UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
x Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2005
or
o Transition Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934

For the transition period from ____________ to ____________

Commission file number:0-28080

UNITED FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)


MINNESOTA		81-0507591
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

P.O. Box 2779, 120 1st Avenue North, Great Falls, Montana 59403
(Address of Principal Executive Offices)

(406) 727-6106
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YESo NOx

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YESo NOx

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YESx NOo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated file” in Rule12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filero	Non-accelerated filerx

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). YESo NOx

The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 2005 (the last day of the Registrant’s most recently completed second fiscal quarter), was $33,645,542 (based on the last sale price of such stock as quoted on the Nasdaq National Market ($18.69) on such date).

The number of shares of Registrant’s common stock outstanding on March 27, 2006 was 3,072,129. Registrant’s common stock is traded on the Nasdaq National Market, under the symbol UBMT.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 23, 2006 at 1:00 p.m., Mountain Time, in Great Falls, Montana, are incorporated by reference into Part III of this Form 10-K.

UNITED FINANCIAL CORP.
2005 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS


Part I

*Cautionary Statement*		1

*Item 1. Business*		2

*Item 1A. Risk Factors*		16

*Item 1B. Unresolved Staff Comments*		19

*Item 2. Properties*		19

*Item 3. Legal Proceedings*		19

*Item 4. Submission of Matters to a Vote of Security Holders*		19

PART II

*Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*		20

*Item 6. Selected Financial Data*		21

*Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations*		22

*Item 7A. Quantitative and Qualitative Disclosures about Market Risk*		42

*Item 8. Financial Statements and Supplementary Data*		43

*Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*		43

*Item 9A. Controls and Procedures*		43

*Item 9B. Other Information*		44

PART III

*Item 10. Directors and Executive Officers of the Registrant*		44

*Item 11. Executive Compensation*		44

*Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*		44

*Item 13. Certain Relationships and Related Transactions*		44

*Item 14. Principal Accountant Fees and Services*		44

PART IV

*Item 15. Exhibits and Financial Statement Schedules*		45

*Signatures*		46

*Exhibit Index*		47

CAUTIONARY STATEMENT

All statements included or incorporated by reference in this report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on United’s current expectations, estimates and projections about United’s industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words, and include, but are not limited to, statements regarding projected results of operations, market acceptance and performance of United’s products and services, the competitive nature of and anticipated growth in United’s markets, its accounting estimates, assumptions and judgments, the impact of tax accounting elections, and management’s future strategic plans. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that are difficult to predict and that could cause United’s actual results to differ materially and adversely from those expressed in any forward-looking statement. The risks and uncertainties referred to above include, but are not limited to: (i) general economic or industry conditions could deteriorate or be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan losses, or a reduced demand for United’s products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase loan losses; (iii) changes in the extensive laws, regulations and policies governing financial services companies could alter United’s business environment or affect operations; (iv) the potential need to adapt to industry changes in information technology systems, on which United is highly dependent, could present operational issues or require significant capital spending; (v) competitive pressures could intensify and affect United’s profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments, or bank regulatory reform; (vi) the impact of weather conditions in the geographic markets and business areas in which United conducts it business; and (vii) capital investments in United’s businesses may not produce expected growth in earnings anticipated at the time of the expenditure. These forward-looking statements speak only as of the date of this report. United undertakes no obligation to revise or update publicly any forward-looking statement for any reason.

PART I

Item 1. BUSINESS

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 iswww.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. Small Business 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 Small Business 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		587		474		1,899
Corporate bonds and equity securities		493		—		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:


	December 31,				December 31,				December 31,

(Dollars in thousands)	2005				2004				2003

	Amount		Percent		Amount		Percent		Amount		Percent

Type:
Non-interest bearing	$	56,642	18.7	%	$	47,490	18.4	%	$	36,551	16.1	%
Interest bearing:
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
Time deposits		161,663	53.2			120,444	46.6			102,766	45.2

Total	$	303,691	100.0	%	$	258,335	100.0	%	$	227,514	100.0	%

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		294

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	49	Chairman of United; Director and Vice President of Heritage Bank
Kevin P. Clark	50	Chief Executive Officer and Director of United; Director, President and Chief Executive Officer of Heritage Bank
Steve L. Feurt	50	President of United; Director, Executive Vice President and Senior Lending Officer of Heritage Bank
Paula J. Delaney	45	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 theCorporate Governancelink on the home pagewww.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.

Item 2. PROPERTIES

At December 31, 2005, United owned 13 of its 15 offices, including its headquarters and other property having an aggregated book value including land of approximately $7.1 million, and leased the remaining branches. Three locations are leased, including two building leases and one land lease. The following schedule provides property information for the United’s locations as of December 31, 2005.


(Dollars in thousands)	Properties Leased	Properties Owned	Net Leasehold Improvements			Net Book Value Owned

Heritage Bank:
Great Falls (25,125 sq. ft.)	—	3		$	—		$	2,821
Billings (4,900 sq. ft.)	1	1			—			1,379
Bozeman (4,000 sq. ft.)	—	1			—			1,193
Missoula (3,600 sq. ft.)	—	1			—			762
Havre (2,400 sq. ft.)	—	1			—			246
Libby (1,250 sq. ft.)	—	1			—			149
Chester (1,800 sq. ft.)	—	1			—			142
Shelby (2,800 sq. ft.)	—	1			—			101
Fort Benton (5,000 sq. ft.)	—	1			—			99
Glendive (4,000 sq. ft.)	—	1			—			99
Geraldine (4,350 sq. ft.)	—	1			—			61
Kalispell (2,500 sq. ft.)	1	—			65			—
Hamilton (1,200 sq. ft.)	1	—			—			—

Total Montana locations	3	13		$	65		$	7,052

Item 3. LEGAL PROCEEDINGS

Although United was not involved in any material pending litigation as of February 28, 2006, it is from time to time named in various legal proceedings arising in the normal course of business. In the opinion of management, the disposition of current litigation will not have a material effect on United’s consolidated financial position, results of operations, or liquidity.

Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the quarter ended December 31, 2005.

PART II

Item 5. MARKET FOR UNITED’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

United common stock is quoted on the Nasdaq National Market under the symbol “UBMT.” The closing sale price per share of UFC common stock on February 24, 2006 was $22.47.

Shareholder Data

As of February 15, 2006, there were approximately 200 owners of record of United common stock and an estimated 1,000 additional beneficial holders whose shares of United common stock were held in street name by brokerage houses.

Common Stock Market Prices

The quarterly (high and low) sale prices for United’s common stock on the Nasdaq National Market during the past two years were as follows. All prices have been adjusted for the effect of the June 2002 10% stock dividend, the June 2003 50% stock dividend, and the December 2005 25% stock dividend.


	2005				2004

	United Stock Price				United Stock Price

	High		Low		High		Low


First Quarter	$	19.75	$	18.88	$	23.02	$	19.84
Second Quarter		20.20		18.88		20.73		18.34
Third Quarter		20.16		19.12		19.54		17.94
Fourth quarter		21.56		20.75		19.77		18.59

Dividend Payment History on United Common Stock

United paid the following cash dividends for each of the four quarters of 2005 and 2004, adjusted for the 10% stock dividend in June 2002, the 50% stock dividend in June 2003 and the 25% stock dividend in December 2005:


	2005		2004


First Quarter	$	.22	$	.21
Second Quarter		.22		1.01
Third Quarter		.23		.22
Fourth quarter		.23		.22

	$	.90	$	1.66

The declaration and payment of future dividends by the United Board is dependent upon United’s net income, financial condition, economic and market conditions, industry standards, certain regulatory and tax considerations and limitations and other conditions. See “Supervision and Regulation.” No assurance can be given, or should be assumed, as to the amount, timing or frequency of future dividend payments.

Item 6. SELECTED FINANCIAL DATA

Five Year Summary of Operations and Selected Financial Data


	As Of And For The Years Ended December 31,

(Dollars in thousands, Except per share data)	2005			2004			2003			2002			2001

Operating Data:
Interest income	$	21,309		$	18,165		$	17,808		$	19,513		$	22,022
Interest expense		7,177			5,153			5,955			9,182			12,424

Net interest income		14,132			13,012			11,853			10,331			9,598
Provision for loan losses		230			70			778			1,115			1,387

Net interest income after provision for loan losses		13,902			12,942			11,075			9,216			8,211
Non-interest income		4,550			4,427			6,184			4,648			4,142
Non-interest expense		11,787			11,089			11,492			9,747			8,795

Income from continuing operations Before income taxes		6,665			6,280			5,767			4,117			3,558
Provision for income taxes		2,525			2,362			1,938			1,562			1,411

Income from continuing operations		4,140			3,918			3,829			2,555			2,147
Income from discontinued operations		—			—			891			400			228

Net income	$	4,140		$	3,918		$	4,720		$	2,955		$	2,375

Per Share Data (1):
Basic earnings per share	$	1.35		$	1.29		$	1.55		$	.97		$	.75
Diluted earnings per share		1.32			1.25			1.50			.96			.75
Book value per share		10.41			10.06			10.63			10.00			9.38
Dividends per common share		.90			1.66			.72			.53			.51
Shares used to calculate per share Data (Book value)		3,071			3,046			3,046			3,048			3,048
Shares used to calculate per share Data (Earnings - basic)		3,061			3,043			3,050			3,048			3,145
Shares used to calculate per share Data (Earnings - diluted)		3,147			3,143			3,139			3,085			3,155
Financial Condition Data (2):
Assets from continuing operations	$	389,547		$	347,140		$	304,817		$	303,590		$	317,826
Assets from discontinued operations		—			—			—			74,483			64,997
Net loans and loans held for sale		315,899			270,797			231,062			224,164			222,402
Securities available for-sale		35,359			38,949			43,279			43,526			53,484
Deposits		303,691			258,334			227,514			225,230			223,703
FHLB advances		42,044			44,794			31,000			34,000			48,500
Other borrowings and securities sold Under agreements to repurchase		4,248			7,498			7,889			13,487			11,604
Stockholders’ equity		31,978			30,628			32,381			30,476			28,597
Selected Financial Ratios and Other Data:
Return on average assets		1.13	%		1.18	%		1.51	%		.95	%		.78	%
Return on average stockholders’ Equity		13.35			12.73			14.96			10.06			8.21
Net interest margin		4.16			4.22			4.03			3.57			3.36
Efficiency ratio (3)		63.09			63.59			63.71			65.07			64.01
Net charge-offs to average loans		.06			.05			.06			.36			.27
Nonperforming loans to total loans		.01			.15			.36			.30			.46
Allowance for loan losses to total Loans		1.19			1.38			1.63			1.45			1.28
Nonperforming loans to allowance for Loan losses		.80			10.85			21.89			20.51			35.96
Average equity to average assets		8.43			9.29			10.09			9.46			9.50
Dividend payout ratio		66.37			128.99			46.23			54.30			66.40


(1)	All years have been restated for the effect of the June 2002 10% stock dividend, the June 2003 50% stock dividend and the December 2005 25% stock dividend.

(2)	At year end.

(3)	Non-interest expense¸(net interest income + non-interest income).

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of United’s financial condition and results of operations should be read in conjunction with “Selected Financial Data” and its financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. United’s actual results could differ significantly from those projected in the forward-looking statements as a result of certain factors, including those discussed in “Cautionary Statement” and elsewhere in this report. United assumes no obligation to update the forward-looking statements or such factors.

Selected United Financial Data

The following results of operations is derived from the audited consolidated financial statements.

��
	Years ended December 31,

(In thousands, except per share data)	2005		2004		2003

Interest income	$	21,309	$	18,165	$	17,808
Interest expense		7,177		5,153		5,955

Net interest income		14,132		13,012		11,853
Provision for loan losses		230		70		778

Net interest income after provision for loan losses		13,902		12,942		11,075
Non-interest income		4,550		4,427		6,184
Non-interest expense		11,787		11,089		11,492

Income from continuing operations before income taxes		6,665		6,280		5,767
Provision for income taxes		2,525		2,362		1,938

Income from continuing operations		4,140		3,918		3,829
Income from discontinued operations		—		—		891

Net income	$	4,140	$	3,918	$	4,720

Basic earnings per share
Continuing operations	$	1.35	$	1.29	$	1.26
Discontinued operations		—		—		.29

Net income	$	1.35	$	1.29	$	1.55

Weighted average shares outstanding – basic		3,061		3,043		3,050

Diluted earnings per share
Continuing operations	$	1.32	$	1.25	$	1.22
Discontinued operations		—		—		.28

Net income	$	1.32	$	1.25	$	1.50

Weighted average shares outstanding – diluted		3,147		3,143		3,139

Results of Operations - Three Years Ended December 31, 2005

United’s net income for the year ended December 31, 2005 was $4.1 million, or basic and diluted earnings per share of $1.35 and $1.32, respectively. This compares to net income of $3.9 million, or basic and diluted earnings per share of $1.29 and $1.25, respectively, in 2004 and to net income of $4.7 million, or basic and diluted earnings per share of $1.55 and $1.50, respectively, in 2003.

During 2005, United’s continuing operations contributed $4.1 million in net income or $1.32 per diluted share, compared to $1.25 per diluted share in 2004 and $1.22 per diluted share in 2003.

Summary Results for 2005 Compared to 2004. Strong loan growth in 2005 and increases in interest rates were the driving factors behind the $3.1 million increase in interest income during 2005. Interest bearing deposits increased $36.2 million or 17.2% in 2005 over 2004. This growth along with increased interest rates paid on deposits represented 87.2% of the total increase in interest expense in 2005.

Net interest income increased $1.1 million or 8.6% to $14.1 million in 2005, and the provision for loan losses increased $.1 million, resulting in a total increase of $1.0 million, or 7.4%, in net interest income after provision for loan losses. Non-interest income increased $.2 million, or 2.8%, in 2005 to $4.6 million over 2004, including a $.4 million increase in gain on sale of loans and a $.2 million decrease in gain on sale of securities. The $.7 million increase in non-interest expense in 2005 includes a $.5 million increase in salaries and commissions and a $.1 million increase in legal and accounting costs.

United’s results of operations for the year ended December 31, 2005 were impacted favorably by consistent mortgage lending volumes and growth in net interest income. Interest rates increased steadily in 2005, with a gradual 1.90% increase of the federal funds rate by the Federal Reserve Board for the twelve months ended December 31, 2005.

Interest rate margins at Heritage Bank declined .06% to 4.16% in 2005 from 4.22% in 2004. Average yields on interest-earning assets rose .38% in 2005 as compared to 2004, while average rates on interest-bearing liabilities increased .49%. This resulted in a drop in interest rate spread of .11% from 3.86% in 2004 to 3.75% in 2005.

Summary Results for 2004 Compared to 2003. Net interest income increased $1.1 million to $13.0 million in 2004, or 9.8%, and the provision for loan losses decreased $.7 million, resulting in a total increase of $1.9 million, or 16.9%, in net interest income after provision for loan losses. Non-interest income decreased $1.8 million, or 29.0%, in 2004 to $4.4 million over 2003, due to a record gain on sale of loans by United’s mortgage lending activities in 2003.

United’s subsidiary, Heritage Bank, experienced a significant increase in net loan volumes in 2004 of $37.8 million, a 16.6% increase in net loans over 2003. In the 2004 lower rate environment, Heritage Bank focused on its strengths as a community service bank to remain competitive and retain favorable client relationships. Total loans secured by real estate were up $25.1 million in 2004 over 2003. Commercial loans were also up $8.4 million and consumer loans have increased $2.7 million for the same time period.

