolio loans and investment purchases. In addition,
noninterest expense was lower due primarily to reduced FDIC/SAIF deposit
insurance rates.
United's return on average assets for the first nine months of 1997 was
1.44%, compared to .94% for the same 1996 period. Based on weighted average
shares outstanding, year-to-date 1997 net income was $.93 per share, compared to
$.62 per share for the same 1996 period.
INTEREST INCOME. Compared to the same nine month period in 1996,
average year-to-date 1997 interest-earning assets decreased $1.1 million, or
1.1%. The mix of interest-earning assets changed with loans receivable average
balances increasing $4.0 million, or 13.0%, mortgage-backed securities average
balances declining $9.6 million, or 28.4% and other investments and interest
earning deposits average balances increasing $4.5 million, or 11.7%. The
year-to-date 1997 average yield for all interest-earning assets increased to
7.29%, compared to 7.01% for the same 1996 period. As a result, 1997
year-to-date interest income increased $157,900, or 2.9%.
INTEREST EXPENSE. Compared to the first nine months of 1996,
year-to-date 1997 average deposits decreased $3.3 million, or 4.2%. The average
cost of deposits was 4.42% for the first nine months of 1997, compared to 4.41%
for the same 1996 period. As a result, deposits interest expense declined
$106,400, or 4.1%. The first nine months of 1997 average FHLB advances were $3.5
million, average cost was 5.87%, and borrowing expense was $155,700. For the
same 1996 period, average FHLB advances were $1.6 million, average cost was
5.76%, and borrowing expense was $71,000. The first nine months of 1997 and 1996
cost of all interest-bearing liabilities was 4.49% and 4.44%, respectively.
NET INTEREST INCOME. This category increased $179,700, or 6.6%, for the
reasons cited above. Net interest spread (the difference between the average
yield on interest-earning assets less the average cost of
123
<PAGE>
interest-bearing liabilities) increased to 2.80% for the first nine months of
1997, compared to 2.57% for the same 1996 period. Net interest margin (net
interest income divided by average interest-earning assets) increased to 3.81%
for the first nine months of 1997, compared to 3.54% for the same 1996 period.
The ratio of average interest-earning assets to average interest-bearing
liabilities was 1.29 and 1.28 for the first nine months of 1997 and 1996,
respectively.
NONINTEREST INCOME. Year-to-date 1997 noninterest income was $482,000,
a $161,400, or 25.1%, decrease compared to the same nine month period in 1996.
The primary reason for this decline was the 1996 sale of an available-for-sale
investment which resulted in a pre-tax gain of $132,400. In addition, fees and
discounts income was down $18,300, or 5.6%, FHLB stock dividend income was up
$4,000, or 17.0%, and other income was down $14,700, or 9.1%.
NONINTEREST EXPENSE. This category decreased $613,800, or 28.2%, due
primarily to the third quarter 1996 $549,700 one-time FDIC special assessment.
Absent this special assessment, the first nine months of 1996 noninterest
expense was $1,629,200 compared to $1,565,100 for the same 1997 nine month
period. This $64,100, or 3.9%, improvement was primarily due to a $97,800, or
72.3%, reduction in 1997 FDIC insurance expense as assessment rates dropped from
23 to 6.5 basis points per $100 of insured deposits. In addition, salaries and
employee benefits increased $58,500, or 6.9%, offset by other expenses which
decreased $35,400, or 9.0%.
INCOME TAXES. Income before taxes for the first nine months of 1997 was
$1,825,500 compared to $1,192,400 for the same 1996 period. Income taxes
increased $244,600 from $440,200 in 1996 to $684,800 in 1997. The primary reason
for this change was the additional $547,700 before tax expense and $211,400 tax
reduction for the 1996 FDIC special assessment, and the 1996 $132,400 before tax
income and $50,900 additional taxes for the 1996 investment securities sale.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
GENERAL. Net income for 1996 was $1,103,000, a $619,000, or 36%,
decrease compared to 1995. The primary reasons for this decline were: (1) a
$549,700 FDIC/SAIF deposit insurance special assessment, (2) a $286,000 decline
in net interest income resulting primarily from higher deposit costs and
borrowing expense, and (3) higher other expenses due to approximately $90,000 of
advertising expenditures.
Net interest margin (net interest income divided by average interest-earning
assets) declined 24 basis points to 3.59%. Net interest spread (the difference
between the average yield on interest-earning assets less the average cost of
interest-bearing liabilities) declined 29 basis points to 2.62%. The return on
average assets for 1996 was 1.03% compared to 1.62% for 1995. Based on weighted
average shares outstanding, 1996 net income was $.90 per share, compared to
$1.41 per share for 1995.
INTEREST INCOME. Average 1996 interest-earning assets declined $1.1
million, or 1%, to $102.6 million. Average 1996 loans receivable increased $1.0
million, or 3%, to $31.8 million, and average other interest-earning assets
declined $2.1 million, to $70.8 million. Loans receivable average yields
decreased 4 basis points to 9.29% and overall lower yields on all other
interest-earning assets resulted in a 1996 average yield for all
interest-earning assets of 7.07%, compared to 7.13% in 1995.
INTEREST EXPENSE. Average 1996 deposits decreased $2.5 million, or 3%,
to $78.5 million. The mix of average deposits changed with average lower cost
statement savings decreasing $5.2 million, or 15%, while higher cost/repricing
average time deposits increased $2.5 million, or 7%. The 1996 cost of average
time deposits increased 29 basis points to 5.43%. The 1996 average cost of
deposits rose to 4.43%, compared to 4.22% in 1995. Deposit interest expense in
1996 therefore increased $61,000, or 2%, to $3,473,000.
124
<PAGE>
Primarily due to $10.5 million dollars of FHLB advances outstanding at the
end of 1995, average 1996 borrowings were $1.6 million, a $1.5 million increase
over 1995, resulting in $92,000 of interest expense in 1996, compared to $8,000
in 1995. The 1996 average cost of borrowings was 5.72%, compared to 5.89% in
1995. The 1996 average cost of all interest-bearing liabilities increased to
4.45%, compared to 4.22% in 1995.
NET INTEREST INCOME. This category decreased $286,000, or 7%, to
$3,688,000 for the reasons cited above.
NONINTEREST INCOME. This category increased $240,000, or over 40%, to
$835,000. The primary reason for this increase was $150,000 in gains from 1996
sales of available-for-sale investment securities. In 1996, loan origination fee
and discount income increased $85,000, or 24%, to $443,000. This improvement was
the direct result of increased loan production. During 1996 loans originated for
sale to the secondary market were $12 million, compared to $8.4 million in 1995,
and loans originated for portfolio in 1996 were $19.3 million, compared to $10.8
million in 1995.
NONINTEREST EXPENSE. This category increased $638,000, or 30%, to
$2,771,000. The primary reason for this increase was the 1996 $549,700 FDIC/SAIF
deposit insurance premium previously discussed. The after tax impact of this
special assessment was a $338,300, or a 28 cent per share reduction in 1996 net
income. In 1996, a $16,000 loss on the sale of real estate owned was incurred.
Other expenses increased $103,000, or 25%, to $522,000 due primarily to higher
advertising expense for a media marketing campaign.
PROVISION FOR INCOME TAXES. Income before taxes in 1996 was $1,752,000,
a $684,000, or 28%, reduction from 1995. Total 1996 income taxes were $649,000,
a $65,000, or 9%, decrease compared to 1995. This disproportionate decrease in
1996 taxes, compared to the pre-tax earnings decrease, was due primarily to the
1995 federal statutory bad debt deduction. This 1995 bad debt deduction reduced
1995 federal income taxes by approximately $152,000. For 1996 and 1995, the
Company incurred the 6.75% marginal Montana corporate license tax.
PROVISIONS FOR LOSSES ON LOANS AND ASSET QUALITY. Non-performing assets
consisting of non-accrual uninsured loans, accruing loans past due over 90 days,
restructured loans, and all real estate owned held for sale ("REO/HFS") were
approximately $58,000 at December 31, 1996, and $78,000 at December 31, 1995,
representing .06%, and .07% of total assets, respectively. At December 31, 1996
and 1995, total loss reserves were $75,000. Loss reserves as a percentage of
nonperforming assets at December 31, 1996 and 1995, were 130% and 96%,
respectively. Loss reserves as a percentage of uninsured loans and REO/HFS at
December 31, 1996 and 1995, were .25% and .32%, respectively.
Federal regulations require United Bank to classify its assets as
substandard (distinct possibility that some loss will be sustained), doubtful
(high likelihood of loss), and loss (uncollectible). At December 31, 1996 and
1995, United Bank's substandard assets were approximately $40,000. At the end of
1996 and 1995, no asset was classified as doubtful or loss.
Given the continuing low level of nonperforming and classified assets and
the sale of a large percentage of new loan production, no loan loss provision
expense was deemed necessary (i.e. both probable and estimable) for the years
ended December 31, 1996 and 1995. During 1996, loans receivable increased
approximately $1.2 million as a result of new recreational vehicle consumer
loans. Future loan loss provisions may be necessary for these loans.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
GENERAL. Net income for 1995 was $1,722,000, a decrease of $164,000, or
9% less than 1994. Net income for 1995 was the third best year surpassed only by
1994's second best year, $1,886,000. During 1995, continuing increases in market
interest rates had two major unfavorable results: (1) higher deposit costs
125
<PAGE>
and a net deposit outflow (funded by a decrease in average higher yielding
interest-earning assets), and (2) less loan production resulting in lower loan
origination fees and discount income.
Net interest margin (net interest income divided by average interest-earning
assets) increased 11 basis points to 3.83%. Net interest spread (the difference
between the average yield on interest-earning assets less the average cost of
interest-bearing liabilities) decreased 13 basis points to 2.91%. The 1995
return on average assets was 1.62% compared to 1.58% for 1994. Based on weighted
average shares outstanding, 1995 net income was $1.41 per share, compared to
$1.54 per share for 1994.
INTEREST INCOME. Average 1995 interest-earning assets declined $11.9
million, or 10%, due to the funding of deposit withdrawals. Average 1995 loans
receivable decreased $2.5 million and average investment securities decreased
$9.9 million. While loans receivable average yields decreased 5 basis points to
9.33%, overall higher market interest rates for other interest-earning assets
resulted in a 1995 average yield for all interest-earning assets of 7.13%,
compared to 6.85% in 1994.
INTEREST EXPENSE. Average 1995 deposits decreased $14.0 million, or
15%, compared with 1994, while due to higher interest rates and time deposits
repricing, deposit interest expense declined only $204,000, or 6%. The 1995
average cost of deposits was 4.22%, compared to 3.81% in 1994. Due to $10.5
million of FHLB advances at year-end, average 1995 borrowings were only
$137,000, resulting in $8,000 of interest expense in 1995, compared to none in
1994. The 1995 average cost of borrowings was 5.89%. The average 1995 cost of
all interest-bearing liabilities was 4.22%.
NET INTEREST INCOME. Despite the net $196,000 decrease in interest
expense, the even greater $532,000 decrease in interest income resulted in a
$336,000, or 8%, reduction in net interest income.
NONINTEREST INCOME. This category decreased $177,000, or 23%, to
$595,000, and was the second primary reason for the decline in 1995's earnings.
Due to both higher market interest rates and increased competition for loans,
1995 loan production declined 20% to $19.2 million, resulting in loan
origination fee and discount income declining $171,000, or 32%. In addition, due
primarily to lower average balances, 1995 FHLB stock dividend income was $5,000
lower, offset by a $5,000 net gain from the sale of investment securities.
NONINTEREST EXPENSE. This category increased $48,000, or 2%, to
$2,133,000, and was the net result of a $48,000, or 4%, increase in salaries and
employee benefits, a $17,000, or 7%, increase in net occupancy and equipment
expense (due to a Great Falls office remodel and a data center conversion),
offset by a $22,000, or 10%, reduction in FDIC/SAIF deposit insurance due to a
lower deposit base.
PROVISION FOR INCOME TAXES. Income before taxes was $2,436,000, a
$561,000, or 19%, reduction from 1994. Total 1995 income taxes were $714,000, a
$397,000, or 36%, decrease compared to 1994. This disproportionate decrease in
1995 taxes, compared to the decrease in pre-tax earnings, was due primarily to
United Bank utilizing the federal statutory bad debt deduction to lower the 34%
marginal federal corporate tax rate in 1995, compared to no bad debt deduction
in 1994. United Bank's 1995 bad debt deduction reduced federal taxes by
approximately $152,000. For both 1995 and 1994, the marginal Montana corporate
license tax was 6.75%.
REGULATORY DEVELOPMENTS
As required by the FIRREA, the OTS requires that United Bank maintain
minimum levels of capital under three separate standards (see "United Financial
Corp. Audited Consolidated Financial Statements--Notes to Consolidated Financial
Statements--Regulatory Capital"). At December 31, 1996, United Bank's
stockholders' equity was $15.3 million resulting in a capital ratio of
approximately 16.2%. United Bank, as demonstrated by the referenced footnote, is
in substantial compliance with, and far exceeds, each of the three minimum
regulatory capital requirements. The balance of United Bank's operations are in
compliance with the many other FIRREA provisions, none of which materially
restrict
126
<PAGE>
United Bank's present operational plans. However, FIRREA compliance has resulted
in higher deposit insurance premiums, increased regulatory compliance expense
and reduced FHLB stock dividends.
The regulatory focus on capital as the primary measurement of an
institution's strength was reemphasized by the FDICIA. The FDICIA introduced a
capital framework resulting in the classification of an institution as "well
capitalized," "adequately capitalized," "under capitalized," "significantly
under capitalized," and "critically under capitalized." Other FDICIA provisions
address individual capital components for the risk from changes in interest
rates, concentrations of credit, nontraditional activities, and the capital
impact of fair value adjustments associated with the Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." FDICIA provisions also provide for prompt corrective
supervisory action, as well as mandatory and discretionary supervisory actions
for those institutions failing to meet minimum thresholds. FDICIA provisions
significantly expand the scope of operating regulations and widen the
application of regulatory guidelines over the operations of federally insured
financial institutions. United Bank's FDICIA capital rating exceeds "well
capitalized" and its operations are in compliance with FDICIA provisions, none
of which materially restrict United Bank's present operational plans. However,
FDICIA compliance has increased United Bank's regulatory burden and increased
regulatory compliance expense.
LEGISLATION
Over the past year, regulatory and legislative changes have continued to
have a dramatic effect on United Bank and all other federally regulated
depository institutions. Regulatory agencies have become more aggressive in
their oversight role and have been implementing a "get-tough" approach to
compliance examinations and fair lending law interpretation and enforcement. The
current Administration is focusing on consumer compliance issues, in particular
fair lending, while Congress continues to focus on areas that pose potential
safety and soundness problems. It is doubtful that the complexity of the laws,
regulations and guidelines facing United Bank, and all other federally regulated
depository institutions, will materially abate in the near future. Their impact
on United Bank has become clear. United Bank will continue to be burdened with
regulatory compliance issues that add to United Bank's costs of operations,
while at the same time providing a distinct competitive advantage to
nonregulated competitors.
Enacted into law in 1996 was legislation providing for a special assessment
against FDIC/SAIF member institutions which capitalized the SAIF insurance
reserve to the prescribed 1.25% of insured deposits level. For United Bank, this
one-time special assessment was $549,700, or 65.7 basis points per $100 of
United Bank's insured deposit base on March 31, 1995. The Company's 1996
consolidated financial statements reflect the expense and payment of this
$549,700 special assessment.
Based upon United Bank's 1996 year-end "1A" FDIC risk classification, United
Bank's FDIC/SAIF assessment rate, beginning January 1, 1997, will decrease from
23 basis points to 6.48 basis points per $100 of insured deposits. Most
commercial banks, insured under the FDIC/Bank Insurance Fund (BIF) will,
beginning January 1, 1997, be assessed 1.296 basis points per $100 of insured
deposits. In addition, 1996 legislation provides for the merger of the SAIF and
BIF insurance funds on January 1, 1999, provided the bank and savings
association charters have been merged by that date. The U.S. Treasury Department
is required to present its common insurance fund recommendations to Congress by
March 31, 1997.
What ultimate impact this new legislation, and other potential changes in
federal law regarding interstate banking and branching, Glass-Stegall Act
revisions, the potential merger of federal regulatory agencies, the continued
consolidation of the banking industry, increasing competition from non-regulated
competitors, and other regulatory changes will have on United Bank's operations
cannot be predicted at this time.
127
<PAGE>
ASSET/LIABILITY MANAGEMENT
United Bank'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 Bank'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 Bank's interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. When the amount
of interest-earning assets is less than the amount of interest-bearing
liabilities, the net yield on interest-earning assets is less than the interest
rate spread. Should this difference in amounts become too great, United Bank
could incur a net interest expense despite a positive spread.
One of the primary objectives of United Bank's management over the past
several years has been to restructure United Bank'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 Bank to minimize the
mismatch of asset and liability maturities. For the past several years, United
Bank has maintained the policy of selling all 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 Bank promotes the origination and retention of loans providing for
periodic interest rate adjustments, shorter terms to maturity or balloon
provisions. United Bank also emphasizes investment in adjustable rate or
shorter-term mortgage-backed securities and other interest-earning investments.
Liquidity not utilized for retained loan production has resulted, over the past
several years, in an increase in the relative percentage to total assets of
shorter-term investments versus longer-term loans. In the very low market
interest rate and flat yield curve environment of the past few years, no real
opportunity existed to extend loan portfolio or investment maturity purchases
for a higher yield. Longer term (15 to 30-year) fixed-rate mortgage loan
retention, or greater than 7-year to maturity investment purchases would have
provided only a marginal increase in interest income while exposing United Bank
to significant declines in market values if interest rates rose substantially.
During 1996, United Bank decided to retain selected portfolio loans for higher
earnings by engaging in increased multi-family and commercial estate lending, as
well as increased non-mortgage commercial and consumer lending. Multi-family,
all commercial real estate lending and commercial and consumer non-mortgage
lending is generally shorter-term in nature than single family residential
lending and, although typically fixed rate, bears higher interest rates.
While United Bank believes that its ongoing asset/liability management
strategies have reduced exposure to interest rate risk, future earnings and
stockholders' equity will continue to be influenced by changes in levels of
market interest rates, competition, and other economic factors beyond the
control of United Bank's management. Management believes that its conservative
short-term maturity and adjustable rate investment and loan portfolio policies,
enable United to minimize portfolio market value declines, and maintain
earnings, while providing the liquidity to reprice assets to offset higher
market interest rates and increased deposit costs.
INTEREST RATE EXPOSURE. IRR exposure 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 net portfolio
value ("NPV") caused by changes in market interest rates. The earnings of most
128
<PAGE>
financial institutions are exposed to IRR because typically a larger dollar
amount of liabilities (primarily deposits) reprice faster than do loans,
investments, or other interest-earning assets. Therefore, when interest rates
rise, the cost of deposits reprice and often do so more rapidly than the yield
on interest-earning assets, thereby reducing NII. Typically, a financial
institution's interest-earning assets are of a longer duration or term than its
interest-bearing liabilities, and therefore net portfolio value, i.e. the
present value of all expected cash flows from assets less the present value of
all expected cash flows from liabilities will decline as interest rates rise.
NPV thus provides a leading indicator of future potential changes in both NII
and stockholders' equity.
Given that IRR, is the most important component of United Bank's earnings,
and given OTS mandates (including Thrift Bulletin No. 13), United Bank has
established a formal written Board of Director's approved IRR policy. United
Bank has also established an Asset/Liability Management Committee and an
Investment Committee which meets at least quarterly to review and report in
writing to United Bank's Board of Directors management's efforts to minimize
IRR.
IRR EXPOSURE MEASUREMENT. The most effective method of measuring IRR is via
asset/liability computer simulation. Inputting comprehensive detailed raw data
concerning assets and liabilities, along with a variety of assumptions,
forecasts, and pricing changes, simulation compares the effects of a variety of
interest rate environments on an institution's NII and NPV. While United Bank
has the option of buying, and producing its own asset/liability program, the
problems with such computer models are four fold: (1) high cost, (2) rapid
obsolescence as requirements and data change over time, (3) extremely labor
intensive, and (4) most importantly, the product derived is only as good as the
time available to devote to the assumptions and forecasts inputted. United
Bank's management has determined that the cost versus benefit to be derived from
an in-house model is not worth the manpower and software costs involved. Also
given United Bank's asset size, (less than $500 million) United 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 which provides detailed information about the
balances, interest rates, repricing, and maturity characteristics of United
Bank's financial instruments. By utilizing United Bank's provided Schedule CMR
data, the OTS runs computer simulations ("Net Portfolio Value Model") utilizing
OTS assumptions. Received quarterly is an Interest Rate Risk Exposure Report
detailing United Bank's interest rate sensitivity under various instantaneous
changes in interest rates. This OTS computer simulation report displays first
the present value of United Bank's total assets and net portfolio value with no
change in rates, then displays the changes expected to occur with four
instantaneous 100 basis point increases and four instantaneous 100 basis point
decreases in interest rates.
United Bank's Board of Directors, per OTS requirements, has established the
following maximum percentage changes, or policy limits for NPV:
<TABLE>
<CAPTION>
% CHANGE NET
PORTFOLIO VALUE
-------------------
INSTANTANEOUS BASIS POINT CHANGE IN RATES NPV
- ----------------------------------------- -------------------
<S> <C>
+400 -40%
+300 -30%
+200 -20%
+100 -10%
0 0
-100 -10%
-200 -20%
-300 -30%
-400 -40%
</TABLE>
129
<PAGE>
The following table demonstrates United Bank's December 31, 1996 NPV: Dollar
Amount, Dollar Change, and Percentage Change for the four instantaneous
increases and the four instantaneous decreases in interest rates:
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE--NPV
- ------------------------------------------------------
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
- --------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+400 bp 16,353 -1,981 -11%
+300 bp 17,009 -1,326 -7%
+200 bp 17,639 -695 -4%
+100 bp 18,128 -206 -1%
0 18,334
-100 bp 18,217 -118 -1%
-200 bp 18,140 -194 -1%
-300 bp 18,523 188 +1%
-400 bp 19,153 819 +4%
</TABLE>
The following table demonstrates United Bank's December 31, 1996 Present
Value ("PV") of total assets, NPV Ratio, and Basis Point Change for the four
instantaneous increases and the four instantaneous decreases in interest rates:
<TABLE>
<CAPTION>
$ PV OF TOTAL
CHANGE IN RATES ASSETS NPV RATIO BASIS POINT CHANGE
- --------------- ------------------ ----------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+400 bp 93,890 17.42% -140 bp
+300 bp 94,920 17.92% -90 bp
+200 bp 95,932 18.39% -43 bp
+100 bp 96,814 18.72% -9 bp
0 97,423 18.82%
-100 bp 97,721 18.64% -18 bp
-200 bp 98,080 18.49% -32 bp
-300 bp 98,916 18.73% -9 bp
-400 bp 100,012 19.15% +33 bp
</TABLE>
The OTS has also established an IRR Capital Component. For further
information see "--Regulation--United Bank's Regulatory Capital Requirements."
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
AVERAGE BALANCE SHEETS. The following table sets forth for each of the
three years indicated information regarding the Company's: (1) average balance
sheets, and (2) an analysis of net interest earnings as follows: (i) for each
category of interest-earning asset and interest-bearing liability, the average
amount outstanding during the year and interest earned and paid, (ii) the
average yield for each category of interest-earning asset, and average cost for
each category of interest-bearing liability, (iii) the average yield for all
interest-earning assets and the average cost for all interest-bearing
liabilities, (iv) the net yield for interest-earning assets, and (v) other
information regarding return on average assets, return on average equity, equity
to average assets ratio, and dividend payout ratio.
130
<PAGE>
UNITED FINANCIAL CORP.
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST
---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Loans receivable............................................................ $ 31,821 $ 2,956 9.29%
Mortgage-backed securities.................................................. 32,524 2,017 6.20%
Investments--other.......................................................... 35,389 2,128 6.01%
Interest-earning deposits................................................... 2,907 152 5.22%
---------- ----------- ---
Total interest-earning assets........................................... 102,641 $ 7,253 7.07%
----------- ---
----------- ---
Non-earning assets.......................................................... 4,017
----------
Total assets............................................................ $ 106,658
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and money market accounts............................................... $ 8,499 $ 257 3.02%
Savings deposits............................................................ 30,617 1,078 3.52%
Time deposits............................................................... 39,335 2,138 5.44%
---------- ----------- ---
Total deposits.......................................................... 78,451 3,473 4.43%
FHLB advances............................................................... 1,608 92 5.72%
---------- ----------- ---
Total interest-bearing liabilities...................................... $ 80,059 $ 3,565 4.45%
---------- ----------- ---
---------- ----------- ---
Stockholders' equity........................................................ 24,977
Unrealized loss on securities available-for-sale............................ (442)
----------
Total stockholders' equity.............................................. $ 24,535
----------
----------
Net interest-earning assets................................................. $ 22,582
Net interest income......................................................... $ 3,688
-----------
-----------
Net interest spread(1)...................................................... 2.62%
---
---
Net interest margin(2)...................................................... 3.59%
Net income.................................................................. $ 1,103
-----------
-----------
Return on average assets(3)................................................. 1.03%
Return on average equity(4)................................................. 4.50%
Equity to average assets ratio(5)........................................... 23.00%
Dividend payout ratio(6).................................................... 99%
Interest-earning assets to interest-bearing liabilities ratio............... 1.28
Income per share............................................................ $ .90
Dividends paid per share.................................................... $ .89
</TABLE>
- ------------------------
(1) Average yield interest-earning assets minus average rate interest-bearing
liabilities
(2) Net interest income divided by average interest-earning assets
(3) Net income divided by average total assets
(4) Net income divided by average equity
(5) Average equity divided by average total assets
(6) Dividends paid per share divided by net income per share
131
<PAGE>
UNITED FINANCIAL CORP.
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST
---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Loans receivable............................................................ $ 30,870 $ 2,880 9.33%
Mortgage-backed securities.................................................. 20,183 1,262 6.25%
Investments--other.......................................................... 48,388 3,000 6.20%
Interest-earning deposits................................................... 4,319 252 5.83%
---------- ----------- ---
Total interest-earning assets........................................... 103,760 $ 7,394 7.13%
----------- ---
----------- ---
Non-earning assets.......................................................... 2,839
----------
Total assets............................................................ $ 106,599
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and money market accounts............................................... $ 7,996 $ 243 3.04%
Savings deposits............................................................ 36,278 1,277 3.52%
Time deposits............................................................... 36,654 1,892 5.16%
---------- ----------- ---
Total deposits.......................................................... 80,928 3,412 4.22%
FHLB advances............................................................... 137 8 5.89%
---------- ----------- ---
Total interest-bearing liabilities...................................... $ 81,065 $ 3,420 4.22%
---------- ----------- ---
---------- ----------- ---
Stockholders' equity........................................................ $ 24,551
Unrealized loss on securities available-for-sale............................ (687)
----------
Total stockholders' equity.............................................. $ 23,864
----------
----------
Net interest-earning assets................................................. $ 22,695
Net interest income......................................................... $ 3,974
-----------
-----------
Net interest spread(1)...................................................... 2.91%
---
---
Net interest margin(2)...................................................... 3.83%
Net income.................................................................. $ 1,722
-----------
-----------
Return on average assets(3)................................................. 1.62%
Return on average equity(4)................................................. 7.21%
Equity to average assets ratio(5)........................................... 22.39%
Dividend payout ratio(6).................................................... 57%
Interest-earning assets to interest-bearing liabilities ratio............... 1.28
Income per share............................................................ $ 1.41
Dividends paid per share.................................................... $ .81
</TABLE>
- ------------------------
(1) Average yield interest-earning assets minus average rate interest-bearing
liabilities
(2) Net interest income divided by average interest-earning assets
(3) Net income divided by average total assets
(4) Net income divided by average equity
(5) Average equity divided by average total assets
(6) Dividends paid per share divided by net income per share
132
<PAGE>
UNITED FINANCIAL CORP.
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
--------------------------------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/COST
---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Loans receivable............................................................ $ 33,326 $ 3,125 9.38%
Mortgage-backed securities.................................................. 20,438 1,179 5.77%
Investments-other........................................................... 57,986 3,451 5.95%
Interest-earning deposits................................................... 3,897 171 4.39%
---------- ----------- ---
Total interest-earnings assets............................................ 115,647 $ 7,926 6.85%
----------- ---
----------- ---
Non-earning assets.......................................................... 3,440
----------
Total assets.............................................................. $ 119,087
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and money market accounts............................................... $ 8,552 $ 252 2.95%
Savings deposits............................................................ 51,780 1,823 3.52%
Time deposits............................................................... 34,634 1,541 4.45%
---------- ----------- ---
Total deposits............................................................ 94,966 3,616 3.81%
FHLB advances...............................................................
---------- ----------- ---
Total interest-bearing liabilities........................................ $ 94,966 $ 3,616 3.81%
---------- ----------- ---
---------- ----------- ---
Stockholders' equity........................................................ $ 23,759
Unrealized loss on securities available-for-sale............................ (641)
----------
Total stockholders' equity................................................ $ 23,118
----------
----------
Net interest-earning assets................................................. $ 20,681
Net interest income......................................................... $ 4,310
-----------
-----------
Net interest spread(1)...................................................... 3.04%
---
---
Net interest margin(2)...................................................... 3.72%
Net income.................................................................. $ 1,886
-----------
-----------
Return on average assets(3)................................................. 1.58%
Return on average equity(4)................................................. 8.16%
Equity to average assets ratio(5)........................................... 19.41%
Dividend payout ratio(6).................................................... 47%
Interest-earning assets to interest-bearing liabilities ratio............... 1.22
Income per share............................................................ $ 1.54
Dividends paid per share.................................................... $ .73
</TABLE>
- ------------------------
(1) Average yield interest-earning assets minus average rate interest-bearing
liabilities
(2) Net interest income divided by average interest-earning assets
(3) Net income divided by average total assets
(4) Net income divided by average equity
(5) Average equity divided by average total assets
(6) Dividends paid per share divided by net income per share
133
<PAGE>
The following table sets forth United's weighted average yield on
interest-earning assets and cost of interest-bearing liabilities at December
31st for each of the three years indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Year-end yield:
Loans receivable......................................................................... 9.18% 9.16% 9.16%
Mortgage-backed securities............................................................... 6.27 5.77 5.89
Investments.............................................................................. 5.76 6.00 6.18
Interest-earning deposits................................................................ 6.41 4.75 5.81
--- --- ---
Interest-earning assets................................................................ 7.14% 6.79% 6.98%
Year-end cost:
Deposits................................................................................. 4.45% 4.44% 3.94%
FHLB advances............................................................................ -- 5.78 --
--- --- ---
Interest-bearing liabilities........................................................... 4.45% 4.60% 3.94%
Interest rate spread................................................................... 2.69% 2.19% 3.04%
--- --- ---
--- --- ---
</TABLE>
134
<PAGE>
The following table sets forth information regarding changes in interest
income and interest expense for United for the years indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by previous rate), (2) changes in rates (changes in rate multiplied
by previous volume) and (3) change in rate/ volume (change in rate multiplied by
the change in volume):
UNITED FINANCIAL CORP.
RATE VOLUME ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
----------------------------------------------
1996 V. 1995
INCREASE (DECREASE) DUE TO:
RATE/
VOLUME RATE VOLUME TOTAL
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable............................................................ $ 90 $ (9) $ (5) $ 76
Mortgage-backed securities.................................................. 771 (10) (6) 755
Investments................................................................. (806) (91) 25 (872)
Interest-earning deposits................................................... (82) (26) 8 (100)
----- --------- ----- ---------
Total interest income..................................................... (27) (136) 22 (141)
Interest expense:
Deposits.................................................................... (40) 92 9 61
FHLB advances............................................................... 87 -- (3) 84
----- --------- ----- ---------
Total interest expense.................................................... 47 92 6 145
----- --------- ----- ---------
Net interest income....................................................... $ (74) $ (228) $ 16 $ (286)
----- --------- ----- ---------
----- --------- ----- ---------
<CAPTION>
1995 V. 1994
----------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable............................................................ $ (230) $ (16) $ 1 $ (245)
Mortgage-backed securities.................................................. (15) 99 (1) 83
Investments................................................................. (510) 114 (54) (450)
Interest-bearing deposits................................................... 18 56 6 80
----- --------- ----- ---------
Total interest income..................................................... (737) 253 (48) (532)
Interest expense:
Deposits.................................................................... (534) 387 (57) (204)
FHLB advances............................................................... -- -- 8 8
----- --------- ----- ---------
Total interest expense.................................................... (534) 387 (49) (196)
----- --------- ----- ---------
Net interest income....................................................... $ (203) $ (134) $ 1 $ (336)
----- --------- ----- ---------
----- --------- ----- ---------
<CAPTION>
1994 V. 1993
----------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable............................................................ $ (667) $ (43) $ 7 $ (703)
Mortgage-backed securities.................................................. 333 (130) (43) 160
Investments................................................................. 439 (115) (41) 283
Interest-bearing deposits................................................... (112) 86 (41) (67)
----- --------- ----- ---------
Total interest income..................................................... (7) (202) (118) (327)
Interest expense:
Deposits.................................................................... (61) (375) 6 (430)
FHLB advances............................................................... -- -- -- --
----- --------- ----- ---------
Total interest expense.................................................... (61) (375) 6 (430)
----- --------- ----- ---------
Net interest income....................................................... $ 54 $ 173 $ (124) $ 103
----- --------- ----- ---------
----- --------- ----- ---------
</TABLE>
135
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Federal regulations require United Bank to maintain a daily average balance
of liquid assets equal to a percentage, currently 5%, of net withdrawable
deposits and other borrowings payable in one year or less. As of December 31,
1996 and December 31, 1995, United Bank's liquidity ratios were 28.9% and 46.0%,
respectively. The same regulations also require United Bank to maintain a
short-term liquid assets ratio equal to at least 1% of its average daily balance
of net withdrawable deposits and borrowings payable in one year or less. As of
December 31, 1996 and 1995, United Bank's short-term liquid asset ratios were
17.1% and 22.5%, respectively. During the fiscal years 1996 and 1995, United
Bank consistently maintained both ratios far in excess of regulatory
requirements. United Bank's liquidity investments for regulatory purposes were
approximately $23.4 million at December 31, 1996, and consisted primarily of
cash, interest-earning bank accounts, FHLB certificates of deposit, U.S.
Treasuries and U.S. Government agencies with maturities of five years or less.
The primary sources of funds are deposits, FHLB borrowings, loan and
mortgage-backed securities repayments, proceeds from loan sales, investment
securities interest payments and maturities, and net operating revenues. The
principal uses of funds are loan originations, mortgage-backed securities and
other investment securities purchases, maturing savings certificates and deposit
withdrawals, repayment of FHLB borrowings, cash dividends, maintaining liquidity
and meeting operating expenses. As demonstrated by the 1996 Statements of Cash
Flows, $12.6 million of net cash provided by investing activities was utilized
to repay $10.5 million of FHLB advances outstanding at the end of 1995, and pay
$1.1 million of cash dividends to shareholders. During 1996, unlike 1995 or
1994, the Company experienced deposits as a source, rather than a use of funds.
In addition, during 1996, the mix of investing activities changed with increased
loans originated for, and retained for portfolio in 1996 compared to 1995 or
1994.
United Bank can borrow from the FHLB in an amount not to exceed 25% of
assets. United currently has no material commitments for loan fundings or other
expenditures.
At December 31, 1996, United's stockholders' equity was approximately $24.4
million, or over 23.5% of assets. Additionally, United Bank's regulatory capital
is over $12.1 million more than the highest of three regulatory capital
standards required by federal regulations. United's current level of capital and
liquidity provides it with the opportunity to manage its balance sheet with a
great deal of flexibility while still complying with regulatory requirements.
This operating advantage has provided management with the ability to restructure
its balance sheet over the past several years. As a result, United has become
more profitable and has better matched its assets and liabilities to react to
and take advantage of changes in market conditions. Management believes that the
present facilities and equipment required to conduct its business are more than
adequate for the foreseeable future.
EFFECT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historic dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
YEAR 2000 COMPLIANCE
At the time of the OTS merger application filing, both Heritage Bank and
United Bank filed with the OTS a required "Year 2000 Project Management
Awareness Assessment." Each company is addressing Year 2000 risk and assessing
its impact on the availability and integrity of financial systems and the
reliability of their respective operational systems. Each company has made an
initial inquiry to, and
136
<PAGE>
received written responses form, their data processing centers regarding their
Year 2000 compliance status. Each company has made an inventory of and received
written responses from each of their software vendors as to their Year 2000
compliance. Each company is now monitoring and will continue to monitor and
evaluate the responses received from their data centers and software vendors.
The institutions have initiated mutual preliminary discussions of post-Merger
Year 2000 issues. Following regulatory and shareholder approval of the Merger
additional meetings will be held to further discuss Year 2000 issues on a merged
operational basis. Data center operations of the banks will be consolidated,
with United Bank converting to Heritage Bank's data processing center, which is
anticipated to be completed by June 30, 1998. Heritage Bank has recently been
advised by their data processing provider that a new generation of software, to
be implemented by early 1998, will be Year 2000 certified.
A follow up report will be submitted to the OTS outlining specific Year 2000
compliance and the combined entity's readiness. Until that time, each company
will continue to monitor its data center and software vendors for their specific
Year 2000 testing and ongoing certification progress.
