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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 ENDING DECEMBER 31, 1997
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 0-11916
FIRST UNITED BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
ARKANSAS 71-0538646
- -------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
MAIN AND WASHINGTON STREETS, EL DORADO, ARKANSAS 71730
- ------------------------------------------------ ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (870) 863-3181
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF CLASS WHICH REGISTERED
-------------- ------------------------
Common Stock, $1.00 par value NASDAQ-NMS
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. Yes [x] No [ ]
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 [x] No [ ]
As of March 1, 1998, 10,276,772 shares of the Registrant's Common
Stock, $1.00 par value were issued and outstanding, and the approximate
aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $450,050,000.00. (For purposes of the above stated
amount only, all directors and officers of the registrant are presumed to be
affiliates.)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into
the listed Parts and Items of Form 10-K:
Annual Report to Stockholders for the year ending December 31, 1997 to
the extent indicated in the Form 10-K cross reference index - PARTS II, III,
and IV.
Definitive Proxy Statement to Stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the Registrant's fiscal year - PART III.
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FIRST UNITED BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1997
CROSS REFERENCE SHEET AND INDEX
<TABLE>
<CAPTION>
PART I.
ITEM NO. LOCATION*
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<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . Page 4 of Form 10-K
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . Page 5 of Form 10-K
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . Page 5 of Form 10-K
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . . . . . Page 5 of Form 10-K
PART II.
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . Page 11 of the 1997
Annual Report
to Stockholders
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . Page 17 of the 1997
Annual Report to
Stockholders
Item 7. Managements's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . Pages 3-16 of the
1997 Annual Report
to Stockholders
Item 8. Financial Statements and Supplementary Data . . . . . . . Pages 20-37 of the
1997 Annual Report
to Stockholders
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . Not Applicable
</TABLE>
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FIRST UNITED BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1997
CROSS REFERENCE SHEET AND INDEX (CONTINUED)
<TABLE>
<CAPTION>
PART III.
ITEM NO. LOCATION*
- -------- ---------
<S> <C> <C>
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . . Pages 38-40 of the
1997 Annual Report
to Stockholders
The remaining information for Item 10 and the information required by
Items 11 through 13 are incorporated by reference to the Registrant's
Definitive Proxy Statement for the 1998 Annual Meeting of Stockholders
filed with the Securities and Exchange Commission.
PART IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . Page 7
</TABLE>
*Page number references are to the locations of the listed items contained in
this Annual Report on Form 10-K for the year ended December 31, 1997. The
Registrant's 1997 Annual Report to Stockholders and Definitive Proxy Statement
are referred to above where such information is incorporated by reference into
this Annual Report on Form 10-K from such 1997 Annual Report to Stockholders and
Definitive Proxy Statement.
3
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FIRST UNITED BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1997
PART I
ITEM 1. BUSINESS.
DESCRIPTION OF BUSINESS
First United Bancshares, Inc. (First United) is a multi-bank holding
company incorporated in 1980 for the purpose of holding all of the outstanding
stock of The First National Bank of El Dorado (FNBE). Between 1981 and 1997,
First United acquired twelve other banks in different cities within Arkansas,
Louisiana and Texas. The banks acquired were the First National Bank of Magnolia
(FNBM), Merchants and Planters Bank, N.A., of Camden (MPBC), City National Bank
of Fort Smith (CNBFS), Commercial Bank at Alma (CBA), The Bank of North Arkansas
(BNA), First Stuttgart Bank and Trust Company n\k\a First United Bank (FUB),
FirstBank, Texarkana, Texas (FBTX), Citizens Bank & Trust of Carlisle (CBT
Carlisle), Hazen First State Bank of Hazen (HFSB), First Bank of Arkansas of
Brinkley (FBA), City Bank & Trust of Shreveport, Shreveport, Louisiana (CBT),
and Fredonia State Bank, Nacogdoches, Texas (FSB). CBT Carlisle, HFSB and FBA
were merged with and into FUB in 1997. First United formed First United Trust
Company, N.A. (FUTC) in 1996. Each of the banks and the trust company are
wholly-owned by First United.
The banks offer customary services of banks of similar size and similar
markets, including interest-bearing and non-interest bearing deposit accounts,
commercial, real estate and personal loans, correspondent banking services and
safe deposit box activities. The trust company provides trust services and
fiduciary functions of First United's affiliated banks which provide such
services except that FBTX continues to act as the fiduciary for all of its
accounts and FUB maintains a limited number of its accounts on a full service
basis. For further discussion of First United operations, see pages 3 through 16
of the Annual Report, which is incorporated by reference to Item 7 in the Form
10-K.
COMPETITION
The banking business is highly competitive. The banking and trust
subsidiaries of First United compete actively with national and state banks,
savings and loan associations, trust companies, securities dealers, mortgage
bankers, finance companies and insurance companies.
REGULATION
First United is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended (the "Act"), and as such, is subject to
regulation and examination by the Federal Reserve Board and is required to file
with the Federal Reserve Board annual reports and other information regarding
the business operations of itself and its subsidiaries. The Act provides that a
bank holding company may be required to obtain Federal Reserve Board approval
for the acquisition of more than 5% of the voting securities or substantially
all of the assets of any bank or bank holding company, unless it already owns a
majority of the voting securities of such bank. The Act prohibits First United
from engaging in any business other than banking or bank-related activities
specifically allowed by the Federal Reserve Board. The Act also prohibits First
United and its subsidiaries from engaging in certain tie-in arrangements in
connection with the extension of credit, the lease or sale of property or the
provision of any services. Under Title VI of the Financial Institutions, Reform,
Recovery and Enforcement Act of 1989, the Act has been amended to authorize bank
holding companies to acquire savings and thrift institutions without tandem
operations restrictions.
First United's ten banking subsidiaries ("the Banks") are subject to a
variety of regulations concerning the maintenance of reserves against deposits,
limitations on the rates that can be charged on loans or paid on deposits,
branching, restrictions on the nature and amounts of loans and investments that
can be made and limits on daylight overdrafts. All of the Banks are regulated by
the Federal Deposit Insurance Corporation. In addition, as national banking
associations, FNBE, FNBM, MPBC, and CNBFS are subject to the regulation and
supervision of the Comptroller of the Currency, while CBA, BNA, and FUB are
subject to the regulation of the Arkansas State Bank Department, CBT is subject
to the regulation of the Louisiana Office of Financial Institutions and FBTX and
FSB are subject to the regulation of the Texas Department of Banking. FABE,
MPBC, CNBFS, FNBM and FUTC are members of the Federal Reserve System and subject
to regulation by the Federal Reserve Board. FUTC is also subject to regulation
by the Comptroller of Currency.
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The Banks are limited in the amount of dividends they may declare. Prior
approval must be obtained from the appropriate regulatory authorities before
dividends can be paid by the Banks to First United if the amount of adjusted
capital, surplus and retained earnings is below defined regulatory limits. See
Note 14 of Notes to the Consolidated Financial Statements, which is incorporated
by reference into Item 8 of this Annual Report on Form 10-K. The Banks are also
restricted from extending credit or making loans to or investments in First
United and certain other affiliates as defined in the Federal Reserve Act.
Furthermore, loans and extensions of credit are subject to certain other
collateral requirements.
EMPLOYEES
At December 31, 1997, First United and its subsidiaries had approximately
814 full-time equivalent employees and considers its relationship with its
employees to be good.
ITEM 2. PROPERTIES.
PROPERTIES
The ten (10) banking subsidiaries of First United hold in fee and primarily
occupy their main office buildings. In addition, the subsidiaries occupy and
operate branches located in thirty-one (31) communities throughout Arkansas,
Louisiana and Texas. The majority of the branch locations are held in fee. The
locations not held in fee are leased for various terms. First United does not
own or lease any real property. Minimal office space is required for First
United's officers and employees and such space is provided without charge by
FNBE. First United's data processing operations and FUTC are also located in
facilities owned by FNBE.
ITEM 3. LEGAL PROCEEDINGS.
LEGAL PROCEEDINGS
First United and its subsidiaries have been named as defendants in various
legal actions arising from normal business activities in which damages of
various amounts are claimed. The amount, if any, of ultimate liability with
respect to such matters cannot be determined. However, after consulting with
legal counsel, management believes any such liability will not have a material
effect on First United's consolidated financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 17, 1997, the Company held a special shareholders meeting where
the Board of Directors of the Company submitted to the shareholders a proposal
to vote upon the Agreement and Plan of Reorganization, dated June 18, 1997 (the
"Agreement"), by and between the Company and City Bank & Trust of Shreveport,
where the Company would acquire all of the issued and outstanding shares of
common stock of City Bank & Trust of Shreveport in exchange for the issuance of
the Company's common stock as described in the Agreement. The acquisition is
more fully described in the Company's Form S-4 Registration Statement under the
Securities Act of 1933, as amended, Registration No. 333-37281 as filed with the
Securities and Exchange Commission on October 6, 1997, and Amendment No. 1
thereto, filed on November 3, 1997, and which became effective on November 4,
1997, and in the Company's current report on Form 8-K filed with the Securities
and Exchange Commission on January 14, 1998, 1998. Of the total shares voted at
the special meeting 7,664,725 were voted in favor of the Agreement, 10,744 voted
against the Agreement and 102,587 abstained from voting.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<S> <C>
James V. Kelley, 48 . . . . . . . . . . . . Chairman, President and Chief Executive
Officer of First United since 1987; Chairman and Chief
Executive Officer of FNBE since 1985.
Robert G. Dudley, 65 . . . . . . . . . . . Secretary of First United since 1983;
President of FNBE since 1985.
John E. Burns, 39 . . . . . . . . . . . . . Senior Vice President and Chief Financial
Officer of First United since 1993; Vice President and
Director of Audit from 1988 to 1993.
SIGNIFICANT OTHER EMPLOYEES
Jim N. Harwood, 58 . . . . . . . . . . . . President and Chief Executive Officer of
CNBFS since 1993; Executive Vice President of CNBFS
from 1983 to 1993.
</TABLE>
5
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
The information required in response to this Item is incorporated by
reference from the disclosure contained under the caption "Common Stock and
Dividends" on page 11 of the Annual Report to Stockholders, which is included as
Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA.
The information required in response to this Item is incorporated by
reference from the disclosure contained under the caption "Selected Financial
Data" on page 17 of the Annual Report to Stockholders, which is included as
Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required in response to this Item is incorporated by
reference from the disclosure contained under the caption "Financial Analysis"
on pages 3-16 of the Annual Report to Stockholders, which is included as Exhibit
13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required in response to this Item is incorporated by
reference from the disclosure contained under the caption "Financial Statements
and Notes" on pages 20-37 of the Annual Report to Stockholders, which is
included as Exhibit 13 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
Pursuant to general instruction G(3) of the instructions to Form 10-K,
information concerning First United's executive officers and other significant
employees is included under the separate captions "Executive Officers of the
Registrant" and "Significant Other Employees" at the end of Part I of this
report. The remaining information required in response to this Item is
incorporated by reference from the disclosure contained under the caption
"Executive Officers and Directors" on pages 41-43 of the Annual Report to
Stockholders, which is included as Exhibit 13 hereto, and is incorporated by
reference from the Definitive Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the end of the
1997 fiscal year covered by this Annual Report on 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated by
reference from the Definitive Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the end of the
1997 fiscal year covered by this Annual Report on 10-K.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this Item is incorporated by
reference from the Definitive Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the end of the
1997 fiscal year covered by this Annual Report on 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this Item is incorporated by
reference from the Definitive Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the end of the
1996 fiscal year covered by this Annual Report on 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORT ON FORM 8-K.
ITEM 14(a)(1) FINANCIAL STATEMENTS.
The following consolidated financial statements and the report of
independent auditors of First United Bancshares, Inc. and subsidiaries for the
year ended December 31, 1997 as required by Item 8, are:
<TABLE>
<CAPTION>
Page(s) in 1997 Annual
Report to Stockholders
<S> <C>
Reports of Management and Independent Auditors ............................. Page 37
Consolidated Statements of Condition as of
December 31, 1997 and 1996 ............................................ Page 20
Consolidated Statement of Income
for the three years ended December 31, 1997, 1996 and 1995 ............ Page 21
Consolidated Statements of Changes in Capital Accounts
for the three years ended December 31, 1997, 1996 and 1995 ............ Page 22
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997, 1996 and 1995 ............ Page 23
Notes to Consolidated Financial Statements-December 31, 1997 ............... Pages 24-36
</TABLE>
ITEM 14(a)(2) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
ITEM 14(a)(3) FINANCIAL STATEMENT SCHEDULES.
The Exhibits required by Item 601 of Regulation S-K which are required to
be filed in response to this Item 14(a)(3) are submitted as a separate section
of this Annual Report on Form 10-K under the caption "Exhibit Index".
ITEM 14(b) REPORTS ON FORM 8-K.
On September 16, 1996, First United filed a Current Report on Form 8-K
under Items 2 and 7 regarding the Company's September 3, 1997 acquisition of all
of the issued and outstanding shares of common stock in Fredonia Bancshares,
Inc., Nacogdoches, Texas ("Fredonia") pursuant to an Agreement and Plan of
Reorganization, dated April 25, 1997, whereby the Company acquired all of the
issued and outstanding shares of common stock of Fredonia in exchange for the
issuance of 1,599,807 shares of Company common stock and satisfied unexercised
stock options of Fredonia common stock by issuing an additional 5,876 shares of
Company common stock.
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First United filed a current report on Form 8-K dated October 3, 1997,
providing under Item 5 supplemental financial statements of the Company as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, as well as certain unaudited supplemental consolidated
financial information, giving retroactive effect to the merger with Fredonia.
First United filed a current report on Form 8-K dated October 7, 1997,
disclosing under Item 5 that the merger by and between First United and Fredonia
was accounted for using the pooling of interest method and providing summary
financial data of the combined operations of Fredonia and First United for the
period ended October 31, 1997.
ITEM 14(c) EXHIBITS.
The exhibits required by Item 601 of Regulation S-K which are required to
be filed in response to this Item 14(c) are submitted as a separate section of
this Annual Report on Form 10-K under the caption "Exhibit Index".
ITEM 14(d) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
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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, on this 16th day of
March, 1998.
FIRST UNITED BANCSHARES, INC.
By:/s/ JOHN E. BURNS
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John E. Burns, Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes James V. Kelley
and/or John E. Burns, to file one or more amendments to this Annual Report on
Form 10-K, which amendments may make such changes to the Annual Report on Form
10-K as he deems appropriate, and each such person hereby appoints James V.
Kelley and/or John E. Burns as his lawful attorney-in-fact to execute in the
name and on behalf of each such person individually, and in each capacity stated
below, any such amendments to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
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<S> <C> <C>
/s/ JAMES V. KELLEY Chairman of the Board, President, Chief March 16, 1998
- ----------------------- Executive Officer
James V. Kelley
/s/ JOHN E. BURNS Vice President, Chief Financial Officer, March 16, 1998
- ----------------------- Principle Accounting Officer
John E. Burns
/s/ E. LARRY BURROW Director March 16, 1998
- -----------------------
E. Larry Burrow
/s/ CLAIBORNE P. DEMING Director March 16, 1998
- -----------------------
Claiborne P. Deming
</TABLE>
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<TABLE>
<S> <C> <C>
/s/ TOMMY HILLMAN Director March 16, 1998
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Tommy Hillman
March 16, 1998
/s/ ROY E. LEDBETTER Director
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Roy E. Ledbetter
/s/ MICHAEL F. MAHONY Director March 16, 1998
- ---------------------------
Michael F. Mahony
- --------------------------- Director March 16, 1998
Richard H. Mason
/s/ JACK W. MCNUTT Director March 16, 1998
- ---------------------------
Jack W. McNutt
/s/ GEORGE MIDDLEBROOK, III Director March 16, 1998
- ---------------------------
George Middlebrook, III
- --------------------------- Director March 16, 1998
R. Madison Murphy
/s/ ROBERT C. NOLAN Director March 16, 1998
- ---------------------------
Robert C. Nolan
/s/ CAL PARTEE, JR. Director March 16, 1998
- ---------------------------
Cal Partee, Jr.