Interest rate margins at Heritage Bank rose 19% to 4.22% in 2004 from 4.03% in 2003. Average yields on interest-earning assets declined 17% in 2004 as compared to 2003, while average rates on interest-bearing liabilities decreased .45%. This resulted in a change in interest rate spread of .28% from 3.58% in 2003 to 3.86% in 2004.

The $.8 million decrease in income from discontinued operations in 2004 was the result of the sale of United’s majority owned subsidiary Valley Bancorp Inc. in July 2003. For more details on this transaction, see “Discontinued Operations” in this report.

Critical Accounting Policies. United has identified its most critical accounting policies to be that related to the allowance for loan losses, stock based compensation and accounting for securities available-for-sale.

United’s allowance for loan losses methodology incorporates a variety of risk considerations in establishing an allowance for loan losses that management believes is appropriate. Risk factors include historical loss experience, delinquency and charge-off trends, collateral values, an analysis of the current loan portfolio, and the level of non-performing and impaired loans. An internal loan risk grading system is also used to evaluate potential losses of individual loans. Other factors include the future economic trends in United’s markets and, in particular, the state of certain industries. Changes in any of the above factors could have a significant affect on the calculation of the allowance for loan losses in any given period. Therefore, a full analysis is performed by management on a quarterly basis to ensure that changes in estimated loan loss levels are adjusted on a timely basis.

SFAS No. 123, “Accounting for Stock-Based Compensation,” requires disclosure about stock-based compensation arrangements regardless of the method used to account for them. As permitted by SFAS No. 123, United applies the accounting provisions of Accounting Principles Board (APB) Opinion No. 25, and therefore discloses the difference between compensation cost included in net income and the related cost measured by the fair value-based method defined by SFAS No. 123, including tax effects, that would have been recognized in the statement of operations if the fair value method had been used. Under APB Opinion No. 25, no compensation cost has been recognized for United’s stock option plan. Had compensation cost for this plan been determined consistent with SFAS No. 123 and recognized over the vesting period, United’s net income and earnings per share would have been reduced to the following pro forma amounts:


	2005				2004				2003

(Dollars in thousands, except for share amounts)	As Reported		Pro Forma		As Reported		Pro Forma		As Reported		Pro Forma


Net income	$	4,140	$	4,120	$	3,918	$	3,865	$	4,720	$	4,661

Basic earnings per Share:
Continuing operations	$	1.35	$	1.35	$	1.29	$	1.27	$	1.26	$	1.24
Discontinued operations		—		—		—		—		.29		.29

	$	1.35	$	1.35	$	1.29	$	1.27	$	1.55	$	1.53

Diluted earnings Per share:
Continuing Operations	$	1.32	$	1.31	$	1.25	$	1.23	$	1.22	$	1.21
Discontinued Operations		—		—		—		—		.28		.28

	$	1.32	$	1.31	$	1.25	$	1.23	$	1.50	$	1.49

In December 2004, FASB issued SFAS No 123 (revised 2004), “Share-Based Payment.” This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.

A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period.

The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, the incremental value of compensation cost will be recognized.

As a public company, this Statement becomes effective for United as of January 1, 2006. United will continue to use the same fair value based method to compute stock-based employee compensation as was used in prior years for disclosure purposes under SFAS No. 123. As of December 31, 2005, management estimates the total stock-based employee compensation expense that United will report during 2006 will be approximately $.01 to $.02 per share. This amount is subject revisions as assumptions are finalized.

United has also identified its accounting method for securities available-for-sale to be a critical accounting policy. Securities available-for-sale are carried at fair value and unrealized gains and losses (net of related tax effects) are excluded from earnings and reported as a separate component of stockholders’ equity. Declines in the fair value of available-for-sale securities below carrying value that are other than temporary are changed to expense as realized losses and the related carrying value is reduced to fair value. In estimating other-than-temporary losses, management considers (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of United to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. (See Part IV, Item 15- “Notes to Consolidated Financial Statements- Securities Available-For-Sale”).

Discontinued Operations. On July 31, 2003, United sold its majority-owned subsidiary, Valley Bancorp Inc. (“Valley”), to Marquette Financial Companies. An after-tax gain of $714,129 was recorded on the sale, and along with the results of operations of Valley, is recorded within the consolidated income statement as net income from discontinued operations. All previously issued consolidated financial statements have been restated to also disclose the assets, liabilities, and operations of Valley as discontinued operations. Valley’s discontinued operations resulted in income net of tax of $890,716, or $.28 per diluted share, during 2003.

Unless noted otherwise, the results of operation of the discontinued segment are excluded from the following presentation and discussions. The footnotes to the accompanying consolidated financial statements include additional presentation and discussions regarding the discontinued operations of Valley.

Net Interest Income. Like most financial institutions, the most significant component of United’s earnings is net interest income, which is the difference between the interest earned on interest-earning assets (loans, investment securities, mortgage-backed securities and other interest-earning assets), and the interest paid on deposits and borrowings. This amount, when divided by average interest-earning assets, is referred to as the net interest margin and expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The difference between the yield on interest-earning assets and the cost of interest-bearing liabilities expressed as a percentage is referred to as the net interest rate spread.

The following table illustrates the changes in United’s net interest income due to changes in volume and changes in net interest income due to changes in rates:


(Dollars in thousands)	Year Ended December 31, 2005 vs. 2004												Year Ended December 31, 2004 vs. 2003


	Increase (decrease) due to												Increase (decrease) due to

	Volume			Rate			Rate/ Volume			Total			Volume			Rate			Rate/ Volume			Total

Interest-earning assets:
Loans	$	2,411		$	751		$	110		$	3,272		$	1,731		$	(1,030	)	$	(113	)	$	(588	)
Investment and mortgage Backed securities		(169	)		32			(3	)		(140	)		(38	)		(32	)		1			(69	)
Other interest-earning Assets		(25	)		46			(9	)		12			(134	)		(52	)		24			(162	)

Total interest-earning Assets	$	2,217		$	829		$	98		$	3,144		$	1,559		$	(1,114	)	$	(88	)	$	357
Interest-bearing Liabilities:
Interest-bearing Demand		(6	)		25			(1	)		18			27			(59	)		(7	)		(39	)
Savings deposits		(42	)		79			(7	)		30			24			(195	)		(8	)		(179	)
Time deposits		951			572			195			1718			(44	)		(590	)		8			(626	)
Borrowings		78			182			(1	)		259			426			(313	)		(71	)		42

Total interest-bearing Liabilities	$	981		$	858		$	186		$	2,025		$	433		$	(1 157	)	$	(78	)		(802	)

Net interest income	$	1,236		$	(29	)	$	(88	)	$	1,119		$	1,126		$	43		$	(10	)	$	1,159

The following tables set forth average balances for interest-earning assets and interest-bearing liabilities, the interest and yield on interest-earning assets, the interest and rate paid on interest-bearing liabilities, the net interest income and net interest spread, and the net interest margin for the years indicated:


Average Balance Sheet (Dollars in thousands)
	Year Ended December 31, 2005

	Average Balance		Interest		Average Yield/Rate

Interest-earning assets:
Loans (1)	$	294,112	$	19,717		6.70	%
Investment and mortgage-backed securities		35,858		1,446		4.03	%
Other interest-earning assets		9,666		146		1.52	%

Total interest-earning assets	$	339,636	$	21,309		6.27	%
Non-interest-earning assets		27,981

Total assets	$	367,617

Interest-bearing liabilities:
Interest-bearing demand	$	31,390	$	212		.68	%
Savings deposits		54,298		478		.88	%
Time deposits		144,276		4,509		3.12	%
Borrowings		54,810		1,978		3.61	%

Total interest-bearing liabilities	$	284,774	$	7,177		2.52	%


Stockholders’ equity	$	31,002



Net interest income			$	14,132

Net interest spread						3.75	%
Net interest margin(2)						4.16	%


(1)	Includes nonaccrual loans.

(2)	Computed on a fully taxable basis, without regard to tax equivalent yields.


Average Balance Sheet (Dollars in thousands)
	Year Ended December 31, 2004

	Average Balance		Interest		Average Yield/Rate

Interest earning assets:
Loans (1)	$	256,512	$	16,445		6.41	%
Investment and mortgage-backed securities		40,133		1,586		3.95	%
Other interest-earning assets		11,860		134		1.13	%

Total interest-earning assets	$	308,505	$	18,165		5.89	%
Non-interest-earning assets		22,686

Total assets	$	331,191

Interest-bearing liabilities:
Interest-bearing demand	$	32,351	$	194		.60	%
Savings deposits		59,925		448		.75	%
Time deposits		107,603		2,791		2.59	%
Borrowings		54,105		1,720		3.18	%

Total interest-bearing liabilities	$	253,984	$	5,153		2.03	%


Stockholders’ equity	$	30,773



Net interest income			$	13,012

Net interest spread						3.86	%
Net interest margin(2)						4.22	%


(1)	Includes nonaccrual loans.

(2)	Computed on a fully taxable basis, without regard to tax equivalent yields.


Average Balance Sheet (Dollars in thousands)
	Year Ended December 31, 2003

	Average Balance		Interest		Average Yield/Rate

Interest-earning assets:
Loans (1)	$	231,260	$	15,857		6.86	%
Investment and mortgage-backed securities		41,083		1,655		4.03	%
Other interest-earning assets		21,631		296		1.37	%

Total interest-earning assets	$	293,974	$	17,808		6.06	%
Non-interest-earning assets		18,896

Total assets	$	312,870

Interest-bearing liabilities:
Interest-bearing demand	$	29,039		233		.80	%
Savings deposits		57,671		627		1.09	%
Time deposits		109,018		3,416		3.13	%
Borrowings		44,678		1,679		3.76	%

Total interest-bearing liabilities	$	240,406	$	5,955		2.48	%


Stockholders’ equity	$	31,557



Net interest income			$	11,853

Net interest spread						3.58	%
Net interest margin(2)						4.03	%


(1)	Includes nonaccrual loans.

(2)	Computed on a fully taxable basis, without regard to tax equivalent yields.

Interest-Earning Assets. The yield earned on loans outstanding (including residential mortgage loans held-for-sale) during 2005 was 6.70% compared to 6.41% in 2004 and 6.86% in 2003. Increased volume of loans and increased rates on loans from 2004 to 2005, resulted in total interest income on loans of $19.7 million for 2005 compared to $16.4 million for 2004 and $15.9 million for 2003. The yield earned on taxable securities increased to 4.03% in 2005 from 3.95% in 2004 as longer term securities matured and were replaced at current, higher rates. The average other interest-earning assets balances decreased $2.2 million during 2005 to $9.7 million compared to 2004, and the yield earned on these assets increased .39% to 1.52%. The total yield earned on all interest-earning assets increased to 6.27% in 2005 from 5.89% and 6.06% for the years 2004 and 2003, respectively. As discussed above, the increase in interest income is due to continued increases in interest rates and increases in interest-earning assets.

Interest-Bearing Liabilities. The rate paid for each category of interest-bearing liabilities began to increase during 2005. The yield on interest-bearing demand deposit accounts increased to .68% in 2005 compared to ..60% and .80% in 2004 and 2003, respectively. The yield on savings deposits increased to .88% in 2005 compared to .75% and 1.09% in 2004 and 2003, respectively. Average rates on certificates of deposit also increased to 3.12% during 2005 from 2.59% in 2004 and 3.13% in 2003. As certificates of deposit matured during 2005, they were generally renewed or replaced at higher rates. Borrowings had increases in rate and in volume and interest expense in 2005 compared to 2004. For all interest-bearing liabilities, the average rate paid increased to 2.52% in 2005 from 2.03% in 2004 and 2.48% in 2003.

Net interest income for the year ended December 31, 2005 was $14.1 million, an increase of $1.1 million from $13.0 million in 2004, which was $1.1 million higher than 2003. The net interest margins for the periods ended December 31, 2005, 2004 and 2003 were 4.16%, 4.22% and 4.03%, respectively.

The following factors affected United’s interest yields, margins, and spread when comparing the year ending December 31, 2005, to 2004. During 2004, the national federal funds interest rate and United’s prime rate remained constant the first six months of the year at 4.00% and increased by .25% in July 2004. Starting in August of 2004, the rate increased monthly for a total increase of .90% for the remainder of the year. By comparison, in 2005, these rates increased on a monthly basis, from 5.25% in January 2005 to 7.15% in December 2005, an increase of 1.90%. In addition, both interest-earning assets and interest-bearing liabilities have seen a change in the mix of their respective components. Interest spread and interest margins decreased in 2005 compared to 2004, while yields and costs increased under the same comparison.

Loan volumes increased in 2005 with a decrease in volumes of investment securities and other assets, which was also consistent with the results in 2004. Borrowing volumes were up in both 2005 and 2004, with rates increasing in 2005 and 2004. In 2005, volumes of time deposits were up significantly with respective increases in rates paid on time deposits.

Provision for Loan Loss.United provided $.2 million for loan losses in 2005 compared to $.1 million in 2004 and $.8 million in 2003. The increase in the loan loss provision in 2005 was the result of loan growth in 2005. The decreases in loan loss provisions in both 2005 and 2004 as compared to 2003 reflect management’s view on future loan loss and overall condition of the loan portfolio, past due loans and loan growth.

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which is considered adequate to absorb probable losses in the loan portfolio in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as of the reporting date. Future additions to United’s allowance for loan losses and any change in the related ratio of the allowance for loan losses to non-performing assets are dependent upon the performance and composition of United’s loan portfolio, the economy, inflation, changes in real estate values and interest rates and the view of the regulatory authorities toward adequate reserve levels.

Non-Interest Income. In addition to net interest income, United generates significant non-interest income from a range of retail banking services, including mortgage banking activities and service charges for deposit services. Non-interest income increased by $.2 million, or 4.5%, in 2005 to $4.6 million compared to $4.4 million in 2004 and $6.2 million in 2003, principally due to the level of fees from the real estate production activity at Heritage Bank. United’s loan demand continued to be strong in the residential mortgage market, and particularly the purchase origination market, during 2005, as interest rates continued to be at levels which were attractive to customers in the residential mortgage market.

Gain on sale of loans totaled $3.2 million in 2005, an increase of $.4 million over 2004 and a decrease of $1.8 million over the record 2003 total of $5.0 million. The increase in gain on sale of loans was offset in 2005 by an equal decrease in gain on sale of securities and other income. The decrease in other income was the result of lost rental income in 2005 from the sale of a building in 2004, which was previously leased. Customer service charges increased $.1 million in 2005 as a result of the growth in deposit accounts.

Non-Interest Expense.Non-interest expense increased $.7 million, or 6.3%, to $11.8 million from 2004 to 2005, and decreased $.4 million, or 3.5%, to $11.1 million from 2003 to 2004. Salary and employee benefit expense increased $.5 million to $7.1 million from 2004 to 2005 and decreased $.3 million to $6.6 million from 2003 to 2004 in part due to commissions paid to loan originators in Heritage

Bank’s mortgage banking department. Commissions increased $.2 million in 2005 to $1.4 million, compared to $1.2 million in 2004. The decrease in 2004 was $.7 million, down from $1.9 million in 2003.

The remaining 2005 increase of $.2 million was split equally between occupancy and equipment expense and legal and accounting. Occupancy and equipment expense increased $.1 million due to utility and maintenance contract increases. Legal and accounting increased $.1 million due to higher accounting costs from Sarbanes Oxley Act compliance.

Financial Condition

The following balance sheet information as of December 31, 2005 and 2004 is derived from the audited consolidated financial statements.


