General. United Financial Corp. (“United”) is a bank holding company headquartered in Great Falls, Montana, with operations in 15 locations in 13 Montana communities. United was organized as a Minnesota corporation in 1996. United’s banking business in Montana is conducted through its wholly-owned subsidiary, Heritage Bank, a Montana corporation established in 1923. United had assets of approximately $389.5 million, deposits of approximately $303.7 million and stockholders’ equity of approximately $32.0 million at December 31, 2005.
Heritage Bank is a state-chartered commercial bank with locations in Billings, Bozeman, Chester, Fort Benton, Geraldine, Glendive, Great Falls (three locations), Hamilton, Havre, Kalispell, Missoula, Libby and Shelby, Montana. Heritage Bank is engaged in the community banking business of attracting deposits from the general public through its branches and using those deposits, together with other available funds, to originate commercial (including lease financing), commercial real estate, residential, agricultural and consumer loans primarily in its market areas in Montana. Heritage Bank’s banking business is concentrated in the Great Falls area through its two full service branches and one separate drive up location. Based on total assets, 41% of United’s assets are located at Heritage Bank’s Great Falls locations. Heritage Bank also invests in mortgage-backed securities, U.S. Treasury obligations, other U.S. Government agency obligations and other interest-earning assets.
Heritage Bank’s financial condition and results of operations, and therefore the financial condition and results of operations of United, are dependent primarily on net interest income and fee income. Heritage Bank’s financial condition and results of operations are also significantly influenced by local and national economic conditions, changes in market interest rates, governmental policies, tax laws and the actions of various regulatory agencies.
In January 2006, Heritage Bank sold its 17% ownership interest in Bankers’ Resource Center (“BRC”), a computer data center, located in Helena, Montana. The data center was owned and operated by a number of Montana banks, including Heritage Bank. BRC provided data processing services to its bank owners. In 2005, the owners collectively decided to sell the assets of BRC to a non-related third party and to liquidate the corporation. Heritage Bank will purchase these data processing services from this third party in 2006. While this transaction has eliminated Heritage Bank’s ownership in BRC, and United’s data processing services will now be provided by a third party operator, United does not expect this transaction to have a material effect on United’s operations, financial condition or financial results.
United’s principal offices are located at 120 First Avenue North, Great Falls, Montana 59401, and its telephone number is (406) 727-6106.
United makes available all periodic and current reports, free of charge, on its website as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). United’s website address is www.ufcmontana.com. The contents of our website are not incorporated into this report or into our other filings with the SEC.
Lending Activities
General. Lending activities are United’s primary source of both interest income and fee income. United’s interest income from loans receivable was approximately $19.7 million, $16.4 million and $15.9 million, or approximately 92%, 90% and 89% of total interest income, for the years ended December 31, 2005, 2004 and 2003, respectively. United’s principal lending activity has been the origination of real estate loans, including conventional residential real estate loans (loans which are neither insured nor partially guaranteed by government agencies) and residential real estate loans insured by the Federal Housing Administration (“FHA”) or partially guaranteed by the Veterans Administration (“VA”). United
also originates commercial and agricultural loans secured by real estate. In addition to loans secured by real estate, United’s lending activity includes the origination of non-mortgage commercial, agricultural and consumer loans.
The following table sets forth the composition of United’s loans receivable at December 31, 2005, 2004, 2003, 2002 and 2001:
(Dollars in thousands)
December 31,
December 31,
December 31,
2005
2004
2003
Amount
Percent
Amount
Percent
Amount
Percent Loans secured by real estate: 1 - 4 residential
$
42,541
13.5
%
$
43,391
16.2
%
$
37,401
16.2
%
5 or more residential
3,108
1.0
3,012
1.1
3,150
1.4
Commercial
79,036
25.0
51,017
19.0
48,235
20.9
Construction
41,154
13.0
29,083
10.8
17,175
7.4
Agricultural
27,501
8.7
24,837
9.2
20,216
8.7
Total loans secured by real estate
193,340
61.2
151,340
56.3
126,177
54.6
Commercial loans
65,576
20.8
65,108
24.2
56,416
24.5
Agricultural loans
16,577
5.3
15,108
5.6
14,511
6.3
Consumer loans
40,255
12.7
37,163
13.9
33,830
14.6
Total loans receivable
315,748
100.0
%
268,719
100.0
%
230,934
100.0
% Less: Allowance for loan losses
3,751
3,708
3,755 Net loans receivable
$
311,997
$
265,011
$
227,179
December 31,
December 31, (Dollars in thousands)
2002
2001
Amount
Percent
Amount
Percent Loans secured by real estate: 1 - 4 residential
$
34,288
16.0
%
$
35,863
16.5
%
5 or more residential
4,693
2.2
5,010
2.3
Commercial
45,355
21.1
45,820
21.1
Construction
15,259
7.1
19,384
8.9
Agricultural
19,039
8.9
18,994
8.7
Total loans secured by real estate
118,634
55.3
125,071
57.5
Commercial loans
51,461
24.0
52,363
24.1
Agricultural loans
14,548
6.8
11,607
5.3
Consumer loans
29,820
13.9
28,442
13.1
Total loans receivable
214,463
100.0
%
217,483
100.0
%
Less: Allowance for loan losses
3,113
2,794
Net loans receivable
$
211,350
$
214,689
Residential (Non-Construction) Real Estate Lending. Residential mortgage lending constitutes a significant portion of United’s lending activities. United’s residential loan originations are conducted by residential loan production officers in Heritage Bank’s twelve banking offices and its two loan production offices. The majority of Heritage Bank’s residential loan production is secured by properties located in Montana and are fixed-rate, long-term mortgage loans which are sold to the secondary market.
