Table of Contents





UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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|(Mark One)
|----------
|x         

For the quarterly period ended September 30, 2006



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

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UNITED FINANCIAL CORP.

(Exact Name of Registrant as Specified in its Charter)



|MINNESOTA                                                     | 81-0507591                         
|------------------------------------------------------------- | -----------------------------------
|(State or Other Jurisdiction ofIncorporation or Organization) | (I.R.S. EmployerIdentification No.)



P.O. Box 2779, 120 First Avenue North, Great Falls, Montana 59403

(Address of Principal Executive Offices)   (Zip Code)



(406) 727-6106

(Registrants telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 filing requirements for the past 90 days.

Yes xNo 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 filer in Rule12b-2 of the Exchange Act. (Check one):



|Large accelerated filer o | Accelerated filer o | Non-accelerated filer x
|------------------------- | ------------------- | -----------------------



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



Indicate the number of shares outstanding of each of the issuers

classes of Common Stock, as of the latest practicable date:



Common Stock, no par value; 3,075,820 shares outstanding as of October 31, 2006





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UNITED FINANCIAL CORP.

TABLE OF CONTENTS





|PART I  FINANCIAL INFORMATION                                            |  |  |  |    | 
|------------------------------------------------------------------------- |  |  |  | -- | 
|                                                                         
|ITEM 1 FINANCIAL STATEMENTS                                               |  | 
|                                                                         
|Consolidated Condensed Statements of Financial Condition at               |  | 
|September 30, 2006 and December 31, 2005                                  |  |  |  | 1  | 
|                                                                         
|Consolidated Condensed Statements of Income  Three and Nine Months Ended |  | 
|September 30, 2006 and September 30, 2005                                 |  |  |  | 2  | 
|                                                                         
|Consolidated Condensed Statements of Cash Flows  Nine Months Ended       |  | 
|September 30, 2006 and September 30, 2005                                 |  |  |  | 3  | 
|                                                                         
|Notes to Consolidated Condensed Financial Statements                      |  |  |  | 4  | 
|                                                                         
|ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL                  |  | 
|CONDITION AND RESULTS OF OPERATIONS                                       |  |  |  | 10 | 
|                                                                         
|ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK         |  |  |  | 19 | 
|                                                                         
|ITEM 4 CONTROLS AND PROCEDURES                                            |  |  |  | 19 | 
|                                                                         
|PART II  OTHER INFORMATION                                               |  | 
|                                                                         
|ITEM 1 LEGAL PROCEEDINGS                                                  |  |  |  | 20 | 
|                                                                         
|ITEM 1A. RISK FACTORS                                                     |  |  |  | 20 | 
|                                                                         
|ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS        |  |  |  | 20 | 
|                                                                         
|ITEM 3 DEFAULTS UPON SENIOR SECURITIES                                    |  |  |  | 20 | 
|                                                                         
|ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS              |  |  |  | 20 | 
|                                                                         
|ITEM 5 OTHER INFORMATION                                                  |  |  |  | 20 | 
|                                                                         
|ITEM 6 EXHIBITS                                                           |  |  |  | 21 | 
|                                                                         
|SIGNATURES                                                                |  |  |  | 21 | 

Page i

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Table of Contents

PART I  FINANCIAL INFORMATION



ITEM 1   FINANCIAL STATEMENTS.



UNITED FINANCIAL CORP.

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share and per share data)



|                                                          | (Unaudited)September 30, |  | December 31,
|--------------------------------------------------------- | ------------------------ |  | ------------
|
|ASSETS                                                    |                          |  |             
|Cash and cash equivalents                                 |                          |  | $           
|Securities available-for-sale                             |                          |  |             
|Restricted stock, at cost                                 |                          |  |             
|Loans held for sale                                       |                          |  |             
|Loans receivable, net                                     |                          |  |             
|Accrued interest receivable                               |                          |  |             
|Premises and equipment, net                               |                          |  |             
|Goodwill                                                  |                          |  |             
|Other assets                                              |                          |  |             
|                                                          |                          |  |             
|                                                          |                          |  | $           
|                                                          |                          |  |             
|                                                         
|LIABILITIES AND STOCKHOLDERS EQUITY                      |                          | 
|Deposits:                                                 |                          | 
|Demand, NOW and money market demand accounts              |                          |  | $           
|Savings deposits                                          |                          |  |             
|Time deposits                                             |                          |  |             
|                                                          |                          |  |             
|                                                          |                          |  |             
|Federal Home Loan Bank advances                           |                          |  |             
|Securities sold under agreements to repurchase            |                          |  |             
|Accrued interest payable                                  |                          |  |             
|Subordinated debt owed to trust                           |                          |  |             
|Other liabilities                                         |                          |  |             
|                                                          |                          |  |             
|                                                          |                          |  |             
|                                                          |                          |  |             
|                                                         
|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;  |                          | 
|3,075,820 and 3,071,158 shares issued and outstanding     |                          | 
|at September 30, 2006 and December 31, 2005, respectively |                          |  |             
|Paid in capital                                           |                          |  |             
|Retained earnings                                         |                          |  |             
|Accumulated other comprehensive loss, net                 |                          |  |             
|                                                          |                          |  |             
|                                                          |                          |  |             
|                                                          |                          |  |             
|                                                          |                          |  | $           
|                                                          |                          |  |             
|                                                         
|Equity/Assets                                             |                          |  |             
|Book Value/Share                                          |                          |  | $           

See Notes to Consolidated Condensed Financial Statements.