/s/ CAROLYN TENNYSON Director March 16, 1998
- ---------------------------
Carolyn Tennyson
/s/ JOHN D. TRIMBLE, JR. Director March 16, 1998
- ---------------------------
John D. Trimble, Jr.
</TABLE>
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FIRST UNITED BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1997
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
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<S> <C>
2(a) Agreement and Plan of Reorganization between First United
Bancshares, Inc. and Fredonia Bancshares, Inc. and Plan of
Merger attached as Exhibit A thereto (previously filed by
First United in its Form S-4 Registration Statement under the
Securities Act of 1933, Registration No. 333-30007 as filed
with the Securities and Exchange Commission on June 25, 1997,
and Amendment No. 1 thereto, filed on July 17, 1997, which
became effective July 18, 1997) incorporated herein by
reference.
2(b) Agreement and Plan of Reorganization between First United
Bancshares, Inc. and City Bank & Trust of Shreveport and Plan
of Merger attached as Exhibit A thereto (previously filed by
First United in its Form S-4 Registration Statement under the
Securities Act of 1933, Registration No. 333-37281 as filed
with the Securities and Exchange Commission on October 6,
1997, and Amendment No. 1 thereto, filed on November 3, 1997,
which became effective November 4, 1997) incorporated herein
by reference.
3(a) Amended and Restated Articles of Incorporation of First
United Bancshares, Inc.
3(b) Restated Bylaws of First United Bancshares, Inc. (Filed as
Exhibit 3(b) to the Annual Report on form 10-K for the Year
Ended December 31, 1995) incorporated herein by reference.
9 Trust Agreement dated June 14, 1994, by and among Jackson T.
Stephens, the W. R. Stephens Trust, the W. R. Stephens, Jr.
Trust, W. R. Stephens, Jr., Warren A. Stephens, the Elizabeth
Ann Stephens Campbell Trust, Stephens Group, Inc. and the
Bank of New York, a Trustee (filed as Exhibit 9 to the
Registration Statement of Form S-4 of the Company filed with
the Securities and Exchange Commission on May 4, 1994)
incorporated by reference herein.
10(a) Severance Agreement between First United Bancshares, Inc. and
James V. Kelley (filed as Exhibit 10.1 to the Annual Report
on Form 10-K for the year ended December 31, 1992)
incorporated by reference herein.
10(b) Shareholders Agreement dated December 17, 1993 by and among
First United, W. R. Stephens, Jr., the W. R. Stephens Trust,
W. R. Stephens, Jr. Trust, Jackson T. Stephens, Warren A.
Stephens, Elizabeth Ann Stephens Trust and Stephens Group,
Inc. (filed as Exhibit 10 to the Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on
May 4, 1994) incorporated by reference herein.
10(c) Agreement and Plan of Reorganization between First United
Bancshares, Inc. and Citizens National Bancshares of Hope,
Inc. and Plan of Merger attached as Exhibit A thereto
(previously filed by First United in its Form S-4
Registration Statement under the Securities Act of 1933,
Registration No. 333-43637, as filed with the Securities and
Exchange Commission on December 31, 1997, and Amendment No. 1
thereto, filed on February 3, 1998, which became effective
February 6, 1998) incorporated herein by reference.
10(d) Agreement and Plan of Reorganization between First United
Bancshares, Inc. and First Republic Bancshares, Inc. and Plan
of Merger attached as Exhibit A thereto (previously filed by
first United in its Form S-4 Registration Statement under the
Securities Act of 1933, Registration No. 333-44601 as filed
with the Securities and Exchange Commission on January 21,
1998, and Amendment No. 1 thereto, filed on February 4, 1998,
which became effective February 6, 1998) incorporated herein
by reference.
11 Statement of Computation of Per Share Earnings (see page 21
of the Consolidated Financial Statements of First United
Bancshares, Inc. contained in the 1997 Annual Report to
Stockholders which is included herein as Exhibit 13).
13 First United Bancshares, Inc. 1997 Annual Report to
Stockholders.
21 Subsidiaries of First United Bancshares, Inc.
23(a) Consent of Arthur Andersen LLP.
23(b) Consent of Axley & Rode LLP.
24 Power of Attorney (see signature page).
27 Financial Data Schedule.
</TABLE>
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EXHIBIT 3(a)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FIRST UNITED BANCSHARES, INC.
FIRST. The name of the corporation is FIRST UNITED BANCSHARES, INC.
SECOND. The period of its duration is perpetual.
THIRD. The purposes for which the corporation is organized are:
(a) To engage in all business activities allowable for a bank holding
company and to own and manage banks and other businesses in the
area of financial services.
(b) To acquire and own property, both real and personal, including
common stock or other beneficial interest incorporations,
associations, trusts and other forms of business whether
incorporated or unincorporated, and to provide services to and for
such businesses, and to engage in businesses related to any such
businesses, and to do any and all lawful acts necessary,
convenient, advisable or desirable which may be incidental or
pertinent to such businesses.
(c) To engage in any business not prohibited by law.
FOURTH. The total number of shares of authorized capital stock which
the corporation shall have the authority to issue shall be as follows:
<TABLE>
<CAPTION>
SHARES CLASS PAR VALUE PER SHARE
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<S> <C> <C>
24,000,000 Common $1.00
500,000 Preferred $1.00
</TABLE>
The board of directors may determine, in whole or in part, the preferences,
limitations, and relative rights of any class of stock, or one (1) or more
series within a class, before the issuance of such class or series,
respectively, and may amend The Articles of Incorporation to set forth such
preferences, limitations, and relative rights without shareholders approval or
action.
FIFTH. Shareholders shall have no pre-emptive right to acquire
additional or treasury shares of the corporation.
SIXTH. All shareholders are entitled to cumulate their votes for the
election of directors.
SEVENTH. Except upon the approval of two-thirds (2/3) of all shares
issued and outstanding that are entitled to vote at a duly called shareholders
meeting, the corporation shall not:
(i) effect any transaction pursuant to which a purchaser would
acquire control of the corporation, whether by merger,
consolidation, purchase of stock or otherwise,
(ii) effect a merger or share exchange with another entity pursuant
to which the corporation would issue shares of common stock in
an amount greater than twenty percent (20%) of the number of
shares of common stock issued and outstanding immediately prior
to consummation of the transaction,
(iii) effect a merger or share exchange with another entity pursuant
to which the corporation would issue shares of common stock in
an amount that would cause the total number of shares issued
during any consecutive twelve month period in connection with
such transactions to exceed twenty percent (20%)
<PAGE> 2
of the number of shares of common stock issued and outstanding
immediately prior to consummation of the transaction,
(iv) sell, exchange, lease or otherwise dispose of all or
substantially all of the corporation's assets and property
other than in the usual and regular course of business of the
corporation,
(v) effect a dissolution or liquidation of the corporation, or
(vi) amend these Articles of Incorporation.
EIGHTH. The internal affairs of the corporation shall be regulated in
accordance with the By-Laws duly adopted in accordance with the laws of the
State of Arkansas.
NINTH. The address of the registered office of the corporation is
First National Bank Building, Main at Washington, El Dorado, Arkansas 71730.
The name of its registered agent at such address is Robert G. Dudley.
TENTH. The number of directors that constitutes the Board of Directors
of the corporation shall not exceed twenty-five (25). The number of directors
shall be determined by the stockholders at each annual meeting or may be
determined at any special meeting. The Board of Directors may increase or
decrease by thirty percent (30%) or less the number of directors last fixed by
the stockholders, provided that the number of directors shall not be less than
three (3) nor more than twenty-five (25). The Board of Directors may fill a
vacancy created by the Board of Directors under this Article Tenth.
ELEVENTH. To the fullest extent permitted by the Arkansas Business
Corporation Act, as is now exists or may hereafter be amended, a director of
this corporation shall not be liable to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director.
TWELFTH. The corporation may indemnify any person who was, or is, a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding to the fullest extent permitted by the
Arkansas Business Corporation Act as it now exists or may hereafter be amended.
THIRTEENTH. The corporation elects to be governed by the provisions of
the Arkansas Business Corporation Act of 1987 as it now exists or may hereafter
be amended from time to time.
FOURTEENTH. The name and address of the incorporator is:
Robert G. Dudley
Main at Washington Streets
El Dorado, Arkansas 71730
<PAGE> 1
EXHIBIT 13
FIRST UNITED BANCSHARES, INC.
1997 ANNUAL REPORT TO STOCKHOLDERS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Letter to the Stockholders . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-16
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 17
Quarterly Results of Operations . . . . . . . . . . . . . . . . . . . . 18
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . 19-36
Report of Independent Public Accountants . . . . . . . . . . . . . . . . 37
Report of Management on Financial Statements . . . . . . . . . . . . . . 37
Executive Officers and Directors of First United and its Subsidiaries. . 38-40
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------
FIRST UNITED BANCSHARES, INC.
(Dollars In Thousands, Except Per Share Data) 1997 1996 % Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DATA
Net Income $ 24,905 $ 22,372 11.32%
Net Interest Income 74,826 65,582 14.10%
- --------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net Income $ 2.42 $ 2.27 6.61%
Book Value (End of Period) 19.17 17.55 9.23%
Tangible Book Value (End of Period) 18.14 16.39 10.68%
Market Value (End of Period) 40.00 33.00 21.21%
Cash Dividends .77 .66 16.67%
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (YEAR END)
Total Securities(1) $ 732,608 $ 731,802 0.11%
Loans(2) 1,003,308 844,255 18.84%
Earning Assets(2) 1,806,139 1,642,327 9.97%
Total Assets 1,938,236 1,772,992 9.32%
Deposits 1,633,222 1,514,038 7.87%
Stockholders' Equity 197,006 172,800 14.01%
- --------------------------------------------------------------------------------------------------------------------
KEY RATIOS
Return on Average Assets 1.37% 1.29%
Return on Average Equity 13.94% 13.92%
Net Interest Margin (FTE) 4.45% 4.28%
Allowance for Loan Losses to Loans(2) 1.45% 1.50%
Equity to Assets(3) 10.10% 9.75%
Leverage Ratio 9.61% 9.07%
Primary Capital Ratio 10.77% 10.41%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes available-for-sale and investment securities.
(2) Net of unearned income.
(3) Excludes unrealized gains or losses on securities available-for-sale.
[1]
<PAGE> 3
TO OUR STOCKHOLDERS AND FRIENDS:
1997 was a very active year for First United Bancshares. While achieving
record earnings, the company announced four new bank mergers, further progress
on our technology enhancement plan and another increase in our cash dividend
rate. This letter will outline each of these areas and hopefully convey our
thoughts concerning the future direction of our company.
Operating Results
Earnings per share for 1997 were $2.42 compared with $2.27 for 1996 and
$1.97 for 1995, all on a restated basis, to reflect acquisitions. When compared
with originally reported earnings per share in 1996 of $2.21, earnings per share
increased approximately 10% during 1997. First United reported record net income
of $24.9 million during 1997 when compared to $22.4 million and $18.4 million
during 1996 and 1995, respectively. Total assets at year-end were $1.9 billion.
The internal growth rate of our consolidated loan portfolio grew 13.3% to
approximately $1 billion. While we were pleased with this growth, it brings our
loan to deposit ratio to 61.43%. This represents potential for continued growth.
Our efficiency ratio of 55.58% is indicative of our commitment to
controlling non-interest expense. Additionally, our return on equity of 13.94%
during the past year, while not at the level we wish, is an improvement over our
originally stated returns for 1996 and 1995. Improving our return on equity
continues to be a high priority for First United. Return on average assets was
1.37%, also an increase from last year.
The cash dividend rate was increased from $0.17 to $0.20 in May 1997. This
was the sixth consecutive year of dividend increases. One of the primary focuses
of this company is on increasing total return to the shareholders through return
on equity and yield through cash dividends. Our efforts which are outlined in
this letter are to further that end.
Expansion
Expansion of our core banking franchise was furthered by the addition of
Fredonia State Bank (Nacogdoches, Texas) with $250 million in assets and City
Bank & Trust (Shreveport, Louisiana) with $65 million in assets to First United.
We also announced during 1997 pending mergers with First Republic Bank (Monroe,
Louisiana) with $149 million in assets and Citizens National Bancshares (Hope,
Arkansas) with $263 million in assets. It is anticipated that all of these
transactions have been or will be accretive to earnings per share immediately
upon consummation. These fine banks fit the model that we are looking for in
First United banks - strong community orientation, excellent management and a
commitment to increasing shareholder value. We would expect continued merger and
acquisition opportunities in 1998.
Technology Enhancements
This past year saw First United continuing a reengineering program of its
management information systems and technology services. Work continued on the
conversion of our banking subsidiaries to our consolidated core processing,
branch automation, and ATM network systems. As you are aware, the next
millennium is fast approaching and with it comes complex issues related to
reprogramming of many electronic and data processing systems. We are fortunate
to have business partners that are for all practical purposes year 2000
compliant with respect to their computer software and hardware products. Unlike
many financial institutions, we do not anticipate significant additional
expenses to bring our banking systems into compliance with year 2000 standards.
This fact will assist your company in meeting the financial goals and objectives
we have set for 1998 and beyond.
Our online Internet Banking product was introduced in the Nacogdoches,
Texas market during the third quarter of last year. With the online banking
product, bank customers are able to make inquiries on their loan and deposit
accounts, get online account statements, transfer funds, make loan payments,
order checks, request stop payments, apply for loans and open new accounts.
Online banking makes it easier and more convenient for our banks' customers to
access their accounts from their homes, offices or any site with Internet
access. It is our plan to introduce this product in our other markets during
1998. Online banking is part of a broader array of services that banks must
offer in order to meet the needs of a diverse population and First United is
leading the way in providing our customers with this outstanding product. Our
customers will continue to be able to handle their transactions at the bank if
they prefer, but the segment of our customers who prefer to use the online
method will be able to do so.
It was recently announced that First United is purchasing a one-third
interest in the DASH(TM) ATM Network. The transaction is expected to close
during the first quarter of 1998. DASH(TM) provides turnkey ATM network
processing and debit card services. Electronic commerce is a strong source of
fee income and we would like to expand our presence in that area because more
and more financial transactions, i.e., credit card, debit card, merchant, ATM
and smart card transactions are being processed in this manner. The purchase of
an interest in this network will provide us with a vehicle to increase our fee
income and scope of services.
The results reported here would not be possible without your support and
the complete dedication and hard work of our staff. We hope that our progress
this past year reflects our commitment to making First United a high performing
company in every way. We are confident that 1998 will be another year in which
your company achieves a high level of financial performance.
James V. Kelley
Chairman, President and
Chief Executive Officer
[2]
<PAGE> 4
FINANCIAL ANALYSIS
OVERVIEW
The following financial review and analysis is intended to highlight the
significant factors affecting First United Bancshares, Inc. (First United)
Consolidated Statements of Condition and Statements of Income presented in this
Annual Report. This discussion is designed to provide readers with a more
comprehensive review of the operating results and financial position than would
be obtained from an examination of the financial statements alone. Reference
should be made to those statements and the selected financial data presented
elsewhere in this Annual Report for an understanding of the following review and
analysis.
In 1997, First United increased its quarterly cash dividend as a result of
higher sustainable earnings. The current annual dividend rate is $0.80 per share
versus $0.68 prior to the increase.
On September 3, 1997, First United merged with Fredonia Bancshares, Inc.
("Fredonia") and in connection therewith issued approximately 1,606,000 shares
of common stock for all of Fredonia's outstanding common stock (the "Merger").
The Merger was accounted for as a pooling-of-interests and, accordingly, First
United's financial statements for periods prior to the Merger have been restated
to include the results of Fredonia for all periods presented.