Under Heritage Bank’s residential lending policies, most loans originated conform to Government National Mortgage Association/Federal National Mortgage Association (“GNMA/FNMA”) secondary mortgage market standards and are secured by residential property with an appraised value of not more than 80% (or 95% if private mortgage insurance is obtained) of the principal amount of the loan. In accordance with federal guidelines, an appraisal by an independent licensed or certified appraiser is required for residential loans in excess of $250,000. United generally also obtains appraisals or valuations on most residential loans under $250,000. The terms of Heritage Bank’s conventional real estate loans provide that the loan can be prepaid without penalty and typically include a due-on-sale clause that provides for acceleration of indebtedness upon the sale or other disposition of secured property. Evidence of fire, casualty and hazard insurance with a mortgagee clause in favor of United is required prior to settlement of residential and commercial real estate loans. Title insurance is generally required on properties securing such loans.
Most of Heritage Bank’s residential loans are originated through personal contacts of loan officers, including contacts with local realtors, and through referrals from deposit customers. Although the majority of Heritage Bank’s loans are fixed rate loan products that are subsequently sold on the secondary market, Heritage Bank does offer a variety of adjustable rate residential loans, some of which are sold on the secondary market and some of which are retained in its own portfolio. The interest rates on variable loans 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. Heritage Bank’s primary indexes are the 1, 3 and 5-year constant maturity Treasury indexes. Most of the ARMs currently originated by Heritage Bank have loan terms of 15 to 30 years with rate adjustments generally every 1, 3 or 5 years during the term of the loan. Generally, interest rate adjustments on Heritage Bank’s ARMs are limited to changes of 2.5% - 3.25% per year and 6% - 10% for the life of the loan. The average lives of these loans were 9.5 years at December 31, 2005.
The majority of Heritage Bank’s total production of long-term (15 to 30-year maturity) fixed rate residential loans is originated according to pre-arranged underwriting standards that result in immediate sale to the secondary market, primarily to mortgage bankers and pension funds. Heritage Bank sold long-term fixed-rate residential mortgage loans to the secondary market in aggregate amounts of approximately $170.9 million in 2005, $143.3 million in 2004 and $325.9 million in 2003. Heritage Bank also sells long-term fixed-rate loans that are refinances of existing portfolio loans or permanent financing of completed construction loans. These are sold to the secondary market or State of Montana housing agencies. The combination of both of these types of secondary market sales resulted in a gain on sale of loans totaling $3.2 million, $2.8 million and $5.0 million in 2005, 2004 and 2003, respectively. Components of the recognized gain include origination fees, service release fees or an amount capitalized for retained servicing rights, and premiums or discounts related to the sale. Heritage Bank retains a limited number of adjustable rate mortgages and fixed rate mortgage loans up to 15-year maturities for its own portfolio.
Real Estate Construction Loans. In addition to permanent real estate mortgage loans, Heritage Bank also provides interim financing for the construction of single-family and multi-unit dwellings, commercial real estate and improvements of real estate. Construction loans are generally made for periods of approximately nine months, with interest paid at periodic intervals. Such loans may be extended for several months due to adverse weather conditions or other justifiable delays in construction. Heritage Bank provides financing primarily for a limited number of registered contractors who have demonstrated an ability to complete projects in residential development and construction, have operated in Heritage Bank’s lending area for a number of years and are deemed to be financially responsible. Heritage Bank also provides construction loans for customers who have made the decision to construct a new home for their personal use and in that case the Heritage Bank customer will choose their own contractor who is then approved by Heritage Bank. Heritage Bank requires that permanent financing is in place prior to entering into a construction loan for an individual customer.
Commercial and Agricultural Real Estate Loans. Heritage Bank engages in commercial real estate lending secured by both commercial and agricultural properties. Occasionally when making such loans, Heritage Bank participates in the U.S. S Administration’s program for guaranteed commercial real estate loans. Heritage Bank’s loans on commercial and agricultural real estate are primarily first lien loans with 10 to 15-year maturities and adjustable interest rates based on U.S. Treasury indexes for 1, 3 and 5 years.
Non-Mortgage Commercial and Agricultural Lending. In addition to real estate lending, Heritage Bank offers commercial and agricultural non-mortgage loans. Heritage Bank offers commercial lines of credit, equipment term loans, working capital loans and loans guaranteed by the S Administration to its business customers. It also offers seasonal lines of credit and term equipment loans to its agricultural borrowers. Heritage Bank purchases, on a participation basis, loans originated outside its normal market areas. Participation loans are generally purchased from commercial banks and third party loan production offices. Generally, these purchased participations allow Heritage Bank to diversify its geographic risk and are purchased with a higher level of underwriting standards since a direct customer relationship does not exist. At December 31, 2005, Heritage Bank had $65.6 million of non-mortgage commercial loans in its loan portfolio, which included approximately $32.6 million of purchased participation loans located outside of Montana.
Consumer Lending. Heritage Bank’s consumer loan portfolio includes home equity, home improvement, line of credit, auto, deposit account, dealer loans and credit card receivables. Heritage Bank has entered into agreements with certain local merchants to purchase qualifying conditional sales contracts. Heritage Bank requires fire, hazard and casualty insurance for loans secured by home equity and casualty insurance for loans secured by autos and recreational vehicles. Heritage Bank also maintains an underlying vendors single interest insurance policy to protect it in the event a loss is incurred to a non-insured customer vehicle.
Investment Activities
The investment activities of United are designed to provide an investment alternative for funds not presently required to meet loan demand, assist in maximizing income, supply collateral to secure public funds and retail repurchase agreements, provide a means for balancing market and credit risks, and provide consistent income and market value throughout changing economic times.
