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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2003

or
[   ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the transition period from ____________ to ____________

Commission file number: 0-28080

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

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

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

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

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

Common Stock, no par value
(Title of Class)

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

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

        Indicate by checkmark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [   ]   No [X]

        The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of June 30, 2003 (the last day of the Registrant's most recently completed second fiscal quarter), was $24,137,776 (based on the last sale price of such stock as quoted on the Nasdaq National Market ($17.72) on such date).

        The number of shares of Registrant's common stock outstanding on February 27, 2004 was 2,444,142. Registrant's common stock is traded on the Nasdaq National Market, under the symbol UBMT.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

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UNITED FINANCIAL CORP.
2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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PART I

Item 1.    BUSINESS

    General.        United Financial Corp. (“United”) is a bank holding company headquartered in Great Falls, Montana, with operations in 15 locations in 13 Montana communities. United was organized as a Minnesota corporation in 1996. United’s banking business in Montana is conducted through its wholly-owned subsidiary, Heritage Bank, a Montana corporation established in 1923. United’s wholly-owned subsidiary, United Financial–Montana Capital Trust I, was established in 2001 to issue and administer $3.0 million of Capital Trust Pass-Through Securities. United had assets of approximately $304.7 million, deposits of approximately $227.5 million and stockholders’ equity of approximately $32.4 million at December 31, 2003.

        Heritage Bank is a state-chartered commercial bank with locations in Billings, Bozeman, Chester, Fort Benton, Geraldine, Glendive, Great Falls (three locations), Hamilton, Havre, Kalispell, Missoula, Libby and Shelby, Montana. Heritage Bank is engaged in the community banking business of attracting deposits from the general public through its branches and using those deposits, together with other available funds, to originate commercial (including lease financing), commercial real estate, residential, agricultural and consumer loans primarily in its market areas in Montana. Heritage Bank’s banking business is concentrated in the Great Falls area through its two full service branches and one separate drive up location. Based on total assets, 49% of United’s assets are located at Heritage Bank’s Great Falls locations. Heritage Bank also invests in mortgage-backed securities, U.S. Treasury obligations, other U.S. Government agency obligations and other interest-earning assets.

        Heritage Bank’s financial condition and results of operations, and therefore the financial condition and results of operations of United, are dependent primarily on net interest income and fee income. Heritage Bank’s financial condition and results of operations are also significantly influenced by local and national economic conditions, changes in market interest rates, governmental policies, tax laws and the actions of various regulatory agencies.

        At December 31, 2002 and 2001, United owned 65.32% of the outstanding stock of Valley Bancorp, Inc. (“Valley”), a bank holding company for an Arizona state-chartered commercial bank, with locations in Phoenix and Scottsdale. United completed the sale of Valley to Marquette Financial Companies (“Marquette”) on July 31, 2003 (See Part II, Item 7, Discontinued Operations). All previously issued consolidated financial statements have been restated to disclose the assets, liabilities, and operations of Valley as discontinued operations.

        Heritage Bank also holds a 14% ownership interest in Bankers’ Resource Center, a computer data center, located in Helena, Montana.

        In December 2003, Heritage Bank incorporated a new wholly-owned subsidiary, Heritage Northwest, Inc. which will operate a mortgage banking company in Bellingham, Washington. An application has been filed with the State of Washington in January 2004 and operations are scheduled to begin in the spring of 2004.

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

        United makes available all periodic and current reports, free of charge, on its website as soon as reasonably practicable after such material is

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electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). United’s website address is www.ufcmontana.com. The contents of our website are not incorporated into this report or into our other filings with the SEC.

Lending Activities

    General.        Lending activities are United’s primary source of both interest income and fee income. United’s interest income from loans receivable was approximately $15.4 million, $16.2 million and $18.3 million, or approximately 89%, 84% and 84% of total interest income, for the years ended December 31, 2003, 2002 and 2001, respectively. United’s principal lending activity has been the origination of real estate loans, including conventional residential real estate loans (loans which are neither insured nor partially guaranteed by government agencies) and residential real estate loans insured by the Federal Housing Administration (“FHA”) or partially guaranteed by the Veterans Administration (“VA”). United also originates commercial and agricultural loans secured by real estate. In addition to loans secured by real estate, United’s lending activity includes the origination of non-mortgage commercial, agricultural and consumer loans.

        The following table sets forth the composition of United’s loans receivable at December 31, 2003, 2002, 2001, 2000 and 1999:

(Dollars in thousands)

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(Dollars in thousands)

        Residential (Non-Construction) Real Estate Lending. Residential mortgage lending constitutes a significant portion of United’s lending activities. United’s residential loan originations are conducted by residential loan production officers in Heritage Bank’s twelve banking offices and its two loan production offices. The vast majority of Heritage Bank’s residential loan production is secured by properties located in Montana and are fixed-rate, long-term mortgage loans which are sold to the secondary market.

        Under Heritage Bank’s residential lending policies, most loans originated conform to Government National Mortgage Association/Federal National Mortgage Association (“GNMA/FNMA”) secondary mortgage market standards and are secured by residential property with an appraised value of not more than 80% (or 95% if private mortgage insurance is obtained) of the principal amount of the loan. In accordance with federal guidelines, an appraisal by an independent licensed or certified appraiser is required for residential loans in excess of $250,000. United generally also obtains appraisals or valuations on most residential loans under $250,000. The terms of Heritage Bank’s conventional real estate loans provide that the loan can be prepaid without penalty and typically include a due-on-sale clause that provides for acceleration of indebtedness upon the sale or other disposition of secured property. Evidence of fire, casualty and hazard insurance with a mortgagee clause in favor of United is required prior to settlement of residential and commercial real estate loans. Title insurance is generally required on properties securing such loans.