As of the date of this Joint Proxy Statement, given the initial responses
form both data centers and software vendors, Heritage Bank and United Bank
believe that the costs to be incurred as a result of Year 2000 issues will not
have a material impact on their financial position or results of operations.
137
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
HERITAGE:
Independent Auditors' Report.......................................................... F-2
Consolidated Statements of Financial Condition--September 30, 1997 (unaudited),
December 31, 1996 and 1995.......................................................... F-3
Consolidated Statements of Income--Nine Months Ended September 30, 1997 and 1996
(unaudited) and Years Ended December 31, 1996 and 1995.............................. F-4
Consolidated Statements of Stockholders' Equity--Nine Months Ended September 30, 1997
(unaudited) and Years Ended December 31, 1996 and 1995.............................. F-5
Consolidated Statements of Cash Flows--Nine Months Ended September 30, 1997 and 1996
(unaudited) and Years Ended December 31, 1996 and 1995.............................. F-6
Notes to Consolidated Financial Statements............................................ F-8
Independent Auditors' Report.......................................................... F-26
Consolidated Statements of Financial Condition--December 31, 1995 and 1994............ F-27
Consolidated Statements of Income--Years Ended December 31, 1995 and 1994............. F-28
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1995 and
1994................................................................................ F-29
Consolidated Statements of Cash Flows--Years Ended December 31, 1995 and 1994......... F-30
Notes to Consolidated Financial Statements............................................ F-31
UNITED:
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition--September 30, 1997, September 30, 1996
and December 31, 1996............................................................... F-49
Consolidated Statements of Income--Nine Months Ended September 30, 1997 and 1996...... F-50
Consolidated Statements of Cash Flows--Nine Months Ended September 30, 1997 and
1996................................................................................ F-51
Consolidated Statement of Changes in Stockholders' Equity--Nine Months Ended
September 30, 1997.................................................................. F-52
Notes to Unaudited Consolidated Financial Statements.................................. F-53
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.......................................................... F-62
Consolidated Statements of Financial Condition--December 31, 1996 and 1995............ F-63
Consolidated Statements of Income--Years Ended December 31, 1996, 1995 and 1994....... F-64
Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994... F-65
Consolidated Statements of Changes in Stockholders' Equity--Years Ended
December 31, 1996, 1995 and 1994.................................................... F-66
Notes to Consolidated Financial Statements............................................ F-67
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Heritage Bancorporation
Great Falls, Montana
We have audited the accompanying consolidated statements of financial
condition of Heritage Bancorporation and subsidiary as of December 31, 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the management of Heritage Bancorporation. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Heritage Bancorporation and
subsidiary as of December 31, 1995, were audited by other auditors whose report
dated March 7, 1996 expressed an unqualified opinion on those statements.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all materials respects, the financial position of Heritage
Bancorporation and subsidiary as of December 31, 1996, and the results of its
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
Douglas Wilson & Company, PC
Great Falls, Montana
March 31, 1997
F-2
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1997, DECEMBER 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
9/30/97
UNAUDITED 12/31/96 12/31/95
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents........................................... $ 5,949,858 $ 10,089,203 $ 6,944,814
Time Deposits in Banks.............................................. 98,000 98,000 345,485
Securities Available-for-Sale....................................... 14,949,780 14,172,122 16,089,603
Loans Receivable, Net............................................... 52,337,693 41,454,506 27,774,445
Loans Held for Sale................................................. 1,850,159 2,398,942 1,394,679
Excess of Cost over Fair Value of Net Assets Acquired, Net.......... 505,091 537,329 580,313
Stock in Federal Home Loan Bank of Seattle, at Cost................. 360,900 328,100 303,800
Accrued Interest Receivable......................................... 620,462 480,693 400,299
Premises and Equipment, Net......................................... 1,198,066 1,189,648 936,160
Prepaid Expenses and Other Assets................................... 484,916 598,524 440,521
------------- ------------- -------------
Total Assets.................................................... $ 78,354,925 $ 71,347,067 $ 55,210,119
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.......................................................... $ 65,044,661 $ 57,640,689 $ 42,741,642
Borrowed Funds.................................................... 2,450,000 2,550,000 2,650,000
Federal Home Loan Bank Advances................................... 5,925,000 1,425,000 --
Securities Sold under Agreements to Repurchase.................... 969,390 6,374,786 7,090,982
Advances from Borrowers for Taxes and Insurance................... 298,188 143,019 126,566
Income Taxes Payable.............................................. 139,263 131,543 172,872
Accrued Interest Payable.......................................... 636,469 532,491 390,035
Accrued Expenses and Other Liabilities............................ 157,511 371,387 344,090
------------- ------------- -------------
Total Liabilities............................................... 75,620,482 69,168,915 53,516,187
------------- ------------- -------------
Minority Interest................................................... -- 451 412
------------- ------------- -------------
Stockholders' Equity, Substantially Restricted:
Common Stock, $.01 stated value;
Authorized 2,000,000 Shares; 10,000 Shares Issued and
Outstanding................................................... 100 100 100
Additional Paid-In Capital........................................ 1,080,028 1,080,028 1,080,028
Retained Earnings................................................. 1,536,665 997,384 511,355
Net Unrealized Gains (Losses) on Securities Available-for-Sale.... 117,650 100,189 102,037
------------- ------------- -------------
Total Stockholders' Equity.................................... 2,734,443 2,177,701 1,693,520
------------- ------------- -------------
Total Liabilities and Stockholders' Equity.................... $ 78,354,925 $ 71,347,067 $ 55,210,119
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
9/30/97 9/30/96
UNAUDITED UNAUDITED 12/31/96 12/31/95
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income:
Loans Receivable....................................... $ 3,267,158 $ 2,293,223 $ 3,225,854 $ 2,226,432
Mortgage-Backed Securities............................. 600,274 616,337 823,694 673,192
Investment Securities.................................. 164,101 159,746 179,962 263,701
Time Deposits in Banks................................. 5,135 12,842 21,923 46,461
Other Interest-Earning Assets.......................... 174,644 187,166 268,931 259,431
------------ ------------ ------------ ------------
Total Interest Income................................ 4,211,312 3,269,314 4,520,364 3,469,217
------------ ------------ ------------ ------------
Interest Expense:
Deposits............................................... 1,929,659 1,472,697 2,058,630 1,576,235
Borrowed Funds......................................... 270,763 157,835 222,793 220,988
Securities Sold under Agreements to Repurchase......... 55,163 119,899 137,565 143,689
------------ ------------ ------------ ------------
Total Interest Expense............................... 2,255,585 1,750,431 2,418,988 1,940,912
------------ ------------ ------------ ------------
Net Interest Income.................................. 1,955,727 1,518,883 2,101,376 1,528,305
Provision for Loan Losses................................ 192,400 135,000 160,000 46,000
------------ ------------ ------------ ------------
Net Interest Income after Provision for Loan
Losses............................................. 1,763,327 1,383,883 1,941,376 1,482,305
------------ ------------ ------------ ------------
Non-Interest Income:
Loan Origination Fees.................................. 465,910 527,350 678,575 300,135
Loan Servicing Fees.................................... 50,301 35,224 45,687 44,959
Customer Service Charges............................... 195,797 182,094 245,265 208,797
Other.................................................. 96,302 62,910 89,371 76,650
------------ ------------ ------------ ------------
Total Non-Interest Income............................ 808,310 807,578 1,058,898 630,541
------------ ------------ ------------ ------------
Non-Interest Expense:
Compensation and Benefits.............................. 875,796 721,908 1,006,825 706,476
Occupancy and Equipment................................ 169,581 127,958 191,693 124,473
Deposit Insurance Premiums............................. 17,238 315,635 343,144 86,816
Data Processing Fees................................... 144,027 115,350 156,715 127,484
Other.................................................. 492,059 405,258 552,354 459,418
------------ ------------ ------------ ------------
Total Non-Interest Expense........................... 1,698,701 1,686,109 2,250,731 1,504,667
------------ ------------ ------------ ------------
Income before Income Taxes and Minority Interest..... 872,986 505,352 749,543 608,179
Income Taxes............................................. 333,655 194,935 263,457 214,511
------------ ------------ ------------ ------------
Income before Minority Interest...................... 539,281 310,417 486,086 393,668
Minority Interest........................................ -- -- (57) (53)
------------ ------------ ------------ ------------
Net Income........................................... $ 539,281 $ 310,417 $ 486,029 $ 393,615
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND
FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES) TOTAL
ADDITIONAL ON SECURITIES STOCK
COMMON PAID-IN RETAINED AVAILABLE- HOLDERS'
STOCK CAPITAL EARNINGS FOR-SALE EQUITY
----------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994................ $ 100 $ 1,080,028 $ 117,740 $ (18,606) $ 1,179,262
Net Income................................... -- -- 393,615 -- 393,615
Change in Net Unrealized Gains (Losses) on
Securities Available-for-Sale.............. -- -- -- 120,643 120,643
----- ------------ ------------ -------------- ------------
Balances at December 31, 1995.............. 100 1,080,028 511,355 102,037 1,693,520
Net Income................................... -- -- 486,029 -- 486,029
Change in Net Unrealized Gains (Losses) on
Securities Available-for-Sale.............. -- -- -- (1,848) (1,848)
----- ------------ ------------ -------------- ------------
Balances at December 31, 1996.............. 100 1,080,028 997,384 100,189 2,177,701
Net Income................................... -- -- 539,281 -- 539,281
Change in Net Unrealized Gains (Losses) on
Securities Available-for-Sale.............. -- -- -- 17,461 17,461
----- ------------ ------------ -------------- ------------
Balances at September 30, 1997
(Unaudited).............................. $ 100 $ 1,080,028 $ 1,536,665 $ 117,650 $ 2,734,443
----- ------------ ------------ -------------- ------------
----- ------------ ------------ -------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
9/30/97 9/30/96
UNAUDITED UNAUDITED
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income...................................................................... $ 539,281 $ 310,417
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Provision for Loan Losses..................................................... 192,400 135,000
Amortization of Excess of Cost over Fair Value of Net Assets Acquired......... 32,238 32,238
Depreciation and Amortization of Premises and Equipment....................... 82,690 51,911
Amortization of Discounts on Loans and Deferred Loan Origination Fees......... (69,899) (68,656)
Stock Dividends Reinvested in Federal Home Loan Bank
of Seattle.................................................................. (32,800) (17,900)
Increase in Accrued Interest Receivable....................................... (139,769) (64,427)
Increase (Decrease) in Prepaid Expenses and Other Assets...................... 113,608 (300,714)
Increase (Decrease) in Accrued Interest Payable............................... 103,978 63,725
Increase in Accrued Expenses and Other Liabilities............................ (50,987) 220,606
Increase (Decrease) in Minority Interest...................................... (451) 16
-------------- --------------
Net Cash Provided by Operating Activities................................... 770,289 362,216
-------------- --------------
Cash Flows from Investing Activities:
Net Decrease in Time Deposits in Banks.......................................... -- 99,000
Net Increase in Loans Receivable................................................ (10,456,905) (10,564,658)
Purchases of Securities Available-for-Sale...................................... (3,448,610) (4,102,160)
Proceeds from Maturities and Paydowns of Securities Available-for-Sale.......... 2,688,413 5,366,390
Purchases of Premises and Equipment............................................. (91,108) (282,416)
-------------- --------------
Net Cash Used in Investing Activities....................................... (11,308,210) (9,483,844)
-------------- --------------
Cash Flows from Financing Activities:
Net Increase in Deposits........................................................ 7,403,972 12,097,012
Federal Home Loan Bank Advances................................................. 11,150,000 2,685,000
Federal Home Loan Bank Payments................................................. (6,650,000) (1,260,000)
Payments on Borrowings.......................................................... (100,000) (100,000)
Securities Sold under Repurchase Agreements..................................... (5,405,396) (4,559,523)
-------------- --------------
Net Cash Provided by Financing Activities................................... 6,398,576 8,862,489
-------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents........................ (4,139,345) (259,139)
Cash and Cash Equivalents at Beginning of Period.................................. 10,089,203 6,944,814
-------------- --------------
Cash and Cash Equivalents at End of Period.................................. $ 5,949,858 $ 6,685,675
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
12/31/96 12/31/95
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income...................................................................... $ 486,029 $ 393,615
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Provision for Loan Losses..................................................... 160,000 46,000
Amortization of Excess of Cost over Fair Value of Net Assets Acquired......... 42,984 42,984
Depreciation and Amortization of Premises and Equipment....................... 87,582 57,502
Deferred Loan Origination Fees (Costs), Net................................... (42,770) (12,384)
Amortization of Discounts on Loans............................................ (91,541) (18,525)
Stock Dividends Reinvested in Federal Home Loan Bank of Seattle............... (24,300) (19,000)
Increase in Accrued Interest Receivable....................................... (80,394) (98,169)
Decrease (Increase) in Deferred Income Tax Assets............................. (1,904) 57,689
Increase in Prepaid Expenses and Other Assets................................. (156,099) (57,942)
Increase (Decrease) in Income Taxes Payable................................... (41,329) 159,117
Increase (Decrease) in Accrued Interest Payable............................... 142,456 280,930
Increase in Accrued Expenses and Other Liabilities............................ 27,297 185,058
Increase in Minority Interest................................................. 39 36
-------------- --------------
Net Cash Provided by Operating Activities................................... 508,050 1,016,911
-------------- --------------
Cash Flows from Investing Activities:
Net Decrease in Time Deposits in Banks.......................................... 247,485 701,109
Net Increase in Loans Receivable................................................ (14,710,013) (7,575,623)
Purchases of Securities Held-to-Maturity........................................ -- (5,013,729)
Proceeds from Maturities and Paydowns of Securities Held-to-Maturity............ -- 1,099,507
Purchases of Securities Available-for-Sale...................................... (4,561,250) (1,594,179)
Proceeds from Maturities and Paydowns of Securities Available-for-Sale.......... 6,476,883 1,976,187
Purchases of Premises and Equipment............................................. (341,070) (223,997)
-------------- --------------
Net Cash Used in Investing Activities....................................... (12,887,965) (10,630,725)
-------------- --------------
Cash Flows from Financing Activities:
Net Increase in Deposits........................................................ 14,899,047 4,826,395
Federal Home Loan Bank Advances................................................. 1,425,000 --
Payments on Borrowings.......................................................... (100,000) (75,000)
Securities Sold under Repurchase Agreements..................................... (716,196) 6,830,948
Increase (Decrease) in Advances from Borrowers for Taxes and Insurance.......... 16,453 (25,780)
-------------- --------------
Net Cash Provided by Financing Activities................................... 15,524,304 11,556,563
-------------- --------------
Net Increase in Cash and Cash Equivalents................................... 3,144,389 1,942,749
Cash and Cash Equivalents at Beginning of Year.................................... 6,944,814 5,002,065
-------------- --------------
Cash and Cash Equivalents at End of Year.................................... $ 10,089,203 $ 6,944,814
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. GENERAL--Heritage Bancorporation ("the Company") was organized in 1993
as a savings and loan holding company, and on June 7, 1994, completed the
acquisition of Heritage Bank, FSB ("the Bank") and its wholly owned subsidiary,
Fidelity Service Corporation. Net income for the Bank since the date of
acquisition is included in the consolidated statements of income. The Company
owns 199,980 shares of the 200,000 outstanding shares of the Bank, or 99.99
percent.
The Bank provides a full range of banking services to individual and
corporate customers in central Montana. The Bank is subject to competition from
other financial institutions. The Bank is also subject to the regulations of
certain federal and state agencies and undergoes periodic examinations by those
regulatory authorities. Fidelity Service Corporation is dormant and has no
assets.
The accounting and consolidated financial statement reporting policies of
the Company conform with generally accepted accounting principles and prevailing
practices within the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported and disclosed amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
Management believes the allowance for losses on loans and real estate owned
are adequate. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowances may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for losses on loans and real estate owned. Such agencies
may require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
However, no such adjustments have been required to be made.
B. BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries, the Bank and Fidelity Service
Corporation. All significant intercompany transactions have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (all of which are of a normal
recurring nature) necessary to present fairly the consolidated financial
position at September 30, 1997, and the results of operations and cash flows for
each of the nine-month periods ended September 30, 1997 and 1996, in conformity
with generally accepted accounting principles.
C. CASH EQUIVALENTS--For purposes of the statement of cash flows, the
Company considered all cash, daily interest demand deposits and
non-interest-bearing deposits with banks, and time deposits in banks having
original maturities of three months of less to be cash equivalents.
F-8
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
D. INVESTMENT SECURITIES--At the date of acquisition, the Company's
investments are classified into three categories and accounted for as follows:
- Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at
amortized cost.
- Debt and equity securities, if bought and held principally for the purpose
of selling them in the near term, are classified as trading securities and
reported at fair value, with unrealized gains and losses included in
earnings.
- Debt and equity securities not classified as either held-to-maturity or
trading securities are classified as available-for-sale and reported at
fair value, with any unrealized gains and losses excluded from earnings
and reported (net of tax effect) as a separate component of stockholders'
equity.
During 1995, the Bank reclassified all existing held-to-maturity securities
to available-for-sale (see Note 2).
Declines in the fair value of available-for-sale or held-to-maturity
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.
Premiums and discounts on investment securities are recognized in interest
income using a method approximating the level-yield method over the term of each
security. Realized gains and losses of investments sold are based on the net
proceeds and the adjusted carrying amount of the securities sold using the
specific identification method, and are reported "net" in the consolidated
statements of income.
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.
Material loan origination fees and related direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan.
Origination fees on loan sold to the secondary market are recognized when the
loan is sold. The amortization of deferred loan fees and costs and the accretion
of unearned discounts on non-performing loans is discontinued during periods of
non-performance.
F. 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 through a valuation allowance by charges to
income.
G. ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is established
through a provision for loan losses charged against operating expense. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal balance is unlikely. The allowance is an amount
that management believes will be adequate to absorb losses inherent in existing
loans and commitments to extend credit, based on evaluations of the
collectibility and prior loss experience of loans and commitments to extend
credit. The evaluation takes into consideration such factors as changes in the
F-9
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, commitments, and current and anticipated
economic conditions that may affect the borrowers' ability to pay.
In 1995, the Company adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures," (collectively, the
"Statements"). The Statements provide guidance for establishing an allowance for
losses on specific loans which are deemed to be impaired. Groups of smaller
balance homogeneous loans (generally consumer loans) are evaluated for
impairment collectively. A loan is considered impaired when it is probable that
the Company will be unable to collect all principal and interest according to
the contractual terms of the loan's original agreement. When a loan is
determined to be impaired, a reserve is established through a charge to bad debt
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 operations 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 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.
The Company's adoption of the Statements did not have a material impact on
the Company's financial position or results of operations. At December 31, 1996
and 1995, impaired loans were not material.
H. AMORTIZATION OF EXCESS PURCHASE PRICE--The excess of cost over the fair
value of the net assets of the subsidiary is being amortized against income
using the straight-line method over a period of 15 years.
I. OTHER REAL ESTATE OWNED--Other real estate owned represents real estate
acquired through foreclosure and is initially recorded at the lower of fair
market value less estimated costs to sell or "cost" (defined as the fair market
value at initial foreclosure). Valuations are periodically performed by
management, and an allowance for losses is established by a charge to expense if
the fair market value less estimated costs to sell is less than "cost". At
December 31, 1996 and 1995, the Company did not hold any other real estate.
J. STOCK IN FEDERAL HOME LOAN BANK--Federal law requires a member
institution of the Federal Home Loan Bank (FHLB) System to hold common stock of
its district FHLB accordingly to predetermined formulas.
K. PREMISES AND EQUIPMENT--Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is provided over the estimated useful
lives of the assets on straight-line and accelerated methods.
F-10
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
L. INCOME TAXES--The Company and the Bank file a consolidated federal
income tax return. Under a formal tax sharing arrangement, the Bank's federal
income tax provision is computed on a separate company basis, and income taxes
currently payable are paid to the Company. State statute prevents filing of a
consolidated Montana income tax return; and accordingly, separate returns are
filed by the Bank and the Company.
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.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
M. NET INCOME PER SHARE--Net income per share data is calculated by
dividing net income by the weighted average number of shares outstanding during
the year.
NOTE 2: CASH AND CASH EQUIVALENTS:
Cash and cash equivalents includes $8,801,966 and $6,122,848 in interest
bearing deposits with banks at December 31, 1996 and 1995, respectively.
NOTE 3: SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY:
On November 15, 1995, FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." The Special Report allows for a "one-time
classification" of securities as of a single date between November 15, 1995, and
December 15, 1995. In December 1995, the Company reclassified all existing
held-to-maturity securities with an amortized cost of approximately $10,992,000
and an unrealized gain of approximately $54,000 to available-for-sale.
The amortized cost, unrealized gains and losses, and estimated market values
of securities available-for-sale at December 31 are as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U. S. Government and Federal
Agencies............................. $ 750,000 $ 9,295 $ -- $ 759,295
Mortgage-Backed Securities............. 12,163,382 180,819 (38,351) 12,305,850
Municipal Bonds........................ 860,965 3,312 -- 864,277
Other.................................. 238,727 3,973 -- 242,700
------------- ----------- ----------- -------------
$ 14,013,074 $ 197,399 $ (38,351) $ 14,172,122
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
F-11
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3: SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY: (CONTINUED)
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Federal Agencies....................... $ 3,549,906 $ 26,751 $ (1,542) $ 3,575,115
Mortgage-Backed Securities............. 11,856,164 168,583 (31,164) 11,993,583
Municipal Bonds........................ 520,734 171 -- 520,905
------------- ----------- ----------- -------------
$ 15,926,804 $ 195,505 $ (32,706) $ 16,089,603
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
Maturities of securities available-for-sale by contractual maturity at
December 31, 1996, are shown below. Maturities of securities do not reflect
repricing opportunities present in many adjustable rate securities, nor do they
reflect shorter maturities based upon early prepayments of principal.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------- -------------
<S> <C> <C>
Due in One Year or Less........................................ $ -- $ --
Due after One Year through Five Years.......................... 512,500 521,405
Due after Five Years through Ten Years......................... 1,337,192 1,344,867
Mortgage-Backed Securities..................................... 12,163,382 12,305,850
------------- -------------
$ 14,013,074 $ 14,172,122
------------- -------------
------------- -------------
</TABLE>
There were no sales of available-for-sale securities or held-to-maturity
securities during the years ended December 31, 1996 and 1995.
Securities with carrying amounts of $250,390 and $254,765 at December 31,
1996 and 1995, respectively, were pledged to secure deposits as required or
permitted by law.
F-12
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4: LOANS RECEIVABLE:
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
------------- -------------
<S> <C> <C>
First Mortgage Loans and Contracts Secured by Real Estate...... $ 12,013,810 $ 9,303,296
Commercial Mortgage Loans...................................... 8,814,436 6,488,530
Commercial Non-Mortgage Loans.................................. 8,578,642 5,149,883
Second Mortgage Consumer Loans................................. 5,692,364 3,355,565
Auto and Other Consumer Loans.................................. 5,388,508 3,822,860
Agricultural Loans............................................. 1,252,851 --
Savings Account Loans.......................................... 188,503 201,066
------------- -------------
41,929,114 28,321,200
Less: Unearned Discount........................................ 93,612 185,153
Allowance for Loan Losses................................. 387,656 325,492
Net Deferred Loan Origination Fees (Costs)................ (6,660) 36,110
------------- -------------
Loans Receivable, Net..................................... $ 41,454,506 $ 27,774,445
------------- -------------
------------- -------------
</TABLE>
The weighted average stated interest rate on loans receivable at December
31, 1996 and 1995, was approximately 8.9 percent and 9.0 percent, respectively.
The average yield on loans receivable, including amortization of unearned
discount, was approximately 8.4 percent and 8.3 percent for the years ended
December 31, 1996 and 1995, respectively.
Loans receivable include approximately $14,347,000 and $11,527,000 in
adjustable rate loans at December 31, 1996 and 1995, respectively.
Real estate loans serviced for others totaled approximately $14,104,000 and
$11,143,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, approximately $5,978,000 and $4,369,000,
respectively, of loans or purchased participation loans were acquired where the
customers are out of the state of Montana. Anticipated credit losses arising
from these transactions compare favorably with the Company's credit loss
experience of its loan portfolio as a whole.
A summary of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
---------- ----------
<S> <C> <C>
Balance, Beginning of Year............................................ $ 325,492 $ 324,021
Provision for Loan Losses............................................. 160,000 46,000
Losses Charged Against the Allowance, Net of Recoveries............... (97,836) (44,529)
---------- ----------
Balance, End of Year.............................................. $ 387,656 $ 325,492
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5: ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable at December 31 is summarized as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
---------- ----------
<S> <C> <C>
Loans Receivable...................................................... $ 316,403 $ 182,339
Mortgage-Backed Securities............................................ 98,563 92,300
Investment Securities................................................. 49,876 71,501
Time Deposits in Banks and Other Interest-Earning Assets.............. 15,851 54,159
---------- ----------
$ 480,693 $ 400,299
---------- ----------
---------- ----------
</TABLE>
NOTE 6: PREMISES AND EQUIPMENT:
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
------------ ------------
<S> <C> <C>
Land.............................................................. $ 120,531 $ 100,531
Building and Improvements......................................... 913,215 742,691
Furniture, Fixtures and Equipment................................. 652,844 502,269
------------ ------------
1,686,590 1,345,491
Accumulated Depreciation.......................................... (496,942) (409,331)
------------ ------------
$ 1,189,648 $ 936,160
------------ ------------
------------ ------------
</TABLE>
Depreciation of premises and equipment was $87,582 and $57,502 for the years
ended December 31, 1996 and 1995, respectively.
F-14
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 7: DEPOSITS:
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
WEIGHTED ------------------------ ------------------------
AVERAGE RATE AMOUNT % AMOUNT %
------------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Passbook Accounts.......................... 3.55% $ 5,780,992 10.0% $ 4,026,947 9.4%
NOW and Demand Accounts.................... 1.31% 18,778,245 32.6 15,186,477 35.5
------------- --------- ------------- ---------
24,559,237 42.6 19,213,424 44.9
------------- --------- ------------- ---------
Certificate of Deposit Accounts............ 3.00 to 3.99% -- -- -- --
4.00 to 4.99% 361,107 .6 411,244 1.0
5.00 to 5.99% 25,606,360 44.4 3,496,659 8.2
6.00 to 6.99% 7,113,985 12.4 19,620,315 45.9
7.00 to 7.99% -- -- -- --
8.00 to 8.99% -- -- -- --
------------- --------- ------------- ---------
33,081,452 57.4% 23,528,218 55.1
------------- --------- ------------- ---------
Total Deposits......................... $ 57,640,689 100.0% $ 42,741,642 100.0%
------------- --------- ------------- ---------
------------- --------- ------------- ---------
</TABLE>
Scheduled maturities of certificates of deposit at December 31, 1996, are as
follows:
<TABLE>
<S> <C>
Due within One Year............................................ $ 13,967,613
Due within Two to Three Years.................................. 12,086,423
Due within Four to Five Years.................................. 7,027,416
------------
$ 33,081,452
------------
------------
</TABLE>
The weighted average cost of deposits was approximately 4.6 percent and 4.0
percent at December 31, 1996 and 1995, respectively.The average cost of deposits
approximated 4.1 percent and 4.2 percent for the years ended December 31, 1996
and 1995, respectively.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
------------ ------------
<S> <C> <C>
Passbook Accounts................................................. $ 376,563 $ 118,027
NOW and Demand Accounts........................................... 251,771 230,663
Certificate of Deposit Accounts................................... 1,430,296 1,227,545
------------ ------------
$ 2,058,630 $ 1,576,235
------------ ------------
------------ ------------
</TABLE>
Cash payments for interest on deposits for the year ended December 31, 1996
and 1995, totaled approximately $1,861,000 and $1,348,000, respectively.
F-15
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 8: BORROWED FUNDS:
Borrowed funds consist of a note payable due in annual installments
beginning July 1996 with a $1,000,000 final payment on January 15, 2005. The
note is secured by 199,980 shares of the Bank and is guaranteed by certain
principal shareholders of the Company. Interest is at an annual rate equal to
two percent over the Federal Funds rate. The July 1996 payment of $75,000 was
paid during 1995, and the July 1997 payment of $100,000 was paid in 1996.
Therefore, the scheduled maturities of the debt are as follows:
<TABLE>
<S> <C>
1997............................................................ $ --
1998............................................................ 150,000
1999............................................................ 200,000
2000............................................................ 200,000
2001............................................................ 250,000
Thereafter...................................................... 1,750,000
-----------
$ 2,550,000
-----------
-----------
</TABLE>
NOTE 9: FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
INTEREST MATURITY
DATE OF ADVANCE AMOUNT RATE DATE
- ------------------------------------------------------------ ---------- ------- --------
<S> <C> <C> <C>
1/16/96..................................................... $ 200,000 5.8% 1/16/01
1/23/96..................................................... 100,000 5.77% 1/23/01
2/9/96...................................................... 125,000 5.64% 2/9/01
9/24/96..................................................... 1,000,000 5.72% 1/22/97
----------
$1,425,000
----------
----------
</TABLE>
The advances are secured by certain securities of the bank with carrying
amounts totaling $1,899,605. Interest on the advances is payable monthly with
principal due at maturity.
F-16
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 10: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
Securities sold under agreements to repurchase at December 31 consist of the
following:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
BOOK MARKET
WEIGHTED VALUE OF VALUE OF
REPURCHASE AVERAGE UNDERLYING UNDERLYING
AMOUNT RATE PAID SECURITIES SECURITIES
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Securities Sold Under Agreements to
Repurchase Within:
1-30 days............................. $ 4,980,000 5.34% $ 5,006,905 $ 5,004,650
31-90 days............................ 1,150,789 5.04 1,327,653 1,347,463
Greater than 90 days.................. 243,997 3.20 514,821 513,019
------------ --- ------------ ------------
$ 6,374,786 5.00% $ 6,849,379 $ 6,865,132
------------ --- ------------ ------------
------------ --- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
BOOK MARKET
WEIGHTED VALUE OF VALUE OF
REPURCHASE AVERAGE UNDERLYING UNDERLYING
AMOUNT RATE PAID SECURITIES SECURITIES
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Securities Sold Under Agreements to
Repurchase Within:
1-30 days............................. $ 4,902,682 5.24% $ 5,254,715 $ 5,313,077
31-90 days............................ 1,938,300 5.39 2,082,153 2,102,433
Greater than 90 days.................. 250,000 5.96 260,851 258,065
------------ --- ------------ ------------
$ 7,090,982 5.35% $ 7,597,719 $ 7,673,575
------------ --- ------------ ------------
------------ --- ------------ ------------
</TABLE>
The securities underlying agreements to repurchase entered into by the
Company are for the same securities originally sold and are held in a custody
account by a third party. For the year ended December 31, 1996, securities sold
under agreements to repurchase averaged approximately $3,486,000, and the
maximum outstanding at any month end during the year was $6,374,786.
NOTE 11: INCOME TAXES:
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Year ended December 31, 1996:
Current.................................................. $ 203,643 $ 60,331 $ 263,974
Deferred................................................. (7,632) 7,115 (517)
---------- --------- ----------
$ 196,011 $ 67,446 $ 263,457
---------- --------- ----------
---------- --------- ----------
Year ended December 31, 1995:
Current.................................................. $ 105,019 $ 51,803 $ 156,822
Deferred................................................. 48,236 9,453 57,689
---------- --------- ----------
$ 153,255 $ 61,256 $ 214,511
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-17
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 11: INCOME TAXES: (CONTINUED)
Actual income tax expense differs from the expected income tax expense for
that year (computed by applying the United State federal corporate rate of 34
percent to earnings before income taxes) as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
---------- ----------
<S> <C> <C>
Computed Expected Tax Expense......................................... $ 254,845 $ 206,781
Increase (Decrease) Resulting from:
State Taxes, Net of Federal Income Tax Effects...................... 44,514 40,429
Goodwill Amortization............................................... 16,532 14,615
Prior Year (Over) Under Accrual..................................... 44,775 (34,674)
Other, Net.......................................................... (97,209) (12,640)
---------- ----------
$ 263,457 $ 214,511
---------- ----------
---------- ----------
</TABLE>
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities. The types of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Loans, Principally Due to Reserve for Loan Losses and Loan
Origination Fees Deferred for Financial Reporting Purposes........ $ 116,639 $ 105,951
Purchase Accounting................................................. 63,740 115,086
Capital Loss Carryforwards.......................................... 17,868 17,868
Other............................................................... 43,893 6,604
---------- ----------
Total Gross Deferred Tax Assets................................... 242,140 245,509
---------- ----------
Deferred Tax Liabilities:
Stock in Federal Home Loan Bank of Seattle, Principally Due to
Dividends Not Recognized for Tax Purposes......................... 81,758 72,403
Available-for-Sale Securities Fair Value Adjustment................. 58,847 60,751
Premises and Equipment, Principally Due to Differences in
Depreciation...................................................... 18,195 10,153
SAIF Assessment..................................................... -- 20,766
---------- ----------
Total Gross Deferred Tax Liabilities.............................. 158,800 164,073
---------- ----------
Net Deferred Tax Assets........................................... $ 83,340 $ 81,436
---------- ----------
---------- ----------
</TABLE>
In assessing the realization 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
in 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 make this
assessment. Based upon the level of historical taxable income and projections
for
F-18
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 11: INCOME TAXES: (CONTINUED)
future taxable income over the periods in which the deferred tax assets are
deductible, at December 31, 1996 and 1995, management believes it is more likely
than not that the Company and the Bank will realize the benefits of these
deductible differences.
Retained earnings at December 31, 1996 and 1995, include approximately
$265,000 for which no provision for federal income tax has been made. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate. However, it is not contemplated that amounts
allocated to bad debt deductions will be used in any manner that would create
taxable income.
The Bank has capital loss carryforwards totaling approximately $110,000 that
expire in 1997.
Cash paid for income taxes for the years ended December 31, 1996 and 1995,
totaled $130,000 and $82,000, respectively.
NOTE 12: RELATED PARTIES:
The Bank has entered into transactions with its directors, principal
officers and their affiliates (related parties). The aggregate amount of loans
to such related parties at December 31, 1996, was $60,620. During 1996, new
loans to related parties amounted to $61,985 and repayments amounted to $23,642.
Central Financial Services (CFS) provides various management services to the
Bank, including accounting and tax services, investment consulting, personnel
consulting, insurance advisory services and regulatory consulting. CFS is owned
by Heritage's majority stockholder. The charges were $70,009 and $63,942 for the
years ended December 31, 1996 and 1995, respectively.
NOTE 13: EMPLOYEE BENEFIT PLAN:
The Bank has a cash or deferred profit-sharing plan. To be eligible for the
plan, an employee must complete one-half year of full-time employment with the
Bank. Annual contributions are determined by the Bank's board of directors.
Contributions for the years ended December 31, 1996 and 1995, totaled $28,267
and $20,626, respectively.
NOTE 14: REGULATORY CAPITAL OF THE BANK:
The three capital requirements under the Financial Institutions Reform,
Recovery and Enforcement Act are: (1) a tangible capital requirement
(stockholders' equity adjusted for the effects of intangibles, investments and
advances to "nonincludable" subsidiaries and other factors) equal to not less
than 1.5 percent of tangible assets (as defined in the regulations), (2) a core
capital requirement (comprised of tangible capital adjusted for supervisory
goodwill and other defined factors) equal to not less than 3 percent of tangible
assets, and (3) a risk-based capital requirement equal to at least 8 percent of
all risk-weighted assets. For the risk-weighting, selected assets are given a
risk assignment of 0 percent to 100 percent. As an example, cash and securities
backed by the full faith and credit of the U. S. Government are risk-weighted at
0 percent of book value, while repossessed assets and delinquent loans over 90
days past due are assigned a 100 percent factor, or a risk-weighting equal to
their book value.
F-19
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The following table demonstrates, in dollars and percents, the extent to
which the Bank exceeds the minimum capital requirements as of December 31, 1996:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
----------------------------------------
APPROXIMATE
ACTUAL REQUIREMENT EXCESS
------------ ------------ ------------
<S> <C> <C> <C>
Tangible Capital:
Dollar Amount..................................... $ 3,878,604 $ 1,059,720 $ 2,818,884
Percent of Tangible Assets........................ 5.5% 1.5% 4.0%
Percent of Risk-Weighted Assets................... 9.6% 2.6% 6.9%
Core Capital:
Dollar Amount..................................... 3,878,604 2,119,440 1,759,164
Percent of Tangible Assets........................ 5.5% 3.0% 2.5%
Percent of Risk-Weighted Assets................... 9.6% 5.2% 4.3%
Risk-Based Capital:
Dollar Amount..................................... 4,266,260 3,248,160 1,018,100
Percent of Risk-Weighted Assets................... 10.5% 8.0% 2.5%
</TABLE>
Generally accepted accounting principles (GAAP) capital differs from
tangible, core, and risk-based capital as a result of the following:
<TABLE>
<S> <C>
Capital Measured by GAAP........................................ $ 4,516,132
Unrealized Gains on Available-for-Sale Securities............... (100,199)
Goodwill........................................................ (537,329)
-----------
Tangible and Core Capital................................... 3,878,604
General Valuation Reserve....................................... 387,656
-----------
Risk-Based Capital.......................................... $ 4,266,260
-----------
-----------
</TABLE>
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1995, the Company adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS No. 107 requires disclosures of fair value for
financial instruments, whether recognized or not recognized in the statement of
financial condition. A financial instrument is defined by SFAS No. 107 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.