On December 31, 1997, First United acquired the issued and outstanding
stock of City Bank & Trust of Shreveport, Louisiana ("City Bank") in a
transaction accounted for as a pooling-of-interests. First United issued
approximately 425,000 shares in exchange for all of the outstanding shares of
City Bank. City Bank had assets of approximately $65.9 million at the date of
acquisition. First United's statements for years prior to the merger with City
Bank have not been restated to include the results of City Bank.
Operations for 1997 resulted in net income of $24.9 million or $2.42 per
share compared to $22.4 million or $2.27 per share in 1996. As shown in Table 1,
the most significant changes in per share net income for 1997 as compared to
1996 occurred in net interest income, non-interest income and non-interest
expense. A more detailed discussion of the components of net income is given
throughout this Financial Analysis.
Net income as a percentage of total average assets (ROA) was 1.37% in 1997
versus 1.29% in 1996 and 1.32% in 1995. The return on stockholders' equity (ROE)
was 13.94% in 1997 versus 13.92% in 1996 and 13.46% in 1995. These measures
compare favorably with banks of similar size nationwide.
Total assets at December 31, 1997 were $1.9 billion as compared to the
year-end 1996 balance of $1.8 billion. The book value of First United's common
stock increased 9.23% to $19.17 per share in 1997 from $17.55 per share in 1996.
Cash dividends were $.77 per share in 1997 and $.66 per share in 1996 and $.62
per share in 1995.
[3]
<PAGE> 5
TABLE 1: CHANGES IN PER SHARE INCOME
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prior year income $2.27 $1.97 $1.79
Increase(decrease) attributable to:
Effect of immaterial pooling 0.03 0.02 -0-
Net interest income 0.53 0.53 0.75
Provision for loan losses (0.16) (0.01) (0.03)
Non-interest income 0.16 0.20 0.19
Non-interest expense (0.42) (0.41) (0.60)
Income taxes 0.01 (0.03) (0.13)
- ------------------------------------------------------------------------------------------------
Current year income $2.42 $2.27 $1.97
- ------------------------------------------------------------------------------------------------
</TABLE>
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income, the principal source of earnings, is the difference
between the income generated by earning assets and the total interest cost of
the funds obtained to carry them. Net interest income, as it is referred to in
this discussion, is on a fully tax-equivalent basis, which adjusts for the
tax-exempt status of income earned on certain municipal loans and investments.
The reported interest income for these tax-free assets is increased by the
amount of income tax savings less the nondeductible portion of interest expense
incurred to acquire the tax-free assets.
On a tax-equivalent basis, net interest income for the year ended December
31, 1997 was $77.3 million, an increase of 13% over the year-end 1996 total of
$68.3 million. Net interest income for the year ended December 31, 1995 was
$60.1 million. The growth in net interest income for 1997 and 1996 was the
result of the effects of increased levels of earning assets.
TABLE 2: ANALYSIS OF NET INTEREST MARGIN
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C>
Yield on earning assets 8.07% 7.95% 7.93%
Break-even yield 3.62% 3.66% 3.62%
Net interest margin 4.45% 4.28% 4.30%
Net interest spread 3.61% 3.47% 3.37%
------------------------------------------------------------------------------
</TABLE>
The net interest margin increased in 1997 when compared with the previous
year, from 4.28% in 1996 to 4.45% in 1997. First United's growth in
interest-earning assets at a rate greater than the growth in interest-bearing
liabilities has contributed to the increase in net interest margin.
Earning assets increased from a level of $1.64 billion at December 31, 1996
to a level of $1.81 billion at year-end 1997. Short-term investments increased
$4.0 million, securities increased $0.8 million and loans increased $159.1
million. As a percentage of earning assets, short-term investments remained at
4%, total securities decreased from 45% to 41% and loans increased from 51% to
56%. The relative level and mix of earning assets reflected the effect of higher
earnings being available in the investment market.
Interest-bearing deposits increased $104.9 million during 1997. Total
interest-bearing deposits were $1.36 billion at December 31, 1997 compared with
$1.26 billion at year-end 1996. Non-interest-bearing demand deposits increased
$14.3 million or 6% during 1997. The increase is attributable to a general
increase in deposits on hand at First United's subsidiary banks.
[4]
<PAGE> 6
PROVISION FOR LOAN LOSSES
The provision for possible loan losses is the amount charged to current
period earnings. In order to ensure that the provisions maintain the allowance
at an adequate level, First United considers factors such as watch list trends,
the collateral adequacy of loans on the watch list, economic conditions, net
charge-offs and the size of the loan portfolio in determining the current period
provision.
The provision for loan losses totaled $2.4 million in 1997 versus $0.7
million in 1996 and $0.6 million in 1995. First United's loan portfolio modestly
reflects the national trend of increased levels of consumer spending and
borrowings. As a result, First United increased its 1997 provision as compared
to 1996 and 1995 levels to ensure that the allowance is maintained at an
adequate level.
NON-INTEREST INCOME
Total non-interest income was $15.3 million for 1997 compared with $12.3
million in 1996 and $9.6 million in 1995. The increase in 1997 compared to prior
year levels is primarily the result of continued increases in fee income earned
on deposits and trust company accounts. Since 1995, deposits subject to service
charges have increased by 5.6% while trust assets under management have
increased by 7.9%.
NON-INTEREST EXPENSE
Non-interest expense increased 16% or $7.4 million in 1997 over 1996
levels, and increased 14% in 1996 over 1995 levels. First United's 1996
conversion of four of its subsidiary banks to a new computer system accounts for
the increase in non-interest expense in 1996.
INCOME TAXES
Federal income taxes as a percentage of pre-tax income were 27.98% in 1997,
28.89% in 1996 and 30.94% in 1995. Additional information regarding income taxes
can be found in Note 9 in the Notes to the Consolidated Financial Statements.
BALANCE SHEET ANALYSIS
LOANS AND CREDIT RISK MANAGEMENT
A sound credit policy combined with periodic and independent credit reviews
are the key factors for First United's credit risk management program. All
subsidiary banks operate under written loan policies that help maintain a
consistent lending function and provide sound credit decisions.
TABLE 3: LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, Financial and
Agricultural $ 256,893 $207,886 $181,256 $158,272 $121,148
Real Estate 579,948 488,846 434,722 346,590 370,813
Consumer Loans 170,502 149,867 133,599 103,318 98,696
Loans for Purchasing or
Carrying Securities 237 116 6,835 2,461 2,830
Financing Leases 424 605 512 237 509
---------- -------- -------- -------- --------
Total Loans $1,008,004 $847,320 $756,924 $610,878 $593,996
========== ======== ======== ======== ========
Non-Performing Assets $ 5,889 $ 5,636 $ 6,174 $ 5,210 $ 6,649
========== ======== ======== ======== ========
</TABLE>
[5]
<PAGE> 7
TABLE 4: LOAN MATURITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------------------------------
1 Year Over 1 Over
(Dollars in Thousands) or Less through 5 years 5 years Total
------- --------------- ------- -----
<S> <C> <C> <C> <C>
Commercial, Financial &
Agricultural $147,815 $96,681 $12,397 $256,893
======== ======= ======= ========
Variable Rate $ 91,495
Pre-determined Rate $165,398
- --------------------------------------------------------------------------------------------------------
</TABLE>
Credit decisions continue to be based on the borrower's cash flow position
and the value of the underlying collateral, as well as other relevant factors.
Each bank is responsible for evaluating its loans to identify those credits
beginning to show signs of deterioration so that prompt corrective action may be
taken. In addition, First United has a loan review function that operates
independently of the subsidiary banks. The loan review teams perform periodic
examinations of each bank's loans and related documentation. Results of these
examinations are reviewed with the Chairman and Chief Executive Officer of First
United, the management and boards of the respective subsidiary banks, and the
First United Audit Committee.
Construction loans outstanding at December 31, 1997 are not material in
amount. However, to the extent loans are made to finance construction, those
amounts are included in Table 3 as Real Estate Loans.
A primary measure of loan quality is the percentage of the loan portfolio
that moves from an earning category to one of non-performing and thus becomes a
burden to earnings performance. Non-performing loans totaled $5.1 million and
$4.5 million at December 31, 1997 and 1996, respectively. The level of
non-performing loans represented 0.5% of loans for the years ended 1997 and
1996.
Non-accrual loans are those where management has considerable doubt about
the borrower's ability to repay on the terms originally contracted. In addition
to discontinuing the accrual of interest, interest previously recorded in the
current period as earned that has not been collected is reversed. Non-accrual
loans at December 31, 1997 totaled $2.8 million compared with $2.9 million at
year ended 1996. It is the policy of First United to place loans on non-accrual
status when interest and/or principal payments for such loans become 90 days or
more past due. However, there are instances when loans 90 days or more past due
continue to accrue interest because management considers that such loans are in
the process of collection. First United's non-accrual policy had the effect of
reducing interest income on non-performing loans in 1997 by approximately $0.1
million. The amount of interest income on such non-performing loans included in
net income for 1997 was not material.
Certain loans are renegotiated to provide a reduction or deferral of
interest or principal because of deterioration in the financial condition of the
respective borrowers. Once a loan is placed in this category, it remains there
until the terms are not more favorable than those of other customers.
Other real estate (ORE) that has been acquired through foreclosure has a
carrying value of $0.7 million at year ended 1997. This compares with $1.1
million and $1.3 million at year ended 1996 and 1995, respectively.
First United has no foreign credits in its loan portfolio. The intent of
management is to deploy its funds in its primary trade area where management is
familiar with its customers. This policy of First United permits funds obtained
locally to be re-channeled into the communities First United serves, promoting
economic growth.
Although First United maintains sound credit policies, certain credits
unexpectedly deteriorate and are charged off as a loss. The allowance for
possible loan losses is maintained to absorb potential losses, and the
management of First United views the allowance as a source of financial
strength. The allowance is increased by regular provisions which are based on
the current level and character of the loan and lease portfolio, historical
charge-off experience, watch list trends and national and local economic trends
and the evaluation of specific loans. First United continues to revise and
enhance its credit policies as well as its formal loan review program, and is
committed to reducing the level of non-performing assets.
[6]
<PAGE> 8
TABLE 5: SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of Allowance for Loan
Losses at Beginning of Period $ 12,655 $ 12,882 $12,250 $12,704 $10,535
-------- -------- ------- ------- -------
Allowance Applicable to Loans of Acquired Bank 426 1,215 1,627 86 840
-------- -------- ------- ------- -------
Loans Charged-Off:
Commercial, Financial and Agricultural 615 982 1,118 1,131 611
Real Estate 199 533 550 315 407
Consumer 1,775 2,532 1,444 1,372 696
Other 2 -0- 7 9 276
-------- -------- ------- ------- -------
Total Loans Charged-Off 2,591 4,047 3,119 2,827 1,990
-------- -------- ------- ------- -------
Recoveries of Loans Previously Charged-Off:
Commercial, Financial and Agricultural 894 663 834 825 501
Real Estate 170 231 169 218 718
Consumer 520 986 547 910 285
-------- -------- ------- ------- -------
Total Recoveries 1,584 1,880 1,550 1,953 1,504
-------- -------- ------- ------- -------
Net Loans Charged-Off 1,007 2,167 1,569 874 486
-------- -------- ------- ------- -------
Provision to Allowance 2,448 725 574 334 1,815
-------- -------- ------- ------- -------
Balance at End of Period $ 14,522 $ 12,655 $12,882 $12,250 $12,704
======== ======== ======= ======= =======
Ratio of Net Charge-Offs to Loans
Outstanding .10% .26% .20% .12% .08%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 6: ALLOCATION OF RESERVE BY CATEGORY
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
% Loans % Loans in % Loans % Loans % Loans in
(Dollars in in each each in each in each each
Thousands) AMOUNT Category Amount Category Amount Category Amount Category Amount Category
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Financial $ 4,264 25% $4,028 24% $4,548 29% $ 6,027 22% $ 6,769 15%
Real Estate 2,144 58% 1,567 58% 1,307 55% 1,170 62% 1,330 29%
Consumer 2,106 17% 2,322 18% 2,166 16% 1,880 16% 1,418 56%
Unallocated 6,008 -0- 4,738 -0- 4,861 -0- 3,173 -0- 3,187 -0-
- -----------------------------------------------------------------------------------------------------------------------------------
Total $14,522 100% $12,655 100% $12,882 100% $12,250 100% $12,704 100%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance as a
Percentage of
Total Loans 1.44% 1.50% 1.70% 2.01% 2.14%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Allowance for possible loan losses as a percentage of non-performing loans
was approximately 282%, 278% and 265% at December 31, 1997, 1996 and 1995,
respectively.
All non-performing assets of First United as of December 31, 1997 were
previously classified as substandard, doubtful or loss by First United or its
regulators. At December 31, 1997, First United's management has no loans about
which serious doubts exist as to collectibility other than those disclosed in
Table 7.
[7]
<PAGE> 9
TABLE 7: RISK ELEMENTS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Performing Loans:
Non-Accrual Loans:
Commercial & Financial $ 965 $ 929 $ 1,865 $ 697 $ 2,001
Real Estate 1,457 1,667 1,284 2,082 1,514
Consumer 334 288 174 183 175
-----------------------------------------------------------------------------------------------------------
Total Non-Accrual Loans 2,756 2,884 3,323 2,962 3,690
-----------------------------------------------------------------------------------------------------------
Past Due 90 Days or More and
Still Accruing:
Commercial 582 287 173 204 84
Real Estate 854 358 208 197 409
Consumer 427 340 312 220 261
-----------------------------------------------------------------------------------------------------------
Total Past Due 90 Days
or More and Still
Accruing 1,863 985 693 621 754
-----------------------------------------------------------------------------------------------------------
Renegotiated Loans 524 677 851 326 223
-----------------------------------------------------------------------------------------------------------
Total Non-Performing Loans 5,143 4,546 4,867 3,909 4,667
Other Real Estate 746 1,090 1,307 1,301 1,982
-----------------------------------------------------------------------------------------------------------
Total Non-Performing Assets $ 5,889 $ 5,636 $ 6,174 $ 5,210 $ 6,649
-----------------------------------------------------------------------------------------------------------
Non-Performing Loans
as a % of Outstanding Loans .51% .54% .64% .64% .79%
Non-Performing Assets
as a % of Equity Capital 2.99% 3.26% 4.11% 4.15% 5.37%
-----------------------------------------------------------------------------------------------------------
</TABLE>
SECURITIES
First United's goal in managing the securities portfolio is to maximize the
long-term total return on invested funds. On January 1, 1994, First United
adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Under this
accounting standard, debt securities that First United has the positive intent
and ability to hold to maturity are classified as investment securities and
reported at amortized cost. Debt and equity securities which are not classified
as investment securities are classified as available-for-sale and reported at
fair value, with unrealized gains and losses reported as a separate component of
stockholders' equity, net of income taxes. Securities available-for-sale include
securities that management intends to use as part of its asset-liability
strategy and that may be sold in response to changes in interest rates or
economic factors. The carrying value of available-for-sale securities that were
sold during 1997 was approximately $10.3 million as compared to $17.2 million
and $50.9 million in 1996 and 1995, respectively. See Notes 4 and 5 of the Notes
to the Consolidated Financial Statements for additional information on
available-for-sale and investment securities.
TABLE 8: SECURITIES CARRYING VALUE(1)
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
U.S. Treasury Securities and Other U.S. Government Agencies $ 452,539 $ 439,873 $ 331,295
Obligations of States and Political Subdivisions 105,292 80,993 100,343
Mortgage-Backed Securities 174,123 203,933 201,994
Other Securities 654 7,003 13,870
--------- ---------- ----------
$ 732,608 $ 731,802 $ 647,502
========= ========== ==========
</TABLE>
(1) Includes available-for-sale and investment securities.
