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 June 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; 3,074,559 shares outstanding as of August 10, 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 June 30, 2006 and December 31, 2005          | 1 
|                                                                                                         |   
|Consolidated Condensed Statements of Income  Three and Six Months Ended June 30, 2006 and June 30, 2005 | 2 
|                                                                                                         |   
|Consolidated Condensed Statements of Cash Flows  Six Months Ended June 30, 2006 and June 30, 2005       | 3 
|                                                                                                         |   
|Notes to Consolidated Condensed Financial Statements                                                     | 4 
|                                                                                                         |   
|ITEM 2   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS           | 9 
|                                                                                                         |   
|ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                      | 17
|                                                                                                         |   
|ITEM 4   CONTROLS AND PROCEDURES                                                                         | 18
|                                                                                                         |   
|PART II - OTHER INFORMATION                                                                              |   
|                                                                                                         |   
|ITEM 1   LEGAL PROCEEDINGS                                                                               | 19
|                                                                                                         |   
|ITEM 1A.   RISK FACTORS                                                                                  | 19
|                                                                                                         |   
|ITEM 2   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                     | 19
|                                                                                                         |   
|ITEM 3   DEFAULTS UPON SENIOR SECURITIES                                                                 | 19
|                                                                                                         |   
|ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                             | 19
|                                                                                                         |   
|ITEM 5   OTHER INFORMATION                                                                               | 19
|                                                                                                         |   
|ITEM 6   EXHIBITS                                                                                        | 19
|                                                                                                         |   
|SIGNATURES                                                                                               | 20

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)June 30, |   | December 31, |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------------------- | - | ------------ | -
|                                                                                                                                                                        |  |   | 2006                |   | 2005         |  
|ASSETS                                                                                                                                                                  |  |   |                     |   |              |  
|Cash and cash equivalents                                                                                                                                               |  | $ | 13,191              |   | 19,127       |  
|Securities available-for-sale                                                                                                                                           |  |   | 39,469              |   | 35,359       |  
|Restricted stock, at cost                                                                                                                                               |  |   | 4,228               |   | 4,228        |  
|Loans held for sale                                                                                                                                                     |  |   | 8,027               |   | 3,902        |  
|Loans receivable, net                                                                                                                                                   |  |   | 332,175             |   | 311,997      |  
|Accrued interest receivable                                                                                                                                             |  |   | 2,766               |   | 2,537        |  
|Premises and equipment, net                                                                                                                                             |  |   | 8,553               |   | 8,519        |  
|Goodwill                                                                                                                                                                |  |   | 1,422               |   | 1,422        |  
|Other assets                                                                                                                                                            |  |   | 2,731               |   | 2,456        |  
|                                                                                                                                                                        |  | $ | 412,562             |   | 389,547      |  
|                                                                                                                                                                        |  |   |                     |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                    |  |   |                     |   |              |  
|Deposits:                                                                                                                                                               |  |   |                     |   |              |  
|Demand, NOW and money market demand accounts                                                                                                                            |  | $ | 89,527              |   | 90,556       |  
|Savings deposits                                                                                                                                                        |  |   | 50,443              |   | 51,472       |  
|Time deposits                                                                                                                                                           |  |   | 174,101             |   | 161,663      |  
|                                                                                                                                                                        |  |   | 314,071             |   | 303,691      |  
|Federal Home Loan Bank advances                                                                                                                                         |  |   | 51,669              |   | 42,044       |  
|Securities sold under agreements to repurchase                                                                                                                          |  |   | 6,397               |   | 4,248        |  
|Accrued interest payable                                                                                                                                                |  |   | 2,802               |   | 2,043        |  
|Subordinated debt owed to trust                                                                                                                                         |  |   | 3,093               |   | 3,093        |  
|Other liabilities                                                                                                                                                       |  |   | 2,173               |   | 2,450        |  
|                                                                                                                                                                        |  |   | 380,205             |   | 357,569      |  
|                                                                                                                                                                        |  |   |                     |   |              |  
|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; 3,074,301 and 3,071,158 shares issued and
    outstanding at June 30, 2006 and December 31, 2005, respectively |  |   | 26,930              |   | 26,902       |  
|Paid in capital                                                                                                                                                         |  |   | 94                  |   | 64           |  
|Retained earnings                                                                                                                                                       |  |   | 5,915               |   | 5,263        |  
|Accumulated other comprehensive loss, net                                                                                                                               |  |   | (582                | ) | (251         | )
|                                                                                                                                                                        |  |   | 32,357              |   | 31,978       |  
|                                                                                                                                                                        |  | $ | 412,562             |   | 389,547      |  
|                                                                                                                                                                        |  |   |                     |   |              |  
|Equity/Assets                                                                                                                                                           |  |   | 7.84                | % | 8.21         |  
|Book Value/Share                                                                                                                                                        |  | $ | 10.52               |   | 10.41        |  



See Notes to Consolidated Condensed Financial Statements.