Interest income from investment activities was approximately $1.5 million, $1.6 million and $1.7 million, or approximately 6.9%, 8.8% and 9.6% of United’s total interest income, for the years ended December 31, 2005, 2004 and 2003, respectively.
United’s portfolio consists primarily of obligations of the U.S. government and its agencies, mortgage-backed securities, municipal bonds and corporate bonds and equity securities. United’s investment portfolio does not contain a concentration of investments in any one issuer in excess of 10% of its total investment portfolio, except for securities of the U.S. government and U.S. government agencies. All of United’s investments are classified as available-for-sale.
The following table sets forth the carrying values of United’s investments at December 31, 2005, 2004 and 2003:
(Dollars in thousands)
December
31,
2005
December
31,
2004
December
31,
2003 U.S. government and federal agencies
$
6,423
$
4,029
$
8,106
Mortgage-backed securities
27,856
34,446
31,574
Municipal bonds
1,899
Corporate bonds and equity securities
—
1,700
$
35,359
$
38,949
$
43,279
During 2005, United received $11.4 million in mortgage-backed security principal payments and had $1.0 million of calls and maturities of investment securities. United sold $1.8 million of investment securities and mortgage–backed securities while purchasing $11.2 million in investment securities and mortgage-backed securities. United recorded an unrealized loss in market values of its investment portfolio of $.5 million, and amortization of purchase premium of $.1 million during the year. The unrealized loss is the result of the normal market fluctuations on bonds and mortgage-backed securities due to recent increases in interest rates.
During 2004, United received $11.9 million in mortgage-backed security principal payments and had $7.1 million of calls and maturities of investment securities. Sales of investment securities and mortgage-backed securities were $3.5 million in 2004 and purchases totaled $18.5 million. United experienced a decrease in unrealized gain in market values of its investment portfolio of $.4 million, from $.5 million in 2003 to $.1 million in 2004, before taxes.
Sources of Funds
The primary sources of funds for United’s lending and investment activities are deposits, repurchase agreements, Federal Home Loan Bank (“FHLB”) borrowings, loan and mortgage-backed securities repayments, proceeds from loan sales, investment securities, interest payments and maturities, and net operating revenues.
Deposit Activities. Deposits are attracted from within United’s market area through the offering of a broad selection of deposit instruments, including NOW accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, United considers current market interest rates, profitability to United, matching deposit and loan products offered by its competition and its customer preferences and concerns. United reviews its deposit mix and pricing on a regular basis.
The following table sets forth the composition of United’s deposits at December 31, 2005, 2004 and 2003:
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December 31, |
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December 31, |
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December 31, |
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(Dollars in thousands) |
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2005 |
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2004 |
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2003 |
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Amount |
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Amount |
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Percent |
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Type: |
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Non-interest bearing |
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$ |
56,642 |
|
18.7 |
% |
|
$ |
47,490 |
|
18.4 |
% |
|
$ |
36,551 |
|
16.1 |
% |
|
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Interest bearing: |
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NOW & money market accounts |
|
|
33,914 |
|
11.2 |
|
|
|
35,974 |
|
13.9 |
|
|
|
33,300 |
|
14.6 |
|
|
|
Savings accounts |
|
|
51,472 |
|
16.9 |
|
|
|
54,427 |
|
21.1 |
|
|
|
54,897 |
|
24.1 |
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Time deposits |
|
|
161,663 |
|
53.2 |
|
|
|
120,444 |
|
46.6 |
|
|
|
102,766 |
|
45.2 |
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Total |
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$ |
303,691 |
|
100.0 |
% |
|
$ |
258,335 |
|
100.0 |
% |
|
$ |
227,514 |
|
100.0 |
% |
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Scheduled maturities of certificates of deposit at December 31, 2005 are as follows:
(Dollars in thousands) Due within one year
$
112,778
Due within two to three years
39,519
Due within four to five years
9,072
Thereafter
Totals
$
161,663
Time deposits of $100,000 or more were approximately $40.4 million, $29.1 million and $24.0 million at December 31, 2005, 2004 and 2003, respectively. Amounts in excess of $100,000 are not insured by a federal agency.
The maturity of time deposits of $100,000 or more at December 31, 2005 was as follows:
(Dollars in thousands) Less than three months
$
8,869
Three to six months
4,556
Six to twelve months
15,113
Greater than twelve months
11,892
Total
$
40,430
Early withdrawal from time deposits subjects the depositor to an early withdrawal penalty which is currently equal to six months of simple, nominal interest when the original maturity is longer than one year, three months of simple, nominal interest when original maturity is 92 days to one year, and all interest earned when original maturity is 91 days or less.
Beginning in 2004, United began issuing brokered deposits. Brokered deposits are deposits obtained through a broker who engages in facilitating the placement of deposits with insured depository institutions for a third party. Heritage Bank’s correspondent bank acts as custodian for these deposits. At December 31, 2005, such brokered deposits totaled $18.3 million.
Although deposits are not solicited outside of Montana, historically, a small number of the Heritage Bank’s depositors have resided outside Montana. As market demand generally dictates deposit maturities and rates, United intends to continue to offer those types of accounts that it believes have broad market appeal.
Borrowings. Heritage Bank relies to a significant extent on borrowings from the FHLB to finance its short-term, and increasingly its longer term, financing needs. The FHLB functions as the central reserve bank providing credit for commercial banks and certain other member financial institutions. Borrowings from the FHLB are available at various maturities, which facilitates the matching of asset and liability maturity dates.
As a member of the FHLB, Heritage Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of specified collateral. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Heritage Bank’s established available FHLB advance credit line for 2005 was 25% of assets. The FHLB is required to review its credit limitations and standards at least annually.