        Most of Heritage Bank’s residential loans are originated through personal contacts of loan officers, including contacts with local realtors, and through referrals from deposit customers. Although the majority of Heritage Bank’s loans are fixed rate loan products that are subsequently sold, Heritage Bank does offer a variety of adjustable rate residential loans. The interest rates on variable loans vary with the movement of the index upon which the interest rates are based. If the interest rates change, loan payments, balances or terms may be adjusted. Heritage Bank’s primary indexes are the 1, 3 and 5-year constant maturity Treasury indexes. Most of the ARMs currently originated by Heritage Bank have loan terms of 15 to 30 years with rate adjustments generally every 1, 3 or 5 years during the term of the loan. Generally, interest rate adjustments on Heritage Bank’s ARMs are limited to changes of 2.5% — 3.25% per year and 6% — 10% for the life of the loan. The average lives of these loans were 10.6 years at December 31, 2003.

        The majority of Heritage Bank’s total production of long-term (15 to 30-year maturity) fixed rate residential loans is originated according to pre-arranged

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underwriting standards that result in immediate sale to the secondary market, primarily to mortgage bankers and pension funds. While origination and sale of these loans produces fee income, the loans are carried at their outstanding principal balance, which is the contracted purchase price, and therefore no gain or loss is realized at sale, except for gains associated with recognizing any retained mortgage servicing rights. Heritage Bank sold long-term fixed-rate residential mortgage loans to the secondary market in aggregate amounts of approximately $321.0 million in 2003, $197.8 million in 2002 and $167.5 million in 2001. Heritage Bank also sells long-term fixed-rate loans that are refinances of existing portfolio loans or permanent financing of completed construction loans to the secondary market or State of Montana housing agencies. These loans are carried at their outstanding principal balance, which was the contracted purchase price, and therefore no gain or loss is realized at sale. The combination of both of these types of secondary market sales resulted in fee income totaling $5.3 million, $3.8 million and $3.3 million in 2003, 2002 and 2001, respectively. These fees are reported by United as non-interest income in its statements of operations. Fees on sales to State of Montana housing agencies are not included in these totals. Also not included is $.6 million in 2003 and $.4 million in each of 2002 and 2001 of interest on fundings for secondary market sales. These totals are reflected in total loan interest income. Heritage Bank retains a limited number of adjustable rate mortgages and fixed rate mortgage loans up to 15-year maturities for its own portfolio.

        Real Estate Construction Loans. In addition to permanent real estate mortgage loans, Heritage Bank also provides interim financing for the construction of single-family and multi-unit dwellings, commercial real estate and improvements of real estate. Construction loans are generally made for periods of approximately nine months, with interest paid at periodic intervals. Such loans may be extended for several months due to adverse weather conditions or other justifiable delays in construction. Heritage Bank provides financing primarily for a limited number of registered contractors who have demonstrated an ability to complete projects in residential development and construction, have operated in Heritage Bank’s lending area for a number of years and are deemed to be financially responsible. Heritage Bank also provides construction loans for customers who have made the decision to construct a new home for their personal use and in that case the Heritage Bank customer will choose their own contractor who is then approved by Heritage Bank. Heritage Bank assures that permanent financing is in place prior to entering into a construction loan for an individual customer.

        Commercial and Agricultural Real Estate Loans. Heritage Bank engages in commercial real estate lending secured by both commercial and agricultural properties. Occasionally when making such loans, Heritage Bank participates in the U.S. Small Business Administration’s program for guaranteed commercial real estate loans. Heritage Bank’s loans on commercial and agricultural real estate are primarily first lien loans with 10 to 15-year maturities and adjustable interest rates based on U.S. Treasury indexes for 1, 3 and 5 years. While government regulations limit the level of commercial real estate lending by a financial institution to 400% of its capital, this limitation has not had a material impact on the lending activities of Heritage Bank to date.

        Non-Mortgage Commercial and Agricultural Lending. In addition to real estate lending, Heritage Bank offers commercial and agricultural non-mortgage loans. Heritage Bank offers commercial lines of credit, equipment term loans, working capital loans and loans guaranteed by the Small Business Administration to its business customers. It also offers seasonal lines of credit and term equipment loans to its agricultural borrowers and purchases, on a participation basis, loans originated outside its normal market areas. Participation loans are generally purchased from commercial banks and third party loan production offices. Generally, these purchased participations allow Heritage Bank to diversify its geographic risk and are purchased with a higher level of underwriting standards since a direct customer relationship does not exist. At December 31, 2003, Heritage Bank had $54.0 million of non-mortgage commercial loans in its loan portfolio, which included approximately $27.0 million of purchased participation loans located outside of Montana.

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        Consumer Lending. Heritage Bank’s consumer loan portfolio includes home equity, home improvement, line of credit, auto, deposit account, dealer loans and credit card receivables. Heritage Bank has entered into agreements with certain local merchants to purchase qualifying conditional sales contracts. Heritage Bank’s consumer lending is conducted at branch offices and Heritage Bank’s home offices in Great Falls. Heritage Bank requires fire, hazard and casualty insurance for loans secured by home equity and casualty insurance for loans secured by autos and recreational vehicles. Heritage Bank also maintains an underlying vendors single interest insurance policy to protect it in the event a loss is incurred to a non-insured customer vehicle.