[8]
<PAGE> 10
TABLE 9: SECURITIES MATURITY AND WEIGHTED AVERAGE YIELDS(1)
<TABLE>
<CAPTION>
Investment Securities
-----------------------------------------------------------------------------------
Maturing
------------------------------------------------------------------
After One But After Five But Mortgage-Backed Available-for-Sale
Within One Year Within Five Years Within Ten Years After Ten Years Securities Securities
------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities
and Other U.S.
Government Agencies $15,423 6.59% $36,531 6.75% $ 7,063 6.45% $ -0- 0.00% $ -0- 0.00% $393,522 6.35%
State & Political
Subdivisions 16,019 5.20% 36,184 4.87% 36,201 5.19% 12,803 6.31% -0- 0.00% 4,085 5.09%
Mortgage-Backed
Securities -0- 0.00% -0- 0.00% -0- 0.00% -0- 0.00% 77,047 6.53% 97,076 6.51%
Other 153 5.76% -0- 0.00% -0- 0.00% -0- 0.00% -0- 0.00% 501 5.78%
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total $31,595 5.88% $72,715 5.82% $43,264 5.40% $12,803 6.31% $77,047 6.53% $495,184 6.37%
======= ==== ======= ==== ======= ==== ======= ==== ======= ==== ======== ====
</TABLE>
(1) Yield information does not give effect to changes in fair value that are
reflected as a separate component of stockholders' equity.
TABLE 10: AVERAGE DEPOSITS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
------------------------------ -------------------------- ------------------------
Amount Rate Amount Rate Amount Rate
------------------------------ -------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
Demand Deposits $ 270,466 0.00% $ 252,191 0.00% $ 254,384 0.00%
Savings Deposits and
Interest-bearing
Deposits 497,820 2.79% 463,152 2.75% 395,709 3.16%
Time Deposits of $100 or
more 238,076 5.44% 205,458 4.92% 181,772 5.40%
Other Time Deposits 592,576 5.33% 561,134 5.62% 477,410 5.26%
---------- ----------- ----------
Total $1,598,938 $ 1,481,935 $1,309,275
========== =========== ==========
</TABLE>
CAPITAL ADEQUACY AND RESOURCES
CAPITAL AND LIQUIDITY
The adequacy of bank capital in the banking industry has received
considerable attention in the past few years and continues to be a concern to
regulators and depositors.
First United is well capitalized with a primary capital to asset ratio of
10.77% at December 31, 1997 compared with 10.41% in 1996 and 10.39% in 1995.
First United's stockholders' equity for the year ended December 31, 1997 totaled
[9]
<PAGE> 11
$197.0 million compared with $172.8 million in 1996 and $150.2 million in 1995.
Retention of earnings will continue to be emphasized in order to provide a
strong capital base to support future growth.
In today's environment, liquidity for a banking organization is essentially
a function of its ability to renew and acquire new purchased liabilities. First
United is aided significantly in this respect by its strong capital position and
its continuing high rate of internal capital generation. Additional liquidity is
derived from the short maturity of First United's investment portfolio, its
relatively low level of problem loans and its substantial local customer base at
each member bank.
TABLE 11: MATURITIES OF TIME DEPOSITS OF $100,000 AND OVER
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1997
---------------------------
<S> <C>
Three Months or Less $121,989
Over 3 Through 6 Months 73,828
Over 6 Through 12 Months 52,467
Over 12 Months 17,449
--------
Total $265,733
========
</TABLE>
TABLE 12: SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
December 31,
---------------------------------------
(Dollars in Thousands) 1997 1996 1995
-------------- -------------- ---------
<S> <C> <C> <C>
Balance at December 31 $72,112 $50,024 $49,245
Daily Average Amount Outstanding 60,941 52,229 36,162
Maximum Month-End Balance 72,112 58,357 46,988
Daily Average Interest Rate 5.00% 4.47% 4.89%
Weighted Average Interest Rate on
Balance at December 31 5.07% 4.99% 4.96%
</TABLE>
TABLE 13: CAPITAL RATIOS(1)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Equity Capital to Assets 10.10% 9.74% 9.48%
Primary Capital to Assets 10.77% 10.45% 10.30%
Leverage Ratio 9.61% 9.16% 8.79%
Tier 1 Capital 16.52% 16.61% 15.72%
Risk-Based Capital 17.77% 17.85% 16.97%
Dividend Payout Ratio 32.98% 25.72% 26.26%
</TABLE>
(1) Excludes unrealized gains and losses on securities available-for-sale.
TABLE 14: REGULATORY COMPARISON OF CAPITAL RATIOS
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Regulatory
December 31, 1997 First United Requirements
----------------------------------------------------------------------
<S> <C> <C>
Total Capital/Total Assets 10.77% 6.00%
Primary Capital/Total Assets 10.77% 5.50%
Total Risk-Based Capital 17.77% 8.00%
Tier 1 Capital 16.52% 4.00%
Leverage Ratio 9.61% 3.00%
</TABLE>
[10]
<PAGE> 12
TABLE 15: COMMON STOCK MARKET PRICE AND DIVIDENDS PER SHARE
<TABLE>
<CAPTION>
1997 High Low Div. Paid
--------------------------------------------------------------------
<S> <C> <C> <C>
First quarter $40 7/8 $31 1/2 $.17
Second quarter 44 3/4 37 1/2 .20
Third quarter 49 1/4 39 3/8 .20
Fourth quarter 42 5/8 37 5/8 .20
1996 High Low Div. Paid
--------------------------------------------------------------------
First quarter $28 1/2 $26 1/2 $.15
Second quarter 28 26 1/2 .17
Third quarter 28 26 3/4 .17
Fourth quarter 33 27 .17
</TABLE>
COMMON STOCK AND DIVIDENDS
First United anticipates continuing its policy of regular cash dividends,
although there is no assurance as to future dividends because they are dependent
on future earnings, capital requirements and the financial condition of First
United. First United strives to maintain a balance between the retention of
earnings for a support of growth and expansion and a fair cash return for its
stockholders. National banking law limits the amount of dividends which banks
can pay without obtaining prior approval from bank regulatory authorities.
During the second quarter of 1997, First United increased its annual cash
dividend rate from $0.68 per share to $0.80 per share and during the second
quarter of 1996, First United increased its annual dividend from $0.60 to $0.68
per share. These increases result from higher sustainable earnings.
First United Common Stock is traded on the NASDAQ-NMS Over-the-Counter
Market under the symbol "UNTD."
All Over-the-Counter Market quotations are interdealer quotations without
retail mark-up, mark-down or commission, and may not represent actual
transactions. The high and low common stock market price quotations for each of
the quarters during 1997 and 1996 are listed in Table 15. Table 15 also lists
dividends paid by First United to its stockholders during each of those
quarters.
On March 3, 1998, the Company had approximately 1,860 stockholders of
record.
ASSET - LIABILITY MANAGEMENT
CHANGING INTEREST RATES
First United, like most financial institutions, provides for the relative
stability in profits and the control in interest rate risk through
asset-liability management. An important element of asset-liability management
is the analysis and examination of the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets expected to mature or reprice
within a time period and the amount of interest-bearing liabilities expected to
mature or reprice within that same time period. A gap is considered negative
when the amount of interest rate sensitive liabilities maturing within a
specific time frame exceeds the amount of interest rate sensitive assets
maturing within that same time frame. During a period of falling interest rates,
a negative gap tends to result in an increase in net interest income. Whereas in
a rising interest rate environment, an institution with a negative gap could
experience the opposite results. At December 31, 1997, First United's
interest-bearing liabilities maturing or repricing within one year exceeded the
interest-bearing assets maturing or repricing within the same time period.
First United continually monitors its asset-liability position in order to
maximize profits and minimize interest rate risk. Additionally, First United can
reduce the impact that changing interest rates have on earnings and adapt to
changes in the economic environment by closely monitoring its Statement of
Condition. An interest rate sensitive balance sheet as of December 31, 1997 is
presented in Table 17.
The interest rate sensitivity table that follows provides additional
information about the Company's financial instruments that are sensitive to
changes in interest rates. The quantitative information about market risk is
necessarily
[11]
<PAGE> 13
limited because it does not take into account operating transactions. The
tabular disclosure of the Company's market risk is also limited by its failure
to depict accurately the effect on assumptions of significant changes in the
economy or interest rates as well as changes in Management's expectations or
intentions. The information in the interest rate sensitivity table that follows
reflects contractual interest rate repricing dates and contractual maturity
(including principal amortization) dates. Weighted average floating rates are
based on the rate for that product as of December 31, 1997.
<TABLE>
<CAPTION>
TABLE 16: INTEREST RATE SENSITIVITY OTHER THAN TRADING PORTFOLIO
December 31, 1997
----------------------------------------------------------------------------------------------------
Current
(Dollars in Thousands) 1998 1999 2000 2001 2002 BEYOND Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
Fixed Rate $ 270,002 $115,941 $140,155 $ 82,460 $ 65,409 $106,454 $ 780,421 $ 777,984
Average Interest Rate 9.27% 9.43% 9.22% 9.04% 9.00% 8.57% 9.14%
Floating Rate 142,838 6,990 2,773 3,356 3,768 63,162 222,887 222,887
Average Interest Rate 9.32% 9.22% 9.24% 8.48% 9.26% 8.86% 8.72%
INVESTMENT SECURITIES
Fixed Rate 81,431 69,957 72,648 81,678 75,331 226,076 607,121 610,850
Average Interest Rate 5.02% 6.03% 6.35% 6.15% 6.37% 6.23% 6.06%
Floating Rate 7,243 3,653 9,987 273 -0- 98,009 119,165 119,897
Average Interest Rate 4.86% 4.58% 4.85% 8.69% 0.00% 6.45% 6.17%
OTHER EARNING ASSETS
Fixed Rate 70,223 -0- -0- -0- -0- -0- 70,223 70,223
Average Interest Rate 5.28% -0- -0- -0- -0- -0- 5.28%
Floating Rate -0- -0- -0- -0- -0- -0- -0- -0-
Average Interest Rate -0- -0- -0- -0- -0- -0- -0-
TOTAL FINANCIAL ASSETS $ 571,737 $196,541 $225,563 $ 167,767 $144,508 $493,701 $1,799,817 $1,801,841
Average Interest Rate 8.13% 8.12% 8.10% 7.62% 7.64% 7.11% 7.70%
DEPOSITS
Fixed Rate $ 717,448 $110,696 $ 31,692 $ 1,890 $ 1,720 $ 296 $ 863,742 $ 865,226
Average Interest Rate 5.32% 5.62% 5.80% 5.76% 5.52% 7.92% 5.38%
Floating Rate 497,325 3,453 -0- -0- -0- -0- 500,778 500,777
Average Interest Rate 2.92% 5.37% -0- -0- -0- -0- 2.93%
OTHER INTEREST-BEARING
LIABILITIES
Fixed Rate -0- -0- -0- -0- -0- -0- -0- -0-
Average Interest Rate -0- -0- -0- -0- -0- -0- -0-
Floating Rate 72,112 -0- -0- -0- -0- -0- 72,112 72,112
Average Interest Rate 5.07% -0- -0- -0- -0- -0- 5.07%
LONG TERM DEBT
Fixed Rate -0- -0- -0- -0- -0- -0- -0- -0-
Average Interest Rate -0- -0- -0- -0- -0- -0- -0-
Floating Rate 6,294 1,295 2,076 6,299 1,299 3,828 21,091 21,091
Average Interest Rate 7.05% 6.94% 6.56% 6.02% 6.94% 6.29% 6.54%
TOTAL FINANCIAL
LIABILITIES $ 1,293,179 $115,444 $ 33,768 $ 8,189 $ 3,019 $ 4,124 $1,457,723 $1,459,206
Average Interest Rate 4.39% 5.62% 5.85% 5.96% 6.13% 6.41% 4.54%
</TABLE>
[12]
<PAGE> 14
TABLE 17: INTEREST RATE SENSITIVE BALANCE SHEET
<TABLE>
<CAPTION>
By Repricing Dates At December 31, 1997
--------------------------------------------------------------------------------------------
(Dollars in Thousands) 0-30 31-90 91-180 181-365 1-5 Over 5
Days Days Days Days Years Years Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short-Term
Investments $ 70,223 $ -0- $ -0- $ -0- $ -0- $ -0- $ 70,223
Total Securities 79,817 93,078 71,767 65,360 311,936 110,650 732,608
Loans and Leases,
Net of Unearned
Income 196,256 67,263 86,748 147,062 430,537 75,442 1,003,308
-------- -------- -------- -------- -------- --------- ----------
Total Rate Sensitive
Assets $346,296 $160,341 $158,515 $212,422 $742,473 $ 186,092 $1,806,139
======== ======== ======== ======== ======== ========= ==========
SOURCES OF FUNDS
Savings and Interest-
bearing Demand
Deposits 472,991 -0- -0- -0- -0- -0- 472,991
Time Deposits 169,893 180,363 218,048 201,474 121,329 422 891,529
Short-Term
Borrowings 71,715 183 -0- 214 -0- -0- 72,112
Long-Term Debt 6,048 -0- 19 -0- 10,059 4,965 21,091
-------- -------- -------- -------- -------- --------- ----------
Total Rate Sensitive
Liabilities $720,647 $180,546 $218,067 $201,688 $131,388 $ 5,387 $1,457,723
======== ======== ======== ======== ======== ========= ==========
Interest Rate
Sensitivity Gap (374,351) (20,205) (59,552) 10,734 611,085 180,705 348,416
Cumulative Interest
Rate Sensitivity Gap (374,351) (394,556) (454,108) (443,374) 167,711 348,416
Cumulative Interest
Rate Sensitivity Gap
as a Percent of Total
Assets (19%) (20%) (23%) (23%) 9% 18%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
INFLATION
Inflation also impacts the banking industry, but the problem with inflation
for banking institutions differs substantially from those incurred by
non-financial institutions. In industries with a high proportion of property and
equipment, there is a greater potential for earnings to be inflated by
understated depreciation charges, as well as the potential for significant
understatement of the current values of those assets. In industries with high
levels of inventories, reported earnings may reflect significant increases in
inventory values. Neither of these factors is important in the banking industry
since bank assets are primarily monetary assets which move in concert with
inflation; however, interest rates earned and paid by banks do not necessarily
move in the same direction or magnitude as general inflation. Because First
United has a significant investment in long-term securities and fixed-rate
loans, earnings on these assets will not keep up with yields available on
alternative investments during periods of rising inflation. Furthermore, First
United's liabilities are more sensitive to changes in interest rates than its
assets are, so in this respect, inflation has a negative impact on earnings.
[13]
<PAGE> 15
REGULATORY AND ACCOUNTING ISSUES
REGULATORY ISSUES
Pursuant to the Interest Rate Control Amendment to the Constitution of the
State of Arkansas, "consumer loans and credit sales" have a maximum limitation
of 17% per annum and all "general loans" have a maximum limitation of 5% over
the Federal Reserve Discount Rate in effect at the time the loan was made. The
Arkansas Supreme Court has determined that "consumer loans and credit sales" are
"general loans" and are subject to the limitation of 5% over the Federal Reserve
Discount Rate as well as a maximum limitation of 17% per annum. As a general
rule, First United's subsidiary banks are required to comply with the Arkansas
usury laws on loans made within the State of Arkansas.
The Federal Deposit Insurance Corporation Improvement Act of 1991 imposes
strict statutory rules for a bank's senior management, outside directors,
independent auditors, examiners and regulators to ensure that a bank's finances,
management and legal compliance are thoroughly analyzed.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement requires that all items that are to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement is effective for fiscal years beginning after December
15, 1997. Management does not expect this standard to have a material impact on
First United's consolidated financial condition or results of operations.
Management intends to comply with this standard in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997. Management does not expect this standard to have a material
impact on First United's consolidated financial condition or results of
operations. Management intends to comply with this standard in 1998.