For the years ended December 31, 2005, 2004 and 2003, FHLB borrowing information was as follows:
(Dollars in thousands)
2005
2004
2003
Average FHLB advances
$
45.8
$
42.5
$
31.6
Maximum advances outstanding
59.7
60.6
36.0
Year end advances outstanding
42.0
44.8
31.0
Weighted average interest rate
4.01
%
3.41
%
4.05
%
Securities Sold Under Agreements To Repurchase. Heritage Bank generates funds through the sale of investment securities under agreements requiring their repurchase at a premium that represents interest. The securities underlying agreements to repurchase are for the same securities originally sold and are held in a custody account by a third party.
For the years ended December 31, 2005, 2004 and 2003, securities sold under agreements to repurchase information was as follows:
(Dollars in thousands)
2005
2004
2003
Average balances
$
6.1
$
8.2
$
9.2
Maximum balances outstanding
10.0
13.7
9.9
Year end balances
4.2
7.5
7.9
Weighted average interest rate
2.68
%
1.30
%
1.54
%
Subordinated Debentures. In July 2001, United issued junior subordinated debentures, aggregating $3.1 million to United Financial-Montana Capital Trust I (the “Trust”). The Trust issued preferred securities, as part of a pooled issue, with an aggregate liquidation amount of $3.0 million ($1,000 per capital security) to third-party investors. The junior subordinated debentures and cash are the sole assets of the Trust. The preferred securities are includable as Tier I capital for regulatory capital purposes. The junior subordinated debentures and the preferred securities pay interest and dividends, respectively, on a semi-annual basis, which are included in interest expense. The variable interest rate resets on January 25 and July 25 of each year, based upon six month LIBOR plus 3.75%. The interest rate reset on January 25, 2006 was 8.56%. The junior subordinated debentures and preferred securities will mature on July 25, 2031. The junior subordinated debentures and preferred securities can be redeemed contemporaneously, in whole or in part, after five years at decreasing premiums with the permission of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). United has provided a full and unconditional guarantee of the obligations of the Trust in the event of the occurrence of an event of default, as defined.
Market Area
Great Falls, the county seat of Cascade County and a regional trade center, is among the largest cities in Montana. The estimated 2005 Great Falls and Cascade County populations were approximately 57,000 and 80,000, respectively. The economy of Great Falls is largely based on agriculture, health care and Department of Defense activities. Malmstrom Air Force Base (“MAFB”), which employs approximately 4,000 people, is the largest employer in Great Falls and Cascade County. Any significant reduction in size or closure of MAFB would likely adversely affect United and its results of operations and financial condition. MAFB is home to 200 of the nation’s 500 land based intercontinental ballistic missiles.
The economies of Chester, Fort Benton, Geraldine, Glendive, Havre and Shelby, Montana are dependent to a large extent on agricultural, livestock and railroad activities. Areas such as Bozeman, Great Falls, Hamilton, Kalispell, Libby and Missoula are supported in part by tourism, higher education and natural resources. Agriculture and natural resources are among the predominant activities in the State of Montana, and any adverse trends in either of these two industries could adversely affect United and its results of operations and financial condition.
Competition
Heritage Bank, like other depository institutions, is operating in a rapidly changing environment and, therefore, faces considerable competition in the attraction of deposits and the origination of loans. Historically, the most direct competition for deposits has come from savings banks, credit unions and commercial banks. According to a recent market share report prepared by the FHLB, there are approximately 155 commercial bank branch locations, 38 credit union branch locations and 8 savings bank branch locations in Heritage Bank’s Montana market areas. In addition to these entities, United estimates there are approximately 35 mortgage companies directly competing with its real estate originators in the Montana market area. Non-depository financial service organizations, primarily in the securities and insurance industries, have also become competitors for retail savings and investment funds. Heritage Bank’s deposit programs compete with money market mutual funds, government securities and other investment alternatives. Heritage Bank competes for deposits by offering a variety of deposit accounts at interest rates based upon market conditions, convenient business hours, quality service and convenient branch locations.
Employees
At February 29, 2006, Heritage Bank employed 126 full-time employees and 24 part-time employees. Heritage Bank maintains a comprehensive employee benefit program providing, among other benefits, hospitalization and major medical insurance, paid sick leave, disability, life insurance and 401K retirement plans. Heritage Bank’s employees are not represented by any collective bargaining group. See Part IV, Item 15. – “Notes to Consolidated Financial Statements – Employee Benefit Plans.” United, as a parent company, has no paid employees.
Executive Officers of the Registrant
The following table sets forth information with respect to the executive officers of United. All executive officers are elected annually by the Board of Directors. There are no arrangements or understandings between individual officers and any other person pursuant to which he or she was elected as an officer.
Name
Age
Position Held Kurt R. Weise
Chairman of United; Director and Vice President of Heritage Bank
Kevin P. Clark
Chief Executive Officer and Director of United; Director, President and Chief Executive Officer of Heritage Bank
Steve L. Feurt
President of United; Director, Executive Vice President and Senior Lending Officer of Heritage Bank
Paula J. Delaney
Chief Financial Officer of United; Director and Vice President of Heritage Bank
Mr. Weise has served as Chairman of United since 2003. Mr. Weise has served as director of United since 1998, and director and Vice President of Heritage Bank since 1994. Mr. Weise’s term of office as a director of United expires at United’s annual shareholder meeting in 2006. Mr. Weise also serves as President of Central Financial Services (“CFS”), a bank-consulting firm and President of Central Bancshares, Inc. (“Central Bancshares”). Central Bancshares is the parent company of Central Bank, located in Stillwater, Minnesota. Central Bancshares and CFS are both wholly-owned by United’s largest shareholder. CFS provides various management services to United, including certain accounting and tax services, investment consulting, personnel consulting, asset liability management and regulatory consulting.