Investment Activities

        The investment activities of United are designed to provide an investment alternative for funds not presently required to meet loan demand, assist in maximizing income, supply collateral to secure public funds and retail repurchase agreements, provide a means for balancing market and credit risks, and provide consistent income and market value throughout changing economic times.

        Interest income from investment activities was approximately $1.7 million, $2.6 million and $2.8 million, or approximately 9.7%, 13.4% and 13.1% of United’s total interest income, for the years ended December 31, 2003, 2002 and 2001, respectively.

        United’s portfolio consists primarily of obligations of the U.S. government and its agencies, mortgage-backed securities, municipal bonds and corporate bonds and equity securities. United’s investment portfolio does not contain a concentration of investments in any one issuer in excess of 10% of United’s total investment portfolio, except for securities of the U.S. government and U.S. government agencies. All of United’s investments are classified as available-for-sale.

        The following table sets forth the carrying values of United’s investments at December 31, 2003, 2002 and 2001:

(Dollars in thousands)

        During 2003, United received $20.8 million in mortgage-backed security principal payments and had $7.1 million of calls and maturities of investment securities. United sold $1.9 million of investment securities and mortgage–backed securities while purchasing $30.2 million in investment securities and mortgage-backed securities. United recorded a decrease in unrealized gain in market values of its investment portfolio of $.5 million, amortization of purchase premium of $.2 million and a realized gain of $.1 million, before taxes.

        During 2002, United received $16.1 million in mortgage-backed security principal payments and had $43.2 million of calls and maturities of investment securities. Sales of investment securities and mortgage-backed securities were $18,625 in 2002 and purchases totaled $48.6 million. United recorded an unrealized gain in market values of its investment portfolio of $.7 million, before taxes. The increase in principal payments on mortgage-backed securities and the increase in calls of investment securities are both results of the unprecedented drops in interest rates during 2002 as compared to 2001. United’s purchases of investment securities increased accordingly to maintain its investment portfolio.

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Sources of Funds

        The primary sources of funds for United’s lending and investment activities are deposits, repurchase agreements, Federal Home Loan Bank (“FHLB”) borrowings, loan and mortgage-backed securities repayments, proceeds from loan sales, investment securities, interest payments and maturities, and net operating revenues.

        Deposit Activities.   Deposits are attracted from within United’s market area through the offering of a broad selection of deposit instruments, including NOW accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, United considers current market interest rates, profitability to United, matching deposit and loan products offered by its competition and its customer preferences and concerns. United reviews its deposit mix and pricing weekly.

        The following table sets forth the composition of United’s deposits at December 31, 2003, 2002 and 2001:

(Dollars in thousands)

        Scheduled maturities of certificates of deposit at December 31, 2003 are as follows:

        Time deposits of $100,000 or more were approximately $24.0 million, $29.1 million and $25.2 million at December 31, 2003, 2002 and 2001, respectively. Amounts in excess of $100,000 are not insured by a federal agency.

        The maturity of time deposits of $100,000 or more at December 31, 2003 was as follows:

        Early withdrawal from time deposits subjects the depositor to an early withdrawal penalty which is currently equal to six months of simple, nominal interest when the original maturity is longer than one year, three months of simple, nominal interest when original maturity is 92 days to one year, and all interest earned when original maturity is 91 days or less.

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        As a matter of policy, United does not accept, place or solicit brokered deposits. Although deposits are not solicited outside of Montana, historically, a small number of the Heritage Bank’s depositors have resided outside Montana. As market demand generally dictates deposit maturities and rates, United intends to continue to offer those types of accounts that it believes have broad market appeal.

        Borrowings.   Heritage Bank relies to a significant extent on borrowings from the FHLB to finance its short-term, and increasingly its longer term, financing needs. The FHLB functions as the central reserve bank providing credit for commercial banks and certain other member financial institutions. Borrowings from the FHLB are available at various maturities, which facilitates the accurate matching of asset and liability maturity dates.

        As a member of the FHLB, Heritage Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of specified collateral. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Heritage Bank’s established available FHLB advance credit line for 2003 was 25% of assets. The FHLB is required to review its credit limitations and standards at least annually.

        For the years ended December 31, 2003, 2002 and 2001, FHLB borrowing information was as follows:

        Securities Sold Under Agreements To Repurchase.   Heritage Bank generates funds through the sale of investment securities under agreements requiring their repurchase at a premium that represents interest. The securities underlying agreements to repurchase are for the same securities originally sold and are held in a custody account by a third party.

        For the years ended December 31, 2003, 2002 and 2001, securities sold under agreements to repurchase information was as follows:

        Trust Preferred Securities.   In July 2001, United issued junior subordinated debentures, aggregating $3.0 million to United Financial-Montana Capital Trust I (the “Trust”). The Trust issued preferred securities, as part of a pooled issue, with an aggregate liquidation amount of $3.0 million ($1,000 per capital security) to third-party investors. The junior subordinated debentures and cash are the sole assets of the Trust. The preferred securities are includable as Tier I capital for regulatory capital purposes. The offering price was $1,000 per capital security. The junior subordinated debentures and the preferred securities pay interest and dividends, respectively, on a semi-annual basis, which are included in interest expense. The variable interest rate resets on January 30 and July 30 of each year, based upon six month LIBOR plus 3.75%. The interest rate reset on January 29, 2004 was 4.96%. The Trust is a statutory business trust formed under the laws of the State of Delaware and is wholly-owned by United. The junior subordinated debentures and preferred securities will mature on July 25, 2031. The junior subordinated debentures and preferred securities can be redeemed contemporaneously, in whole or in part, after five years at decreasing premiums with the permission of the Board of Governors of the

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Federal Reserve System (the “Federal Reserve”). United has provided a full and unconditional guarantee of the obligations of the Trust in the event of the occurrence of an event of default, as defined. Debt issuance costs totaling $118,812 were capitalized related to the debenture offering and are being amortized over the 10-year non-premium callable life of the preferred securities.