Page 1

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Table of Contents

UNITED FINANCIAL CORP.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)



|                                                    |  | Three Months EndedJune 30, |       | Six Months EndedJune 30, |      
|--------------------------------------------------- |  | -------------------------- | ----- | ------------------------ | -----
|                                                    |  | 2006                       |       | 2005                     |      
|Interest income                                     |  |                            |       |                          |      
|Loans receivable                                    |  | $                          | 5,944 |                          | 4,641
|Taxable investments                                 |  |                            | 455   |                          | 370  
|Non taxable investments                             |  |                            | 5     |                          | 5    
|Other interest earning assets                       |  |                            | 36    |                          | 24   
|Total interest income                               |  |                            | 6,440 |                          | 5,040
|Interest expense                                    |  |                            |       |                          |      
|Deposits                                            |  |                            | 2,101 |                          | 1,094
|Other borrowings                                    |  |                            | 659   |                          | 563  
|Total interest expense                              |  |                            | 2,760 |                          | 1,657
|Net interest income                                 |  |                            | 3,680 |                          | 3,383
|Provision for loan losses                           |  |                            | 100   |                          | 50   
|Net interest income after provision for loan losses |  |                            | 3,580 |                          | 3,333
|Non-interest income                                 |  |                            |       |                          |      
|Gain on sale of loans                               |  |                            | 905   |                          | 868  
|Service charges and fees                            |  |                            | 283   |                          | 320  
|Other income                                        |  |                            | 24    |                          | 19   
|Total non-interest income                           |  |                            | 1,212 |                          | 1,207
|Non-interest expense                                |  |                            |       |                          |      
|Compensation and benefits                           |  |                            | 1,890 |                          | 1,749
|Occupancy and equipment expense                     |  |                            | 358   |                          | 347  
|Data processing fees                                |  |                            | 54    |                          | 201  
|Other                                               |  |                            | 659   |                          | 623  
|Total non-interest expense                          |  |                            | 2,961 |                          | 2,920
|Income before income taxes                          |  |                            | 1,831 |                          | 1,620
|Income taxes                                        |  |                            | 697   |                          | 615  
|Net income                                          |  | $                          | 1,134 |                          | 1,005
|                                                   
|Basic earnings per share                            |  | $                          | 37    |                          | .33  
|                                                   
|Diluted earnings per share                          |  |                            | .36   |                          | .32  
|                                                    |  |                            |       |                          |      
|Dividends declared per share                        |  |                            | .23   |                          | .22  
|Weighted average shares outstanding-basic           |  |                            | 3,073 |                          | 3,059
|Weighted average shares outstanding-diluted         |  |                            | 3,148 |                          | 3,145



See Notes to Consolidated Condensed Financial Statements.

Page 2

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UNITED FINANCIAL CORP.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