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UNITED FINANCIAL CORP.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

|                                                    | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|--------------------------------------------------- | ------------------------------- |  | ------------------------------
|
|Interest income                                     |                                 |  |                               
|Loans receivable                                    |                                 |  | $                             
|Taxable investments                                 |                                 |  |                               
|Nontaxable investments                              |                                 |  |                               
|Other interest earning assets                       |                                 |  |                               
|                                                    |                                 |  |                               
|Total interest income                               |                                 |  |                               
|Interest expense                                    |                                 | 
|Deposits                                            |                                 |  |                               
|Other borrowings                                    |                                 |  |                               
|                                                    |                                 |  |                               
|Total interest expense                              |                                 |  |                               
|                                                    |                                 |  |                               
|Net interest income                                 |                                 |  |                               
|Provision for loan losses                           |                                 |  |                               
|                                                    |                                 |  |                               
|Net interest income after provision for loan losses |                                 |  |                               
|                                                   
|Non-interest income                                 |                                 | 
|Gain on sale of loans                               |                                 |  |                               
|Service charges and fees                            |                                 |  |                               
|Gain on sale of securities available-for-sale       |                                 |  |                               
|Other                                               |                                 |  |                               
|                                                    |                                 |  |                               
|Total non-interest income                           |                                 |  |                               
|Non-interest expense                                |                                 | 
|Compensation and benefits                           |                                 |  |                               
|Occupancy and equipment expense                     |                                 |  |                               
|Data processing fees                                |                                 |  |                               
|Other expenses                                      |                                 |  |                               
|                                                    |                                 |  |                               
|Total non-interest expense                          |                                 |  |                               
|                                                    |                                 |  |                               
|Income before income taxes                          |                                 |  |                               
|Income taxes                                        |                                 |  |                               
|                                                    |                                 |  |                               
|Net income                                          |                                 |  | $                             
|                                                    |                                 |  |                               
|                                                   
|Basic earnings per share                            |                                 |  | $                             
|Diluted earnings per share                          |                                 |  |                               
|Dividends declared per share                        |                                 |  |                               
|Weighted average shares outstanding-basic           |                                 |  |                               
|Weighted average shares outstanding-diluted         |                                 |  |                               

See Notes to Consolidated Condensed Financial Statements.

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UNITED FINANCIAL CORP.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

|                                                                          | Nine Months Ended
|------------------------------------------------------------------------- | -----------------
|
|Cash flows from operating activities, before loans held for sale          |                  
|Mortgage loans originated and held for sale                               |                  
|Proceeds from sales of mortgage loans held for sale                       |                  
|                                                                          |                  
|Net cash from operating activities                                        |                  
|                                                                         
|Cash flows from investing activities                                      |                  
|                                                                         
|Net increase in loans receivable                                          |                  
|Purchases of securities available-for-sale                                |                  
|Proceeds from maturities, pay downs and sales of securities              
|available-for-sale                                                        |                  
|Purchases of premises and equipment                                       |                  
|Proceeds from sale of real estate and other personal property owned       |                  
|                                                                          |                  
|Net cash from investing activities                                        |                  
|                                                                          |                  
|                                                                         
|Cash flows from financing activities                                      |                  
|                                                                         
|Net increase in deposits                                                  |                  
|Proceeds from Federal Home Loan Bank advances                             |                  
|Payments on Federal Home Loan Bank advances                               |                  
|Net increase (decrease) in securities sold under agreements to repurchase |                  
|Dividends paid to stockholders                                            |                  
|Proceeds from issuance of common stock                                    |                  
|Excess tax benefit from exercise of stock options                         |                  
|                                                                          |                  
|                                                                         
|Net cash from financing activities                                        |                  
|                                                                          |                  
|                                                                         
|Decrease in cash and cash equivalents                                     |                  
|Cash and cash equivalents at beginning of year                            |                  
|                                                                          |                  
|Cash and cash equivalents at end of period                                |                  
|                                                                          |                  
|                                                                         
|Supplemental Cash Flow Disclosure                                        
|Cash payments for interest                                                |                  
|Cash payments for income taxes                                            |                  
|                                                                          |                  
|                                                                         
|Non Cash Investing and Financing Activities                              
|Acquisition of other personal property in settlement of loans             |                  

See Notes to Consolidated Condensed Financial Statements.

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UNITED FINANCIAL CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)



1.
        GENERAL




United Financial Corp. (United, or the Company) 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 conducts its banking business in Montana through its wholly-owned subsidiary, Heritage Bank, a Montana corporation established in 1923.



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. Effective October 31, 2006, the Geraldine location was closed and those operations were merged into the Fort Benton location. Heritage Bank conducts its community banking business by soliciting 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 with 49% of Uniteds total assets 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, its financial condition and results of operations, depend 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.



Uniteds principal offices are located at 120 First Avenue North, Great Falls, Montana  59401, and its telephone number is (406) 727-6106.



Uniteds periodic and current reports are available, free of charge, on its website as soon as reasonably practicable after we file or furnish such material to the Securities and Exchange Commission (SEC). Uniteds website address is www.ufcmontana.com. The contents of Uniteds website are not a part of this report or of its other filings with the SEC.



2.
        BASIS OF PRESENTATION




The accompanying consolidated condensed statement of financial condition as of December 31, 2005, which has been derived from audited financial statements, and the unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, Uniteds consolidated condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation
of the consolidated financial condition, results of operations, and cash flows for the periods disclosed. Uniteds operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that United anticipates for the year ending December 31, 2006. For additional information, you should refer to the consolidated audited financial statements and related footnotes included in Uniteds Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2005. Certain reclassifications have been made to the September 30, 2005 financial information to conform to the September 30, 2006 presentation. These reclassifications did not affect previously reported net income or stockholders equity.