Quoted market prices are used for fair value when available but do not exist
for some of the Bank's financial instruments, primarily loans and time deposits.
The fair value of these instruments has been derived from the Federal Home Loan
Bank ("FHLB") Rate Shock Analysis ("FHLB Analysis"). This FHLB Analysis
primarily employs the discounted cash flow method which determines the economic
value of loans and time deposits by calculating the present value of expected
cash flows. The present value is determined 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
F-20
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
value, the FHLB makes assumptions about the size and timing of expected cash
flows and appropriate discount rates. Different assumptions could materially
change these instruments' estimated values.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Therefore, the aggregate fair
values presented do not represent the Bank's underlying value.
The following assumptions and methods were used by the Bank in estimating
fair value:
A. FINANCIAL ASSETS--Due to the liquid nature of the instruments, the
carrying value of cash and cash equivalents and time deposits in banks
approximates market value. For all investment securities, the fair value is
based upon quoted market prices. The fair value of loans receivable was obtained
from the FHLB Analysis. The fair value of accrued interest receivable
approximates book value as the Bank expects contractual receipt in the
short-term. The fair value of FHLB stock approximates redemption value.
B. FINANCIAL LIABILITIES--The fair value of NOW and demand accounts and
non-term savings deposits approximates book values as these deposits are payable
on demand. The fair value of time deposits was obtained from the FHLB Analysis.
The imputed interest rate on the borrowed funds and advances approximates the
Company's current long-term borrowing rate. Accordingly, the fair value of
borrowed funds and advances approximates the carrying value. The fair value of
securities sold under agreements to repurchase and accrued interest payable
approximates book value due to contractual payment in the short term.
C. 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.
D. LIMITATIONS--Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding comparable market interest rates, future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax effect of the difference between the
fair value
F-21
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
BOOK VALUE FAIR VALUE
------------- -------------
<S> <C> <C>
Financial Assets:
Cash and Cash Equivalents.................................... $ 10,089,000 $ 10,089,000
Time Deposits in Banks....................................... 98,000 98,000
Securities Available-for-Sale................................ 14,172,000 14,172,000
Loans Receivable, Net........................................ 43,853,000 43,623,000
Accrued Interest Receivable.................................. 481,000 481,000
Stock in Federal Home Loan Bank of Seattle................... 328,000 328,000
------------- -------------
$ 69,021,000 $ 68,791,000
------------- -------------
------------- -------------
Financial Liabilities:
NOW and Demand Accounts...................................... $ 18,778,000 $ 18,778,000
Savings Deposits............................................. 5,781,000 5,781,000
Time Deposits................................................ 33,081,000 33,162,000
Borrowed Funds and Advances.................................. 3,975,000 3,975,000
Securities Sold under Agreements to Repurchase............... 6,375,000 6,375,000
Accrued Interest Payable..................................... 532,000 532,000
------------- -------------
$ 68,522,000 $ 68,603,000
------------- -------------
------------- -------------
Off-Balance Sheet:
Commitments to Extend Credit................................. $ 430,000
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------
BOOK VALUE FAIR VALUE
------------- -------------
<S> <C> <C>
Cash and Cash Equivalents...................................... $ 6,945,000 $ 6,945,000
Time Deposits in Banks....................................... 345,000 345,000
Securities Available-for-Sale................................ 16,090,000 16,090,000
Loans Receivable, Net........................................ 29,169,000 29,727,000
Accrued Interest Receivable.................................. 400,000 400,000
Stock in Federal Home Loan Bank of Seattle................... 304,000 304,000
------------- -------------
$ 53,253,000 $ 53,811,000
------------- -------------
------------- -------------
</TABLE>
F-22
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------
BOOK VALUE FAIR VALUE
------------- -------------
<S> <C> <C>
Financial Liabilities:
NOW and Demand Accounts...................................... $ 15,186,000 $ 15,186,000
Savings Deposits............................................. 4,027,000 4,027,000
Time Deposits................................................ 23,528,000 23,669,000
Borrowed Funds and........................................... 2,650,000 2,650,000
Securities Sold under Agreements to Repurchase............... 7,091,000 7,091,000
Accrued Interest Payable..................................... 390,000 390,000
------------- -------------
$ 52,872,000 $ 53,013,000
------------- -------------
------------- -------------
Off-Balance Sheet:
Commitments to Extend Credit................................. $ 688,000
-------------
-------------
</TABLE>
NOTE 16: COMMITMENTS AND CONTINGENCIES:
The Bank has sold loans to various investors in the secondary market under
sales agreements which contain repurchase provisions. Under the repurchase
provisions, the Bank may be required to repurchase a loan if a borrower fails to
make three monthly payments within 120 days after the sale of the loan. The
balance of loans sold with repurchase provisions remaining at December 31, 1996,
is approximately $7,200,000. Total loans repurchased during 1996 under limited
repurchase agreements totaled $79,199 on total sold volume of $29,337,311.
In March 1994 the Bank entered into a three-year noncancelable service
contract for data processing services.
NOTE 17: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Bank 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 involve, to
varying degrees, elements of credit risk.
The Bank's exposure to credit loss in the event of nonperformance by the
other parties to the financial instruments is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
Financial instruments outstanding at December 31, 1996, whose contract
amounts represent credit risk include:
<TABLE>
<S> <C>
Commitments to Extend Credit--Fixed Rate.......................... $ 429,704
--Variable Rate........................ --
---------
$ 429,704
---------
---------
</TABLE>
F-23
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
GREAT FALLS, MONTANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 17: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties.
NOTE 18: PARENT COMPANY INFORMATION:
<TABLE>
<CAPTION>
12/31/96 12/31/95
------------ ------------
<S> <C> <C>
CONDENSED BALANCE SHEET
Assets:
Cash (Deposited with Bank).......................................................... $ 91,196 $ 33,020
Investment in Bank.................................................................. 4,515,681 4,117,399
Other Assets........................................................................ 161,731 239,692
------------ ------------
$ 4,768,608 $ 4,390,111
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity:
Notes Payable....................................................................... $ 2,550,000 $ 2,650,000
Other Liabilities................................................................... 40,907 46,591
Stockholders' Equity................................................................ 2,177,701 1,693,520
------------ ------------
$ 4,768,608 $ 4,390,111
------------ ------------
------------ ------------
CONDENSED STATEMENT OF INCOME
Revenues:
Cash Dividends from the Bank........................................................ $ 200,000 $ 160,000
Interest Earning Assets............................................................. 16,665 2,338
------------ ------------
216,665 162,338
------------ ------------
Expenses:
Interest on Note Payable............................................................ 191,234 220,988
Other............................................................................... 43,846 34,276
------------ ------------
235,080 255,264
------------ ------------
Loss before Income Tax Benefit and Equity in Undistributed Income of the Bank..... (18,415) (92,926)
Income Tax Benefit.................................................................... 104,332 120,953
------------ ------------
Income before Equity in Undistributed Income of the Bank.......................... 85,917 28,027
Equity in Undistributed Income of the Bank............................................ 400,112 365,588
------------ ------------
Net Income........................................................................ $ 486,029 $ 393,615
------------ ------------
------------ ------------
</TABLE>
F-24
<PAGE>
HERITAGE BANCORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Heritage Bancorporation:
We have audited the accompanying consolidated statements of financial
condition of Heritage Bancorporation and subsidiary as of December 31, 1995 and
1994, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
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 materials respects, the financial position of Heritage
Bancorporation and subsidiary as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Billings, Montana
March 7, 1996
F-26
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 6,944,814 5,002,065
Time deposits in banks............................................................. 345,485 1,046,594
Securities available-for-sale (note 2)............................................. 16,089,603 4,035,889
Securities held-to-maturity, market value of $8,180,021 (note 2)................... -- 8,329,166
------------- -------------
16,089,603 12,365,055
Loans receivable, net (notes 3 and 14)............................................. 27,774,445 21,313,038
Loans held for sale................................................................ 1,394,679 295,554
Excess of cost over fair value of net assets acquired, net (note 15)............... 580,313 623,297
Stock in Federal Home Loan Bank of Seattle, at cost................................ 303,800 284,800
Accrued interest receivable (note 4)............................................... 400,299 302,130
Premises and equipment, net (note 5)............................................... 936,160 769,665
Deferred income tax assets, net (note 9)........................................... 81,436 210,804
Prepaid expenses and other assets.................................................. 359,085 301,143
------------- -------------
$ 55,210,119 42,514,145
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6)................................................................ $ 42,741,642 37,936,359
Borrowed funds (note 7).......................................................... 2,650,000 2,725,000
Securities sold under agreements to repurchase (note 8).......................... 7,090,982 238,922
Advances from borrowers for taxes and insurance.................................. 126,566 152,346
Income taxes payable (note 9).................................................... 172,872 13,755
Accrued interest payable......................................................... 390,035 109,105
Accrued expenses and other liabilities........................................... 344,090 159,032
------------- -------------
Total liabilities............................................................ 53,516,187 41,334,519
------------- -------------
Minority interest.................................................................. 412 364
Stockholders' equity, substantially restricted (notes 9 and 11):
Common stock, $.01 stated value; Authorized 2,000,000 shares; 10,000 shares
issued and outstanding......................................................... 100 100
Additional paid-in capital....................................................... 1,080,028 1,080,028
Retained earnings................................................................ 511,355 117,740
Net unrealized gains (losses) on securities available-for-sale (note 2).......... 102,037 (18,606)
------------- -------------
Total stockholders' equity................................................... 1,693,520 1,179,262
------------- -------------
Commitments and contingencies (notes 13 and 14).................................... $ 55,210,119 42,514,145
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1994 (SEE NOTE 1)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Interest income:
Loans receivable.................................................................... $ 2,226,432 988,164
Mortgage-backed securities.......................................................... 673,192 285,790
Investment securities............................................................... 263,701 82,408
Time deposits in banks.............................................................. 46,461 41,869
Other interest-earning assets....................................................... 259,431 130,069
------------ ------------
Total interest income............................................................. 3,469,217 1,528,300
------------ ------------
Interest expense:
Deposits............................................................................ 1,576,235 701,862
Borrowed funds...................................................................... 220,988 122,223
Securities sold under agreements to repurchase...................................... 143,689 5,754
------------ ------------
Total interest expense............................................................ 1,940,912 829,839
------------ ------------
Net interest income............................................................... 1,528,305 698,461
Provision for loan losses (note 3).................................................... 46,000 --
------------ ------------
Net interest income after provision for loan losses............................... 1,482,305 698,461
Non-interest income:
Loan origination fees............................................................... 300,135 110,484
Loan servicing fees................................................................. 44,959 27,502
Customer service charges............................................................ 208,797 96,239
Other............................................................................... 76,650 47,185
------------ ------------
Total non-interest income......................................................... 630,541 281,410
------------ ------------
Non-interest expense:
Compensation and benefits........................................................... 706,476 353,842
Occupancy and equipment............................................................. 124,473 66,768
Deposit insurance premiums.......................................................... 86,816 41,113
Data processing fees................................................................ 127,484 59,916
Other............................................................................... 459,418 253,411
------------ ------------
Total non-interest expense........................................................ 1,504,667 775,050
------------ ------------
Income before income taxes and minority interest.................................. 608,179 204,821
Income taxes (note 9)................................................................. 214,511 86,959
------------ ------------
Income before minority interest....................................................... 393,668 117,862
Minority interest................................................................. (53) (122)
------------ ------------
Net income............................................................................ $ 393,615 117,740
------------ ------------
------------ ------------
Net income per share.................................................................. $ 39.36 11.77
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NET
UNREALIZED
GAINS
(LOSSES) ON
ADDITIONAL SECURITIES TOTAL
COMMON PAID-IN RETAINED AVAILABLE-FOR- STOCKHOLDERS'
STOCK CAPITAL EARNINGS SALE EQUITY
----------- ------------ --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993................... $ -- -- -- -- --
Issuance of stock............................... 100 1,080,028 -- -- 1,080,128
Net income...................................... -- -- 117,740 -- 117,740
Change in net unrealized gains (losses) on
securities available-for-sale................. -- -- -- (18,606) (18,606)
----- ------------ --------- ------------- ------------
Balances at December 31, 1994................... 100 1,080,028 117,740 (18,606) 1,179,262
Net income...................................... -- -- 393,615 -- 393,615
Change in net unrealized gains (losses) on
securities available-for-sale................. -- -- -- 120,643 120,643
----- ------------ --------- ------------- ------------
Balances at December 31, 1995................... $ 100 1,080,028 511,355 102,037 1,693,520
----- ------------ --------- ------------- ------------
----- ------------ --------- ------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 393,615 117,740
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses....................................................... 46,000 --
Amortization of excess of cost over fair value of net assets acquired........... 42,984 21,492
Depreciation of premises and equipment.......................................... 57,502 29,270
Deferred loan origination fees, net............................................. (12,384) (22,167)
Amortization of discounts on loans.............................................. (18,525) (13,753)
Amortization of premiums and discounts on investment securities, net............ (36,831) (6,281)
Stock dividends reinvested in Federal Home Loan Bank of Seattle................. (19,000) (12,900)
Increase in accrued interest receivable......................................... (98,169) (106,221)
Decrease (increase) in deferred income tax assets............................... 57,689 (3,899)
Increase in prepaid expenses and other assets................................... (57,942) (280,174)
Increase (decrease) in income taxes payable..................................... 159,117 (14,916)
Increase (decrease) in accrued interest payable................................. 280,930 (2,651)
Increase in accrued expenses and other liabilities.............................. 185,058 5,921
Increase in minority interest................................................... 36 366
-------------- ------------
Net cash provided by (used in) operating activities........................... 980,080 (288,173)
-------------- ------------
Cash flows from investing activities:
Net decrease in time deposits in banks............................................ 701,109 491,315
Net increase in loans receivable.................................................. (7,575,623) (3,708,571)
Purchases of securities held-to-maturity.......................................... (5,013,729) (2,558,225)
Proceeds from maturities and paydowns of securities held-to-maturity.............. 1,099,507 898,425
Purchases of securities available-for-sale........................................ (1,594,179) (2,964,580)
Proceeds from maturities and paydowns of securities available-for-sale............ 2,013,018 107,992
Purchases of premises and equipment............................................... (223,997) (18,568)
Payment for purchase of Heritage Bank (note 15)................................... -- (3,454,349)
Acquired subsidiaries' cash and cash equivalents (note 15)........................ -- 4,288,207
-------------- ------------
Net cash used in investing activities......................................... (10,593,894) (6,918,354)
-------------- ------------
Cash flows from financing activities:
Net increase in deposits.......................................................... 4,826,395 8,373,929
Proceeds from borrowings.......................................................... -- 2,725,000
Payments on borrowings............................................................ (75,000) (258,891)
Securities sold under repurchase agreements....................................... 6,830,948 260,034
Increase (decrease) in advances from borrowers for taxes and insurance............ (25,780) 28,392
Proceeds from issuance of stock................................................... -- 1,080,128
-------------- ------------
Net cash provided by financing activities..................................... 11,556,563 12,208,592
-------------- ------------
Net increase in cash and cash equivalents........................................... 1,942,749 5,002,065
Cash and cash equivalents at beginning of year...................................... 5,002,065 --
-------------- ------------
Cash and cash equivalents at end of year............................................ $ 6,944,814 5,002,065
-------------- ------------
-------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Heritage Bancorporation (the Company) was organized in 1993 as a Savings and
Loan Holding Company and on June 7, 1994 completed the acquisition of Heritage
Bank, F.S.B. (the Bank) and its wholly-owned subsidiary, Fidelity Service
Corporation (see note 15). Net income for the Bank since the date of acquisition
is included in the consolidated statements of income. The Company owns 199,980
shares of the 200,000 outstanding shares of the Bank or 99.9%.
The Bank provides a full range of banking services to individual and
corporate customers in central Montana. The Bank is subject to competition from
other financial institutions. The Bank is also subject to the regulations of
certain federal and state agencies and undergoes periodic examinations by those
regulatory authorities. Fidelity Service Corporation is dormant and has no
assets.
The accounting and consolidated financial statement reporting policies of
the Company conform with generally accepted accounting principles and prevailing
practices within the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported and disclosed amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
losses on loans and real estate owned, management obtains independent appraisals
for significant properties.
Management believes the allowances for losses on loans and real estate owned
are adequate. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowances may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses on loans and real estate owned. Such agencies
may require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
(b) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, the Bank and Fidelity Service Corporation. All significant
intercompany transactions have been eliminated in consolidation.
(c) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
cash, daily interest demand deposits and non-interest-bearing deposits with
banks, and time deposits in banks having original maturities of three months or
less to be cash equivalents.
F-31
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) INVESTMENT SECURITIES
At the date of acquisition, the Company's investments are classified into
three categories and accounted for as follows:
- Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as HELD-TO-MATURITY and reported at
amortized cost.
- Debt and equity securities, if bought and held principally for the purpose
of selling them in the near term, as classified as TRADING SECURITIES and
reported at fair value, with unrealized gains and losses included in
earnings.
- Debt and equity securities not classified as either held-to-maturity or
trading securities are classified as AVAILABLE-FOR-SALE and reported at
fair value, with any unrealized gains and losses excluded from earnings
and reported (net of tax effect) as a separate component of stockholders'
equity.
During 1995, the Bank reclassified all existing held-to-maturity securities
to available-for-sale (see note 2).
Declines in the fair value of available-for-sale or held-to-maturity
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.
Premiums and discounts on investment securities are recognized in interest
income using a method approximating the level-yield method over the term of each
security. Realized gains and losses of investments sold are based on the net
proceeds and the adjusted carrying amount of the securities sold using the
specific identification method, and are reported "net" in the consolidated
statements of income.
(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.
Material loan origination fees and related direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan.
Origination fees on loans sold to the secondary market are recognized when the
loan is sold. The amortization of deferred loan fees and costs and the accretion
of unearned discounts on non-performing loans is discontinued during periods of
non-performance.
(f) 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 through a valuation allowance by charges to income.
(g) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged against operating expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal balance is unlikely. The allowance is an amount that management
F-32
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
believes will be adequate to absorb losses inherent in existing loans and
commitments to extend credit, based on evaluations of the collectibility and
prior loss experience of loans and commitments to extend credit. The evaluation
takes into consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, commitments, and current and anticipated economic conditions that may
affect the borrowers' ability to pay.
In 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," (collectively, the Statements). The
Statements provide guidance for establishing an allowance for losses on specific
loans which are deemed to be impaired. Groups of smaller-balance homogeneous
loans (generally consumer loans) are evaluated for impairment collectively. A
loan is considered impaired when it is probable that the Company will be unable
to collect all principal and interest according to the contractual terms of the
loan's original agreement. When a loan is determined to be impaired, a reserve
is established through a charge to bad debt 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 operations 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 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.
The Company's adoption of the Statements did not have a material impact on
the Company's financial position or results of operations. At December 31, 1995,
impaired loans were not material.
(h) AMORTIZATION OF EXCESS PURCHASE PRICE
The excess of cost over the fair value of the net assets acquired of the
Bank is being amortized against income using the straight-line method over a
period of 15 years.
(i) OTHER REAL ESTATE OWNED
Other real estate owned represents real estate acquired through foreclosure
and is initially recorded at the lower of fair market value less estimated costs
to sell or "cost" (defined as the fair market value at initial foreclosure).
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to expense if the fair market value less estimated
costs to sell is less than "cost". At December 31, 1995 and 1994 the Company did
not hold any other real estate.
(j) STOCK IN FEDERAL HOME LOAN BANK
Federal law requires a member institution of the Federal Home Loan Bank
(FHLB) System to hold common stock of its district FHLB according to
predetermined formulas.
F-33
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on
straight-line and accelerated methods.
(l) INCOME TAXES
The Company and the Bank file a consolidated Federal income tax return.
Under a formal tax sharing arrangement, the Bank's Federal income tax provision
is computed on a separate company basis and income taxes currently payable are
paid to the Company. State statute prevents filing of a consolidated Montana
income tax return and, accordingly, separate returns are filed by the Bank and
the Company.
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.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(m) NET INCOME PER SHARE
Net income per share data is calculated by dividing net income by the
weighted average number of shares outstanding during the year.
(n) RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 financial statements to
conform with 1995 presentation.
(2) SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." The Special Report allows for a "one-time
classification" of securities as of a single date between November 15, 1995 and
December 15, 1995. In December 1995, the Company reclassified all existing
held-to-maturity securities with an amortized cost of approximately $10,982,000
and unrealized gain of approximately $54,000 to available-for-sale.
F-34
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(2) SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY (CONTINUED)
The amortized cost, unrealized gains and losses, and estimated market values
of securities available-for-sale at December 31 is as follows:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Government and Federal agencies......................... $ 3,549,906 26,751 (1,542) 3,575,115
Mortgage-backed securities................................... 11,856,164 168,583 (31,164) 11,993,583
Municipal bonds.............................................. 520,734 171 -- 520,905
------------- ----------- ----------- ------------
$ 15,926,804 195,505 (32,706) 16,089,603
------------- ----------- ----------- ------------
------------- ----------- ----------- ------------
<CAPTION>
1994
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Government and Federal agencies......................... $ 1,999,709 14 (35,822) 1,963,901
Mortgage-backed securities................................... 2,065,716 12,028 (5,756) 2,071,988
------------- ----------- ----------- ------------
$ 4,065,425 12,042 (41,578) 4,035,889
------------- ----------- ----------- ------------
------------- ----------- ----------- ------------
</TABLE>
Maturities of securities available-for-sale by contractual maturity at
December 31, 1995 are shown below. Maturities of securities do not reflect
repricing opportunities present in many adjustable rate securities, nor do they
reflect expected shorter maturities based upon early prepayments of principal.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
------------- ------------
<S> <C> <C>
Due in one year or less.......................................... $ 2,399,961 2,410,725
Due after one year through five years............................ 1,012,500 1,022,185
Due after five years through ten years........................... 658,179 663,110
Mortgage-backed securities....................................... 11,856,164 11,993,583
------------- ------------
$ 15,926,804 16,089,603
------------- ------------
------------- ------------
</TABLE>
There were no sales of available-for-sale securities or held-to-maturity
securities during the years ended December 31, 1995 and 1994.
F-35
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(2) SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY (CONTINUED)
The amortized cost and estimated market values of securities
held-to-maturity at December 31, 1994 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government and Federal agencies....... $ 1,296,345 -- (33,978) 1,262,367
Mortgage-backed securities................. 6,913,449 5,835 (116,569) 6,802,715
Municipal bonds............................ 119,372 -- (4,433) 114,939
------------ ----- ---------- ----------
Total.................................. $ 8,329,166 5,835 (154,980) 8,180,021
------------ ----- ---------- ----------
------------ ----- ---------- ----------
</TABLE>
(3) LOANS RECEIVABLE
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
First mortgage loans and contracts secured by real estate........ $ 9,303,296 8,100,585
Commercial loans................................................. 11,638,413 8,063,501
Second mortgage consumer loans................................... 3,355,565 2,931,115
Auto and other consumer loans.................................... 3,822,860 2,539,164
Savings account loans............................................ 201,066 254,866
------------- ------------
28,321,200 21,889,231
Less:
Unearned discount.............................................. 185,153 203,678
Allowance for loan losses...................................... 325,492 324,021
Net deferred loan origination fees............................. 36,110 48,494
------------- ------------
Loans receivable, net........................................ $ 27,774,445 21,313,038
------------- ------------
------------- ------------
</TABLE>
The weighted average stated interest rate on loans receivable at December
31, 1995 and 1994 was approximately 9.0% and 8.6%, respectively. The average
yield on loans receivable, including amortization of unearned discount, was
approximately 8.3% and 7.8% for the years ended December 31, 1995 and 1994,
respectively.
Loans receivable include approximately $11,527,000 and $10,587,000 in
adjustable rate loans at December 31, 1995 and 1994, respectively.
Real estate loans serviced for others totaled approximately $11,143,000 and
$11,585,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, approximately $4,369,000 and $2,757,000,
respectively, of loans or purchased participation loans were acquired where the
customers are out of the state of Montana. Anticipated credit losses arising
from these transactions compare favorably with the Company's credit loss
experience of its loan portfolio as a whole.
F-36
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(3) LOANS RECEIVABLE (CONTINUED)
A summary of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Balance, beginning of year............................................. $ 324,021 --
Provision for loan losses.............................................. 46,000 --
Reserve acquired (note 15)............................................. -- 325,497
Losses charged against the allowance, net of recoveries................ (44,529) (1,476)
---------- ---------
Balance, end of year................................................... $ 325,492 324,021
---------- ---------
---------- ---------
</TABLE>
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Loans receivable....................................................... $ 182,339 141,772
Mortgage-backed securities............................................. 92,300 50,464
Investment securities.................................................. 71,501 64,838
Time deposits in banks and other interest-earning assets............... 54,159 45,056
---------- ---------
$ 400,299 302,130
---------- ---------
---------- ---------
</TABLE>
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Land............................................................... $ 100,531 100,531
Building and improvements.......................................... 742,691 677,691
Furniture, fixtures and equipment.................................. 502,269 343,273
------------ ----------
1,345,491 1,121,495
Accumulated depreciation........................................... (409,331) (351,830)
------------ ----------
$ 936,160 769,665
------------ ----------
------------ ----------
</TABLE>
Depreciation of premises and equipment (included in occupancy and equipment
expense) was $57,502 and $29,270 for the years ended December 31, 1995 and 1994,
respectively.
F-37
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(6) DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995
------------------------------------------ 1994
WEIGHTED AVERAGE ------------------------
RATE AMOUNT % AMOUNT %
---------------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Passbook accounts.............................. 3.23% $ 4,026,947 9.4% $ 4,587,867 12.1%
NOW and demand accounts........................ 1.46% 15,186,477 35.5 15,852,253 41.8
------------- --------- ------------- ---------
Total...................................... 19,213,424 44.9 20,440,120 53.9
------------- --------- ------------- ---------
Certificate of deposit accounts:............... 3.00 to 3.99% -- -- 1,297,865 3.4
4.00 to 4.99% 411,244 1.0 1,485,942 3.9
5.00 to 5.99% 3,496,659 8.2 9,851,977 26.0
6.00 to 6.99% 19,620,315 45.9 2,706,204 7.1
7.00 to 7.99% -- -- 872,068 2.3
8.00 to 8.99% -- -- 1,282,183 3.4
------------- --------- ------------- ---------
Total certificate of deposit accounts.......... 23,528,218 55.1 17,496,239 46.1
------------- --------- ------------- ---------
Total deposits............................. $ 42,741,642 100.0% $ 37,936,359 100.0%
------------- --------- ------------- ---------
------------- --------- ------------- ---------
</TABLE>
Scheduled maturities of certificates of deposit at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
Due within one year............................................ $13,254,433
Due within two to three years.................................. 8,678,321
Due within four to five years.................................. 1,595,464
-----------
$23,528,218
-----------
-----------
</TABLE>
The weighted average cost of deposits was approximately 4.0% and 3.3% at
December 31, 1995 and 1994, respectively. The average cost of deposits
approximated 4.2% and 3.6% for the years ending December 31, 1995 and 1994,
respectively.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1995 1994
------------ ---------
<S> <C> <C>
Passbook accounts................................................. $ 118,027 66,127
NOW and demand accounts........................................... 230,663 126,624
Certificate of deposit accounts................................... 1,227,545 509,111
------------ ---------
$ 1,576,235 701,862
------------ ---------
------------ ---------
</TABLE>
Cash payments for interest on deposits for the years ended December 31, 1995
and 1994 totaled approximately $1,348,000 and $841,000, respectively.
F-38
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(7) BORROWED FUNDS
Borrowed funds consist of a note payable due in annual installments
beginning July 1996 with a $1,000,000 final payment on January 15, 2005. The
note is secured by 199,980 shares of the Bank and is guaranteed by certain
principal shareholders of the Company. Interest is at an annual rate equal to 2%
over the Federal Funds rate. The July 1996 payment of $75,000 was paid during
1995, therefore, the scheduled maturities of the debt are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 100,000
1998............................................................ 150,000
1999............................................................ 200,000
2000............................................................ 200,000
Thereafter...................................................... 2,000,000
---------
---------
</TABLE>
(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31, consist of
the following:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
BOOK MARKET VALUE
WEIGHTED VALUE OF OF
REPURCHASE AVERAGE UNDERLYING UNDERLYING
AMOUNT RATE PAID SECURITIES SECURITIES
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Securities sold under agreements to
repurchase within:
1 - 30 days............................ $ 4,902,682 5.24% $ 5,254,715 $ 5,313,077
31 - 90 days........................... 1,938,300 5.39 2,082,153 2,102,433
Greater than 90 days................... 250,000 5.96 260,851 258,065
------------ --- ------------ ------------
$ 7,090,982 5.35% $ 7,597,719 $ 7,673,575
------------ --- ------------ ------------
------------ --- ------------ ------------
<CAPTION>
1994
-----------------------------------------------------
BOOK MARKET VALUE
WEIGHTED VALUE OF OF
REPURCHASE AVERAGE UNDERLYING UNDERLYING
AMOUNT RATE PAID SECURITIES SECURITIES
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Securities sold under agreements to
repurchase within 31 - 90 days......... $ 238,922 5.04% $ 504,233 $ 484,645
------------ --- ------------ ------------
------------ --- ------------ ------------
</TABLE>
The securities underlying agreements to repurchase entered into by the
Company are for the same securities originally sold and are held in a custody
account by a third party. For the year ended December 31, 1995 securities sold
under agreements to repurchase averaged approximately $2,600,000 and the maximum
outstanding at any month-end during the year was approximately $7,100,000.
F-39
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(9) INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------- --------- ---------
<S> <C> <C> <C>
Year ended December 31, 1995:
Current.................................................... $ 105,019 51,803 156,822
Deferred................................................... 48,236 9,453 57,689
---------- --------- ---------
$ 153,255 61,256 214,511
---------- --------- ---------
---------- --------- ---------
1994:
Current.................................................... $ 60,118 12,915 73,033
Deferred................................................... 11,435 2,491 13,926
---------- --------- ---------
$ 71,553 15,406 86,959
---------- --------- ---------
---------- --------- ---------
</TABLE>
Actual income tax expense differs from the "expected" income tax expense for
that year (computed by applying the United States Federal corporate tax rate of
34% to earnings before income taxes) as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Computed "expected" tax expense......................................... $ 206,781 69,639
Increase (decrease) resulting from:
State taxes, net of Federal income tax effects........................ 40,429 10,168
Goodwill amortization................................................. 14,615 7,307
Prior year overaccrual................................................ (34,674) --
Other, net............................................................ (12,640) (155)
---------- ---------
$ 214,511 86,959
---------- ---------
---------- ---------
</TABLE>
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities. The types of
F-40
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(9) INCOME TAXES (CONTINUED)
temporary differences that give rise to significant portions of the deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to reserve for loan losses and loan
origination fees deferred for financial reporting purposes......... $ 105,951 114,451
Purchase accounting (note 15)........................................ 115,086 136,665
Available-for-sale securities fair value adjustment.................. -- 10,928
Capital loss carryforwards........................................... 17,868 16,266
Other................................................................ 6,604 8,382
---------- ---------
Total gross deferred tax assets.................................... 245,509 286,692
---------- ---------
Deferred tax liabilities:
Stock in Federal Home Loan Bank of Seattle, principally due to
dividends not recognized for tax purposes.......................... $ 72,403 65,097
Available-for-sale securities fair value adjustment.................. 60,762 --
Premises and equipment, principally due to differences in
deprecation........................................................ 10,153 10,153
SAIF assessment...................................................... 20,755 --
Other................................................................ -- 638
---------- ---------
Total gross deferred tax liabilities............................... 164,073 75,888
---------- ---------
Net deferred tax asset............................................. $ 81,436 210,804
---------- ---------
---------- ---------
</TABLE>
In assessing the realization 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 projections
for future taxable income over the periods which the deferred tax assets are
deductible, at December 31, 1995 and 1994 management believes it is more likely
than not that the Company and the Bank will realize the benefits of these
deductible differences.
Retained earnings at December 31, 1995 and 1994 includes approximately
$265,000 for which no provision for Federal income tax has been made. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate. However, it is not contemplated that amounts
allocated to bad debt deductions will be used in any manner that would create
taxable income.
The Bank has capital loss carryforwards totaling approximately $110,000 that
expire in 1998.
F-41
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(9) INCOME TAXES (CONTINUED)
Cash paid for income taxes for the years ended December 31, 1995 and 1994
totaled approximately $82,000 and $101,000, respectively.
(10) RELATED PARTY TRANSACTIONS
Central Financial Services (CFS) provides various management services to the
Bank including, accounting and tax services, investment consulting, personnel
consulting, insurance advisory services and regulatory consulting. CFS is owned
by the Company's majority stockholder. The charges were $63,942 and $36,031 for
the years ended December 31, 1995 and 1994, respectively.
(11) EMPLOYEE BENEFIT PLAN
The Bank has an employee savings plan. To be eligible for the plan, an
employee must complete one year of full-time employment with the Bank. Annual
contributions, which are determined by the Bank's Board of Directors, are to be
at least 2% of the participating employees' wages. Contributions for the years
ended December 31, 1995 and 1994 totaled approximately $20,600 and $9,300,
respectively.
(12) REGULATORY CAPITAL OF THE BANK
The three capital requirements under the Financial Institutions Reform,
Recovery and Enforcement Act are: (1) a tangible capital requirement
(stockholders' equity adjusted for the effects of intangibles, investments and
advances to "nonincludable" subsidiaries and other factors) equal to not less
than 1.5% of tangible assets (as defined in the regulations), (2) a core capital
requirement (comprised of tangible capital adjusted for supervisory goodwill and
other defined factors) equal to not less than 3% of tangible assets, and (3) a
risk-based capital requirement equal to at least 8% of all risk-weighted assets.
For the risk-weighting, selected assets are given a risk assignment of 0% to
100%. As an example, cash and securities backed by the full faith and credit of
the U.S. Government are risk-weighted at 0% of book value, while repossessed
assets and delinquent loans over 90 days past due are assigned a 100% factor, or
a risk-weighting equal to their book value.
The following table demonstrates, in dollars and percents, the extent to
which the Bank exceeds the minimum capital requirements as of December 31, 1995:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
----------------------------------------------
APPROXIMATE
ACTUAL REQUIREMENT EXCESS
-------------- -------------- --------------
<S> <C> <C> <C>
Tangible capital:
Dollar amount.............................. $ 3,433,000 817,000 2,616,000
Percent of tangible assets................. 6.3% 1.5% 4.8%
Core capital:
Dollar amount.............................. $ 3,433,000 1,634,000 1,799,000
Percent of tangible assets................. 6.3% 3.0% 3.3%
Risk-based capital:
Dollar amount.............................. $ 3,758,000 2,353,000 1,405,000
Percent of risk-weighted assets............ 12.8% 8.0% 4.8%
</TABLE>
F-42
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(12) REGULATORY CAPITAL OF THE BANK (CONTINUED)
Generally accepted accounting principles (GAAP) capital differs from
tangible, core, and risk-based capital as a result of the following:
<TABLE>
<S> <C>
Capital measured by GAAP........................................ $ 4,117,000
Unrealized gains on available-for-sale securities............... (102,000)
Goodwill........................................................ (580,000)
Other........................................................... (2,000)
-----------
Tangible and core capital....................................... 3,433,000
General valuation reserve....................................... 325,000
-----------
Risk-based capital.............................................. $ 3,758,000
-----------
-----------
</TABLE>
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
In 1995, the Company adopted SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments." SFAS No. 107 requires disclosures of fair value for
financial instruments, whether recognized or not recognized in the statement of
financial condition. A financial instrument is defined by SFAS No. 107 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.
Quoted market prices are used for fair value when available, but do not
exist for some of the Bank's financial instruments, primarily loans and time
deposits. The fair value of these instruments has been derived from the Federal
Home Loan Bank (FHLB) Rate Shock Analysis (FHLB Analysis). This FHLB Analysis
primarily employs the discounted cash flow method which determines the economic
value of loans and time deposits by calculating the present value of expected
cash flows. The present value is determined 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 FHLB makes assumptions about the size and timing of
expected cash flows and appropriate discount rates. Different assumptions could
materially change these instruments' estimated values.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Therefore, the aggregate fair
values presented do not represent the Bank's underlying value.
The following assumptions and methods were used by the Bank in estimating
fair value:
FINANCIAL ASSETS. Due to the liquid nature of the instruments, the carrying
value of cash and cash equivalents and time deposits in banks approximates
market value. For all investment securities, the fair value is based upon quoted
market prices. The fair value of loans receivable was obtained from the FHLB
Analysis. The fair value of accrued interest receivable approximates book value
as the Bank expects contractual receipt in the short-term. The fair value of
FHLB stock approximates redemption value.
FINANCIAL LIABILITIES. The fair value of NOW and demand accounts and
non-term savings deposits approximates book values as these deposits are payable
on demand. The fair value of time deposits was obtained from the FHLB Analysis.