|                                                                               |  | Six Months Ended |             
|------------------------------------------------------------------------------ |  | ---------------- | ------------
|                                                                               |  |                  | June 30,2006
|Cash flows from operating activities:                                          |  |                  |             
|                                                                               |  |                  |             
|Net cash from operating activities                                             |  | $                | (1,383      
|                                                                               |  |                  |             
|Cash flows from investing activities:                                          |  |                  |             
|                                                                               |  |                  |             
|Net increase in loans receivable                                               |  |                  | (20,495     
|Purchases of securities available-for-sale                                     |  |                  | (9,022      
|Proceeds from maturities, pay downs and sales of securities available-for-sale |  |                  | 4,346       
|Purchases of premises and equipment                                            |  |                  | (345        
|Proceeds from sale of real estate and other personal property owned            |  |                  | 184         
|                                                                               |  |                  |             
|Net cash from investing activities                                             |  |                  | (25,332     
|                                                                               |  |                  |             
|Cash flows from financing activities:                                          |  |                  |             
|                                                                               |  |                  |             
|Net increase in deposits                                                       |  |                  | 10,380      
|Proceeds from Federal Home Loan Bank advances                                  |  |                  | 57,250      
|Payments on Federal Home Loan Bank advances                                    |  |                  | (47,625     
|Net increase (decrease) in securities sold under agreements to repurchase      |  |                  | 2,149       
|Dividends paid to stockholders                                                 |  |                  | (1,413      
|Proceeds from issuance of common stock                                         |  |                  | 28          
|Excess tax benefit from exercise of stock options                              |  |                  | 10          
|                                                                               |  |                  |             
|Net cash from financing activities                                             |  |                  | 20,779      
|                                                                               |  |                  |             
|Increase (decrease) in cash and cash equivalents                               |  |                  | (5,936      
|                                                                               |  |                  |             
|Cash and cash equivalents at beginning of year                                 |  |                  | 19,127      
|Cash and cash equivalents at end of period                                     |  | $                | 13,191      
|                                                                               |  |                  |             
|Supplemental Cash Flow Disclosure                                              |  |                  |             
|Cash payments for interest                                                     |  | $                | 4,380       
|Cash payments for income taxes                                                 |  |                  | 1,133       
|                                                                               |  |                  |             
|Non Cash Investing and Financing Activities                                    |  |                  |             
|Acquisition of other personal property in settlement of loans                  |  |                  | 135         



See Notes to Consolidated Condensed Financial Statements.

Page 3

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Table of Contents

UNITED FINANCIAL CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)



|1. | GENERAL
|-- | -------



United Financial Corp. (United, the Company, we, our or us) is a bank holding company headquartered in Great Falls, Montana, with operations in 15 locations in 13 Montana communities. We were organized as a Minnesota corporation in 1996. We conduct our banking business in Montana through our 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. 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 50% of our 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 our 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 our telephone number is (406) 727-6106.



You can access Uniteds periodic and current reports, free of charge, on our 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 our website are not a part of this report or of our 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, our 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. Our operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that we anticipate for the year ending December 31, 2006. For additional information, you should refer to the consolidated audited financial statements and related footnotes included in our 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 June 30, 2005 financial information to conform to the June 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 Ended
June 30,
        
        Six Months Ended
June 30,2006
        
        2005
        
        2006
        
        2005Net income
        
        $
        1,134
        
        1,005
        
        2,065
        
        1,873Unrealized and realized holding gains (losses) arising during period
        
        
        (216
        )
        153
        
        (331
        )
        (74
        )Less: reclassification adjustment for gains included in net income,  net of tax
        
        
        
        
        
        
        
        
        Net unrealized gains (losses) on securities available for sale, net of tax
        
        
        (216
        )
        153
        
        (331
        )
        (74
        )Total comprehensive income
        
        $
        918
        
        1,158
        
        1,734
        
        1,799






|4. | COMPUTATION OF EARNINGS PER SHARE
|-- | ---------------------------------



United calculates basic earnings per share (EPS) 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 sum of 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 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 Ended
        
        Six Months EndedJune 30,
        
        June 30,2006
        
        2005
        
        2006
        
        2005Weighted average shares outstanding during the period on which basic earnings per share is calculated
        
        3,073
        
        3,059
        
        3,072
        
        3,055Add: incremental shares under stock option plans
        
        75
        
        86
        
        76
        
        88Average outstanding shares on which diluted earnings per share is calculated
        
        3,148
        
        3,145
        
        3,148
        
        3,143Net income applicable to common stockholders, basic and diluted
        $
        1,134
        
        1,005
        
        2,065
        
        1,873Basic earnings per share
        $
        .37
        
        .33
        
        .67
        
        .61Diluted earnings per share
        $
        .36
        
        .32
        
        .66
        
        .60


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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 $.2 million for the six month periods ended June 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 June 30, 2006 were $3.3 million and $12.8 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 EVENT-DIVIDENDS DECLARED
|-- | -----------------------------------



On July 25, 2006, Uniteds Board of Directors declared a quarterly cash dividend of $.23 per share, payable September 1, 2006, to shareholders of record on August 18, 2006.



|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.

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.