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3.
        COMPREHENSIVE INCOME




Unrealized gains and losses on securities available-for-sale comprise Uniteds only significant element of other comprehensive income.



|                                                                                   | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|---------------------------------------------------------------------------------- | ------------------------------- |  | ------------------------------
|
|Net income                                                                         |                                 |  | $                             
|                                                                                  
|Unrealized and realized holding gains                                              |                                 | 
|(losses) arising during period                                                     |                                 |  |                               
|                                                                                  
|Less: reclassification adjustment for     gains included in net income, net of tax |                                 |  |                               
|                                                                                   |                                 |  |                               
|                                                                                  
|Net unrealized gains (losses) on                                                   |                                 | 
|securities available for sale, net of tax                                          |                                 |  |                               
|                                                                                   |                                 |  |                               
|                                                                                  
|Total comprehensive income                                                         |                                 |  | $                             
|                                                                                   |                                 |  |                               

4.
        COMPUTATION OF EARNINGS PER SHARE




Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding for 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. Potential common stock includes the incremental shares available for issuance under stock option plans.



The following table sets forth the computation of basic and diluted earnings per share.



|(In thousands, except per share data)                  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|------------------------------------------------------ | ------------------------------- |  | ------------------------------
|
|Weighted average shares outstanding during the         |                                 |  |                               
|period on which basic earnings per share is calculated |                                 |  |                               
|Add: incremental shares under stock option plans       |                                 |  |                               
|                                                       |                                 |  |                               
|                                                      
|Average outstanding shares on which diluted           
|earnings per share is calculated                       |                                 |  |                               
|                                                       |                                 |  |                               
|                                                      
|Net income applicable to common                        |                                 | 
|stockholders, basic and diluted                        |                                 |  | $                             
|                                                      
|Basic earnings per share                               |                                 |  | $                             
|                                                      
|Diluted earnings per share                             |                                 |  | $                             

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5.
        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 services organizations since December of 1988. CFS fees billed to United were approximately $.1 million for the three month periods and $.3 million for the nine month periods ended September 30, 2006 and 2005, respectively. The fees are billed by CFS on an hourly basis for work performed by Uniteds Chairman, Uniteds largest shareholder, and four other CFS employees. Uniteds Chairman does not receive direct compensation from United for these services. He is compensated for services as a director through
directors fees of $400 per month, and for services as an officer of United through CFS. Through CFS, Uniteds largest shareholder and Chairman earn annual salaries of $100,000 and $151,000, respectively.



From time to time, Heritage Bank purchases loans from Central Bank, a Stillwater, Minnesota Bank and Timberline Bank in Grand Junction, Colorado. Uniteds largest shareholder founded Central Bank in 1988, and Uniteds Chairman is the Chairman of its Board. Uniteds Chairman also serves on the Board of Directors of Timberline Bank. Balances of loan participations outstanding with Central Bank and Timberline Bank at September 30, 2006 were $3.2 million and $12.4 million, respectively.



United expects such transactions to continue to occur in the future with both Central Bank and Timberline Bank. Such sales have in the past and will continue in the future to be made on the same terms as loan participations which are sold to nonaffiliated persons. Uniteds largest shareholder and its Chairman serve on other bank boards as well. These banks, to date, have not had any loan participation activity with Heritage Bank.



6.
        SUBSEQUENT EVENTS-DIVIDENDS DECLARED AND DEFINITIVE AGREEMENT SIGNED


On October 24, 2006, Uniteds Board of Directors declared a quarterly cash dividend of $.23 per share, payable December 1, 2006, to shareholders of record on November 17, 2006.



On November 6, 2006, U.S. Bancorp and United Financial Corp. announced the signing of a definitive agreement for U.S. Bancorp to acquire United Financial Corp. This acquisition will nearly double the branch presence in Montana for U.S. Bancorps lead bank, U.S. Bank National Association and give the bank a deposit base exceeding $1 billion. The agreement provides for a stock-for-stock merger in which 0.6825 shares of U.S. Bancorp will be exchanged for each common share of United Financial Corp. Based upon stock prices of both companies on November 3,2006, this represents approximately $22.91 per share. Completion of the transaction, which is expected to occur in the first quarter of 2007, is contingent upon customary closing conditions, including regulatory approval and the approval of Uniteds shareholders.



7.
        STOCK-BASED COMPENSATION




United has a stock-based employee compensation plan which is described more fully in footnotes included in our Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2005. United adopted Statement of Financial Accounting Standards (SFAS) Number 123 (R),Share-Based Payment(SFAS No. 123 (R)), on January 1, 2006 using the modified prospective method. Under this method, awards that are granted, modified, or settled after December 31, 2005, are measured and accounted for in accordance with SFAS No. 123(R). Also under this method, expense is recognized for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123,Accounting for Stock-Based Compensation(SFAS No. 123). Prior to adoption of
SFAS No. 123 (R), United accounted for stock compensation under the intrinsic value method permitted by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB No. 25) and related interpretations. Accordingly, United previously recognized no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. Uniteds accounting policy for recognizing compensation costs for awards with graded vesting is straight line over the vesting period.





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The following table illustrates
the effect on net income and earnings per share if United had applied the fair value recognition provisions of SFAS No. 123 (R) in
2005.

|(In thousands, except per share data)(Unaudited)        | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|------------------------------------------------------- | ------------------------------- |  | ------------------------------
|
|Net income: As reported                                 |                                 |  | $                             
|Deduct: Total stock-based employee compensation expense |                                 | 
|determined under fair value based method for all        |                                 | 
|awards, net of related tax effects (1)                  |                                 |  |                               
|                                                        |                                 |  |                               
|Pro forma net income                                    |                                 |  | $                             
|                                                        |                                 |  |                               
|Earnings per share:                                     |                                 | 
|Basic  as reported                                     |                                 |  | $                             
|                                                        |                                 |  |                               
|Basic  pro forma                                       |                                 |  | $                             
|                                                        |                                 |  |                               
|Diluted  as reported                                   |                                 |  | $                             
|                                                        |                                 |  |                               
|Diluted  pro forma                                     |                                 |  | $                             
|                                                        |                                 |  |                               

(1)   A Black-Scholes option pricing model was used to determine the fair value of the options granted.