The imputed interest rate on the borrowed funds approximates the Company's
current long-term borrowing rate. Accordingly, the fair value of borrowed funds
approximates
F-43
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
the carrying value. The fair value of securities sold under agreements to
repurchase and accrued interest payable approximates book value due to
contractual payment in the short-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 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
BOOK VALUE FAIR VALUE
------------- ------------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents.......................................................... $ 6,945,000 6,945,000
Time deposits in banks............................................................. 345,000 345,000
Securities available-for-sale...................................................... 16,090,000 16,090,000
Loans receivable, net.............................................................. 29,169,000 29,727,000
Accrued interest receivable........................................................ 400,000 400,000
Stock in Federal Home Loan Bank of Seattle......................................... 304,000 304,000
------------- ------------
$ 53,253,000 53,811,000
------------- ------------
------------- ------------
Financial Liabilities:
NOW and demand accounts............................................................ $ 15,186,000 15,186,000
Savings deposits................................................................... 4,027,000 4,027,000
Time deposits...................................................................... 23,528,000 23,669,000
Borrowed funds..................................................................... 2,650,000 2,650,000
Securities sold under agreements to repurchase..................................... 7,091,000 7,091,000
Accrued interest payable........................................................... 390,000 390,000
------------- ------------
$ 52,872,000 53,013,000
------------- ------------
------------- ------------
Off-Balance Sheet:
Commitments to extend credit....................................................... $ -- 688,000
------------- ------------
------------- ------------
</TABLE>
F-44
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(14) COMMITMENTS AND CONTINGENCIES
The Bank has sold loans to various investors in the secondary market under
sales agreements which contain recourse provisions. Under the recourse
provisions, the Bank may be required to repurchase a loan if a borrower fails to
make three monthly payments within 120 days after the sale of the loan. The
balance of loans sold with recourse provisions remaining at December 31, 1995 is
approximately $6,884,000.
In March 1994, the Bank entered into a three-year noncancelable service
contract for data processing services.
The deposits of the Bank are insured by the Savings Association Insurance
Fund (SAIF), one of two funds administered by the Federal Deposit Insurance
Corporation (FDIC). The Bank currently pays premiums of approximately 0.23% of
thrift deposits. Under a plan to recapitalize the SAIF, the U.S. Treasury
Department, FDIC, OTS, and the Congress are considering a plan to impose a
"one-time" premium assessment of an incremental 0.85% to 0.90% of deposits. If
this plan is implemented, the Bank would be assessed a "one-time" premium of
approximately $239,000, based on deposit balances as of March 31, 1995.
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank 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 involve, to
varying degrees, elements of credit risk.
The Bank's exposure to credit loss in the event of nonperformance by the
other parties to the financial instruments is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
Financial instruments outstanding at December 31, 1995 whose contract
amounts represent credit risk include:
<TABLE>
<S> <C>
Commitments to extend credit:
--fixed rate.................................................... $ 126,075
--variable rate................................................. 562,200
---------
$ 688,275
---------
---------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case by case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counter-party. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
F-45
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(16) ACQUISITION
On June 7, 1994, the Company acquired 199,980 shares of the 200,000
outstanding shares (99.9%) of Heritage Bank. The transaction was accounted for
as a purchase and, accordingly, the consolidated statement of income for the
year ended December 31, 1994 includes the Bank's results of operations since the
date of the purchase.
In connection with the purchase, the Company recorded the following:
<TABLE>
<S> <C>
Cash and cash equivalents......................... $ 4,288,207
Time deposits in bank............................. 1,537,909
Investment securities............................. 7,871,922
Loans receivable, net............................. 17,864,101
Excess of cost over fair value of net assets
acquired........................................ 644,789
Stock in Federal Home Loan Bank of Seattle........ 271,900
Accrued interest receivable....................... 195,909
Premises and equipment............................ 780,367
Deferred income tax assets........................ 195,977
Prepaid expense and other assets.................. 20,969
------------
33,672,050
------------
Deposits.......................................... 29,541,318
Borrowed funds.................................... 258,891
Advances from borrowers for taxes and insurance... 123,954
Income taxes payable.............................. 28,671
Accrued interest payable.......................... 111,756
Accrued expenses and other liabilities............ 153,111
------------
30,217,701
------------
Payment for purchase............................ $ 3,454,349
------------
------------
</TABLE>
The premium paid over the historical net assets of the Bank at the date of
purchase was as follows:
<TABLE>
<S> <C>
Cash consideration paid........................... $ 3,454,349
Net assets........................................ 3,045,291
-----------
Premium paid over historical cost of net
assets........................................ $ 409,058
-----------
-----------
</TABLE>
The premium was allocated to the assets acquired as follows:
<TABLE>
<S> <C>
Loans................................... $ (132,000)
Investment securities................... (248,211)
Deferred income tax assets.............. 144,480
Excess of acquisition cost (goodwill)... 644,789
-----------
$ 409,058
-----------
-----------
</TABLE>
F-46
<PAGE>
HERITAGE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(17) PARENT COMPANY INFORMATION
The following is condensed information of Heritage Bancorporation (parent
company only):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
------------ ----------
<S> <C> <C>
CONDENSED BALANCE SHEETS
ASSETS:
Cash (deposited with Bank)............................................................. $ 33,020 33,718
Investment in Bank..................................................................... 4,117,399 3,631,151
Other assets........................................................................... 239,692 277,789
------------ ----------
$ 4,390,111 3,942,658
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Note payable........................................................................... $ 2,650,000 2,725,000
Other liabilities...................................................................... 46,591 38,396
Stockholders' equity................................................................... 1,693,520 1,179,262
------------ ----------
$ 4,390,111 3,942,658
------------ ----------
------------ ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
------------ ----------
<S> <C> <C>
CONDENSED STATEMENTS OF INCOME
Revenues:
Cash dividends from the Bank......................................................... $ 160,000 50,000
Interest earning assets.............................................................. 2,338 1,545
------------ ----------
162,338 51,545
------------ ----------
Expenses:..............................................................................
Interest on note payable............................................................. 220,988 122,238
Other................................................................................ 34,276 32,219
------------ ----------
255,264 154,457
------------ ----------
Loss before income tax benefit and equity in undistributed income of the Bank.......... (92,926) (102,912)
Income tax benefit..................................................................... 120,953 25,000
------------ ----------
Income (loss) before equity in undistributed income of the Bank........................ 28,027 (77,912)
Equity in undistributed income of the Bank............................................. 365,588 195,652
------------ ----------
Net income........................................................................... $ 393,615 117,740
------------ ----------
------------ ----------
</TABLE>
F-47
<PAGE>
UNITED UNAUDITED AND AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
F-48
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED, EXCEPT DECEMBER 31)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER
-------------------- 31,
1997 1996 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
EQUITY/
ASSETS, SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks................. $ 715 $ 673 $ 921
Interest-earning deposits with banks............ 5,028 485 2,013
--------- --------- ---------
5,743 1,158 2,934
Investments:
Securities held-to-maturity (estimated fair
value of $32,492, $36,705 and $35,943 at
September 30, 1997 and 1996 and December 31,
1996, respectively)........................... 32,300 36,764 35,828
Securities available-for-sale................... 26,349 31,655 25,185
--------- --------- ---------
58,649 68,419 61,013
Loans receivable, net............................. 34,160 33,585 35,176
Premises and equipment, net....................... 1,363 1,432 1,407
Real estate owned................................. 357 666 425
Accrued interest receivable....................... 1,052 956 817
FHLB stock, at cost............................... 524 379 379
Other assets...................................... 1,234 1,350 1,686
--------- --------- ---------
$ 103,082 $ 107,945 $103,837
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market accounts................... $ 7,753 $ 8,407 $ 8,669
Savings deposits................................ 26,477 30,317 29,918
Time deposits................................... 37,881 39,568 40,110
--------- --------- ---------
72,111 78,292 78,697
FHLB advances..................................... 5,000 3,650 --
Accrued interest payable.......................... 297 276 66
Advance payments by borrowers for taxes and
insurance....................................... 466 522 211
Income taxes payable.............................. 281 83 259
Other liabilities................................. 170 802 188
--------- --------- ---------
78,325 83,625 79,421
Stockholders' equity:
Preferred stock, no par value (2,000,000 shares
authorized; none outstanding)................... -- -- --
Common stock, no par value (8,000,000 shares
authorized; 1,223,312 outstanding).............. 8,849 1,223 1,223
Paid-in capital................................... -- 7,626 7,626
Retained earnings--partially restricted........... 16,319 15,991 16,060
Unrealized loss on securities
available-for-sale.............................. (411) (520) (493 )
--------- --------- ---------
24,757 24,320 24,416
--------- --------- ---------
$ 103,082 $ 107,945 $103,837
--------- --------- ---------
--------- --------- ---------
Equity/Assets..................................... 24.0% 22.5% 23.5%
Book Value/Share.................................. $ 20.24 $ 19.88 $ 19.96
</TABLE>
F-49
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest income:
Loans..................................................................................... $ 2,419 $ 2,150
Mortgage-backed securities................................................................ 1,177 1,550
Investment securities..................................................................... 1,821 1,578
Interest-earning deposits................................................................. 143 124
--------- ---------
5,560 5,402
Interest Expense:
Deposits.................................................................................. 2,497 2,603
FHLB advances............................................................................. 155 71
--------- ---------
2,652 2,674
Net interest income....................................................................... 2,908 2,728
Provision for losses on loans............................................................... -- --
--------- ---------
Net interest income after provision for losses on loans................................... 2,908 2,728
Noninterest Income:
Fees and discounts........................................................................ 307 325
FHLB stock dividends...................................................................... 28 24
Investment securities sales, net gain..................................................... -- 132
Other Income.............................................................................. 147 162
--------- ---------
482 643
Noninterest Expense:
Salaries and employee benefits............................................................ 908 850
Net occupancy and equipment expense....................................................... 195 184
Data processing expense................................................................... 66 67
FDIC/SAIF deposit insurance premium....................................................... 38 135
FDIC/SAIF deposit insurance special assessment............................................ -- 550
Other expenses............................................................................ 358 393
--------- ---------
1,565 2,179
--------- ---------
Income before income taxes................................................................ 1,825 1,192
Provision for income taxes.................................................................. 685 440
--------- ---------
Net income................................................................................ $ 1,140 $ 752
--------- ---------
--------- ---------
Net income per share........................................................................ $ .93 $ .62
</TABLE>
F-50
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................................ $ 1,140 $ 752
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization of Bank premises and equipment............................ 87 86
Depreciation of real estate held for investment......................................... 27 27
Investment securities net accretion..................................................... (59) (174)
Sales of available-for-sale securities, net gain........................................ -- (132)
Loans originated for the secondary market............................................... (7,989) (9,078)
Proceeds from secondary market loan sales............................................... 8,443 8,978
FHLB stock dividends.................................................................... (27) (23)
Net change in income taxes payable...................................................... 22 (177)
Net change in accrued interest receivable............................................... (235) (41)
Net change in accrued interest payable.................................................. 231 208
Net change in other assets.............................................................. (86) 79
Net change in other liabilities......................................................... (18) 393
---------- ----------
Net cash provided by operating activities............................................. 1,536 898
INVESTING ACTIVITIES:
Purchases of held-to-maturity securities.................................................. (17,350) (17,047)
Proceeds from matured and called held-to-maturity securities.............................. 14,950 2,000
Mortgage-backed securities principal collections.......................................... 5,987 21,590
Purchases of available-for-sale securities................................................ (3,998) (6,908)
Proceeds from matured and called available-for-sale securities............................ 3,000 7,000
Proceeds from sales of available-for-sale securities...................................... 3,139
Loans originated for portfolio............................................................ (12,007) (14,311)
Loan principal collections................................................................ 10,864 7,868
Proceeds from sales of portfolio loans.................................................... 1,896 2,239
All other changes in loans, net........................................................... 263 904
Purchases of premises and equipment....................................................... (43) (24)
Net change in real estate owned........................................................... 41 (136)
Proceeds from redemption of FHLB stock.................................................... -- 120
FHLB stock purchase....................................................................... (118) --
---------- ----------
Net cash provided by investing activities............................................. 3,485 6,434
---------- ----------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits....................................................... (6,586) 1
Net increase (decrease) in FHLB advances.................................................. 5,000 (6,850)
Net increase in advance escrow payments by borrowers...................................... 255 298
Capitalized holding company formation costs............................................... -- (37)
Cash dividends paid....................................................................... (881) (807)
---------- ----------
Net cash used by financing activities................................................. (2,212) (7,395)
---------- ----------
Increase (decrease) in cash and cash equivalents.......................................... 2,809 (63)
Cash and cash equivalents at beginning of year............................................ 2,934 1,221
---------- ----------
Cash and cash equivalents at end of period............................................ $ 5,743 $ 1,158
---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash payments for interest................................................................ $ 2,421 $ 2,466
Cash payments for income taxes............................................................ $ 663 $ 481
</TABLE>
F-51
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------
UNREALIZED
HOLDING
GAINS
COMMON PAID-IN RETAINED (LOSSES)
STOCK CAPITAL EARNINGS NET TOTAL
----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance--December 31, 1996................................ $ 1,223 $ 7,626 $ 16,060 $ (493) $ 24,416
Net income.............................................. -- -- 1,140 -- 1,140
Cash dividends paid ($.72 per share).................... -- -- (881) -- (881)
Decrease in unrealized loss on investment securities
available-for-sale.................................... -- -- -- 82 82
Elimination of par value................................ 7,626 (7,626) -- -- --
----------- --------- --------- ----- ---------
Balance--September 30, 1997............................... $ 8,849 $ $ 16,319 $ (411) $ 24,757
----------- --------- --------- ----- ---------
----------- --------- --------- ----- ---------
</TABLE>
F-52
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL
United Financial Corp. ("United"), a Minnesota corporation formed in 1996,
is a unitary savings bank holding company headquartered in Great Falls, Montana.
United Financial Corp.'s wholly owned subsidiary, United Savings Bank, F.A.
("United Bank") is a federally chartered stock savings bank. United Bank's
wholly owned subsidiary, Community Service Corporation, a Montana corporation
formed in 1974, owns and manages real estate held for investment. United, United
Bank, and United Bank's subsidiary are collectively referred to as the Company.
United Bank's Great Falls Montana headquarters serves its primary market, the
Great Falls metropolitan area. Full service branches are located in Shelby,
Glendive and Havre, Montana. United Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC")--Savings Association Insurance Fund
("SAIF"). United Bank is a member of the Federal Home Loan Bank ("FHLB") of
Seattle, Washington, and is subject to comprehensive supervision, regulation and
examination by the Office of Thrift Supervision ("OTS") and the FDIC.
BASIS OF PRESENTATION
United's consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Securities and Exchange Commission Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the information contained herein reflects all postings and
disclosures (consisting only of normal recurring adjustments) necessary for a
fair presentation of the consolidated financial condition, results of
operations, changes in stockholders' equity, and changes in cash flows for the
periods disclosed. Operating results for the nine months ended September 30,
1997, are not necessarily indicative of the results anticipated for the year
ended December 31, 1997. For additional information, refer to the consolidated
audited financial statements and footnotes thereto included in the Company's
annual report and Form 10-K for the year ending December 31, 1996.
MERGER ANNOUNCEMENT
On June 24, 1997, a joint press release announced that United and Heritage
Bancorporation had signed a letter of intent to merge. Heritage Bancorporation
is the parent company of Heritage Bank, FSB, a Great Falls, Montana federally
chartered savings bank with $80 million in assets. A combination of United and
Heritage would create a banking institution with approximately $183 million in
assets, $88 million in loans, $137 million in deposits and $30 million in
stockholders' equity.
Under the terms of the letter of intent, United and Heritage will merge in a
tax-free reorganization pursuant to which United shareholders will own 70% of
the combined entity and Heritage shareholders will own 30% of the combined
entity. The parties have agreed that the bank holding company which results from
the merger will be called United Financial Corp. and that the resulting bank
will be called Heritage Bank.
The merger has been approved by the Boards of Directors of both companies
with the effective date expected to be in the first quarter of 1998, pending
regulatory approval and a favorable vote by shareholders.
F-53
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STOCKHOLDERS' EQUITY
On April 23, 1997, the shareholders of United approved a resolution which
amended United's Articles of Incorporation and changed the par value of United's
common stock and preferred stock from $1.00 par value to no par value. As a
result, United's additional paid-in capital account has been combined with
common stock as presented in the Consolidated Statement of Changes in
Stockholders' Equity. In addition, the Stockholders' Equity section of United's
Consolidated Statements of Financial Condition reflect no par value for
preferred and common stock.
CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, all cash, daily
interest and noninterest-bearing deposits with banks are classified as cash
equivalents.
COMPUTATION OF NET INCOME PER SHARE
Net income or earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. The
weighted average number of common shares outstanding for the quarters and nine
months ended September 30, 1997, and September 30, 1996, were 1,223,312.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board ("FASB") Statement No. 128 "Earnings
per Share," was issued in February 1997. This Statement will replace the
presentation of primary earnings per share (EPS) with a presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stocks were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
Statement No. 128 is effective for United for periods ending after December
15, 1997. Once effective, all prior period EPS data presented must be restated
to conform to the provisions of the Statement. Since United has never had
employee stock options or any other provisions whereby common stock could be
exercised or converted into additional common stock, the adoption of Statement
No. 128 is not expected to have a material impact on the calculation of EPS.
DIVIDENDS DECLARED
On January 27, 1997, the Board of Directors of United declared a
first-quarter 1997 cash dividend of $.235 per share, paid February 24, 1997. On
April 23, 1997, the Board of Directors of United declared a second-quarter 1997
cash dividend of $.24 per share, paid May 26, 1997. On July 28, 1997, the Board
of Directors of United declared a third-quarter 1997 cash dividend of $.245 per
share paid August 25, 1997. On October 27, 1997, the Board of Directors of
United declared a fourth-quarter 1997 cash dividend of $.25 per share, paid
November 24, 1997.
MATERIAL CONTRACTS--SEVERANCE AGREEMENTS
Beginning in 1993, and renewed each year, United Bank's Board of Directors
provided change of control severance agreements to its President and each of its
five Vice-Presidents. The agreements provide
F-54
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
for severance compensation in the event any company or person acquires control
of United Bank, as determined in accordance with applicable federal regulations.
Pursuant to his agreement upon a change of control, United Bank's President
would be entitled to lump-sum compensation equal to two times his annual base
salary plus any target bonuses, and 24 months of continued welfare and employee
benefits. The agreements with each of the five Vice-Presidents provide for
payment, upon a change of control, of lump-sum compensation equal to their
annual base salary, plus any target bonuses, and 12 months of continued welfare
and employee benefits.
FDIC/SAIF INSURANCE SPECIAL ASSESSMENT AND CHANGE IN INSURANCE PREMIUM
Enacted into law in 1996 was legislation providing for a special assessment
against FDIC/SAIF member institutions which capitalized the SAIF insurance
reserve to the statutory prescribed 1.25% of insured deposits level. For United
Bank, this one-time special assessment was $549,700, based upon 65.7 basis
points per $100 of United Bank's insured deposit base on March 31, 1995. The
Company's 1996 consolidated financial statements reflect this additional
FDIC/SAIF insurance expense, the after tax impact amounting to a $338,300, or
$.28 per share, reduction in third quarter and all 1996 net income.
Based upon United Bank's 1996 year-end "1A" FDIC risk classification, United
Bank's semi-annual FDIC/SAIF assessment rate, beginning January 1, 1997,
decreased from 23 basis points to 6.5 basis points per $100 of insured deposits.
Most commercial banks, now insured under the FDIC/Bank Insurance Fund (BIF),
began paying 1.3 basis points per $100 of insured deposits. For the second half
of 1997 United Bank's FDIC/SAIF assessment rate will be 6.3 basis points and BIF
members will pay 1.26 basis points. In addition, this new law provides for the
merger of the BIF/SAIF insurance funds on January 1, 1999, provided the bank and
savings association charters have been merged by that date.
EMERGING LEGISLATION
Now being debated in the U.S. Congress and Senate are several "Banking" and
"Financial Modernization" bills that include such issues as thrift and thrift
holding company charter changes, conversion of thrifts to national bank charter
status, changes in bank holding company powers, merger of the BIF and SAIF FDIC
insurance funds, consolidation of federal regulatory agencies, "modernization"
of the FHLB system, branch banking and several other "consumer" and regulatory
issues. What final form, and impact, this type of legislation and other
potential changes in federal law regarding interstate banking and branching,
Glass-Stegall Act revisions, the continued consolidation of the banking industry
and other regulatory changes will have on United Bank's operations cannot be
predicted at this time.
DEBT AND EQUITY INVESTMENT ACCOUNTING
FASB Statement No. 115, "Accounting for Investments in Certain Debt and
Equity Securities" addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and all investments
in debt securities. Statement No. 115 requires that the Company's investments be
classified into the following three categories and accounted for as follows:
(1) Debt securities purchased with the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at amortized
cost.
(2) Debt and equity securities purchased and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
F-55
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale and
reported at fair value, with net unrealized gains and losses excluded
from earnings and reported (net of tax effect) as a separate component of
stockholders' equity.
United does not maintain a trading portfolio. All investment securities are
therefore classified as either held-to-maturity or available-for-sale.
Held-to-maturity investments, shown at cost, are comprised of mortgage-backed
securities, Federal Home Loan Bank ("FHLB") certificates of deposit and U.S.
Government securities and agencies. Available-for-sale securities, shown at fair
value with net unrealized holding gains and losses, net of tax, reported in
stockholders' equity, are comprised of the Kemper U.S. Government bond mutual
fund and U.S. Government securities and agencies.
F-56
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
A comparison of the amortized cost and estimated fair value of investment
securities at the dates indicated is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government agencies.................................... $11,000 $ 78 $ -- $11,078
GNMA fixed and adjustable rate.............................. 1,728 41 -- 1,769
FNMA and FHLMC adjustable rate.............................. 5,619 46 (83 ) 5,582
FNMA and FHLMC 7 yr. and FHLMC 5 yr balloons................ 12,646 112 -- 12,758
FNMA and FHLMC REMIC certificates........................... 1,307 -- (2 ) 1,305
--------------------------------
Mortgage-backed securities................................ 21,300 199 (85 ) 21,414
--------------------------------
$32,300 $ 277 $ (85 ) $32,492
--------------------------------
--------------------------------
Available-for-Sale:
U.S. Treasuries and U.S. Government agencies................ $21,022 $ 65 $ (16 ) $21,071
Kemper U.S. Government bond mutual fund..................... 5,996 -- (718 ) 5,278
--------------------------------
$27,018 $ 65 $ (734 ) $26,349
--------------------------------
--------------------------------
DECEMBER 31, 1996
--------------------------------
(DOLLARS IN THOUSANDS)
Held-to-Maturity:
U.S. Government agencies.................................... $ 2,600 $ 9 -- $ 2,609
FHLB certificates of deposit................................ 6,000 -- -- 6,000
--------------------------------
U.S. Government agencies and other........................ 8,600 9 -- 8,609
--------------------------------
GNMA fixed and adjustable rate.............................. 2,092 31 (1 ) 2,122
FNMA and FHLMC adjustable rate.............................. 5,787 28 (79 ) 5,736
FNMA and FHLMC 7 yr and FHLMC 5 yr balloons................. 14,965 143 (3 ) 15,105
FNMA and FHLMC REMIC certificates........................... 4,384 -- (13 ) 4,371
--------------------------------
Mortgage-backed securities................................ 27,228 202 (96 ) 27,334
--------------------------------
$35,828 $ 211 $ (96 ) $35,943
--------------------------------
--------------------------------
Available-for-Sale:
U.S. Treasuries and U.S. Government agencies................ $20,024 $ 94 $ (115 ) $20,003
Kemper U.S. Government bond mutual fund..................... 5,996 -- (814 ) 5,182
--------------------------------
$26,020 $ 94 $ (929 ) $25,185
--------------------------------
--------------------------------
</TABLE>
F-57
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
A comparison of the amortized cost and estimated fair values of
held-to-maturity and available-for-sale investment securities by contractual
maturities at September 30, 1997, is shown below. Estimated maturities may
differ from contractual maturities as some securities have call or prepayment
options.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Held-to-Maturity:
Due after 2 years through 5 years......................................................... $ 8,000 $ 8,063
Due after 5 years through 7 years......................................................... 3,000 3,015
Mortgage-backed securities................................................................ 21,300 21,414
----------- -----------
32,300 $ 32,492
----------- -----------
----------- -----------
Available-for-Sale:
Due in 1 year or less..................................................................... $ 14,043 $ 14,040
Due after 1 year through 2 years.......................................................... 1,985 2,001
Due after 2 years through 5 years......................................................... 4,994 5,030
Kemper U.S. Government bond mutual fund................................................... 5,996 5,278
----------- -----------
$ 27,018 $ 26,349
----------- -----------
----------- -----------
</TABLE>
During the nine months ended September 30, 1997, no investment security was
sold. During the nine months ended September 30, 1996, one available-for-sale
investment security with a book value of $3,007,090 was sold realizing a gain of
$132,363.
ITEMS OF OTHER INCOME OR OTHER EXPENSES EXCEEDING ONE PERCENT OF THE AGGREGATE
OF TOTAL INTEREST INCOME AND OTHER INCOME
Advertising-related expenses for the nine months ended September 30, 1997,
and 1996 were $60,800 and $68,000, respectively.
REGULATORY CAPITAL
United Bank, the wholly owned regulated thrift institution of United is
required to meet three FIRREA-enacted capital regulations: (1) a tangible
capital requirement (stockholders' equity adjusted for the effects of
intangibles, investments and advances to "nonincludable" subsidiaries and other
factors) equal to not less than 1.5% of tangible assets (as defined in the
regulations), (2) a core capital requirement, comprised of tangible capital
adjusted for supervisory goodwill and other defined factors equal to not less
than 3% of tangible assets, and (3) a risk-based capital requirement equal to 8%
of all risk-weighted assets. For risk-weighting, selected assets are given a
risk assignment of 0% to 100%. For example, cash and securities backed by the
full faith and credit of the U.S. Government are risk-weighted at 0% of book
value, while repossessed assets and delinquent loans over 90 days past due are
assigned a 100% factor, or a risk-weighting equal to their book value. United
Bank's total risk-weighted assets at September 30, 1997 were approximately $35.4
million.
F-58
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table demonstrates as of September 30, 1997, the extent to
which United Bank exceeds in dollars and in percent, the three minimum
regulatory capital requirements:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
-----------------------------------
ACTUAL REQUIREMENT EXCESS
--------- ------------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Tangible capital:
$ Amount.................................................................... $ 15,052 $ 1,400 $ 13,652
% of tangible assets........................................................ 16.1% 1.5% 14.6%
Core capital:
$ Amount $ 15,052 $ 2,800 $ 12,252
% of tangible assets 16.1% 3.0% 13.1%
Risk-based capital:
$ Amount.................................................................... $ 15,127 $ 2,836 $ 12,291
% of risk-weighted assets................................................... 42.7% 8.0% 34.7%
</TABLE>
Stockholders' equity as shown on United's consolidated financial statements
differs from tangible, core and risk-based regulatory capital at the date
indicated as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
(DOLLARS IN
THOUSANDS)
(UNAUDITED)
<S> <C>
Consolidated stockholders' equity.......................................................... $ 24,757
United stockholders' equity................................................................ (9,347)
-------
United Bank stockholders' equity......................................................... 15,410
Non-includable investments and notes of United Bank's subsidiary........................... (351)
Unrealized loss on debt investment securities available-for-sale........................... (7)
-------
Tangible and Core United Bank capital.................................................... 15,052
Reserve for possible loan losses........................................................... 75
-------
Risk-based capital....................................................................... $ 15,127
-------
-------
</TABLE>
The Office of Thrift Supervision ("OTS") is responsible for insuring that
capital standards reflect interest rate risk ("IRR"), defined as the potential
for the reduction of earnings and stockholders' equity resulting from changes in
market interest rates. The OTS has delayed implementation of a proposed capital
deduction for savings institutions with a greater than normal level of IRR as
calculated by the OTS Net Portfolio Value Model. Due to its current capital
position, most recent OTS calculated IRR and proposed exemption criteria, United
Bank would not have an IRR capital adjustment.
Failure to comply with applicable regulatory capital requirements can result
in capital directives from the director of the OTS, restrictions on growth, and
other limitations on a savings association's operations.
F-59
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table sets forth for the nine month period ended September 30,
1997, information regarding (1) average balance sheets, (2) an analysis of net
interest income, and (3) other information regarding changes in interest-earning
assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID COST
--------- ----------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Mortgage loans (net of LIP)................................................... $ 31,374 $ 2,190 9.31%
Non-mortgage loans............................................................ 3,522 229 8.67%
--------- ----------- ---------
Loans receivable............................................................ 34,896 2,419 9.24%
Mortgage-backed securities.................................................... 24,085 1,177 6.52%
Investments-other............................................................. 39,124 1,821 6.21%
Interest-earning deposits..................................................... 3,567 143 5.35%
--------- ----------- ---------
Total interest-earning assets............................................... 101,672 $ 5,560 7.29%
----------- ---------
----------- ---------
Non-earning assets............................................................ 3,811
---------
$ 105,483
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and money market demand accounts.......................................... $ 8,373 $ 187 2.98%
Savings deposits.............................................................. 27,908 733 3.50%
Time deposits................................................................. 39,074 1,577 5.38%
--------- ----------- ---------
Total deposits.............................................................. 75,355 2,497 4.42%
FHLB advances................................................................. 3,481 155 5.87%
--------- ----------- ---------
Total interest-bearing liabilities.......................................... $ 78,836 $ 2,652 4.49%
--------- ----------- ---------
--------- ----------- ---------
Stockholders' Equity........................................................ $ 25,014
Unrealized loss on securities available-for-sale.............................. (502)
---------
Stockholders' equity, net..................................................... $ 24,512
---------
---------
Net interest-earning assets................................................... $ 22,836
Net interest income........................................................... $ 2,908
-----------
-----------
Net interest spread (1)....................................................... 2.80%
---------
---------
Net interest margin (2)....................................................... 3.81%
Net income.................................................................... $ 1,140
-----------
-----------
Return on average assets (3).................................................. 1.44%
Return on average equity (4).................................................. 6.20%
Equity to average assets ratio (5)............................................ 23.24%
Dividend payout ratio (6)..................................................... 77.28%
Interest-earning assets to interest-bearing liabilities ratio................. 1.29
Net income per share.......................................................... $ .93
Cash dividends paid........................................................... $ 881
</TABLE>
- --------------------------
(1) Average yield interest-earning assets minus average rate interest-bearing
liabilities
(2) Net interest income divided by average interest-earning assets
(3) Net income divided by average total assets
(4) Net income divided by average equity
(5) Average equity divided by average total assets
(6) Dividends paid per share divided by net income per share
F-60
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table sets forth for the nine month period ended September 30,
1996, information regarding (1) average balance sheets, (2) an analysis of net
interest income, and (3) other information regarding changes in interest-earning
assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID COST
--------- ----------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Mortgage loans (net of LIP)................................................... $ 28,515 $ 1,989 9.30%
Non-mortgage loans............................................................ 2,377 161 9.03%
--------- ----------- ---------
Loans receivable............................................................ 30,892 2,150 9.28%
Mortgage-backed securities.................................................... 33,656 1,550 6.14%
Investments-other............................................................. 35,061 1,578 6.00%
Interest-earning deposits..................................................... 3,175 124 5.22%
--------- ----------- ---------
Total interest-earning assets............................................... 102,784 $ 5,402 7.01%
----------- ---------
----------- ---------
Non-earning assets............................................................ 3,979
---------
$ 106,763
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW and money market demand accounts.......................................... $ 8,472 $ 192 3.02%
Savings deposits.............................................................. 30,910 815 3.52%
Time deposits................................................................. 39,247 1,596 5.42%
--------- ----------- ---------
Total deposits.............................................................. 78,629 2,603 4.41%
FHLB advances................................................................. 1,644 71 5.76%
--------- ----------- ---------
Total interest-bearing liabilities.......................................... $ 80,273 $ 2,674 4.44%
--------- ----------- ---------
--------- ----------- ---------
Stockholders' Equity........................................................ $ 25,015
Unrealized loss on securities available-for-sale.............................. (434)
---------
Stockholders' equity, net..................................................... $ 24,581
---------
---------
Net interest-earning assets................................................... $ 22,511
Net interest income $ 2,728
-----------
-----------
Net interest spread (1)....................................................... 2.57%
---------
---------
Net interest margin (2)....................................................... 3.54%
Net income.................................................................... $ 752
-----------
-----------
Return on average assets (3).................................................. .94%
Return on average equity (4).................................................. 4.08%
Equity to average assets ratio (5)............................................ 23.02%
Dividend payout ratio (6)..................................................... 107.31%
Interest-earning assets to interest-bearing liabilities ratio................. 1.28
Net income per share.......................................................... $ .62
Cash dividends paid........................................................... $ 807
</TABLE>
- --------------------------
(1) Average yield interest-earning assets minus average rate interest-bearing
liabilities
(2) Net interest income divided by average interest-earning assets
(3) Net income divided by average total assets
(4) Net income divided by average equity
(5) Average equity divided by average total assets
(6) Dividends paid per share divided by net income per share
F-61
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of United Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of United Financial Corp. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of United'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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements, United
changed its method of accounting for investments in debt and equity securities
in 1994 to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
KPMG Peat Marwick LLP
Billings, Montana
January 17, 1997
F-62
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks......................................................... $ 921 $ 805
Interest-earning deposits with banks.................................................... 2,013 416
---------- ----------
2,934 1,221
Investments:
Securities held-to-maturity (estimated fair value of $35,943 and $43,199 at December 31
1996 and 1995, respectively).......................................................... 35,828 43,117
Securities available-for-sale........................................................... 25,185 35,261
---------- ----------
61,013 78,378
Loans receivable, net..................................................................... 35,176 30,352
Premises and equipment, net............................................................... 1,407 1,494
Real estate owned......................................................................... 425 491
Accrued interest receivable............................................................... 817 916
Federal Home Loan Bank stock, at cost..................................................... 379 476
Other assets.............................................................................. 1,686 1,112
---------- ----------
$ 103,837 $ 114,440
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market demand accounts.................................................... $ 8,669 $ 8,167
Savings deposits........................................................................ 29,918 32,461
Time deposits........................................................................... 40,110 37,663
---------- ----------
78,697 78,291
Federal Home Loan Bank advances........................................................... -- 10,500
Accrued interest payable.................................................................. 66 68
Advance payments by borrowers for taxes and insurance..................................... 211 224
Income taxes payable...................................................................... 36 19
Deferred income taxes..................................................................... 223 241
Other liabilities......................................................................... 188 409
---------- ----------
79,421 89,752
Stockholders' equity:
Preferred stock, $1.00 par value (2,000,000 shares authorized; none outstanding)........ -- --
Common stock, $1.00 par value (8,000,000 shares authorized; 1,223,312 outstanding)...... 1,223 1,223
Paid-in capital......................................................................... 7,626 7,663
Retained earnings-partially restricted.................................................. 16,060 16,046
Unrealized loss on securities available-for-sale........................................ (493) (244)
---------- ----------
24,416 24,688
---------- ----------
Commitments and contingencies............................................................. $ 103,837 $ 114,440
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-63
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest Income:
Loans.................................................................... $ 2,956 $ 2,880 $ 3,125
Mortgage-backed securities............................................... 2,017 1,262 1,179
Investment securities.................................................... 2,128 3,000 3,451
Interest-earning deposits................................................ 152 252 171
---------- ---------- ----------
7,253 7,394 7,926
Interest Expense:
Deposits................................................................. 3,473 3,412 3,616
Federal Home Loan Bank advances.......................................... 92 8 --
---------- ---------- ----------
3,565 3,420 3,616
---------- ---------- ----------
Net interest income.................................................... 3,688 3,974 4,310
Provision for losses on loans............................................ -- -- --
---------- ---------- ----------
Net interest income after provision for losses on loans................ 3,688 3,974 4,310
Noninterest Income:
Fees and discounts....................................................... 444 358 529
FHLB stock dividends..................................................... 31 23 29
Investment securities sales, net gain.................................... 150 6 --
Other income............................................................. 210 208 214
---------- ---------- ----------
835 595 772
Noninterest Expense:
Salaries and employee benefits........................................... 1,172 1,174 1,126
Net occupancy and equipment expense...................................... 248 250 233
Data processing expense.................................................. 93 91 91
FDIC/SAIF deposit insurance premium...................................... 170 199 221
FDIC/SAIF deposit insurance special assessment........................... 550 -- --
Other expenses........................................................... 538 419 414
---------- ---------- ----------
2,771 2,133 2,085
---------- ---------- ----------
Income before income taxes............................................. 1,752 2,436 2,997
Provision for income tax expense (benefit):
Current.................................................................. 667 759 1,126
Deferred................................................................. (18) (45) (15)
---------- ---------- ----------
649 714 1,111
---------- ---------- ----------
Net income............................................................. $ 1,103 $ 1,722 $ 1,886
---------- ---------- ----------
---------- ---------- ----------
Net income per share....................................................... $ .90 $ 1.41 $ 1.54
</TABLE>
See Notes to Consolidated Financial Statements.
