SPECIAL FINANCIAL REPORT
                                         CONTAINS ONLY FINANCIAL STATEMENTS FOR
                                         THE THREE YEARS ENDED DECEMBER 31, 1996


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                            ------------------------

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                                       OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1996       Commission File No.: 333-15067

                        UNITED COMMUNITY BANCSHARES, INC.
             (Exact name of Registrant as specified in its charter)

          Minnesota                                        41-1380239
(State or other jurisdiction of             (IRS Employer Identification Number)
incorporation or organization)

                        2600 Eagan Woods Drive, Suite 155
                             Eagan, Minnesota 55121
                    (Address of principal executive offices)

               Registrant's telephone number, including area code:
                                 (612) 552-2828
                            ------------------------

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [ ] No [ X ]

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

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
Registrant  as of March 10, 1997 was  approximately  $37,759,485  based upon the
December  31,  1996  financial  results and the  formula  transfer  price of the
Registrant's Common Stock under Article 7 of the Registrant's Bylaws.

Shares of $.01 par value Common  Stock  outstanding  at March 10, 1997:  
610,148 shares.




<PAGE>
                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
United Community Bancshares, Inc.
    and Subsidiaries
Eagan, Minnesota

We have audited the accompanying consolidated balance sheets of United Community
Bancshares,  Inc. and  Subsidiaries  as of December  31, 1996 and 1995,  and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the  years  ended  December  31,  1996,  1995,  and  1994.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of United Community
Bancshares,  Inc. and  Subsidiaries  as of December  31, 1996 and 1995,  and the
results of their  operations  and their cash flows for the years ended  December
31, 1996,  1995,  and 1994, in conformity  with  generally  accepted  accounting
principles.




                                                  /s/ McGladrey & Pullen, LLP
St. Paul, Minnesota                                  McGLADREY & PULLEN, LLP
February 19, 1997
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                          December 31
                                                               ----------------------------------
ASSETS                                                              1996              1995
-------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>            
Cash and due from banks                                        $    27,774,060   $    20,513,154
Federal funds sold                                                  15,725,000         8,725,000
Investment securities available for sale                           102,360,467       101,836,962

Loans and leases                                                   286,204,870       265,904,636
Allowance for loan and lease losses                                 (3,168,098)       (2,899,165)
                                                               ----------------------------------
                   Net loans and leases                            283,036,772       263,005,471
                                                               ----------------------------------

Property and equipment, net                                         11,630,681        10,654,578
Accrued interest receivable                                          3,369,793         3,180,346
Cash surrender value of life insurance                               9,577,434         9,116,888
Intangible assets, net                                               3,516,113         4,188,801
Other assets                                                         2,147,453           619,375
                                                               ----------------------------------
                   Total assets                                $   459,137,773   $   421,840,575
                                                               ==================================

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
     Deposits                                                  $   372,792,254   $   340,723,249
     Securities sold under repurchase agreements                    21,797,343        23,173,292
     Accrued expenses and other liabilities                          6,165,548         5,213,321
     Notes payable and other borrowings                             17,516,476        15,762,119
                                                               ----------------------------------
                   Total liabilities                               418,271,621       384,871,981
                                                               ----------------------------------

Commitments, Contingencies, and Credit Risk

Common Stock Owned by Employee Stock 
   Ownership Plan Participants
     Par value $0.01 per share; 67,948 
     and 65,798 shares held (Note 1)                                 7,360,127         6,123,162
                                                               ----------------------------------

Stockholders' Equity
     Common stock, par value $0.01 per share; 
         5,000,000 shares authorized; 476,271 
         and 478,952 shares issued                                       4,763             4,790
     Additional paid-in capital                                     17,525,797        17,808,360
     Retained earnings                                              15,579,526        12,419,736
     Unrealized gain on securities available for sale                  395,939           612,546
                                                               ----------------------------------
                                                                    33,506,025        30,845,432
                                                               ----------------------------------
         Total liabilities and stockholders' equity            $   459,137,773   $   421,840,575
                                                               ==================================
</TABLE>

                See Notes to Consolidated Financial Statements.

<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                Year Ended December 31
                                                     ---------------------------------------------
                                                         1996           1995            1994
--------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>             <C>
Interest income:
   Loans and leases                                  $  27,005,660  $  25,089,584   $  21,004,079
   Investment securities--taxable                        5,605,725      4,949,453       3,843,603
   Investment securities--tax exempt                       533,932        405,726         343,892
   Federal funds sold                                      567,430        760,820         324,871
                                                     ---------------------------------------------
          Total interest income                         33,712,747     31,205,583      25,516,445
                                                     ---------------------------------------------

Interest expense:
   Deposits                                             11,770,388     10,438,601       7,529,696
   Federal funds purchased and securities
     sold under repurchase agreements                    1,273,169      1,453,699         841,693
   Notes payable and other borrowings                    1,041,962        955,752         788,064
                                                     ---------------------------------------------
          Total interest expense                        14,085,519     12,848,052       9,159,453
                                                     ---------------------------------------------

          Net interest income                           19,627,228     18,357,531      16,356,992

Provision for loan and lease losses                        594,977         60,999         234,454
                                                     ---------------------------------------------
          Net interest income after provision 
            for loan and lease losses                   19,032,251     18,296,532      16,122,538
                                                     ---------------------------------------------

Noninterest income:
   Service charges and other fees                        3,378,801      2,922,664       2,962,662
   Net investment securities gains (losses)                      -        (32,329)         79,351
   Other                                                 1,391,201      1,028,650         795,321
                                                     ---------------------------------------------
          Total noninterest income                       4,770,002      3,918,985       3,837,334
                                                     ---------------------------------------------

Noninterest expense:
   Salaries and employee benefits                       10,194,267      9,291,893       8,510,365
   Occupancy                                               843,966      1,208,300       1,060,089
   Depreciation                                          1,534,614      1,252,682       1,215,848
   Amortization of intangibles                             827,696        824,140         561,882
   FDIC assessment                                           4,000        350,856         643,845
   Other                                                 4,244,603      3,603,063       4,139,114
                                                     ---------------------------------------------
          Total noninterest expense                     17,649,146     16,530,934      16,131,143
                                                     ---------------------------------------------

          Income before income taxes                     6,153,107      5,684,583       3,828,729

Income tax expense                                       1,956,431      2,055,552       1,395,772
                                                     ---------------------------------------------
          Net income                                 $   4,196,676  $   3,629,031   $   2,432,957
                                                     =============================================

Average shares outstanding                                 548,777        520,160         504,540
Earnings per share                                   $        7.65  $        6.98   $        4.82
Dividends per share                                              -              -               -

See Notes to Consolidated Financial Statements.

</TABLE>

<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995, and 1994

<TABLE>
<CAPTION>
                                                                                                 Unrealized
                                                                  Additional                     Gain (Loss)
                                              Common Stock         Paid-In                       on Securities
                                 ----------------------------------------------   Retained       Available
                                    Shares         Par Value       Capital        Earnings       for Sale          Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>       <C>             <C>             <C>              <C>           <C>          
Balance, December 31, 1993             260,951   $     260,951   $   2,536,797   $   8,069,684    $         -   $  10,867,432
   Change in par value from $1.00 to
     $0.01 per share                         -        (258,341)        258,341               -              -               -
   Net income                                -               -               -       2,432,957              -       2,432,957
   Common stock issued:
     For acquisition of GCFC           138,067           1,381       8,851,475               -              -       8,852,856
     In stock offering                  61,504             615       4,181,657               -              -       4,182,272
   Increase in stock owned by ESOP
     participants                      (21,900)           (219)     (1,404,009)              -              -      (1,404,228)
   Net change in fair value of stock
     owned by ESOP participants              -               -               -        (749,311)             -        (749,311)
   Net change in unrealized loss on
     securities available for sale           -               -               -               -     (1,652,626)     (1,652,626)
                                 ---------------------------------------------------------------------------------------------
Balance, December 31, 1994             438,622           4,387      14,424,261       9,753,330     (1,652,626)     22,529,352
   Net income                                -               -               -       3,629,031              -       3,629,031
   Common stock issued                  44,010             440       3,692,229               -              -       3,692,669
   Common stock repurchased             (1,577)            (16)       (143,213)              -              -        (143,229)
   Increase in stock owned by ESOP
     participants                       (2,103)            (21)       (164,917)              -              -        (164,938)
   Net change in fair value of stock
     owned by ESOP participants              -               -               -        (962,625)             -        (962,625)
   Net change in unrealized gain on
     securities available for sale           -               -               -               -      2,265,172       2,265,172
                                 ---------------------------------------------------------------------------------------------
Balance, December 31, 1995             478,952           4,790      17,808,360      12,419,736        612,546      30,845,432
   Net income                                -               -               -       4,196,676              -       4,196,676
   Common stock issued                   2,467              25         226,418               -              -         226,443
   Common stock repurchased             (2,998)            (30)       (310,193)              -              -        (310,223)
   Increase in stock owned by ESOP
     participants                       (2,150)            (22)       (200,057)              -              -        (200,079)
   Net change in fair value of stock
     owned by ESOP participants              -               -               -      (1,036,886)             -      (1,036,886)
   Net change in unrealized gain on
     securities available for sale           -               -               -               -       (216,607)       (216,607)
   Tax effect of stock options exercised     -               -           1,269               -              -           1,269
                                 ---------------------------------------------------------------------------------------------
Balance, December 31, 1996             476,271   $       4,763   $  17,525,797   $  15,579,526  $     395,939   $  33,506,025
                                 =============================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>

UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS                   
<TABLE>
<CAPTION>

                                                                             Year Ended December 31
                                                      ---------------------------------------------------------------------
                                                                             1996             1995              1994
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>               <C>
Cash Flows From Operating Activities
     Net income                                                         $     4,196,676  $     3,629,031   $     2,432,957
     Adjustments to reconcile net income to net cash
         flows from operating activities:
         Net investment securities (gains) losses                                     -           32,329           (79,351)
         Net amortization and accretion of bond premiums
            and discounts                                                      (216,918)        (310,582)          222,538
         Provision for loan and lease losses                                    594,977           60,999           234,454
         Depreciation                                                         1,534,614        1,252,682         1,215,848
         Amortization of intangibles                                            827,696          824,140           561,882
         Earnings on cash surrender value of life insurance                    (401,165)        (377,103)         (462,453)
         Net gain on sale of loans                                             (439,624)        (485,626)         (195,048)
         Net gain on sale of other real estate                                  (79,991)         (63,247)          (67,674)
         Net (gain) loss on sale of property and equipment                       22,723          (49,923)          (70,718)
         Provision for deferred income taxes                                   (367,435)          24,950          (232,134)
         Other, net                                                            (252,680)         912,636          (244,419)
                                                                        ---------------------------------------------------
                   Net cash flows from operating activities                   5,418,873        5,450,286         3,315,882
                                                                        ---------------------------------------------------

Cash Flows Used for Investing Activities
     Net increase in federal funds sold                                      (7,000,000)        (750,000)       (2,525,000)
     Net cash flows used for investment securities                             (672,770)     (14,396,539)       (3,859,963)
     Net increase in loans and leases                                       (20,312,331)     (18,513,417)      (26,999,676)
     Purchases of property and equipment                                     (2,610,980)      (1,028,111)       (2,350,262)
     Proceeds from sales of property and equipment                               32,600          117,349           409,934
     Proceeds from sales of other real estate owned                              79,991          327,160         1,116,100
     Purchase of cash surrender value of life insurance                         (59,381)        (254,300)         (156,450)
     Acquisition of other assets                                                      -                -        (1,500,000)
     Cash paid, net of cash acquired upon purchase of
         subsidiaries                                                                 -                -        (3,032,859)
                                                                        ---------------------------------------------------
                   Net cash flows used for investing activities             (30,542,871)     (34,497,858)      (38,898,176)
                                                                        ---------------------------------------------------
</TABLE>

                                                       (Continued)



<PAGE>

UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>

                                                                             Year Ended December 31
                                                      ---------------------------------------------------------------------
                                                                             1996             1995              1994
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>               <C>
Cash Flows From Financing Activities
     Net increase in deposits                                                32,088,157       27,879,916        21,791,336
     Net increase (decrease) in securities sold under
         repurchase agreements                                               (1,375,949)      (4,573,273)       12,421,478
     Proceeds from notes payable and other borrowings                         3,839,476        9,003,000         9,532,420
     Payments made on notes payable and other borrowings                     (2,083,000)      (5,650,000)       (1,084,420)
     Proceeds from issuance of common stock                                     226,443        3,692,669         4,182,272
     Repurchase of common stock                                                (310,223)        (143,229)                -
                                                                        ---------------------------------------------------
                   Net cash flows from financing activities                  32,384,904       30,209,083        46,843,086
                                                                        ---------------------------------------------------

                   Net increase in cash and cash equivalents                  7,260,906        1,161,511        11,260,792

Cash and Cash Equivalents
     Beginning                                                               20,513,154       19,351,643         8,090,851
                                                                        ---------------------------------------------------
     Ending                                                             $    27,774,060  $    20,513,154   $    19,351,643
                                                                        ===================================================
</TABLE>

See Notes to Consolidated Financial Statements 
(Additional Cash Flow Information - Note 15).





<PAGE>

UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies

Organization:  United Community Bancshares,  Inc. and its subsidiaries provide a
full  range of  financial  services.  The  accompanying  consolidated  financial
statements  include the accounts of United  Community  Bancshares,  Inc. and its
wholly-owned  subsidiaries,  Signal Bank, Inc. (Signal), Goodhue County National
Bank (GCNB),  Consumers Credit  Corporation  (CCC), and Unitech  Services,  Inc.
(Unitech).  These entities are  collectively  referred to herein as the Company.
All significant  intercompany  balances and transactions have been eliminated in
consolidation.

Basis  of  financial  statement  presentation  and  accounting  estimates:   The
consolidated   financial  statements  have  been  prepared  in  conformity  with
generally accepted accounting principles. In preparing the financial statements,
management  is  required  to make  estimates  and  assumptions  that  affect the
reported  amounts of assets and liabilities as of the dates of the balance sheet
and revenues and expenses for the years then ended.  Actual results could differ
from those estimates.

Cash, cash  equivalents,  and cash flows:  For purposes of reporting cash flows,
cash and cash equivalents includes cash on hand and amounts due from banks. Cash
flows from loans,  federal funds  purchased and sold,  deposits,  and securities
sold under repurchase agreements are reported net.

Investment  securities:  The Company  accounts  for debt and  marketable  equity
securities  in  accordance  with  Financial  Accounting  Standards  Board (FASB)
Statement  No. 115.  This  statement  requires  that  management  determine  the
appropriate  classification of securities at the date of adoption and thereafter
as each individual  security is acquired.  In addition,  the  appropriateness of
such   classification   is   reassessed   at  each  balance   sheet  date.   The
classifications and related accounting policies under FASB Statement No. 115 are
as follows:

Held-to-maturity securities: Securities classified as held-to-maturity are those
debt  securities the Company has both the intent and ability to hold to maturity
regardless  of  changes in market  conditions,  liquidity  needs,  or changes in
general economic  conditions.  These securities are carried at cost adjusted for
amortization  of premiums and accretion of  discounts,  computed by the interest
method over their contractual lives.

Available-for-sale  securities:  Securities classified as available-for-sale are
those debt securities that the Company intends to hold for an indefinite  period
of time,  but not  necessarily  to  maturity.  Any  decision  to sell a security
classified as  available-for-sale  would be based on various factors,  including
significant  movements  in interest  rates,  changes in the  maturity mix of the
Company's  assets  and  liabilities,   liquidity   needs,   regulatory   capital
considerations,  and other similar  factors.  Securities  available for sale are
carried at fair value.  Unrealized gains or losses,  net of the related deferred
tax effect,  are reported as increases  or  decreases in  stockholders'  equity.
Realized  gains or  losses,  determined  on the  basis  of the cost of  specific
securities sold, are included in earnings.

Loans and  allowance  for loan losses:  Loans are stated at the amount of unpaid
principal, reduced by an allowance for loan losses.

<PAGE>




Note 1.     Summary of Significant Accounting Policies (Continued)

The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management  believes  that  collectibility  of the  principal is  unlikely.  The
allowance  is an amount  that  management  believes  will be  adequate to absorb
estimated  losses on  existing  loans  that may become  uncollectible,  based on
evaluation of the  collectibility of loans and prior loan loss experience.  This
evaluation also takes into  consideration  such factors as changes in the nature
and volume of the loan portfolio,  overall portfolio quality, review of specific
problem loans,  and current  economic  conditions that may affect the borrower's
ability to pay. While management uses the best information available to make its
evaluation,  future  adjustments  to the allowance may be necessary if there are
significant changes in economic conditions.