        In accordance with newly issued accounting pronouncements, for periods ending after March 15, 2004, United will no longer consolidate the Trust in its financial statements. See Part IV, Item 15. – “Notes to Consolidated Financial Statements – New Accounting Pronouncements.”

Other Activities

        Heritage Bank also holds a 14% ownership interest in Bankers’ Resource Center, a computer data center, which provides certain data processing services to Heritage Bank and United.

        In December 2003, Heritage Bank incorporated a new wholly-owned subsidiary, Heritage Northwest, Inc. which will operate a mortgage banking company in Bellingham, Washington. An application has been filed with the State of Washington in January 2004 and operations are scheduled to begin in the spring of 2004.

Market Area

        Great Falls, the county seat of Cascade County and a regional trade center, is one of the largest cities in Montana. The estimated 2003 Great Falls and Cascade County populations were approximately 57,000 and 80,000, respectively. The economy of Great Falls is largely based on agriculture, health care and Department of Defense activities. Malmstrom Air Force Base (“MAFB”), which employs approximately 4,000 people, is the largest employer in Great Falls and Cascade County. Any significant reduction in size or closure of MAFB would likely adversely affect United and its results of operations and financial condition.

        The economies of Chester, Fort Benton, Geraldine, Glendive, Havre and Shelby, Montana are dependent to a large extent on agricultural, livestock and railroad activities. Areas such as Bozeman, Great Falls, Hamilton, Kalispell, Libby and Missoula are supported in part by tourism, higher education and natural resources. Nevertheless, agriculture and natural resources are among the predominant activities in the State of Montana, and any adverse trends in either of these two industries could adversely affect United and its results of operations and financial condition.

Competition

        Heritage Bank, like other depository institutions, is operating in a rapidly changing environment and, therefore, faces considerable competition in the attraction of deposits and the origination of loans. Historically, the most direct competition for deposits has come from savings banks, credit unions and commercial banks. There are approximately 41 depository institutions, commercial banks, credit unions and savings banks with offices in Heritage Bank’s Montana market areas. In addition to these entities, United estimates there are approximately 33 mortgage companies directly competing with its real estate originators in the Montana market area. Non-depository financial service organizations, primarily in the securities and insurance industries, have also become competitors for retail savings and investment funds. Heritage Bank’s deposit programs compete with money market mutual funds, government securities and other investment alternatives. Heritage Bank competes for deposits by offering a variety of deposit accounts at interest rates based upon market conditions, convenient business hours, quality service and convenient branch locations.

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Employees

        At February 29, 2004, Heritage Bank employed 118 full-time employees and 29 part-time employees. Heritage Bank maintains a comprehensive employee benefit program providing, among other benefits, hospitalization and major medical insurance, paid sick leave, disability, life insurance and 401K retirement plans. Heritage Bank’s employees are not represented by any collective bargaining group. See Part IV, Item 15. – “Notes to Consolidated Financial Statements – Employee Benefit Plans.” United, as a parent company, has no employees.

Executive Officers of the Registrant

        The following table sets forth information with respect to the executive officers of United. All executive officers are elected annually by the Board of Directors. There are no arrangements or understandings between individual officers and any other person pursuant to which he or she was elected as an officer.

    Mr. Weise has served as Chief Executive Officer of United since the annual shareholder meeting in 1999 and became chairman of United upon Mr. Morrison’s resignation in January 2003. Mr. Weise has served as President and director of United, and director and Vice President of Heritage Bank, since February 1998. Mr. Weise’s term of office as a director of United expires at United’s annual shareholder meeting in 2006. Mr. Weise also serves as President of CFS and President of Central Bancshares. He has been involved in various capacities with the Central Bank group of companies since they were founded in 1988 and with Heritage Bank since 1994.

    Mr. Clark has served as Senior Vice President and Secretary of United, and director, President and Chief Executive Officer of Heritage Bank, since February 1998. Mr. Clark was elected as Vice President and a director of United in May 1998, and his term of office as a director of United expires at United’s annual shareholder meeting in 2006.

    Mr. Feurt has served as Senior Vice President and Chief Credit Officer of United, and director and Executive Vice President and Senior Lending Officer of Heritage Bank, since February 1998. Mr. Feurt was elected as a director of United in May 1998, and his term of office as a director of United expires at United’s annual shareholder meeting in 2005.

    Ms. Delaney was elected to the Heritage Bank board in October 2000 and has served as Chief Financial Officer of United since January 2001, and as Vice President of Heritage Bank since December 1998. Previously, Ms. Delaney was employed in public accounting from 1984 to 1998, with Hamilton Misfeldt & Co. P.C., a Great Falls, Montana based public accounting firm.