Mr. Clark has served as Chief Executive Officer of United since June of 2005 and as director of United since 1998. Mr. Clark has served as director, President and Chief Executive Officer of Heritage Bank, since 1994. Mr. Clark’s term of office as a director of United expires at United’s annual shareholder meeting in 2006.
Mr. Feurt has served as President of United since June of 2005, and has served as Senior Vice President and Chief Credit Officer of United, and director and Executive Vice President and Senior Lending Officer of Heritage Bank, since 1998.
Ms. Delaney has served as Chief Financial Officer of United since 2001, and as Vice President of Heritage Bank since 1998. Ms. Delaney has served on the Heritage Bank board since 2000. Previously, Ms. Delaney was employed in public accounting from 1984 to 1998, with Hamilton Misfeldt & Co. P.C., a Great Falls, Montana based public accounting firm.
Supervision and Regulation
United is a bank holding company which owns Heritage Bank, a Montana-state chartered commercial bank.
Bank holding companies are subject to the general supervision and regulation by the Federal Reserve Bank (“FRB”). Under the Bank Holding Company Act of 1956, as amended (“BHCA”), and FRB regulations, a bank holding company may engage in banking, managing or controlling banks, furnishing or performing services for banks it controls and conducting activities that the FRB has determined to be closely related to banking. Bank holding companies must also obtain the prior approval of the FRB before acquiring 5% or more of the outstanding shares of another bank or bank holding company and must provide notice to, and in some situations obtain the prior approval of, the FRB in connection with the acquisition of 5% or more of the outstanding shares of a company engaged in a “bank related” business.
Under FRB regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity. A bank holding company’s failure to
meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound practice or a violation of FRB regulations, or both.
Bank holding companies are subject to certain limitations on redemption of common stock or other equity securities. In addition, the FRB has issued regulations setting minimum capital standards for bank holding companies. Depending on the capital classification of a bank holding company, it may be restricted from engaging in certain non-bank activities or from acquiring interests in additional banks or other depository institutions. As of December 31, 2005, United met the limitations on redemption of common stock and the minimum capital requirements issued by the FRB. See also discussion below under Capital Adequacy regarding recent amendments to the FRB Board’s Small Bank Holding Company Policy Statement.
Under the BHCA, as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”), a bank holding company may acquire banks throughout the United States subject only to state or federal deposit caps and state minimum age requirements. Effective June 1, 1997, the Interstate Act authorized interstate branching by acquisition and consolidation in those states that had not opted out by that date. Montana had opted out of the interstate branching by acquisition and consolidation until October 1, 2001.
The Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) came into effect on March 11, 2000. The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve member banks with firms “engaged principally” in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. In addition, the Financial Services Modernization Act contains provisions that expressly preempt any state law restricting the establishment of financial affiliation, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliation among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the bank holding company framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a financial holding company. To date, United has not elected to become a financial holding company.
Bank holding companies that elect to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or are incidental or complementary to activities that are financial in nature. “Financial in nature” activities include securities underwriting, dealing, and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines from time to time to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
To the extent that the Financial Services Modernization Act permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this legislation may increase the amount of competition from larger institutions and other types of companies with substantially greater resources and a wider variety of financial products than United currently offers.
Under the Financial Services Modernization Act, federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. United has implemented procedures to comply with these rules and believes that compliance has not adversely affected its operations.
United and its subsidiaries are deemed affiliates within the meaning of the Federal Reserve Act, and transactions between the affiliates are subject to certain restrictions. Accordingly, United and its respective subsidiaries must comply with Sections 23A and 23B of the Federal Reserve Act (the “FRA”). Generally, these sections restrict “covered transactions” ( i.e., loans, purchases of assets, guaranties and similar transactions) to a percentage of the depository institution’s capital and surplus, require that such transactions be appropriately collateralized and require that such transactions be on terms as favorable to the depository institution as transactions with non-affiliates. Loans to insiders (officers, directors and 10% shareholders) of a depository institution are subject to Sections 22(g) and (h) of the FRA and regulations thereunder. Among other things, such loans must be made on terms substantially the same as loans to non-insiders.
On October 26, 2001, President Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (“USA Patriot Act”) of 2001. Among other things, the USA Patriot Act (1) prohibits banks from providing correspondent accounts directly to foreign shell banks; (2) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (3) required financial institutions to establish an anti-money-laundering compliance program; and (4) generally eliminates civil liability for persons who file suspicious activity reports. The Act also increased governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Act. While the USA Patriot Act may, to some degree, affect United’s record-keeping and reporting expenses, United does not believe that the Act will have a material adverse effect on its business and operation. Management believes United is in compliance with the USA Patriot Act.
Depository Institution Subsidiary—Heritage Bank. As a Montana-chartered commercial bank, Heritage Bank is subject to regulation and supervision by the Montana Department of Commerce, Division of Banking and Financial Institutions (the “Montana Division”) and the FDIC. Heritage Bank’s deposits are insured by the FDIC up to $100,000.
The Montana statutes and regulations place limitations on the business and other activities of Heritage Bank which may be more restrictive than limitations applicable to depository institutions that are not state-chartered commercial banks. In particular, and among other limitations, the establishment and operation of new branch offices, is limited by, and subject to approval by, the Montana Division. In addition, state-chartered commercial banks are generally not authorized to make investments in the capital stock of any corporation, or to make other investments in equity securities or to engage in securities or insurance activities. A Montana bank may acquire shares of stock in an affiliate or subsidiary, the business activities of which are limited to those allowed by law for a bank. Some federally chartered depository institutions located in Montana may engage in such activities without regard to state law.