YEAR 2000 COMPLIANCE
First United has established a task force to review all computer-based
systems and applications and develop an action plan to ensure that its computer
and information systems will function properly in the year 2000. This plan,
which has been approved by the Board of Directors and Management, documents
First United's approach to having all systems and applications year 2000
compliant by December 31, 1998 with final testing to take place during 1999. At
this time, Management believes that implementation of its year 2000 plan will
not materially affect First United's future operations. However, First United
could be affected by the unsuccessful attempt of other entities in addressing
this issue. First United is in the process of identifying which of its systems
could be adversely affected by the year 2000 issue and is developing an
implementation plan to resolve the issue. Management does not expect the cost of
any of the required modifications to have a material effect on First United's
consolidated financial statements.
[14]
<PAGE> 16
TABLE 18: SUMMARY OF AVERAGE BALANCE SHEETS, INTEREST RATES AND CHANGES IN NET
INTEREST INCOME (FTE)(1)
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------
Average Average
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Loans (net of unearned income) $ 938,909 $ 87,613 9.33% $ 828,585 $ 77,171 9.31%
Securities(2):
Taxable Securities 655,421 41,986 6.41% 603,034 37,877 6.28%
Non-taxable Securities 96,940 7,091 7.31% 93,899 7,654 8.15%
Money-Market Assets:
Federal Funds Sold and Securities Purchased Under
Agreements to Resell and Other Short-Term
Investments 46,572 3,582 7.69% 67,521 3,924 5.81%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 1,737,842 140,272 8.07% 1,593,039 126,626 7.95%
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST-EARNING ASSETS:
Cash and Due From Banks 90,710 78,347
Premises and Equipment, Net 34,346 31,852
Other Assets 40,787 39,652
Less Allowance for Loan Losses (13,525) (13,400)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,890,160 $ 1,729,490
=========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
INTEREST-BEARING LIABILITIES:
Savings and Interest-Bearing Deposits $ 497,820 $ 13,868 2.79% $ 463,152 $ 12,718 2.75%
Time Deposits of $100 or More 238,076 12,948 5.44% 205,458 10,117 4.92%
Other Time Deposits 592,576 31,586 5.33% 561,134 31,509 5.62%
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 60,941 3,050 5.00% 52,229 2,334 4.47%
Notes Payable 23,480 1,512 6.44% 20,194 1,687 8.35%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 1,412,893 62,964 4.46% 1,302,167 58,365 4.48%
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST-BEARING LIABILITIES:
Demand Deposits 270,466 252,191
Other Liabilities 18,154 14,375
Stockholders' Equity 188,647 160,757
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,890,160 $ 1,729,490
=========== ===========
Net Interest-Earnings $ 77,308 $ 68,261
========= =========
Net Interest Margin 4.45% 4.28%
==== ====
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Marginal Tax Rate of 35%.
(2) Includes available-for-sale and investment securities.
[15]
<PAGE> 17
<TABLE>
<CAPTION>
1997 Compared to 1996 1995
---------------------------------- --------------------------------
Total Due To Due to
Increase Change in Change in Average
(Dollars in Thousands) (Decrease) Volume Rate Balance Interest Rate
----------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Loans (net of unearned income) $10,442 $10,275 $ 167 $ 718,668 $ 65,732 9.15%
Securities(2):
Taxable Securities 4,109 3,290 819 545,983 34,680 6.34%
Non-taxable Securities (563) 248 (811) 92,539 7,348 7.94%
Money-Market Assets:
Federal Funds Sold and Securities Purchased Under
Agreements to Resell and Other Short-Term
Investments (342) (1,217) 875 38,611 2,891 7.49%
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 13,646 12,596 1,050 1,395,801 110,651 7.93%
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST-EARNING ASSETS:
Cash and Due From Banks 67,152
Premises and Equipment, Net 27,035
Other Assets 37,270
Less Allowance for Loan Losses (13,519)
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,513,739
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
INTEREST-BEARING LIABILITIES:
Savings and Interest-Bearing Deposits $ 1,150 $ 952 $ 198 $ 395,709 $ 12,499 3.16%
Time Deposits of $100 or More 2,831 1,606 1,225 181,772 9,814 5.40%
Other Time Deposits 77 1,766 (1,689) 477,410 25,132 5.26%
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 716 389 327 36,162 1,768 4.89%
Notes Payable (175) 275 (450) 17,989 1,356 7.54%
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 4,599 4,988 (389) 1,109,042 50,569 4.56%
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST-BEARING LIABILITIES:
Demand Deposits 254,384
Other Liabilities 13,742
Stockholders' Equity 136,571
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,513,739
==========
Net Interest-Earnings $ 9,047 $ 7,608 $ 1,439 $ 60,082
======= ======= ======= =========
Net Interest Margin 4.30%
=====
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 Compared to 1995
----------------------------------------
Total Due To Due To
Increase Change in Change in
(Dollars in Thousands) (Decrease) Volume Rate
----------------------------------------
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Loans (net of unearned income) $ 11,439 $10,053 $1,386
Securities(2):
Taxable Securities 3,197 3,624 (427)
Non-taxable Securities 306 108 198
Money-Market Assets:
Federal Funds Sold and Securities Purchased Under
Agreements to Resell and Other Short-Term
Investments 1,033 2,165 (1,132)
- --------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 15,975 15,950 25
- --------------------------------------------------------------------------------------------------
NON-INTEREST-EARNING ASSETS:
Cash and Due From Banks
Premises and Equipment, Net
Other Assets
Less Allowance for Loan Losses
- --------------------------------------------------------------------------------------------------
Total
- --------------------------------------------------------------------------------------------------
LIABILITIES
INTEREST-BEARING LIABILITIES:
Savings and Interest-Bearing Deposits $ 219 $ 2,130 $ (1,911)
Time Deposits of $100 or More 303 1,279 (976)
Other Time Deposits 6,377 4,407 1,970
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 566 786 (220)
Notes Payable 331 166 165
- --------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 7,796 8,768 (972)
- --------------------------------------------------------------------------------------------------
NON-INTEREST-BEARING LIABILITIES:
Demand Deposits
Other Liabilities
Stockholders' Equity
- --------------------------------------------------------------------------------------------------
Total
Net Interest-Earnings $ 8,179 $7,182 $997
======== ====== ====
Net Interest Margin
- --------------------------------------------------------------------------------------------------
</TABLE>
[16]
<PAGE> 18
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
(In Thousands, Except Per Share Data)
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Total Interest Income $ 137,790 $ 123,947 $ 108,079 $ 86,614 $ 83,930
Net Interest Income 74,826 65,582 57,510 50,478 50,017
Provision for Possible
Loan Losses 2,448 725 574 334 1,815
Net Income 24,905 22,372 18,376 16,711 16,187
PER SHARE DATA
Net Income $ 2.42 $ 2.27 $ 1.97 $ 1.79 $ 1.74
Cash Dividends Paid .77 .66 .62 .45 .41
SELECTED BALANCE SHEET ITEMS
Year Ended Balances
Total Assets $ 1,938,236 $ 1,772,992 $ 1,572,682 $ 1,339,440 $ 1,334,383
Total Securities(1) 732,608 731,802 647,502 598,129 615,282
Net Loans(2) 1,003,308 844,255 741,080 598,171 580,685
Total Deposits 1,633,222 1,514,038 1,340,492 1,168,815 1,163,703
Notes Payable 21,091 22,426 16,832 13,892 7,723
Capital Accounts 197,006 172,800 150,163 125,466 123,876
</TABLE>
(1)Includes available-for-sale and investment securities.
(2)Net of unearned discount.
[17]
<PAGE> 19
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended
(In Thousands, Except Per Share Data)
---------------------------------------------------------
(Unaudited) March 31 June 30 Sept. 30 Dec. 31
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
1997
Interest Income $ 33,053 $ 34,187 $ 35,042 $ 35,508
Interest Expense 15,125 15,613 15,845 16,381
Net Interest Income 17,928 18,574 19,197 19,127
Provision for Possible Loan Losses (407) (296) (812) (933)
Other Income 3,354 3,639 3,996 4,313
Other Expense 12,315 13,119 12,683 14,980
Income Tax Expense 2,374 2,647 3,237 1,420
---------- ----------- ---------- ---------
Net Income $ 6,186 $ 6,151 $ 6,461 $ 6,107
========== =========== ========== =========
Earnings Per Share $ 0.60 $ 0.60 $ 0.63 $ 0.60
========== =========== ========== =========
1996
Interest Income $ 30,331 $ 30,770 $ 31,381 $ 31,465
Interest Expense 14,364 14,457 14,546 14,998
Net Interest Income 15,967 16,313 16,835 16,467
Provision for Possible Loan Losses 657 (572) (390) (420)
Other Income 3,131 2,894 3,070 3,181
Other Expense 10,915 11,566 11,608 11,582
Income Tax Expense 2,671 1,743 2,321 2,355
---------- ----------- ---------- ---------
Net Income $ 6,169 $ 5,326 $ 5,586 $ 5,291
========== =========== ========== =========
Earnings Per Share $ 0.63 $ 0.54 $ 0.57 $ 0.54
========== =========== ========== =========
</TABLE>
[18]
<PAGE> 20
FINANCIAL STATEMENTS AND NOTES
[19]
<PAGE> 21
CONSOLIDATED STATEMENTS OF CONDITION
First United Bancshares, Inc.
<TABLE>
<CAPTION>
(in thousands, except per share data) December 31,
-------------------------------
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and Due from Banks . . . . . . . . . . . . . . . . . . . . . . . $ 70,557 $ 72,075
------------ ------------
Short-Term Investments:
Federal Funds Sold and Securities Purchased Under
Agreements to Resell . . . . . . . . . . . . . . . . . . . . . . . 48,002 44,677
Other Short-Term Investments . . . . . . . . . . . . . . . . . . . . 22,221 21,593
------------ ------------
Total Short-Term Investments . . . . . . . . . . . . . . . . . . . 70,223 66,270
------------ ------------
Securities Available-for-Sale . . . . . . . . . . . . . . . . . . . . 495,184 455,488
------------ ------------
Investment Securities (Fair Value of $239,766 and $277,954 at
December 31, 1997 and 1996, respectively). . . . . . . . . . . . . . 237,424 276,314
------------ ------------
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,008,004 847,320
Unearned Discount . . . . . . . . . . . . . . . . . . . . . . . . . (4,696) (3,065)
Allowance for Possible Loan Losses . . . . . . . . . . . . . . . . . (14,522) (12,655)
------------ ------------
Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 988,786 831,600
------------ ------------
Premises and Equipment . . . . . . . . . . . . . . . . . . . . . . . . 34,857 32,688
------------ ------------
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,597 11,447
------------ ------------
Other Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . 746 1,090
------------ ------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,862 26,020
------------ ------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,938,236 $ 1,772,992
============ ============
LIABILITIES
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268,702 $ 254,426
Savings and Interest-bearing Demand . . . . . . . . . . . . . . . . 472,991 469,377
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 891,529 790,235
------------ ------------
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 1,633,222 1,514,038
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase . . . . . . . . . . . . . . . . . . . . . . 72,112 50,024
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 14,805 13,704
Notes Payable:
Unaffiliated Bank . . . . . . . . . . . . . . . . . . . . . . . . . 16,091 17,426
Affiliated Company . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000
------------ ------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,741,230 1,600,192
------------ ------------
Commitments and Contingencies
CAPITAL ACCOUNTS
Preferred Stock (Par value of $1.00; 500 shares authorized in 1997
and 1996; none outstanding). . . . . . . . . . . . . . . . . . . . -0- -0-
Common Stock (Par value of $1.00; 24,000 shares authorized;
10,277 and 9,852 shares issued and outstanding in 1997 and
1996, respectively). . . . . . . . . . . . . . . . . . . . . . . . 10,277 9,852
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,243 21,975
Undivided Profits . . . . . . . . . . . . . . . . . . . . . . . . . . 160,114 141,845
Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- (936)
Net Unrealized Gain on Securities Available-for-Sale, Net of Tax . . . 1,372 64
------------ ------------
Total Capital Accounts . . . . . . . . . . . . . . . . . . . . . . 197,006 172,800
------------ ------------
Total Liabilities and Capital Accounts . . . . . . . . . . . . . . $ 1,938,236 $ 1,772,992
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
[20]
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
First United Bancshares, Inc.
<TABLE>
<CAPTION>
(in thousands, except per share data) Year Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ------------------ ------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 87,613 $ 77,171 $ 65,732
Interest on Securities:
Taxable Securities 41,986 37,877 34,680
Non-taxable Securities 4,609 4,975 4,776
Interest on Federal Funds Sold and Securities
Purchased Under Agreements to Resell 2,462 2,936 2,203
Interest on Deposits in Banks 1,120 988 688
------- -------- --------
TOTAL INTEREST INCOME 137,790 123,947 108,079
------- -------- --------
INTEREST EXPENSE 58,402 54,344 47,445
Interest on Deposits
Interest on Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 3,050 2,334 1,768
Interest on Notes Payable 1,512 1,687 1,356
------- -------- --------
TOTAL INTEREST EXPENSE 62,964 58,365 50,569
------- -------- --------
NET INTEREST INCOME 74,826 65,582 57,510
Provision for Loan Losses (2,448) (725) (574)
------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 72,378 64,857 56,936
------- -------- --------
OTHER INCOME
Service Charges on Deposit Accounts 7,743 6,609 5,876
Trust Income 2,287 2,180 1,799
Security Gains (Losses) 21 122 (355)
Other Operating Income 5,251 3,365 2,311
------- -------- --------
TOTAL OTHER INCOME 15,302 12,276 9,631
------- -------- --------
OTHER EXPENSE
Salaries 20,841 17,302 15,228
Pension and Other Employee Benefits 6,588 5,882 4,919
Net Occupancy Expense 4,293 4,162 3,350
Equipment Expense 3,449 2,852 1,953
Data Processing Expense 3,127 2,331 1,715
Other Operating Expenses 14,799 13,142 12,793
------- -------- --------
TOTAL OTHER EXPENSE 53,097 45,671 39,958
------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 34,583 31,462 26,609
INCOME TAX EXPENSE 9,678 9,090 8,233
------- -------- --------
NET INCOME $24,905 $ 22,372 $ 18,376
======= ======== ========
EARNINGS PER SHARE
Basic $ 2.42 $ 2.27 $ 1.97
======= ======== ========
Diluted $ 2.42 $ 2.27 $ 1.97
======= ======== ========
CASH DIVIDENDS PER SHARE $ 0.77 $ 0.66 $ 0.62
======= ======== ========
AVERAGE SHARES ISSUED AND
OUTSTANDING 10,277 9,852 9,344
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
[21]
<PAGE> 23
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL ACCOUNTS
First United Bancshares, Inc.
(in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Common Stock Securities
--------------------- Undivided Treasury Available-for
Shares Amount Surplus Profits Stock Sale, Net of Tax
--------- -------- ------- ------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 9,344 $ 9,344 $19,638 $107,430 $ (45) $(10,895)
Net Income -0- -0- -0- 18,376 -0- -0-
Cash Dividends -0- -0- -0- (4,825) -0- -0-
Sale of Treasury Stock -0- -0- 12 -0- 45 -0-
Purchase of Treasury Stock -0- -0- -0- -0- (936) -0-
Increase in Unrealized Gain on
Securities Available-for-Sale,
Net of Tax -0- -0- -0- -0- -0- 12,025
-------- -------- ------- -------- ------ ---------
Balance, December 31, 1995 9,344 9,344 19,650 120,981 (936) 1,130
Effect of Carlisle Acquisition 508 508 2,325 4,247 -0- (77)
Net Income -0- -0- -0- 22,372 -0- -0-
Cash Dividends -0- -0- -0- (5,755) -0- -0-
Decrease in Unrealized Gain on -0-
Securities Available-for-Sale,
Net of Tax -0- -0- -0- -0- -0- (989)
-------- -------- ------- -------- ------ ---------
Balance, December 31, 1996 9,852 9,852 21,975 141,845 (936) 64
Effect of City Bank Acquisition 425 425 3,268 2,514 -0- 56
Retirement of Treasury Stock -0- -0- -0- (936) 936 -0-
Net Income -0- -0- -0- 24,905 -0- -0-
Dividends Paid -0- -0- -0- (8,214) -0- -0-
Increase in Unrealized Gain on
Securities Available-for-Sale,
Net of Tax -0- -0- -0- -0- -0- 1,252
-------- -------- ------- -------- ------ ---------
Balance, December 31, 1997 10,277 $ 10,277 $25,243 $160,114 $ -0- $1,372
======== ======== ======= ======== ====== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
[22]
<PAGE> 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
First United Bancshares, Inc.