On January 1, 1995, the Company  adopted FASB  Statement No. 114,  Accounting by
Creditors for  Impairment of a Loan.  Statement No. 114 has been amended by FASB
Statement  No. 118,  Accounting by Creditors  for  Impairment of a  Loan--Income
Recognition and  Disclosures.  Statement No. 114, as amended,  defines a loan as
impaired when it is probable the Company will be unable to collect all principal
and interest  payments due in accordance  with the terms of the loan  agreement.
The  statement  further  requires  that the  impairment  of loans that have been
separately  identified  for evaluation be measured based on the present value of
expected future cash flows or, alternatively, the observable market price of the
loans or the fair value of the  collateral.  However,  for those  loans that are
collateral  dependent  (that is, if  repayment  of those loans is expected to be
provided  solely by the  underlying  collateral)  and for which  management  has
determined  foreclosure is probable, the measure of impairment of those loans is
to be  based on the  fair  value  of the  collateral.  The  effect  of  adopting
Statement No. 114 was not significant to the Company.

Interest on loans is  recognized  over the terms of the loans and is  calculated
using the simple-interest method on principal amounts outstanding.  For impaired
loans,  accrual of interest is discontinued on a loan when management  believes,
after  considering  collection  efforts and other  factors,  that the borrower's
financial  condition  is such that  collection  of  interest is  doubtful.  Cash
collections on impaired loans are credited to the loan receivable  balance,  and
no interest income is recognized on those loans until the principal  balance has
been collected.

Loan origination, commitment, and other fees and costs incurred to extend credit
are not  significant  and are recorded in the income  statement when received or
incurred.

Property  and  equipment:  Property  and  equipment  are  stated  at  cost  less
accumulated depreciation and amortization.  Depreciation is provided principally
by the  straight-line  method  over the  estimated  useful  lives of the assets.
Leasehold improvements are amortized over the terms of the respective leases.

Cash surrender  value of life  insurance:  The Company  maintains life insurance
contracts which are informally related to certain deferred compensation,  salary
continuation,  and key executive  life  insurance  agreements  with officers and
directors of the Company.  The Company's  investment in cash surrender  value of
life  insurance  is  recorded  at the  amount  that can be  realized  under  the
insurance contracts.


<PAGE>




Note 1.     Summary of Significant Accounting Policies (Continued)

Intangible  assets:  Intangible  assets  include  costs in excess of net  assets
acquired and certain covenants not to compete, resulting from the acquisition of
Goodhue County  Financial  Corporation  (GCFC) on January 1, 1994, and a deposit
base premium  resulting from the acquisition of certain  branches in 1988. These
intangible assets are being amortized over the expected period of benefit from 3
to 15 years.

Other real estate owned: Real estate acquired through foreclosure or insubstance
foreclosure  is recorded  in other  assets at the lower of cost or fair value of
the  asset  less the  estimated  costs to sell the  asset.  When a  property  is
acquired,  any excess of the recorded loan balance over its estimated fair value
is charged  against the allowance for loan losses.  Any  subsequent  declines in
fair value and operating  expenses are recorded in other  expenses.  Property is
evaluated  regularly  to ensure that the  recorded  amount is  supported  by its
current fair value.

Income  taxes:  The Company  files a  consolidated  federal and a unitary  state
income tax return.  Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary  differences
and operating loss or tax credit  carryforwards and deferred tax liabilities are
recognized for taxable  temporary  differences.  Temporary  differences  are the
differences  between the amounts of assets and  liabilities  recorded for income
tax and  financial  reporting  purposes.  Deferred  tax assets are  reduced by a
valuation  allowance when management  determines that it is more likely than not
that some  portion  or all of the  deferred  tax  assets  will not be  realized.
Deferred tax assets and  liabilities  are adjusted for the effects of changes in
tax laws and rates on the date of enactment.

Earnings per share:  Earnings  per share data is computed  based on the weighted
average  number of shares  outstanding.  Pursuant  to  Securities  and  Exchange
Commission Staff  Accounting  Bulletin No. 83, stock issued and to be issued for
consideration below the initial public offering price during the 12-month period
preceding the date of the initial filing of the registration  statement has been
included in the calculation of shares  outstanding,  as if they were outstanding
for all periods presented up through the date of the initial public offering.

Employee benefit plans:

Employee stock ownership plan: The Company provides a  noncontributory  employee
stock ownership plan (ESOP) covering  substantially all employees eligible as to
age and length of service.  The amount of the  contribution to the ESOP trust is
determined  annually at the  discretion  of the Board of Directors  and complies
with the requirements of the plan agreement.

<PAGE>




Note 1.     Summary of Significant Accounting Policies (Continued)

Under the terms of the ESOP,  participants who have terminated may elect to have
their  distributions  made in cash,  United  common  stock,  or  both.  If stock
distributed  under  the plan to a  participant  is not  readily  tradable  on an
established  market,  the  participant  has the option to require the Company to
purchase the stock  distributed.  This put option must be  exercised  within six
months of receiving  the stock or by March 31  following  the end of the initial
six-month period. If the put options are not exercised within these periods, the
put options expire.

The  Securities  and Exchange  Commission's  Accounting  Series  Release No. 268
requires  that  to  the  extent  there  are  conditions   (regardless  of  their
probability of occurrence)  whereby holders of equity securities may demand cash
in exchange for their securities,  the Company must reflect the maximum possible
cash requirements  related to those securities outside of stockholders'  equity.
Accordingly, the common stock owned by the ESOP participants is reflected on the
accompanying balance sheet at its fair value.

401(k) profit  sharing plan:  The Company also provides a 401(k) profit  sharing
plan which covers  substantially all of the Company's employees who are eligible
as to age and length of service.  A participant may elect to make  contributions
of up to 15 percent of the participant's annual compensation.  The Company makes
a matching contribution of 50 percent of each participant's contribution,  up to
a maximum matching  contribution of 2 1/2 percent of  compensation.  The Company
also may make a discretionary profit sharing contribution determined annually by
the Board of Directors.

Interest swap: The Company engages in interest rate swap  transactions to manage
its interest rate risk.  Income or expense on swaps is recorded as an adjustment
to interest income or expense.

Fair value of financial  instruments:  FASB Statement No. 107, Disclosures About
Fair  Value  of  Financial  Instruments,   requires  disclosure  of  fair  value
information  about  financial  instruments,  whether  or not  recognized  in the
balance  sheet,  for which it is  practicable  to estimate that value.  In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Fair value estimates are made
at  a  specific  point  in  time,  based  on  relevant  market  information  and
information about the financial instruments.  These estimates do not reflect any
premium or discount  that could  result from  offering  for sale at one time the
Company's  entire  holdings of a  particular  financial  instrument.  Because no
market exists for a significant portion of the Company's financial  instruments,
fair value  estimates  are based on judgments  regarding  future  expected  loss
experience,   current  economic  conditions,  risk  characteristics  of  various
financial  instruments,  and other  factors.  These  estimates are subjective in
nature and  involve  uncertainties  and  matters of  significant  judgment  and,
therefore,  cannot be determined  with precision.  Changes in assumptions  could
significantly affect the estimates.  In addition,  the tax ramifications related
to the  realization  of the  unrealized  gains can have a significant  effect on
market  value  estimates  and have not been  considered  in the  estimates.  The
derived  fair  value  estimates   cannot  be   substantiated  by  comparison  to
independent  markets  and,  in many cases,  could not be  realized in  immediate
settlement  of the  instruments.  Statement No. 107 excludes  certain  financial
instruments and all nonfinancial instruments from its disclosure requirements.


<PAGE>




Note 1.     Summary of Significant Accounting Policies (Continued)

Accordingly,  the aggregate  fair value  amounts  presented do not represent the
underlying value of the Company.

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

Cash and due from  banks:  Fair value of cash and due from banks is based on the
carrying value reported on the consolidated balance sheets.

Federal  funds sold:  Fair value of federal  funds sold is based on the carrying
value reported on the consolidated balance sheets.

Investment securities: Fair values for all securities are based on quoted market
prices, where available. If quoted market prices are not available,  fair values
are based on quoted market prices of comparable instruments.

Loans: For variable-rate loans that reprice frequently and that have experienced
no significant  change in credit risk, fair values are based on carrying values.
Fair values for all other loans are estimated  based on  discounted  cash flows,
using  interest  rates  currently  being offered for loans with similar terms to
borrowers with similar credit quality.

Cash surrender  value of life  insurance:  Fair value of cash surrender value of
life  insurance  is based on the  carrying  value  reported on the  consolidated
balance sheets.