F-64
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................................................... $ 1,103 $ 1,722 $ 1,886
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of bank premises and equipment.................. 114 118 85
Depreciation of real estate held for investment............................... 37 38 40
Investment securities net accretion........................................... (208) (54) (21)
Sales of available-for-sale securities, net gain.............................. (150) (6) --
Loans originated for the secondary market..................................... (11,996) (8,426) (12,704)
Proceeds from secondary market loan sales..................................... 11,482 8,725 12,727
Federal Home Loan Bank stock dividends........................................ (30) (23) (29)
Net change in income taxes payable............................................ 17 13 (77)
Net change in deferred income taxes........................................... (18) (45) (15)
Net change in accrued interest receivable..................................... 98 91 (74)
Net change in accrued interest payable........................................ (2) 26 6
Net change in other assets.................................................... 114 (138) (8)
Net change in other liabilities............................................... (222) 139 (93)
--------- --------- ---------
Net cash provided by operating activities................................... 339 2,180 1,723
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of held-to-maturity securities........................................ (25,047) (25,092) (17,560)
Proceeds from matured and called held-to-maturity securities.................... 7,000 3,195 14,060
Mortgage-backed securities principal collections................................ 25,559 4,707 3,736
Purchases of available-for-sale securities...................................... (6,908) -- (7,824)
Proceeds from matured and called available-for-sale securities.................. 12,556 3,294 2,500
Proceeds from sales of available-for-sale securities............................ 4,141 12,797 --
Loans originated for portfolio.................................................. (19,330) (10,794) (11,302)
Loan principal collections...................................................... 11,384 8,945 12,448
Proceeds from sales of portfolio loans.......................................... 3,031 2,748 3,679
All other changes in loans, net................................................. 92 262 122
Purchases of premises and equipment............................................. (28) (301) (16)
Net decrease in real estate owned............................................... 29 35 64
Federal Home Loan Bank stock net redemptions (purchases)........................ 128 (62) 147
--------- --------- ---------
Net cash provided (used) by investing activities............................ 12,607 (266) 54
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits............................................. 406 (10,795) (6,206)
Net change in Federal Home Loan Bank advances................................... (10,500) 10,500 --
Net decrease in advance escrow payments by borrowers............................ (13) (42) (44)
Holding company formation costs................................................. (37) -- --
Cash dividends paid............................................................. (1,089) (991) (893)
--------- --------- ---------
Net cash used by financing activities....................................... (11,233) (1,328) (7,143)
--------- --------- ---------
Increase (Decrease) in cash and cash equivalents................................ 1,713 586 (5,366)
Cash and cash equivalents at beginning of year.................................. 1,221 635 6,001
--------- --------- ---------
Cash and cash equivalents at end of year.................................... $ 2,934 $ 1,221 $ 635
--------- --------- ---------
--------- --------- ---------
Supplemental Cash Flow Disclosure:
Cash payments for interest...................................................... $ 3,566 $ 3,394 $ 3,610
Cash payments for income taxes.................................................. $ 513 $ 915 $ 1,197
</TABLE>
See Notes to Consolidated Financial Statements
F-65
<PAGE>
UNITED FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1996
---------------------------------------------------------
UNREALIZED
HOLDING
GAINS
COMMON PAID-IN RETAINED (LOSSES)
STOCK CAPITAL EARNINGS NET TOTAL
----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance--December 31, 1993................................. $ 1,223 $ 7,663 $ 14,322 $ (553) $ 22,655
Effect of change in accounting for investment securities
January 1, 1994........................................ -- -- -- 619 619
Net income............................................... -- -- 1,886 -- 1,886
Cash dividends paid ($.73 per share)..................... -- -- (893) -- (893)
Increase in unrealized loss on investment securities
available-for-sale..................................... -- -- -- (1,718) (1,718)
----------- --------- --------- ----------- ---------
Balance--December 31, 1994................................. 1,223 7,663 15,315 (1,652) 22,549
Net income............................................... -- -- 1,722 -- 1,722
Cash dividends paid ($.81 per share)..................... -- -- (991) -- (991)
Decrease in unrealized loss on investment securities
available-for-sale..................................... -- -- -- 1,408 1,408
----------- --------- --------- ----------- ---------
Balance--December 31, 1995................................. 1,223 7,663 16,046 (244) 24,688
Net income............................................... -- -- 1,103 -- 1,103
Cash dividends paid ($.89 per share)..................... -- -- (1,089) -- (1,089)
Holding company formation costs.......................... -- (37) -- -- (37)
Increase in unrealized loss on investment securities
available-for-sale..................................... -- -- -- (249) (249)
----------- --------- --------- ----------- ---------
Balance--December 31, 1996................................. $ 1,223 $ 7,626 $ 16,060 $ (493) $ 24,416
----------- --------- --------- ----------- ---------
----------- --------- --------- ----------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-66
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
GENERAL
United Financial Corp. ("United"), a Minnesota corporation formed in 1996,
is a unitary savings bank holding company headquartered in Great Falls, Montana.
United Financial Corp.'s wholly owned subsidiary, United Savings Bank, F.A.
("United Bank") is a federally chartered stock savings bank. United Bank's
wholly owned subsidiary, Community Service Corporation, a Montana corporation
formed in 1974, owns and manages real estate held for investment. United, United
Bank, and United Bank's subsidiary are collectively referred to as the Company.
United Bank's Great Falls Montana headquarters serves its primary market, the
Great Falls metropolitan area. Full service branches are located in Shelby,
Glendive and Havre, Montana. United Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC")--Savings Association Insurance Fund
("SAIF"). United Bank is a member of the Federal Home Loan Bank ("FHLB") of
Seattle, Washington, and is subject to comprehensive supervision, regulation and
examination by the Office of Thrift Supervision ("OTS") and the FDIC.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
United, United Bank. The consolidated financial statements also include the
Community Service Corporation, a wholly-owned subsidiary of United Bank. United,
United Bank and United Bank's subsidiary are collectively referred to as the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
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 and disclosed amounts of assets and liabilities as of
the date of the balance sheet and income and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the reserve for possible loan
losses and the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the determination of the
reserves for losses on loans and real estate owned, management obtains
independent appraisals for significant properties. Management believes that the
reserves for losses on loans and real estate owned are adequate. While
management uses available information to recognize losses on loans and real
estate owned, future additions to the reserves may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review United Bank's reserves
for losses on loans and real estate owned. Such agencies may require United Bank
to recognize additions to the reserves based on their judgments about
information available to them at the time of their examination.
INVESTMENTS
Investments are required to be classified into three categories and
accounted for as follows:
1) Debt securities purchased with the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at
amortized cost.
F-67
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
2) Debt and equity securities, if bought and held principally for the
purpose of selling them in the near term, are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
3) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale and
reported at fair value, with net unrealized gains and losses excluded from
earnings and reported (net of tax effect) as a separate component of
stockholders' equity.
At December 31, 1996 and 1995, the net unrealized gains and losses for all
available-for-sale securities were losses of $834,590 and $412,405, for which
the net unrealized tax benefit (a component of other assets) was $341,336 and
$168,055, respectively. The stockholders' equity unrealized loss adjustment, net
of the tax effect, at December 31, 1996 and 1995, was $493,254 and $244,350,
respectively.
The Company's investment portfolio contains both debt and equity securities.
The Kemper U.S. Government bond fund is the only equity investment, while debt
investments include U.S. Treasuries, U.S. Government agencies (including FHLB
certificates of deposit) and mortgage-backed securities. Nonmortgage-backed
investment securities are classified as either held-to-maturity or
available-for-sale. Mortgage-backed investment securities represent
participating interests in pools of first-mortgage loans originated and serviced
by issuers of the securities. Mortgage-backed securities are classified as
held-to-maturity and are recorded at cost in the underlying pool of mortgage
loans at the time of purchase, adjusted for any premium or discount. Investment
discount is accreted or, in the case of premium, is amortized into income, using
a method that approximates the level yield method, over the remaining term to
maturity, adjusted for prepayments as received. United, by policy, does not
purchase any investment for trading purposes. The cost of any investment, if
sold, is determined by specific identification. Declines in the fair value of
available-for-sale or held-to-maturity 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.
SECONDARY MARKET LOAN SALES
For the past several years, United Bank's total production of long-term,
fixed-rate loans has been originated according to prearranged purchaser
underwriting standards that result in immediate sale to the secondary market,
primarily to mortgage bankers and pension funds. These loans are carried at
their outstanding principal balance, which is the contracted purchase price, and
therefore, no gain or loss is realized at sale. At December 31, 1996 and 1995,
the other assets component of the Consolidated Statements of Financial Condition
included $1,238,647 and $724,476, respectively, of loan production contracted
for sale to the secondary market.
LOAN ORIGINATION FEES
Material loan origination fees and related direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan.
Origination fees on loans sold to the secondary market are recognized when the
loan is sold. The amortization of deferred loan fees and costs and the accretion
of unearned discounts on non-performing loans is discontinued during periods of
non-performance.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the reserve
for loan losses, discounts, unearned income and loans in process. Loans are
placed on non-accrual status when collection of interest
F-68
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
is considered doubtful (generally loans past due 90 days or more). All loan
interest previously accrued is provided an allowance by a charge to interest
income, and income is subsequently recognized only to the extent that cash
payments are received.
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses is established through a provision for
losses on loans which is charged to expense. Loan losses are charged against the
reserve when management believes that the collectability of principal is
unlikely. The reserve balance is an amount management believes will be adequate
to absorb losses inherent in existing loans and commitments to extend credit,
based on evaluations of collectability and prior loss experience. The
evaluations consider such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, commitments, and current and anticipated economic conditions that may
affect the borrowers' ability to pay.
The Company provides a reserve 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 reserve for possible 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. The Company recognizes
interest income on impaired loans only to the extent that cash payments are
received.
The reserve for possible loan losses as determined above, includes the
reserve for impaired loans. The Company's existing policies for evaluating the
adequacy of the reserve for loan losses and policies for discontinuing the
accrual of interest on loans are used to establish the basis for determining
whether a loan is impaired. At December 31, 1996 and 1995, no loans were
classified as non-accrual or impaired.
REAL ESTATE OWNED
Real estate owned represents real estate assets acquired through foreclosure
or deed in lieu, and is comprised of properties both held for sale and held for
investment, i.e., the production of income. Foreclosed assets held for sale are
carried at the lower of (1) fair value minus estimated cost to sell, or (2)
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. Management conducts an evaluation of each asset
after foreclosure, and periodically thereafter. If the fair value of the asset
minus the estimated cost to sell is less than the cost of the property, this
deficiency is recognized as a valuation allowance and is charged to expense.
Foreclosed assets held for the production of income are properties sold at their
carrying value to United Bank's subsidiary, the Community Service Corporation,
in exchange for loans and cash. The subsidiary carries these assets at their
cost, less depreciation, which is computed using the straight-line method over
the estimated useful lives of the assets. For both types of real estate owned,
costs, if any, related to development and improvement are capitalized, whereas
costs related to the holding of the assets are expensed.
F-69
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost. Depreciation and amortization
are computed on the straight-line method over the estimated useful lives of the
assets which range from 10 to 40 years for buildings and improvements and 3 to
10 years for furniture and equipment.
FEDERAL HOME LOAN BANK STOCK
Federal law requires a member institution of the FHLB System to hold common
stock of its district FHLB according to predetermined formulas.
INCOME TAXES
United and its subsidiaries have elected to file a consolidated federal
income tax return. State statute prevents filing of a consolidated Montana
income tax return, and thus separate returns are filed by United and United
Bank. Deferred tax assets and liabilities are recognized for the estimated
future consequences attributable to differences between the financial statement
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.
RETIREMENT PLANS
United Bank contributes to the Savings Associations Retirement Fund (a
multi-employer defined benefit plan) which covers substantially all employees.
United Bank funds actuarially determined pension costs as accrued. Consulting
actuaries to the plan have indicated that the Fund continues to maintain the
ERISA full funding limitation. Accordingly, normal plan costs of $111,971,
$102,779 and $95,816, were offset from full funding for the plan years ending
June 30, 1996, 1995 and 1994, respectively. Actual recorded pension expense,
representing fiduciary insurance and administrative costs only, was $2,697,
$2,709 and $2,577, for the years ending December 31, 1996, 1995 and 1994,
respectively.
United Bank has an employees' savings plan under Section 401(k) of the
Internal Revenue Code (the Code). United allows eligible employees to contribute
up to 15% of their monthly wages. Subject to Code limitations, United Bank
matches an amount equal to 50% of the employee's contribution, up to 6% of total
wages. Participants are at all times fully vested in their contributions and are
immediately vested in United Bank's contributions. United Bank's 401(k)
contributions and administrative costs were $23,345, $25,583 and $25,577
respectively in 1996, 1995 and 1994.
NET INCOME PER SHARE
Net income per share data is based upon the weighted average number of
shares outstanding.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
cash, daily interest and non-interest-bearing deposits with banks as cash
equivalents.
F-70
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has not entered into any swaps, options, or futures contracts.
Included in U.S. Government agencies are investments in structured notes which
have contractual step-up interest rates and call features.
IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS
FASB Statement No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed Of," requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or circumstances indicate that the carrying amount of an 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. Statement No. 121 was
adopted January 1, 1996, and did not have a material impact on the Company's
consolidated financial position or results of operations.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS.
In May 1995, the FASB issued Statement No. 122, "Accounting for Mortgage
Servicing Rights." Statement No. 122 amends FASB Statement No. 65, "Accounting
for Certain Mortgage Banking Activities," and requires that entities engaged in
mortgage banking activities recognize rights to serve mortgage loans for others
as separate assets, whether those rights were acquired through loan origination
activities or through purchase transactions. In addition, a valuation reserve is
established for impairment of mortgage servicing rights based on the predominate
risk characteristics of the underlying loans and subsequently adjusted to
reflect changes in the fair value of the servicing rights. Statement #122 was
adopted by United Bank effective January 1, 1996 and did not have a material
impact on United Bank's financial position or results of operations.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." Statement
No. 125 provides guidance on accounting for transfers and servicing of financial
assets, recognition and measurement of servicing assets and liabilities,
financial assets subject to prepayment, secured borrowings and collateral, and
extinguishment of liabilities.
Statement No. 125 generally requires the recognition as separate assets the
rights to service mortgage loans for others, whether the servicing rights are
acquired through purchases or loan originations. Statement No. 125 also
specifies that financial assets subject to prepayment, including loans that can
be contractually prepaid or otherwise settled in such a way that the holder
would not recover substantially all of its recorded investment, be measured like
debt securities available-for-sale under Statement No. 115, as amended by
Statement No. 125. Statement No. 125 is effective for fiscal years beginning
after December 31, 1996, and is not expected to have a material impact on the
Company's consolidated financial position or results of operations.
F-71
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
INVESTMENT SECURITIES
A comparison of the amortized cost and estimated fair value of investment
securities at the dates indicated is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Government agencies........................................ $ 2,600 $ 9 $ -- $ 2,609
FHLB certificates of deposit.................................... 6,000 -- -- 6,000
----------- ----- ----- -----------
U.S. Government agencies and other............................ 8,600 9 -- 8,609
----------- ----- ----- -----------
GNMA fixed and adjustable rate.................................. 2,092 31 (1) 2,122
FNMA and FHLMC adjustable rate.................................. 5,787 28 (79) 5,736
FNMA and FHLMC 7 yr and FHLMC 5 yr balloons..................... 14,965 143 (3) 15,105
FNMA and FHLMC REMIC certificates............................... 4,384 -- (13) 4,371
----------- ----- ----- -----------
Mortgage-backed securities.................................... 27,228 202 (96) 27,334
----------- ----- ----- -----------
$ 35,828 $ 211 $ (96) $ 35,943
----------- ----- ----- -----------
----------- ----- ----- -----------
Available-for-Sale:
U.S. Treasuries and U.S. Government agencies.................... $ 20,024 $ 94 $ (115) $ 20,003
Kemper U.S. Government bond mutual fund......................... 5,996 -- (814) 5,182
----------- ----- ----- -----------
$ 26,020 $ 94 $ (929) $ 25,185
----------- ----- ----- -----------
----------- ----- ----- -----------
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasuries and U.S. Government agencies.................... $ 2,901 $ 1 $ (1) $ 2,901
GNMA fixed and adjustable rate.................................. 2,339 35 (1) 2,373
FNMA and FHLMC adjustable rate.................................. 5,952 35 (31) 5,956
FNMA 7 year and FHLMC 5 year balloons........................... 5,196 79 -- 5,275
FNMA and FHLMC REMIC certificates............................... 26,729 8 (43) 26,694
----------- ----- ----- -----------
Mortgage-backed securities.................................... 40,216 157 (75) 40,298
----------- ----- ----- -----------
$ 43,117 $ 158 $ (76) $ 43,199
----------- ----- ----- -----------
----------- ----- ----- -----------
Available-for-Sale:
U.S. Treasuries and U.S. Government agencies.................... $ 29,678 $ 395 $ (234) $ 29,839
Kemper U.S. Government bond mutual fund......................... 5,996 -- (574) 5,422
----------- ----- ----- -----------
$ 35,674 $ 395 $ (808) $ 35,261
----------- ----- ----- -----------
----------- ----- ----- -----------
</TABLE>
F-72
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
A comparison of the amortized cost and estimated fair values of
held-to-maturity and available-for-sale investment securities by contractual
maturities at December 31, 1996 is shown below. Expected maturities may differ
from contractual maturities as some securities have call or prepayment options.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Held-to-Maturity:
Due in 1 year or less................................................ $ 6,000 $ 6,000
Due after 1 year through 5 years..................................... 2,600 2,609
Mortgage-backed securities........................................... 27,228 27,334
----------- -----------
$ 35,828 $ 35,943
----------- -----------
----------- -----------
Available-for-Sale:
Due in 1 year or less................................................ $ 10,027 $ 10,006
Due after 1 year through 2 years..................................... 6,003 5,971
Due after 2 years through 5 years.................................... 3,994 4,026
Kemper U.S. Government bond mutual fund.............................. 5,996 5,182
----------- -----------
$ 26,020 $ 25,185
----------- -----------
----------- -----------
</TABLE>
Gross proceeds from sales of investment securities available-for-sale for
the year ended December 31, 1996, were $4,141,328 resulting in gross gains of
$150,235. Gross proceeds from sales of investment securities available-for-sale
for the year ended December 31, 1995, were $12,796,898 resulting in gross gains
of $154,608 and gross losses of $149,305. There were no sales of investment
securities in 1994.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at the dates indicated consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Accrued interest receivable on:
Interest-earning deposits................................................... $ 15 $ 30
Mortgage-backed securities.................................................. 142 193
Other investment securities................................................. 371 438
Loans receivable............................................................ 289 255
--------- ---------
$ 817 $ 916
--------- ---------
--------- ---------
</TABLE>
F-73
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
LOANS RECEIVABLE
Loans receivable at the dates indicated consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Conventional real estate loans:
1-4 family residential units......................................... $ 15,445 $ 13,540
5 or more family residential units................................... 4,497 3,986
Construction......................................................... 4,620 3,373
Commercial and other................................................. 3,077 2,517
FHA insured or VA guaranteed loans..................................... 5,530 6,970
Home equity loans...................................................... 1,132 1,136
Loans to depositors, savings secured................................... 92 175
Recreational vehicle and auto loans.................................... 1,239 31
Other non-mortgage loans............................................... 1,251 307
--------- ---------
36,883 32,035
Less:
Discounts on loans................................................... 4 8
Reserve for possible loan losses..................................... 75 75
Loans in process..................................................... 1,628 1,600
--------- ---------
$ 35,176 $ 30,352
--------- ---------
--------- ---------
</TABLE>
Real estate loans serviced for others totaled $4,380,889, $3,719,442 and
$2,101,509 at December 31, 1996, 1995 and 1994, respectively. These loans are
not included in the consolidated financial statements.
There were no nonaccrual loan principal balances for which interest income
had not been recognized at December 31, 1996, 1995 and 1994.
The average yield on loans was 9.29%, 9.33% and 9.38% for the years ended
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, 1995 and
1994, the average yield on loans was 9.18%, 9.16% and 9.16%, respectively.
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 involve, to
varying degrees, elements of credit risk.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitment and conditional obligations as it does
for on-balance-sheet instruments.
Financial instruments outstanding at December 31, 1996, whose contract
amounts represent credit risk are fixed-rate commitments to extend credit
totaling approximately $462,000.
At December 31, 1996 and 1995, the Company had adjustable rate loans in its
portfolio of approximately $1,765,000 and $2,290,000, respectively.
F-74
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
A summary of changes in the reserve for possible loan losses for the years
indicated is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period........................................ $ 75 $ 75 $ 75
Provision charged to operating expense................................ -- -- --
Losses charged off.................................................... -- -- --
--- --- ---
$ 75 $ 75 $ 75
--- --- ---
--- --- ---
</TABLE>
REAL ESTATE OWNED
Real estate owned at the dates indicated consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Real estate held for investment.............................................. $ 755 $ 792
Accumulated depreciation..................................................... (370) (341)
--------- ---------
385 451
Real estate held for sale.................................................... 40 40
--------- ---------
$ 425 $ 491
--------- ---------
--------- ---------
</TABLE>
During 1996, United Bank sold real estate held for sale with a $245,924 book
value to an individual in exchange for a $184,000 loan and cash. There was a
$15,924 loss recognized on the sale. During 1996, United Bank's subsidiary sold
real estate held for investment with a $33,168 book value to an individual in
exchange for cash. There was a $13,832 gain recognized on the sale.
During 1995, United Bank's subsidiary sold real estate held for investment
with a $34,799 book value to an individual in exchange for cash. There was a
$6,669 gain recognized on the sale.
A summary of changes in the allowance for possible losses on the disposition
of real estate owned for the years indicated is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period......................................... -- -- $ 60
Provision charged to operating expense................................. -- -- --
Losses charged off..................................................... -- -- (60)
-- --
---
-- -- --
-- --
-- --
---
---
</TABLE>
F-75
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
PREMISES AND EQUIPMENT
Premises and equipment at the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Land.................................................................. $ 264 $ 264
Buildings and improvements............................................ 2,257 2,257
Furniture and equipment............................................... 341 396
--------- ---------
2,862 2,917
Accumulated depreciation.............................................. (1,455) (1,423)
--------- ---------
$ 1,407 $ 1,494
--------- ---------
--------- ---------
</TABLE>
DEPOSITS
Deposits at the dates indicated are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------- DECEMBER 31, 1995
WEIGHTED AVG. ----------------------
INTEREST RATE AMOUNT PERCENT AMOUNT PERCENT
------------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NOW accounts...................... 2.86% $ 6,250 7.9% $ 5,733 7.3%
Money market demand accounts...... 3.49% 2,419 3.1% 2,434 3.1%
------------- --------- ----- --------- -----
3.03% 8,669 11.0% 8,167 10.4%
Savings deposits.................. 3.56% 29,918 38.0% 32,461 41.5%
Time deposits..................... 3.25-4.99% 7,471 9.5% 1,441 1.8%
5.00-5.99% 32,576 41.4% 33,108 42.3%
6.00-7.99% 63 .1% 3,114 4.0%
------------- --------- ----- --------- -----
5.43% 40,110 51.0% 37,663 48.1%
------------- --------- ----- --------- -----
4.45% $ 78,697 100.0% $ 78,291 100.0%
------------- --------- ----- --------- -----
------------- --------- ----- --------- -----
</TABLE>
There were no jumbo time deposits (minimum $.1 million) at December 31,
1996. There were approximately $.4 million of jumbo time deposits at December
31, 1995.
F-76
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
Maturities of time deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Due date:
Within one year.................................................... $ 27,015 $ 22,949
Within two years................................................... 5,500 9,226
Within three years................................................. 3,109 2,201
Thereafter......................................................... 4,486 3,287
--------- ---------
$ 40,110 $ 37,663
--------- ---------
--------- ---------
</TABLE>
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest on deposits:
NOW and money market demand accounts........................... $ 257 $ 243 $ 252
Savings deposits............................................... 1,078 1,277 1,823
Time deposits.................................................. 2,147 1,898 1,548
Less withdrawal penalties...................................... (9) (6) (7)
--------- --------- ---------
$ 3,473 $ 3,412 $ 3,616
--------- --------- ---------
--------- --------- ---------
</TABLE>
The average cost of deposits was 4.43%, 4.22% and 3.81% for the years ended
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, 1995 and
1994, the cost of deposits was 4.45%, 4.44% and 3.94%, respectively.
FEDERAL HOME LOAN BANK ADVANCES
There were no FHLB advances outstanding at December 31, 1996, and $10.5
million of FHLB advances were outstanding at December 31, 1995. The weighted
average interest rate on FHLB advances outstanding at December 31, 1995 was
5.78%. FHLB advances are secured by pledges of FHLB stock, funds on deposit, and
by a blanket assignment of United Bank's unpledged, qualifying mortgage loans,
mortgage-backed securities, and other investment securities.
F-77
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
INCOME TAXES
A summary of the current and deferred components of income tax expense
(benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current--Federal..................................................... $ 549 $ 595 $ 921
--State........................................................ 118 164 205
--------- --------- ---------
667 759 1,126
--------- --------- ---------
Deferred--Federal.................................................... (15) (44) (13)
--State....................................................... (3) (1) (2)
--------- --------- ---------
(18) (45) (15)
--------- --------- ---------
Provision for income taxes........................................... $ 649 $ 714 $ 1,111
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's income taxes differ from those computed at the federal
statutory corporate tax rate of 34% for 1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax provision at statutory rate..................................... $ 596 $ 828 $ 1,019
Tax-exempt interest and dividends................................... (23) (29) (42)
State tax, net of federal income tax benefit........................ 76 108 134
Tax reserve for loan losses due to an increase in base year
reserves.......................................................... -- (194) --
Other............................................................... -- 1 --
--------- --------- ---------
Provision for income taxes........................................ $ 649 $ 714 $ 1,111
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-78
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at the dates
indicated are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loans, due to the reserve for possible loan losses deferred for financial
purposes.................................................................. $ 29 $ 29
Vacation/termination benefits not recognized for tax purposes until paid.... 27 25
Other deferred tax assets................................................... 13 --
--------- ---------
69 54
--------- ---------
Deferred tax liabilities:
Premises and equipment, principally due to differences in depreciation...... 211 198
Federal Home Loan Bank stock, principally due to dividends not recognized
for tax purposes.......................................................... 68 88
Other deferred tax liabilities.............................................. 13 9
--------- ---------
292 295
--------- ---------
Net deferred tax liability................................................ $ 223 $ 241
--------- ---------
--------- ---------
</TABLE>
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 projections
for future taxable income over the periods which the deferred tax assets are
deductible, at December 31, 1996 and 1995, management believes it is more likely
than not that United and United Bank will realize the benefits of those
deductible differences.
Retained earnings, at December 31, 1996, includes approximately $3,200,000
for which no provision for federal income tax has been made. This amount
represents the base year tax bad debt reserve which is essentially an allocation
of earnings to pre-1988 bad debt deductions for income tax purposes only. This
amount is treated as a permanent difference and deferred taxes are not
recognized unless it appears that this amount will be reduced and thereby result
in taxable income in the foreseeable future. Under current tax regulations,
management does not foresee any changes in its business or operations which
would result in a recapture of its federal bad debt reserve into taxable income.
For taxable years beginning prior to January 1, 1996, savings institutions
such as United Bank were allowed, if certain conditions were met, a special bad
debt deduction for income tax purposes under Section 593 of the Internal Revenue
Code. The deduction was based on actual loss experience over a period of years
or a percentage of taxable income before such deduction. United Bank, beginning
with the 1988 tax year, had not utilized the percentage of taxable income bad
debt deduction.
F-79
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
Recently enacted federal legislation repeals the Section 593 percentage of
taxable income method of computing tax deductions for bad debt reserves for tax
years beginning after December 31, 1995. As a result, savings associations are
no longer able to calculate their deduction for bad debts using the
percentage-of-taxable-income method. Instead, savings associations with assets
of less than $500 million compute their deduction based on actual loss
experience over a period of years. This legislation also requires savings
associations to recapture into income over a six-year period their bad debt tax
reserves in excess of their 1987 "base year" reserve level thereby generating
additional tax liability. At December 31, 1996, United Bank's bad debt tax
reserves were approximately the same as its base year reserves, therefore no
recapture is required.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value of financial instruments,
whether recognized or not recognized in the statement 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.
Quoted market prices are used for fair value when available, but do not
exist for some of the Company's financial instruments, primarily loans and time
deposits. The fair value of these instruments has been derived from the Office
of Thrift Supervision Net Portfolio Value Model ("OTS Model"). This OTS Model
primarily employs the static discounted cash flow method which estimates the
fair value of loans and time deposits by discounting the cash flows the
instruments are expected to generate by the yields currently available to
investors on instruments of comparable risk and duration. Therefore, to
calculate present value, the OTS Model makes assumptions about the size and
timing of expected cash flows and appropriate discount rates. Different
assumptions could materially change these instruments' estimated value.
The following assumptions and methods are used by the Company in estimating
fair value:
Financial Assets--The fair value approximates book value for cash and
cash equivalents as they represent over-night funds. For all investment
securities, the fair value is based upon quoted market prices. The fair
value of loans receivable was obtained from the OTS Model. The fair value of
accrued interest receivable approximates book value as the Company expects
contractual receipt in the short-term. The fair value of FHLB stock
approximates redemption value. Secondary market loan sales receivable
approximates book value as each loan is contracted for immediate sale.
Financial Liabilities--The fair value of NOW and money market demand
accounts and non-term savings deposits approximates book value as these
deposits are payable on demand. The fair value of time deposits was obtained
from the OTS Model. The fair value of FHLB advances and accrued interest
payable approximates book value due to contractual payment in the
short-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
F-80
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
market interest rates, future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax effect of the difference between the
fair value and carrying value of financial instruments can have a significant
effect on fair value estimates and have not been considered in the estimates
presented herein.
The approximate book value and estimated fair value of the Company's
financial instruments at the dates indicated are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1996 1995
-------------------- --------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents....................... $ 2,934 $ 2,934 $ 1,221 $ 1,221
Securities held-to-maturity..................... 35,828 35,943 43,117 43,199
Securities available-for-sale................... 25,185 25,185 35,261 35,261
Loans receivable................................ 35,176 35,700 30,352 31,200
Accrued interest receivable..................... 817 817 916 916
Federal Home Loan Bank stock.................... 379 379 476 476
Secondary market loan sales receivable.......... 1,239 1,239 724 724
Financial Liabilities:
NOW and money market demand accounts............ 8,669 8,669 8,167 8,167
Savings deposits................................ 29,918 29,918 32,461 32,461
Time deposits................................... 40,110 40,000 37,662 37,700
Federal Home Loan Bank advances................. -- -- 10,500 10,500
Accrued interest payable........................ 66 66 68 68
Off-Balance Sheet:
Commitments to extend credit.................... 462 462 1,328 1,328
</TABLE>
MATERIAL CONTRACTS
Beginning in 1993, and renewed each year since, United Bank's Board of
Directors provided change of control severance agreements to its President and
each of its five Vice Presidents. The agreements provide for severance
compensation in the event any company or person acquires control of United Bank,
as determined in accordance with applicable federal regulations. Pursuant to his
agreement upon a change of control, United Bank's President would be entitled to
lump-sum compensation equal to two times his annual base salary plus any target
bonuses, and 24 months of continued welfare and employee benefits. The
agreements with United Bank's five Vice Presidents provide for payment, upon a
change of control, of lump-sum compensation equal to their annual base salary,
plus any target bonuses, and 12 months of continued welfare and employee
benefits.
F-81
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
REGULATORY CAPITAL
United Bank is required to meet three FIRREA-enacted capital requirements: a
tangible capital requirement (stockholders' equity adjusted for the effects of
intangibles, investments and advances to "nonincludable" subsidiaries and other
factors) equal to not less than 1.5% of tangible assets (as defined in the
regulations), a core capital requirement, comprised of tangible capital adjusted
for supervisory goodwill and other defined factors equal to not less than 3% of
tangible assets, and a risk-based capital requirement equal to at least 8% of
all risk-weighted assets. For risk-weighting, selected assets are given a risk
assignment of 0% to 100%. United Bank's total risk-weighted assets at December
31, 1996, were approximately $35.8 million.
The following table demonstrates as of December 31, 1996, the extent to
which United Bank exceeds in dollars and in percent, the three FIRREA minimum
capital requirements:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
-----------------------------------
ACTUAL REQUIREMENT EXCESS
--------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tangible capital:
$ Amount.............................................. $ 14,974 $ 1,417 $ 13,557
% of tangible assets.................................. 15.9% 1.5% 14.4%
Core capital:
$ Amount.............................................. $ 14,974 $ 2,834 $ 12,140
% of tangible assets.................................. 15.9% 3.0% 12.9%
Risk-based capital:
$ Amount.............................................. $ 15,009 $ 2,862 $ 12,147
% of risk-weighted assets............................. 42.0% 8.0% 34.0%
</TABLE>
Stockholders' equity as shown on the Company's consolidated financial
statements differs from United Bank's tangible, core and risk-based regulatory
capital at December 31, 1996, as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Consolidated stockholders' equity....................................... $ 24,416
United stockholders' equity............................................. (9,100)
-------
United Bank stockholders' equity...................................... 15,316
Non-includable investments and notes of United Bank subsidiary.......... (386)
Unrealized loss on debt investment securities available-for-sale........ 44
-------
Tangible and Core United Bank capital................................. 14,974
Reserve for possible loan losses........................................ 75
Other assets required to be deducted.................................... (40)
-------
Risk-based capital.................................................... $ 15,009
-------
-------
</TABLE>
The OTS is responsible for insuring that capital standards reflect interest
rate risk ("IRR"), defined as the potential for the reduction of earnings and
stockholders' equity resulting from changes in market interest rates. The OTS
has delayed implementation of a proposed capital deduction for savings
institutions with a greater than normal level of IRR as calculated by the OTS
Model. Due to its current capital
F-82
<PAGE>
UNITED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1996
position, the most recent OTS calculated IRR and proposed exemption criteria,
United Bank is not expected to have an IRR capital adjustment.
Failure to comply with applicable regulatory capital requirements can result
in capital directives from the director of the OTS, restrictions on growth, and
other limitations on a savings association's operations.
ITEMS OF OTHER INCOME OR OTHER EXPENSES EXCEEDING ONE PERCENT OF THE AGGREGATE
OF TOTAL INTEREST INCOME AND OTHER INCOME
Advertising expenses included in other expenses were $91,600, $30,900 and
$3,300, for the years ended December 31, 1996, 1995 and 1994, respectively.
LITIGATION
The Company is not involved in any pending material legal proceedings.
REORGANIZATION
During the year ended December 31, 1996, the Board of Directors of United
Bank approved a plan of reorganization whereby United Bank became a wholly-owned
subsidiary of United Financial Corp. The plan was approved by stockholders and
federal regulators and each common share of United Savings Bank, F.A. was
exchanged for one share of United Financial Corp. The reorganization was a
business combination between entities under common control and accounted for
similar to a pooling-of-interests.
F-83
<PAGE>
UNITED FINANCIAL CORP. (PARENT ONLY)
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
ASSETS
Cash and cash equivalents--interest-earning deposits with banks............................. $ 593
-------
Investments:
Securities held-to-maturity............................................................... 1,600
Securities available-for-sale............................................................. 5,998
-------
7,598
Loans receivable............................................................................ 802
Accrued interest receivable................................................................. 138
Investment in subsidiary.................................................................... 15,316
-------
$ 24,447
-------
-------
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable........................................................................ $ 31
-------
Stockholders' equity:
Common stock.............................................................................. 1,223
Paid-in capital........................................................................... 7,626
Retained earnings-partially restricted.................................................... 16,060
Unrealized loss on securities available-for-sale.......................................... (493)
-------
24,416
-------
$ 24,447
-------
-------
</TABLE>
F-84
<PAGE>
UNITED FINANCIAL CORP. (PARENT ONLY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Income
Interest Income:
Loans............................................................................. $ 13
Investment securities............................................................. 290
Interest-earning deposits......................................................... 41
------
344
Gain on sale of investment security................................................. 18
Dividends from subsidiary........................................................... 556
------
918
Expenses............................................................................ 11
------
Income before income taxes and equity in undistributed income of subsidiary....... 907
Provision for current income tax expense............................................ 133
------
Income before equity in undistributed income of subsidiary........................ 774
Equity in undistributed income of subsidiary........................................ 329
------
Net income........................................................................ $ 1,103
------
------
</TABLE>
F-85
<PAGE>
UNITED FINANCIAL CORP. (PARENT ONLY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Operating activities:
Net income.......................................................................... $ 1,103
Adjustments to reconcile net cash provided by operating activities:
Investment securities discount accretion.......................................... (20)
Gain on sale of available-for-sale security....................................... (18)
Net change in accrued interest receivable......................................... (138)
Net change in income taxes payable................................................ 10
Equity in undistributed income of subsidiary...................................... (329)
-------
Net cash provided by operating activities....................................... 608
-------
Investing Activities
Purchases of held-to-maturity securities............................................ (2,600)
Proceeds from matured held-to-maturity security..................................... 1,000
Purchases of available-for-sale securities.......................................... (6,908)
Proceeds from sale of available-for-sale security................................... 1,002
Purchase of mortgage loan participation from subsidiary............................. (810)
Loan principal collections.......................................................... 8
-------
Net cash used by investing activities........................................... (8,308)
-------
Financing activities:
Initial capitalization from subsidiary.............................................. 8,886
Holding company formation costs..................................................... (37)
Cash dividends paid................................................................. (556)
-------
Net cash provided by financing activities....................................... 8,293
-------
Increase in cash and cash equivalents............................................... 593
Cash and cash equivalents at beginning of year...................................... --
-------
Cash and cash equivalents at end of year.......................................... $ 593
-------
-------
Cash payments for income taxes.................................................... $ 123
</TABLE>
F-86
<PAGE>
APPENDIX A
RESTATED AGREEMENT AND PLAN OF MERGER
Agreement entered into on August 25, 1997 and restated as of the same date
by and between United Financial Corp., a Minnesota corporation ("United"), and
Heritage Bancorporation, a Montana corporation ("Heritage"). United and Heritage
are referred to collectively herein as the "Parties."