As a result of adopting SFAS 123
(R) on January 1, 2006, income before taxes and net income for the nine months ended September 30, 2006 are $31,677 and $29,173
lower, respectively, than if United had continued to account for share-based compensation under APB No. 25. Basic and diluted
earnings per share for the nine months ended September 30, 2006 would have been $1.06 and $1.03, respectively, if United had not
adopted SFAS 123 (R), compared to reported basic and diluted earnings per share of $1.05 and $1.02, respectively. Prior to
adopting SFAS 123 (R), United presented all tax benefits of deductions resulting from the exercise of stock options as operating
cash flows in the Consolidated Statements of Cash Flows. SFAS 123 (R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. The $11,962 excess tax benefit classified as a financing cash flow would have been classified
as an operating cash inflow if United had not adopted SFAS 123 (R).



Share-based compensation expense
recognized for stock options was $31,677 for the nine months ended September 30, 2006. The total related income tax benefit
recognized was $2,504 for the nine months ended September 30, 2006.



Stock Option Plan



United has a stock-based employee
compensation plan for directors and employees. Options have a term of ten years, are generally granted with an exercise price
equal to the market value of Uniteds stock at the date of grant, and generally vest over four years. At September 30, 2006,
54,856 shares of common stock were available for grant under the plan.



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The following table presents the activity related to options under the plan for the nine months ended September 30, 2006.



|                                       | Shares Actual |  | Weighted-AverageExercise Price |         | Weighted-AverageRemaining Term(in years) |   | AggregateIntrinsicValue
|-------------------------------------- | ------------- |  | ------------------------------ | ------- | ---------------------------------------- | - | -----------------------
|Options Outstanding at January 1, 2006 |               |  |                                | 208,578 |                                          | $ | 11.99                  
|Granted                                |               |  |                                |        |                                          |   |                       
|Exercised                              |               |  |                                | (4,662  | )                                        |   | 10.25                  
|Forfeited or Expired                   |               |  |                                | (3,932  | )                                        |   | 15.95                  
|                                       |               |  |                                |        
|Outstanding at September 30, 2006      |               |  |                                | 199,984 |                                          | $ | 11.96                  
|                                       |               |  |                                |         |                                          |   |                        
|                                      
|Exercisable at September 30, 2006      |               |  |                                | 162,626 |                                          | $ | 10.12                  
|                                       |               |  |                                |         |                                          |   |                        

No options were granted during the nine months ended September 30, 2006 and 2005. The total intrinsic value (amount by which the fair value of the underlying stock exceeds the exercise price of an option on exercise date) of options exercised during the nine months ended September 30, 2006 and 2005 was $54,142 and $176,856, respectively.



Cash received from option exercises for the nine months ended September 30, 2006 and 2005 was $47,803 and $156,482, respectively. The amount of excess tax benefits received for these options exercised for the nine months ended September 30, 2006 and 2005 was $11,962 and $20,087, respectively.



United issues new shares to satisfy option exercises.



At September 30, 2006, there was $.1 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.5 years.



8.
        CRITICAL ACCOUNTING POLICIES




United has identified its most
critical accounting policies to be those 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. United also uses an internal loan risk grading system to evaluate potential losses of
individual loans. Other factors include the future economic trends in our 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, management performs a full analysis on a quarterly basis to ensure that changes in
estimated loan loss levels are reflected in the loan loss allowance on a timely basis.



In December 2004, the Financial
Accounting Standards Board (the FASB) issued SFAS No. 123 (R) (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 recognizes that cost over the period during which an employee provides service
in exchange for the award. See Note 7 above regarding the impact of implementing this statement.



United has also identified its
accounting method for securities available-for-sale to be a critical accounting policy. United carries securities
available-for-sale at fair value and exclude unrealized gains and losses (net of related tax effects) from earnings, except when
unrealized losses are determined to be other than temporary. United reports these unrealized gains and losses (net of related tax
effects) as a separate component of stockholders equity.







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9.
        RECENTLY ISSUED ACCOUNTING STANDARDS




In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No, 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This interpretation provides that the financial statement effects of a tax position shall initially be recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. This interpretation also may require additional disclosures related to tax position taken.



The provisions of FIN 48 are effective as of the beginning of fiscal 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. Management is currently evaluating the impact of adopting FIN 48 on Uniteds financial statements but does not expect the adoption of this statement to be significant to the financial statements.



In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets, an amendment of SFAS No. 140. This Statement amends SFAS No.140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This Statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value.



The provisions of SFAS No. 156 are effective as of the beginning of an entitys first fiscal year that begins after September 15, 2006, with the cumulative effect of the change in fair value recorded as an adjustment to the opening balance of retained earnings. Management is currently evaluating the impact of adopting SFAS No. 156 on Uniteds financial statements but does not expect the impact of the change to be material.



In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements.



The provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is currently evaluating the impact of adopting SFAS No.157 on Uniteds financial statements but does not expect the impact of the change to be material.



In September 2006, the FASB also issued SFAS No. 158,Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of the business entity or changes in unrestricted net assets of a not-for-profit organization.. This statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.



The provisions of SFAS No. 158 are effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. Management is currently evaluating the impact of adopting SFAS No.158 on Uniteds financial statements but does not expect the impact of the change to be material.