Deposits:  Fair values of demand,  savings,  and NOW  accounts  are based on the
carrying values  reported on the  consolidated  balance sheets.  Fair values for
fixed-rate  certificates  of deposit are estimated  using a discounted cash flow
calculation  that applies interest rates currently being offered on certificates
of deposit of similar remaining maturities.

Securities sold under repurchase agreements: Fair value of securities sold under
repurchase   agreements  is  based  on  the  carrying   value  reported  on  the
consolidated balance sheets.

Notes  payable and other  borrowings:  Fair values of  variable-rate,  long-term
borrowings are based on carrying values. Fair value of fixed-rate long-term debt
is estimated by discounting the future cash flows using interest rates currently
being offered on debt of similar remaining maturity.

Accrued  interest  receivable and payable:  Fair values of both accrued interest
receivable  and  payable  are  based  on the  carrying  values  reported  on the
consolidated balance sheets.

Off-balance sheet financial  instruments:  Fair value of interest rate swaps are
based on quoted market  prices.  Loan  commitments  and standby letter of credit
fees are not  material.  As such,  there are no  carrying  amounts or fair value
disclosures related to these financial instruments.

<PAGE>




Note 1.     Summary of Significant Accounting Policies (Continued)

Emerging  accounting  standards:  The Financial  Accounting  Standards Board has
issued  Statement No. 125,  Accounting  for Transfers and Servicing of Financial
Assets  and   Extinguishment   of  Liabilities,   which  becomes  effective  for
transactions  occurring  after  December 31, 1996. The statement does not permit
earlier or retroactive  application.  The statement  distinguishes  transfers of
financial  assets that are sales from transfers that are secured  borrowings.  A
transfer of financial  assets in which the  transferor  surrenders  control over
those assets is accounted for as a sale to the extent that  consideration  other
than beneficial interests in the transferred assets is received in exchange. The
statement also establishes  standards on the initial recognition and measurement
of servicing assets and other retained interests and servicing liabilities,  and
their subsequent measurement.

The  statement  requires that debtors  reclassify  financial  assets  pledged as
collateral and that secured parties  recognize those assets and their obligation
to return them in certain  circumstances  in which the  secured  party has taken
control of those assets. In addition, the statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally  released from being the primary  obligor under
the liability, either judicially or by the creditor.

Management  does not believe the application of the statement to transactions of
the  Company  that have been  typical  in the past will  materially  affect  the
Company's financial position and results of operations.


Note 2.   Restrictions on Cash and Cash Equivalents

The subsidiary  banks are required to maintain reserve  balances,  in cash or on
deposit with the Federal Reserve Bank, based upon a percentage of deposits.  The
total  required  reserve  balances  as of  December  31,  1996  and  1995,  were
approximately $2,552,000 and $3,092,000, respectively.


Note 3.   Investment Securities Available for Sale

Summary of securities:
<TABLE>
<CAPTION>

                                                                     December 31, 1996
                                           -----------------------------------------------------------------
                                                                  Gross             Gross
                                              Amortized        Unrealized        Unrealized          Fair
                                                 Cost             Gains            Losses           Value
------------------------------------------------------------------------------------------------------------
<S>                                        <C>                <C>               <C>             <C>     
U.S. Treasury securities                   $ 22,520,520       $ 122,736         $ (21,069)      $ 22,622,187
U.S. government corporations and
   agencies                                   2,785,647         283,092           (63,169)        33,005,570
Obligations of states and political
   subdivisions                              13,721,452         359,927           (23,614)        14,057,765
Mortgage-backed securities                   30,592,462         120,561          (112,828)        30,600,195
Corporate equity securities                   2,074,750            --                --            2,074,750
                                           -----------------------------------------------------------------
                                           $101,694,831       $ 886,316         $(220,680)      $102,360,467
                                           =================================================================
</TABLE>


<PAGE>




Note 3.     Investment Securities Available for Sale (Continued)
<TABLE>
<CAPTION>

                                                                     December 31, 1995
                                           ------------------------------------------------------------------
                                                                  Gross             Gross
                                              Amortized        Unrealized        Unrealized          Fair
                                                 Cost             Gains            Losses           Value
-------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>                <C>              <C>             
U.S. Treasury securities                   $ 29,648,393      $  293,400         $ (100,502)      $ 29,841,291
U.S. government corporations and
   agencies                                  29,745,481         548,338              --            30,293,819
Obligations of states and political
   subdivisions                               7,592,217         184,799            (20,400)         7,756,616
Mortgage-backed securities                   31,836,062         209,427            (88,903)        31,956,586
Corporate equity securities                   1,988,650           --                 --             1,988,650
                                           ------------------------------------------------------------------
                                           $100,810,803      $1,235,964         $ (209,805)      $101,836,962
                                           ------------------------------------------------------------------
</TABLE>


Contractual maturities:
<TABLE>
<CAPTION>

                                                                          --------------------------------
                                                                                 December 31, 1996
                                                                          --------------------------------
                                                                               Amortized        Fair
                                                                                 Cost          Value
-----------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                <C>              
Due in one year or less                                                   $   20,439,514     $  20,447,098
Due after one year through five years                                         34,217,673        34,517,497
Due after five years through ten years                                         9,600,645         9,824,148
Due after ten years                                                            4,769,787         4,896,779
                                                                          ---------------------------------
                                                                              69,027,619        69,685,522

Mortgage-backed securities                                                    30,592,462        30,600,195
Corporate equity securities                                                    2,074,750         2,074,750
                                                                          ---------------------------------
                                                                          $  101,694,831 $     102,360,467
                                                                          =================================

</TABLE>

Anticipated   maturities   on   mortgage-backed   securities   are  not  readily
determinable  since they may be prepaid without  penalty,  and corporate  equity
securities do not have stated maturity dates.

Realized gains and losses:

                                           Year Ended December 31
                                  ---------------------------------------------
                                   1996                1995               1994
-------------------------------------------------------------------------------
Gross gains                       $   --           $ 40,980           $ 88,146
Gross losses                          --            (73,309)           ( 8,795)
                                  ---------------------------------------------
                                  $   --           $(32,329)          $ 79,351
                                  =============================================


Pledged  securities:  Investment  securities  available for sale with a carrying
value  of   $64,939,888   and   $74,161,604  at  December  31,  1996  and  1995,
respectively,  were pledged to secure public  deposits and for other purposes as
required or permitted by law.

<PAGE>
Note 3.     Investment Securities Available for Sale (Continued)

Changes in the net  unrealized  gain  (loss) on  securities  available  for sale
included in equity:
<TABLE>
<CAPTION>
                                                                       Year Ended December 31
                                                     -----------------------------------------------------------
                                                             1996                1995               1994
----------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>                    <C>
Balance, beginning                                   $ 612,546           $ (1,652,626)          $      --
 Initial unrealized gain on date of adoption of
      Statement No. 115, net of related deferred
         tax effect                                       --                    --                  121,767
  Unrealized gain (loss) during the year, net         (360,522)             3,792,056            (2,970,444)
  Deferred tax effect related to unrealized
         gain (loss)                                   143,915             (1,526,884)            1,196,051
                                                     -----------------------------------------------------------
Balance, ending                                      $ 395,939           $    612,546           $(1,652,626)
                                                     ===========================================================

</TABLE>


Note 4.     Loans and Leases
Composition of loans and leases:
<TABLE>
<CAPTION>

                                                                                    December 31
                                                                          ---------------------------------
                                                                                1996               1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                <C>               
Commercial                                                                 $  79,060,956      $ 70,543,465
Commercial real estate                                                        68,377,044        62,730,992
Agricultural                                                                  11,008,655        10,582,438
Agricultural real estate                                                       9,411,587         6,002,566
                                                                          ---------------------------------
Total commercial and agricultural                                            167,858,242       149,859,461

Residential real estate                                                       67,570,045        69,576,597
Consumer                                                                      38,567,732        35,896,609
Leases                                                                        13,915,002        12,119,437
Less unearned income                                                          (1,706,151)       (1,547,468)
                                                                          ---------------------------------
                                                                             286,204,870       265,904,636

Less allowance for loan and lease losses                                      (3,168,098)       (2,899,165)
                                                                          ---------------------------------
Net loans and leases                                                       $ 283,036,772      $263,005,471
                                                                          =================================
</TABLE>


Allowance for loan and lease losses:
<TABLE>
<CAPTION>

                                                                    Year Ended December 31
                                                     -----------------------------------------------
                                                          1996               1995            1994
----------------------------------------------------------------------------------------------------
<S>                                                   <C>                <C>             <C>        
Balance, beginning                                    $ 2,899,165        $ 2,856,288     $ 1,500,870
  Provision charged to operations                         594,977             60,999         234,454
  Loans charged off                                      (762,837)          (337,079)       (447,987)
  Recoveries                                              436,793            318,957         345,020
  Allowance for loan losses acquired                        --                 --          1,223,931
                                                     -----------------------------------------------
Balance, ending                                       $ 3,168,098        $ 2,899,165     $ 2,856,288
                                                     ===============================================