	December 31, 2005		December 31, 2004

Assets
Cash and cash equivalents	$	19,127	$	19,187
Securities available-for-sale		35,359		38,949
Loans held for sale		3,902		5,786
Loans receivable, net		311,997		265,011
Other assets		19,162		18,207

Total assets	$	389,547	$	347,140

Liabilities and Stockholders’ Equity
Non-interest-bearing deposits	$	56,641	$	47,490
Interest-bearing deposits		247,050		210,845

Total deposits		303,691		258,335
Federal Home Loan Bank advances		42,044		44,794
Subordinated debt		3,093		3,093
Accrued expenses and other liabilities		8,741		10,290

Total liabilities		357,569		316,512

Stockholders’ Equity		31,978		30,628

Total liabilities and stockholders’ equity	$	389,547	$	347,140

Loans Receivable and Loans Held for Sale. Net loans receivable increased $47.0 million during 2005 to $312.0 million from $265.0 million at December 31, 2004. Commercial real estate loans increased $28.0 million to $79.0 million in 2005. Construction loans increased $12.1 million to $41.2 million in 2005. Agricultural loans increased $2.7 million to $27.5 million 2005. Total loans secured by real estate increased $42.0 million to $193.3 million in 2005. Consumer loans increased $3.0 million to $40.3 million in 2005 and agricultural non-mortgage loans increased $1.5 million.

Approximately 60% of the increase in net loans receivable was generated in Heritage Bank’s Billings and Great Falls branches. Billings was a new market for Heritage Bank in 2004 and continued to increase its market share in 2005. Bozeman and Missoula continued to be robust markets representing approximately 18% and 15% of the total increase, respectively. Heritage Bank’s Great Falls main branch continued to be successful on several larger credits for new customers, and on loans for existing customers who have expanded their operations. Construction loans in the Great Falls main branch have also increased as a function of low interest rates and a stable economy. The remaining increase of approximately 7% was spread proportionately between the remaining branches of Heritage Bank.

The diverse loan portfolio includes: real estate residential mortgages, commercial and agricultural mortgages, agricultural and commercial non-mortgages, consumer loans secured by real estate, and various consumer installment loans. Heritage Bank also purchases and participates in commercial and lease financing loans. Heritage Bank had $32.6 million and $25.7 million of participation and purchased loans as of December 31, 2005 and 2004, respectively. Nearly all of these loans are secured by properties outside the Montana market area.

Heritage Bank sells and retains the servicing rights for a portion of its residential real estate loans to agencies of Montana such as the Montana Board of Investments and the Montana Board of Housing. Heritage Bank recognizes mortgage servicing rights as an asset regardless of whether the servicing rights are acquired or retained on loans originated and subsequently sold. The mortgage servicing rights are assessed for impairment based on the fair value of the mortgage servicing rights. As of December 31, 2005 and 2004, the carrying value of originated servicing rights was approximately $.7 million and $.5 million, respectively. Heritage Bank’s servicing portfolio as of December 31, 2005 was $81.2 million and as of December 31, 2004 was $69.3 million.

During 2005, loans held for sale by Heritage Bank decreased $1.9 million to $3.9 million at December 31, 2005 from $5.8 million at December 31, 2004. Approximately $165.8 and $142.4 million of loans were originated for sale and $170.9 and $143.3 million of loans were sold to the secondary market during 2005 and 2004, respectively.

Allowance For Loan Losses. The following schedule details changes in United’s allowance for loan losses at December 31 for each of the five years indicated:

(Dollars in thousands)


	Year Ended December 31, 2005			Year Ended December 31, 2004			Year Ended December 31, 2003			Year Ended December 31, 2002			Year Ended December 31, 2001

Balance beginning of year	$	3,708		$	3,755		$	3,113		$	2,794		$	2,011
Provision for loan losses		230			70			778			1,115			1,387
Charge-offs:
Residential		(14	)		(45	)		—			(15	)		(5	)
Commercial		(152	)		(90	)		(76	)		(697	)		(422	)
Consumer		(51	)		(50	)		(72	)		(173	)		(215	)

Total charge-offs		(217	)		(185	)		(148	)		(885	)		(642	)
Recoveries		30			68			12			89			38

Net charge-offs		(187	)		(117	)		(136	)		(796	)		(604	)

Balance end of year end	$	3,751		$	3,708		$	3,755		$	3,113		$	2,794

Allowance for loan losses to total loans at year end		1.19	%		1.38	%		1.63	%		1.45	%		1.28	%

Net charge-offs to average Loans		.06	%		.05	%		.06	%		.36	%		.27	%

The following schedule allocates the loan loss reserve based on management’s judgment of potential losses in the respective areas. While management has allocated the reserve to various portfolio segments for purposes of this table, the reserve is general in nature and is available for the portfolio in its entirety.

(Dollars in thousands)


	December 31, 2005					December 31, 2004					December 31, 2003

	Allowance		% of loans in each category to total loans			Allowance		% of loans in each category to total loans			Allowance		% of loans in each category to total loans

Real estate loans:
1 - 4 residential		216		13.5	%	$	278		16.2	%	$	193		16.2	%
5 or more residential		29		1.0			28		1.1			51		1.4
Construction		388		13.0			272		10.8			279		7.4
Commercial and agricultural		1,397		33.7			1,160		28.2			1,285		29.6
Non-real estate loans:
Commercial and agricultural		1,249		26.1			1,508		29.8			1,357		30.8
Consumer		380		12.7			347		13.9			590		14.6
Unallocated		92		—			115		—			—		—

Total	$	3,751		100.0	%	$	3,708		100.0	%	$	3,755		100.0	%

(Dollars in thousands)


	December 31, 2002					December 31, 2001

	Allowance		% of loans in each category to total loans			Allowance		% of loans in each category to total loans

Real estate loans:
1 - 4 residential	$	97		16.0	%	$	106		16.5	%
5 or more residential		68		2.2			64		2.3
Construction		221		7.1			249		8.9
Commercial and agricultural		1,040		30.0			906		29.8
Non-real estate loans:
Commercial and agricultural		1,233		30.8			1,082		29.4
Consumer		454		13.9			387		13.1
Unallocated		—		—			—		—

Total	$	3,113		100.0	%	$	2,794		100.0	%

Real Estate and Other Personal Property Owned. Total real estate and other personal property owned (“REO”) of United was $.1 million, $.3 million and $.7 million at December 31, 2005, 2004 and 2003, respectively. The schedule below details properties both held for sale and investment by United as of the dates indicated.

(Dollars in thousands)


	December 31, 2005			December 31, 2004			December 31, 2003

REO held for sale	$	—		$	195		$	40


REO held for investment	$	—		$	—		$	567
Accumulated depreciation		—			—	��		(77	)

REO held for investment	$	—		$	—		$	490

Total REO	$	—		$	195		$	530

As a percent of total assets		—	%		.05	%		17	%

Other personal property held for sale	$	71		$	98		$	148

As a percent of total assets		.02	%		.03	%		.05	%

Securities Available-for-Sale.United’s securities available-for-sale decreased $3.6 million to $35.3 million at December 31, 2005 compared to $38.9 million at December 31, 2004. In 2005, United’s purchases of securities available-for-sale were approximately $11.2 million while proceeds from sales, maturities and paydowns totaled approximately $14.2 million. United also recorded an unrealized loss in market values of approximately $.5 million in 2005 and amortization of purchase premium of $.1 million during 2005. During 2005, Heritage Bank utilized cash to fund loan growth rather than to purchase securities. The unrealized loss in market values was due to normal fluctuations in security prices caused by higher interest rates.

Cash and Cash Equivalents.Cash and cash equivalents from continuing operations decreased $.1 million during 2005 to $19.1 million at December 31, 2005 from $19.2 million at December 31, 2004. Net cash from operating activities, or net income adjusted for non-cash items, was $7.8 million in 2005. Net cash from investing activities such as the net increase in loans receivable and the net decrease in securities available-for-sale was $(44.7) million in 2005. Net cash from financing activities such as increases in deposits, net changes in borrowings and dividends paid to stockholders was $36.8 million, for a net decrease in cash and cash equivalents for 2005 of $(.1) million.

Nonperforming Assets. When a borrower fails to make a scheduled payment on a loan and does not cure the delinquency within 15 days, United’s policy is to contact the borrower between the 15th and 30th day of delinquency to establish a repayment schedule. If a loan is not current, or a realistic repayment schedule is not being followed by the 90th day of delinquency, United will generally proceed with legal action to foreclose the property after the loan has become contractually delinquent 90 days. Loans contractually past due 90 days are classified as nonperforming. However, not all loans past due 90 days automatically result in the non-accrual of interest income. If a 90 days past due loan has adequate collateral, or is FHA insured or VA guaranteed, and management concludes that loss of principal and interest would likely not be realized, then interest income will continue to be accrued.

The following schedule details the amounts of United’s nonperforming assets, consisting of nonaccrual loans and accruing loans past due over 90 days. There have been no restructured loans during this time period.

(Dollars in thousands)


	December 31, 2005		December 31, 2004		December 31, 2003		December 31, 2002		December 31, 2001

Principal Balances:
Accruing loans past due Over 90 days	$	30	$	75	$	324	$	553	$	294
Non-accrual loans		—		327		498		86		708

Total	$	30	$	402	$	822	$	639	$	1,002

Interest:
Due on non-accrual loans	$	none	$	40	$	128	$	67	$	83
Included in income		none		none		none		none		none

Heritage Bank is required to review, classify and report to its Board of Directors its assets on a regular basis and classify them as “substandard” (distinct possibility that some loss will be sustained), “doubtful” (high likelihood of loss), or “loss” (uncollectible). Adequate valuation allowances are required to be established for assets classified as substandard or doubtful in accordance with GAAP. If an asset is classified as a loss, the institution must either establish a specific valuation allowance equal to the amount classified as loss or charge off such amount. At December 31, 2005, United had no assets reported as doubtful and no assets classified as loss. At December 31, 2004, United had $ .3 million assets reported doubtful assets and no assets classified as loss. At December 31, 2005, 2004 and 2003, United had $.3 million, $.1 million and $.6 million, respectively, of reported substandard assets. As a percent of total assets, substandard assets were approximately .07%, .01% and .20% at December 31, 2005, 2004 and 2003, respectively.

Deposits and Borrowings. United experienced a net increase in deposits of $45.4 million or 17.6% in 2005 as deposits grew to $303.7 million at Heritage Bank in 2005 from $258.3 million in 2004. This included an increase in brokered funds by $9.9 million to $18.3 million in 2005 and from $8.4 million in 2004. The increase in deposits resulted from a combination of competitive rates on all deposit offerings, and Heritage Bank’s commitment to community banking, both of which have attracted depositors.

FHLB advances decreased $2.8 million in 2005 to $42.0 million from $44.8 million in 2004. Heritage Bank was able to repay $19.2 million in FHLB long term note advances in 2005 and received proceeds of $20.0 million on new FHLB long term note advances, for a net decrease of $2.8 million. At December 31, 2005, the current established available FHLB advance credit line for Heritage Bank was 25% of its assets. The weighted average interest rate on FHLB advances was 4.01% and 3.41% at December 31, 2005 and 2004, respectively. Advances from the FHLB are secured by pledges of FHLB stock and a blanket assignment of Heritage Bank’s unpledged, qualifying mortgage loans, mortgage-backed securities and U.S. Government and federal agency securities.

During 2005, Heritage Bank had a FHLB Cash Management Advance (CMA) credit facility with a maximum allowable advance of $94.3 million, subject to available collateral limits. The credit facility expires on February 23, 2007. During 2005, there were advances of $56.1 million and repayments of $59.6 million made on the CMA credit facility. The outstanding balance due as of December 31, 2005 was $3.0 million, which is included in the balance disclosed in the preceding paragraph.

United, at the parent company level, has a line of credit of $1.0 million with a correspondent bank at an interest rate of 1.75% over the federal funds rate, which totaled 5.69% and 3.69% at December 31, 2005 and 2004, respectively. This line is secured by United’s Heritage Bank stock and expires November 1, 2006. Interest is payable quarterly. Principal is payable at maturity. There was no principal balance outstanding at December 31, 2005 and 2004, respectively.

Asset/Liability Management. United’s earnings depend to a large extent on the level of its “net interest income”. Net interest income depends upon the difference (referred to as “interest rate spread”) between the yield on United’s loan and investment portfolios and interest-earning cash balances (“interest-earning assets”), and the rates paid on its deposits and borrowings (“interest-bearing liabilities”). Net interest income is further affected by the relative amounts of United’s interest-earning assets and interest-bearing liabilities. In recent years, United’s interest-earning assets have exceeded interest-bearing liabilities. However, when interest-earning assets decrease as a result of non-accrual loans and investments in non-interest earning assets, net interest income and interest rate spread also decrease and any continued decrease in the level of interest-earning assets would generally result in a negative impact on earnings.

One of the primary objectives of United’s management has been to restructure United’s balance sheet to reduce its vulnerability to changes in interest rates (Interest Rate Risk). Depository 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 depository institutions. In periods of rising interest rates, this mismatch can render depository institutions vulnerable to increases in costs of funds (deposits and borrowings) that can outstrip increases in returns on longer-term fixed rate loans and investments, resulting in a decrease in positive interest rate spread and lower earnings.

Several strategies have been employed by United to minimize the mismatch of asset and liability maturities. For the past several years, Heritage Bank has maintained a policy of selling the majority of newly-originated long-term (15 to 30-year maturity) fixed-rate mortgage loans to the secondary market. These loans are sold at their outstanding principal balance, which is the prearranged contract purchase price, and therefore, no gain or loss is realized at sale. United promotes the origination and retention of loans providing for periodic interest rate adjustments, shorter terms to maturity or balloon provisions. United also emphasizes investment in adjustable rate or shorter-term mortgage-backed securities and other interest-earning investments. When maturities of loans increase, United offsets the increased interest rate risk with matching funds and maturities with FHLB borrowings.

The following table shows the contractual maturities of United’s loans as of December 31, 2005. The amounts reflected in the following table give no effect to assumptions regarding loan prepayments or payoffs. Loans with variable rates of interest are classified as due when the loan principal balances are contractually due, not when the interest rate reprices.