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(In thousands, except per share data)(Unaudited)
        
        Three Months Ended
June 30,
        
        Six Months Ended
June 30,2005
        
        2005Net income:   As reported
        
        $
        1,005
        
        1,873Deduct:   Total stock-based employee compensation expense determined under fair value based
method for all awards, net of related tax effects (1)
        
        
        (4
        )
        (8
        )Pro forma net income
        
        $
        1,001
        
        1,865Earnings per share:Basic - as reported
        
        $
        .33
        
        .61Basic - pro forma
        
        $
        .33
        
        .61Diluted - as reported
        
        $
        .32
        
        .60Diluted - pro forma
        
        $
        .32
        
        .60




(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 six months ended June 30, 2006 are $21,118 and $19,448 lower, respectively, than if we had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for the six months ended June 30, 2006 would have been $.68 and $.66, respectively, if United had not adopted SFAS 123 (R), compared to reported basic and diluted earnings per share of $.67 and $.66, 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 $10,337 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 $21,118 for the six months ended June 30, 2006. The total related income tax benefit recognized was $1,670 for the six months ended June 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 June 30, 2006, 54,088 shares of common stock were available for grant under the plan.



| | The following table presents the activity related to options under the plan for the six months ended June 30, 2006.
| | -------------------------------------------------------------------------------------------------------------------



|                                       |  | Shares Actual |   | Weighted-Average Exercise Price |       | Weighted-Average Remaining Term (in years) |      | AggregateIntrinsic Value |  
|-------------------------------------- |  | ------------- | - | ------------------------------- | ----- | ------------------------------------------ | ---- | ------------------------ | -
|Options Outstanding at January 1, 2006 |  | 208,578       |   | $                               | 11.99 |                                            |      |                          |  
|Granted                                |  |              |   |                                 |      |                                            |      |                          |  
|Exercised                              |  | (3,143        | ) |                                 | 9.19  |                                            |      |                          |  
|Forfeited or Expired                   |  | (3,164        | ) |                                 | 15.50 |                                            |      |                          |  
|Outstanding at June 30, 2006           |  | 202,271       |   | $                               | 11.98 |                                            | 6.06 |                          | $
|                                      
|Exercisable at June 30, 2006           |  | 164,230       |   | $                               | 10.14 |                                            | 6.06 |                          | $



No options were granted during the six months ended June 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 six months ended June 30, 2006 and 2005 was $40,802 and $153,209, respectively.

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Cash received from option exercises for the six months ended June 30, 2006 and 2005 was $28,886 and $133,518, respectively. The amount of excess tax benefits received for these options exercised for the six months ended June 30, 2006 and 2005 was $10,337 and $20,087, respectively.



United issues new shares to satisfy option exercises.



At June 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 us 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 our accounting method for securities available-for-sale to be a critical accounting policy. We carry 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.





|9. | RECENTLY ISSUED ACCOUNTING STANDARD
|-- | -----------------------------------



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.

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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.
|-- | ---------------------------



| | Our executive level management consider the following to be key performance indicators for United.
| | --------------------------------------------------------------------------------------------------



|                                          |  |   | June 30, 2006 |   | December 31, 2005 | 
|----------------------------------------- |  | - | ------------- | - | ----------------- | 
|Capital ratios (Bank holding company):    |  |   |               |   |                   | 
|Tier 1 leverage ratio                     |  |   | 8.38          | % | 8.71              | 
|Tier 1 risk-based capital ratio           |  |   | 9.74          | % | 10.18             | 
|Total risk-based capital ratio            |  |   | 10.85         | % | 11.26             | 
|Allowance for loan losses to loans        |  |   | 1.13          | % | 1.19              | 
|Nonperforming loans to total loans        |  |   |              |   |                  | 
|Book value per share                      |  | $ | 10.52         |   | 10.41             | 
|                                          |  |   |               |   |                   | 
|(In Thousands)                            |  |   |               |   |                   | 
|Loans receivable and held for sale, gross |  | $ | 344,106       |   | 319,650           | 
|Allowance for loan losses                 |  | $ | 3,904         |   | 3,751             | 
|Nonperforming loans                       |  | $ |              |   | 30                | 
|Total assets                              |  | $ | 412,562       |   | 389,547           | 
|Total deposits                            |  | $ | 314,071       |   | 303,691           | 
|Net loans to deposits                     |  |   | 105.8         | % | 104.0             | 