By reason of FDIC insurance, Heritage Bank is an insured depository institution for purposes of certain federal laws and regulations. The federal laws that apply to depository institutions regulate, among other things, the scope of their businesses, their investments, the reserves against deposits, the timing and availability of deposited funds and certain aspects of their lending activities. These laws and regulations governing the depository institution activities have generally been promulgated to protect depositors and not to protect stockholders of such institutions or their holding companies. These laws and regulations are designed to ensure that appropriate action is taken to address concerns regarding the safe and sound operation of insured depository institutions and generally relate to internal control and information systems, loan documentation and credit underwriting, asset growth, management performance and earnings. If an insured depository institution fails to meet the applicable standards and regulatory requirements, an appropriate banking agency may require that the institution prepare and submit to the agency an acceptable plan for addressing the regulatory concern. If the plan submitted is deemed inadequate, or if the institution fails to submit or comply with the required plan, a banking agency
may take further action with respect to the regulatory concerns, including institution of an enforcement action with respect to the institution.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) required federal banking regulators to adopt regulations in a number of specific areas to insure depository institution safety and soundness, including internal controls, credit underwriting, asset growth, management compensation, asset quality and earnings performance. FDICIA also contains provisions intended to change independent auditing requirements, to restrict the activities of certain insured depository institutions, to change various consumer banking laws and to limit the ability of “under-capitalized banks” to borrow from the FRB’s discount window or to acquire brokered deposits. Heritage Bank is in compliance with applicable FDICIA regulations as of December 31, 2005.
The Financial Institution Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) significantly changed existing federal banking legislation and regulation, including significant increases in FDIC insurance premiums, separation of the FDIC insurance into two deposit insurance funds, authorizing bank holding companies to own savings associations, increasing the federal banking agencies’ enforcement powers and increasing the civil and criminal penalties for violations of federal banking laws and regulations.
Heritage Bank is subject to certain federal consumer laws, including the Community Reinvestment Act of 1977, as amended (“CRA”), and other fair lending laws and regulations which impose nondiscriminatory lending requirements on insured depository institutions. In recent periods, federal regulatory agencies have sought a more rigorous enforcement of the CRA and other fair lending laws and regulations. A successful challenge to a depository institution’s performance under the CRA and related fair lending laws and regulations could result in a variety of sanctions, including the required payment of damages and civil money penalties, prospective and retrospective injunctive relief and the imposition of restrictions on mergers and acquisitions or other activities of the depository institution or the holding companies controlling such depository institutions. Private parties may also have the ability to challenge an institution’s performance under the fair lending laws in private class action litigation. Heritage Bank’s most recent CRA exam in May of 2005 earned the Bank a satisfactory rating.
Federal regulatory banking agencies have also established uniform capital requirements for all insured depository institutions. An insured depository institution that does not achieve and maintain required capital levels may be subject to supervisory action through the issuance of capital directives, cease and desist orders or other written orders or agreements with the appropriate federal banking agency. Failure of an insured depository institution to meet the required capital levels may also prohibit or limit the ability of a bank holding company controlling such institution to engage in merger and acquisition activities or other expansion activities. As of December 31, 2005, Heritage Bank met the “well capitalized” requirements issued by the applicable federal banking agency.
Depository institutions generally depend upon the difference between the interest rate paid by them on deposits and other borrowings and the interest rate received on loans extended to customers and on investment securities. The interest rates are highly sensitive to many factors beyond the control of depository institutions, including general economic conditions in their primary market area and the broader economy. In addition to general economic conditions affecting business generally, depository institutions such as Heritage Bank is affected by federal government policies and actions of regulatory agencies. In particular, the FRB through its various operations and powers may affect interest rates charged on loans or paid on deposits. Such changes in interest rates affect the growth and quality of depository institution loans, investments and deposits.
Federal banking regulatory agencies may institute enforcement actions against depository institutions, their parent holding companies and other institution-affiliated parties with respect to violations of any federal law or regulation. Enforcement actions may include the appointment of a conservator or receiver, the issuance of cease and desist orders or other formal action, termination of
insurance of deposits and the imposition of civil money penalties. Heritage Bank is currently not subject to any such enforcement actions.
From time to time, various types of federal and state legislation have been proposed that would result in additional regulation of, or restrictions on, the business of depository institutions. It cannot be predicted whether such legislation will be adopted or how such legislation would affect the business of Heritage Bank.
Deposit Insurance and FDIC Regulation. Heritage Bank is a member of the Savings Association Insurance Fund (“SAIF”), and the Bank Insurance Fund (“BIF”), both administered by the FDIC. Section 5(d) of the Federal Deposit Insurance Act (“FDI Act”), known as the Oakar Amendment, permits merger transactions between SAIF- and BIF-member institutions resulting in an institution with deposits that are proportionally insured by both SAIF and BIF.
Savings deposits are insured up to the applicable limits (generally $100,000 per insured depositor) by the FDIC. The FDIC is empowered to impose deposit insurance premiums, conduct examinations and require reporting by Heritage Bank. The FDIC may also prohibit Heritage Bank from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC. The FDIC can also initiate enforcement actions against Heritage Bank and may terminate the deposit insurance of Heritage Bank if it determines that Heritage Bank has engaged or is engaging in any unsafe or unsound practice, or are in an unsafe or unsound condition.
For 2005, the FDIC assessment rate for Heritage Bank decreased each quarter from 1.44 basis points per $100 of insured deposits during the first quarter, to 1.34 basis points for the fourth quarter. As a result, Heritage Bank’s 2005 FDIC deposit insurance premium was approximately $.1 million. FDIC has published assessment rates for the first quarter of 2006, per $100 of insured deposits, of 1.32 basis points.
State Lending Limits. Heritage Bank is subject to a State of Montana lending limit of 20% of capital. The maximum aggregate amount of loans outstanding to a single borrower at Heritage Bank at December 31, 2005 and 2004 was approximately $2.1 million and $2.2 million, respectively. At December 31, 2005 and 2004 Heritage Bank was in compliance with the State of Montana lending limit.