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 24,905 $ 22,372 $ 18,376
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation 3,547 2,938 2,474
Amortization of Goodwill 1,149 1,158 979
Provision for Possible Loan Losses 2,448 725 574
Provision (Benefit) for Deferred Taxes (228) 521 249
(Gain) Loss on Sales of Securities (21) (122) 355
Accretion of Bond Discount, Net (2,457) (3,463) (1,436)
Decrease (Increase) in Other Assets 2,227 (580) 1,541
Increase (Decrease) in Other Liabilities 541 (5,011) 4,941
--------- --------- ---------
Net Cash Provided by Operating Activities 32,111 18,538 28,053
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities 49,708 52,110 43,023
Proceeds from Maturities of Securities Available-for-Sale 179,122 120,624 90,737
Proceeds from Sales of Securities Available-for-Sale 10,292 17,187 50,951
Purchase of Investment Securities (34,108) (47,607) (63,849)
Purchase of Available-for-Sale Securities (192,213) (194,311) (118,439)
Increase (Decrease) in Federal Funds, Net 22,738 (8,328) 36,834
(Increase) Decrease in Other Short-Term Investments (628) 2,802 (16,988)
Increase in Loans (119,631) (29,656) (52,469)
Capital Additions (4,523) (4,483) (8,974)
Purchase of Subsidiary Bank -0- -0- (19,079)
--------- --------- -------
Net Cash Used in Investing Activities (89,243) (91,662) (58,253)
--------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Demand, Savings and
Interest-bearing Demand Deposits (10,796) 41,857 (20,077)
Increase in Time Deposits 75,959 48,158 55,467
Issuance (Repayment) of Notes Payable (1,335) (877) 2,940
Purchase of Treasury Stock -0- -0- (879)
Dividends Paid (8,214) (5,755) (4,825)
--------- -------- ---------
Net Cash Provided by Financing Activities 55,614 83,383 32,626
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (1,518) 10,259 2,426
Cash and Cash Equivalents, Beginning 72,075 61,816 59,390
--------- --------- ---------
Cash and Cash Equivalents, Ending $ 70,557 $ 72,075 $ 61,816
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
[23]
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First United Bancshares, Inc.
1. THE MERGER
On September 3, 1997, First United Bancshares, Inc. ("the Company") merged
with Fredonia Bancshares, Inc. ("Fredonia") and in connection therewith issued
approximately 1,606,000 shares of common stock for all of Fredonia's outstanding
common stock (the "Merger"). The Merger was accounted for as a
pooling-of-interests and, accordingly, the Company's financial statements for
periods prior to the Merger have been restated to include the results of
Fredonia for all periods presented. Separate and combined results of operations
for periods prior to the Merger are as follows (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended For the Year Ended
June 30, December 31,
1997 1996 1995
<S> <C> <C> <C>
Net Interest Income
First United $ 29,626 $ 57,257 $ 49,485
Fredonia 5,025 8,325 8,025
---------- ---------- ----------
$ 34,651 $ 65,582 $ 57,510
========== ========== ==========
Net Income
First United $ 9,571 $ 18,259 $ 15,204
Fredonia 1,946 4,113 3,172
---------- ---------- ----------
$ 11,517 $ 22,372 $ 18,376
========== ========== ==========
</TABLE>
2. BUSINESS, BASIS OF FINANCIAL STATEMENT PRESENTATION, ACCOUNTING POLICIES
AND RECENT PRONOUNCEMENTS
BUSINESS:
The Company engages in the general banking business and activities closely
related to banking and provides these services primarily to customers in
Arkansas, Louisiana and Texas through its subsidiary banks and trust company.
The Company is subject to the regulations of certain federal and state agencies
and undergoes periodic examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, the Company is required to make estimates and assumptions,
the most significant of which is the estimate of the required amount of the
allowance for possible loan losses, that affect the reported amounts of assets
and liabilities as of the dates of the statements of condition and the reported
amounts of income and expenses for the years then ended. Actual results could
differ significantly from those estimates.
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts have
been eliminated.
<PAGE> 26
SECURITIES:
Debt securities not classified as trading account securities or investment
securities expected to be held to maturity and all equity securities are
classified as available-for-sale securities and reported at fair value, with net
unrealized gains and losses reported, net of tax, as a separate component of
stockholders' equity.
Management determines the appropriate classification of securities at the
time of purchase. Securities available-for-sale include securities that
Management intends to use as part of its asset-liability management strategy and
that could be sold in response to changes in interest rates or other economic
factors. The amortized costs of the specific securities sold are used to compute
gains and losses on the sale of securities. Realized gains or losses upon sale
of the securities available-for-sale are classified as securities gains
(losses). When Management has the intent and ability at the time of purchase to
hold securities until maturity, these securities are classified as investment
securities and carried at amortized cost.
LOANS:
Loans are stated at the amount of unpaid principal, reduced by unearned
income and an allowance for possible loan losses. Unearned income on a portion
of installment loans is recognized as income over the terms of the loans by a
method which approximates the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding.
[24]
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for possible loan losses is established through a provision
for possible loan losses charged to expense. Loans are charged against the
allowance for loan losses when Management believes that the collectibility of
the principal is unlikely. The allowance is an amount that Management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take 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. Accrual of interest is discontinued on
a loan when Management believes, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is
such that collection of principal or interest is doubtful. This evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed over the estimated useful lives of assets
utilizing the straight-line method of depreciation as disclosed in Note 8.
Maintenance, repairs and minor improvements are charged to operating expenses.
Gains or losses on dispositions are reflected currently in the Statement of
Income.
GOODWILL:
Goodwill represents the excess of the purchase price over the fair market
value of net assets acquired in business combinations accounted for under the
purchase method. The Company amortizes goodwill over fifteen years using the
straight-line method. Accumulated amortization of goodwill was $5,334,000 and
$4,240,000 at December 31, 1997 and 1996, respectively.
OTHER REAL ESTATE:
Other real estate owned represents properties that have been acquired in
satisfaction of debt. Other real estate is valued at the lower of its fair value
or the recorded investment in the related loan upon foreclosure. If at a later
date the Company determines that the recorded investment cannot be recovered,
the loss is recognized by a charge to income. When the property is in a
condition for use or sale at the time of the foreclosure, any subsequent holding
costs are included in expense as incurred. Legal fees and other direct costs
incurred by the Company in foreclosure are expensed when they are incurred.
Payments received for the rental or lease of property held in other real estate
are recognized as income in the period in which the payment is received. The net
costs of operating other real estate (including provisions for real estate
losses and gains and losses on sales of real estate) were approximately $293,000
and $30,000 for the year ended December 31, 1997 and 1996, respectively. The
Company had net gains of $70,000 for the year ended December 31, 1995.
PER SHARE DATA:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 established standards for computing and presenting earnings
per share ("EPS") and applies to entities with publicly held common stock or
potential common stock. This statement replaces the presentation of primary EPS
with a presentation of basic EPS and requires dual presentation of basic and
diluted EPS on the face of the Consolidated Statement of Condition for all
entities with complex capital structures. The Company has adopted this statement
effective December 31, 1997, and restated all prior period per share data to
conform with this statement. This restatement has no effect on prior period per
share data.
<PAGE> 28
Basic EPS was computed by dividing net income by the weighted average
shares of common stock outstanding, 10,277,000 in 1997, 9,852,000 in 1996 and
9,344,000 in 1995. Diluted EPS was computed by dividing net income by the sum of
the weighted average shares of common stock outstanding and the effect of stock
options outstanding. The effect of the stock options was to increase the
weighted average number of shares by 33,000 in 1997, 19,000 in 1996 and 5,000 in
1995.
All per share data and number of shares outstanding have been retroactively
restated to reflect the effect of a 3-for-2 stock split during 1996. (See Note
16.)
STATEMENT OF CASH FLOWS:
For purposes of the Statement of Cash Flows, the Company considers all
currency on hand as well as all due from bank balances to be cash equivalents.
RECENT PRONOUNCEMENTS:
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on consistent
application of a "financial-components approach" that focuses on control. The
Company adopted SFAS No. 125 on January 1, 1997. The adoption of this statement
did not have a material impact on the Company's consolidated financial condition
or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. This statement requires that all items
that are to be recognized under accounting standards as components of
[25]
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
comprehensive income be reported in a financial statement that is to be
displayed with the same prominence as other financial statements. The statement
is effective for fiscal years beginning after December 15, 1997. Management does
not expect this standard to have a material impact on the Company's consolidated
financial condition or results of operations. Management intends to comply with
this standard in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997. Management does not expect this standard to have a material
impact on the Company's consolidated financial condition or results of
operations. Management intends to comply with this standard in 1998.
3. ACQUISITIONS
On December 31, 1997, the Company acquired City Bank & Trust of Shreveport,
Louisiana ("City Bank") in a merger accounted for as a pooling-of-interests (the
"City Bank Merger"). In connection with the City Bank Merger, the Company issued
approximately 425,000 shares of common stock for all of City Bank's outstanding
common stock. As the effect of the City Bank Merger has been deemed immaterial,
the Company's statements for years prior to the City Bank Merger have not been
restated to include the results of City Bank.
On January 31, 1995, the Company acquired all of the issued and outstanding
stock of FirstBank for cash payments of approximately $25,000,000 funded through
cash and borrowings. The transaction was accounted for as a purchase. FirstBank
had assets of approximately $154,000,000 at the date of acquisition. The excess
of the purchase price over the fair market value of the net assets acquired was
allocated to goodwill. The results of operations for FirstBank are included in
the consolidated statements of income from the date of acquisition.
4. SECURITIES AVAILABLE-FOR-SALE
The carrying values and estimated fair values of securities
available-for-sale at December 31, 1997 and 1996 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
1997
U.S. Treasury Securities and
Other U.S. Government Agencies $392,079 $1,534 $ 91 $393,522
Obligations of States and
Political Subdivisions 4,040 45 -0- 4,085
Mortgage-Backed Securities 96,441 1,099 464 97,076
Other 504 -0- 3 501
-------- ------ ------ --------
$493,064 $2,678 $ 558 $495,184
======== ====== ====== ========
1996
U.S. Treasury Securities and
Other U.S. Government Agencies $336,550 $1,884 $1,612 $336,822
Obligations of States and
Political Subdivisions 1,294 19 7 1,306
Mortgage-Backed Securities 112,381 918 1,046 112,253
Other 5,075 38 6 5,107
-------- ------ ------ --------
$455,300 $2,859 $2,671 $455,488
======== ====== ====== ========
</TABLE>
<PAGE> 30
The amortized cost and estimated fair value of securities
available-for-sale at December 31, 1997, by contractual maturity, are shown on
the following page (in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
Due in One Year or Less $154,452 $155,462
Due After One Year Through Five Years 201,226 201,324
Due After Five Years Through Ten Years 38,462 38,787
Due After Ten Years 2,483 2,535
Mortgage-Backed Securities 96,441 97,076
-------- --------
$493,064 $495,184
======== ========
</TABLE>
[26]
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from sales of securities available-for-sale were $10,292,000,
$17,187,000 and $50,951,000 during 1997, 1996 and 1995, respectively. Gross
gains realized on these sales during 1997 and 1996 were $21,000 and $122,000,
respectively. There were gross losses of $355,000 during 1995.
5. INVESTMENT SECURITIES
The carrying values and estimated fair values of investments in debt
securities as of December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross
Gross Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
---------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
1997
U.S. Treasury Securities and
Other U.S. Government Agencies $ 59,017 $ 230 $ 95 $ 59,152
Obligations of States and
Political Subdivisions 101,207 1,311 49 102,469
Mortgage-Backed Securities 77,047 949 4 77,992
Other 153 -0- -0- 153
-------- -------- --------- --------
$237,424 $ 2,490 $ 148 $239,766
======== ======== ========= ========
1996
U.S. Treasury Securities and
Other U.S. Government Agencies $ 103,051 $ 518 $ 463 $103,106
Obligations of States and
Political Subdivisions 79,687 1,464 224 80,927
Mortgage-Backed Securities 91,680 836 562 91,954
Other 1,896 76 5 1,967
--------- -------- --------- --------
$ 276,314 $ 2,894 $ 1,254 $277,954
========= ======== ========= ========
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1997, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-------------- --------------
<S> <C> <C>
Due in One Year or Less $ 31,595 $ 31,819
Due After One Year Through Five Years 72,715 73,396
Due After Five Years Through Ten Years 43,264 43,655
Due After Ten Years 12,803 12,903
Mortgage-Backed Securities 77,047 77,993
-------- --------
$237,424 $239,766
======== ========
</TABLE>
There were no sales of investment securities during 1997 and 1996.
Securities with a carrying value of $351,880,000 at December 31, 1997
were pledged to secure public deposits and for other purposes required by law.
<PAGE> 32
6. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The changes in the allowance for possible loan losses during 1997, 1996
and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- ----------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 12,655 $ 12,882 $ 12,250
Allowance Applicable to Loans of
Acquired Bank 426 1,215 1,627
Provision Charged Against Income 2,448 725 574
Recoveries on Loans Charged-Off 1,584 1,880 1,550
Loans Charged-Off (2,591) (4,047) (3,119)
--------- --------- ---------
Balance at End of Year $ 14,522 $ 12,655 $ 12,882
========= ========= =========
</TABLE>
[27]
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LOANS
Loans consist of the following categories (in thousands):
<TABLE>
<CAPTION>
TYPE 1997 1996
---------- -----------
<S> <C> <C>
Real Estate Loans Collateralized by -
Residential Properties, Primarily
Single Family Residences $ 280,828 $ 248,314
Commercial Properties 299,120 240,532
Commercial and Industrial Loans, Other Than
Real Estate and Energy-Related 245,827 190,253
Energy-Related Loans 11,066 17,633
Consumer Loans 170,502 149,867
Loans for Purchasing or Carrying
Securities 237 116
Financing Leases 424 605
---------- ----------
$1,008,004 $ 847,320
========== ==========
</TABLE>
In the normal course of business, officers and directors of the Company
and their related interests maintain certain loan relationships with the
Company's subsidiary banks. At December 31, 1997 and 1996, officers, directors,
and related parties had loans of approximately $22,993,000 and $17,644,000,
respectively. At the time of acquisition by the Company, City Bank also had
loans outstanding of $1,825,000 to officers, directors and related parties.
During the year ended December 31, 1997, loans made to these parties totaled
$11,969,000 and repayments totaled $8,445,000.
A summary of non-performing assets as of December 31, 1997 and 1996 is
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Non-Accrual Loans $ 2,756 $ 2,467
Past Due Loans (90 Days or more and still
accruing) 1,863 985
Renegotiated Loans 524 1,094
--------- ---------
5,143 4,546
Other Real Estate 746 1,090
--------- ---------
Total Non-Performing Assets $ 5,889 $ 5,636
========= =========
</TABLE>
The Company's non-accrual policy had the effect of reducing interest
and fees on loans in 1997 and 1996 by approximately $113,000 and $81,000,
respectively. Substantially all payments on non-accrual loans were applied to
principal.