Three Months Ended
        
        Six Months EndedJune 30,2006
        
        June 30,2005
        
        June 30,2006
        
        June 30,2005Net earnings:Return on average assets
        
        
        1.11
        %
        1.12
        
        1.03
        
        1.06Return on average common equity
        
        
        14.14
        %
        13.11
        
        12.87
        
        12.28Net interest margin
        
        
        3.88
        %
        4.05
        
        3.86
        
        4.02Earnings per share-basic
        
        $
        .37
        
        .33
        
        .67
        
        .61Earnings per share-diluted
        
        $
        .36
        
        .32
        
        .66
        
        .60Dividends per share
        
        $
        .23
        
        .22
        
        .46
        
        .44Non Financial:Full-time employees
        
        
        125
        
        125
        
        125
        
        125New deposit accounts
        
        
        1,404
        
        1,281
        
        3,160
        
        2,599Closed or reissued deposit accounts
        
        
        1,157
        
        910
        
        2,254
        
        1,911Full service branches
        
        
        13
        
        13
        
        13
        
        13ATMs
        
        
        10
        
        9
        
        10
        
        9


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



(In Thousands)
        
        Selected Financial Condition DataJune 30, 2006
        
        December 31, 2005
        
        $
Change
        
        %
ChangeCash and cash equivalents
        
        $
        13,191
        
        19,127
        
        (5,936
        )
        (31.0
        )Securities available-for-sale
        
        
        39,469
        
        35,359
        
        4,110
        
        11.6Restricted stock, at cost
        
        
        4,228
        
        4,228
        
        
        
        Loans held for sale
        
        
        8,027
        
        3,902
        
        4,125
        
        105.7Loans receivable, net
        
        
        332,175
        
        311,997
        
        20,178
        
        6.5Premises and equipment, net
        
        
        8,553
        
        8,518
        
        35
        
        .4Goodwill
        
        
        1,422
        
        1,422
        
        
        
        All other assets
        
        
        5,497
        
        4,994
        
        503
        
        10.1Total assets
        
        
        412,562
        
        389,547
        
        23,015
        
        5.9Deposits
        
        
        314,071
        
        303,691
        
        10,380
        
        3.4Federal Home Loan Bank Advances
        
        
        51,669
        
        42,044
        
        9,625
        
        22.9Securities sold under agreements to repurchase
        
        
        6,397
        
        4,248
        
        2,149
        
        50.6Subordinated debt
        
        
        3,093
        
        3,093
        
        
        
        All other liabilities
        
        
        4,975
        
        4,493
        
        482
        
        10.7Total liabilities
        
        
        380,205
        
        357,569
        
        22,636
        
        6.3Stockholders equity, net
        
        
        32,357
        
        31,978
        
        379
        
        1.2




Total assets Total assets increased $23.0 million to $412.5 million at June 30, 2006 from $389.5 million at December 31, 2005. Assets increased primarily because of a net increase in loans receivable and loans held for sale of $24.3 million.



Cash and cash equivalents Cash used in investing activities, primarily funding new loans receivable and purchasing securities available for sale, net of proceeds from principal repayments on securities, totaled approximately $25.3 million for the six months ended June 30, 2006. Cash provided by financing activities, primarily funds obtained from the increase in deposits and the net increase in Federal Home Loan Bank advances totaled approximately $20.8 million for that same time period. The remaining $1.4 million decrease in cash and cash equivalents resulted from operating activities. Overall, cash and cash equivalents decreased $5.9 million from $19.1 million at December 31, 2005 to $13.2 million at June 30, 2006.



Securities available-for-sale Securities available-for-sale increased $4.1 million to $39.5 million at June 30, 2006 from $35.4 million at December 31, 2005. The net increase was the result of $9.0 million of purchases partially offset by $4.3 million of principal repayments. We incurred unrealized losses on securities available-for-sale of $.6 million, before income taxes, for the six months ended June 30, 2006.

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We summarize loans receivable, net of unamortized net deferred loan fees, as of June 30, 2006 and December 31, 2005, in the following table:



|(In thousands)                                            |  |   |              |   |                  |  
|--------------------------------------------------------- |  | - | ------------ | - | ---------------- | -
|                                                          |  |   | June 30,2006 |   | December 31,2005 |  
|First mortgage loans and contracts secured by real estate |  | $ | 136,174      |   | 114,303          |  
|Commercial real estate loans                              |  |   | 73,965       |   | 79,036           |  
|Commercial loans                                          |  |   | 64,392       |   | 65,576           |  
|Agricultural loans                                        |  |   | 17,565       |   | 16,578           |  
|Consumer Loans                                            |  |   | 43,983       |   | 40,255           |  
|                                                          |  |   | 336,079      |   | 315,748          |  
|Allowance for loan losses                                 |  |   | (3,904       | ) | (3,751           | )
|                                                          |  | $ | 332,175      |   | 311,997          |  