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    Mr. Morrison has served as a director of Heritage Bank since 1994. Mr. Morrison is the Chief Executive Officer and sole shareholder of Central Bancshares, Inc. (“Central Bancshares”), the parent company of Central Bank, located in Stillwater, Minnesota, which was founded by Mr. Morrison in 1988. He is also the sole shareholder and Chairman of the Board of Directors of Central Financial Services (“CFS”), a bank-consulting firm. In March 2003, Mr. Morrison became Vice Chairman of the Board of Directors of Allina Health Systems, a non-profit organization in Minnesota that provides healthcare services through hospitals and clinics in Minnesota and Wisconsin. Mr. Morrison is involved in various other businesses, and serves as Chairman of the Executive Committee of the Board of Trustees of the University of St. Thomas, and is a member of the board of the University of St. Thomas Law School.

Supervision and Regulation

        United is a bank holding company which owns Heritage Bank, a Montana-state chartered commercial bank.

        Bank holding companies are subject to the general supervision and regulation by the Federal Reserve Bank (“FRB”). Under the Bank Holding Company Act of 1956, as amended (“BHCA”), and FRB regulations, a bank holding company may engage in banking, managing or controlling banks, furnishing or performing services for banks it controls and conducting activities that the FRB has determined to be closely related to banking. Bank holding companies must also obtain the prior approval of the FRB before acquiring 5% or more of the outstanding shares of another bank or bank holding company and must provide notice to, and in some situations obtain the prior approval of, the FRB in connection with the acquisition of 5% or more of the outstanding shares of a company engaged in a “bank related” business.

        Under FRB regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound practice or a violation of FRB regulations, or both.

        Bank holding companies are subject to certain limitations on redemption of common stock or other equity securities. In addition, the FRB has issued regulations setting minimum capital standards for bank holding companies. Depending on the capital classification of a bank holding company, it may be restricted from engaging in certain non-bank activities or from acquiring interests in additional banks or other depository institutions. As of December 31, 2003, United met the minimum capital requirements issued by the FRB.

        Under the BHCA, as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”), a bank holding company may acquire banks throughout the United States subject only to state or federal deposit caps and state minimum age requirements. Effective June 1, 1997, the Interstate Act authorized interstate branching by acquisition and consolidation in those states that had not opted out by that date. Montana had opted out of the interstate branching by acquisition and consolidation until October 1, 2001.

        The Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) came into effect on March 11, 2000. The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve member banks with firms “engaged principally” in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. In addition, the Financial Services

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Modernization Act contains provisions that expressly preempt any state law restricting the establishment of financial affiliation, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliation among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the bank holding company framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a financial holding company. To date, United has not elected to become a financial holding company.

        Bank holding companies that elect to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or are incidental or complementary to activities that are financial in nature. “Financial in nature” activities include securities underwriting, dealing, and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines from time to time to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

        United does not believe that the Financial Services Modernization Act has negatively affected its operations in the near-term. However, to the extent that the legislation permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on and ad hoc basis. Nevertheless, this legislation may increase the amount of competition from larger institutions and other types of companies with substantially greater resources and a wider variety of financial products than United currently offers.

        Under the Financial Services Modernization Act, federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The rules were effective November 13, 2000, but compliance was optional until July 1, 2001. United has implemented procedures to comply with these rules and believes that compliance has not adversely affected its operations.

        United and its subsidiaries are deemed affiliates within the meaning of the Federal Reserve Act, and transactions between the affiliates are subject to certain restrictions. Accordingly, United and its respective subsidiaries must comply with Sections 23A and 23B of the Federal Reserve Act (the “FRA”). Generally, these sections restrict “covered transactions” (i.e., loans, purchases of assets, guaranties and similar transactions) to a percentage of the depository institution’s capital and surplus, require that such transaction be appropriately collateralized and require that such transactions be on terms as favorable to the depository institution as transactions with non-affiliates. Loans to insiders (officers, directors and 10% shareholders) of a depository institution are subject to Sections 22(g) and (h) of the FRA and regulations thereunder. Among other things, such loans must be made on terms substantially the same as loans to non-insiders.

        On October 26, 2001, President Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (“USA Patriot Act”) of 2001. Among other things, the USA Patriot Act (1) prohibits banks from providing correspondent accounts directly to foreign shell banks; (2) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (3) required financial institutions to establish an anti-money-laundering compliance program; and (4) generally eliminates civil liability for persons who file suspicious activity reports. The Act also increased governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Act. While the USA Patriot Act may, to some degree,

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affect United’s record-keeping and reporting expenses, United does not believe that the Act will have a material adverse effect on its business and operation. Management believes United is in compliance with the USA Patriot Act.

        Depository Institution Subsidiaries–Heritage Bank.    Effective January 1, 2001, Heritage Bank became a Montana-chartered commercial bank. As such, Heritage Bank is subject to regulation and supervision by the Montana Department of Commerce, Division of Banking and Financial Institutions (the “Montana Division”) and the FDIC. Heritage Bank’s deposits are insured by the FDIC up to $100,000.

        The Montana statutes and regulations place limitations on the business and other activities of Heritage Bank which may be more restrictive than limitations applicable to depository institutions that are not state-chartered commercial banks. In particular, and among other limitations, the establishment and operation of new branch offices, is limited by, and subject to approval by, the Montana Division. In addition, state-chartered commercial banks are generally not authorized to make investments in subsidiary companies or to make other investments in equity securities or to engage in securities or insurance activities. Some federally chartered depository institutions located in Montana may engage in such activities without regard to state law.