This Agreement contemplates a tax-free merger of Heritage with and into
United in a reorganization pursuant to Code Section 368(a)(1)(A) in which United
will be the surviving legal entity. The Heritage Stockholders will receive
capital stock in United in exchange for their capital stock in Heritage. In
addition, Heritage Stockholders will receive certain rights with respect to
appointment of a majority of the directors of United upon the consummation of
the merger and certain rights of refusal with respect to the transfer of a
portion of United capital stock. In recognition of these rights, the Parties
will account for the transaction treating Heritage as the accounting acquirer of
United as required by the purchase method of accounting. The Parties expect that
the Merger, together with the contemporaneous merger of the Parties' subsidiary
banking organizations, will further certain of their business objectives
including, without limitation, a strengthening of capital base with which to
diversify the loan portfolios and expand the deposit base of the Parties'
subsidiary banking organizations.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. DEFINITIONS.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"CERTIFICATE OF MERGER" has the meaning set forth in Section 2(c) below.
"CLOSING" has the meaning set forth in Section 2(b) below.
"CLOSING DATE" has the meaning set forth in Section 2(b) below.
"CONFIDENTIAL INFORMATION" means any information concerning the businesses
and affairs of Heritage and its Subsidiaries that is not already generally
available to the public.
"CONVERSION RATIO" has the meaning set forth in Section 2(d)(v) below.
"CURRENT LIABILITIES" means any liability which is due and payable in less
than 12 months.
"DEFINITIVE UNITED PROXY MATERIALS" means the definitive proxy materials
relating to the Special United Meeting.
"DEFINITIVE HERITAGE PROXY MATERIALS" means the definitive proxy materials
relating to the Special Heritage Meeting.
"DISCLOSURE SCHEDULE" has the meaning set forth in Section 3 below.
"DISSENTING SHARE" means any Heritage Share or United Share which any
respective Heritage or United Stockholder holds of record and who or which has
exercised his or its appraisal rights under the Montana Business Corporation Act
with respect to any Heritage Share or the Minnesota Business Corporation Law
with respect to any United Share.
"EFFECTIVE TIME" has the meaning set forth in Section 2(d)(i) below.
"EXCHANGE AGENT" has the meaning set forth in Section 2(e) below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"HERITAGE" means Heritage Bancorporation.
A-1
<PAGE>
"HERITAGE COMFORT LETTER" has the meaning set forth in Section 5(d) below.
"HERITAGE FAIRNESS OPINION" has the meaning set forth in Section 5(d) below.
"HERITAGE SHARE" means any share of the Common Stock, no par value, of
Heritage.
"HERITAGE STOCKHOLDER" means any Person who or which holds any Heritage
Shares.
"HOLA" means the Home Owners' Loan Act, as amended.
"IRS" means the Internal Revenue Service.
"JOINT DISCLOSURE DOCUMENT" means the disclosure document combining the
Prospectus, the Definitive United Proxy Materials, and the Definitive Heritage
Proxy Materials.
"KNOWLEDGE" means actual knowledge after reasonable investigation.
"LOAN AGREEMENT" the $2,750,000 loan agreement, dated January 15, 1995 and
amended as of January 31, 1996, by and between Heritage Bancorporation, as
borrower, and Norwest Bank Minnesota, National Association as lender and which
is guaranteed by certain Heritage Stockholders.
"MERGER" has the meaning set forth in Section 2(a) below.
"MINNESOTA BUSINESS CORPORATION LAW" means the Business Corporation Act of
the State of Minnesota, as amended.
"MONTANA BUSINESS CORPORATION ACT" means the Montana Business Corporation
Act of the State of Montana, as amended.
"MOST RECENT FISCAL QUARTER END" has the meaning set forth in Section 3(g)
below.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"OTS" means the Office of Thrift Supervision.
"PARTY" has the meaning set forth in the preface above.
"PERSON" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"PROSPECTUS" means the final prospectus relating to the registration of
United Shares under the Securities Act.
"PUBLIC REPORT" has the meaning set forth in Section 3(e) below.
"REGISTRATION STATEMENT" has the meaning set forth in Section 5(c)(i) below.
"REQUISITE UNITED STOCKHOLDER APPROVAL" means the affirmative vote of the
holders of a majority of United Shares in favor of this Agreement and the
Merger.
"REQUISITE HERITAGE STOCKHOLDER APPROVAL" means the affirmative vote of the
holders of two-thirds of Heritage Shares in favor of this Agreement and the
Merger.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for taxes not yet due and payable or
A-2
<PAGE>
for taxes that the taxpayer is contesting in good faith through appropriate
proceedings, (c) purchase money liens and liens securing rental payments under
capital lease arrangements, and (d) other liens arising in the Ordinary Course
of Business and not incurred in connection with the borrowing of money.
"SPECIAL UNITED MEETING" has the meaning set forth in Section 5(c)(ii)
below.
"SPECIAL HERITAGE MEETING" has the meaning set forth in Section 5(c)(ii)
below.
"SUBSIDIARY" means any corporation with respect to which a specified Person
(or a Subsidiary thereof) owns a majority of the common stock or has the power
to vote or direct the voting of sufficient securities to elect a majority of the
directors.
"SURVIVING CORPORATION" has the meaning set forth in Section 2(a) below.
"UNITED" means United Financial Corp.
"UNITED-OWNED SHARE" means any Heritage Share that United owns beneficially.
"UNITED COMFORT LETTER" has the meaning set forth in Section 5(d) below.
"UNITED FAIRNESS OPINION" has the meaning set forth in Section 5(d) below.
"UNITED SHARE" means any share of the Common Stock, no par value, of United.
2. BASIC TRANSACTION.
(a) THE MERGER. On and subject to the terms and conditions of this
Agreement, Heritage will merge with and into United (the "Merger") at the
Effective Time and the separate existence of Heritage shall cease. United shall
be the corporation surviving the Merger (the "Surviving Corporation").
(b) THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Dorsey & Whitney
LLP, Eight Third Street North, in Great Falls, Montana, commencing at 9:00 a.m.
local time on the first business day following the satisfaction or waiver of all
conditions to the obligations of the Parties to consummate the transactions
contemplated hereby (other than conditions with respect to actions the
respective Parties will take at the Closing itself) or such other date as the
Parties may mutually determine (the "Closing Date"); provided, however, that the
Closing Date shall be no earlier than January 1, 1998 and no later than June 30,
1998.
(c) ACTIONS AT THE CLOSING. At the Closing, (i) Heritage will deliver to
United the various certificates, instruments, and documents referred to in
Section 6(a) below, (ii) United will deliver to Heritage the various
certificates, instruments, and documents referred to in Section 6(b) below,
(iii) United and Heritage will file with the Secretaries of State of the States
of Minnesota and Montana Certificates or Articles of Merger in the form
acceptable to counsel for United and Heritage (the "Certificate of Merger"), and
(iv) United will deliver to the Exchange Agent in the manner provided below in
this Section 2 the certificate evidencing United Shares issued in the Merger.
(d) CONDITIONS AND EFFECT OF MERGER.
(i) GENERAL. The Merger shall become effective at the time (the
AEffective Time") United and Heritage file the Certificate or Articles of
Merger with the Secretaries of State of the States of Minnesota and Montana.
The Merger shall have the effect set forth in the Minnesota Business
Corporation Law. The Surviving Corporation may, at any time after the
Effective Time, take any action (including executing and delivering any
document) in the name and on behalf of either United or Heritage in order to
carry out and effectuate the transactions contemplated by this Agreement.
(ii) CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
United in effect at and as of the Effective Time will remain the Certificate
of Incorporation of the Surviving Corporation without any modification or
amendment in the Merger.
(iii) BYLAWS. The Bylaws of United in effect at and as of the
Effective Time will remain the Bylaws of the Surviving Corporation without
any modification or amendment in the Merger.
A-3
<PAGE>
(iv) DIRECTORS. As of the Effective Time, four (4) members of the
existing Board of Directors of United shall resign and the remaining members
of the Board of Directors shall create two new vacancies on the Board with
one new member added to those classes in order to provide that each class
shall have one-third of the total number of directors comprising the Board.
Upon the resignation and creation of the new directorships, the remaining
Board shall elect five persons, nominated by the Heritage Shareholders at
the Special Heritage Meeting, to fill the unexpired terms of the members
resigning and the newly created directorships according to the respective
class of such directorship.
(v) OFFICERS. All existing officers of United and Heritage shall
resign as of the Effective Time and the majority of the newly constituted
Board of Directors of United shall appoint all officers in accordance with
the Bylaws; provided that any existing officer who resigns and is
reappointed shall be deemed to have been engaged in continuous service with
the Surviving Corporation and no termination of employment for any reason
shall be deemed to have occurred. The Surviving Corporation will assume all
obligations with respect to change of control agreements existing between
any officer and United or Heritage.
(vi) BENEFIT AND WELFARE PLANS.
(1) Effective at such time as the Board of Directors of the Surviving
Corporation may determine, but not later than the close of the plan year
following the plan year that includes the Effective Time, the Board of
Directors of the Surviving Corporation may terminate the multiple
employer defined benefit pension plan administered by the Financial
Institutions Retirement Fund (hereinafter the "United plan") subject to
the terms of the plan and the requirements of law. Former Heritage
officers and employees shall not be entitled to commence participation in
the United plan at any time subsequent to the Effective Time and prior to
termination.
(2) The Surviving Corporation shall assume and maintain the Heritage
Subsidiary 401(k) plan with the United Subsidiary 401(k) plan to merge
with and into the Heritage Subsidiary 401(k) plan; provided, that
Effective not later than the date on which the United defined benefit
pension plan is terminated (or the United plan is amended to
significantly reduce or terminate the accrual of benefits, if earlier):
(a) the Surviving Corporation shall extend coverage in the
Heritage Subsidiary 401(k) plan (hereinafter the "Heritage plan") to
employees of United on the same terms and conditions as such plan
extends to similarly situated Heritage employees, and
(b) the Surviving Corporation shall amend the Heritage plan to
provide a transitional employer contribution subject to the following
principles:
(i) the transitional contribution shall not be directly or
indirectly dependent on employees making elective contributions
to the Heritage plan, and
(ii) the transitional contribution shall be made only for
those United employees who the Board of Directors of the
Surviving Corporation reasonably determines could be expected to
receive, in the aggregate, lesser benefits as a result of the
termination of the United defined benefit pension plan and the
substitution of the Heritage plan than if the United defined
benefit pension plan had continued in place, and
(iii) the transitional contribution shall be limited to a
specific period of time as determined by the Board of Directors
and structured to approximately replace the benefits that will
not be expected to be earned by those United employees as a
result of the transition from defined benefit to defined
contribution plan structure, and
(iv) the transitional contribution shall not be directly or
indirectly dependent on employees making elective contributions
to the Heritage plan, and
A-4
<PAGE>
(v) the transitional contribution shall be in addition to
any other contribution that United employees would receive by
reason of coverage under the Heritage plan on the same terms and
conditions as similarly situated Heritage employees, and
(vi) to the extent necessary to satisfy federal income tax
rules regarding prohibited discrimination in favor of highly
compensated employees, the transitional employer contribution to
the Heritage plan may be reduced or eliminated for United
employees that are highly compensated employees.
(3) The Surviving Corporation shall maintain health, disability,
and other insurance plans for the benefit of its employees
substantially similar, in the aggregate, to those maintained by the
Heritage Subsidiary.
(vii) CONVERSION OF HERITAGE SHARES. At and as of the Effective Time,
(A) each Heritage Share (other than any Dissenting Share or United-owned
Share) shall be converted into the right to receive forty seven and one half
(47.5) United Shares (the ratio of 47.5 United Shares to one Heritage Share
is referred to herein as the "Conversion Ratio"), (B) each Dissenting Share
shall be converted into the right to receive payment from the Surviving
Corporation with respect thereto in accordance with the provisions of the
Minnesota Business Corporation Law, and (C) each United-owned Share shall be
canceled; provided, however, that no fractional shares shall be issued and
the Conversion Ratio shall be subject to equitable adjustment in the event
of any stock split, stock dividend, reverse stock split, or other change in
the number of Heritage Shares outstanding. No Heritage Share shall be deemed
to be outstanding or to have any rights other than those set forth above in
this Section 2(d)(v) after the Effective Time.
(viii) UNITED SHARES. Each United Share issued and outstanding at and
as of the Effective Time will remain issued and outstanding.
(x) MERGER OF HERITAGE SUBSIDIARY AND UNITED SUBSIDIARY. As of the
Closing Date the Parties shall execute an agreement and plan of merger in
form and substance substantially similar to that attached as Exhibit A
providing for the merger of the United Subsidiary with and into the Heritage
Subsidiary, the separate existence of the United Subsidiary shall cease, and
the Heritage Subsidiary shall be the corporation surviving the merger.
(xi) UNITED SHARES TO BE RESTRICTED SECURITIES. The United Shares
issued to the Heritage stockholders in the Merger will be issued pursuant to
an exemption from registration under Section 4(2) of the Securities Act and
pursuant to Rule 506 of Regulation D promulgated under the Securities Act.
Each certificate representing the United Shares shall be endorsed with
substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER APPLICABLE STATE LAWS AND
MAY NOT BE SOLD, TRANSFERRED, OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION
UNLESS PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS. THE COMPANY
RESERVES THE RIGHT TO REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO IT BEFORE
EFFECTING ANY TRANSFER OF THE SHARES.
(e) PROCEDURE FOR PAYMENT.
(i) Immediately after the Effective Time, (A) United will furnish to
TrustCorp, a Montana Trust Company, (the "Exchange Agent") a stock
certificate (issued in the name of the Exchange Agent or its nominee)
representing that number of United Shares equal to the product of (I) the
Conversion Ratio times (II) the number of outstanding Heritage Shares (other
than any Dissenting Shares and United-owned Shares) and (B) United will
cause the Exchange Agent to mail a letter of transmittal (with instructions
for its use) in the form acceptable to counsel for United and Heritage to
each record holder of outstanding Heritage Shares for the holder to use in
surrendering the certificates
A-5
<PAGE>
which represented his or its Heritage Shares in exchange for a certificate
representing the number of United Shares to which he or it is entitled.
(ii) United will not pay any dividend or make any distribution on United
Shares (with a record date at or after the Effective Time) to any record
holder of outstanding Heritage Shares until the holder surrenders for
exchange his or its certificates which represented Heritage Shares. United
instead will pay the dividend or make the distribution to the Exchange Agent
in trust for the benefit of the holder pending surrender and exchange.
United may cause the Exchange Agent to invest any cash the Exchange Agent
receives from United as a dividend or distribution in direct general
obligations of the United States or its agencies; provided, however, that
the terms and conditions of the investments shall be such as to permit the
Exchange Agent to make prompt payments of cash to the holders of outstanding
Heritage Shares as necessary. United may cause the Exchange Agent to pay
over to United any net earnings with respect to the investments, and United
will replace promptly any cash which the Exchange Agent loses through
investments. In no event, however, will any holder of outstanding Heritage
Shares be entitled to any interest or earnings on the dividend or
distribution pending receipt.
(iii) United may cause the Exchange Agent to return any United Shares and
dividends and distributions thereon remaining unclaimed 180 days after the
Effective Time, and thereafter each remaining record holder of outstanding
Heritage Shares shall be entitled to look to United (subject to abandoned
property, escheat, and other similar laws) as a general creditor thereof
with respect to United Shares and dividends and distributions thereon to
which he or it is entitled upon surrender of his or its certificates.
(iv) United shall pay all charges and expenses of the Exchange Agent.
(f) CLOSING OF TRANSFER RECORDS. After the close of business on the
Closing Date, transfers of Heritage Shares outstanding prior to the Effective
Time shall not be made on the stock transfer books of the Surviving Corporation.
3. REPRESENTATIONS AND WARRANTIES OF HERITAGE. Heritage represents and
warrants to United that the statements contained in this Section 3 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 3), except as
set forth in the disclosure schedule accompanying this Agreement and initialed
by the Parties (the "Disclosure Schedule"). The Disclosure Schedule will be
arranged in paragraphs corresponding to the lettered and numbered paragraphs
contained in this Section 3.
(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. Each of Heritage and
its Subsidiaries is a corporation duly organized, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation. Each of
Heritage and its Subsidiaries is duly authorized to conduct business and is in
good standing under the laws of each jurisdiction where such qualification is
required. Each of Heritage and its Subsidiaries has full corporate power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it.
(b) CAPITALIZATION. The entire authorized capital stock of Heritage
consists of 50,000 Heritage Shares, of which 10,000 Heritage Shares are issued
and outstanding. All of the issued and outstanding Heritage Shares have been
duly authorized and are validly issued, fully paid, and nonassessable. There are
no outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other contracts or commitments
that could require Heritage to issue, sell, or otherwise cause to become
outstanding any of its capital stock. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect to Heritage.
(c) AUTHORIZATION OF TRANSACTION. The Board of Directors of Heritage has,
by resolutions duly adopted at a meeting held on August 25, 1997, approved this
Agreement and the Articles of Merger and the transactions contemplated hereby
and thereby, including the Merger, and resolved to recommend
A-6
<PAGE>
approval of the Plan of Merger by Heritage's shareholders. None of the
resolutions described in this Section 3(c) has been amended or otherwise
modified in any respect since the date of adoption thereof and all such
resolutions remain in full force and effect. Heritage has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder; provided, however, that
Heritage cannot consummate the Merger unless and until it receives the Requisite
Heritage Stockholder Approval. This Agreement constitutes the valid and legally
binding obligation of Heritage, enforceable in accordance with its terms and
conditions.
(d) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of Heritage and its Subsidiaries is
subject or any provision of the charter or bylaws of any of Heritage and its
Subsidiaries or (ii) except with respect to Loan Agreement which shall be
satisfied by the Heritage Shareholders as of the Closing, conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any agreement, contract, lease, license, instrument or
other arrangement to which any of Heritage and its Subsidiaries is a party or by
which it is bound or to which any of its assets is subject (or result in the
imposition of any Security Interest upon any of its assets), except where the
violation, conflict, breach, default, acceleration, termination, modification,
cancellation, or failure to give notice would not have a material adverse effect
on the ability of the Parties to consummate the transactions contemplated by
this Agreement.
(e) GOVERNMENTAL AUTHORITIES; CONSENTS. Except in connection with the
provisions of HOLA, the information required of Heritage in connection with any
filing with the SEC in connection with the Agreement and the filing of the
Articles of Merger with the Secretary of State of the State of Montana, Heritage
is not required to submit any notice, report or other filing with any
governmental authority in connection with the execution or delivery by it of
this Agreement or the Articles of Merger or the consummation of the transactions
contemplated hereby or thereby. Except as set forth in the Disclosure Schedule,
no consent, approval or authorization of any governmental or regulatory
authority or any other party or person (except the approval of the Plan of
Merger by the shareholders of Heritage) is required to be obtained by Heritage
in connection with its execution, delivery and performance of this Agreement or
the Articles of Merger or the transactions contemplated hereby or thereby.
(f) HERITAGE SUBSIDIARIES. Each Subsidiary of Heritage is set forth in the
Disclosure Schedule under the caption referencing this Section 3(f) and is owned
by Heritage, either directly or through one or more other subsidiaries, free and
clear of all liens, charges, encumbrances, claims and options of any nature,
except with respect to liens and encumbrances held by Norwest Bank Minnesota,
National Association, in connection with the Loan Agreement is to be satisfied
by the Heritage Shareholders as of the Closing. All of the outstanding shares of
capital stock each Subsidiary has been duly and validly authorized and issued,
and is fully paid and nonassessable.
(g) FINANCIAL STATEMENTS. Heritage has provided United with financial
statements of income and expenses and a balance sheet for the fiscal quarters
ended June 30, 1997 (the "Most Recent Fiscal Quarter End"), and March 31,1997
and annual financial statements of income and expenses and a balance sheet for
the fiscal years ended December 31, 1996, 1995 and 1994. The financial
statements and balance sheets (including the related notes and schedules) have
been prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby, and present fairly the financial condition of
Heritage and its Subsidiaries as of the indicated dates and the results of
operations of Heritage and its Subsidiaries for the indicated periods are
correct and complete in all material respects, and are consistent with the books
and records of Heritage and its Subsidiaries; provided, however, that the
interim statements are subject to normal year-end adjustments.
(h) EVENTS SUBSEQUENT TO MOST RECENT FISCAL QUARTER END. Since the Most
Recent Fiscal Quarter End, there has not been any material adverse change in the
business, financial condition, operations,
A-7
<PAGE>
results of operations, or future prospects of Heritage and its Subsidiaries
taken as a whole. Since the Most Recent Fiscal Quarter End, Heritage has not:
(1) borrowed any amount or incurred or become subject to any liability
in excess of $25,000, except (i) Current Liabilities incurred in the
ordinary course of business and (ii) liabilities under contracts entered
into in the ordinary course of business;
(2) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of its assets with a fair market value in excess of
$25,000, except (i) liens for current property taxes not yet due and
payable, (ii) liens imposed by law and incurred in the ordinary course of
business for obligations not yet due to carriers, warehousemen, laborers,
materialmen and the like, (iii) liens in respect of pledges or deposits
under workers' compensation laws, (iv) liens set forth under the caption
referencing this Section3(h) in the Disclosure Schedule, or (v) liens
voluntarily created in connection with any pledge to the Federal Home Loan
Board, any pledge to state or local governments as a condition precedent for
the deposit of public funds, and any pledge related to a repurchase
agreement, as well as any other lien created in the ordinary course of
business;
(3) discharged or satisfied any lien or encumbrance or paid any
liability, in each case with a value in excess of $25,000, other than the
Loan Agreement and Current Liabilities paid in the ordinary course of
business;
(4) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any tangible assets
with a fair market value in excess of $25,000, or canceled any debts or
claims, in each case, except in the ordinary course of business;
(5) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any patents,
trademarks, trade names, copyrights, trade secrets or other intangible
assets;
(6) waived any rights of material value or suffered any extraordinary
losses or adverse changes in collection loss experience, whether or not in
the ordinary course of business or consistent with past practice;
(7) declared or paid any dividends or other distributions with respect
to any shares of Heritage's capital stock, except in the ordinary course of
business and consistent with past practice, or redeemed or purchased,
directly or indirectly, any shares of the Heritage's capital stock or any
options;
(8) issued, sold or transferred any of its equity securities, securities
convertible into or exchangeable for its equity securities or warrants,
options or other rights to acquire its equity securities, or any bonds or
debt securities;
(9) taken any other action or entered into any other transaction other
than in the ordinary course of business and in accordance with past custom
and practice, or entered into any transaction with any director or officer
other than employment arrangements otherwise disclosed in this Agreement and
the Disclosure Schedule, or the transactions contemplated by this Agreement;
(10) suffered any material theft, damage, destruction or loss of or to
any property or properties owned or used by it, whether or not covered by
insurance;
(11) made or granted any bonus or any wage, salary or compensation
increase to any director, officer, employee, or consultant or made or
granted any increase in any employee benefit plan or arrangement, or amended
or terminated any existing employee benefit plan or arrangement, or adopted
any new employee benefit plan or arrangement or made any commitment or
incurred any liability to any labor organization, except in the ordinary
course of business and consistent with past practice;
(12) made any single capital expenditure or commitment therefor in excess
of $25,000; or
A-8
<PAGE>
(13) made any change in accounting principles or practices from those
utilized in the preparation of the Annual Financial Statements.
(i) ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in the balance
sheet as of the Most Recent Fiscal Quarter End, Heritage and its Subsidiaries
have no liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise, whether due or to become due, whether known or unknown, and
regardless of when asserted) arising out of transactions or events heretofore
entered into, or any action or inaction, or any state of facts existing, with
respect to or based upon transactions or events heretofore occurring, except (i)
liabilities which have arisen after the date of the Most Recent Fiscal Quarter
End in the ordinary course of business (none of which is a material uninsured
liability for breach of contract, breach of warranty, tort, infringement, claim
or lawsuit), or (ii) as otherwise set forth in the Disclosure Schedule under the
caption referencing this Section3(i).
(j) TITLE TO PROPERTIES.
(1) The real property owned by Heritage and its Subsidiary or demised by
the leases (the "Leases") described under the caption referencing this
Section3(j) in the Disclosure Schedule constitute all of the real property
owned, used or occupied by Heritage or its Subsidiary (the "Real Property").
The Real Property has access, sufficient for the conduct of Heritage or its
Subsidiary's businesses as now conducted or as presently proposed to be
conducted, to public roads and to all utilities, including electricity,
sanitary and storm sewer, potable water, natural gas and other utilities,
used in the operation of the business of Heritage or its Subsidiary at such
location.
(2) The Leases are in full force and effect, and Heritage or its
Subsidiary holds a valid and existing leasehold interest under each of the
Leases for the term set forth under such caption in the Disclosure Schedule.
Heritage has delivered to United complete and accurate copies of each of the
Leases, and none of the Leases has been modified in any respect, except to
the extent that such modifications are disclosed by the copies delivered to
United. Neither Heritage or any Subsidiary is in default, and no
circumstances exist which, if unremedied, would, either with or without
notice or the passage of time or both, result in such default under any of
the Leases; nor, to the best knowledge of Heritage, is any other party to
any of the Leases in default.
(3) Heritage or its Subsidiary owns good and marketable title to each
parcel of Real Property identified in the Disclosure Schedule under the
caption referencing this Section3(j) as being owned by Heritage or its
Subsidiary to each of the tangible properties and tangible assets reflected
on the balance sheet as of the Most Recent Fiscal Quarter End or acquired
since the date thereof, free and clear of all liens and encumbrances, except
for (i) liens for current taxes not yet due and payable, (ii) liens set
forth under the caption referencing this Section3(j) in the Disclosure
Schedule, (iii) the properties subject to the Leases, (iv) assets disposed
of since the date of the Most Recent Fiscal Quarter End in the ordinary
course of business, (v) liens imposed by law and incurred in the ordinary
course of business for obligations not yet due to carriers, warehousemen,
laborers and materialmen and (vi) liens in respect of pledges or deposits
under workers' compensation laws.
(4) All of the buildings, machinery, equipment and other tangible assets
necessary for the conduct of Heritage or its Subsidiary's business are in
good condition and repair, ordinary wear and tear excepted, and are usable
in the ordinary course of business. There are no defects in such assets or
other conditions relating thereto which, in the aggregate, materially
adversely affect the operation or value of such assets. Heritage or its
Subsidiary owns, or leases under valid leases, all buildings, machinery,
equipment and other tangible assets necessary for the conduct of its
business.
(5) Heritage and its Subsidiary are not in violation of any applicable
zoning ordinance or other law, regulation or requirement relating to the
operation of any properties used in the operation of its business, and
neither Heritage or its Subsidiary have not received any notice of any such
violation, or the existence of any condemnation proceeding with respect to
any of the Real Property, except, in
A-9
<PAGE>
each case, with respect to violations the potential consequences of which do
not or will not have a material adverse effect on Heritage or its
Subsidiary.
(6) Heritage has no knowledge of improvements made or contemplated to be
made by any public or private authority, the costs of which are to be
assessed as special taxes or charges against any of the Real Property, and
there are no present assessments.
(k) TAX MATTERS.
(1) Each of Heritage and its Subsidiary, any affiliated, combined or
unitary group of which Heritage and its Subsidiary is or was a member, any
"Plans" (as defined in Section3(l) hereof), as the case may be (each, a "Tax
Affiliate" and, collectively, the "Tax Affiliates"), has: (i) timely filed
(or has had timely filed on its behalf) all returns, declarations, reports,
estimates, information returns, and statements ("Returns") required to be
filed or sent by it in respect of any "Taxes" (as defined in subsection (11)
below) or required to be filed or sent by it by any taxing authority having
jurisdiction; (ii) timely and properly paid (or has had paid on its behalf)
all Taxes shown to be due and payable on such Returns; (iii) established on
its latest balance sheet as of the Most Recent Fiscal Quarter End, in
accordance with generally accepted accounting principles, reserves that are
adequate for the payment of any Taxes not yet due and payable; (iv) complied
with all applicable laws, rules, and regulations relating to the withholding
of Taxes and the payment thereof (including, without limitation, withholding
of Taxes under Sections 1441 and 1442 of the Internal Revenue Code of 1986,
as amended (the "Code"), or similar provisions under any foreign laws), and
timely and properly withheld from individual employee wages and paid over to
the proper governmental authorities all amounts required to be so withheld
and paid over under all applicable laws.
(2) There are no liens for Taxes upon any assets of Heritage, its
Subsidiary or of any Tax Affiliate, except liens for Taxes not yet due.
(3) No deficiency for any Taxes has been proposed, asserted or assessed
against Heritage, its Subsidiary or the Tax Affiliates that has not been
resolved and paid in full. No waiver, extension or comparable consent given
by Heritage, its Subsidiary or the Tax Affiliates regarding the application
of the statute of limitations with respect to any Taxes or Returns is
outstanding, nor is any request for any such waiver or consent pending.
There has been no Tax audit or other administrative proceeding or court
proceeding with regard to any Taxes or Returns, nor is any such Tax audit or
other proceeding pending, nor has there been any notice to Heritage or its
Subsidiary by any Taxing authority regarding any such Tax, audit or other
proceeding, or, to the best knowledge of Heritage, is any such Tax audit or
other proceeding threatened with regard to any Taxes or Returns. Heritage
does not expect the assessment of any additional Taxes of Heritage, its
Subsidiary or the Tax Affiliates and is not aware of any unresolved
questions, claims or disputes concerning the liability for Taxes of
Heritage, its Subsidiary or the Tax Affiliates which would exceed the
estimated reserves established on its books and records.
(4) Neither Heritage, its Subsidiary nor any Tax Affiliate is a party to
any agreement, contract or arrangement that would result, separately or in
the aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code and the consummation of the transactions
contemplated by this Agreement will not be a factor causing payments to be
made by Heritage, its Subsidiary or any Tax Affiliate that are not
deductible (in whole or in part) under Section 280G of the Code.
(5) Neither Heritage, its Subsidiary nor any Tax Affiliate has requested
any extension of time within which to file any Return, which Return has not
since been filed.
(6) No property of Heritage, its Subsidiary or any Tax Affiliate is
property that Heritage, its Subsidiary or any Tax Affiliates is or will be
required to treat as being owned by another person under
A-10
<PAGE>
the provisions of Section 168(f)(8) of the Code (as in effect prior to
amendment by the Tax Reform Act of 1986) or is "tax-exempt use property"
within the meaning of Section 168 of the Code.
(7) Neither Heritage, its Subsidiary nor any Tax Affiliate is required
to include in income any adjustment under Section 481(a) of the Code by
reason of a voluntary change in accounting method initiated by Heritage, its
Subsidiary or any Tax Affiliate as a result of the Tax Reform Act of 1986
and neither Heritage, its Subsidiary nor any Tax Affiliate has knowledge
that the Internal Revenue Service has proposed any such adjustment or change
in accounting method.
(8) All transactions that could give rise to an understatement of
federal income tax (within the meaning of Section 6661 of the Code as it
applied prior to repeal) or an underpayment of tax (within the meaning of
Section 6662 of the Code) were reported in a manner for which there is
substantial authority or were adequately disclosed (or, with respect to
Returns filed before the Closing Date, will be reported in such a manner or
adequately disclosed) on the Returns required in accordance with Sections
6661(b)(2)(B) and 6662(d)(2)(B) of the Code.
(9) Neither Heritage, its Subsidiary nor any Tax Affiliate has engaged
in any transaction that would result in a deemed election under Section
338(e) of the Code, and neither Heritage nor any Tax Affiliate will engage
in any such transaction within any applicable "consistency period" (as such
term is defined in Section 338 of the Code).
(10) Neither Heritage, its Subsidiary nor any Tax Affiliate has filed any
consent under Section 341(f) of the Code.
(11) For purposes of this Agreement, the term "Taxes" means all taxes,
charges, fees, levies, or other assessments, including, without limitation,
all net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, withholding, payroll, employment,
social security, unemployment, excise, estimated, severance, stamp,
occupation, property, or other taxes, customs duties, fees, assessments, or
charges of any kind whatsoever, including, without limitation, all interest
and penalties thereon, and additions to tax or additional amounts imposed by
any taxing authority, domestic or foreign, upon Heritage, its Subsidiary or
any Tax Affiliate.
(l) EMPLOYEE BENEFIT PLANS.
(1) Except as set forth under the caption referencing this Section3(l)
hereof in the Disclosure Schedule, with respect to all employees and former
employees of the Company and all dependents and beneficiaries of such
employees and former employees, (i) Heritage and its Subsidiary do not
maintain or contribute to any nonqualified deferred compensation or
retirement plans, contracts or arrangements; (ii) Heritage and its
Subsidiary do not maintain or contribute to any qualified defined
contribution plans (as defined in Section 3(34) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 414(i) of the
Code; (iii) Heritage and its Subsidiary do not maintain or contribute to any
qualified defined benefit plans (as defined in Section 3(35) of ERISA or
Section 414(j) of the Code); and (iv) Heritage and its Subsidiary do not
maintain or contribute to any employee welfare benefit plans (as defined in
Section 3(1) of ERISA).
(2) To the extent required (either as a matter of law or to obtain the
intended tax treatment and tax benefits), all employee benefit plans (as
defined in Section 3(3) of ERISA) which Heritage or its Subsidiary does
maintain or to which Heritage or its Subsidiary does contribute
(collectively, the "Plans") comply in all material respects with the
requirements of ERISA and the Code and any other applicable law (including
all reporting and disclosure requirements thereunder) and the terms of the
Plan. With respect to the Plans, (i) all required contributions which are
due have been made and a proper accrual has been made for all contributions
due in the current fiscal year; (ii) there are no actions, suits or claims
pending, other than routine uncontested claims for benefits; and (iii) there
have been no prohibited transactions (as defined in Section 406 of ERISA or
Section 4975 of the Code).
A-11
<PAGE>
(3) Heritage and its Subsidiary have delivered to United true and
complete copies of (i) the most recent determination letter, if any,
received by Heritage and its Subsidiary from the Internal Revenue Service
regarding the Plans which Heritage or its Subsidiary maintains or to which
Heritage or its Subsidiary contributes and any amendment to any Plan made
subsequent to any Plan amendments covered by any such determination letter;
(ii) the most recent financial statements and annual report or return for
the Plans including form 5500 for the three most recent plan years; and
(iii) the most recently prepared actuarial valuation reports; the current
plan document and amendments, summary plan descriptions, trust documents,
insurance contracts, service agreements and all related contracts and
documents (including any employee summaries and material employee
communications).
(4) Neither Heritage nor its Subsidiary contribute (and have never
contributed) to any multi-employer plan, as defined in Section 3(37) of
ERISA. Heritage and its Subsidiary have no actual or potential liabilities
under Section 4201 of ERISA for any complete or partial withdrawal from a
multi-employer plan. Heritage and its Subsidiary have no actual or potential
liability for death or medical benefits after separation from employment,
other than set forth under the caption referencing this Section3(l) in the
Disclosure Schedule with respect to (i) death benefits under the employee
benefit plans or programs (whether or not subject to ERISA) and (ii) health
care continuation benefits described in Section 4980B of the Code.
(5) Neither Heritage and its Subsidiary or any of their respective
directors, officers, employees or other "fiduciaries", as such term is
defined in Section 3(21) of ERISA, has committed any breach of fiduciary
responsibility imposed by ERISA or any other applicable law with respect to
the Plans which would subject Heritage and its Subsidiary or United or any
of their respective directors, officers or employees to any liability under
ERISA or any applicable law.
(6) Heritage and its Subsidiary have not incurred any liability for any
tax or civil penalty or any disqualification of any employee benefit plan
(as defined in Section 3(3) of ERISA) imposed by Sections 4980B and 4975 of
the Code and Part 6 of Title I and Section 502(i) of ERISA.
(m) INSURANCE. The Disclosure Schedule, under the caption referencing this
Section3(m), lists and briefly describes each insurance policy maintained by
Heritage and its Subsidiary with respect to their respective, assets and
operations and sets forth the date of expiration of each such insurance policy.
All of such insurance policies are in full force and effect and are issued by
insurers of recognized responsibility. Neither Heritage nor its Subsidiary is in
default with respect to its obligations under any of such insurance policies.
(n) COMPLIANCE WITH LAWS; PERMITS.
(1) Heritage, its Subsidiary and their respective officers, directors,
agents and employees have complied in all material respects with all
applicable laws, regulations and other requirements, including, but not
limited to, federal, state, local and foreign laws, ordinances, rules,
regulations and other requirements pertaining to banking, truth-in-lending,
truth-in-savings, consumer credit disclosures, equal employment opportunity,
employee retirement, affirmative action and other hiring practices,
occupational safety and health, workers' compensation, unemployment and
building and zoning codes, which materially affect the business of Heritage
and its Subsidiary or the Real Property and to which Heritage and its
Subsidiary may be subject, and no claims have been filed against Heritage
and its Subsidiary alleging a violation of any such laws, regulations or
other requirements. Heritage and its Subsidiary have no knowledge of any
action, pending or threatened, to change the zoning or building ordinances
or any other laws, rules, regulations or ordinances affecting the Real
Property. Heritage and its Subsidiary are not relying on any exemption from
or deferral of any such applicable law, regulation or other requirement that
would not be available to United after it acquires Heritage's properties,
assets and business.