</TABLE>

Impaired loans: The Company had no material  impaired loans at December 31, 1996
and 1995.
<PAGE>

Note 5. Property and Equipment
                                                           December 31
                                                ------------------------------
                                                     1996               1995
------------------------------------------------------------------------------
Land                                             $  1,474,391     $  1,474,391
Buildings and improvements                          9,674,752        8,080,458
Equipment                                           9,924,246        8,924,949
Leasehold improvements                              1,433,719        1,458,058
                                                ------------------------------
                                                   22,507,108       19,937,856

Less accumulated depreciation and amortization     10,876,427        9,283,278
                                                ------------------------------
Property and equipment, net                      $ 11,630,681     $ 10,654,578
                                                ==============================



Note 6.  Deposits
                                                         December 31
                                           ------------------------------------
                                                 1996               1995
-------------------------------------------------------------------------------
Noninterest-bearing demand deposits          $   80,146,030    $   70,871,849
NOW and money market accounts                   158,406,180       114,066,189
Savings deposits                                 27,640,755        47,735,468
Time certificates, $100,000 or more              14,605,809        14,090,029
Other time deposits                              91,993,480        93,959,714
                                             --------------------------------
Total                                        $  372,792,254    $  340,723,249
                                             ================================


At December 31, 1996, the scheduled maturities of time deposits are as follows:

1997                                                      $ 62,893,580
1998                                                        30,913,794
1999                                                         6,395,957
2000                                                         4,263,972
2001 and thereafter                                          2,131,986
                                                          ------------
                                                          $106,599,289
                                                          ============


Note 7.  Notes Payable and Other Borrowings

Notes payable:

                                                             December 31
                                                    ---------------------------
                                                      1996               1995
-------------------------------------------------------------------------------
Term note payable to a bank,  interest at LIBOR 
  plus 1.8% (7.43% at December 31, 1996), due
  January 3, 1999, with annual installments of
  $500,000, secured by all the common stock of
  Signal, GCNB, and CCC                              $ 3,150,000    $ 3,400,000

Term note payable to a bank, interest at prime
  (8.25% at December 31, 1996), due
  May 1, 1997, secured by the loans of CCC             1,400,000         --
<PAGE>

Note 7.  Notes Payable and Other Borrowings (Continued)

                                                               December 31
                                                     --------------------------
                                                      1996               1995
-------------------------------------------------------------------------------

Advances from the Federal Home Loan Bank of 
  Des Moines,  principal due between May 12,
  1997 and June 5, 1998, plus interest payable
  monthly at rates between 5.67% and 6.61%,
  secured by blanket pledge agreements totaling
  $38,847,000 of residential real estate mortgage
  loans                                               12,000,000     12,000,000

Unsecured term notes payable to certain  individuals,
  interest varies from 6.0% to 9.0%, payable 
  semiannually, notes had original maturities of
  three years                                            277,000        362,119

Unsecured note payable to Minnesota Department of
  Agriculture, noninterest-bearing, due 
  November 30, 2015                                      289,476            --
                                                     --------------------------
Total                                               $ 17,116,476    $15,762,119
                                                     ==========================



The term note payable to a bank includes certain covenants including maintenance
of certain ratios, including capital to assets and average return on assets.

Future annual maturities:

Year ending December 31:
 1997                                     $   8,045,000
 1998                                         6,598,000
 1999                                         2,184,000
 2015                                           289,476
                                          -------------
                                          $  17,116,476
                                          =============


Line  of  credit:  The  Company  has an  open  line of  credit  with a bank  for
$2,000,000.  The agreement has an expiration  date of April 3, 1997. The line of
credit has a balance of $400,000 as of December 31, 1996.  Borrowings under this
line of credit are secured by all the common stock of Signal, GCNB, and CCC.


Note 8.  Income Taxes
The cumulative tax effects of the primary temporary differences are shown in the
following table:

                                                              December 31
                                                     --------------------------
                                                       1996              1995
-------------------------------------------------------------------------------
Deferred tax assets:
   Loan loss allowances                              $  777,021      $  666,351
   Deferred compensation accruals                       517,862         403,326
   Amortization of intangible assets                    161,638          47,061
   Other                                                 38,386            --
                                                     --------------------------
Total deferred tax assets                             1,494,907       1,116,738
                                                     --------------------------
<PAGE>

Note 8.  Income Taxes (Continued)

                                                               December 31
                                                       ------------------------
                                                        1996            1995
-------------------------------------------------------------------------------
Deferred tax liabilities:
   Property and equipment                            (168,456)       (233,031)
   Acquisition adjustment                            (747,787)       (808,250)
   Unrealized gain on securities available for sale  (269,698)       (413,613)
   Other                                             (536,530)       (400,758)
                                                   ----------------------------
Total deferred tax liabilities                     (1,722,471)     (1,855,652)
                                                   ----------------------------
Net deferred tax liabilities                      $  (227,564)    $  (738,914)
                                                   ============================


The Company evaluated the available  evidence  supporting the realization of its
deferred  tax assets and  determined  it is more likely than not that the assets
will be realized.

The provision for income taxes charged to operations consists of the following:

                                              Year Ended December 31
                                    -----------------------------------------
                                       1996           1995           1994
-----------------------------------------------------------------------------
Current tax expense                 $ 2,323,866   $ 2,030,602    $ 1,627,906
Deferred tax expense (benefit)         (367,435)       24,950       (232,134)
                                    -----------------------------------------
                                    $ 1,956,431   $ 2,055,552    $ 1,395,772
                                    =========================================


The income tax  provision  differs from the amount of income tax  determined  by
applying the U.S. federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>

                                                                   Year Ended December 31
                                                    -----------------------------------------------------
                                                          1996              1995                1994
---------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>                 <C>               
Computed "expected" tax expense                      $ 2,153,587         $ 1,989,604         $ 1,340,055
Increase (decrease) in income taxes
   resulting from:
   State income taxes, net of federal tax benefit        385,467             355,473             245,489 
   Tax-exempt interest income (net of
      disallowed expenses)                              (398,133)           (354,330)           (324,612)
   Intangible asset amortization                          76,821              76,821              76,821
   Other                                                (261,311)            (12,016)             58,019
                                                     ----------------------------------------------------
                                                     $ 1,956,431         $ 2,055,552         $ 1,395,772
                                                     ====================================================
</TABLE>


Included in other tax expense above for 1996 are refunds received from the state
of Minnesota from the settlement of a class action lawsuit.  The refunds reduced
tax expense (net of federal income taxes) by approximately $174,000.

<PAGE>


Note 9.  Commitments, Contingencies, and Credit Risk

Financial  instruments  with  off-balance  sheet  risk:  The Company is party to
financial  instruments  with  off-balance  sheet  risk in the  normal  course of
business  to  meet  the  financing  needs  of  its  customers.  These  financial
instruments  include commitments to extend credit and standby letters of credit.
They involve,  to varying degrees,  elements of credit risk in excess of amounts
recognized on the consolidated balance sheets.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other parties to the financial  instruments for these commitments is represented
by the contractual amounts of the instruments.  The Company uses the same credit
policies in making  commitments  as it does for  on-balance  sheet  instruments.
These commitments were as follows:

                                                           December 31
                                                  -----------------------------
                                                     1996               1995
-------------------------------------------------------------------------------
Commitments to extend credit                      $ 29,751,000     $ 21,224,000
Standby letters of credit                            2,465,000        2,976,000
                                                  -----------------------------
                                                  $ 32,216,000     $ 24,200,000
                                                  =============================


Commitments  to extend  credit:  Commitments  to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract.  Since many of the  commitments  are expected to expire without
being drawn upon,  the total  commitment  amounts do not  necessarily  represent
future cash requirements. The Company evaluates each customer's creditworthiness
on a case-by-case  basis.  If deemed  necessary  upon  extension of credit,  the
amount of collateral  obtained is based on management's credit evaluation of the
party.  Collateral held varies, but may include accounts receivable,  inventory,
equipment, and real estate.

Standby letters of credit: Standby letters of credit are conditional commitments
issued by the  Company to  guarantee  the  performance  of a customer to a third
party.  Those  guarantees  are  primarily  issued to support  public and private
borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Collateral held varies as specified above and is required in instances which the
Company deems necessary.