Allowance for loan losses for the periods indicated are:



|(In thousands)               |  |   | Six Months Ended |   | Year Ended        |  
|---------------------------- |  | - | ---------------- | - | ----------------- | -
|                             |  |   | June 30, 2006    |   | December 31, 2005 |  
|Balance, beginning of period |  | $ | 3,751            |   | 3,708             |  
|Provision for loan losses    |  |   | 175              |   | 230               |  
|Losses charged off           |  |   | (40              | ) | (217              | )
|Recoveries                   |  |   | 18               |   | 30                |  
|Balance, end of period       |  | $ | 3,904            |   | 3,751             |  





Loans Receivable and Loans Held for Sale Net loans receivable increased by $20.2 million to $332.2 million at June 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 consists of a $21.9 million increase in first mortgage loans and contracts secured by real estate, a $3.7 million increase in consumer loans and a $1.0 million decrease in agricultural loans. These increases were offset by a $5.0 million decrease in commercial real estate loans, a $1.2 million decrease in commercial loans and a $.2 million increase in the allowance for loan losses.



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 $30.7 million and $32.6 million of participation and purchased loans as of June 30, 2006 and December 31, 2005, respectively. The $30.7 million balance at June 30, 2006 includes loan participation balances outstanding with Central Bank of $3.3 million and $12.8 million 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 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 six months ended June 30, 2006, loans held for sale increased $4.1 million to $8.0 million at June 30, 2006 from $3.9 million at December 31, 2005. We originated for sale $81.6 million of residential real estate loans, and we sold $77.5 million of residential real estate loans to the secondary market during the six month period ending June 30, 2006.



Allowance for Loan Losses The allowance for loan losses increased $.2 million to $3.9 million at June 30, 2006 as compared to $3.7 million at December 31, 2005. The increase resulted from loan provisions of $.2 million for the six months ended June 30, 2006. Management believes the allowance for loan losses at June 30, 2006 was adequate given the relatively low level of non-performing assets and managements assessment of loan risk. The allowance for loan losses to total loans at June 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 June 30, 2006 as compared to December 31, 2005.



|(In thousands)                   |  |   |              |  |                       |   |         |  |                       | 
|-------------------------------- |  | - | ------------ |  | --------------------- | - | ------- |  | --------------------- | 
|                                 |  |   | June 30,2006 |  | December 31,2005      |  
|                                 |  |   | Balance      |  | % of TotalBank Assets |   | Balance |  | % of TotalBank Assets | 
|Non-accrual loans                |  | $ |             |  |                      | % |        |  |                      | 
|90 days past due                 |  |   |             |  |                      |   | .1      |  | .02                   | 
|Assets classified as loss        |  |   |             |  |                      |   |        |  |                      | 
|Assets classified as doubtful    |  |   |             |  |                      |   |        |  |                      | 
|Assets classified as substandard |  |   | .3           |  | .1                    |   | .3      |  | .1                    | 
|Impaired                         |  |   | .3           |  | .1                    |   | .3      |  | .1                    | 





Deposits Deposits increased by $10.4 million to $314.1 million at June 30, 2006 from $303.7 million at December 31, 2005. The increase in demand accounts and decrease in NOW and money market accounts and savings accounts from December 31, 2005 to June 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. Also, brokered deposits increased $2.1 million to $20.4 million at June 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 June 30, 2006 and December 31, 2005, by types and amounts.



|(In thousands)                |  |   |              |  |                  |   |         |  |       | 
|----------------------------- |  | - | ------------ |  | ---------------- | - | ------- |  | ----- | 
|                              |  |   | June 30,2006 |  | December 31,2005 |  
|Demand accounts               |  | $ | 58,412       |  | 18.6             | % | 56,642  |  | 18.7  | 
|NOW and money market accounts |  |   | 31,115       |  | 9.9              |   | 33,914  |  | 11.2  | 
|Savings accounts              |  |   | 50,443       |  | 16.1             |   | 51,472  |  | 16.9  | 
|Certificate of deposits       |  |   | 174,101      |  | 55.4             |   | 161,663 |  | 53.2  | 
|                              |  | $ | 314,071      |  | 100.0            | % | 303,691 |  | 100.0 | 



Borrowed Funds Federal Home Loan Bank advances increased $9.6 million from $42.0 million at December 31, 2005 to $51.6 million at June 30, 2006. The increase of $9.6 million consists of $57.2 million in advances and $47.6 million in repayments. Securities sold under agreements to repurchase increased $2.1 million to $6.4 million at June 30, 2006 from $4.3 million at December 31, 2005.