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ITEM 2   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

1.
        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. We base these forward-looking statements on
our current expectations, estimates and projections about our 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 our products and services, the competitive nature of and anticipated growth in our markets, our
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 our 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 our 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 our business environment or affect operations;
(iv) the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could
present operational issues or require significant capital spending; (v) competitive pressures could intensify and affect our
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 we conduct business; (vii) changes in the Montana real estate market; and (viii) capital investments
in our 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. We undertake no obligation to revise or update publicly any forward-looking
statement for any reason. You should also carefully review the risk factors described in our most recent Annual Report on Form
10-K for the period ending December 31, 2005, which we filed with the Securities and Exchange Commission on March 31,
2006.

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2.
        KEY PERFORMANCE INDICATORS.




|                                          | September 30,2006 |  | December 31,2005
|----------------------------------------- | ----------------- |  | ----------------
|Capital ratios (Bank holding company):    |                   |  |                 
|Tier 1 leverage ratio                     |                   |  |                 
|Tier 1 risk-based capital ratio           |                   |  |                 
|Total risk-based capital ratio            |                   |  |                 
|Allowance for loan losses to loans        |                   |  |                 
|Nonperforming loans to total loans        |                   |  |                 
|Book value per share                      |                   |  | $               
|                                         
|(In Thousands)                            |                   | 
|Loans receivable and held for sale, gross |                   |  | $               
|Allowance for loan losses                 |                   |  | $               
|Nonperforming loans                       |                   |  | $               
|Total assets                              |                   |  | $               
|Total deposits                            |                   |  | $               
|Net loans to deposits                     |                   |  |                 

|                                    | Three Months Ended |  | Nine Months Ended
|----------------------------------- | ------------------ |  | -----------------
|
|Net earnings:                       |                    |  |                  
|Return on average assets            |                    |  |                  
|Return on average common equity     |                    |  |                  
|Net interest margin                 |                    |  |                  
|Earnings per share-basic            |                    |  | $                
|Earnings per share-diluted          |                    |  | $                
|Dividends per share                 |                    |  | $                
|                                   
|Non Financial:                      |                    | 
|Full-time employees                 |                    |  |                  
|New deposit accounts                |                    |  |                  
|Closed or reissued deposit accounts |                    |  |                  
|Full service branches               |                    |  |                  
|ATMs                               |                    |  |                  

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3.
        MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF SEPTEMBER 30, 2006 TO DECEMBER 31, 2005.




|(In Thousands)                                 | Selected Financial Condition Data
|---------------------------------------------- | ---------------------------------
|
|Cash and cash equivalents                      |                                  
|Securities available-for-sale                  |                                  
|Restricted stock, at cost                      |                                  
|Loans held for sale                            |                                  
|Loans receivable, net                          |                                  
|Premises and equipment, net                    |                                  
|Goodwill                                       |                                  
|All other assets                               |                                  
|Total assets                                   |                                  
|Deposits                                       |                                  
|Federal Home Loan Bank advances                |                                  
|Securities sold under agreements to repurchase |                                  
|Subordinated debt                              |                                  
|All other liabilities                          |                                  
|Total liabilities                              |                                  
|Stockholders equity, net                      |                                  

Total assets Total assets increased $28.5 million to $418.1 million at September 30, 2006 from $389.6 million at December 31, 2005. Assets increased primarily because of a net increase in loans receivable and loans held for sale of approximately $24.6 million. Securities available-for-sale increased approximately $4.3 million. Other changes totaling $(.4) million are detailed in the table above.



Securities available-for-sale Securities available-for-sale increased $4.3 million to $39.6 million at September 30, 2006 from $35.4 million at December 31, 2005. The increase was the result of $11.0 million of purchases offset by $6.7 million of principal repayments and maturities. Unrealized losses on securities available-for-sale decreased $.1 million, before income taxes, for the nine months ended September 30, 2006.  Uniteds portfolio consists primarily of agency and mortgage backed securities and is likely to remain as such.

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We summarize loans receivable, net of unamortized net deferred loan fees, as of September 30, 2005 and December 31, 2004, in the following table:



|(In thousands)                             | September 30,2006 |  | December 31,2005
|------------------------------------------ | ----------------- |  | ----------------
|First mortgage loans and contracts secured |                   |  |                 
|by real estate                             |                   |  | $               
|Commercial real estate loans               |                   |  |                 
|Commercial loans                           |                   |  |                 
|Agricultural loans                         |                   |  |                 
|Consumer Loans                             |                   |  |                 
|                                           |                   |  |                 
|                                           |                   |  |                 
|Allowance for loan losses                  |                   |  |                 
|                                           |                   |  |                 
|                                           |                   |  | $               
|                                           |                   |  |                 

Allowance for loan losses for the periods indicated are:



|(In thousands)               | Nine Months EndedSeptember 30, 2006 |  | Year EndedDecember 31, 2005
|---------------------------- | ----------------------------------- |  | ---------------------------
|Balance, beginning of period |                                     |  | $                          
|Provision for loan losses    |                                     |  |                            
|Losses charged off           |                                     |  |                            
|Recoveries                   |                                     |  |                            
|                             |                                     |  |                            
|Balance, end of period       |                                     |  | $                          
|                             |                                     |  |                            

Loans Receivable and Loans Held
for Sale- Net loans receivable increased by $20.6 million to $332.6 million at September 30, 2006 from
$312.0 million at December 31, 2005. We attribute the increase primarily to growth in the real estate loan category. The increase
includes a $24.3 million increase in first mortgage loans and contracts secured by real estate and a $3.3 million increase in
consumer loans. These increases were offset by a $2.1 million decrease in commercial real estate loans and a $5.9 million decrease
in commercial loans.