<PAGE>




Note 9.     Commitments, Contingencies, and Credit Risk (Continued)

Interest rate swaps:  Interest rate swaps  involve the  contractual  exchange of
fixed  and  floating  rate  interest  payment  obligations  based on a  notional
principal amount. The Company enters into interest rate swap contracts to manage
interest rate risk caused by  fluctuations  in interest  rates.  At December 31,
1996 and 1995,  interest rate swaps totaling  $4,480,000 hedged the note payable
to a bank and a commercial  loan.  Activity  with respect to interest  rate swap
contracts was as follows:

                                                             December 31
                                                    ---------------------------
                                                       1996               1995
-------------------------------------------------------------------------------
Notional amount outstanding at beginning of year    $ 4,480,000    $ 7,000,000
  Additions                                               --         1,480,000
  Terminations                                            --        (4,000,000)
                                                    ---------------------------
Notional amount outstanding at end of year          $ 4,480,000    $ 4,480,000
                                                    ===========================

Unrealized gain (loss)                              $    26,855    $   (30,172)
                                                    ===========================


The Company is a receiver of  floating-rate  interest and a payer of  fixed-rate
interest.  The weighted average interest rate paid was 5.56 and 5.45 percent and
the weighted  average  interest rate  received was 5.64 and 6.13 percent  during
1996 and 1995, respectively. The swaps terminate in January 1999.

Interest rate swap contracts  will result in gains and losses  subsequent to the
date of the contract, due to interest rate movements.  The Company amortizes the
gain or loss on terminated  contracts over the original life of the hedge if the
hedged item remains  outstanding.  There were no unamortized  gains or losses at
December 31, 1996.

Lease  commitments:  At December  31,  1996,  the Company  was  obligated  under
noncancelable leases for office space, with terms including renewal options from
three to five  years.  The  following  is a schedule  of future  minimum  rental
payments under the noncancelable operating leases:

Year ending December 31:
     1997                                     $  206,439
     1998                                        209,972
     1999                                        169,349
     2000                                         85,000
     2001                                           --
                                              -----------
                                              $  670,760
                                              ===========


Total rent  expense  under these  leases for the years ended  December 31, 1996,
1995, and 1994, was $291,038, $241,527, and $184,384, respectively.

Financial  instruments with  concentrations  of credit risk: The Banks originate
loans  to  customers  who are  primarily  located  in the  Minneapolis-St.  Paul
seven-county  metropolitan  area and Goodhue  County.  Although  the Banks' loan
portfolios are diversified, a substantial portion of their borrowers' ability to
repay their loans is dependent on the economic strength of these areas.

<PAGE>




Note 10.       Benefit Plans

Employee  stock  ownership  plan:  Contributions  to  the  plan  were  $342,564,
$309,362, and $199,208 in 1996, 1995, and 1994, respectively.

401(k) profit sharing plan:  Contributions to the plan were $134,587,  $127,143,
and $311,726, in 1996, 1995, and 1994, respectively.


Note 11.       Stock Option Plan

In April 1994, the Company's  Board of Directors  approved the 1994 Stock Option
Plan,  which  authorizes  the issuance of up to 100,000  shares of the Company's
common stock to key  employees  and  directors of the Company.  The plan extends
through April 30, 2004. The plan provides for the granting of nonqualified stock
options and incentive stock options to employees and directors in order for them
to purchase  common stock of the Company at 100 percent of the repurchase  price
on the dates of grant.

Under the plan, options become exercisable over a five-year period beginning one
year after  date of grant and expire ten years from date of grant.  There are no
charges  or  credits  to income in  connection  with the  grant or  exercise  of
options.  Compensation  cost based on the grant  date fair value of awards  (the
method  described in FASB No. 123) was not material in either 1996 or 1995.  The
approximate weighted average contractual  remaining life of the options is eight
years. The number and exercise price of options under this plan were as follows:

                                  Outstanding       Exercisable   Exercise Price
                                    Options           Options        per Share
                                  ----------------------------------------------
December 31, 1994                    27,500                0    $     73.46
                                                   ==========
  Options granted February 1, 1995   21,333                           79.80
  Options canceled                   (1,440)                      73.46 - 79.80
                                    -------                   ------------------
December 31, 1995                    47,393            5,500      73.46 - 79.80
                                                   ==========
  Options granted February 1, 1996   22,133                           94.20
  Options exercised                    (160)                          73.46
                                    -------                   ------------------
December 31, 1996                    69,366           14,787    $ 73.46 - 94.20
                                    =======        ========== ==================


Note 12.     Common Stock Repurchase Agreement

Article 7 of the Company's  bylaws grants the Company the option to purchase the
shares of common stock held by a  stockholder  or his estate in the event of the
stockholder's  death,  insolvency,  or desire to sell or transfer shares. If the
Company does not exercise its option to purchase the available  shares within 60
days,  the other  stockholders  may  acquire the shares in  proportion  to their
ownership  of the Company.  The  Company's  Employee  Stock  Ownership  Plan may
acquire all remaining shares of stock not purchased by other stockholders.

<PAGE>




Note 12.    Common Stock Repurchase Agreement (Continued)

The repurchase price of common stock shall be equal to one hundred fifty percent
(150%) of the adjusted  consolidated tangible book value of the Company plus one
hundred percent (100%) of the intangible  assets recorded  divided by the number
of shares outstanding.  Adjusted  consolidated tangible book value is defined to
include all equity  accounts of the Company but shall not include any cumulative
unrealized  gain or loss on investment  securities  available for sale, less the
intangible  assets  recorded.  The per share repurchase price as of December 31,
1996, was $108.32.


Note 13.      Loans and Other Transactions With Related Parties

Stockholders  of the  Company,  and  officers  and  directors,  including  their
families and companies of which they are principal owners,  are considered to be
related  parties.  These related  parties were loan  customers of, and had other
transactions  with,  the  Company  in  the  ordinary  course  of  business.   In
management's  opinion,  these loans and  transactions  were on the same terms as
those for comparable loans and transactions with nonrelated parties. Total loans
to related  parties were  approximately  $10,035,052 and $11,902,788 at December
31, 1996 and 1995,  respectively.  Activity with respect to related-party  loans
was as follows:

Balance, December 31, 1995               $ 11,902,788
   New loans advanced                       4,780,358
   Repayments                               6,648,094
                                         ------------
Balance, December 31, 1996               $ 10,035,052
                                         ============


Note 14.    Regulatory Capital Requirements

The  Company's  subsidiary  banks are  subject  to  various  regulatory  capital
requirements  administered  by the Banks'  primary  federal  regulatory  agency.
Failure to meet minimum capital  requirements can initiate certain mandatory and
possibly  additional  discretionary  actions by regulators  that, if undertaken,
could have a direct  material  effect on the  Company's  consolidated  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt corrective  action,  the Banks must meet specific capital guidelines that
involve  quantitative  measures of assets and certain off-balance sheet items as
calculated under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company's  subsidiary banks to maintain minimum ratios (set forth in
the table below) of total risk-based  capital,  Tier I risk-based  capital,  and
Tier I  leverage.  Management  believes,  as of  December  31,  1996,  that  the
Company's subsidiary banks meet all capital adequacy  requirements to which they
are subject.

<PAGE>




Note 14.    Regulatory Capital Requirement (Continued)

Below is a comparison of the Company's and the Company's  subsidiary banks' 1996
actual ratios with the minimum  requirements for well capitalized and adequately
capitalized  banks,  as  defined  by the  federal  regulatory  agencies'  Prompt
Corrective   Action  Rules  (both  subsidiary  banks  were  classified  as  well
capitalized at December 31, 1996):

                                                   For Capital Adequacy Purposes
                                                   -----------------------------
                                            Actual        Well       Adequately
                                             Ratio     Capitalized   Capitalized
--------------------------------------------------------------------------------
As of December 31, 1996:
  Total risk-based capital (to
    risk-weighted assets):
    Consolidated                             14.23%        10.0%         8.0%
    Signal Bank, Inc.                        15.00%        10.0%         8.0%
    Goodhue County National Bank             13.26%        10.0%         8.0%
  Tier I capital (to risk-weighted assets):
    Consolidated                             13.11%         6.0%         4.0%
    Signal Bank, Inc.                        13.75%         6.0%         4.0%
    Goodhue County National Bank             12.31%         6.0%         4.0%
  Leverage ratio:
    Consolidated                              8.66%         5.0%         3.0%
    Signal Bank, Inc.                         8.80%         5.0%         4.0%
    Goodhue County National Bank              7.98%         5.0%         4.0%