(Dollars in thousands)
	December 31, 2005

	1 Year or Less		1 - 5 Years		5 Years and Beyond		Total

Fixed rate loans:
1-4 residential	$	5,737	$	11,639	$	19,617	$	36,993
Multi-family and commercial		3,456		10,384		12,551		26,391
Construction and undeveloped land		28,773		21,809		342		50,924
Commercial non-real estate(1)		5,746		23,198		6,893		35,837
Agriculture non-real estate		6,013		5,193		642		11,848
Consumer(2)		1,610		16,958		4,071		22,639

		51,335		89,181		44,116		184,632
Variable rate loans:
1-4 residential		5,490		9,259		950		15,699
Multi-family and commercial		7,695		42,352		6,821		56,868
Construction and undeveloped land		13,307		3,952		59		17,318
Commercial non-real estate(1)		19,009		9,121		439		28,569
Agriculture non-real estate		3,287		738		—		4,025
Consumer(2)		8,419		218		—		8,637

		57,207		65,640		8,269		131,116


Gross loans	$	108,542	$	154,821	$	52,385	$	315,748


	Gross loans due after December 31, 2006

Fixed interest rates	$	133,297
Floating or adjustable rates or balloon payments		73,909

	$	207,206


(1)	Includes loans on commercial savings accounts

(2)	Includes consumer loans secured by real estate

The following table sets forth the book value, maturities and weighted average yield of United’s investment portfolio at the dates indicated:


(Dollars in thousands)
	December 31, 2005

	1 Year or Less			1 - 5 years			5 - 10 years			10 years and beyond			Total

U.S. government and agencies	$	—		$	2,457		$	992		$	2,974		$	6,423
Mortgage-backed securities		26			6,750			2,260			18,820			27,856
Municipal bonds		—			467			—			120			587
Other		—			493			—			—			493

Total securities	$	26		$	10,167		$	3,252		$	21,914		$	35,359

Weighted average yield		6.00	%		4.04	%		5.77	%		4.65	%		4.57	%


	December 31, 2004

	1 Year or Less			1 - 5 years			5 - 10 years			10 years and beyond			Total

U.S. government and agencies	$	—		$	—		$	2,007		$	2,022		$	4,029
Mortgage-backed securities		2			5,075			6,383			22,986			34,446
Municipal bonds		—			—			474			—			474

Total securities	$	2		$	5,075		$	8,864		$	25,008		$	38,949

Weighted average yield		9.50	%		4.29	%		4.57	%		4.01	%		4.18	%


	December 31, 2003

	1 Year or Less			1 - 5 years			5 - 10 years			10 years and beyond			Total

U.S. government and agencies	$	—		$	—		$	2,516		$	5,590		$	8,106
Mortgage-backed securities		6			6,528			5,780			19,260			31,574
Municipal bonds		51			430			524			894			1,899
Other		—			1,105			548			47			1,700

Total securities	$	57		$	8,063		$	9,368		$	25,791		$	43,279

Weighted average yield		5.31	%		4.47	%		4.58	%		4.86	%		4.73	%

Stockholders’ Equity. Stockholders’ equity at December 31, 2005 was $32.0 million, or 8.21% of total assets, an increase of $1.4 million from $30.6 million, or 8.82% of total assets, at December 31, 2004. At December 31, 2005, book value was $10.41 per share. Increases included net income of $4.1 million for 2005 and the issuance of employee stock options of $.3 million. Other decreases included the payment of $2.7 million in cash dividends on United’s common stock and a increase in unrealized loss on securities available-for-sale of $.3 million, after tax.

Liquidity and Capital Resources

United’s primary sources of funds are deposits, repurchase agreements, FHLB borrowings, proceeds from loan sales, and loan and mortgage-backed securities repayments. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition. In a period of rising interest rates, it is anticipated that mortgage prepayments would decrease and the proceeds from such prepayments generally would be invested in higher yielding loans or investment which would have the effect of increasing interest income. In a period of declining interest rates, it is anticipated that mortgage prepayments would increase. As a result, these proceeds from mortgage prepayments generally would be invested in lower yielding loans or other investments which have the effect of reducing interest income.

United’s liquidity, represented by cash and cash equivalents, is a result of its operations, investing and financing activities. These activities are summarized below for the years ended December 31, 2005, 2004 and 2003.


(Dollars in thousands)
	For the Year Ended December 31,
	2005			2004			2003

Net income from continuing operations	$	4,140		$	3,917		$	3,829
Adjustments to reconcile net income from continuing operations to net cash from continuing operations		3,700			(1,909	)		10,551

Net cash from continuing operations		7,840			2,008			14,380
Net cash from discontinued operations		—			—			(732	)

Net cash from operating activities		7,840			2,008			13,648
Net cash from investing activities		(44,725	)		(35,121	)		(5,909	)
Net cash from financing activities		36,825			38,786			(15,260	)

Net increase in cash and cash equivalents		(60	)		5,673			(7,521	)
Change in cash from discontinued operations		—			—			3,043
Cash and cash equivalents at beginning of year		19,187			13,514			17,992

Cash and cash equivalents at end of year	$	19,127		$	19,187		$	13,514

The primary investing activities of United are the origination of loans receivable and the purchase of investment securities, offset by the proceeds from maturities, calls, paydowns and sales of investment securities. During 2005, 2004 and 2003, loans receivable increased $47.3 million and $38.3 million and $15.1 million, respectively, which was a use of cash. Purchases of securities available-for-sale totaled $11.2 million, $18.5 million and $38.6 million in 2005, 2004 and 2003, respectively. During 2003 a net $8.3 million of cash was realized from the sale of Valley.

During 2005, 2004 and 2003, investing activities were funded primarily by principal repayments on securities available-for-sale, the maturity of securities available-for-sale, and the sales of securities available-for-sale totaling $14.2 million, $22.5 million and $40.7 million, respectively.

The major sources of cash flows from financing activities are increases in deposit accounts and additional borrowings. The major uses of cash flows from financing activities are withdrawals from deposit accounts, payments on borrowings, purchases of common stock, and payment of dividends to stockholders. For 2005, 2004, and 2003 the net increase (decrease) in cash flows from financing activities was $36.8 million, $38.8 million and $(15.3) million, respectively.

Heritage Bank’s most liquid assets are cash and cash in banks and highly liquid, short-term investments. The levels of these assets are dependent Heritage Bank’s operating, financing, lending, and investing activities during any given period.

Liquidity management of Heritage Bank is both a daily and long-term function of United’s management strategy. Excess funds are generally invested in FHLB overnight funds. If Heritage Bank should require funds beyond its ability to generate them internally, additional sources of funds are available through the use of FHLB advances. At December 31, 2005 Heritage Bank had outstanding borrowings of $46.2 million which included $42.0 million of FHLB advances and $4.2 million of securities sold under agreements to repurchase. (See Part IV, Item 15-”Notes to Consolidated Financial Statements-Federal Home Loan Bank Advances and Securities Sold Under Agreements to Repurchase”). United has issued and outstanding $3.1 million of subordinated debt owed to trust. Management continues to monitor the interest rate repricing with respect to its ability to refinance this obligation, the first opportunity of which comes about in July 2006. (See Part IV, Item 15-”Notes to Consolidated Financial Statements-Subordinated Debentures”).

United is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on United’s operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, United must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting guidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

At the parent company level, in addition to the $1.0 million line of credit, another source of liquidity is the payment of dividends to the parent company from Heritage Bank. State banks, such as Heritage Bank, may pay dividends up to the total of the prior two years earnings without permission of State regulators. This restriction on the payment of dividends has not had, and is not expected in the future to have, an impact on the ability of the parent company to meet its cash obligations.

Quantitative measures established by regulation to ensure capital adequacy require United to maintain minimum amounts and ratios (set forth in the table below). As of December 31, 2005 United met all capital adequacy requirements to which it is subject.


		Actual			Minimum for capital Adequacy purposes

(Dollars in thousands)	Amount		Ratio		Amount		Ratio

December 31, 2005:
Total capital	$	37,491		11.26%	$	26,647		8.0%
Tier I capital		33,740		10.18		13,323		4.0
Tier I leverage		33,740		8.71		15,494		4.0

Off-Balance Sheet Arrangements

Heritage 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 letters of credit and involve, to varying degrees, elements of credit risk. Heritage Bank’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. Heritage Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Financial instruments outstanding at December 31 whose contract amounts represent credit risk include:


(Dollars in thousands)		2005		2004

Unused lines of credit	$	49,252	$	52,887
Commitments outstanding- variable rate		10,461		5,775
Unfunded commitments under credit card arrangements		2,418		2,373
Letters of credit		1,891		970

The majority of Heritage Bank’s loans, commitments, and standby letters of credit have been granted to customers in Heritage Bank’s market area, primarily central and western Montana. Substantially all such customers are also depositors of Heritage Bank. The concentrations of credit by type of loan are set forth above. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Outstanding commitments and standby letters of credit were granted primarily to commercial borrowers.

At December 31, 2005, Heritage Bank had outstanding commitments to originate loans of $12.6 million, on 1-4 family mortgages at fixed and adjustable interest rates. These loans are to be secured by properties located in Heritage Bank’s primary market areas. Heritage Bank anticipates that it will have sufficient funds available to meet current loan commitments.

Table of Contractual Obligations

The following table presents United’s contractual obligations as of December 31, 2005.


(Dollars in thousands)		December 31, 2005

		1 Year or Less		1 - 3 Years		4 - 5 Years		5 Years and Beyond		Total

FHLB advances	$	23,000	$	19,044	$	—	$	—	$	42,044
Securities sold under agreements to repurchase		4,167		71		10		—		4,248
Purchase obligations		686		1,373		1,373		686		4,118
Operating leases		141		209		205		1,609		2,164
Subordinated debentures		—		—		—		3,093		3,093

Total	$	27,994	$	20,697	$	1,588	$	5,388	$	55,667

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk. Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Since United’s earnings depend on its level of interest rate spread, its primary market risk exposure is interest rate risk (“IRR”).

Interest Rate Risk. United has established a formal IRR policy, and Heritage Bank has an Asset/Liability Management Committee (“ALCO”) and an Investment Committee, which meet at least quarterly to review and report on management’s efforts to minimize IRR. Members of the ALCO Committee are Kurt Weise, Kevin Clark, Paula Delaney, Steve Feurt and Renae Johnson. Several asset/liability management strategies have been employed by United to minimize its exposure to IRR. These include selling most newly-originated long-term fixed-rate mortgages, promoting the origination and retention of loans providing for periodic interest rate adjustments, shorter terms to maturity or balloon provisions, and investing in adjustable rate or shorter-term mortgage-backed securities and other interest-earning investments.

The ALCO Committee utilizes an institutional funds management service detailed simulation model to quantify the estimated exposure of net interest income (“NII”) to sustained interest rate changes. The model predicts the impact of changing interest rates on the interest income received and interest expense paid on assets and liabilities. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII given a 200 basis point (bp) rise or decline in interest rates.

The following summarizes the sensitivity analysis for Heritage Bank as of December 31, 2005, the most recent information available. Management believes there has been no material change in interest rate risk since December 31, 2005. For additional information, see Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein in Item 7.


Heritage Bank Estimated decrease in net interest income:			Interest Rate Change +200 bp			Interest Rate Change -200 bp

	0-90 days	$	(29,449	)	$	(59,658	)
	91-360 days		(403,054	)		(41,307	)
	2 years		(774,828	)		(120,879	)
	3 years		(1,032,906	)		(296,807	)

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of assets and liability cash flows and others. Sensitivity analysis does not reflect actions that United might take in responding to or anticipating changes in interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The management of United has prepared and is responsible for the consolidated financial statements of United. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis, and are included in this report starting on page F-1 after the Exhibit Index.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of United’s management, including United’s Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of United’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, United’s disclosure controls and procedures were effective. There were no changes in United’s internal control over financial reporting (as defined in section 13a-15(f) of the Exchange Act during United’s fourth quarter that have materially affected, or is reasonably likely to materially affect, United’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the captions “Board Meetings and Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” in United’s definitive Proxy Statement for its 2006 Annual Meeting of Shareholders (the “Proxy Statement”) is incorporated herein by reference. Information regarding executive officers is set forth in Part I of this Report.

Code of Ethics and Business Conduct.The Boards of Directors of United and Heritage Bank have adopted a Code of Ethics and Business Conduct (the “Code”) that applies to all members of their respective Boards of Directors and to all of their employees, including their principal executive officers, principal financial officers and principal accounting officers or controllers. The Code is available, free of charge, on either United’s websitewww.ufcmontana.com or Heritage Bank’s websitewww.heritagemontana.com. The Code is also available, without charge, from Investor Relations, P.O. Box 2779, Great Falls, MT 59403 or by calling (406) 727-6106. Any amendment to, or waiver from, the provisions of the Code that applies to any of those officers will be posted to the same location on United’s or Heritage Bank’s website, respectively.

The information set forth under the caption “Information Concerning the Board of Directors” of the Proxy Statement is incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the captions “Executive Compensation and Other Information” and “Compensation of Directors” in the Proxy Statement is incorporated by reference. The Report of the Compensation Committee is not incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information set forth under the captions “Equity Compensation Plan Information” and “Securities Ownership of Management and Certain Beneficial Owners” in the Proxy Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption “Certain Relationships and Related Transactions between Management and the Company” in the Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth under the caption “Additional Information About our Independent Auditor” of the Proxy Statement is incorporated by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements:



	The following consolidated financial statements of United Financial Corp. are included in this Annual Report as follows:

Pages in Annual Report


Reports of Independent Registered Public Accounting Firms	F-1

Consolidated Statements of Financial Condition	F-3
December 31, 2005 and 2004

Consolidated Statements of Income - Years Ended	F-4
December 31, 2005, 2004, and 2003

Consolidated Statements of Stockholders’ Equity and Comprehensive Income - Years Ended	F-5
December 31, 2005, 2004, and 2003

Consolidated Statements of Cash Flows - Years Ended	F-6
December 31, 2005, 2004, and 2003

Notes to Consolidated Financial Statements	F-8

(2) Financial Statement Schedules:

Financial statement schedules have been omitted because they are inapplicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.

(3) Exhibits.

Exhibits are listed in the Exhibit Index beginning on page 47 of this report.

(b) See Item 15(a)(3) above.

(c) See Item 15(a)(2) above.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

UNITED FINANCIAL CORP.


By: /s/ Kevin P. Clark

Kevin P. Clark
Chief Executive Officer
(Principal Executive Officer and Director)

Date: March 29, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:


By: /s/ Kevin P. Clark				By: /s/ Paula J. Delaney

Kevin P. Clark				Paula J. Delaney
Chief Executive Officer				Chief Financial Officer
(Principal Executive Officer and Director)				(Principal Financial and Accounting Officer)
Date: March 29, 2006				Date: March 29, 2006

By: /s/ Kurt R. Weise				By: /s/ Dr. J. William Bloemendaal

Kurt R. Weise				Dr. J. William Bloemendaal
Chairman				Director
Date: March 29, 2006				Date: March 29, 2006

By: /s/ William L. Madison				By: /s/ Kenneth R. Murray

William L. Madison				Kenneth R. Murray
Director				Director
Date: March 29, 2006				Date: March 29, 2006

INDEX TO EXHIBITS


Exhibit No.	Exhibit

3.1	Articles of Incorporation of United Financial Corp., as amended (incorporated by reference to Exhibit 3.1 of United’s Annual Report on Form 10-K dated March 31, 1998).
3.2	Bylaws of United Financial Corp., as amended (incorporated by reference to Exhibit 3.1 of United’s Annual Report on Form 10-K dated March 31, 1998).
10.1	Promissory Note issued by United Financial Corp. to Wells Fargo Bank Minnesota National Association, dated November 16, 2001 (incorporated by reference to Exhibit 10.1 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.2	Second Amendment to Letter Agreement between Wells Fargo Bank Minnesota National Association and United Financial Corp., dated November 16, 2001 (incorporated by reference to Exhibit 10.2 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.3	Service Agreement between United Financial Corp. and Central Financial Services, Inc., dated January 1, 2002 (incorporated by reference to Exhibit 10.3 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.4	Service Agreement between Heritage Bank and Central Financial Services, Inc., dated January 1, 2002 (incorporated by reference to Exhibit 10.4 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.5*	Management Retention Supplemental Retirement Income Salary Continuation Plan between Kevin Clark and Heritage Bank, revised January 10, 1996 (incorporated by reference to Exhibit 10.5 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.6*	Heritage Bank Supplemental Retirement Agreement between Heritage Bank and Steve L. Feurt, dated October 25, 1999 (incorporated by reference to Exhibit 10.6 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.7	Indenture between United Financial Corp. and The Bank of New York, as trustee, dated July 16, 2001 (incorporated by reference to Exhibit 10.7 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.8	Amended and Restated Declaration of Trust of United Financial - Montana Capital Trust I among United Financial Corp. and the trustees, administrators and holders named therein, dated July 16, 2001 (incorporated by reference to Exhibit 10.8 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.9	Guarantee Agreement between United Financial Corp. and The Bank of New York, as trustee, dated July 16, 2001 (incorporated by reference to Exhibit 10.9 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.10	United Financial Corp. 2000 Long-Term Incentive and Stock Option Plan (incorporated by reference to Exhibit 10.10 of United’s Quarterly Report on Form 10-Q dated June 30, 2002).
10.11	Letter Agreement between Wells Fargo Bank Minnesota National Association and United Financial Corp., dated November 17, 1999 (incorporated by reference to Exhibit 10.11 of United’s Quarterly Report on Form 10-Q dated September 30, 2002).
10.12	First Amendment to Letter Agreement between Wells Fargo Bank Minnesota National Association and United Financial Corp., dated September 29, 2000 (incorporated by reference to Exhibit 10.12 of United’s Quarterly Report on Form 10-Q dated September 30, 2002).
10.13	Credit Agreement between Wells Fargo Bank Minnesota National Association and United Financial Corp. dated October 30, 2002 (incorporated by reference to Exhibit 10.14 of United’s Annual Report on Form 10-K dated March 28, 2003).
10.14	General Pledge Agreement between Wells Fargo Bank Minnesota National Association and United Financial Corp. dated October 30, 2002 (incorporated by reference to Exhibit 10.15 of United’s Annual Report on Form 10-K dated March 28, 2003).
10.15	Revolving Line of Credit note between Wells Fargo Bank Minnesota National Association and United Financial Corp. dated October 1, 2005.