<PAGE> 34
8. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
Principal
Depreciation Estimated
Method Useful Life 1997 1996
----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
Land $ 7,596 $ 7,139
Buildings and Leasehold
Improvements Straight-line 5-40 years 34,829 32,221
Furniture, Fixtures and
Equipment Straight-line 3-10 years 23,378 20,725
-------- --------
65,803 60,085
Less: Accumulated
Depreciation (30,946) (27,397)
-------- --------
$ 34,857 $ 32,688
======== ========
</TABLE>
[28]
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation included in other expense, net occupancy expense and
equipment expense was $3,547,000 in 1997, $2,938,000 in 1996 and $2,474,000 in
1995.
The Company leases land on which two branches are located and rents on
a monthly basis an employee parking lot from a company with common officers and
directors of the Company. Rental payments related to these arrangements were
approximately $20,000 during each of the years ended December 31, 1997, 1996 and
1995.
9. INCOME TAXES
Income tax expense (benefit) is composed of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Currently Payable $ 9,906 $ 8,569 $ 7,984
Deferred (228) 521 249
------- ------- -------
$ 9,678 $ 9,090 $ 8,233
======= ======= =======
</TABLE>
The income tax provision included $7,000, $35,000 and $(109,000) for
the years ended December 31, 1997, 1996 and 1995, respectively, resulting from
securities transactions.
The effective income tax rates in the accompanying statements of income
are less than the statutory income tax rate because of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Less:
Non-Taxable Interest Income (4.4) (5.5) (6.2)
Charitable Contributions -0- (0.7) -0-
Amortization of Goodwill 1.1 1.1 1.2
Other Items, Net (3.7) (1.0) 0.9
---- ---- ----
Effective Income Tax Rate 28.0% 28.9% 30.9%
==== ==== ====
</TABLE>
At December 31, 1997 and 1996, temporary differences between the
financial statement carrying amounts and the tax bases of assets and liabilities
give rise to the following net deferred tax asset, which is included in other
assets (in thousands).
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Accelerated Depreciation $(1,411) $ (1,213)
Provision for Possible Loan Losses 4,336 3,266
Unrealized Gain on Marketable Securities (742) (43)
Effects of Pension and Benefit Plans (92) (295)
Difference in Tax and Book Basis of Securities (923) (586)
Difference in Tax and Book Basis of Loans (544) -0-
Write-down of Other Real Estate 33 88
Other 128 39
-------- -------
$ 785 $ 1,256
======== =======
</TABLE>
The Company has evaluated the need for a valuation allowance and, based
on the weight of available evidence, has determined that it is more likely than
not that all deferred tax assets will be realized.
[29]
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. OTHER BORROWED FUNDS
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds consist of term federal funds purchased and treasury tax and loan
deposits and generally are repaid within one to 120 days from the transaction
date. Information concerning securities sold under agreements to repurchase is
summarized below.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Average balance during the year $60,941 $52,229
Average interest rate during the year 5.00% 4.47%
Maximum month-end balance during the year $72,112 $58,357
U.S. government securities pledged as collateral for the
repurchase agreements:
Carrying Value $88,412 $80,988
Estimated Fair Value 89,056 81,015
</TABLE>
11. NOTES PAYABLE
A summary of notes payable as of December 31, 1997 and 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C> <C>
Promissory Note Bearing Interest at 1.20% Above the 30-Day
LIBOR (7.118% and 6.763% at December 31, 1997 and
1996), Principal Due 1998 $ 5,000 $ 5,000
Promissory Note Bearing Interest at 0.1% Above the 30-Day
LIBOR (5.788% and 5.475% at December 31, 1997 and
1996), Principal Due 2001 5,000 5,000
Promissory Note to Unaffiliated Bank Bearing Interest at 1.20%
Above the 30-Day LIBOR (7.118% and 6.763% at
December 31, 1997 and 1996), $1,100,000 Due Annually 6,657 4,362
Other Installment Notes Payable Bearing Interest at Rates
Varying From 4.400% to 7.470% and With Maturities
Varying From 1998 to 2023 4,434 4,670
Line of Credit from Unaffiliated Bank Bearing Interest at 1.20%
Above the 30-Day LIBOR (6.763% at December 31, 1996) -0- 3,394
------- -------
$21,091 $22,426
======= =======
</TABLE>
The promissory note to the unaffiliated bank is secured by the
outstanding stock of City National Bank of Fort Smith and contains financial
covenants relating to the issuance of additional debt and maintenance of minimum
tangible net worth.
The notes payable require principal repayments as follows: 1998 -
$6,294,000; 1999 - $1,295,000; 2000 - $2,076,000; 2001 - $6,299,000; 2002 -
$1,299,000; and thereafter - $3,828,000.
<PAGE> 37
12. BENEFIT PLANS
The Company has a defined benefit pension plan (the "Plan") which
covers substantially all of the Company's employees. Operating expenses of the
Plan are paid by the Company and no contributions are required of participants.
The annual contribution to the Plan by the Company ($904,000 in 1997, $762,000
in 1996 and $695,000 in 1995) is determined by various actuarial factors. The
Plan contains provisions for early retirements, disability and death benefits.
The following tables set forth the Plan's funded status and amounts recognized
in the Company's balance sheet at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
Actuarial Present Value of Benefit
Obligation at December 31: 1997 1996
--------- ---------
<S> <C> <C>
Accumulated Benefit Obligation $(13,131) $(11,942)
Effect of Projected Future
Compensation Levels (1,450) (1,222)
-------- --------
Projected Benefit Obligation for
Service Rendered to Date (14,581) (13,164)
Plan Assets at Fair Value, Primarily
Stock and U.S. Government Securities 16,330 13,873
-------- --------
Plan Assets Greater Than Projected 1,749 709
Benefit Obligation
Unrecognized Net Loss From Past
Experience Different From That Assumed 1,555 2,496
Unrecognized Net Obligations (851) (1,156)
-------- --------
Prepaid Pension Cost $ 2,453 $ 2,049
======== ========
</TABLE>
[30]
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Plan's net pension cost for 1997, 1996 and 1995 included the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ----------
<S> <C> <C> <C>
Service Cost $ 664 $ 578 $ 424
Interest Cost on Projected
Benefit Obligation 926 915 845
Actual Return on Assets (2,488) (1,104) (1,948)
Net Amortization and Deferral 1,399 61 1,120
------- ------- -------
$ 501 $ 450 $ 441
======= ======= =======
Significant Assumptions:
Weighted Average Discount Rate 7.00% 7.25% 7.50%
Estimated Future Pay Increases 4.00% 4.00% 4.00%
Expected Return on Assets 7.50% 7.50% 7.50%
</TABLE>
The Company has an Employee Stock Ownership Plan for substantially all
of its employees. Contributions to the Plan during any one year are determined
by the Company and limited to 15 percent of the payroll for the participants.
During 1997, 1996 and 1995, the Company's expenses totaled approximately
$855,000, $777,000 and $601,000, respectively.
The Company offers qualified employees the opportunity to participate
in one of its defined contribution employee benefit plans, qualifying under
Section 401(k) of the Internal Revenue Code. Contributions to the plan are based
on the total amount of salary the employee elects to defer, a matching
contribution which in none of the plans exceeds 5% of each employee's salary,
and a discretionary amount determined each year by the Company. The amount of
expense recognized in 1997, 1996 and 1995 was $353,000, $569,000 and $607,000,
respectively.
The Company has a stock option plan under which options to purchase up
to 150,000 shares of the Company's common stock may be granted to officers and
other key employees of the Company. Terms and conditions of the Company's
options including exercise price and period in which options are exercisable are
generally at the discretion of the Board of Directors; however, no options are
exercisable for more than 10 years after date of grant. The table on the
following page details the stock option activity for the past three years.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ----------------------------- ------------------------------
AMOUNT OF AVERAGE AMOUNT OF AVERAGE AMOUNT OF AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE
------------------------------ ----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 48,269 $24.25 14,166 $18.96 7,248 $19.00
Granted 6,603 32.49 34,103 26.45 6,918 18.92
Exercised -0- -0- -0- -0- -0- -0-
Canceled -0- -0- -0- -0- -0- -0-
-------- ------ ------ ------ ------ ------
Outstanding, end of year 54,872 $25.24 48,269 $24.25 14,166 $18.96
======== ====== ======
</TABLE>
Options to purchase 17,421 shares of common stock were exercisable at
an average exercise price of $22.63 at December 31, 1997.
<PAGE> 39
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. If compensation cost had been
determined based on the fair value at grant date for awards in 1997 and 1996 in
accordance with SFAS No. 123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income - As reported $24,905 $22,372
Net income - Pro forma $24,763 $22,307
Net income per share - As reported $ 2.42 $ 2.27
Net income per share - Pro forma $ 2.41 $ 2.26
</TABLE>
[31]
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Expected life 10 years 10 years
Risk-free interest rate 6.54% 6.49%
Expected volatility 30.00% 30.64%
Dividend yield 2.46% 2.10%
</TABLE>
The weighted average fair value of options granted during 1997 and 1996
was $12.54 and $18.97 per share, respectively. The pro forma effect on net
income for 1997 and 1996 is not representative of the pro forma effect on net
income in future years because pro forma compensation expense related to grants
made prior to 1996 is not included.
13. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include standby letters of credit and
commitments to extend credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the Statement of Condition.
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.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. 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. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
Management's credit evaluation of the counterparty. The extent of collateral
varies for each commitment but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are 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, including
commercial paper, bond financing, and similar transactions. Most guarantees
expire in 1998. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds collateral supporting those commitments for which collateral
is deemed necessary. The extent of collateral held for those commitments at
December 31, 1997 varies from 0 percent to 100 percent; the average amount
collateralized is 50 percent.
Financial instruments whose amounts represent credit risk as of
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Commitments to Extend Credit $86,067 $133,568
Standby Letters of Credit 11,323 8,593
</TABLE>
The Company has a facilities management contract with a data processing
firm to provide computer equipment and the needed personnel for systems support.
Payments related to this contract, which expires in 1998, are expensed when
paid. Certain branch facilities and warehouse space are leased under various
operating lease agreements. These contracts require approximate minimum annual
rentals as follows: 1998-$1,600,000; 1999-$65,000; 2000-$55,000; 2001-$118,000;
and 2002-$66,000.
The Company has been named as a defendant in certain lawsuits which are
currently pending. In the opinion of Management, after consulting with legal
counsel, any liability incurred in connection with the ultimate outcome of these
suits will not have a material adverse effect on the Company's results of
operations.
<PAGE> 41
14. RESTRICTIONS
Each of the Company's subsidiary banks is subject to either national or
state banking regulations which restrict the level of dividends that may be paid
in a given year. Such restrictions are based on a percentage of the subsidiary
bank's net income. During 1997, the Company's subsidiary banks will have
available for payment of dividends, without regulatory approval, approximately
$450,000 of undistributed earnings plus the net income earned in 1997.
At December 31, 1997, the Company was required to maintain reserve
balances in cash and due from accounts of approximately $11,834,000.
Banking regulations also require that banks pay insurance premiums to
the Federal Deposit Insurance Corporation (the "FDIC") in exchange for the FDIC
insuring the deposits of the Company's customers. Insurance premiums paid to the
FDIC for the years ended December 31, 1997, 1996 and 1995 were approximately
$178,000, $102,000 and $1,483,000, respectively, and those premiums were
included in other operating expenses on the Company`s Consolidated Statements of
Income.
[32]
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUPPLEMENTARY DATA FOR CASH FLOWS
Income taxes paid by the Company during the years ended December 31,
1997, 1996 and 1995 amounted to $6,875,000, $7,621,000 and $7,023,000,
respectively. Interest paid on notes payable during the years ended December 31,
1997, 1996 and 1995 was $1,434,000, $1,609,000 and $1,199,000, respectively.
In connection with the acquisition in 1995, the Company acquired assets
and assumed liabilities as follows (in thousands):
<TABLE>
<CAPTION>
1995
--------------
<S> <C>
Fair Value of Assets Acquired $ 154,811
Goodwill 8,707
Liabilities Assumed (138,518)
---------
Cash Paid 25,000
Cash Acquired (5,921)
---------
Net Payment for Purchase $ 19,079
=========
</TABLE>
16. CAPITAL ACCOUNTS
On May 20, 1996, the Company declared a 3-for-2 stock split which was
effected in the form of a fifty percent (50%) stock dividend. The dividend was
distributed on June 28, 1996 and increased the issued and outstanding common
stock of the Company from 6,225 to 9,338 shares. All per share data and number
of shares outstanding have been retroactively restated to reflect the effect of
this stock split.
The Company and each of its subsidiary banks are subject to minimum
capital requirements which are administered by various federal regulatory
agencies. These capital requirements, as defined by federal guidelines, involve
quantitative and qualitative measures of assets, liabilities and certain
off-balance sheet instruments. 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
financial statements of the Company and its subsidiaries.
Management believes, as of December 31, 1997, that the Company and its
subsidiaries meet all capital adequacy requirements to which they are subject.
At December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized each of the subsidiaries as well
capitalized. To be categorized as well capitalized, a bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios (as defined in
applicable regulations) as set forth in the table below. There are no conditions
or events since the notification that Management believes have changed any of
the subsidiary banks' category.