Note 15.       Additional Cash Flow Information
<TABLE>
<CAPTION>

                                                                   Year Ended December 31
                                                     --------------------------------------------
                                                         1996            1995           1994
-------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>             <C>
Net Cash Flows Used for Investment Securities:

 Available-for-sale securities:
         Maturities                                  $ 44,651,839   $ 47,854,796    $ 13,974,815
         Sales                                              --         7,666,148       7,985,749
         Purchases                                    (45,324,609)   (70,933,314)    (24,072,986)
         Held-to-maturity securities:
         Maturities                                         --         1,232,302       3,484,667
         Purchases                                          --          (216,471)     (5,232,208)
                                                     --------------------------------------------
 Net cash flows used for investment securities       $   (672,770)  $(14,396,539)   $ (3,859,963)
                                                     ============================================

</TABLE>

<PAGE>

Note 15. Additional Cash Flow Information (Continued)
<TABLE>
<CAPTION>

                                                               Year Ended December 31
                                                     --------------------------------------------
                                                          1996           1995            1994
-------------------------------------------------------------------------------------------------

<S>                                                   <C>            <C>             <C>
Supplemental Disclosures of Cash Flow
         Information:
         Cash payments for interest                   $ 14,186,611   $ 12,260,709    $  8,753,626
         Cash payments for income taxes                  2,844,000      1,884,820       2,216,337
                                                     ============================================

Supplemental Schedule of Noncash Investing and
Financing Activities:
         Securities held for investment reclassified to:
         Held-to-maturity securities                  $      --      $     --        $ 11,447,407
         Available-for-sale securities                       --            --          71,162,630
    Held-to-maturity securities transferred to
             available-for-sale                              --        11,972,456           --
    Net change in unrealized gain (loss) on
             securities available-for-sale                (216,607)     2,265,172      (1,652,626)
    Other real estate acquired in settlement of loans        --            --             221,258
                                                     ============================================


Acquisition of Subsidiaries:
  Fair value of assets acquired, principally 
    customer loans, investments, property
    and equipment, and cost in excess of net
    assets acquired, excluding net cash acquired      $      --      $     --        $166,762,616
  Fair value of deposits and other liabilities
    assumed                                                  --            --        (154,876,901)
  Common stock issued for acquisition of GCFC                --            --          (8,852,856)
                                                     --------------------------------------------
Net cash paid                                                --            --           3,032,859
Cash acquired                                                --            --           6,231,125
                                                     --------------------------------------------
Cash paid                                             $      --      $     --        $  9,263,984
                                                     ============================================

</TABLE>

<PAGE>




Note 16.       Fair Values of Financial Instruments

The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>

                                                                      December 31
                                        -----------------------------------------------------------------
                                                       1996                                  1995
                                        -------------------------------       ---------------------------
                                            Carrying            Fair              Carrying       Fair
                                             Amount            Value               Amount       Value
---------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>                <C>            <C>
Financial assets:
  Cash and due from banks                 $ 27,774,060    $  27,774,060      $ 20,513,154   $ 20,513,154
  Federal funds sold                        15,725,000       15,725,000         8,725,000      8,725,000
  Investment securities available
     for sale                              102,360,467      102,360,467       101,836,962    101,836,962
  Loans and leases                         286,204,870      284,047,870       265,904,636    265,669,636
  Less allowance for loan and lease
     losses                                 (3,168,098)         --             (2,899,165)        --
  Accrued interest receivable                3,369,793        3,369,793         3,180,346      3,180,346
  Cash surrender value of life
     insurance                               9,577,434        9,577,434         9,116,888      9,116,888
Financial liabilities:
  Deposits                                 372,792,254      373,282,254       340,723,249    341,692,249
  Securities sold under repurchase
     agreements                             21,797,343       21,835,343        23,173,292     23,173,292
  Accrued interest payable                   2,062,464        2,062,464         2,163,556      2,163,556
  Notes payable and other
     borrowings                             17,516,476       17,462,415        15,762,119     15,801,470
Off-balance sheet financial
     instruments:
  Interest rate swaps in a net gain
     (loss) position                             --              26,855             --           (30,172)

</TABLE>


<PAGE>




Note 17.       Parent Company Financial Information

Condensed financial  information for United Community  Bancshares,  Inc. (parent
company only) follows:
<TABLE>
<CAPTION>

                            CONDENSED BALANCE SHEETS

                                                    December 31
                                            --------------------------
                                                  1996         1995
----------------------------------------------------------------------
<S>                                          <C>          <C>
Assets:
  Cash and due from banks                    $    73,623  $   112,503
  Advances to nonbank subsidiaries               950,000      600,000
  Property and equipment, net                    180,368      215,098
  Accrued interest receivable                      9,049        3,548
  Cash surrender value of life insurance         768,940      696,709
  Intangible assets, net                         390,000      760,000
  Other assets                                 1,358,746      231,521
  Investment in bank subsidiaries             38,669,333   35,672,594
  Investment in nonbank subsidiaries           2,984,138    2,723,190
                                             -------------------------
Total assets                                 $45,384,197  $41,015,163
                                             =========================

Liabilities and stockholders' equity:
  Accrued expenses and other liabilities     $   968,045  $   646,569
  Notes payable                                3,550,000    3,400,000
                                             -------------------------
Total liabilities                              4,518,045    4,046,569

Common stock owned by ESOP participants        7,360,127    6,123,162
Stockholders' equity                          33,506,025   30,845,432
                                             -------------------------
Total liabilities and stockholders' equity   $45,384,197  $41,015,163
                                             =========================
</TABLE>


                         CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                Year Ended December 31
                                                     -------------------------------------------------
                                                         1996                1995             1994
------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>              <C>            
Dividend income from bank subsidiaries               $ 2,300,000         $ 2,100,000      $ 1,550,000
Management fee income from bank
    subsidiaries                                         537,600             450,800          855,573
Management fee income from nonbank
    subsidiaries                                          64,800              23,400           16,232
Interest income from nonbank subsidiaries                 90,139              11,012              --
Other income                                              37,090              35,614           67,030
                                                     -------------------------------------------------
Total income                                           3,029,629           2,620,826        2,488,835
                                                     -------------------------------------------------
</TABLE>
<PAGE>

Note 17. Parent Company Financial Information (Continued)

                   CONDENSED STATEMENTS OF INCOME (Continued)
<TABLE>
<CAPTION>


                                                                       Year Ended December 31
                                                     -------------------------------------------------
                                                         1996                1995               1994
------------------------------------------------------------------------------------------------------

<S>                                                  <C>                 <C>              <C>      
Interest expense                                         274,612             424,533          583,964
Salaries and employee benefits                         1,883,232           1,467,509        1,136,502
Occupancy                                                 70,381              55,214          205,342
Depreciation                                              75,685              69,863          229,680
Amortization of intangibles                              370,000             370,000          370,000
Other                                                    253,144             180,979          402,908
                                                     --------------------------------------------------
Total expenses                                         2,927,054           2,568,098        2,928,396
                                                     --------------------------------------------------

Income (loss) before income tax benefit and equity
in undistributed earnings of subsidiaries                102,575              52,728         (439,561)

Income tax benefit                                       886,850             831,565          787,410
                                                     -------------------------------------------------
Income before equity in undistributed earnings
    of subsidiaries                                      989,425             884,293          347,849

Equity in undistributed earnings of bank
    subsidiaries                                       3,213,347           2,710,578        2,050,046
Equity in undistributed earnings/(loss) of
    nonbank subsidiaries                                  (6,096)             34,160           35,062
                                                     -------------------------------------------------
Net income                                           $ 4,196,676         $ 3,629,031      $ 2,432,957
                                                     =================================================



                       CONDENSED STATEMENTS OF CASH FLOWS

                                                                     Year Ended December 31
                                                     -------------------------------------------------
                                                         1996                1995               1994
------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
   Net income                                        $ 4,196,676         $ 3,629,031      $ 2,432,957
   Adjustments to reconcile net income to net
      cash flows from operating activities:
      Equity in undistributed earnings of
         subsidiaries                                 (3,207,251)         (2,744,738)      (2,085,108)
      Depreciation                                        75,685              69,863          229,680
      Amortization of intangibles                        370,000             370,000          370,000
      Earnings on cash surrender value of life
         insurance                                       (33,615)            (29,764)         (66,906)
      Gain on sale of property and equipment              (9,057)             (5,570)
      Other, net                                        (809,981)            899,849         (357,944)
                                                     -------------------------------------------------
Net cash flows from operating activities                 582,457           2,188,671          522,679
                                                     -------------------------------------------------
</TABLE>
<PAGE>