10.16*	Heritage Bank Supplemental Retirement Agreement between Heritage Bank and Jeffrey C. Mortensen, dated January 1, 2006
16.1	Letter regarding change in certifying accountant received from Moss Adams LLP dated January 30, 2004 (incorporated by reference to Exhibit 16 of United’s Report on Form 8-K dated January 27, 2004).
21.1	Subsidiaries List.
23.1	Consent of Moss Adams LLP.
23.2	Consent of McGladrey & Pullen, LLP.
31.1	Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensation plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 15(a)-3 of the Annual Report.

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2005

Report of Independent Registered Public Accounting Firm

To the Board of Directors
United Financial Corp. and Subsidiaries
Great Falls, Montana

We have audited the consolidated statements of financial condition of United Financial Corp. and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Financial Corp. and Subsidiaries as of December 31, 2005 and 2004 and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

Sioux Falls, South Dakota
March 3, 2006

F-1

INDEPENDENT AUDITOR’S REPORT

Board of Directors and Stockholders
United Financial Corp. and Subsidiaries
Great Falls, Montana

We have audited the accompanying consolidated statements of financial condition of United Financial Corp. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years ended December 31, 2003, 2002, and 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Financial Corp. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years ended December 31, 2003, 2002, and 2001, in conformity with accounting principles generally accepted in the United States of America.

/s/ Moss Adams LLP

Spokane, Washington
February 20, 2004

F-2

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Statements of Financial Condition


	December 31,

	2005		2004

Assets

Cash and cash equivalents	$	19,126,528		19,187,177
Securities available-for-sale		35,358,861		38,949,170
Restricted stock, at cost		4,228,300		4,211,400
Loans held for sale		3,902,478		5,785,521
Loans receivable, net		311,996,555		265,010,993
Accrued interest receivable		2,536,867		1,937,338
Premises and equipment, net		8,518,570		8,471,062
Real estate and other personal property owned		70,774		293,125
Deferred tax asset, net		738,281		279,392
Goodwill		1,421,912		1,421,912
Other assets		1,648,022		1,592,702

	$	389,547,148		347,139,792


Liabilities and Stockholders’ Equity

Liabilities:
Non-interest bearing deposits	$	56,641,508		47,489,541
Interest bearing deposits		247,049,557		210,844,643

Total deposits		303,691,065		258,334,184
Federal Home Loan Bank advances		42,044,355		44,794,355
Securities sold under agreements to repurchase		4,248,120		7,497,859
Income taxes payable		307,793		13,643
Accrued interest payable		2,042,888		1,189,449
Subordinated debt owed to trust		3,093,000		3,093,000
Accrued expenses and other liabilities		2,141,793		1,589,184

Total liabilities		357,569,014		316,511,674

Commitments and contingencies (Notes 4, 13 and 21)

Stockholders’ equity:
Preferred stock, no par value; authorized 2,000,000 shares; no shares issued and outstanding		—		—
Common stock, no par value; authorized 8,000,000 shares; 3,071,158 and 3,045,748 shares issued at December 31, 2005 and 2004, respectively		26,901,546		26,649,795
Paid in capital		63,864		29,341
Retained earnings		5,263,346		3,871,256
Accumulated other comprehensive income (loss), net of taxes		(250,622	)	77,726

Total stockholders’ equity		31,978,134		30,628,118

	$	389,547,148		347,139,792

See accompanying notes to consolidated financial statements.

F-3

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Statements of Income


	Years ended December 31,

	2005		2004		2003

Interest income:
Loans receivable	$	19,716,705		16,445,196		15,856,651
Taxable investments		1,427,837		1,551,514		1,574,538
Nontaxable investments		17,937		34,142		80,579
Other interest-earning assets		146,461		133,888		295,940

Total interest income		21,308,940		18,164,740		17,807,708

Interest expense:
Deposits		5,198,749		3,432,324		4,275,965
Federal Home Loan Bank advances		1,663,822		1,446,962		1,327,754
Securities sold under agreements to repurchase		99,435		112,032		189,260
Other borrowings		—		—		7,837
Subordinated debt owed to trust		215,207		161,166		153,541

Total interest expense		7,177,213		5,152,484		5,954,357

Net interest income		14,131,727		13,012,256		11,853,351
Provision for loan losses		230,000		70,000		778,300

Net interest income after provision for loan losses		13,901,727		12,942,256		11,075,051

Non-interest income:
Gain on sale of loans		3,163,310		2,803,889		4,970,369
Customer service charges		1,164,648		1,072,315		911,938
Loan servicing fees		110,250		101,977		93,197
Gain on sale of securities		989		242,007		17,587
Other		110,776		206,934		191,445

Total non-interest income		4,549,973		4,427,122		6,184,536

Non-interest expense:
Compensation and benefits		7,094,978		6,575,253		6,895,696
Occupancy and equipment		1,470,181		1,426,718		1,306,579
Data processing fees		785,546		753,169		708,518
Management fees		452,096		472,183		459,000
Marketing and business development		192,424		170,246		326,689
Telephone and postage		303,694		298,585		298,995
Legal and accounting		218,069		116,798		148,067
Other		1,269,959		1,275,970		1,348,254

Total non-interest expense		11,786,947		11,088,922		11,491,798

Income from continuing operations before income taxes		6,664,753		6,280,456		5,767,789
Income taxes		2,525,242		2,362,497		1,938,504

Income from continuing operations		4,139,511		3,917,959		3,829,285
Discontinued operations:
Income from operations, net of tax		—		—		176,587
Gain on disposal, net of tax		—		—		714,129

Income from discontinued operations		—		—		890,716
Net income	$	4,139,511		3,917,959		4,720,001

Basic earnings per share
Continuing operations	$	1.35		1.29		1.26
Discontinued operations		—		—		0.29

Net income	$	1.35		1.29		1.55

Diluted earnings per share
Continuing operations	$	1.32		1.25		1.22
Discontinued operations		—		—		0.28

Net income	$	1.32		1.25		1.50

See accompanying notes to consolidated financial statements.

F-4

UNITED FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Years ended December 31, 2005, 2004 and 2003


	Number of shares			Common stock			Paid in capital		Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders’ equity

Balances at December 31, 2002		3,048,961		$	27,166,756			—		2,476,481			832,491			30,475,728

Comprehensive income:
Net income					—			—		4,720,001			—			4,720,001
Decrease in net unrealized gain on securities available-for-sale, net of reclassification adjustment					—			—		—			(491,605	)		(491,605	)


Total comprehensive income																4,228,396


Issuance of 8,341 shares; employee stock options and stock awards		8,341			78,501			—		—			—			78,501

Dividends declared ($.72 per share)					—			—		(2,181,826	)		—			(2,181,826	)

Redemption of common stock (11,000 shares)		(11,000	)		(220,110	)		—		—			—			(220,110	)


Balances at December 31, 2003		3,046,302			27,025,147			—		5,014,656			340,886			32,380,689

Comprehensive income:
Net income					—			—		3,917,959			—			3,917,959
Decrease in net unrealized gain on securities available-for-sale, net of reclassification adjustment					—			—		—			(263,160	)		(263,160	)


Total comprehensive income																3,654,799


Tax benefit on exercise of stock options					—			29,341		—			—			29,341

Issuance of 30,071 shares; employee stock options		30,071			248,363			—		—			—			248,363

Dividends declared ($1.66 per share)					—			—		(5,061,359	)		—			(5,061,359	)

Redemption of common stock (30,625 shares)		(30,625	)		(623,715	)		—		—			—			(623,715	)


Balances at December 31, 2004		3,045,748		$	26,649,795			29,341		3,871,256			77,726			30,628,118

Comprehensive income:
Net income										4,139,511			—			4,139,511
Decrease in net unrealized gain on securities available-for-sale, net of reclassification adjustment					—			—		—			(328,348	)		(328,348	)


Total comprehensive income																3,811,163

Tax benefit on exercise of stock options					—			34,523		—			—			34,523

Issuance of 25,410 shares; employee stock options and stock awards		25,410			251,751			—		—			—			251,751

Dividends declared ($.90 per share)					—			—		(2,747,421	)		—			(2,747,421	)

Balances at December 31, 2005		3,071,158		$	26,901,546			63,864		5,263,346			(250,622	)		31,978,134



Disclosure of reclassification amount:	2005			2004			2003

Unrealized holding gains (losses) arising during the period	$	(532,520	)		(185,583	)		(529,464	)
Tax (expense) benefit		204,785			72,467			203,685

Net after tax		(327,735	)		(113,116	)		(325,779	)

Realized gain from discontinued operations		—			—			(376,461	)
Tax expense from discontinued operations		—			—			139,286
Less realized gain allocated to minority interest		—			—			82,253

		—			—			(154,922	)

Reclassification adjustment for gains included in net income		(989	)		(242,007	)		(17,587	)
Tax expense		376			91,963			6,683

Net after tax		(613	)		(150,044	)		(10,904	)
Portion of unrealized gain allocated to minority interest		—			—			—


Net change in unrealized gain (loss) on availiable-for-sale securities	$	(328,348	)		(263,160	)		(491,605	)

See accompanying notes to consolidated financial statements.

F-5

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows


	Years ended December 31,

	2005			2004			2003

Cash flows from operating activities:
Net income from continuing operations	$	4,139,511			3,917,959			3,829,285
Adjustments to reconcile net income from continuing operations to net cash from operating activities:

Provision for loan losses		230,000			70,000			778,300
Depreciation		634,449			633,224			545,059
Net (gain) loss on sale of premises and equipment		—			(4,019	)		4,269
Deferred income tax expense (benefit)		(253,728	)		157,249			(5,887	)
Amortization/accretion of premiums and discounts on securities and loans, net		84,779			115,898			173,589
Gain on sale of investment securities		(989	)		(242,007	)		(17,587	)
Non cash compensation expense		36,600			—			—
Loss on sale of real estate owned, net		22,964			44,540			—
Writedown of loan premium		—			—			17,251
Mortgage loans originated and held for sale		(165,835,508	)		(142,395,826	)		(312,030,881	)
Proceeds from sales of mortgage loans held for sale		170,881,861			143,297,079			325,931,522
Gain on sale of loans		(3,163,310	)		(2,803,889	)		(4,970,369	)
FHLB stock dividends		(16,900	)		(102,500	)		(200,100	)
(Increase) decrease in accrued interest receivable		(599,529	)		(153,709	)		383,642
Decrease in other assets		(55,320	)		(428,038	)		(88,228	)
Increase (decrease) in income taxes		328,673			63,564			(315,265	)
Increase (decrease) in accrued interest payable		853,439			174,757			(304,495	)
Increase (decrease) in accrued expenses and other liabilities		552,609			(335,805	)		649,927

Net cash from continuing operations		7,839,601			2,008,477			14,380,032


Net income from discontinued operations		—			—			890,716
Adjustments to reconcile net income from discontinued operations to net cash from operating activities:

Provision for loan losses		—			—			50,000
Depreciation		—			—			85,566
Deferred income tax expense		—			—			12,844
Amortization/accretion of premiums and discounts on securities and loans, net		—			—			4,515
Mortgage loans originated and held for sale		—			—			(1,593,426	)
Proceeds from sales of mortgage loans held for sale		—			—			288,046
Gain on sale of discontinued operations		—			—			(714,129	)
FHLB stock dividends		—			—			(4,800	)
Increase in accrued interest receivable and other assets		—			—			(343,212	)
Increase in accrued interest payable and other liabilities		—			—			70,327
Net change in minority interest		—			—			521,372

Net cash from discontinued operations		—			—			(732,181	)

Net cash from operating activies		7,839,601			2,008,477			13,647,851

F-6

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)


	Years ended December 31,

	2005			2004			2003

Cash flows from investing activities:
Net increase in loans receivable		(47,341,410	)		(38,318,904	)		(15,065,216	)
Purchases of securities available-for-sale		(11,213,717	)		(18,505,363	)		(38,652,712	)
Proceeds from maturities, calls, paydowns and sales of securities available-for-sale		14,199,513			22,546,487			40,724,741
Purchases of premises and equipment		(681,957	)		(1,598,302	)		(1,345,124	)
Proceeds from sale of premises and equipment		—			28,750			13,000
Proceeds from sale of real estate and other personal property owned		312,449			726,017			117,073
Net proceeds from the sale of discontinued operations		—			—			8,299,630

Net cash from investing activities		(44,725,122	)		(35,121,315	)		(5,908,608	)

Cash flows from financing activities:
Net increase (decrease) in deposits		45,356,881			30,820,036			(3,339,205	)
Proceeds from FHLB advances		76,100,000			70,250,000			35,000,000
Payments on FHLB advances		(78,850,000	)		(56,455,645	)		(39,000,000	)
Payments on line of credit		—			—			(700,000	)
Net decrease in securities sold under repurchase agreements		(3,249,739	)		(391,558	)		(4,897,823	)
Proceeds from issuance of common stock		215,151			248,363			78,501
Redemption of common stock		—			(623,715	)		(220,110	)
Dividends paid to stockholders		(2,747,421	)		(5,061,359	)		(2,181,826	)

Net cash from financing activities		36,824,872			38,786,122			(15,260,463	)

Net increase (decrease) in cash and cash equivalents		(60,649	)		5,673,284			(7,521,220	)
Less net decrease in cash from discontinued operations		—			—			3,043,194

Net increase (decrease) in cash from continuing operations		(60,649	)		5,673,284			(4,478,026	)

Cash and cash equivalents at beginning of year		19,187,177			13,513,893			17,991,919

Cash and cash equivalents at end of year	$	19,126,528			19,187,177			13,513,893

Supplemental disclosure of cash flow information

Cash paid during the year for:
Interest, approximately	$	6,324,000			4,978,000			6,259,000
Income taxes, approximately	$	2,447,000			2,142,000			2,955,000

Supplemental schedule of noncash investing and financing activities

Loans transferred to other real estate owned	$	113,062			404,325			287,493

See accompanying notes to consolidated financial statements.

F-7

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


(1)	Organization and Summary of Significant Accounting Policies
	*(a)*	*General*
		The accompanying consolidated financial statements include the accounts of United Financial Corp. (United), a bank holding company headquartered in Great Falls, Montana and United’s wholly-owned subsidiary, Heritage Bank. United’s banking business is conducted through its wholly-owned subsidiary, Heritage Bank. United, through Heritage Bank, provides a full range of banking services to individual and corporate customers in thirteen Montana communities. 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, Libby, Missoula 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. Based on total assets, 41% of United’s assets are located at Heritage Bank’s Great Falls locations.