        By reason of FDIC insurance, Heritage Bank is an insured depository institution for purposes of certain federal laws and regulations. The federal laws that apply to depository institutions regulate, among other things, the scope of their businesses, their investments, the reserves against deposits, the timing and availability of deposited funds and certain aspects of their lending activities. These laws and regulations governing the depository institution activities have generally been promulgated to protect depositors and not to protect stockholders of such institutions or their holding companies. These laws and regulations are designed to ensure that appropriate action is taken to address concerns regarding the safe and sound operation of insured depository institutions and generally relate to internal control and information systems, loan documentation and credit underwriting, asset growth, management performance and earnings. If an insured depository institution fails to meet the applicable standards and regulatory requirements, an appropriate banking agency may require that the institution prepare and submit to the agency an acceptable plan for addressing the regulatory concern. If the plan submitted is deemed inadequate, or if the institution fails to submit or comply with the required plan, a banking agency may take further action with respect to the regulatory concerns, including institution of an enforcement action with respect to the institution.

        The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) required federal banking regulators to adopt regulations in a number of specific areas to insure depository institution safety and soundness, including internal controls, credit underwriting, asset growth, management compensation, asset quality and earnings performance. FDICIA also contains provisions intended to change independent auditing requirements, to restrict the activities of certain insured depository institutions, to change various consumer banking laws and to limit the ability of “under-capitalized banks” to borrow from the FRB’s discount window or to acquire brokered deposits.

        The Financial Institution Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) significantly changed existing federal banking legislation and regulation, including significant increases in FDIC insurance premiums, separation of the FDIC insurance into two deposit insurance funds, authorizing bank holding companies to own savings associations, increasing the federal banking agencies’ enforcement powers and increasing the civil and criminal penalties for violations of federal banking laws and regulations.

        Heritage Bank is subject to certain federal consumer laws, including the Community Reinvestment Act of 1977, as amended (“CRA”), and other fair lending laws and regulations which impose nondiscriminatory lending requirements on insured depository institutions. In recent periods, federal regulatory agencies have sought a more rigorous enforcement of the CRA and other fair lending laws and regulations. A successful challenge to a depository institution’s performance under the CRA and

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related fair lending laws and regulations could result in a variety of sanctions, including the required payment of damages and civil money penalties, prospective and retrospective injunctive relief and the imposition of restrictions on mergers and acquisitions or other activities of the depository institution or the holding companies controlling such depository institutions. Private parties may also have the ability to challenge an institution’s performance under the fair lending laws in private class action litigation. Heritage Bank’s most recent rating under CRA is satisfactory. The previous CRA performance evaluation in July 1999, conducted by the OTS, rated Heritage Bank as having had “an outstanding record of meeting community credit needs”.

        Federal regulatory banking agencies have also established uniform capital requirements for all insured depository institutions. An insured depository institution that does not achieve and maintain required capital levels may be subject to supervisory action through the issuance of capital directives, cease and desist orders or other written orders or agreements with the appropriate federal banking agency. Failure of an insured depository institution to meet the required capital levels may also prohibit or limit the ability of a bank holding company controlling such institution to engage in merger and acquisition activities or other expansion activities. As of December 31, 2003, Heritage Bank met the “well capitalized” requirements issued by the applicable federal banking agency.

        Depository institutions generally depend upon the difference between the interest rate paid by them on deposits and other borrowings and the interest rate received on loans extended to customers and on investment securities. The interest rates are highly sensitive to many factors beyond the control of depository institutions, including general economic conditions in their primary market area and the broader economy. In addition to general economic conditions affecting business generally, depository institutions such as Heritage Bank is affected by federal government policies and actions of regulatory agencies. In particular, the FRB through its various operations and powers may affect interest rates charged on loans or paid on deposits. Such changes in interest rates affect the growth and quality of depository institution loans, investments and deposits.

        Federal banking regulatory agencies may institute enforcement actions against depository institutions, their parent holding companies and other institution-affiliated parties with respect to violations of any federal law or regulation. Enforcement actions may include the appointment of a conservator or receiver, the issuance of cease and desist orders or other formal action, termination of insurance of deposits and the imposition of civil money penalties. Heritage Bank is currently not subject to any such enforcement actions.

        From time to time, various types of federal and state legislation have been proposed that would result in additional regulation of, or restrictions on, the business of depository institutions. It cannot be predicted whether such legislation will be adopted or how such legislation would affect the business of Heritage Bank.

        Deposit Insurance and FDIC Regulation.   Effective January 1, 2001, Heritage Bank became a member of the Savings Association Insurance Fund (“SAIF”), and the Bank Insurance Fund (“BIF”), both administered by the FDIC. Section 5(d) of the Federal Deposit Insurance Act (“FDI Act”), known as the Oakar Amendment, permits merger transactions between SAIF- and BIF-member institutions resulting in an institution with deposits that are proportionally insured by both SAIF and BIF.

        Savings deposits are insured up to the applicable limits (generally $100,000 per insured depositor) by the FDIC. The FDIC is empowered to impose deposit insurance premiums, conduct examinations and require reporting by Heritage Bank. The FDIC may also prohibit Heritage Bank from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC. The FDIC can also initiate enforcement actions against Heritage Bank and may terminate the deposit insurance of Heritage Bank if it determines that Heritage Bank has engaged or is engaging in any unsafe or unsound practice, or are in an unsafe or unsound condition.