Capital Adequacy. FDIC emphasizes capital as a measure of performance and establishes a rigid regulatory scheme based almost entirely on capital levels. Banks are assigned to one of five capital categories depending on their total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. Banks which are deemed to be “undercapitalized” are subject to certain mandatory supervisory corrective actions. The five statutory capital categories established by FDIC are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Heritage Bank’s capital position exceeded the minimum requirement for the “well capitalized” category as of December 31, 2005. FDIC also mandates that regulations be promulgated adding other risk-based capital requirements covering (a) concentrations of credit risk, (b) risks from nontraditional activities and (c) the capital impact of fair value adjustments associated with FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” See Part IV, Item 15 – “Notes to Consolidated Financial Statements – Regulatory Matters.”
Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses, to open new facilities, or to accept brokered deposits.
The FDIC and Federal Reserve use risk-based capital guidelines for banks and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the Federal Reserve has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum.
The Board of Governors of the Federal Reserve System (“Board”) is amending the asset size threshold and other criteria for determining whether a bank holding company (“BHC”) qualifies for the Board’s Small Bank Holding Company Policy Statement and an exemption from the Board’s consolidated risk-based and leverage capital adequacy guidelines for BHC’s. The Board is adopting this final rule to address the effects of inflation, industry consolidation, and normal asset growth of BHC’s since the Board introduced its previous policy statement in 1980. The final rule increases the asset size threshold from $150 million to $500 million in consolidated assets for determining whether a BHC may qualify for the policy statement and an exemption from the capital guidelines; modifies the qualitative criteria used in determining whether a BHC that is under the asset size threshold nevertheless would not qualify for the policy statement or the exemption from the capital guidelines; and clarifies the treatment under the policy statement of subordinated debt associated with trust preferred securities.
The risk-based guidelines apply on a consolidated basis to any BHC with consolidated assets of $500 million or more. The risk-based guidelines also apply on a consolidated basis to any BHC with consolidated assets of less than $500 million if the holding company (i) is engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) conducts significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; or (iii) has a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission. The Federal Reserve may apply the risk-based guidelines at its discretion to any BHC, regardless of asset size, if such action is warranted for supervisory purposes.
With current consolidated assets of approximately $390 million, it does not appear that United will be subject to the new risk-based guidelines as described above. United would, however, be subject to the small bank holding company rules in Part 225, Regulation Y of title 12 of the Code of Federal Regulations.
Federal Home Loan Bank System. Heritage Bank is a member of the FHLB of Seattle, Washington. Each FHLB serves as a reserve or central bank for its members within its assigned region, is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system and makes loans (advances) to its members in accordance with the policies and the procedures established by the FHLB board of directors. All advances from the FHLB are required to be fully secured by sufficient collateral as is determined by the FHLB. Member banks are required to purchase and maintain FHLB stock in an amount equal to the greater of 1% of the unpaid principal of residential mortgage loans, or 5% of FHLB advances outstanding.
Corporate Governance. United regularly monitors developments in the area of corporate governance. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) established a number of new corporate governance standards and disclosure requirements. The Securities and Exchange Commission (the “SEC”) has issued additional rules to implement the Sarbanes-Oxley Act. In addition, Nasdaq adopted changes to its corporate governance and listing standards. United has reviewed its governance policies and practices against the requirements of the Sarbanes-Oxley Act, related SEC rules and Nasdaq’s listing standards. As a result, United has taken steps to implement those rules and listing standards. In particular, United continues to maintain the following:
• A Nominating Committee and a Nominating Committee Charter;
• A Code of Ethics and Business Conduct applicable to directors, officers and employees of the Company and of Heritage Bank;
• An Audit Committee Charter;
• A Compensation Committee Charter; and
• A policy of holding regularly scheduled meetings of United’s non-management directors, separate from management.
United will be subject to the new Sarbanes-Oxley Act Section 404 requirements regarding internal control evaluation and reporting for the year ended December 31, 2007.
United’s Audit, Compensation and Nominating Committee charters can be obtained by visiting United’s website and clicking on the Corporate Governance link on the home page www.ufcmontana.com , or by writing to: United financial Corp., c/o Investor Relations, P.O. Box 2779, Great Falls, MT 59403.
Taxation
General. United files consolidated Federal and State of Montana income tax returns pursuant to a tax sharing agreement. Generally, with some exceptions, including Heritage Bank’s reserve for bad debts discussed below, United is subject to Federal and state income taxes in the same manner as other corporations.
The following discussion of tax matters is intended solely as a summary and does not purport to be a comprehensive description of all the tax rules applicable to United.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1, 1996, savings institutions, which met certain definitional tests primarily relating to their assets and the nature of their business (“qualifying thrifts”), were permitted to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, were deducted in arriving at their taxable income.
Federal legislation repealed the reserve method of accounting for bad debt reserves for tax years beginning after December 31, 1995. As a result, savings associations could no longer calculate their deduction for bad debts using the percentage-of-taxable-income method. Instead, savings associations were required to compute their deduction based on actual charge-offs during the taxable year or, if the savings association or its controlled group had assets of less than $500 million, based on actual loss experience over a period of years. This legislation also required savings associations to recapture into income over a six-year period their post-1987 additions to their bad debt tax reserves, thereby generating additional current tax liability. For additional information regarding federal and state income taxes, see Part IV, Item 15 – “Notes to Consolidated Financial Statements – Income Taxes.”
Item 1A. RISK FACTORS
Operating in the banking industry exposes United to certain risks. The following are comments regarding the most significant risks and uncertainties that could affect United’s business.