Heritage Bank purchases and
participates in commercial and lease financing loans. In the normal course of business, banks often purchase loans from other
banks that would exceed the originating banks lending limit. Heritage Bank had $29.3 million and $32.6 million of
participation and purchased loans as of September 30, 2006 and December 31, 2005, respectively. The $29.3 million balance at
September 30, 2006 includes $3.2 million of loan participation balances outstanding with Central Bank and $12.4 million of loan
participation balances outstanding with Timberline Bank. The $32.6 million balance at December 31, 2005 includes loan
participation balances outstanding with Central Bank of $3.5 million and $12.7 million of loan participation balances outstanding
with Timberline Bank. Each of the loans purchased from Central Bank and Timberline Bank were loans that would have exceeded those
banks lending limits when originated. Heritage Bank has no participated loans sold as a result of legal lending limit
issues.



During the nine months ended
September 30, 2006, loans held for sale increased $4.0 million to $7.9 million at September 30, 2006 from $3.9 million at December
31, 2005. We originated for sale $125.6 million of residential real estate loans, and we sold $121.6 million of residential real
estate loans to the secondary market during the nine months ending September 30, 2006.



Allowance for Loan
Losses- The allowance for loan losses increased $.1 million to $3.9 million at September 30, 2006 as
compared to $3.8 million at December 31, 2005. Loan charge offs of $.1 million for the nine months ended September 30, 2006, were
offset by a $.2 million provision for loan losses. Management believes the allowance for loan losses at September 30, 2006 was
adequate given the low level of non-performing assets and managements assessment of loan risk. The allowance for loan losses
to total loans receivable at September 30, 2006 was 1.13% as compared to 1.19% at December 31, 2005.



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The following table summarizes non-accrual,
non-performing and classified asset balances at September 30, 2006 as compared to December 31, 2005.



|(In thousands)                      | September 30,2006 |  | December 31,2005
|----------------------------------- | ----------------- |  | ----------------
|
|Non-accrual loans                   |                   |  | $               
|90 days past due and still accruing |                   |  |                 
|Assets classified as loss           |                   |  |                 
|Assets classified as doubtful       |                   |  |                 
|Assets classified as substandard    |                   |  |                 
|Impaired                            |                   |  |                 



Deposits Deposits
increased by $7.4 million to $311.1 million at September 30, 2006 from $303.7 million at December 31, 2005. The decrease in NOW
and money market accounts and savings accounts from December 31, 2005 to September 30, 2006 reflect the normal volatility in these
types of accounts. The increase in certificates of deposits primarily resulted from a combination of competitive rates on all
deposit offerings, and Heritage Banks commitment to community banking, both of which continue to attract depositors.
Brokered deposits decreased $3.9 million to $14.4 million at September 30, 2006, from $18.3 million at December 31, 2005. Brokered
deposits are deposits obtained through a broker who engages in facilitating the placement of deposits with insured depository
institutions for a third party. The following table breaks down our deposits, as of September 30, 2006 and December 31, 2005, by
types and amounts.



|(In thousands)                | September 30,2006 |  | December 31,2005
|----------------------------- | ----------------- |  | ----------------
|Demand accounts               |                   |  | $               
|NOW and money market accounts |                   |  |                 
|Savings accounts              |                   |  |                 
|Certificate of deposits       |                   |  |                 
|                              |                   |  |                 
|                              |                   |  | $               
|                              |                   |  |                 

Borrowed Funds Federal Home Loan Bank advances increased $14.9 million from $42.0 million at December 31, 2005 to $56.9 million at September 30, 2006. The increase of $14.9 million consists of $79.8 million in advances and $64.9 million in repayments. Securities sold under agreements to repurchase increased $4.3 million to $8.6 million at September 30, 2006 from $4.3 million at December 31, 2005.



Stockholders Equity Stockholders equity totaled $33.2 million at September 30, 2006, up $1.2 million from $32.0 million at December 31, 2005. Stockholders equity activity during the third quarter included $3.2 million of net income less cash dividends declared of $2.1 million. The remaining increase of $.1 million was a result of new stock issued under the stock option plan.

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4.
        MATERIAL CHANGES IN RESULTS OF OPERATIONSCOMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005.




|(In thousands)                                          | Selected Income Statement DataThree Months Ended September 30,
|------------------------------------------------------- | --------------------------------------------------------------
|
|Interest income                                         |                                                               
|Interest expense                                        |                                                               
|                                                        |                                                               
|Net interest income                                     |                                                               
|Provision for losses on loans                           |                                                               
|                                                        |                                                               
|Net interest income after provision for losses on loans |                                                               
|Non-interest income                                     |                                                               
|Non-interest expense                                    |                                                               
|                                                        |                                                               
|Income before income taxes                              |                                                               
|Income taxes                                            |                                                               
|                                                        |                                                               
|Net income                                              |                                                               
|                                                        |                                                               

Net Interest Income- Like most financial institutions, the most significant component of our 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, expressed as a percentage. Net interest income and net
interest margins 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. Net interest income
increased $.2 million to $3.7 million for the three months ended September 30, 2006 from $3.5 million for the three months ended
September 30, 2005. Net interest margin decreased .19% to 3.84% for the three months ended September 30, 2006 from 4.03% for the
three months ended September 30, 2005. Net interest spread decreased .36% to 3.25% for the three months ended September 30, 2006
from 3.61% for the three months ended September 30, 2005.



Interest Income The $1.3 million increase reported above in interest income was attributable to loan interest income. Average balances of loans for the three months ended September 30, 2006 increased $34.8 million to $338.5 million as compared to average balances for the same period in 2005 of $303.7 million. Likewise, weighted average interest rates on loans have increased at September 30, 2006 to 7.39%, up .68% from 6.71% at September 30, 2005.