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        For 2003, the FDIC assessment rate for Heritage Bank decreased each quarter from 1.68 basis points per $100 of insured deposits during the first quarter, to 1.52 basis points for the fourth quarter. As a result, Heritage Bank’s 2003 FDIC deposit insurance premium was approximately $.1 million. FDIC has published assessment rates for the first quarter of 2004, per $100 of insured deposits, of 1.54 basis points.

        State Lending Limits.   As of January 1, 2001, Heritage Bank became subject to a State of Montana lending limit of 20% of capital. The maximum aggregate amount of loans outstanding to a single borrower at Heritage Bank at December 31, 2003 and 2002 was approximately $2.4 million and $2.3 million, respectively. At December 31, 2003 and 2002 Heritage Bank was in compliance with the State of Montana lending limit.

        Capital Adequacy.   FDIC emphasizes capital as a measure of performance and establishes a rigid regulatory scheme based almost entirely on capital levels. The five statutory capital categories established by FDIC are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Heritage Bank’s capital position exceeds the definition of “well capitalized.” FDIC also mandates that regulations be promulgated adding other risk-based capital requirements covering (a) concentrations of credit risk, (b) risks from nontraditional activities and (c) the capital impact of fair value adjustments associated with FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” See Part IV, Item 15 – “Notes to Consolidated Financial Statements – Regulatory Matters.”

        Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open new facilities.

        The FDIC and Federal Reserve use risk-based capital guidelines for banks and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheets items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the Federal Reserve has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I capital.

        Tier I capital for bank holding companies includes common shareholders’ equity, qualifying perpetual preferred stock (up to 25% of total Tier I capital, if cumulative, although under a Federal Reserve rule, redeemable perpetual preferred stock may not be counted as Tier I capital unless the redemption is subject to the prior approval of the Federal Reserve), and minority interests in equity accounts of consolidated subsidiaries, less intangibles, except as described above.

        The Federal Reserve also employs a leverage ratio, which is Tier I capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. Except for the most highly rated banks, the minimum leverage ratio is 4%.

        Banks are assigned to one of five capital categories depending on their total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. Banks which are deemed to be “undercapitalized” are subject to certain mandatory supervisory corrective actions.

        Federal Home Loan Bank System.   Heritage Bank is a member of the FHLB of Seattle, Washington. Each FHLB serves as a reserve or central bank for its members within its assigned region, is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system and makes loans (advances) to its members

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in accordance with the policies and the procedures established by the FHLB board of directors. All advances from the FHLB are required to be fully secured by sufficient collateral as is determined by the FHLB. Member banks are required to purchase and maintain FHLB stock in an amount equal to the greater of 1% of the unpaid principal of residential mortgage loans, or 5% of FHLB advances outstanding.

Taxation

        General.   United files consolidated Federal and State of Montana income tax returns pursuant to a tax sharing agreement. Generally, with some exceptions, including Heritage Bank’s reserve for bad debts discussed below, United is subject to Federal and state income taxes in the same manner as other corporations.

        The following discussion of tax matters is intended solely as a summary and does not purport to be a comprehensive description of all the tax rules applicable to United.

        Tax Bad Debt Reserves.   For taxable years beginning prior to January 1, 1996, savings institutions, which met certain definitional tests primarily relating to their assets and the nature of their business (“qualifying thrifts”), were permitted to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, were deducted in arriving at their taxable income.

        Federal legislation repealed the reserve method of accounting for bad debt reserves for tax years beginning after December 31, 1995. As a result, savings associations could no longer calculate their deduction for bad debts using the percentage-of-taxable-income method. Instead, savings associations were required to compute their deduction based on actual charge-offs during the taxable year or, if the savings association or its controlled group had assets of less than $500 million, based on actual loss experience over a period of years. This legislation also required savings associations to recapture into income over a six-year period their post-1987 additions to their bad debt tax reserves, thereby generating additional current tax liability. At December 31, 2003, Heritage Bank’s bad debt reserve for tax purposes was approximately $3.5 million. For additional information regarding federal and state income taxes, see Part IV, Item 14 – “Notes to Consolidated Financial Statements – Income Taxes.”

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Item 2.     PROPERTIES

        At December 31, 2003, United owned 13 of its 15 offices, including its headquarters and other property having an aggregated book value including land of approximately $6.1 million, and leased the remaining branches. Four locations are leased in Montana, including three building leases and one land lease. The following schedule provides property information for the United’s locations as of December 31, 2003.

Item 3.    LEGAL PROCEEDINGS

        Although United was not involved in any material pending litigation as of February 29, 2004, it is a plaintiff in various legal proceedings arising in the normal course of business. In the opinion of management, the disposition of current litigation will not have a material effect on United’s consolidated financial position, results of operations, or liquidity.

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

        No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the quarter ended December 31, 2003.

PART II

Item 5.   MARKET FOR UNITED’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

        United common stock is quoted on the Nasdaq National Market under the symbol “UBMT.” The closing sale price per share of UFC common stock on February 27, 2004 was $26.00.

Shareholder Data

        As of February 17, 2004 there were approximately 200 owners of record of United common stock and an estimated 875 additional beneficial holders whose shares of United common stock were held in street name by brokerage houses.