Changing Interest Rates. The most significant component in United’s net income is net interest income, which is the difference between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings, and other interest-bearing liabilities. This difference is referred to as interest rate spread. Because of the differences in maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent
changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, changes in interest rates can adversely affect interest rate spread, and, in turn, profitability. United cannot guarantee that interest rate risk can be minimized. In addition, interest rates also affect the amount of money available to lend. When interest rates rise, the cost of borrowing also increases. Accordingly, changes in levels of market interest rates can materially and adversely affect net interest spread, asset quality, loan origination volume, customer retention and business development. See discussion concerning Net Interest Income in “Item 7-Management Discussion & Analysis”.
The Allowance For Loan Losses May Not Be Adequate To Cover Actual Loan Losses, Which Could Adversely Affect Net Income. Heritage Bank maintains an allowance for loan losses in an amount that management believes is adequate to provide for losses inherent in the portfolio. While management strives to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. Heritage Bank cannot be sure that deteriorating loans will be identified before they become nonperforming assets, or that management will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Future additions to the allowance may be required based on changes in the composition of the loans comprising the portfolio and changes in the financial condition of borrowers, resulting from changes in economic conditions, or as a result of incorrect assumptions by management in determining the allowance requirements. Additionally, state banking regulators periodically review the allowance for loan losses. These regulatory agencies may require Heritage Bank to increase the allowance for loan losses which could have a negative effect on United’s financial condition and results of operation.
Loan Portfolio Credit Risk. Heritage Bank’s loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in relation to our total loans and total assets. These types of loans generally are viewed as having a higher risk of default than residential real estate loans or certain other types of loans or investments. The Federal Deposit Insurance Corporation recently issued a pronouncement alerting banks to their concern about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential real estate loans and other commercial loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on financial results.
United Relies On Dividends From Heritage Bank For Revenue, And Federal And State Law Can Limit Dividends That The Bank Pays To The Holding Company. As a bank holding company, United is dependent on dividends from Heritage Bank. United uses these dividends to pay dividends on United common stock and to pay interest and principal on debt. Federal and state laws limit the amount of dividends that Heritage Bank may pay to United. Also, United’s right to participate in a distribution of assets upon Heritage Bank’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
Federal And State Regulations Can Restrict Our Business, And Non-Compliance Could Result Materially Adversely Affect Our Financial Condition And Results Of Operations. United and its subsidiary bank Heritage Bank are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds, consumers and the banking system as a whole. This regulation is not designed to protect the holding company’s shareholders. Federal and state regulatory authorities could put restrictions on our operations, and United could be fined or otherwise penalized if United is found to be out of compliance with regulations that apply to our business.
The Sarbanes-Oxley Act also requires that United’s management evaluate its disclosure controls and procedures and its internal control over financial reporting. United’s auditors may in the future be required to express an opinion on our internal controls over financial reporting. United is also required to
disclose, in its annual report on Form 10-K filed with the SEC, the existence of any “material weaknesses” in its internal control. The management of United cannot assure that one or more material weaknesses will not be found as of the end of any given year.
The Patriot Act, which was enacted in the wake of the September 2001 terrorist attacks, requires Heritage Bank to implement new or revised policies and procedures relating to anti-money laundering, compliance, suspicious activities, and currency transaction reporting and due diligence on customers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.
A Downturn In The Montana Real Estate Market Or Economy Could Hurt Heritage Bank’s Business. A downturn in real estate or the general economy in Montana could hurt Heritage Bank’s business because many of our loans are secured by real estate in Montana. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature. If real estate prices decline, the value of real estate collateral securing loans could be reduced. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and Heritage Bank would be more likely to suffer losses on defaulted loans. As of December 31, 2005, approximately 62% of Heritage Bank’s net loans receivable consisted of loans collateralized by various types of real estate. A significant portion of Heritage Bank’s real property collateral is located in Montana. Any such downturn could have a material adverse effect on our business, financial condition, results of operations and cash flows.
United Continually Encounters Technological Change, And May Have Fewer Resources Than Its Competitors To Continue To Invest In Technological Improvements. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of United’s competitors have substantially greater resources to invest in technological improvements. United cannot assure that it will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers.
Our Business And Financial Condition May Be Adversely Affected By An Increase In Competition. The banking business in Montana is highly competitive and is currently dominated by a number of large regional financial institutions. In addition to these regional banks, there are a number of smaller commercial banks that operate in these areas. Heritage Bank competes for loans and deposits with banks, savings and loan associations, finance companies, credit unions, and mortgage bankers. In addition to traditional financial institutions, we also compete for loans with brokerage and investment banking companies, and governmental agencies that make available low-cost or guaranteed loans to certain borrowers. Particularly in times of high interest rates, we also face significant competition for deposits from sellers of short-term money market securities as well as other corporate and government securities.
By virtue of their larger capital bases or affiliation with larger multibank holding companies, many of our competitors have substantially greater capital resources and lending limits than Heritage Bank has and perform other functions that we offer only through correspondents. We have experienced, and expect to continue to experience, greater competition in our primary service areas. Our business, financial condition, results of operations and cash flows may be adversely affected by an increase in competition. Moreover, recently enacted and proposed legislation has focused on expanding the ability of participants in the banking and thrift industries to engage in other lines of business. The enactment of such legislation could put us at a competitive disadvantage because we may not have the capital to participate in other lines of business to the same extent as more highly capitalized financial service holding companies.
United Relies Heavily On Our Management, And The Loss Of Any Of Our Senior Officers May Adversely Affect Our Operations. United is dependent on the continued services of a small number of executive officers and key employees. The loss of the services of any of these individuals could adversely affect United’s business, financial condition, results of operations and cash flows. The failure to recruit and retain key personnel could have a material adverse effect on United’s business, financial condition, results of operations and cash flows.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