		In December 2004, Heritage Bank incorporated a wholly-owned subsidiary, HPM, Inc. to acquire land and a building for a new Great Falls drive-up location, which it then leased it back to Heritage Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

		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.

	*(b)*	*Basis of Presentation*

		The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and income and expenses for the period. Actual results could differ significantly from those estimates.

		A material estimate that is particularly susceptible to significant change in the near-term relates to the determination of the allowance for loan losses. Management believes the allowance for loan losses is adequate, however, future additions to the allowance may be necessary based on changes in factors affecting the borrowers’ ability to repay. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require United to recognize changes to the allowance based on their judgments about information available to them at the time of their examination.

F-8

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


*(c)*	*Cash Equivalents*
	For purposes of the consolidated statements of cash flows, United considers all cash, daily interest demand deposits, amounts due from banks and interest-bearing deposits with banks with original maturities of three months or less to be cash equivalents. Cash flows from customers for loans, deposits and securities sold under agreements to repurchase are reported net.

*(d)*	*Securities Available-for-Sale*

	Securities available-for-sale include all investment securities that management intends to use as part of its overall asset/liability management strategy and that may be sold in response to changes in interest rates and resultant prepayment risk and other related factors. Securities available-for-sale are carried at fair value and unrealized gains and losses (net of related tax effects) are excluded from earnings and reported as a separate component of stockholders’ equity.

	Declines in the fair value of available-for-sale securities below carrying value that are other than temporary are charged to expense as realized losses and the related carrying value is reduced to fair value. The cost of any investment, if sold, is determined by the specific identification method.

	Premiums and discounts on investment securities are amortized or accreted into income using a method which approximates the level-yield interest method.

*(e)*	*Loans Receivable and Loan Fees*

	Loans receivable are stated at unpaid principal balances, less unearned discounts and net of deferred loan origination fees. Interest on loans is credited to income as earned. Interest receivable is accrued only if deemed collectible. Discounts on purchased loans are amortized into interest income using the level-yield method over the remaining period to contractual maturity, adjusted for anticipated prepayments.

	Loans are placed on nonaccrual status when collection of principal or interest is considered doubtful. Interest income previously accrued on these loans, but not yet received, is reversed in the current period. Interest subsequently recovered is credited to income in the period collected.

	Material loan origination fees and related direct origination costs are deferred and the net fee or cost is recognized as interest income using the level-yield method over the contractual life of the loans, adjusted for prepayments. Origination fees on loans sold to the secondary market are recognized when the loan is sold. Amortization of deferred loan origination fees and costs and the accretion of unearned discounts are suspended during periods in which the related loan is on nonaccrual status.

*(f)*	*Allowance for Loan Losses*

	The allowance for loan losses is based on management’s evaluation of the adequacy of the allowance, including an assessment of United’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value

F-9

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	of any underlying collateral, current economic conditions and independent appraisals. Past-due status is determined based upon the loan’s contractual terms.

	Additions to the allowance arise from charges to operations through the provision for loan losses or from the recovery of amounts previously charged off. The allowance is reduced by loans charged off. Loans are charged off when management believes the loan’s principal balance, or a portion thereof, is no longer collectable.

	United also provides an allowance for losses on specific loans which are deemed to be impaired. Groups of small balance homogeneous loans (generally consumer loans) are evaluated for impairment collectively. A loan is considered impaired when, based upon current information and events, it is probable that United will be unable to collect, on a timely basis, all principal and interest according to the contractual terms of the loan’s original agreement. When a specific loan is determined to be impaired, the allowance for loan losses is increased through a charge to expense for the amount of the impairment. The amount of the impairment is measured using cash flows discounted at the loan’s effective interest rate, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current value of the collateral, reduced by anticipated selling costs, is used in place of discounted cash flows. Generally, when a loan is deemed impaired, current period interest previously accrued but not collected is reversed against current period interest income. Income on such impaired loans is then recognized only to the extent that cash in excess of any amounts charged off to the allowance for loan losses is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

*(g)*	*Loans Held for Sale*

	Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value. United expects the loans to be sold in the short-term. The value of derivative instruments related to commitments to fund loans originated for sale and forward loan sale agreements are recognized in the balance sheet at fair value, if material, and changes in fair value thereof are recognized in the statement of income. As of December 31, 2005 and 2004, no such amounts have been recognized.

*(h)*	*Goodwill*

	Goodwill represents the excess of cost over the fair value of the net assets at the date of acquisition. Goodwill is not amortized but is reviewed for impairment annually, or more frequently if certain indicators arise. United did not incur any goodwill impairment in 2005, 2004 or 2003.

*(i)*	*Restricted Stock Investments*

	Federal Home Loan Bank (FHLB) stock is a required investment for institutions that are members of the FHLB system. The required investment in the common stock is based on a predetermined formula and is carried at cost on the statement of financial condition. The stock is pledged as security for advances from the FHLB. Class B(1) stock can be sold back to the FHLB of Seattle at

F-10

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	cost, but is restricted as to purchase, sale, and redemption. Class B(2) is not a required investment for institutions and is not restricted as to purchase and sale, but has the same redemption restrictions as class B(1) stock. Included in restricted stock on the statement of financial condition, Heritage Bank has $3,477,500 and $3,463,400 of class B(1) stock, respectively, at December 31, 2005 and 2004. Heritage Bank held $750,800 and $748,000 of class B(2) stock, respectively, at December 31, 2005 and 2004. During the second quarter of 2005, the FHLB of Seattle announced that it was projecting very low net income over the next few years, possibly even losses. The FHLB of Seattle disclosed in a press release that it anticipates minimal to no dividends during the next few years. While the FHLB of Seattle has ruled that members are no longer required to purchase additional stock to support borrowing levels, it also is not redeeming member stock. Total annual dividend income United received on this stock was $.1 million and $.2 million, respectively, for the years ended December 31, 2004 and 2003. United did not record any accruals of dividend income in 2005. United accounts for the restricted stock at cost, with periodic evaluation for impairment. No impairment has been recognized on this stock.

*(j)*	*Premises and Equipment*

	Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by straight-line and accelerated methods over the estimated useful lives of 39 years for buildings, 5 to 40 years for improvements, and 3 to 10 years for furniture, fixtures and equipment.

*(k)*	*Real Estate and Other Personal Property Owned*

	Real estate owned represents real estate assets acquired through foreclosure or deed in lieu of foreclosure and is comprised of properties held for sale and held for investment. Foreclosed assets held for sale are carried at the lower of fair value less estimated costs to sell, or cost. Fair value is determined as the amount that could be reasonably expected in a current sale (other than a forced or liquidation sale) between a willing buyer and a willing seller.

*(l)*	*Stock Repurchase Plan*

	In October 2003, a stock repurchase plan was approved by the Board for a period of one year to repurchase up to 187,500 shares, or up to $3,900,000 of United’s common stock. Total shares repurchased under this plan in 2003 and 2004 totaled 41,625 for $843,825, an average price of $20.27 per share. The program was extended on September 22, 2004 for twelve months, and was further extended on September 22, 2005 for an additional twelve months. The number of shares United may purchase was reduced to 125,000, with an aggregate purchase price not to exceed $2.4 million. At December 31, 2005, total shares authorized to be repurchased under the plan remained at 125,000.

*(m)*	*Stock-Based Compensation*

	At December 31, 2005, United has a stock-based employee compensation plan, which is described more fully in Note 16. United accounts for the plan under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, for stock options, as all options granted under the plan had an exercise price equal to the market value of the

F-11

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if United had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation.


	Year Ended December 31,

	2005			2004			2003

Net income: As reported	$	4,139,511			3,917,959			4,720,001
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		22,692			-			-
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(41,754	)		(52,725	)		(61,107	)

Pro forma net income	$	4,120,449			3,865,234			4,660,917

Earnings per share:
Basic - as reported	$	1.35			1.29			1.55
Basic - pro forma	$	1.35			1.27			1.53
Diluted - as reported	$	1.32			1.25			1.50
Diluted - pro forma	$	1.31			1.23			1.48


*(n)*	*Income Taxes*

	Deferred tax assets and liabilities are recognized for the estimated future consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in tax expense in the period that includes the enactment date.

*(o)*	*Earnings Per Share*

	Basic earnings per share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares used to compute basic EPS plus the incremental amount of potential common stock determined by the treasury stock method.

	The following table summarizes stock splits approved by United’s Board of Directors.


Date Approved	Type of split/dividend	Record Date	Payable Date	Equity Effect

October 25, 2005	5 for 4 stock split, effected as a 25% stock dividend	December 14, 2005	December 28, 2005	None

May 20, 2003	3 for 2 stock split, effected as a 50% stock dividend	June 23, 2003	June 30, 2003	None

F-12

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	Any fractional shares were paid in cash.

	As a result of the above stock splits, all share and per share amounts for time periods prior to these dates have been retroactively adjusted as if the stock splits occurred on January 1, 2003.

*(p)*	*Long-Lived Assets*

	Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows is less than the carrying amount of the asset. The amount of the impairment loss, if any, is based on the asset’s fair value, which may be estimated by discounting the expected future cash flows. There were no impairment losses recognized during 2005, 2004 or 2003.

*(q)*	*Mortgage Servicing Rights*

	United recognizes as assets the rights to service mortgage loans for others, whether acquired or internally originated. Servicing assets are initially recorded based on fair value determined by comparable market quotes and are amortized in proportion to and over the period of estimated net servicing income. Amortization is netted with loan servicing fees in the consolidated statements of income. Servicing assets are periodically evaluated for impairment by stratifying the servicing assets based on predominant risk characteristics of the underlying loans including loan type, note rate and loan term. Servicing assets are included in other assets on the accompanying consolidated statements of financial condition.

*(r)*	*Comprehensive Income*
	Comprehensive income, which includes net income as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders, is reported in a separate statement. United’s only significant element of other comprehensive income is unrealized gains and losses on securities available-for-sale, net of tax effects.

*(s)*	*Segment Reporting*

	Operations are managed and financial performance is evaluated by management on a Company-wide basis. Accordingly, all of United’s operations are aggregated in one reportable segment.

*(t)*	*New Accounting Pronouncements*

	In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment.” This Statement requires United to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. United will recognize that cost over the period during which an employee provides service in exchange for the award. The new standard also impacts the presentation of tax benefits received in the statement of cash flows. United has adopted SFAS No. 123 R effective January 1, 2006. The annual expense associated with outstanding grants as of December 31, 2005 is currently expected to be approximately $.01 to $.02 per share. This amount is subject to revisions as assumptions are finalized.

F-13

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In May 2005, FASB issued SFAS No. 154,Accounting Changes and Error Corrections.This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement also requires that any correction of an error in the financial statements of a prior period discovered subsequent to their issuance shall be reported as a prior-period adjustment by restating the prior period. SFAS No. 154 is effective for accounting changes and corrections or errors made in fiscal years beginning after December 15, 2005. United’s management does not expect the adoption of this Statement to have a material impact on United’s consolidated financial statements.

(2)

Cash on Hand and In Banks

Heritage Bank is required to maintain an average reserve balance with the Federal Reserve Bank (FRB), or maintain such reserve in cash on hand. The amount of this required reserve balance at December 31, 2005 and 2004 was approximately $3,781,000 and $3,656,000, respectively. An additional $25,000 compensating balance is required to be maintained with the FRB for check clearing services.

United places its cash with high credit quality institutions. The amount on deposit fluctuates, and at times exceeds the insured limit by the Federal Deposit Insurance Corporation, which subjects United to credit risk.

(3)

Securities Available-for-Sale

The amortized cost, unrealized gains and losses, and estimated fair values of investment and mortgage-backed securities available-for-sale at December 31 are as follows:


	2005

	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value

U.S. Government and federal agencies	$	6,500,000		—		(77,455	)		6,422,545
Mortgage-backed securities		28,161,017		56,037		(361,210	)		27,855,844
Municipal bonds		605,000		—		(17,683	)		587,317
Corporate bonds and equity securities		500,062		—		(6,907	)		493,155


	$	35,766,079		56,037		(463,255	)		35,358,861

F-14

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	2004

	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value

U.S. Government and federal agencies	$	4,000,000		31,620		(2,190	)		4,029,430
Mortgage-backed securities		34,337,879		205,579		(97,612	)		34,445,846
Municipal bonds		485,000		—		(11,106	)		473,894

	$	38,822,879		237,199		(110,908	)		38,949,170

The investment securities shown below currently have fair values less than amortized cost and therefore contain unrealized losses. United has evaluated these securities and has determined that the decline in value is not related to any company or industry specific event. As detailed below, there are forty and eighteen investment securities with unrealized losses as of December 31, 2005 and 2004, respectively. United anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.

The length of time that individual securities have been in a continuous unrealized loss position, aggregated by investment category at December 31, 2005 and 2004 are as follows:


December 31, 2005	More than 12 Months					Less than 12 Months					Total

	Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses

U.S. Government and federal agencies	$	988,430		(11,570	)		5,434,115		(65,885	)		6,422,545		(77,455	)
Mortgage-backed securities		10,622,191		(230,923	)		10,766,351		(130,287	)		21,388,542		(361,210	)
Municipal bonds		467,317		(17,683	)		—		—			467,317		(17,683	)
Corporate bonds and equity securities		—		—			493,155		(6,907	)		493,155		(6,907	)

	$	12,077,938		(260,176	)		16,693,621		(203,079	)		28,771,559		(463,255	)

F-15

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


December 31, 2004	More than 12 Months				Less than 12 Months				Total

		Estimated fair value	Gross unrealized losses			Estimated fair value	Gross unrealized losses			Estimated fair value	Gross unrealized losses

U.S. Government and federal agencies	$	—	—			997,810	(2,190	)		997,810	(2,190	)
Mortgage-backed securities		1,528,785	(18,883	)		13,718,955	(78,729	)		15,247,740	(97,612	)
Municipal bonds		—	—			473,894	(11,106	)		473,894	(11,106	)

	$	1,528,785	(18,883	)		15,190,659	(92,025	)		16,717,444	(110,908	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of United to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Maturities of securities available-for-sale by contractual maturity at December 31, 2005 are shown below. Maturities of securities do not reflect repricing opportunities present in many adjustable rate securities. In addition, mortgage-backed securities may be prepaid without penalty. At December 31, 2005 and 2004, market values of variable rate securities included in securities available-for-sale are $11,571,863 and $16,469,562, respectively.


	Amortized cost		Estimated fair value

Due within one year	$	—		—
Due after one year through five years		3,485,062		3,417,957
Due after five years through ten years		1,000,000		991,640
Due after ten years		3,120,000		3,093,420
Mortgage backed securities		28,161,017		27,855,844

	$	35,766,079		35,358,861

Gross proceeds from sales of securities were $1,750,235, $3,543,019 and $1,890,658 for the years ended December 31, 2005, 2004 and 2003, respectively, resulting in gross gains of $989, $242,007 and $17,587 in 2005, 2004 and 2003, respectively.

F-16

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At December 31, 2005 and 2004, investment securities with an amortized cost of $33,592,609 and $37,201,851 respectively, were pledged on FHLB advances, repurchase agreements, public deposits, and other purposes as permitted or required by law.