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Common Stock Market Prices

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

Dividend Payment History on United Common Stock

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

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

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Item 6.   SELECTED FINANCIAL DATA

Five Year Summary of Operations and Selected Financial Data

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

        Forward Looking Statements.    This Annual Report on Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following factors, in addition to those contained in United’s reports on file with the SEC: (i) general economic or industry conditions could deteriorate or be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan losses, or a reduced demand for United’s products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase loan losses; (iii) changes in the extensive laws, regulations and policies governing financial services companies could alter United’s business environment or affect operations; (iv) the potential need to adapt the industry changes in information technology systems, on which United is highly dependent, could present operational issues or require significant capital spending; (v) competitive pressures could intensify and affect United’s profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments, or bank regulatory reform; (vi) the impact of weather conditions in the geographic markets and business areas in which United conducts it business; and (vii) capital investments in United’s businesses may not produce expected growth in earnings anticipated at the time of the expenditure. Forward-looking statements speak only as of the date they are made, and United undertakes no obligation to update them in light of new information of future events.

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Selected United Financial Data

        The following results of operations for 2003, 2002 and 2001 is derived from the audited consolidated financial statements.

Results of Operations for the Year Ended December 31, 2003

        United’s net income for the year ended December 31, 2003 was $4.7 million, or basic and diluted earnings per share of $1.93 and $1.88, respectively. This compares to net income of $3.0 million, or basic and diluted earnings per share of $1.21 and $1.20, respectively, in 2002 and $.94 and $.94, respectively in 2001.

        During 2003, United’s continuing operations contributed $3.8 million in net income or $1.53 per diluted share, compared to $1.04 per diluted share in 2002 and $.85 per diluted share in 2001.

        Net interest income increased $1.4 million to $11.4 million in 2003 or 14.0% and the provision for loan losses decreased $.3 million, resulting in a total increase of $1.7 million, or 19.1%, in net interest income after provision for loan losses. Non-interest income increased $1.8 million, or 36.7%, in 2003 to $6.7 million over 2002 due to a record increase in gain on sale of loans by United’s mortgage lending activities in 2003. The $1.8 million increase in non-interest expense in 2003 includes a $1.5 million increase in salaries and commissions, a $.1 million increase in occupancy costs and a $.1 million increase in data processing fees.

        The $.5 million increase in income from discontinued operations in 2003 was the result of the sale of Valley in July 2003.

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        United’s results of operations for the year ended December 31. 2003 were impacted favorably by record high mortgage lending volumes, an improved net interest margin and the sale of its majority-owned commercial bank subsidiary, Valley. Interest rates were relatively stable in 2003, with a single .25% decline of the federal funds rate by the Federal Reserve Board in June 2003.

        United’s subsidiary, Heritage Bank, experienced a significant increase in loan volumes in 2003 of $15.8 million, a 7.5% increase in net loans over 2002. In the current low rate environment, Heritage Bank has focused on its strengths as a community service bank to remain competitive and retain favorable client relationships. Total loans secured by real estate were up $7.5 million in 2003 over 2002. Commercial loans were also up $4.0 million and consumer loans have increased $3.6 million for the same time period.

        The mortgage re-finance market remained strong in 2003, as it was in 2002. Mortgage loans originated in 2003 were $312.0 million, or $109.1 million over 2002 levels. The related gain on sale of residential loans on the secondary market at Heritage Bank was a record $5.3 million in 2003, a 39% increase over 2002.

        Interest rate margins at Heritage Bank rose .40% to 3.87% in 2003 from 3.47% in 2002. Average yields on interest-earning assets declined .75% in 2003 as compared to 2002, while average rates on interest-bearing liabilities decreased 1.24%. This resulted in a change in interest rate spread of .49% from 2.92% in 2002 to 3.41% in 2003.

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

        Another critical accounting policy of United is that related to the carrying value of goodwill in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). United adopted a market valuation approach in assessing goodwill impairment and will measure the carrying value similarly at least annually under the new accounting rules. Ongoing impairment analysis of the fair value of the remaining goodwill will involve a substantial amount of judgment, as will establishing and monitoring estimated amounts and lives of other intangible assets. Also as required upon adoption of SFAS No. 142, United ceased amortization of goodwill on January 1, 2002. At December 31, 2003 and 2002, United had $1.4 million and $3.4 million of recorded goodwill (See Part IV, Item 15- “Notes to Consolidated Financial Statements- Goodwill and Other Intangible Assets”).

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

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        United has also identified its accounting method for securities available-for-sale to be a critical accounting policy. Securities available-for-sale are carried at fair value and unrealized gains and losses (net of related tax effects) are excluded from earnings and reported as a separate component of stockholders’ equity. While fair values are determined per market quotes from independent brokers and not subject to management estimation, the carrying value of the securities is subject to market variations. At December 31, 2003 and 2002, the unrealized gain on securities available-for-sale to mark them to market was $.5 million and $1.1 million, respectively. (See Part IV, Item 15- “Notes to Consolidated Financial Statements- Securities Available-For-Sale”).

        Discontinued Operations.   On July 31, 2003, United sold its majority-owned subsidiary, Valley, to Marquette Financial Companies. An after-tax gain of $714,129 was recorded on the sale, and along with the results of operations of Valley, is recorded within the consolidated income statement as net income from discontinued operations. All previously issued consolidated financial statements have been restated to also disclose the assets, liabilities, and operations of Valley as discontinued operations. Valley’s discontinued operations resulted in income net of tax of $890,716, or $.35 per diluted share, during 2003, $400,061, or $.16 per diluted share, during 2002 and $227,668, or $.09 per diluted share during 2001.

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

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

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

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

Average Balance Sheet
(Dollars in thousands)