Stockholders Equity Stockholders equity totaled $32.4 million at June 30, 2006, up $.4 million from $32.0 million at December 31, 2005. Stockholders equity activity during the second quarter included $2.1 million of net income less cash dividends declared of $1.4 million, and less a $.3 million decrease due to increases in unrealized losses on investments available-for-sale.

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



(In thousands)
        
        Selected Income Statement DataThree Months Ended June 30,2006
        
        2005
        
        $ Change
        
        % ChangeInterest income
        
        $
        6,440
        
        5,040
        
        1,400
        
        27.8
        %Interest expense
        
        
        2,760
        
        1,657
        
        1,103
        
        66.6Net interest income
        
        
        3,680
        
        3,383
        
        297
        
        8.8Provision for losses on loans
        
        
        100
        
        50
        
        50
        
        100.0Net interest income after provision for losses on loans
        
        
        3,580
        
        3,333
        
        247
        
        7.4Non-interest income
        
        
        1,212
        
        1,207
        
        5
        
        .4Non-interest expense
        
        
        2,961
        
        2,920
        
        41
        
        1.4Income before income taxes
        
        
        1,831
        
        1,620
        
        211
        
        13.0Income taxes
        
        
        697
        
        615
        
        82
        
        13.4Net income
        
        $
        1,134
        
        1,005
        
        129
        
        12.8
        %




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 $.3 million to $3.7 million for the three months ended June 30, 2006 from $3.4 million for the three months ended June 30, 2005. Net interest margin decreased .17% to 3.88% for the three months ended June 30, 2006 from 4.05% for the three months ended June 30, 2005. Net interest spread decreased .36% to 3.32% for the three months ended June 30, 2006 from 3.68% for the three months ended June 30, 2005.



Interest Income The $1.4 million increase reported above in interest income was attributable to loan interest income. Average balances of loans for the three months ended June 30, 2006 increased $44.6 million as compared to average balances for the same period in 2005. Likewise, weighted average interest rates on loans have increased at June 30, 2006 to 6.88%, up .74% from 6.14% at June 30, 2005.



Interest Expense Interest expense increased $1.1 million to $2.8 million for the three months ended June 30, 2006 from $1.7 million for the three months ended June 30, 2005. The average balance of interest bearing deposits increased $44.3 million and higher interest rates resulted in an increase in interest expense on deposits of $1.0 million during the three months ended June 30, 2006 compared to the same period in 2005. Average interest yields on interest bearing deposits were 3.23% and 2.03% for the three months ended June 30, 2006 and 2005, respectively.



Provision for Loan Losses We provided $.1 million for loan losses in both the three months ended June 30, 2006 and 2005. Asset quality at Heritage Bank has remained strong. Heritage Banks non-performing loans, defined as 90 days past due and non-accrual loans, totaled 0% and .02% of total loans at June 30, 2006 and 2005, respectively.



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 our 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 Heritage Bank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.



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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 $1.2 million for the three months ended June 30, 2006 and 2005.



Heritage Banks loan demand has been consistent in the residential real estate refinancing market, during the three months ended June 30, 2006 as compared to the same period in 2005, as mortgage interest rates have stabilized. Gain on sale of loans was $.9 million for each of the three months ending June 30, 2006 and 2005.



|5. | MATERIAL CHANGES IN RESULTS OF OPERATIONSCOMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2006 AND JUNE 30, 2005.
|-- | -------------------------------------------------------------------------------------------------------------



Selected Income Statement Data
Six Months Ended June 30,2006
        
        2005
        
        $ Change
        
        % ChangeInterest income
        
        $
        12,292
        
        9,658
        
        2,634
        
        27.3Interest expense
        
        
        5,139
        
        3,084
        
        2,055
        
        66.6Net interest income
        
        
        7,153
        
        6,574
        
        579
        
        8.8Provision for losses on loans
        
        
        175
        
        50
        
        125
        
        250.0Net interest income after provision for losses on loans
        
        
        6,978
        
        6,524
        
        454
        
        7.0Non-interest income
        
        
        2,233
        
        2,127
        
        106
        
        5.0Non-interest expense
        
        
        5,882
        
        5,637
        
        245
        
        4.4Income before income taxes
        
        
        3,329
        
        3,014
        
        315
        
        10.4Income taxes
        
        
        1,264
        
        1,141
        
        123
        
        10.8Net Income
        
        $
        2,065
        
        1,873
        
        192
        
        10.2




Net Interest Income- Net interest income increased $.6 million to $7.2 million for the six months ended June 30, 2006 from $6.6 million for the six months ended June 30, 2005. Net interest margin decreased .16% to 3.86% for the six months ended June 30, 2006 from 4.02% for the same period last year. Net interest-rate spread decreased .64% to 3.33% for the six months ended June 30, 2006 from 3.97% for the same period last year.