A-12
<PAGE>
(2) Heritage and its Subsidiary have, in full force and effect, all
licenses, permits and certificates, from federal, state, local and foreign
authorities (including, without limitation, federal and state agencies
regulating occupational health and safety) necessary to conduct its business
and own and operate its properties (other than Environmental Permits, as
such term is defined in Section 3(o)(3) hereof) (collectively, the
"Permits"). A true, correct and complete list of all the Permits is set
forth under the caption referencing this Section3(n) in the Disclosure
Schedule. Heritage and its Subsidiary have conducted its business in
compliance with all material terms and conditions of the Permits.
(3) Heritage and its Subsidiary have not made or agreed to make gifts of
money, other property or similar benefits (other than incidental gifts of
articles of nominal value) to any actual or potential customer, supplier,
governmental employee or any other person in a position to assist or hinder
Heritage and its Subsidiary in connection with any actual or proposed
transaction.
(4) In particular, but without limiting the generality of the foregoing,
Heritage and its Subsidiary have not violated and have no liability, and
have not received a notice or charge asserting any violation of or liability
under, the federal Occupational Safety and Health Act of 1970 or any other
federal or state acts (including rules and regulations thereunder)
regulating or otherwise affecting employee health and safety.
(o) ENVIRONMENTAL MATTERS.
(1) As used in this Section3(o), the following terms shall have the
following meanings:
(i) "Hazardous Materials" means any dangerous, toxic or hazardous
pollutant, contaminant, chemical, waste, material or substance as defined
in or governed by any federal, state or local law, statute, code,
ordinance, regulation, rule or other requirement relating to such
substance or otherwise relating to the environment or human health or
safety, including without limitation any waste, material, substance,
pollutant or contaminant that might cause any injury to human health or
safety or to the environment or might subject the Company to any
imposition of costs or liability under any Environmental Law.
(ii) "Environmental Laws" means all applicable federal, state, local
and foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to pollution,
contamination or protection of the environment (including, without
limitation, all applicable federal, state, local and foreign laws, rules,
regulations, codes, ordinances, orders, decrees, directives, permits,
licenses and judgments relating to Hazardous Materials in effect as of
the date of this Agreement).
(iii) "Release" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any
other release or threatened release, however defined, whether intentional
or unintentional, of any Hazardous Material.
(2) Heritage, its Subsidiary and the Real Property are in material
compliance with all applicable Environmental Laws.
(3) Heritage and its Subsidiary have obtained, and maintained in full
force and effect, all environmental permits, licenses, certificates of
compliance, approvals and other authorizations necessary to conduct its
business and own or operate the Real Property (collectively, the
"Environmental Permits"). A true and correct copy of each such Environmental
Permit shall be provided by Heritage and its Subsidiary at least 14 days
prior to the Closing. Heritage and its Subsidiary have conducted their
respective businesses in compliance with all terms and conditions of the
Environmental Permits. Heritage and its Subsidiary have filed all reports
and notifications required to be filed under and pursuant to all applicable
Environmental Laws.
A-13
<PAGE>
(4) Except as set forth in the Disclosure Schedule under the caption
referencing this Section 3(o)(4), the Company has not received notice
alleging in any manner that Heritage or its Subsidiary is, or might be
potentially responsible for any Release of Hazardous Materials, or any costs
arising under or violation of Environmental Laws.
(5) No expenditure will be required in order for United to comply with
any Environmental Laws in effect at the time of the Closing in connection
with the operation or continued operation of the business of Heritage, its
Subsidiary or the Real Property in a manner consistent with the current
operation thereof by Heritage or the Subsidiary.
(6) Heritage and its Subsidiary have disclosed and delivered to United
all environmental reports and investigations which Heritage or its
Subsidiary have obtained or ordered with respect to their respective
businesses and the Real Property.
(7) Except as set forth in the Disclosure Schedule under the caption
referencing this Section 3(o)(7), no part of the business of Heritage, its
Subsidiary or the Real Property have been used as a landfill, dump or other
disposal, storage, transfer, handling or treatment area for Hazardous
Materials, or as a gasoline service station or a facility for selling,
dispensing, storing, transferring, disposing or handling petroleum and/or
petroleum products.
(8) No lien has been attached or filed against Heritage, its Subsidiary
or the Real Property in favor of any governmental or private entity for (i)
any liability or imposition of costs under or violation of any applicable
Environmental Law; or (ii) any Release of Hazardous Materials.
(p) BROKERS' FEES. Heritage and its Subsidiaries are liable and obligated
to pay all fees or commissions owed to D.A. Davidson & Co. Great Falls, Montana
which has acted as a broker to Heritage and its Subsidiary with respect to the
transactions contemplated by this Agreement.
(q) CONTINUITY OF BUSINESS ENTERPRISE. Heritage operates at least one
significant historic business line, or owns at least a significant portion of
its historic business assets, in each case within the meaning of Reg. Section
1.368-1(d).
(r) DISCLOSURE. The Definitive Heritage Proxy Materials will comply with
the Securities Exchange Act in all material respects. The Definitive Heritage
Proxy Materials will not contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they will be made, not misleading;
provided, however, that Heritage makes no representation or warranty with
respect to any information that United will supply specifically for use in the
Definitive Heritage Proxy Materials. None of the information that Heritage will
supply specifically for use in the Registration Statement, the Prospectus, or
the Definitive United Proxy Materials will contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they will
be made, not misleading.
4. REPRESENTATIONS AND WARRANTIES OF UNITED. United represents and
warrants to Heritage that the statements contained in this Section4 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section4), except as
set forth in the Disclosure Schedule. The Disclosure Schedule will be arranged
in paragraphs corresponding to the numbered and lettered paragraphs contained in
this Section4.
(a) ORGANIZATION. Each of United and its Subsidiaries is a corporation
duly organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation. Each of United and its Subsidiaries is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required. Each of United and its
Subsidiaries has full corporate
A-14
<PAGE>
power and authority to carry on the businesses in which it is engaged and to own
and use the properties owned and used by it.
(b) CAPITALIZATION. The entire authorized capital stock of United consists
of 2,000,000 shares of United Preferred Stock, no par value of which no shares
are outstanding and 8,000,000 United Shares, of which 1,223,312 United Shares
are issued and outstanding. All of United Shares to be issued in the Merger have
been duly authorized and, upon consummation of the Merger, will be validly
issued, fully paid, and nonassessable. There are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion rights,
exchange rights, or other contracts or commitments that could require United to
issue, sell, or otherwise cause to become outstanding any of its capital stock.
There are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to United.
(c) AUTHORIZATION OF TRANSACTION. United has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder; provided, however, that
United cannot consummate the Merger unless and until it receives the Requisite
United Stockholder Approval. This Agreement constitutes the valid and legally
binding obligation of United, enforceable in accordance with its terms and
conditions.
(d) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which United is subject or any provision of the
charter or bylaws of United or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument or other arrangement
to which United is a party or by which it is bound or to which any of its assets
is subject, except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation, or failure to give notice would not
have a material adverse effect on the ability of the Parties to consummate the
transactions contemplated by this Agreement.
(e) GOVERNMENTAL AUTHORITIES; CONSENTS. Except in connection with the
provisions of HOLA, the Minnesota Business Corporation Law, the Securities
Exchange Act, the Securities Act, and the state securities laws, United is not
required to submit any notice, report or other filing with any governmental
authority in connection with the execution or delivery by it of this Agreement
or the Articles of Merger or the consummation of the transactions contemplated
hereby or thereby. Except as set forth in the Disclosure Schedule under the
caption referencing this Section 4(e), no consent, approval or authorization of
any governmental or regulatory authority or any other party or person (except
the approval of the Plan of Merger by the shareholders of Heritage) is required
to be obtained by Heritage in connection with its execution, delivery and
performance of this Agreement or the Articles of Merger or the transactions
contemplated hereby or thereby.
(f) UNITED SUBSIDIARIES. Each Subsidiary of United is set forth in the
Disclosure Schedule under the caption referencing this Section4(f) and is owned
by United, either directly or through one or more other subsidiaries, free and
clear of all liens, charges, encumbrances, claims and options of any nature. All
of the outstanding shares of capital stock each Subsidiary has been duly and
validly authorized and issued, and is fully paid and nonassessable.
(g) FINANCIAL STATEMENTS. United has provided Heritage with financial
statements of income and expenses and a balance sheet for the fiscal quarters
ended June 30, 1997 (the "Most Recent Fiscal Quarter End"), and March 31,1997
and annual financial statements of income and expenses and a balance sheet for
the fiscal years ended December 31, 1996, 1995 and 1994. The financial
statements and balance sheets (including the related notes and schedules) have
been prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby, and present fairly the financial condition of
United and its Subsidiaries as of the indicated dates and the results of
operations of United and its Subsidiaries for the indicated periods are correct
and complete in all material respects, and are consistent
A-15
<PAGE>
with the books and records of United and its Subsidiaries; provided, however,
that the interim statements are subject to normal year-end adjustments.
(h) EVENTS SUBSEQUENT TO MOST RECENT FISCAL QUARTER END. Since the Most
Recent Fiscal Quarter End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of United and its Subsidiaries taken as a whole. Since the Most Recent
Fiscal Quarter End, United has not:
(1) borrowed any amount or incurred or become subject to any liability
in excess of $25,000, except (i) Current Liabilities incurred in the
ordinary course of business and (ii) liabilities under contracts entered
into in the ordinary course of business;
(2) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of its assets with a fair market value in excess of
$25,000, except (i) liens for current property taxes not yet due and
payable, (ii) liens imposed by law and incurred in the ordinary course of
business for obligations not yet due to carriers, warehousemen, laborers,
materialmen and the like, (iii) liens in respect of pledges or deposits
under workers' compensation laws, (iv) liens set forth under the caption
referencing this Section4(h) in the Disclosure Schedule, or (v) liens
voluntarily created in connection with any pledge to the Federal Home Loan
Board, any pledge to state or local governments as a condition precedent for
the deposit of public funds, and any pledge related to a repurchase
agreement, as well as any other lien created in the ordinary course of
business;
(3) discharged or satisfied any lien or encumbrance or paid any
liability, in each case with a value in excess of $25,000, other than
Current Liabilities paid in the ordinary course of business;
(4) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any tangible assets
with a fair market value in excess of $25,000, or canceled any debts or
claims, in each case, except in the ordinary course of business;
(5) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any patents,
trademarks, trade names, copyrights, trade secrets or other intangible
assets;
(6) waived any rights of material value or suffered any extraordinary
losses or adverse changes in collection loss experience, whether or not in
the ordinary course of business or consistent with past practice;
(7) declared or paid any dividends or other distributions with respect
to any shares of United's capital stock, except in the ordinary course of
business and consistent with past practice, or redeemed or purchased,
directly or indirectly, any shares of the United's capital stock or any
options;
(8) issued, sold or transferred any of its equity securities, securities
convertible into or exchangeable for its equity securities or warrants,
options or other rights to acquire its equity securities, or any bonds or
debt securities;
(9) taken any other action or entered into any other transaction other
than in the ordinary course of business and in accordance with past custom
and practice, or entered into any transaction with any director or officer
other than employment arrangements otherwise disclosed in this Agreement and
the Disclosure Schedule, or the transactions contemplated by this Agreement;
(10) suffered any material theft, damage, destruction or loss of or to
any property or properties owned or used by it, whether or not covered by
insurance;
(11) made or granted any bonus or any wage, salary or compensation
increase to any director, officer, employee, or consultant or made or
granted any increase in any employee benefit plan or arrangement, or amended
or terminated any existing employee benefit plan or arrangement, or adopted
any new employee benefit plan or arrangement or made any commitment or
incurred any
A-16
<PAGE>
liability to any labor organization, except in the ordinary course of
business and consistent with past practice;
(12) made any single capital expenditure or commitment therefor in excess
of $25,000; or
(13) made any change in accounting principles or practices from those
utilized in the preparation of the Annual Financial Statements.
(i) ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in the balance
sheet as of the Most Recent Fiscal Quarter End, United and its Subsidiaries have
no liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise, whether due or to become due, whether known or unknown, and
regardless of when asserted) arising out of transactions or events heretofore
entered into, or any action or inaction, or any state of facts existing, with
respect to or based upon transactions or events heretofore occurring, except (i)
liabilities which have arisen after the date of the Most Recent Fiscal Quarter
End in the ordinary course of business (none of which is a material uninsured
liability for breach of contract, breach of warranty, tort, infringement, claim
or lawsuit), or (ii) as otherwise set forth in the Disclosure Schedule under the
caption referencing this Section4(i).
(j) TITLE TO PROPERTIES.
(1) The real property owned by United and its Subsidiary or demised by
the leases (the "Leases") described under the caption referencing this
Section4(j) in the Disclosure Schedule constitute all of the real property
owned, used or occupied by United or its Subsidiary (the "Real Property").
The Real Property has access, sufficient for the conduct of United or its
Subsidiary's businesses as now conducted or as presently proposed to be
conducted, to public roads and to all utilities, including electricity,
sanitary and storm sewer, potable water, natural gas and other utilities,
used in the operation of the business of United or its Subsidiary at such
location.
(2) The Leases are in full force and effect, and United or its
Subsidiary holds a valid and existing leasehold interest under each of the
Leases for the term set forth under such caption in the Disclosure Schedule.
United has delivered to United complete and accurate copies of each of the
Leases, and none of the Leases has been modified in any respect, except to
the extent that such modifications are disclosed by the copies delivered to
United. Neither United or any Subsidiary is in default, and no circumstances
exist which, if unremedied, would, either with or without notice or the
passage of time or both, result in such default under any of the Leases;
nor, to the best knowledge of United, is any other party to any of the
Leases in default.
(3) United or its Subsidiary owns good and marketable title to each
parcel of Real Property identified in the Disclosure Schedule under the
caption referencing this Section4(j) as being owned by United or its
Subsidiary to each of the tangible properties and tangible assets reflected
on the balance sheet as of the Most Recent Fiscal Quarter End or acquired
since the date thereof, free and clear of all liens and encumbrances, except
for (i) liens for current taxes not yet due and payable, (ii) liens set
forth under the caption referencing this Section4(j) in the Disclosure
Schedule, (iii) the properties subject to the Leases, (iv) assets disposed
of since the date of the Most Recent Fiscal Quarter End in the ordinary
course of business, (v) liens imposed by law and incurred in the ordinary
course of business for obligations not yet due to carriers, warehousemen,
laborers and materialmen and (vi) liens in respect of pledges or deposits
under workers' compensation laws.
(4) All of the buildings, machinery, equipment and other tangible assets
necessary for the conduct of United or its Subsidiary's business are in good
condition and repair, ordinary wear and tear excepted, and are usable in the
ordinary course of business. There are no defects in such assets or other
conditions relating thereto which, in the aggregate, materially adversely
affect the operation or value of such assets. United or its Subsidiary owns,
or leases under valid leases, all buildings, machinery, equipment and other
tangible assets necessary for the conduct of its business.
A-17
<PAGE>
(5) United and its Subsidiary are not in violation of any applicable
zoning ordinance or other law, regulation or requirement relating to the
operation of any properties used in the operation of its business, and
neither United or its Subsidiary have not received any notice of any such
violation, or the existence of any condemnation proceeding with respect to
any of the Real Property, except, in each case, with respect to violations
the potential consequences of which do not or will not have a material
adverse effect on United or its Subsidiary.
(6) United has no knowledge of improvements made or contemplated to be
made by any public or private authority, the costs of which are to be
assessed as special taxes or charges against any of the Real Property, and
there are no present assessments.
(k) TAX MATTERS.
(1) Each of United and its Subsidiary, any affiliated, combined or
unitary group of which United and its Subsidiary is or was a member, any
"Plans" (as defined in Section4(l) hereof), as the case may be (each, a "Tax
Affiliate" and, collectively, the "Tax Affiliates"), has: (i) timely filed
(or has had timely filed on its behalf) all returns, declarations, reports,
estimates, information returns, and statements ("Returns") required to be
filed or sent by it in respect of any "Taxes" (as defined in subsection (11)
below) or required to be filed or sent by it by any taxing authority having
jurisdiction; (ii) timely and properly paid (or has had paid on its behalf)
all Taxes shown to be due and payable on such Returns; (iii) established on
its latest balance sheet as of the Most Recent Fiscal Quarter End, in
accordance with generally accepted accounting principles, reserves that are
adequate for the payment of any Taxes not yet due and payable; (iv) complied
with all applicable laws, rules, and regulations relating to the withholding
of Taxes and the payment thereof (including, without limitation, withholding
of Taxes under Sections 1441 and 1442 of the Internal Revenue Code of 1986,
as amended (the "Code"), or similar provisions under any foreign laws), and
timely and properly withheld from individual employee wages and paid over to
the proper governmental authorities all amounts required to be so withheld
and paid over under all applicable laws.
(2) There are no liens for Taxes upon any assets of United, its
Subsidiary or of any Tax Affiliate, except liens for Taxes not yet due.
(3) No deficiency for any Taxes has been proposed, asserted or assessed
against United, its Subsidiary or the Tax Affiliates that has not been
resolved and paid in full. No waiver, extension or comparable consent given
by United, its Subsidiary or the Tax Affiliates regarding the application of
the statute of limitations with respect to any Taxes or Returns is
outstanding, nor is any request for any such waiver or consent pending.
There has been no Tax audit or other administrative proceeding or court
proceeding with regard to any Taxes or Returns, nor is any such Tax audit or
other proceeding pending, nor has there been any notice to United or its
Subsidiary by any Taxing authority regarding any such Tax, audit or other
proceeding, or, to the best knowledge of United, is any such Tax audit or
other proceeding threatened with regard to any Taxes or Returns. United does
not expect the assessment of any additional Taxes of United, its Subsidiary
or the Tax Affiliates and is not aware of any unresolved questions, claims
or disputes concerning the liability for Taxes of United, its Subsidiary or
the Tax Affiliates which would exceed the estimated reserves established on
its books and records.
(4) Neither United, its Subsidiary nor any Tax Affiliate is a party to
any agreement, contract or arrangement that would result, separately or in
the aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code and the consummation of the transactions
contemplated by this Agreement will not be a factor causing payments to be
made by United, its Subsidiary or any Tax Affiliate that are not deductible
(in whole or in part) under Section 280G of the Code.
(5) Neither United, its Subsidiary nor any Tax Affiliate has requested
any extension of time within which to file any Return, which Return has not
since been filed.
A-18
<PAGE>
(6) No property of United, its Subsidiary or any Tax Affiliate is
property that United, its Subsidiary or any Tax Affiliates is or will be
required to treat as being owned by another person under the provisions of
Section 168(f)(8) of the Code (as in effect prior to amendment by the Tax
Reform Act of 1986) or is Atax-exempt use property" within the meaning of
Section 168 of the Code.
(7) Neither United, its Subsidiary nor any Tax Affiliate is required to
include in income any adjustment under Section 481(a) of the Code by reason
of a voluntary change in accounting method initiated by United, its
Subsidiary or any Tax Affiliate as a result of the Tax Reform Act of 1986
and neither United, its Subsidiary nor any Tax Affiliate has knowledge that
the Internal Revenue Service has proposed any such adjustment or change in
accounting method.
(8) All transactions that could give rise to an understatement of
federal income tax (within the meaning of Section 6661 of the Code as it
applied prior to repeal) or an underpayment of tax (within the meaning of
Section 6662 of the Code) were reported in a manner for which there is
substantial authority or were adequately disclosed (or, with respect to
Returns filed before the Closing Date, will be reported in such a manner or
adequately disclosed) on the Returns required in accordance with Sections
6661(b)(2)(B) and 6662(d)(2)(B) of the Code.
(9) Neither United, its Subsidiary nor any Tax Affiliate has engaged in
any transaction that would result in a deemed election under Section 338(e)
of the Code, and neither United nor any Tax Affiliate will engage in any
such transaction within any applicable "consistency period" (as such term is
defined in Section 338 of the Code).
(10) Neither United, its Subsidiary nor any Tax Affiliate has filed any
consent under Section 341(f) of the Code.
(11) For purposes of this Agreement, the term "Taxes" means all taxes,
charges, fees, levies, or other assessments, including, without limitation,
all net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, withholding, payroll, employment,
social security, unemployment, excise, estimated, severance, stamp,
occupation, property, or other taxes, customs duties, fees, assessments, or
charges of any kind whatsoever, including, without limitation, all interest
and penalties thereon, and additions to tax or additional amounts imposed by
any taxing authority, domestic or foreign, upon United, its Subsidiary or
any Tax Affiliate.
(l) EMPLOYEE BENEFIT PLANS.
(1) Except as set forth under the caption referencing this Section 4(l)
hereof in the Disclosure Schedule, with respect to all employees and former
employees of the Company and all dependents and beneficiaries of such
employees and former employees, (i) United and its Subsidiary does not
maintain or contribute to any nonqualified deferred compensation or
retirement plans, contracts or arrangements; (ii) United and its Subsidiary
does not maintain or contribute to any qualified defined contribution plans
(as defined in Section 3(34) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 414(i) of the Code; (iii) United
and its Subsidiary does not maintain or contribute to any qualified defined
benefit plans (as defined in Section 3(35) of ERISA or Section 414(j) of the
Code); and (iv) United and its Subsidiary does not maintain or contribute to
any employee welfare benefit plans (as defined in Section 3(1) of ERISA).
(2) With the exception of the Financial Institutions Retirement Fund
defined benefit pension plan in which the United Subsidiary participates, to
the extent required (either as a matter of law or to obtain the intended tax
treatment and tax benefits), all employee benefit plans (as defined in
Section 3(3) of ERISA) which United or its Subsidiary maintains or to which
United or its Subsidiary contributes (collectively, the "Plans") comply in
all material respects with the requirements of ERISA and the Code and any
other applicable law(including all reporting and disclosure requirements
thereunder) and the terms of the Plan. With respect to the Plans, (i) all
required contributions which are due have been made and a proper accrual has
been made for all contributions due in the current
A-19
<PAGE>
fiscal year; (ii) there are no actions, suits or claims pending, other than
routine uncontested claims for benefits; and (iii) there have been no
prohibited transactions (as defined in Section 406 of ERISA or Section 4975
of the Code). With respect to the United Subsidiary's participation in the
Financial Institutions Retirement Fund defined benefit pension plan, the
United Subsidiary has made the contributions required under the terms of its
participation in the Fund.
(3) United and its Subsidiary have delivered to Heritage true and
complete copies of (i) the most recent determination letter, if any,
received by United and its Subsidiary from the Internal Revenue Service
regarding the Plans which United or its Subsidiary maintains or to which
United or its Subsidiary contributes and any amendment to any Plan made
subsequent to any Plan amendments covered by any such determination letter;
(ii) the most recent financial statements and annual report or return for
the Plans including Form 5500 for the three most recent plan years; the
current plan document and amendments, summary plan descriptions, trust
documents, insurance contracts, service agreements and all related contracts
and documents (including any employee summaries and material employee
communications).
(4) Neither United nor its Subsidiary contribute (and have never
contributed) to any multi-employer plan, as defined in Section 3(37) of
ERISA. United and its Subsidiary have no actual or potential liabilities
under Section 4201 of ERISA for any complete or partial withdrawal from a
multi-employer plan. United and its Subsidiary have no actual or potential
liability for death or medical benefits after separation from employment,
other than as set forth under the caption referencing this Section4(l) in
the Disclosure Schedule with respect to (i) death benefits under the
employee benefit plans or programs (whether or not subject to ERISA) and
(ii) health care continuation benefits described in Section 4980B of the
Code.
(5) Neither United and its Subsidiary or any of their respective
directors, officers, employees or other "fiduciaries", as such term is
defined in Section 3(21) of ERISA, has committed any breach of fiduciary
responsibility imposed by ERISA or any other applicable law with respect to
the Plans which would subject United and its Subsidiary or United or any of
their respective directors, officers or employees to any liability under
ERISA or any applicable law.
(6) United and its Subsidiary have not incurred any liability for any
tax or civil penalty or any disqualification of any employee benefit plan
(as defined in Section 3(3) of ERISA) imposed by Sections 4980B and 4975 of
the Code and Part 6 of Title I and Section 502(i) of ERISA.
(m) INSURANCE. The Disclosure Schedule, under the caption referencing this
Section4(m), lists and briefly describes each insurance policy maintained by
United and its Subsidiary with respect to their respective, assets and
operations and sets forth the date of expiration of each such insurance policy.
All of such insurance policies are in full force and effect and are issued by
insurers of recognized responsibility. Neither United nor its Subsidiary is in
default with respect to its obligations under any of such insurance policies.
(n) COMPLIANCE WITH LAWS; PERMITS.
(1) United, its Subsidiary and their respective officers, directors,
agents and employees have complied in all material respects with all
applicable laws, regulations and other requirements, including, but not
limited to, federal, state, local and foreign laws, ordinances, rules,
regulations and other requirements pertaining to banking, truth-in-lending,
truth-in-savings, consumer credit disclosures, equal employment opportunity,
employee retirement, affirmative action and other hiring practices,
occupational safety and health, workers' compensation, unemployment and
building and zoning codes, which materially affect the business of United
and its Subsidiary or the Real Property and to which United and its
Subsidiary may be subject, and no claims have been filed against United and
its Subsidiary alleging a violation of any such laws, regulations or other
requirements. United and its Subsidiary have no knowledge of any action,
pending or threatened, to change the zoning or
A-20
<PAGE>
building ordinances or any other laws, rules, regulations or ordinances
affecting the Real Property. United and its Subsidiary are not relying on
any exemption from or deferral of any such applicable law, regulation or
other requirement that would not be available to United after it acquires
United's properties, assets and business.
(2) United and its Subsidiary have, in full force and effect, all
licenses, permits and certificates, from federal, state, local and foreign
authorities (including, without limitation, federal and state agencies
regulating occupational health and safety) necessary to conduct its business
and own and operate its properties (other than Environmental Permits, as
such term is defined in Section 4(o)(3) hereof) (collectively, the
"Permits"). A true, correct and complete list of all the Permits is set
forth under the caption referencing this Section4(n) in the Disclosure
Schedule. United and its Subsidiary have conducted its business in
compliance with all material terms and conditions of the Permits.
(3) United and its Subsidiary have not made or agreed to make gifts of
money, other property or similar benefits (other than incidental gifts of
articles of nominal value) to any actual or potential customer, supplier,
governmental employee or any other person in a position to assist or hinder
United and its Subsidiary in connection with any actual or proposed
transaction.
(4) In particular, but without limiting the generality of the foregoing,
United and its Subsidiary have not violated and have no liability, and have
not received a notice or charge asserting any violation of or liability
under, the federal Occupational Safety and Health Act of 1970 or any other
federal or state acts (including rules and regulations thereunder)
regulating or otherwise affecting employee health and safety.
(o) ENVIRONMENTAL MATTERS.
(1) As used in this Section4(o), the following terms shall have the
following meanings:
(i) "Hazardous Materials" means any dangerous, toxic or hazardous
pollutant, contaminant, chemical, waste, material or substance as defined
in or governed by any federal, state or local law, statute, code,
ordinance, regulation, rule or other requirement relating to such
substance or otherwise relating to the environment or human health or
safety, including without limitation any waste, material, substance,
pollutant or contaminant that might cause any injury to human health or
safety or to the environment or might subject the Company to any
imposition of costs or liability under any Environmental Law.
(ii) "Environmental Laws" means all applicable federal, state, local
and foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to pollution,
contamination or protection of the environment (including, without
limitation, all applicable federal, state, local and foreign laws, rules,
regulations, codes, ordinances, orders, decrees, directives, permits,
licenses and judgments relating to Hazardous Materials in effect as of
the date of this Agreement).
(iii) "Release" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any
other release or threatened release, however defined, whether intentional
or unintentional, of any Hazardous Material.
(2) United, its Subsidiary and the Real Property are in material
compliance with all applicable Environmental Laws.
(3) United and its Subsidiary have obtained, and maintained in full
force and effect, all environmental permits, licenses, certificates of
compliance, approvals and other authorizations necessary to conduct its
business and own or operate the Real Property (collectively, the
"Environmental Permits"). A true and correct copy of each such Environmental
Permit shall be provided by United and its Subsidiary at least 14 days prior
to the Closing. United and its Subsidiary have conducted their respective
businesses in compliance with all terms and conditions of the Environmental
Permits.
A-21
<PAGE>
United and its Subsidiary have filed all reports and notifications required
to be filed under and pursuant to all applicable Environmental Laws.
(4) Except as set forth in the Disclosure Schedule under the caption
referencing this Section 4(o)(4), the Company has not received notice
alleging in any manner that United or its Subsidiary is, or might be
potentially responsible for any Release of Hazardous Materials, or any costs
arising under or violation of Environmental Laws.
(5) No expenditure will be required in order for United to comply with
any Environmental Laws in effect at the time of the Closing in connection
with the operation or continued operation of the business of United, its
Subsidiary or the Real Property in a manner consistent with the current
operation thereof by United or the Subsidiary.
(6) United and its Subsidiary have disclosed and delivered to United all
environmental reports and investigations which United or its Subsidiary have
obtained or ordered with respect to their respective businesses and the Real
Property.
(7) Except as set forth in the Disclosure Schedule under the caption
referencing this Section 4(o)(7), no part of the business of United, its
Subsidiary or the Real Property have been used as a landfill, dump or other
disposal, storage, transfer, handling or treatment area for Hazardous
Materials, or as a gasoline service station or a facility for selling,
dispensing, storing, transferring, disposing or handling petroleum and/or
petroleum products.
(8) No lien has been attached or filed against United, its Subsidiary or
the Real Property in favor of any governmental or private entity for (i) any
liability or imposition of costs under or violation of any applicable
Environmental Law; or (ii) any Release of Hazardous Materials.
(p) BROKERS' FEES. United does not have any liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which any of Heritage and its
Subsidiaries could become liable or obligated.
(q) DISCLOSURE. The Registration Statement, the Prospectus, and the
Definitive United Proxy Materials will comply with the Securities Act and the
Securities Exchange Act in all material respects. The Registration Statement,
the Prospectus, and the Definitive United Proxy Materials will not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they will be made, not misleading; provided, however, that United
makes no representation or warranty with respect to any information that
Heritage will supply specifically for use in the Registration Statement, the
Prospectus, and the Definitive United Proxy Materials. None of the information
that United will supply specifically for use in the Definitive Heritage Proxy
Materials will contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they will be made, not misleading.
5. COVENANTS. The Parties agree as follows with respect to the period from
and after the execution of this Agreement.
(a) GENERAL. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section6 below).
(b) NOTICES AND CONSENTS. Heritage and United will give any notices (and
will cause each of its respective Subsidiaries to give any notices) to third
parties, and will use its reasonable best efforts to obtain (and will cause each
of its respective Subsidiaries to use its reasonable best efforts to obtain) any
third party consents, that (i) United reasonably may request of Heritage in
connection with the matters referred
A-22
<PAGE>
to in Section3(e) above; and (ii) that Heritage reasonably may request of United
in connection with the matters referred to in Section4(e) above.
(c) REGULATORY MATTERS AND APPROVALS. Each of the Parties will (and will
cause each of its Subsidiaries to) give any notices to, make any filings with,
and use its reasonable best efforts to obtain any authorizations, consents, and
approvals of governments and governmental agencies in connection with the
matters referred to in Section3(e) and Section4(e) above. Without limiting the
generality of the foregoing:
(i) [Intentionally omitted.]
(ii) APPLICABLE CORPORATION LAW. Heritage will call a special meeting
of its stockholders (the "Special Heritage Meeting") as soon as reasonably
practicable in order that the stockholders may consider and vote upon the
adoption of this Agreement, the approval of the Merger in accordance with
the Montana Business Corporation Act and to take such other action as
necessary to effect the terms of the Agreement. United will call a special
meeting of its stockholders (the "Special United Meeting") as soon as
reasonably practicable in order that the stockholders may consider and vote
upon the adoption of this Agreement, the approval of the Merger in
accordance with the Minnesota Business Corporation Law and to take such
other action as necessary to effect the terms of the Agreement. The Parties
will mail the Joint Disclosure Document to their respective stockholders
simultaneously and as soon as reasonably practicable. The Joint Disclosure
Document will contain the affirmative recommendations of the respective
boards of directors of the Parties in favor of the adoption of this
Agreement and the approval of the Merger; provided, however, that an
affirmative recommendation shall be excused in the event of the occurrence
of a material intervening event following the adoptions of resolutions by
the board of directors to submit the Joint Disclosure Document to the
shareholders for approval which event would require contrary action pursuant
to the applicable fiduciary duties of directors of Heritage or United, as
determined by such directors in good faith after consultation with and based
upon the written advice of independent legal counsel.
(iii) HOLA. United will file an application on Form H-(e)3 with OTS
and will make any further filings pursuant thereto and with such other
government agencies and departments that may be necessary.
(d) FAIRNESS OPINION AND COMFORT LETTERS. Heritage will deliver to United
on or before the date the Joint Disclosure Document is mailed to their
respective stockholders (i) an opinion of D.A. Davidson & Co. as to the fairness
of the Merger to Heritage Stockholders from a financial point of view ("Heritage
Fairness Opinion") and (ii) a letter of KPMG- Peat Marwick stating their
conclusions as to the accuracy of certain information derived from the financial
records of Heritage and its Subsidiaries and included within the pro-forma
financial statements contained in the Joint Disclosure Document (the "Heritage
Comfort Letter"). Each of the Heritage Fairness Opinion and Heritage Comfort
Letter shall be reasonably satisfactory to United in form and substance. United
will deliver to Heritage on or before the date the Joint Disclosure Document is
mailed to their respective stockholders (i) an opinion of Columbia Financial
Advisors, Inc. as to the fairness of the Merger to United Stockholders from a
financial point of view ("United Fairness Opinion") and (ii) a letter of
KPMG-Peat Marwick stating their conclusions as to the accuracy of certain
information derived from the financial records of United and its Subsidiaries
and the appropriateness under Generally Accepted Accounting Principals of the
purchase method accounting treatment applied to the pro-forma financial
statements contained in the Joint Disclosure Document (the "United Comfort
Letter"). Each of the United Fairness Opinion and United Comfort Letter shall be
reasonably satisfactory to Heritage in form and substance.
(e) REGISTRATION OF UNITED SHARES FOR RESALE. United will register for
resale the United Shares to be issued in the Merger on the following terms.
United agrees that, if after the Effective Time it shall receive a written
request from the holders of an aggregate of more than 50% of the United Shares
issued to stockholders of Heritage in the Merger and not sold under a previous
registration statement, United will use its best efforts to file a registration
statement on Form S-3 with the Securities and Exchange
A-23
<PAGE>
Commission ("SEC") covering the United Shares issued in the Merger. United shall
be obligated to file only two registration statements under this Section 5(e),
and this obligation shall terminate on the second anniversary date of the
Effective Time (the "Second Anniversary"). United agrees to use its best efforts
to file any such registration statement within 30 days of receipt of such
request, and to file all other documents and to take all other steps necessary
and appropriate in order to have such registration statementdeclared effective
as quickly as possible. United further agrees that once any such registration
statement has been declared effective, United will use its best efforts to file
such post-effective amendments to such registration statement as are necessary
to cause such registration statement to remain effective for a period of not
less than 180 days or such shorter time as is necessary to sell such shares,
commencing on the effective date of the registration statement, provided that
United will not be required to maintain the effectiveness of any registration
statement beyond the Second Anniversary. United's obligation to file a
registration statement shall, in all cases, be subject to the following
conditions and provisions:
(i) In the event United does not meet the requirements for use of
Form S-3 in the time period specified in the first paragraph of this
section, the time for filing any registration statement shall be extended
until United is eligible to use a Form S-3 registration statement;
provided, that United will use its best efforts to qualify for use of a
Form S-3 registration statement in the time period specified in the first
paragraph of this section and to maintain such qualification.
(ii) United will use its best efforts to register or qualify the
United Shares included in such registration statement under the
securities laws of such states and other jurisdictions as the former
Heritage stockholders reasonably request; provided, that United shall not
for any such purpose be required to qualify generally to transact
business as a foreign corporation in any jurisdiction where it is not so
qualified or to consent to general service of process in any such
jurisdiction.
(iii) With respect to any such registration statement, United shall
bear the expense of any registration and qualification fees, state blue
sky fees, fees of United outside counsel and independent public
accountants, printing costs and the salaries and expenses of its
employees, and all other costs of preparing and filing the registration
statement. Heritage's stockholders shall pay all attorneys fees for their
counsel incurred as a part of such registration and any other costs
related to the sale of the United Shares, including commissions. United
agrees to furnish the former Heritage stockholders with such number of
prospectuses or other documents incident to any such registration as may
from time to time be reasonably requested.
(iv) United shall be entitled to postpone for a reasonable period of
time the filing of a registration statement otherwise required to be
prepared and filed by it pursuant to this section if United determines,
in its reasonable judgment, that such registration and offering would
interfere with any financing, acquisition, corporate reorganization or
other material transaction involving United or any of its affiliates or
would require premature disclosure thereof and promptly gives the holders
(or a representative) of such shares requesting registration thereof
pursuant to this section written notice of such determination, containing
a general statement of the reasons for such postponement and an
approximation of the anticipated delay. If United shall so postpone the
filing of a registration statement, such holders requesting registration
thereof pursuant to this section shall have the right to withdraw the
request for registration by giving written notice to United within 30
days after receipt of the notice of delay and, in the event of such
withdrawal, such request shall not be counted for purposes of the
requests for registration to which such holders are entitled pursuant to
this section.