(4)	Loans Receivable, Net

	Loans receivable, net of unamortized net deferred loan fees, at December 31 are summarized as follows:


	2005			2004

First mortgage loans and contracts secured by real estate	$	114,302,901			100,322,421
Commercial real estate loans		79,036,076			51,017,462
Commercial loans		65,576,077			65,107,859
Agricultural loans		16,577,382			15,108,587
Consumer loans		40,255,382			37,163,026

		315,747,818			268,719,355
Allowance for loan losses		(3,751,263	)		(3,708,362	)

	$	311,996,555			265,010,993

A summary of activity in the allowance for loan losses for the years ended December 31 follows:


	2005			2004			2003

Balance, beginning of year	$	3,708,362			3,755,197			3,113,081
Provision for loan losses		230,000			70,000			778,300
Losses charged off		(217,531	)		(184,573	)		(148,089	)
Recoveries		30,432			67,738			11,905

Balance, end of year	$	3,751,263			3,708,362		��	3,755,197

Loans contractually past due in excess of 90 days and loans classified as non-accrual are summarized as follows (rounded to even dollars):


	December 31,

	2005		2004

Loans 90 days past due and still accruing	$	30,000		75,000
Non-accrual loans		—		327,000

	$	30,000		402,000

F-17

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents data on impaired loans:


	2005		2004		2003

Impaired loans for which a specific allowance has been provided	$	260,000		348,000		589,000
Impaired loans for which no specific allowance has been provided		—		—		—

Total loans determined to be impaired	$	260,000		348,000		589,000

Allowance for loan loss for impaired loans included in the allowance for loan losses	$	62,000		148,000		88,000

Average recorded investment in impaired loans	$	308,000		427,000		571,000

Interest income recognized from impaired loans	$	18,000		8,000		19,400


(5)	Premises and Equipment

Premises and equipment at December 31 are summarized as follows:


	2005			2004

Land	$	1,879,441			1,856,625
Building and improvements		6,494,126			6,254,210
Furniture, fixtures and equipment		4,025,075			3,736,309

		12,398,642			11,847,144
Accumulated depreciation		(3,880,072	)		(3,376,082	)

	$	8,518,570			8,471,062

F-18

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


(6)	Deposits

	Deposits at December 31 are summarized as follows:


	2005				2004

	Weighted average rate	Amount		%	Amount	%


Demand accounts	—%	$	56,641,508	18.7	47,489,541	18.4

NOW and money market accounts	.96%		33,914,270	11.2	35,974,153	13.9
Savings accounts	1.20%		51,472,467	16.9	54,426,865	21.1

Certificates of deposit:	1.00 to 1.99%		—	—	74,465,946	28.8
	2.00 to 2.99%		23,508,585	7.7	3,774,100	1.4
	3.00 to 3.99%		71,948,279	23.7	25,804,019	10.0
	4.00 to 4.99%		64,155,972	21.1	13,408,034	5.2
	5.00 to 5.99%		1,479,730	.5	1,776,213	.7
	6.00 to 6.99%		545,059	.2	1,018,142	.4
	7.00 to 7.99%		25,195	—	197,171	.1


Total certificates of deposit	3.66%		161,662,820	53.2	120,443,625	46.6

Total interest-bearing deposits	2.77%		247,049,557	81.3	210,844,643	81.6

	2.26%	$	303,691,065	100.0	258,334,184	100.0


Scheduled maturities of certificates of deposit at December 31, 2005 are as follows:

	2006	$	112,777,799
	2007		21,778,473
	2008		17,740,686
	2009		4,995,401
	2010		4,076,122
	Thereafter		294,339

		$	161,662,820


	Certificates of deposit of $100,000 or more are $40,429,950 and $29,110,108 at December 31, 2005 and 2004, respectively.

	Certificates of deposit balances include $18,300,000 and $8,395,000 of brokered deposits at December 31, 2005 and 2004, respectively.

F-19

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


(7)	Federal Home Loan Bank Advances

	Federal Home Loan Bank advances at December 31 are summarized as follows:


	2005		2004

2.47% to 4.68% fixed rate advances, interest payable monthly	$	34,000,000		36,500,000
4.48% adjustable rate advance, interest payable monthly		3,000,000		—
5.52% putable advance, put options exercisable quarterly, interest payable monthly		2,000,000		4,000,000
3.57%, fixed rate amortizing advance, interest payable monthly		3,044,355		4,294,355

	$	42,044,355		44,794,355


	The weighted average interest rate on these advances was 4.01% and 3.41% at December 31, 2005 and 2004, respectively.

	Contractual principal repayments on advances from the Federal Home Loan Bank are as follows:


Years ending December 31,

2006	$	23,000,000
2007		11,000,000
2008		8,044,355


	$	42,044,355


	Advances from the FHLB are secured by pledges of FHLB stock and a blanket assignment of Heritage Bank’s otherwise unpledged, qualifying mortgage loans, mortgage-backed securities and U.S. Government and federal agency securities.

	At December 31, 2005, the current established available FHLB advance credit line for Heritage Bank was 25% of its assets. Based upon the current collateral pledged to the FHLB, Heritage Bank has an additional available credit lines of approximately $96,434,000 as of December 31, 2005.

F-20

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


(8)	Securities Sold Under Agreements to Repurchase

	Securities sold under agreements to repurchase at December 31 consist of the following:


	2005

	Repurchase amount		Weighted average rate			Book value of underlying securities		Estimated fair value of underlying securities

To repurchase :

Overnight	$	1,452,891		2.30	%		3,043,276		3,001,942
On demand		536,452		—			4,260,622		4,226,819
1 – 30 days		536,366		2.58			702,583		695,775
31 – 90 days		262,524		2.48			856,257		836,675
Greater than 90 days		1,459,887		4.12			2,456,513		2,438,961

	$	4,248,120		2.68			11,319,251		11,200,172


	2004

	Repurchase amount		Weighted average rate			Book value of underlying securities		Estimated fair value of underlying securities

To repurchase :

Overnight	$	460,429		.75	%		1,230,491		1,224,829
On demand		2,436,506		—			3,186,966		3,213,554
1 – 30 days		884,489		1.46			1,189,491		1,184,540
31 – 90 days		2,003,967		1.98			2,661,981		2,678,343
Greater than 90 days		1,712,468		2.42			2,742,519		2,783,808


	$	7,497,859		1.30			11,011,448		11,085,074


	Securities underlying the agreements to repurchase are for the same securities originally sold and are held in a custodial account by the bank’s safekeeping agent. For the years ended December 31, 2005 and 2004, securities sold under agreements to repurchase averaged approximately $6,116,000 and $8,204,000, respectively, and the maximum outstanding at any month end during the year was approximately $10,007,000and $13,667,000, respectively.

(9)	Subordinated Debentures

	In July 2001, United issued junior subordinated debentures, aggregating $3,093,000 to United Financial-Montana Capital Trust I (Trust). The Trust issued preferred securities, as part of a pooled issue, with an aggregate liquidation amount of $3,000,000 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

F-21

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	regulatory capital purposes. The junior subordinated debentures pay interest on a semi-annual basis. The variable interest rate resets on January 25 and July 25 of each year, based upon six month LIBOR plus 3.75%. The current 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. Debt issuance costs totaling $118,812 were capitalized related to the debenture offering and are being amortized over the 10-year non-premium callable life of the preferred securities.

(10)	Line of Credit

	United has a line of credit of $1,000,000 with Wells Fargo with an interest rate of 1.50% and 1.75 % over the Wells Fargo federal funds rate, which was 5.69% and 3.69% at December 31, 2005 and 2004, respectively. This line is secured by United’s Heritage Bank stock and expires November 1, 2006. Interest is payable quarterly. There was no principal balance outstanding at December 31, 2005 and 2004.

(11)	Income Taxes

	Income tax expense for the years ended December 31 is summarized as follows:


	Federal			State			Total

2005:
Current – continuing operations	$	2,284,242			494,728			2,778,970
Deferred		(209,191	)		(44,537	)		(253,728	)

	$	2,075,051			450,191			2,525,242


2004:
Current – continuing operations	$	1,808,310			396,938			2,205,248
Deferred		129,647			27,602			157,249

	$	1,937,957			424,540			2,362,497

2003:
Current – continuing operations	$	1,485,154			520,788			2,005,942
Deferred		(34,353	)		(33,085	)		(67,438	)

		1,450,801			487,703			1,938,504
Current – discontinued operations		573,291			122,054			695,345


	$	2,024,092			609,757			2,633,849

F-22

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	Income tax expense for the years ended December 31 differs from “expected” income tax expense (computed by applying the Federal corporate income tax rate of 34% to income before income taxes) as follows:


	2005			2004			2003


Computed “expected” tax expense	$	2,266,016			2,130,816			1,961,048
Increase (decrease) resulting from:
State taxes, net of Federal income tax effects		297,219			280,196			259,551
Tax-exempt interest		(45,697	)		(51,716	)		(52,780	)
Other, net		7,704			3,201			(229,315	)

	$	2,525,242			2,362,497			1,938,504


Deferred tax assets and liabilities at December 31 are as follows:
	2005		2004

Deferred tax assets:
Loans, principally due to allowance for loan losses	$	1,330,889		1,312,791
Premises and equipment and real estate owned, due to difference in basis		59,152		59,152
Deferred compensation and vacation differences		98,833
Unrealized gains on securities available-for-sale		156,596		—
Purchase accounting basis differences		—		3,071
Other		8,452		115,027

Total gross deferred tax assets		1,653,922		1,490,041


Deferred tax liabilities:
Loans, due to difference in basis		—		10,246
Stock in FHLB, principally due to stock dividends not recognized for tax purposes		653,182		646,683
Premises and equipment, principally due to differences in depreciation		237,327		498,529
Unrealized gains on securities available-for-sale		—		48,565
Other		25,132		6,626

Total gross deferred tax liabilities		915,641		1,210,649


Net deferred tax asset	$	738,281		279,392


	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

F-23

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryback years, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and estimates of future taxable income over the periods which the deferred tax assets are deductible, at December 31, 2005 and 2004 management believes it is more likely than not that United will realize the benefits of these deductible differences.

	Retained earnings at December 31, 2005 includes approximately $3,477,000 for which no provision for Federal income tax has been made. This amount represents the base year income tax bad debt reserve. This amount is treated as a permanent difference and deferred taxes are not recognized unless it appears this reserve will be reduced and thereby result in taxable income in the foreseeable future. United is not currently contemplating any changes to its business or operations which would result in a recapture of the base year bad debt reserve into taxable income.

(12)	Mortgage Servicing Rights

	Total mortgage servicing rights, net of accumulated amortization, were $674,611 and $525,597 at December 31, 2005 and 2004, respectively. Servicing rights of $324,900, $299,199, and $184,050 were capitalized in 2005, 2004 and 2003, respectively. Amortization expense of $175,886, $114,198, and $67,322 was recognized in 2005, 2004 and 2003, respectively. There were no impairment losses recognized in 2005, 2004, and 2003. At December 31, 2005 and 2004, the estimated fair value of United’s servicing assets approximates its carrying value.

	Real estate loans serviced for others, which are not included in the accompanying consolidated financial statements, totaled approximately $81,155,000 and $69,274,000 at December 31, 2005 and 2004, respectively.

(13)	Leases

	Heritage Bank leases certain land and office space under non-cancelable operating leases in its Billings, Great Falls, Hamilton and Kalispell branches. The Billings lease is a 30 year ground lease agreement. The lease required a deposit of $10,000 and annual rentals of $70,000. The Great Falls, Hamilton and Kalispell leases are for office space and range in length from 5 to 10 years. Total rental expense for the years ended December 31, 2005, 2004 and 2003 was $142,348, $156,916 and $130,236, respectively.

	The total future minimum lease payments required under operating leases which have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2005 are as follows:

F-24

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


Year Ending December 31,


	2006	$	141,184
	2007		104,320
	2008		104,320
	2009		104,320
	2010		100,600
	Thereafter		1,609,500

		$	2,164,244


(14)	Related Parties

	Central Financial Services, Inc. (CFS) provides various management services to United, including certain accounting and tax services, investment consulting, personnel consulting, asset-liability management and regulatory consulting. CFS is owned by United’s largest shareholder and has been providing similar services to various banks and financial service organizations since December of 1988. CFS fees billed to United were $452,096, $472,183 and $459,000 for the years ended December 31, 2005, 2004, and 2003, respectively.

	United acquires loan participations from a bank controlled by United’s current largest shareholder. At December 31, 2005 and 2004, the outstanding balances of loans purchased from this bank were $3,459,169 and $4,605,405, respectively. During 2005 and 2004, United’s chairman served on the board of directors of several other banks. One such bank in Grand Junction, Colorado, had loan participations with United. At December 31, 2005 and 2004 the outstanding balances of loans purchased from this bank were $12,688,694 and $239,524, respectively. The loans are underwritten under the same terms and procedures as loans underwritten by United.

	Banker’s Resource Center (BRC) provides data processing services for United. United has a 17% ownership interest in BRC, a computer data center. The charges for BRC’s services were $785,546, $753,169 and 708,518 for the years ended December 31, 2005, 2004 and 2003, respectively.

	As of December 31, 2005 and 2004, the Board of Directors and officers of United (personally and through their respective businesses which bank with Heritage Bank) had approximately $998,000 and $579,000, respectively, on deposit with Heritage Bank.

	A summary of activity with respect to aggregate loans to directors and executive officers for the years ended December 31, 2005 and 2004 follows:


	2005			2004

Balance, beginning of year	$	3,808,461			1,525,626
New loans		10,700,746			7,907,785
Repayments		(10,938,790	)		(5,624,950	)


Balance, end of year	$	3,570,417			3,808,461

F-25

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	Management believes these loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with equivalent risk of collectibility.

(15)	Employee Benefit Plans

	Heritage Bank has a savings plan under Section 401(k) of the Internal Revenue Code. Eligible employees can contribute up to 20% of their wages. Heritage Bank matches an amount equal to 100% of the employee’s contribution, up to 4.5% of total wages. Participants are at all times fully vested in their contributions and are immediately vested in the employer’s contributions. Heritage Bank 401(k) contributions and administrative costs were approximately $213,000, $201,000, and $197,000 during the years ended December 31, 2005, 2004 and 2003, respectively.

	Heritage Bank has deferred compensation agreements with two employees that provide for certain benefits upon retirement, change of control, disability or death. Amounts expensed under these agreements were approximately $19,900, $17,800 and $15,900, respectively, for the years ended December 31, 2005, 2004 and 2003. Heritage Bank owns two single premium insurance policies in connection with one of these agreements. The policies have a cash value, which is included in other assets on the accompanying consolidated statements of financial condition, of approximately $374,000 and $360,000 at December 31, 2005 and 2004, respectively.

(16)	Stock Option Plans

	In 2000, the United Financial Corp. 2000 Long-Term Incentive and Stock Option Plan (the Plan) was adopted. The Plan provides for the grant of incentive stock options (ISOs) and non-qualified stock options to certain full and part-time employees of Heritage Bank and directors of United. As of December 31, 2005, the plan provides for award of options for a maximum of 322,500 shares of United common stock. Vesting for each award is at the discretion of the Board. The term of the options is 10 years. The option price for all ISOs granted under the Plan shall be determined by the Board, but shall not be less than 100% of the fair market value of the common stock at the date of grant of such option. The option price for all non-qualified options shall also be determined by the Board. A change in control, as defined in the Plan, will immediately vest all options.