Interest Income -The $2.6 million increase reported above in interest income was attributable to loan interest income. Average balances of loans for the six months ended June 30, 2006 increased $45.6 million as compared to average balances for the same period in 2005. Likewise, weighted average interest rates on loans have increase at June 30, 2006 to 6.88%, up .74% from 6.14% at June 30, 2005.



Interest Expense- Interest expense increased $2.0 million to $5.1 million for the six months ended June 30, 2006 from $3.1 million for the six months ended June 30, 2005. The average balance of interest bearing deposits increased $42.5 million and higher interest rates resulted in an increase in interest expense on deposits of $1.9 million during the six months ended June 30, 2006 compared to the same period in 2005. Average interest yields on interest bearing deposits were 3.07% and 1.91% for the six months ended June 30, 2006 and 2005, respectively.



Provision for Loan Losses -We provided $.2 million for loan losses for the six months ended June 30, 2006 and $.1 million for the same period in 2005.



Non-interest Income- Non-interest income was $2.2 million for the six months ended June 30, 2006 compared to $2.1 million in the same period in 2005.



Non-interest Expense- Our non-interest expense increased $.2 million during the six months ended June 30, 2006 as compared to the same period in 2005, 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 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.



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.

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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 $413 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 June 30, 2006, Heritage Bank met all regulatory capital adequacy requirements to which it is subject.



Heritage Bank
        
        
        Actual
        
        Minimum capitalrequirements to bewell capitalized(In thousands)
        
        
        Amount
        
        Ratio
        
        Amount
        
        RatioJune 30, 2006:Total risk-based capital
        
        $
        36,141
        
        10.23
        %
        35,325
        
        10.0Tier I risk-based capital
        
        
        32,237
        
        9.13
        
        21,195
        
        6.0Tier I leverage
        
        
        32,237
        
        7.89
        
        20,419
        
        5.0






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 its 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 institution 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. 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.

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The following table summarizes the sensitivity analysis for Heritage Bank as of March 31, 2006, the most recent information available. Management believes there has been no material change in interest rate risk since March 31, 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 decreasein net interest income: |  | Interest RateChange+200 bp |          | Interest RateChange-200 bp |  
|------------------------------------------------------ |  | -------------------------- | -------- | -------------------------- | -
|                                                       |  |                            |          |                            |  
|0-90 days                                              |  | $                          | 23,882   |                            | $
|91-360 days                                            |  |                            | (115,983 | )                          |  
|2 years                                                |  |                            | (213,486 | )                          |  
|3 years                                                |  |                            | (218,404 | )                          |  





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 first quarter that have materially affected, or is 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 is involved in any material pending litigation as of June 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 SECURITY HOLDERS.



On May 23, 2006, United Financial Corp. held its Annual Meeting of Shareholders. The shareholders elected the two directors listed below to serve three year terms expiring in 2009. The continuing directors, J. William Bloemendaal, William L. Madison and Kenneth R Murray are currently serving three year terms which expire in 2007.



The shareholders of United Financial Corp. voted as follows with respect to:



|               | FOR       | WITHHELD
|-------------- | --------- | --------
|Kurt R. Weise  | 2,806,413 | 27,399  
|Kevin P. Clark | 2,824,450 | 9,362   



ITEM 5  OTHER INFORMATION.



None



ITEM 6  EXHIBITS.



|A. | Exhibits
|-- | --------



| | 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.
| | ---- | ---------------------------------------------------------------------------------------------------

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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 | August 10, 2006 |  | /s/  Kevin P. Clark                                                                             
|---- | --------------- |  | ------------------------------------------------------------------------------------------------
|     |                 |  | Kevin P. Clark
Chief Executive Officer
(Duly Authorized Officer and
Principal Executive Officer)







|Date | August 10, 2006 |  | /s/  Paula J. Delaney                                                                
|---- | --------------- |  | -------------------------------------------------------------------------------------
|     |                 |  | Paula J. Delaney
Chief Financial Officer
(Principal Financial and Accounting Officer)

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