Interest Expense- Interest expense increased $1.1 million to $3.1 million for the three months ended September 30, 2006 from $2.0 million for the three months ended September 30, 2005. The average balance of deposits increased $19.9 million for the three months ended September 30, 2006 to $258.4 million compared to $238.5 million the same period in 2005. Higher interest rates during the three months ended September 30, 2006 resulted in an increase in interest expense on deposits of $.8 million during the three months ended September 30, 2006 compared to the same period in 2005. Average interest yields on deposits were 3.49% and 2.41% at September 30, 2006 and 2005, respectively.



Non-interest Income -In addition to net interest income, we generate significant non-interest income from a range of retail banking services, including mortgage banking activities and service charges for deposit services. Non-interest income totaled $1.4 million for the three months ended September 30, 2006 and $1.5 million for the same period in 2005.



Heritage Banks loan demand has remained consistent in the residential real estate origination market, during the three months ended September 30, 2006 as compared to the same period in 2005, as mortgage interest rates remain stable. Gain on sale of loans decreased $.1 million for the three months ending September 30, 2006 to $1.0 million from $1.1 million for the same period in 2005.

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5.
        MATERIAL CHANGES IN RESULTS OF OPERATIONSCOMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005.




|(In thousands)                                          | Selected Income Statement DataNine Months Ended September 30,
|------------------------------------------------------- | -------------------------------------------------------------
|
|Interest income                                         |                                                              
|Interest expense                                        |                                                              
|                                                        |                                                              
|Net interest income                                     |                                                              
|Provision for losses on loans                           |                                                              
|                                                        |                                                              
|Net interest income after provision for losses on loans |                                                              
|Non-interest income                                     |                                                              
|Non-interest expense                                    |                                                              
|                                                        |                                                              
|Income before income taxes                              |                                                              
|Income taxes                                            |                                                              
|                                                        |                                                              
|Net Income                                              |                                                              
|                                                        |                                                              

Net Interest Income Net interest income increased $.7 million to $10.8 million for the nine months ended September 30, 2006 from $10.1 million for the nine months ended September 30, 2005. Net interest margin decreased .18% to 3.85% for the nine months ended September 30, 2006 from 4.03% for the same period in 2005. Net interest-rate spread decreased .35% to 3.30% for the nine months ended September 30, 2006 from 3.65% for the same period in 2005.



Interest Income The $3.9 million increase reported above in interest income was attributable to loan interest income. Average balances of loans for the nine months ended September 30, 2006 increased $42.0 million to $329.8 million as compared to average balances of $287.8 million for the same period in 2005. Likewise, weighted average interest rates on loans have increased at September 30, 2006 to 7.12%, up .66% from 6.46% at September 30, 2005.



Interest Expense Interest expense increased $3.2 million to $8.2 million for the nine months ended September 30, 2006 from $5.0 million for the nine months ended September 30, 2005. The average balance of deposits increased $34.9 million to $257.2 for the nine months ending September 30, 2006, compared to  $222.3 million for the same period in 2005. The $.4 million increase in interest on other borrowings included increases in both interest on FHLB advances and repurchase agreements. The average balance of FHLB advances decreased $2.9 million for the nine months ending September 30, 2006 to $46.9 million, compared to $49.8 million for the same period in 2005 and the weighted average rate for outstanding advances increased to 4.53% at September 30, 2006 from 3.57% at September 30, 2005. The average balance of repurchase agreements increased $2.6 million to $8.9
million for the nine months ended September 30, 2006 compared to $6.3 million for the same period in 2005. The weighted average rate for repurchase agreements increased to 3.26% at September 30, 2006 from 1.53% at September 30, 2005.



Provision for Loan Losses -United provided $.2 million for loan losses for the nine months ended September 30, 2006 and 2005, respectively. Provisions in 2006 were made to offset loan charge-offs.



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 inherent in the loan portfolio in accordance with GAAP. Future additions to Uniteds allowance for loan losses and any change in the related ratio of the allowance for loan losses to non-performing assets are dependent upon the performance and composition of Uniteds loan portfolio, the economy, inflation, changes in real estate values and interest rates and the view of the regulatory authorities toward adequate reserve levels.



Non-interest Income- Non-interest income was $3.6 million for both the nine months ended September 30, 2006 and 2005.



Non-interest Expense- Uniteds non-interest expense increased $.3 million during the nine months ended September 30, 2006 as compared to the same period in 2005 to $9.0 million from $8.7 million, primarily due to increases in personnel costs.



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6.
        ASSET/LIABILITY MANAGEMENT




Our 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 our loan and investment portfolios and interest-earning cash balances (referred to as interest-earning assets), and the rates paid on its deposits and borrowings (referred to as interest-bearing liabilities). The relative amounts of our interest-earning assets and interest-bearing liabilities also affect net interest income. In recent years, our 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 managements primary objectives has been to structure the balance sheet to reduce our vulnerability to changes in interest rates (referred to as interest rate risk). Commercial banking institutions can suffer 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 commercial banking institutions. In periods of rising interest rates, this mismatch can render commercial banking 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 reduction in interest rate spread and lower earnings.



Management has employed several strategies to minimize the mismatch of asset and liability maturities. Heritage Bank sells the majority of newly-originated long-term (15 to 30-year maturity) fixed-rate mortgage loans to the secondary market. Heritage Bank sells these loans at their outstanding principal balance, which is the prearranged contract purchase price, and therefore, the amount recognized under the income statement caption gain on sale of loans represents fee income only. Heritage Bank promotes the origination and retention of loans providing for periodic interest rate adjustments, shorter terms to maturity or balloon provisions. Heritage Bank also emphasizes investment in adjustable rate or shorter-term mortgage-backed securities and other interest-earning investments. When maturities of loans increase, management generally offsets the increased interest rate risk with
matching funds and maturities with Federal Home Loan Bank borrowings.



7.
        LIQUIDITY AND CAPITAL RESOURCES




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



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.