	At December 31, 2005, total shares available for option grants under the Plan were 50,930. A stock award of 1,525 shares was made to certain management personnel in January 2005. Compensation expense of $36,600, the fair value of the shares, was recognized in connection with the award. Changes in options granted by United for the years ended December 31, 2005, 2004 and 2003, are summarized as follows:

F-26

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	2005						2004						2003

	Shares actual			Weighted average exercise price			Shares actual			Weighted average exercise price			Shares actual			Weighted average exercise price

Outstanding options, beginning of year		203,334			$	10.30		228,187			9.63			230,888			9.41
Granted		34,616				20.20		10,000			19.89			9,375			13.98
Exercised		(23,672	)			11.66		(30,071	)		(10.76	)		(6,749	)		(8.23	)
Forfeited		(5,700	)			14.12		(4,782	)		(10.56	)		(5,327	)		(9.30	)

Outstanding options, end of year		208,578			$	11.99		203,334			10.30			228,187			9.63


Options exercisable at end of year		145,555						129,310						97,529

Weighted-average fair value of options granted during year	$	3.98					$	4.28					$	2.70

The stock options outstanding at December 31, 2005 consist of the following:


	Options outstanding							Exercisable options

	Number outstanding at end of year		Weighted average remaining contractual life		Weighted average exercise price			Number exercisable at end of year		Weighted average exercise price

Exercise Prices:
$ 7.21		30,338		4.5		$	7.21		30,338		7.21
$ 8.56		51,191		5.5			8.56		51,191		8.56
$11.34		78,586		6.5			11.34		58,940		11.34
$13.98		5,860		7.5			13.98		2,930		13.98
$19.89		8,625		8.5			19.89		2,156		19.89
$20.20		33,978		9.5			20.20		—		20.20

Total		208,578		6.6		$	11.93		145,555		9.68

The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions:


	2005		2004		2003

Risk-free interest rate	4.01	%	3.85	%	2.52	%
Expected life	5 years		5 years		5 years
Expected volatility	29.24	%	31.77	%	31.49	%
Expected dividend yield	4.52	%	4.38	%	4.43	%

F-27

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	Based on the intrinsic value method, no compensation cost has been recognized for any stock option grants in the accompanying financial statements. Had United determined compensation cost based on the estimated fair value at the grant date for its stock options, United’s net income and net income per share would have been as shown in Note 1.

(17)	Earnings Per Share

	The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31:


	2005		2004		2003

Weighted average shares outstanding during the year on which basic earnings per share is calculated		3,060,717		3,043,240		3,050,180
Add: incremental shares under stock option plans		86,455		99,772		88,881


Average outstanding shares on which diluted earnings per share is calculated		3,147,172		3,143,012		3,139,061


Net income applicable to common stockholders, basic	$	4,139,511		3,917,959		4,720,001
Less: reduction of proportionate share of Valley net income assuming option exercises		—		—		(820	)


Net income applicable to common stockholders, diluted	$	4,139,511		3,917,959		4,719,181


Basic earnings per share
Continuing operations	$	1.35		1.29		1.26
Discontinuing operations		—		—		.29

Net Income	$	1.35		1.29		1.55


Diluted earnings per share
Continuing operations	$	1.32		1.25		1.22
Discontinuing operations		—		—		.28

Net income	$	1.32		1.25		1.50

F-28

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


(18)	Condensed Quarterly Financial Data – Unaudited


	Year Ended December 31, 2005

	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter

Interest income	$	5,887,724		5,562,359		5,150,864		4,707,993
Interest expense		2,131,440		1,961,719		1,656,749		1,427,305

Net interest income		3,756,284		3,600,640		3,494,115		3,280,688

Provision for loan losses		80,000		100,000		50,000		—
Non-interest income		1,202,417		1,421,895		1,095,948		829,713
Non-interest expense		3,123,897		3,026,432		2,919,617		2,717,001

Income before income taxes		1,754,804		1,896,103		1,620,446		1,393,400
Income tax expense		665,505		719,097		615,085		525,555

Net income	$	1,089,299		1,177,006		1,005,361		867,845


Net income per share:
Basic	$	.36		.38		.33		.28

Diluted	$	.35		.37		.32		.28


	Year Ended December 31, 2004

	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter

Interest income	$	4,707,338		4,722,065		4,481,999		4,253,338
Interest expense		1,357,278		1,338,661		1,242,848		1,213,697

Net interest income		3,350,060		3,383,404		3,239,151		3,039,641

Provision for loan losses		—		—		17,500		52,500
Non-interest income		1,104,797		1,171,136		1,082,163		1,069,026
Non-interest expense		2,880,932		2,926,508		2,787,958		2,493,524

Income before income taxes		1,573,925		1,628,032		1,515,856		1,562,643
Income tax expense		589,940		614,016		570,088		588,453

Net income	$	983,985		1,014,016		945,768		974,190


Net income per share:
Basic	$	.32		.34		.31		.32

Diluted	$	.31		.32		.30		.31

F-29

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


(19)	Regulatory Matters

	United (on a consolidated basis) and Heritage Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on United’s operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, United and Heritage Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting guidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

	Quantitative measures established by regulation to ensure capital adequacy require United and Heritage Bank to maintain minimum amounts and ratios (set forth in the tables below). As of December 31, 2005, management believes United and Heritage Bank met all capital adequacy requirements to which they are subject.

	As of December 31, 2005, the most recent notifications from the federal banking agencies categorized Heritage Bank as “well capitalized” under the regulatory framework for prompt corrective action (PCA). To be categorized as “well capitalized” the banks must maintain minimum ratios as set forth in the following tables. There are no conditions or events that management believes have changed the institutions’ PCA category.


									Minimum to be “well
					Minimum for capital				capitalized” under PCA
	Actual				adequacy purposes				provisions

Consolidated: (in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

December 31, 2005:
Total capital	$	37,491	11.26	%	$	26,637	8.0	%		N/A	-
Tier I capital		33,740	10.18			13,257	4.0			N/A	-
Tier I leverage		33,740	8.71			15,495	4.0			N/A	-

December 31, 2004:
Total capital		35,694	12.33			23,158	8.0			N/A	-
Tier I capital		32,075	11.08			11,579	4.0			N/A	-
Tier I leverage		32,075	9.33			13,755	4.0			N/A	-

Heritage Bank: (in thousands)

December 31, 2005:
Total capital		33,720	10.14			26,604	8.0			33,254	10.0	%
Tier I capital		29,969	9.02			13,290	4.0			19,935	6.0
Tier I leverage		29,969	7.82			15,329	4.0			19,162	5.0

December 31, 2004:
Total capital		29,865	10.35			23,084	8.0			28,855	10.0
Tier I capital		26,257	9.10			11,542	4.0			17,313	6.0
Tier I leverage		26,257	7.71			13,673	4.0			17,091	5.0

F-30

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	The total capital and Tier I capital ratios are determined based on risk-weighted assets. The Tier I leverage ratio is determined based on average tangible assets.

	State banks, such as Heritage Bank, may pay dividends up to the total of the prior two years earnings without permission of State regulators.

(20)	Fair Value of Financial Instruments

	United is required to disclose the fair value for financial instruments, whether or not recognized in the statements of financial condition. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that both imposes a contractual obligation on one entity to deliver cash or another financial instrument to a second entity.

	The following assumptions and methods were used by United in estimating the fair value of its financial instruments:


		Financial Assets. Due to the liquid nature of the instruments, the carrying value of cash and cash equivalents approximates fair value. For securities available-for-sale, the fair value is based upon quoted market prices. The fair value of restricted stock approximates carrying value. The fair value of loans receivable was estimated by discounting contractual future cash flow using current rates at which similar loans would be made. The fair value of loans held for sale approximates carrying fair, as the carrying value is the lower of cost or fair value, and United expects the loans to be sold in the short-term. The fair value of accrued interest receivable approximates book value as United expects contractual receipt in the near-term.

		Financial Liabilities. The fair value of NOW, money market accounts, demand accounts and non-term savings deposits are, by definition, equal to their carrying amounts, which represent the amounts payable on demand. The fair value of time deposits was estimated by discounting the future cash flows using current rates for similar deposits. Because the interest rate on subordinated debt approximates United’s current long-term borrowing rate, the fair value of these liabilities approximates the carrying value. The fair value of FHLB advances and securities sold under agreements to repurchase was obtained from discounting cash flows using current borrowing rates. The fair value of accrued interest payable approximates book value due to contractual payment in the near-term.

		Off-Balance Sheet. The fair value of commitments to extend credit is based upon the fee charged, and was determined by management to not have a significant fair value.

		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 United’s entire holdings of a particular instrument. Because no market exists for a significant portion of United’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.

F-31

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	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 carrying value and fair value of United’s financial instruments as of December 31 are as follows:


	2005				2004

	Carrying Value		Fair Value		Carrying Value		Fair Value


Financial assets:
Cash and cash equivalents	$	19,127,000		19,127,000		19,187,000		19,187,000
Securities available-for-sale		35,359,000		35,359,000		38,949,000		38,949,000
Restricted stock		4,228,000		4,228,000		4,211,000		4,211,000
Loans held for sale		3,902,000		3,902,000		5,786,000		5,786,000
Loans receivable, net		311,997,000		308,642,000		265,011,000		264,554,000
Accrued interest receivable		2,537,000		2,537,000		1,937,000		1,937,000

Financial liabilities:
Deposits		303,691,000		303,047,000		258,334,000		258,963,000
FHLB advances and securities sold under agreements to repurchase		46,292,000		45,701,000		52,292,000		52,184,000
Accrued interest payable		2,043,000		2,043,000		1,189,000		1,189,000
Subordinated debt owed to trust		3,093,000		3,093,000		3,093,000		3,093,000


(21)	Commitments and Contingencies

	Heritage Bank has sold loans to various investors in the secondary market under sales agreements which contain repurchase provisions. Under the repurchase provisions, Heritage Bank may be required to repurchase a loan if a borrower fails to make three monthly payments within 120 days after the sale of the loan. The balance of loans sold with repurchase provisions remaining at December 31, 2005 is approximately $ 5,991,000. There were no loans repurchased under these provisions during 2005, 2004 or 2003.

	In December 2005, Heritage Bank entered into a six-year service contract for data processing services with Fiserv, a national information processing company. In the event of early termination of the contract, Heritage Bank has agreed to pay an amount equal to the present value of all payments to be made for the remainder of the initial term or any renewal term of the agreement, which is estimated at December 31, 2005 to be approximately $4.1 million.

	United is a defendant in legal proceedings arising in the normal course of business. In the opinion of management, the disposition of pending litigation will not have a material effect on United’s consolidated financial position, results of operations, or liquidity.

	At December 31, 2005, Heritage Bank had loan commitments outstanding on 1-4 family fixed and adjustable rate mortgages totaling approximately $12,599,000. These loans were approved prior to December 31, 2005 to be closed and funded in 2006. Heritage Bank also has at December 31, 2005

F-32

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


	interest rate locks outstanding on 1-4 family mortgages totaling approximately $2,118,000. These loans may or may not be approved and closed in 2006.

	United is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit and involve, to varying degrees, elements of credit risk. United’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. United uses the same credit policies in making commitments and conditional obligations as it does for loans.

	Financial instruments outstanding at December 31 whose contract amounts represent credit risk include:


(Rounded to even dollars)	2005		2004

Unused lines of credit	$	49,252,000	52,887,000
Commitments outstanding – variable rate		10,461,000	5,775,000
Unfunded commitments under credit card arrangements		2,418,000	2,373,000
Letters of credit		1,891,000	970,000

(22) Parent Company Information (Condensed)

The summarized financial information for United Financial Corp. is presented below:

Condensed Statements of Financial Condition


	December 31,

	2005			2004

Assets
Cash and cash equivalents ($148,957 and $2,254,541, respectively, deposited with Heritage Bank)	$	2,650,341			4,571,534
Securities available-for-sale		1,059,072			1,153,058
Investment in subsidiary bank		31,213,015			27,799,365
Accrued interest receivable		28,060			10,430
Other assets		222,072			288,272

Total assets	$	35,172,560			33,822,659



Liabilities and Stockholders’ Equity

Other liabilities	$	101,426			101,541
Subordinated debt owed to trust		3,093,000			3,093,000

Total liabilities		3,194,426			3,194,541


Common stock		26,901,546			26,649,795
Paid in capital		63,864			29,341
Retained earnings		5,263,346			3,871,256
Accumulated other comprehensive income		(250,622	)		77,726

Total stockholders’ equity		31,978,134			30,628,118


Total liabilities and stockholders’ equity	$	35,172,560			33,822,659

F-33

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Condensed Statements of Income


		Year ended December 31,

	2005			2004			2003

Revenues:
Cash dividends from bank subsidiary	$	750,000			2,800,000		2,600,000
Interest income		152,194			197,968		78,218
Other income		—			19,366		1,168

		902,194			3,017,334		2,679,386

Expenses:
Interest expense		215,277			161,166		161,378
Other operating expenses		478,003			449,784		476,761

		693,280			610,950		638,139

Income before equity in undistributed earnings of subsidiary, discontinued operations and income taxes		208,914			2,406,384		2,041,247
Equity in undistributed earnings of subsidiary		3,722,613			1,487,155		1,490,771


Income from continuing operations before income taxes		3,931,527			3,893,539		3,532,018
Income tax benefit		(207,984	)		(24,420	)	(297,267	)

Income from continuing operations		4,139,511			3,917,959		3,829,285

Income from discontinued operations		—			—		890,716

Net income	$	4,139,511			3,917,959		4,720,001

F-34

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Condensed Statements of Cash Flows


	Year ended December 31,

	2005			2004			2003

Cash flows from operating activities:
Net income from continuing operations	$	4,139,511			3,917,959			3,829,285
Adjustments to reconcile net income from continuing operations to net cash from operating activities:
Gain on sale of securities available-for-sale		—			(18,766	)		—
Equity in undistributed earnings of subsidiary		(3,722,613	)		(1,487,155	)		(1,369,725	)
Increase (decrease) in other assets and liabilities, net		89,961			(15,468	)		(140,804	)

Net cash from continuing operations		506,859			2,396,570			2,318,756

Net cash from discontinued operations		—			—			8,299,630

Net cash from operating activities		506,859			2,396,570			10,618,386


Cash flows from investing activities:
Purchase of securities available-for sale		(1,000,000	)		(1,000,000	)		(2,000,000	)
Proceeds from sales, maturities and paydowns of securities available-for-sale		1,067,618			2,005,015			256,429

Net cash from investing activities		67,618			1,005,015			(1,743,571	)


Cash flows from financing activities:
Payments on line of credit		—			—			(700,000	)
Redemption of common stock		—			(623,715	)		(220,110	)
Proceeds from issuance of common stock		251,751			248,363			78,501
Dividends paid to stockholders		(2,747,421	)		(5,061,359	)		(2,181,826	)

Net cash from financing activities		(2,495,670	)		(5,436,711	)		(3,023,435	)


Net increase (decrease) in cash and cash equivalents		(1,921,193	)		(2,035,126	)		5,851,380
Cash and cash equivalents at beginning of year		4,571,534			6,606,660			755,280


Cash and cash equivalents at end of year	$	2,650,341			4,571,534			6,606,660

F-35

UNITED FINANCIAL CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


(23)	Discontinued Operations – Sale of Valley Bancorp, Inc.

	On July 31, 2003, United sold its majority-owned subsidiary, Valley Bancorp, Inc. (“Valley”). At the time of the sale, taking into account stock options which were exercised immediately prior to closing, United owned approximately 62% of Valley’s issued and outstanding capital stock. United received sales proceeds of approximately $9 million from the sale of the stock.

	The prior year income statements as reported herein for the year ended December 31, 2003 reports the results of operations of Valley in discontinued operations. Income from discontinued operations also includes the gain on the sale of Valley net of applicable income tax provisions.

F-36

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Bad

United Financial Inactive 10-K2005 FY Annual report

Content analysis

INDEPENDENT AUDITOR’S REPORT