Note 17. Parent Company Financial Information (Continued)

                 CONDENSED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>


                                                                    Year Ended December 31
                                                     --------------------------------------------------
                                                          1996              1995             1994
-------------------------------------------------------------------------------------------------------

<S>                                                  <C>                 <C>              <C>
Cash flows from investing activities:
  Advances to nonbank subsidiaries                    (1,750,000)         (600,000)              --
  Repayments from nonbank subsidiaries                 1,400,000             --                  --
  Purchases of property and equipment                    (48,898)         (106,079)        (1,487,462)
  Proceeds from sales of property and
    equipment                                             17,000            28,275               -- 
  Transfer of property and equipment                       --            1,056,195               --
  Purchase of cash surrender value of life
    insurance                                            (38,616)          (36,450)           (36,450)
  Transfer of cash surrender value of life
    insurance                                              --              803,388         (1,330,527)
  Investments in subsidiaries, net                      (267,043)       (1,157,806)       (17,622,846)
  Acquisition of other assets                              --                --            (1,500,000)
                                                     --------------------------------------------------
Net cash flows (used for)/from investing
    activities                                          (687,557)          (12,477)       (21,977,285)
                                                     --------------------------------------------------


Cash flows from financing activities:
  Proceeds from notes payable                          2,150,000             --             9,532,420
  Payments made on notes payable                      (2,000,000)       (5,650,000)        (1,084,420)
  Net proceeds from issuance of common
    stock                                                (83,780)        3,549,440         13,035,128
  Dividends paid                                           --                --                 --  
                                                     --------------------------------------------------
Net cash flows (used for)/from financing
  activities                                              66,220        (2,100,560)        21,483,128
                                                     --------------------------------------------------

Net increase/(decrease) in cash                          (38,880)           75,634             28,522

Cash
  Beginning                                              112,503            36,869              8,347
                                                    ---------------------------------------------------
  Ending                                            $     73,623      $    112,503       $     36,869
                                                    ===================================================


</TABLE>


Federal law prevents United from borrowing from its subsidiary  banks unless the
loans are secured by specific assets.  Such secured loans by any subsidiary bank
are  generally  limited to 10  percent  of the  subsidiary  banks'  capital  and
surplus,  and aggregate loans to United and its nonbank subsidiaries are limited
to 20 percent of the subsidiary banks' capital and surplus.


<PAGE>




Note 17.    Parent Company Financial Information (Continued)

The payment of dividends to United by the subsidiary banks is subject to various
federal  and state  regulatory  limitations.  A  national  bank must  obtain the
approval  of the  Comptroller  of the  Currency  if the  total of all  dividends
declared  in any  calendar  year  exceeds  that bank's net profits for that year
combined with its retained net profits for the preceding two calendar  years.  A
Minnesota  state-chartered  bank  must  obtain  the  approval  of the  Minnesota
Department  of Commerce if the total of all  dividends  declared in any calendar
year exceeds 50 percent of the bank's net profits for the preceding year.


Note 18.       Acquisition

On January 16, 1997,  United acquired Park Financial  Corporation  (PFC), a bank
holding  company  headquartered  in St.  Louis Park,  Minnesota,  which owns one
hundred  percent  of Park  National  Bank.  The total  purchase  price  paid was
$46,888,247.

To facilitate this  transaction,  the Company issued 57,254 additional shares of
its common stock for cash proceeds  totaling  $6,068,924,  received  $10,560,000
from the proceeds of the sale of the Company's  junior  subordinated  deferrable
interest debentures, and incurred acquisition indebtedness totaling $22 million.
The remaining balance of $8,259,323 was obtained from cash on hand. The existing
note payable to bank in the amount of  $3,150,000  and the line of credit in the
amount of $400,000 were retired on January 16, 1997.

The  acquisition  will be accounted for under the purchase  method of accounting
and,  accordingly,  the assets and  liabilities  of Park  National  Bank will be
recorded at their fair values, with any remaining purchase price being allocated
to goodwill.

The following is an unaudited  summary of PFC's balance sheet as of December 31,
1996 and 1995, and unaudited  results of operations for the years ended December
31, 1996 and 1995:

                            CONDENSED BALANCE SHEETS

                                                         December 31
                                                -----------------------------
                                                    1996               1995
-----------------------------------------------------------------------------
                                                (Unaudited)      (Unaudited)
Assets:
  Cash and due from banks                      $ 13,705,862     $ 13,169,628
  Interest-bearing deposits with banks            1,346,000          876,000
  Federal funds sold                             13,300,000        4,900,000
  Investment securities                          65,387,364       63,764,635
  Loans, net                                    117,865,059      113,498,772
  Property and equipment, net                     1,995,506        2,130,254
  Other assets                                    3,130,329        2,230,636
                                               ------------------------------
Total assets                                   $216,730,120     $200,569,925
                                               ==============================
<PAGE>

Note 18. Acquisition (Continued)

                      CONDENSED BALANCE SHEETS (Continued)


                                                           December 31
                                               --------------------------------
                                                     1996               1995
-------------------------------------------------------------------------------
                                                 (Unaudited)         (Unaudited)

Liabilities and stockholders' equity:
  Deposits                                       $180,250,371     $165,753,622
  Securities sold under repurchase agreements       9,348,726       10,665,906
  Accrued expenses and other liabilities            1,290,303        1,262,022
                                                 ------------------------------
Total liabilities                                 190,889,400      177,681,550

Stockholders' equity                               25,840,720       22,888,375
                                                 ------------------------------
Total liabilities and stockholders' equity       $216,730,120     $200,569,925
                                                 ==============================



                         CONDENSED STATEMENTS OF INCOME

                                                      Year Ended December 31
                                                 ------------------------------
                                                     1996               1995
-------------------------------------------------------------------------------
                                                  (Unaudited)       (Unaudited)
Interest income                                  $ 15,964,700     $ 14,968,748
Interest expense                                    5,961,987        5,671,616
                                                 ------------------------------
Net interest income                                10,002,713        9,297,132

Provision for loan losses                             446,574          720,000
                                                 ------------------------------
Net interest income after provision 
    for loan losses                                 9,556,139        8,577,132

Noninterest income                                  1,691,904        1,658,712
Noninterest expense                                 7,400,698        6,337,773
                                                 ------------------------------
Income before income taxes                          3,847,345        3,898,071

Income tax expense                                  1,477,541        1,497,263
                                                 ------------------------------
Net income                                       $  2,369,804     $  2,400,808
                                                 ==============================




<PAGE>


                                   SIGNATURES

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

                                           UNITED COMMUNITY BANCSHARES, INC.


_____________________, 1997                By /s/ Galen T. Pate
                                           Galen T. Pate, President


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this Report has been signed by the  following  persons on behalf of the Company,
in the capacities, and on the dates, indicated.

                               (Power of Attorney)

         Each person whose signature  appears below  constitutes and appoints R.
Scott   Jones  and  Galen  T.  Pate  as  the   undersigned's   true  and  lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all  capacities,  to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits  thereto,  and other
documents in connection therewith,  with the Securities and Exchange Commission,
granting unto said  attorneys-in-fact  and agents, each acting alone, full power
and  authority  to do and  perform  each and every act and thing  requisite  and
necessary  to be done in and about the  premises,  as fully to all  intents  and
purposes as the undersigned  might or could do in person,  hereby  ratifying and
confirming  all said  attorneys-in-fact  and agents,  each acting alone,  or his
substitute  or  substitutes,  may  lawfully  do or  cause  to be done by  virtue
thereof.

Name and Title                                                    Date



/s/ R. Scott Jones
R. Scott Jones, Chairman of the Board
and Director
(principal executive officer)


/s/ Galen T. Pate
Galen T. Pate, President and Director
(principal executive officer)



                     Signatures continued on following page


<PAGE>


Name and Title                                                    Date



/s/ Marcia L. O'Brien
Marcia L. O'Brien, Executive Vice President
and Chief Financial Officer (principal financial
and accounting officer)


/s/ Arlin A. Albrecht
Arlin A. Albrecht, Director


/s/ Larry C. Barenbaum
Larry C. Barenbaum, Director


/s/ Spencer A. Broughton
Spencer A. Broughton, Director


/s/ James P. Fritz
James P. Fritz, Director


/s/ John W. Johnson
John W. Johnson, Director


/s/ Ora G. Jones
Ora G. Jones, Director


/s/ Louis J. Langer
Louis J. Langer, Director