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The Board of Governors of the Federal Reserve System (Board) has amended 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 has adopted 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 $418 million, it does not appear that we will be subject to the new risk-based guidelines as described above. We 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.



As a state-chartered commercial bank, quantitative requirements for capital adequacy for Heritage Bank include minimum amounts and ratios set forth in the table below to be considered well capitalized under the prompt corrective action provisions. As of September 30, 2006, Heritage Bank met all regulatory capital adequacy requirements to which it is subject.



|Heritage Bank             | Actual |  | Minimum capitalrequirements to bewell capitalized
|------------------------- | ------ |  | -------------------------------------------------
|
|September 30, 2006:       |        |  |                                                  
|Total risk-based capital  |        |  | $                                                
|Tier I risk-based capital |        |  |                                                  
|Tier I leverage           |        |  |                                                  

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ITEM 3   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 our earnings depend on its level of interest rate spread, its primary market risk exposure is interest rate risk (IRR).



Interest Rate Risk We have 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. We have employed several asset/liability management strategies to minimize our exposure to IRR. These strategies include selling most newly-originated long-term fixed-rate mortgages, promoting the origination and retention of loans providing for periodic interest rate adjustments, shorter terms to maturity or balloon provisions, and investing in adjustable rate or shorter-term mortgage-backed securities and other interest-earning investments.



The Asset/Liability Management Committee utilizes a detailed simulation model prepared by an institutional fund management service 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 over a 12-month period. We compare this sensitivity analysis 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 table summarizes the sensitivity analysis for Heritage Bank as of June 30, 2006, the most recent information available. Management believes there has been no material change in interest rate risk since June 30, 2006. For additional information, see Managements Discussion and Analysis of Financial Condition and Results of Operations included herein in Item 2 and refer to the Interest Rate Risk Management discussion included in our Annual Report on Form 10-K for the year ended December 31, 2005.



|Heritage BankEstimated increase (decrease)in net interest income: | Interest RateChange+200 bp |  | Interest RateChange-200 bp
|----------------------------------------------------------------- | -------------------------- |  | --------------------------
|                                                                 
|0-90 days                                                         |                            |  | $                         
|91-360 days                                                       |                            |  |                           
|2 years                                                           |                            |  |                           
|3 years                                                           |                            |  |                           

The preceding sensitivity analysis does not represent a forecast and you should not rely upon the analysis 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 other assumptions. Sensitivity analysis does not reflect actions that United might take in responding to or anticipating changes in interest rates.



ITEM 4   CONTROLS AND PROCEDURES.



Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities 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, our disclosure controls and procedures were effective. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during our third quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II  OTHER INFORMATION



ITEM 1   LEGAL PROCEEDINGS.



Although neither we nor Heritage Bank are involved in any material pending litigation as of September 30, 2006, Heritage Bank is a defendant 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 our consolidated financial position, results of operations, or liquidity.



ITEM 1A.   RISK FACTORS.



In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussing Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.



ITEM 2   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS .



None



ITEM 3   DEFAULTS UPON SENIOR SECURITIES.



None



ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.



None



ITEM 5   OTHER INFORMATION.



The following information was included in a Form 8-K filed November 13, 2006 with the U.S. Securities and Exchange Commission.



Important Merger Information



In connection
with the proposed Merger, the Company will file a proxy statement with the U.S. Securities and Exchange Commission, or SEC.
Shareholders and investors are advised to read the proxy statement when it becomes available because it
will contain important information about the Merger and the Company.Shareholders and investors
may obtain a free copy of the proxy statement (when available) and other documents filed by the Company with the SEC at the
SECs web site at www.sec.gov . Free copies of the proxy
statement, once available, and the Companys other filings with the SEC, may also be obtained from the Company at
www.ufcmontana.com by clicking on the Investor
Relations tab and then following the link to SEC Filings. Free copies of the Companys filings may be
obtained by directing a written request to United Financial Corp., P. O. Box 2779, 120 First Avenue North, Great Falls, Montana
59403, Attention: Kevin Clark, or by telephone at (406) 727-6106.



Participants in the Solicitation



The
Company and its directors, executive officers and other members of its management may be deemed to be soliciting proxies from
the Companys shareholders in favor of the Merger. Investors and shareholders may obtain more detailed information
regarding the direct and indirect interests in the Merger of persons who may, under the rules of the SEC, be considered
participants in the solicitation of the Companys shareholders in connection with the merger by reading the preliminary and
definitive proxy statements regarding the Merger, which will be filed with the SEC. Information about the Companys directors
and executive officers may be found in the Companys definitive proxy statement filed with the SEC on April 28, 2006. These
documents will be available free of charge once available at the SECs web site at
www.sec.gov or by directing a request to the Company as described above.



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ITEM 6   EXHIBITS.



A.
        Exhibits




10.17
        Revolving Line of Credit note between Wells Fargo Bank Minnesota National Association and United Financial Corp., dated September 28, 2006.10.18
        Fourth Amendment to Credit Agreement between Wells Fargo Bank Minnesota National Association and United Financial Corp., dated September 28, 2006.31.1
        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 chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
        Certification of chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Signatures



Pursuant to the requirements 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.

|Date | November 13, 2006 |  | /s/   Kevin P. Clark                                                                            
|---- | ----------------- |  | ------------------------------------------------------------------------------------------------
|     |                   |  | Kevin P. Clark
Chief Executive Officer
(Duly Authorized Officer and
Principal Executive Officer)

|Date | November 13, 2006 |  | /s/   Paula J. Delaney                                                               
|---- | ----------------- |  | -------------------------------------------------------------------------------------
|     |                   |  | Paula J. Delaney
Chief Financial Officer
(Principal Financial and
Accounting Officer)

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