(f) OPERATION OF BUSINESS. Heritage and United will not (and will not
cause or permit any of its Subsidiaries to) engage in any practice, take any
action, or enter into any transaction outside the Ordinary Course of Business
except as may be required to fulfill an obligation or covenant undertaken
pursuant to
A-24
<PAGE>
this Agreement. Without limiting the generality of the foregoing none of United,
Heritage or any of their respective Subsidiaries:
(i) will authorize or effect any change in their respective charter
or bylaws;
(ii) will grant any options, warrants, or other rights to purchase
or obtain any capital stock or issue, sell, or otherwise dispose of any
capital stock (except upon the conversion or exercise of options,
warrants, and other rights currently outstanding);
(iii) will declare, set aside, or pay any dividend or distribution
with respect to capital stock (whether in cash or in kind), or redeem,
repurchase, or otherwise acquire any of their respective capital stock,
in either case outside the Ordinary Course of Business;
(iv) issue any note, bond, or other debt security or create, incur,
assume, or guarantee any indebtedness for borrowed money or capitalized
lease obligation outside the Ordinary Course of Business;
(v) will impose any Security Interest upon any assets outside the
Ordinary Course of Business;
(vi) will make any capital investment in, make any loan to, or
acquire the securities or assets of any other Person outside the Ordinary
Course of Business;
(vii) will make any change in employment terms for any of its
directors, officers, and employees outside the Ordinary Course of
Business; and
(viii) will commit to any of the foregoing.
(g) FULL ACCESS. Heritage will (and it will cause each of its respective
Subsidiaries to) permit representatives of United to have full access to all
premises, properties, personnel, books, records (including tax records),
contracts, and documents of or pertaining to each of Heritage and its
Subsidiaries. United will treat and hold as such any Confidential Information it
receives from any of Heritage and its Subsidiaries in the course of the reviews
contemplated by this Section5(g), will not use any of the Confidential
Information except in connection with this Agreement, and, if this Agreement is
terminated for any reason whatsoever, agrees to return to Heritage all tangible
embodiments (and all copies) thereof which are in its possession. United will
(and it will cause each of its respective Subsidiaries to) permit
representatives of Heritage to have full access to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to each of United and its Subsidiaries. Heritage will treat and
hold as such any Confidential Information it receives from any of United and its
Subsidiaries in the course of the reviews contemplated by this Section5(g), will
not use any of the Confidential Information except in connection with this
Agreement, and, if this Agreement is terminated for any reason whatsoever,
agrees to return to United all tangible embodiments (and all copies) thereof
which are in its possession.
(h) NOTICE OF DEVELOPMENTS. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of any of its own
representations and warranties in Section3 and Section4 above. No disclosure by
any Party pursuant to this Section5(h), however, shall be deemed to amend or
supplement the Disclosure Schedule or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant.
(i) EXCLUSIVITY. Heritage will not (and will not cause or permit any of
its Subsidiaries to) solicit, initiate, or encourage the submission of any
proposal or offer from any Person relating to the acquisition of all or
substantially all of the capital stock or assets of any of Heritage and its
Subsidiaries (including any acquisition structured as a merger, consolidation,
or share exchange); provided, however, that Heritage, its Subsidiaries, and
their directors and officers will remain free to participate in any discussions
or negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing to the extent their fiduciary
A-25
<PAGE>
duties may require. Heritage shall notify United immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
United will not (and will not cause or permit any of its Subsidiaries to)
solicit, initiate, or encourage the submission of any proposal or offer from any
Person relating to the acquisition of all or substantially all of the capital
stock or assets of any of United and its Subsidiaries (including any acquisition
structured as a merger, consolidation, or share exchange); provided, however,
that United, its Subsidiaries, and their directors and officers will remain free
to participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing to the extent their fiduciary duties may require. United shall notify
Heritage immediately if any Person makes any proposal, offer, inquiry, or
contact with respect to any of the foregoing.
(j) INSURANCE AND INDEMNIFICATION.
(i) United will provide each individual who served as a director or
officer of Heritage at any time prior to the Effective Time with
liability insurance for a period of 48 months after the Effective Time no
less favorable in coverage and amount than any applicable insurance in
effect immediately prior to the Effective Time; provided, however, that
United may reduce the coverage and amount of liability insurance to the
extent the cost of liability insurance having the full coverage and
amount would exceed $20,000 per annum.
(ii) United, as the Surviving Corporation in the Merger, will
observe any indemnification provisions now existing in the certificate of
incorporation or bylaws of Heritage for the benefit of any individual who
served as a director or officer of Heritage at any time prior to the
Effective Time.
(k) CONTINUITY OF BUSINESS ENTERPRISE. United will continue at least one
significant historic business line of Heritage, or use at least a significant
portion of Heritage's historic business assets in a business, in each case
within the meaning of Reg. Section1.368-1(d).
(l) LOAN REVIEW. Each Subsidiary of United and Heritage engaged in banking
activities shall permit officers of the other Subsidiary to review any loans
proposed to be made to customers in excess of $100,000 prior to the Effective
Time.
6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF UNITED. The obligation of United to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have received the Requisite
Heritage Stockholder Approval and the number of Dissenting Shares shall
not exceed six per cent (6%) of the number of outstanding Heritage
Shares;
(ii) Heritage and its Subsidiaries shall have procured all of the
third party consents specified in Section5(b) above;
(iii) the representations and warranties set forth in Section3 above
shall be true and correct in all material respects at and as of the
Closing Date;
(iv) Heritage shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(v) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause
A-26
<PAGE>
any of the transactions contemplated by this Agreement to be rescinded
following consummation, (C) affect adversely the right of the Surviving
Corporation to own the former assets, to operate the former businesses,
and to control the former Subsidiaries of Heritage, or (D) affect
adversely the right of any of the former Subsidiaries of Heritage to own
its assets and to operate its businesses (and no such injunction,
judgment, order, decree, ruling, or charge shall be in effect);
(vi) Heritage shall have delivered to United a certificate to the
effect that each of the conditions specified above in Section6(a)(i)-(v)
is satisfied in all respects;
(vii) this Agreement and the Merger shall have received the Requisite
United Stockholder Approval;
(viii) Each of the Heritage stockholders shall have provided United
with a letter of investment intent including such representations as are
reasonably requested by United to make available an appropriate exemption
from registration under the Securities Act for the United Shares to be
issued in the Merger.
(ix) United Shares that will be issued in the Merger shall have been
approved for listing on NASDAQ-NMS, subject to official notice of
issuance;
(x) all applicable waiting periods required by the OTS shall have
expired or otherwise been terminated and the Parties shall have received
all other authorizations, consents, and approvals of governments and
governmental agencies referred to in Section3(e) and Section4(e) above;
(xi) United shall have received from counsel to Heritage an opinion
in form and substance acceptable to counsel for United, addressed to
United, and Dated as of the Closing Date;
(xii) United shall have received a certificate from Norwest Bank
Minnesota, N.A. that the Loan Agreement has been satisfied by the
Heritage Shareholders as of the Closing;
(xiii) all actions, conditions, approvals and filings, except for the
filing of Articles of Merger with the appropriate authorities, shall have
been taken in connection with the merger and consolidation of the United
Subsidiaries and Heritage Subsidiaries engaged in the banking business and
such Articles of Merger shall be filed subsequent to the Effective Time;
(xiv) all actions to be taken by Heritage in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form and
substance to United;
(xv) all requisite approvals from all applicable regulatory agencies
having jurisdiction over the transactions contemplated by the Agreement and
the accounting methods to be used have been obtained and there is no
objection by KPMG-Peat Marwick to treating Heritage as the accounting
acquiror of United under GAAP as applied to the purchase method of
accounting; and
(xvi) Heritage shall have provided to United title insurance or title
opinions covering all real property owned by Heritage and its Subsidiary and
a Phase I environmental audit with respect to such real property.
A-27
<PAGE>
United may waive any condition specified in this Section6(a) if it executes
a writing so stating at or prior to the Closing.
(b) CONDITIONS TO OBLIGATION OF HERITAGE. The obligation of Heritage to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have received the Requisite
United Stockholder Approval and the number of Dissenting Shares shall not
exceed ten per cent (10%) of the number of outstanding United Shares;
(ii) the Registration Statement shall have become effective under the
Securities Act;
(iii) United Shares that will be issued in the Merger shall have been
approved for listing on NASDAQ-NMS, subject to official notice of issuance;
(iv) [Intentionally omitted.]
(v) United shall have performed and complied with all of its covenants
hereunder in all material respects through the Closing;
(vi) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by this Agreement
to be rescinded following consummation, (C) affect adversely the right of
the Surviving Corporation to own the former assets, to operate the former
businesses, and to control the former Subsidiaries of United, or (D) affect
adversely the right of any of the former Subsidiaries of United to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge shall be in effect);
(vii) United shall have delivered to Heritage a certificate to the
effect that each of the conditions specified above in Section6(b)(i)-(vi) is
satisfied in all respects;
(viii) this Agreement and the Merger shall have received the Requisite
Heritage Stockholder Approval;
(ix) all necessary approvals have been obtained from OTS pursuant to
HOLA and the Parties shall have received all other authorizations, consents,
and approvals of governments and governmental agencies referred to in
Section3(e) and Section4(e) above;
(x) Heritage shall have received from counsel to United an opinion in
form and substance acceptable to counsel for Heritage, addressed to
Heritage, and dated as of the Closing Date;
(xi) Heritage shall have received from its counsel an opinion to the
effect that the Merger will constitute a tax-free reorganization pursuant to
Code Section368(a)(1)(A);
(xii) Heritage shall have received the resignations, effective as of the
Effective Time, of the directors and officers of United and its Subsidiaries
as provided in Section2(d)(iv);
(xiii) Heritage or the Heritage Shareholder owning or controlling a
majority of Heritage Shares shall have received Rights of First Refusal in
form and substance substantially similar to attached Exhibit B from United
Shareholders representing not less than 250,000 shares of the outstanding
Common Stock of United as of the date of this Agreement;
(xiv) all actions to be taken by United in connection with consummation
of the transactions contemplated hereby and all certificates, opinions,
instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
Heritage;
A-28
<PAGE>
(xv) all requisite approvals from all applicable regulatory agencies
having jurisdiction over the transactions contemplated by the Agreement and
the accounting methods to be used have been obtained and there is no
objection by KPMG-Peat Marwick to treating Heritage as the accounting
acquiror of United under GAAP as applied to the purchase method of
accounting; and
(xvi) United shall have provided to Heritage title insurance or title
opinions covering all real property owned by United and its Subsidiary and a
Phase I environmental audit with respect to such real property.
Heritage may waive any condition specified in this Section6(b) if it
executes a writing so stating at or prior to the Closing.
7. TERMINATION.
(a) TERMINATION OF AGREEMENT. Either of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after stockholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written consent
at any time prior to the Effective Time;
(ii) United may terminate this Agreement by giving written notice to
Heritage at any time prior to the Effective Time (A) in the event Heritage
has breached any material representation, warranty, or covenant contained in
this Agreement in any material respect, United has notified Heritage of the
breach, and the breach has continued without cure for a period of 30 days
after the notice of breach or (B) if the Closing shall not have occurred on
or before March 31, 1998, by reason of the failure of any condition
precedent under Section6(a) hereof (unless the failure results primarily
from United breaching any representation, warranty, or covenant contained in
this Agreement);
(iii) Heritage may terminate this Agreement by giving written notice to
United at any time prior to the Effective Time (A) in the event United has
breached any material representation, warranty, or covenant contained in
this Agreement in any material respect, Heritage has notified United of the
breach, and the breach has continued without cure for a period of 30 days
after the notice of breach or (B) if the Closing shall not have occurred on
or before March 31, 1998, by reason of the failure of any condition
precedent under Section6(b) hereof (unless the failure results primarily
from Heritage breaching any representation, warranty, or covenant contained
in this Agreement);
(iv) any Party may terminate this Agreement by giving written notice to
the other Party at any time prior to the Effective Time in the event a
Fairness Opinion is withdrawn; or
(v) any Party may terminate this Agreement by giving written notice to
the other Party at any time after the Special United Meeting or the Special
Heritage Meeting in the event this Agreement and the Merger fail to receive
the Requisite United Stockholder Approval or the Requisite Heritage
Stockholder Approval respectively.
(b) EFFECT OF TERMINATION. If any Party terminates this Agreement pursuant
to Section7(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except for any
liability of any Party then in breach); provided, however, that the
confidentiality provisions contained in Section5(g) above shall survive any such
termination.
8. MISCELLANEOUS.
(a) SURVIVAL. None of the representations, warranties, and covenants of
the Parties other than the provisions in Section2 above concerning issuance of
United Shares, the provisions in Section5(j) above concerning insurance and
indemnification, and the provisions in Section5(k) above concerning certain
requirements for a tax-free reorganization will survive the Effective Time.
(b) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the other Party; provided,
however, that any Party may make any public disclosure it believes in good
A-29
<PAGE>
faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the disclosing Party
will use its [reasonable] best efforts to advise the other Party prior to making
the disclosure).
(c) NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that (i) the provisions in
Section2 above concerning issuance of United Shares and the provisions in
Section5(k) above concerning certain requirements for a tax-free reorganization
are intended for the benefit of Heritage Stockholders and (ii) the provisions in
Section5(j) above concerning insurance and indemnification are intended for the
benefit of the individuals specified therein and their respective legal
representatives.
(d) ENTIRE AGREEMENT. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the Parties and supersedes any
prior understandings, agreements, or representations by or between the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(e) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party.
(f) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
<TABLE>
<CAPTION>
<S> <C> <C>
IF TO THE HERITAGE: Mr. Kurt Weise
Heritage Bancorporation
5500 Wayzata Blvd., No. 145
Golden Valley, Minnesota 55416
COPY TO: Lindquist & Vennum 80 South 8th Street
4200 IDS Center
Minneapolis, Minnesota 55402
Attn: Kevin Costley
IF TO UNITED: Mr. Bruce Weldele
President and CEO
601 First Avenue North
Great Falls, Montana 59401
COPY TO: Dorsey & Whitney LLP 8 Third Street North
P. O. Box 1566
Great Falls, Montana 59403
Attn: Bruce A. MacKenzie
</TABLE>
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until
A-30
<PAGE>
it actually is received by the intended recipient. Any Party may change the
address to which notices, requests, demands, claims, and other communications
hereunder are to be delivered by giving the other Party notice in the manner
herein set forth.
(i) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Minnesota without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Minnesota or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Minnesota.
(j) AMENDMENTS AND WAIVERS. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time with the prior
authorization of their respective boards of directors; provided, however, that
any amendment effected subsequent to stockholder approval will be subject to the
restrictions contained in the Minnesota Business Corporation Law. No amendment
of any provision of this Agreement shall be valid unless the same shall be in
writing and signed by both of the Parties. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(k) SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(l) EXPENSES. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(m) CONSTRUCTION. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation.
(n) INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the
date first above written.
<TABLE>
<S> <C> <C>
HERITAGE BANCORPORATION
By: /s/ JOHN M. MORRISON
----------------------------------------
Title: CHAIRMAN
----------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
UNITED FINANCIAL CORP.
By: /s/ BRUCE K. WELDELE
----------------------------------------
Title: CHAIRMAN
----------------------------------------
</TABLE>
A-31
<PAGE>
APPENDIX B
OPINION OF COLUMBIA FINANCIAL ADVISORS, INC.
[Columbia Financial Advisors, Inc. Letter head]
January 15, 1998
Board of Directors
United Financial Corp.
601 1st Avenue North
Great Falls, MT 59403
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of United Financial Corp. (the "UFC"), of the
consideration to be paid by such shareholders pursuant to the terms of the
Merger Agreement and Plan of Merger, dated August 25, 1997, (the "Agreement")
between the Bank and Heritage Bancorporation ("HB").
In connection with the proposed merger transaction (the "Merger") whereby HB
will be merged into UFC each issued and outstanding share and option of HB
common stock (along with its associated rights) at the effective time of the
Merger (other than shares of holders of which are exercising appraisal rights
pursuant to applicable law) shall be converted into the right to receive 47.50
shares of UFC common stock (the Merger "Consideration").
Columbia Financial Advisors, Inc. ("CFAI") as a part of its investment
banking services, is periodically engaged in the valuation of banks and advises
the directors, officers and shareholders of both public and private banks and
thrift institutions with respect to the fairness, from a financial point of
view, of the consideration to be received in transactions such as that proposed
by the Agreement. With particular regard to our qualifications for rendering an
opinion as to the fairness, from a financial point of view, of the Consideration
to be paid by UFC pursuant to the Merger, CFAI has advised Montana, Washington
and Oregon community banking and thrift institutions regarding fairness of
capital transactions. UFC has agreed to pay CFAI a fee for this opinion letter.
In connection with rendering this opinion, we have, among other things: (i)
reviewed the Agreement; (ii) reviewed HB's financial information for the twelve
months ended December 31, 1996 and the six months ended June 30, 1997; (iii)
reviewed certain internal financial analyses and certain other forecasts for HB
prepared by and reviewed with the management of HB; (iv) conducted interviews
with senior management of HB regarding the past and current business operations,
results thereof, financial condition and future prospects of HB; (v) reviewed
the current market environment generally and the banking and thrift environment
in particular; (vi) reviewed the prices paid in certain recent mergers and
acquisitions in the banking and thrift industries on a regional basis; (vii)
reviewed UFC's audited financial information for the fiscal year ended December
31, 1996 and financial information for the three months ended March 31, 1997
including the Form 10-KSB and the Form 10-QSB filed with the U.S. Securities and
Exchange Commission; (ix) reviewed the price ranges and dividend history for UFC
common stock; (x) and reviewed such other information, studies and analyses and
performed such other investigations and took into account such other matters as
we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied on the
accuracy and completeness of all information supplied or otherwise made
available to us, and we have not independently verified such information nor
have we undertaken an independent appraisal of the assets or liabilities of HB
or UFC. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgment of the senior management of HB. This
opinion is necessarily based upon circumstances and conditions as they exist and
B-1
<PAGE>
can be evaluated as of the date of this letter. We have not been authorized to
solicit and did not solicit other entities for purposes of a business
combination with UFC.
This opinion is based upon the information available to us and facts and
circumstances as they exist and are subject to evaluation on the date hereof. We
are not expressing any opinion herein as to the prices at which shares of UFC
Common Stock have traded or may trade at any future date.
This opinion is not intended to be and does not constitute a recommendation
to any stockholder as to how such stockholder should vote with respect to the
merger.
In reliance upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Merger Consideration to be paid by UFC to the shareholders
of HB pursuant to the Agreement is fair, from a financial point of view, to the
shareholders of UFC.
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our opinion
as an exhibit to the proxy statement or prospectus related to the merger
transaction.
<TABLE>
<S> <C> <C>
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By: /s/ ROBERT J. ROGOWSKI
-----------------------------------------
Robert J. Rogowski
PRINCIPAL
</TABLE>
B-2
<PAGE>
APPENDIX C
OPINION OF D.A. DAVIDSON & CO.
[D.A. Davidson letter head]
January 15, 1998
Board of Directors
Heritage Bancorporation
120 First Avenue North
Great Falls, MT 59401
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the shareholders of Heritage Bancorporation
("Heritage") of the consideration to be received by Heritage pursuant to the
terms of the Plan and Agreement of Merger, dated as of August 25, 1997 (the
"Merger Agreement"), between Heritage and United Financial Corp. ("United"). The
Merger Agreement provides for the merger (the "Merger") of Heritage with and
into United pursuant to which Heritage shareholders will receive 475,000 shares
of United common stock in exchange for 100% of the outstanding shares of
Heritage. In addition, Heritage will be deemed the acquiror for accounting
purposes, will have the right to elect five of the nine board members of the
combined entity, and Mr. John Morrison, the majority shareholder of Heritage,
will receive rights of first refusal on the purchase of United Shares
representing an additional approximately 15.5% of the pro forma shares
outstanding.
In arriving at our opinion, we have reviewed various financial and operating
information relating to Heritage and United including, without limitation,
historical financial reports of Heritage and United, reports filed with bank
regulatory agencies, internal operating reports and analyses, and related
information. We have also examined economic analyses of and forecasts for
Heritage and United's market area and publicly available information regarding
other banking institutions operating in such market area. We have also held
discussions with Heritage and United's management regarding the business, recent
operating results, and future prospects for Heritage and United.
We have also considered financial and stock market data for United, the pro
forma impact of the Merger on Heritage and United, and the views of both
entity's management concerning the financial, operational and strategic benefits
and implications of the Merger. We have additionally examined and considered
financial and stock market data for similar public companies, the publicly
available financial terms of certain other similar business combinations, and
other analyses and considerations which we deemed relevant.
In conducting our review and arriving at our opinion, we have relied,
without independent investigation, upon the accuracy and completeness of all
financial and other information publicly available or provided to us by Heritage
and United. We have also assumed the reasonableness of and relied upon the
estimates and judgements of management of Heritage and United as to the future
business and financial prospects. We have not made an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Heritage or
United, nor have we been furnished with any such evaluations or appraisals. Our
opinion is necessarily based upon economic, market, financial and other
conditions as they exist and can be evaluated on the date hereof and the
information provided to us through the date hereof.
C-1
<PAGE>
D.A. Davidson & Co. is engaged in the valuation of companies and their
securities in the course of its business as an investment firm. In the ordinary
course of our business, we publish investment research regarding United and make
a market in its common stock. For our services in connection with the Merger,
including rendering this opinion, we will receive a fee from Heritage.
This letter is intended for the benefit and use of the Board of Directors of
Heritage in its consideration of the Merger and does not constitute a
recommendation to any shareholder as to how such shareholder should vote with
respect to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received by Heritage in the Merger is fair,
from a financial point of view, to the shareholders of Heritage.
Very truly yours,
/s/ D.A. Davidson & Co.
D.A. Davidson & Co.
C-2
<PAGE>
APPENDIX D
MINNESOTA DISSENTERS' RIGHTS STATUTE
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) an amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund
for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting rights;
except that an amendment to the articles of an issuing public corporation
that provides that section 302A.671 does not apply to a control share
acquisition does not give rise to the right to obtain payment under this
section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to the
shareholders in accordance with their respective interests within one year
after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their
shares.
SUBD. 2. BENEFICIAL OWNERS.
(a) A shareholder shall not assert dissenters' rights as to less than
all of the shares registered in the name of the shareholder, unless the
shareholder dissents with respect to all the shares that are beneficially
owned by another person but registered in the name of the shareholder and
discloses the name and address of each beneficial owner on whose behalf the
shareholder dissents. In that event, the rights of the dissenter shall be
determined as if the shares as to which the shareholder has dissented and
the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of
this section and section 302A.473, if the beneficial owner submits to
D-1
<PAGE>
the corporation at the time of or before the assertion of the rights a
written consent of the shareholder.
SUBD. 3. RIGHTS NOT TO APPLY.
(a) Unless the articles, the bylaws, or a resolution approved by the
board otherwise provide, the right to obtain payment under this section does
not apply to a shareholder of the surviving corporation in a merger, if the
shares of the shareholder are not entitled to be voted on the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to vote
on an action described in subdivision 1, only shareholders as of the date
fixed, and the beneficial owners as of the date fixed who hold through
shareholders, as provided in subdivision 2, may exercise dissenters' rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS.
(a) For purposes of this section, the terms defined in this subdivision
have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1
or the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1,
up to and including the date of payment, calculated at the rate provided in
section 549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by
the shareholders, a shareholder who is entitled to dissent under section
402A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES.
(a) After the proposed action has been approved by the board and, if
necessary, the shareholders, the corporation shall send to all shareholders
who have complied with subdivision 3 and to all shareholders entitled to
dissent if no shareholder vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date
by which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
D-2
<PAGE>
(3) A form to be used to certify the date on which the shareholder,
or the beneficial owner on whose behalf the shareholder dissents,
acquired the shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply
with any restrictions on transfer of uncertificated shares within 30 days
after the notice required by paragraph (a) was given, but the dissenter
retains all other rights of a shareholder until the proposed action takes
effect.
SUBD. 5. PAYMENT; RETURN OF SHARES.
(a) After the corporate action takes effect, or after the corporation
receives a valid demand for payment, whichever is later, the corporation
shall remit to each dissenting shareholder who has complied with
subdivisions 3 and 4 the amount the corporation estimates to be the fair
value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective
date of the corporate action, together with the latest available interim
financial statements;
(2) An estimate by the corporation of the fair value of the shares
and a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the
reason for withholding the remittance, and an offer to pay to the dissenter
the amount listed in the materials if the dissenter agrees to accept that
amount in full satisfaction. The dissenter may decline the offer and demand
payment under subdivision 6. Failure to do so entitles the dissenter only to
the amount offered. If the dissenter makes demand, subdivisions 7 and 8
apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel
all transfer restrictions. However, the corporation may again give notice
under subdivision 4 and require deposit or restrict transfer at a later
time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in
D-3
<PAGE>
this state in which the last registered office of the constituent corporation
was located. The petition shall name as parties all dissenters who have demanded
payment under subdivision 6 and who have not reached agreement with the
corporation. The corporation shall, after filing the petition, serve all parties
with a summons and copy of the petition under the rules of civil procedure.
Nonresidents of this state may be served by registered or certified mail or by
publication as provided by law. Except as otherwise provided, the rules of civil
procedure apply to this proceeding. The jurisdiction of the court is plenary and
exclusive. The court may appoint appraisers, with powers and authorities the
court deems proper, to receive evidence on and recommend the amount of the fair
value of the shares. The court shall determine whether the shareholder or
shareholders in question have fully complied with the requirements of this
section, and shall determine the fair value of the shares, taking into account
any and all factors the court finds relevant, computed by any method or
combination of methods that the court, in its discretion, see fit to use,
whether or not used by the corporation or by a dissenter. The fair value of the
shares as determined by the court is binding on all shareholders, wherever
located. A dissenter is entitled to judgment in cash for the amount by which the
fair value of the shares as determined by the court, plus interest, exceeds the
amount, if any, remitted under subdivision 5, but shall not be liable to the
corporation for the amount, if any, by which the amount, if any, remitted to the
dissenter under subdivision 5 exceeds the fair value of the shares as determined
by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES.
(a) The court shall determine the costs and expenses of a proceeding
under subdivision 7, including the reasonable expenses and compensation of
any appraisers appointed by the court, and shall assess those costs and
expenses against the corporation, except that the court may assess part or
all of those costs and expenses against a dissenter whose action in
demanding payment under subdivision 6 is found to be arbitrary, vexatious,
or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses
of any experts or attorneys as the court deems equitable. These fees and
expenses may also be assessed against a person who has acted arbitrarily,
vexatiously, or not in good faith in bringing the proceeding, and may be
awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if
any.
D-4
<PAGE>
APPENDIX E
MONTANA DISSENTERS' RIGHTS STATUTE
35-1-826 DEFINITIONS.--As used in 35-1-826 through 35-1-839, the following
definitions apply:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" includes the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under 35-1-827 and who exercises that right when and in the
manner required by 35-1-829 through 35-1-837.
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment at the average rate currently paid by the
corporation on its principal bank loans or, if the corporation has no loans, at
a rate that is fair and equitable under all the circumstances.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial shareholder to the
extent of the rights granted by a nominee certificate on file with a
corporation.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
35-1-827 RIGHT TO DISSENT.--(1) A shareholder is entitled to dissent from
and obtain payment of the fair value of THE SHAREHOLDER'S shares in the event of
any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
if:
(i) shareholder approval is required for the merger by 35-1-815 or
the articles of incorporation and the shareholder is entitled to vote on
the merger; or
(ii) the corporation is a subsidiary that is merged with its parent
corporation under 35-1-818;
(b) consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired if the shareholder
is entitled to vote on the plan;
(c) consummation of a sale or exchange of all or substantially all of
the property of the corporation other than in the usual and regular course
of business if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within 1 year after the date of sale;
(d) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of the shares;
(ii) creates, alters, or abolishes a right in respect of redemption,
including a provision with respect to a sinking fund for the redemption
or repurchase of the shares;
(iii) alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(iv) excludes or limits the right of the shares to be voted on any
matter or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or
<PAGE>
(v) reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share created is to be acquired for
cash under 35-1-621; or
(e) any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and to obtain payment for their shares.
(2) A shareholder entitled to dissent and to obtain payment for shares under
35-1-826 through 35-1-839 may not challenge the corporate action creating the
shareholder's entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
35-1-828 DISSENT BY NOMINEES AND BENEFICIAL OWNERS--(1) A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in his
name only if he dissents with respect to all shares beneficially owned by any
one person and notifies the corporation in writing of the name and address of
each person on whose behalf he asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which he dissents and his other shares were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
(a) he submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(b) he does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
35-1-829 NOTICE OF DISSENTERS' RIGHTS.--(1) If a proposed corporate action
creating dissenters' rights under 35-1-827 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under 35-1-826 through 35-1-839 and
must be accompanied by a copy of 35-1-826 through 35-1-839.
(2) If a corporate action creating dissenters' rights under 35-1-827 is
taken without a vote of shareholders, the corporation shall give written
notification to all shareholders entitled to assert dissenters' rights that the
action was taken and shall send them the dissenters' notice described in
35-1-831.
35-1-830 NOTICE OF INTENT TO DEMAND PAYMENT.--(1) If proposed corporate
action creating dissenters' rights under 35-1-827 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters' rights:
(a) shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action
is effectuated; and
(b) may not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)(a)
is not entitled to payment for his shares under 35-1-826 through 35-1-839.
35-1-831 DISSENTERS' NOTICE.--(1) If proposed corporate action creating
dissenters' rights under 35-1-827 is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of 35-1-830.
(2) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken and must:
(a) state where the payment demand must be sent and where and when
certificates for certified shares must be deposited;
(b) inform shareholders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment is received;
E-2
<PAGE>
(c) supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and that requires the person asserting dissenters'
rights to certify whether or not he acquired beneficial ownership of the
shares before that date;
(d) set a date by which the corporation must receive the payment demand,
which may not be fewer than 30 nor more than 60 days after the date the
required notice under subsection (1) is delivered; and
(e) be accompanied by a copy of 35-1-826 through 35-1-839.
35-1-832 DUTY TO DEMAND PAYMENT.--(1) A shareholder sent a dissenters'
notice described in 35-1-831 shall demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to 35-1-831(2)(c), and
deposit his certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his certificates under
subsection (1) retains all other rights of a shareholder until these rights are
canceled or modified by the taking of the proposed corporate action.
(3) A shareholder who does not demand payment or deposit his certificates
where required, each by the date set in the dissenters' notice, is not entitled
to payment for his shares under 35-1-826 through 35-1-839.
35-1-833 SHARE RESTRICTIONS.--(1) The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions are released
under 35-1-835.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
35-1-834 PAYMENT.--(1) Except as provided in section 35-1-836, as soon as
the proposed corporate action is taken or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with 35-1-832 the amount the
corporation estimates to be the fair value of the dissenters' shares plus
accrued interest.
(2) The payment must be accompanied by:
(a) the corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(b) a statement of the corporation's estimate of the fair value of the
shares;
(c) an explanation of how the interest was calculated;
(d) a statement of the dissenters' right to demand payment under
35-1-837; and
(e) a copy of 35-1-826 through 35-1-839.
35-1-835 FAILURE TO TAKE ACTION--(1) If the corporation does not take the
proposed action within 60 days after the date set for demanding payment and
depositing certificates, the corporation shall return the deposited certificates
and release the transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under 35-1-831 and repeat the payment demand procedure.
E-3
<PAGE>
35-1-836 AFTER-ACQUIRED SHARES.--(1) A corporation may elect to withhold
payment required by 35-1-834 from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1), after taking the proposed corporate action, the corporation
shall estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under
35-1-837.
35-1-837 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.--(1) A
dissenter may notify the corporation in writing of the dissenters' own estimate
of the fair value of the dissenter's shares and the amount of interest due and
may demand payment of the dissenter's estimate, less any payment under 35-1-834,
or reject the corporation's offer under 35-1-836 and demand payment of the fair
value of the dissenter's shares and the interest due if:
(a) the dissenter believes that the amount paid under 35-1-834 or
offered under 35-1-836 is less than the fair value of the dissenter's shares
or that the interest due is incorrectly calculated;
(b) the corporation fails to make payment under 35-1-834 within 60 days
after the date set for demanding payment; or
(c) the corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection (1) within
30 days after the corporation made or offered payment for his shares.
35-1-838 COURT ACTION.--(1) If a demand for payment under 35-1-837 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand and shall petition the court to determine the fair
value of the shares and accrued interest. If the corporation does not commence
the proceeding within the 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the district court of
the county where a corporation's principal office or, if its principal office is
not located in this state, where its registered office is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters whose demands remain
unsettled, whether or not residents of this state, parties to the proceeding as
in an action against their shares, and all parties must be served with a copy of
the petition. Nonresidents may be served by certified mail or by publication as
provided by law.
(4) The jurisdiction of the district court in which the proceeding is
commenced under subsection (2) is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
E-4
<PAGE>
(5) Each dissenter made a party to the proceeding is entitled to judgment:
(a) for the amount, if any, by which the court finds the fair value of
the dissenter's shares plus interest exceeds the amount paid by the
corporation; or
(b) for the fair value plus accrued interest of his after-acquired
shares for which the corporation elected to withhold payment under 35-1-836.
35-1-839 COURT COSTS AND ATTORNEY FEES.--(1) The court in an appraisal
proceeding commenced under 35-1-838 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers appointed by
the court. The court shall assess the costs against the corporation, except that
the court may assess costs against all or some of the dissenters, in amounts the
court finds equitable, to the extent the court finds dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment under
35-1-837.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of 35-1-829 through 35-1-837; or
(b) against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by 35-1-826 through 35-1-839.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated and that the fees
for those services should not be assessed against the corporation, the court may
award the counsel reasonable attorney fees to be paid out of the amounts awarded
the dissenters who were benefited.
E-5
<PAGE>
PROXY
UNITED FINANCIAL CORP.
SPECIAL MEETING OF SHAREHOLDERS--FEBRUARY 3, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Bruce K. Weldele and Dean J. Mart, or either
of them, as proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated below, all the shares of
stock of United Financial Corp. ("United") which the undersigned would be
entitled to vote at the Special Meeting of Shareholders to be held on February
3, 1998, or at any adjournment or adjournments thereof, hereby revoking all
former proxies.
(1)Proposal to approve the Restated Agreement and Plan of Merger with Heritage
Bancorporation ("Heritage") pursuant to which Heritage will be merged with
United and each outstanding share of Heritage will be converted into 47.50
shares of United Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
(2)In their discretion, on such other business as may properly come before the
Special Meeting or any adjournment or adjournments thereof.
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED AND RETURNED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THE
PROXY WILL BE VOTED "FOR" PROPOSAL (1).
IF YOU ARE PLANNING TO ATTEND THE
SPECIAL MEETING, PLEASE COMPLETE THE
FOLLOWING:
Number of Shareholders attending the
Special Meeting: / /
Dated:
-------------------------------------------
Signed:
-------------------------------------------
(Signature of Shareholder)
-------------------------------------------
(Signature of Shareholder)
Please vote, date and sign this proxy
exactly as your name is printed hereon.
When signing as attorney, executor,
administrator, trustee, guardian, etc. give
full title as such. If the stock is held
jointly, each owner should sign. If a
corporation, please sign in full corporate
name by President or other authorized
officer. If a partnership, please sign in
partnership name by authorized person.
<PAGE>
PROXY
HERITAGE BANCORPORATION
SPECIAL MEETING OF SHAREHOLDERS--FEBRUARY 3, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John M. Morrison and Kurt R. Weise, or
either of them, as proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of stock of Heritage Bancorporation ("Heritage") which the undersigned
would be entitled to vote at the Special Meeting of Shareholders to be held on
February 3, 1998, or at any adjournment or adjournments thereof, hereby revoking
all former proxies.
(1)Proposal to approve the Restated Agreement and Plan of Merger with United
Financial Corp. ("United") pursuant to which Heritage will be merged with
United and each outstanding share of Heritage will be converted into 47.50
shares of United Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
(2)Proposal to approve the nominations of directors to the United Board:
/ / FOR all nominees listed below / / WITHHOLD
AUTHORITY
(except as marked to the contrary below) to vote for
all nominees listed below
<TABLE>
<S> <C>
John M. Morrison Kurt R. Weise
Janice M. Graser Larry D. Albert
Jerome H. Hentges
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee, mark the
FOR box and write that nominee's name for which you are withholding authority on
the space provided below)
- --------------------------------------------------------------------------------
(3)In their discretion, on such other business as may properly come before the
Special Meeting or any adjournment or adjournments thereof.
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED AND RETURNED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THE
PROXY WILL BE VOTED "FOR" PROPOSAL ONE AND FOR EACH NOMINEES LISTED IN PROPOSAL
TWO.
Dated:
---------------------------------------------
Signed:
---------------------------------------------
(SIGNATURE OF SHAREHOLDER)
---------------------------------------------
(SIGNATURE OF SHAREHOLDER)
Please vote, date and sign this proxy exactly
as your name is printed hereon. When signing
as attorney, executor, administrator,
trustee, guardian, etc. give full title as
such. If the stock is held jointly, each
owner should sign. If a corporation, please
sign in full corporate name by President or
other authorized officer. If a partnership,
please sign in partnership name by authorized
person.