The actual regulatory capital amounts and ratios for the Company and
the most significant of its bank subsidiaries are presented in the table below
(dollars in thousands):
<PAGE> 43
<TABLE>
<CAPTION>
Minimum Regulatory
Actual Minimum Regulatory Provision to be
Regulatory Capital Capital Required Well Capitalized
----------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997:
Total Capital (to Risk Weighted Assets)
First United Bancshares, Inc. $ 198,784 17.77% $ 89,481 8.00% N/A
City National Bank of Fort Smith $ 40,126 13.57% $ 23,657 8.00% $ 29,571 10.00%
Tier 1 Capital (to Risk Weighted Assets)
First United Bancshares, Inc. $ 184,803 16.52% $ 44,740 4.00% N/A
City National Bank of Fort Smith $ 36,462 12.33% $ 11,828 4.00% $ 67,111 6.00%
Tier 1 Capital (to Average Assets)
First United Bancshares, Inc. $ 184,803 9.59% $ 77,053 4.00% N/A
City National Bank of Fort Smith $ 36,462 8.35% $ 17,475 4.00% $ 21,843 5.00%
At December 31, 1996:
Total Capital (to Risk Weighted Assets)
First United Bancshares, Inc. $ 172,253 17.85% $ 77,217 8.00% N/A
City National Bank of Fort Smith $ 36,846 14.31% $ 20,478 8.00% $ 25,597 10.00%
Tier 1 Capital (to Risk Weighted Assets)
First United Bancshares, Inc. $ 160,287 16.61% $ 38,608 4.00% N/A
City National Bank of Fort Smith $ 33,623 13.06% $ 10,239 4.00% $ 15,359 6.00%
Tier 1 Capital (to Average Assets)
First United Bancshares, Inc. $ 160,287 9.10% $ 70,475 4.00% N/A
City National Bank of Fort Smith $ 33,623 8.39% $ 16,025 4.00% $ 20,031 5.00%
</TABLE>
[33]
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The financial position of First United Bancshares, Inc. (parent company
only), its results of operations and cash flows are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
CONDENSED FINANCIAL POSITION:
Assets:
Cash $ 29,313 $ 15,848
Investment in Subsidiaries 173,169 165,157
Other Assets 10,072 5,556
--------- ---------
Total Assets $ 212,554 $ 186,561
========= =========
Liabilities and Capital Accounts:
Notes Payable $ 11,657 $ 12,756
Other Liabilities 3,891 1,005
--------- ---------
Total Liabilities 15,548 13,761
--------- ---------
Total Capital 197,006 172,800
--------- ---------
Total Liabilities and Capital $ 212,554 $ 186,561
========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
--------------- ------------- --------------
<S> <C> <C> <C>
CONDENSED OPERATING RESULTS:
Dividend Income From Subsidiaries $26,060 $14,135 $ 31,870
Management Fees 428 427 537
Other Income 88 100 35
------- ------- --------
26,576 14,662 32,442
------- ------- --------
Interest Expense 919 812 836
Other Expense 3,667 3,406 1,956
------- ------- --------
4,586 4,218 2,792
------- ------- --------
Income Before Tax Benefit and Equity in
Undistributed Income of Subsidiaries 21,990 10,444 29,650
Income Tax Benefit 2,466 1,754 864
------- ------- --------
Income Before Equity in Undistributed
Income of Subsidiaries 24,456 12,198 30,514
Equity in Undistributed Income of
Subsidiaries 449 10,174 (12,138)
------- ------- --------
Net Income $24,905 $22,372 $ 18,376
======= ======= ========
</TABLE>
[34]
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(Dollars in Thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS:
Cash Flows From Operating Activities: $ 24,905 $ 22,372 $ 18,376
Net Income 272 17 17
Depreciation (449) (10,174) 12,138
Undistributed Income (4,831) (2,623) (1,023)
Increase in Other Assets 2,880 (1,310) (485)
-------- -------- --------
(Decrease) Increase in Other Liabilities 22,777 8,282 29,023
-------- -------- --------
Cash Flows From Investing Activities: -0- (500) (25,000)
Purchase of Subsidiaries -0- -0- (1,495)
Purchase of Investment Securities -0- -0- 3,000
-------- -------- --------
Maturities of Investment Securities -0- (500) (23,495)
-------- -------- --------
Cash Flows From Financing Activities: (1,099) (4,155) (2,875)
Principal Repayments on Notes Payable -0- 3,394 5,936
Issuance of Notes Payable -0- -0- (879)
Treasury Stock Transactions (8,214) (5,755) (4,825)
-------- -------- --------
Payment of Dividends (9,313) (6,516) (2,643)
-------- -------- --------
13,464 1,266 2,885
Net Increase in Cash 15,848 14,582 11,697
-------- -------- --------
Cash at Beginning of Year $ 29,312 $ 15,848 14,582
======== ======== ========
Cash at End of Year
Supplementary Data for Cash Flows: 6,875 7,621 7,023
Taxes Paid 1,434 1,609 1,199
Interest Paid on Notes Payable
</TABLE>
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosure about Fair Values of Financial Instruments,"
requires disclosure of the fair value for all financial instruments as well as
the methodology and significant assumptions used in estimating fair values. In
cases where quoted market prices are not available, fair values are based on
estimates using present value techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates for those
assets or liabilities cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. The estimated fair values of financial instruments with immediate
and shorter term maturities (generally 90 days or less) are assumed to be the
same as the recorded value. All non-financial instruments, by definition, have
been excluded from these disclosure requirements. Accordingly, the aggregate
fair value amounts presented below do not represent the underlying value of the
Company and may not be indicative of amounts that might ultimately be realized
upon disposition or settlement of those assets and liabilities. The carrying
amount and estimated fair values of financial instruments for December 31, 1997
and 1996 are as follows (in thousands):
[35]
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ----------------------------------
CARRYING VALUE ESTIMATED Carrying Value Estimated
FAIR VALUE Fair Value
---------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and Short-Term Investments $ 140,780 $ 140,780 $ 138,345 $ 138,345
Securities 732,608 734,950 731,802 733,442
Loans 1,003,308 1,000,871 844,255 830,238
LIABILITIES
Deposits $1,633,222 $1,634,705 $1,514,038 $1,514,027
Federal Funds Purchased and
Securities Sold Under
Agreements to Repurchase 72,112 72,112 50,024 50,024
Notes Payable 21,091 21,091 22,426 22,426
</TABLE>
The methodology and significant assumptions used in estimating the fair
values presented above are as follows:
CASH AND SHORT-TERM INVESTMENTS
The carrying amounts for cash and due from banks and short-term investments
(federal funds sold and securities purchased under agreements to resell and
other short-term investments) approximate fair value because of the short
maturity of those financial instruments.
SECURITIES
Fair values for securities available-for-sale and investment 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
The fair values of loans are estimated for portfolios of loans with similar
financial characteristics. For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on carrying
values. The fair values for loans with a pre-determined or fixed rate are
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. Fair values for non-performing loans are estimated
using the current carrying value less any specific reserve for which the Company
has provided.
Pursuant to the Interest Rate Control Amendment to the Constitution of the
State of Arkansas, all "general loans" have a maximum financing limitation of 5%
over the Federal Reserve Discount Rate. As of December 31, 1997, the maximum
financing limitation is 10%. This law limits the Company's flexibility in
pricing loans according to credit and rate risk through the use of a greater
spread in financing rates. Accordingly, the difference between the carrying
amount and estimated fair value of the Company's loans is not as great as would
be the case without such a law.
DEPOSITS
The fair value of deposits with no stated maturity, such as
non-interest-bearing deposits, interest-bearing demand deposits and savings
accounts are, by definition, equal to the amount payable on demand at the
reporting date, commonly referred to as the carrying value. Fair value of
certificates of deposit are based upon the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
SHORT-TERM LIABILITIES
The carrying amounts for federal funds purchased, securities sold under
agreements to repurchase and other liabilities approximate their fair values.
OFF-BALANCE SHEET INSTRUMENTS
The fair values of loan commitments and standby letters of credit
approximate the fees currently charged for similar agreements. The fees
associated with these financial instruments are immaterial.
[36]
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of First United Bancshares, Inc.:
We have audited the accompanying consolidated statements of condition
of First United Bancshares, Inc. (an Arkansas corporation) and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in capital accounts and cash flows for each of the years in the
three-year period ended December 31, 1997. 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 did not audit the
1996 and 1995 financial statements of Fredonia Bancshares, Inc., a company
acquired during 1997 in a transaction accounted for as a pooling-of-interests,
as discussed in Note 1. Such statements are included in the consolidated
financial statements of First United and reflect total assets and total interest
income of 14 percent and 13 percent, respectively, in 1996 and 14 percent of
total interest income in 1995 of the related consolidated totals. These
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts included for Fredonia
Bancshares, Inc., is based solely upon the report of the other auditors.
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 audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audit and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First United
Bancshares, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997.
Arthur Andersen LLP
Jackson, Mississippi,
January 20, 1998.
REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS
The management of First United Bancshares, Inc. (First United) is
responsible for the integrity and objectivity of the financial statements and
other financial information contained in this Annual Report. The financial
statements have been prepared in conformity with generally accepted accounting
principles. Financial information throughout this Annual Report is consistent
with that in the financial statements.
First United maintains a system of internal accounting controls which
is believed to provide, in all material respects, reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition;
transactions are properly authorized and recorded; and the financial records are
reliable for preparing financial statements and maintaining accountability for
assets. All systems of internal accounting controls are based on management's
judgment that the cost of controls should not exceed the benefits to be
achieved. Management believes First United's system provides the appropriate
balance between costs of controls and the related benefits.
In order to monitor compliance with this system of controls, First
United maintains an internal audit program. Internal audit reports are issued to
appropriate officers, and significant audit exceptions, if any, are reviewed
with management and the Audit Committee of the Board of Directors.
The financial statements in this Annual Report have been audited by
First United's independent public accountants, Arthur Andersen LLP, for the
purpose of determining that the financial statements are presented fairly. Their
audit included a study of the evaluation of First United's system of internal
controls for the purpose of setting the scope of their auditing procedures.
[37]
<PAGE> 48
FIRST UNITED BANCSHARES, INC. OFFICERS AND BOARD OF DIRECTORS
EXECUTIVE OFFICERS
James V. Kelley
Chairman of the Board,
President & Chief Executive Officer
John E. Burns, CPA
Senior Vice President,
Chief Financial Officer & Secretary
Jim Barnes
Vice President & Auditor
Richard E. Ulmer
Vice President &
Loan Review Officer
Missy Pearcy
Marketing Officer
Cindy Alphin
Assistant Vice President of Planning
REGIONAL CHAIRMEN
John Robert Graves
(effective April 1, 1998)
South Arkansas
Jim Harwood
North and West Arkansas
Gordon Lewis
Texas and Louisiana
BOARD OF DIRECTORS
Larry Burrow
Plant Manager,
Partee Flooring Mill
Claiborne P. Deming
President and
Chief Executive Officer,
Murphy Oil Corporation
Tommy Hillman
President, Winrock Farms, Inc.
James V. Kelley
Chairman of the Board, President
& Chief Executive Officer,
First United Bancshares, Inc.
Roy E. Ledbetter
President & Chief Executive Officer,
Highland Industrial Park, Inc.
Jack W. McNutt
Former President and
Chief Chief Executive Officer,
Murphy Oil Corporation
Michael F. Mahony
Attorney
Richard H. Mason
President,
Gibraltar Energy Company
George Middlebrook, III
Investments
R. Madison Murphy
Chairman of the Board,
Murphy Oil Corporation
Robert C. Nolan
Chairman,
Deltic Timber Corporation
Cal Partee, Jr.
Oil Investments
John D. Trimble, Jr.
Managing Partner,
Trimble Properties
[38]
<PAGE> 49
SUBSIDIARY BANKS' BOARD OF DIRECTORS
FIRST NATIONAL BANK
OF EL DORADO, ARKANSAS
Claiborne P. Deming
Barry Felton
James V. Kelley
Larry Kinard
Michael F. Mahony
Richard H. Mason
R. Madison Murphy
Robert C. Nolan
Robert M. Reynolds
Dr. Henry B. Rogers
John H. Sample
Stephen C. Smart, D.D.S.
Carolyn Tennyson
Charles E. Thomas
John D. Trimble, Jr.
Dr. Srini Vasan
FIRST NATIONAL BANK
OF MAGNOLIA, ARKANSAS
Larry Burrow
Kathy Dickson
Tommy Fallin, Jr.
John Robert Graves
Robert L. Jones
Richard G. Murphy
Cal Partee, Jr.
David F. Rankin
George R. Stuart
Chris W. Weiser
Joe D. Woodward
CITY NATIONAL BANK
OF FORT SMITH, ARKANSAS
Thomas J. Barr
Morris G. Boren
Carolyn L. Branch
George C. Fisher
Jim Harwood
George R. Jacobs
James V. Kelley
A. Samuel Koenig III
Emon A. Mahony, Jr.
Charles Shuffield
Bobby W. Stephens
Robert B. Westphal
ADVISORY DIRECTOR
J. L. Swink
MERCHANTS & PLANTERS
BANK, N.A. OF CAMDEN, ARKANSAS
Eugene Bramblett
John Robert Graves
James R. Jordan
Roy E. Ledbetter
Jim Neeley
Richard L. Robertson
Joe M. Rogers
COMMERCIAL BANK
AT ALMA, ARKANSAS
James A. Arnold II
Leonarde L. Blaschke
William M. "Dockey" Brasher III
Jim V. Fincher
John A. Griffin
Jim Harwood
Paul L. Winborn
THE BANK OF
NORTH ARKANSAS
MELBOURNE, ARKANSAS
W. Wesley Arnold
Brenda K. Barnes
Thomas C. Colegrove
Harlin F. Hames
Jim Harwood
Lloyd T. Jones
James E. Miller
Reed M. Perryman
FIRST UNITED BANK
STUTTGART, ARKANSAS
Jack B. Coker, RPh
Tommy Hillman
Jerry J. Hoskyn
Harold Ives
Steven M. Keith
James V. Kelley
Robert M. Koch
Ben A. Myers, P.D.
Wanda H. Northcutt
Robert Petter, Sr.
Randall Snider
Dewey Snowden
John E. Stephens
Ralph Wilson
FIRSTBANK
TEXARKANA, TEXAS
James M. Carlow
Steve Conner
Lucille T. Cook
Delton G. Gwinn
Joe Connor Hart
Gordon Lewis
M. L. Mayo
Amos McCulloch, Jr.
H. J. Trammell
Graton E. White,, Jr.
Steve C. Wiggs
FREDONIA STATE BANK
NACOGDOCHES, TEXAS
Roy Blake
Hank Crouse
J. R. Honea
James V. Kelley
Gordon Lewis
George Middlebrook, III
Arthur L. Speck, M.D.
Dan Stansel
Craig Stripling
Roger Van Horn
CITY BANK & TRUST
SHREVEPORT, LOUISIANA
Ron C. Boudreaux
John E. Burns, CPA
James E. Egan, Jr.
John C. Gehl
Gordon Lewis
R.A. Mackey
J. Russell Reeves
Gene C. Sigler
Richard K. Speairs, Jr., Ph.D.
S.M. Trombetta
David L. Winkley
FIRST UNITED TRUST
COMPANY, N.A.
Richard P. Clark, II
John Robert Graves
Robert M. Koch
Michael F. Mahony
R. Madison Murphy
[39]
<PAGE> 50
SUBSIDIARY BANKS
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS LOCATION TELEPHONE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FIRST NATIONAL BANK OF EL DORADO
- --------------------------------------------------------------------------------------------------------------------
James V. Kelley, Chairman of the Board & Chief Executive Officer El Dorado, AR (870) 863-3181
- --------------------------------------------------------------------------------------------------------------------
FIRST NATIONAL BANK OF MAGNOLIA
- --------------------------------------------------------------------------------------------------------------------
Robert L. Jones, President & Chief Executive Officer Magnolia, AR (870) 234-1234
- --------------------------------------------------------------------------------------------------------------------
CITY NATIONAL BANK OF FORT SMITH
- --------------------------------------------------------------------------------------------------------------------
Jim Harwood, President & Chief Executive Officer Fort Smith, AR (501) 785-2811
- --------------------------------------------------------------------------------------------------------------------
MERCHANTS & PLANTERS BANK, N.A. OF CAMDEN
- --------------------------------------------------------------------------------------------------------------------
James R. Jordan, President & Chief Executive Officer Camden, AR (870) 836-8136
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANK AT ALMA
- --------------------------------------------------------------------------------------------------------------------
Jim V. Fincher, President & Chief Executive Officer Alma, AR (501) 632-2257
- --------------------------------------------------------------------------------------------------------------------
THE BANK OF NORTH ARKANSAS
- --------------------------------------------------------------------------------------------------------------------
Lloyd T. Jones, President & Chief Executive Officer Melbourne, AR (870) 368-4205
- --------------------------------------------------------------------------------------------------------------------
FIRST UNITED BANK
- --------------------------------------------------------------------------------------------------------------------
Robert M. Koch, President & Chief Executive Officer Stuttgart, AR (870) 673-3545
- --------------------------------------------------------------------------------------------------------------------
FIRSTBANK
- --------------------------------------------------------------------------------------------------------------------
Steve C. Wiggs, Chairman, President & Chief Executive Officer Texarkana, TX (903) 838-6500
- --------------------------------------------------------------------------------------------------------------------
FREDONIA STATE BANK
- --------------------------------------------------------------------------------------------------------------------
Gordon Lewis, Chairman & President Nacogdoches, TX (409) 564-6191
- --------------------------------------------------------------------------------------------------------------------
CITY BANK & TRUST
- --------------------------------------------------------------------------------------------------------------------
Ron C. Boudreaux, President & Chief Executive Officer Shreveport, LA (318) 865-6555
- --------------------------------------------------------------------------------------------------------------------
FIRST UNITED TRUST COMPANY, N.A.
- --------------------------------------------------------------------------------------------------------------------
Richard P. Clark II, President & Chief Executive Officer El Dorado, AR (870) 863-3181
- --------------------------------------------------------------------------------------------------------------------
PENDING ACQUISITIONS
CITIZENS NATIONAL BANK
- --------------------------------------------------------------------------------------------------------------------
John Robert Graves, President & Chief Executive Officer Hope, AR (870) 777-2313
- --------------------------------------------------------------------------------------------------------------------
FIRST REPUBLIC BANK
- --------------------------------------------------------------------------------------------------------------------
Henry A. Logue, President & Chief Executive Officer Monroe, LA (318) 388-3990
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
[40]
<PAGE> 51
CORPORATE INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will convene on
Tuesday, May 26, 1998, at 2:00 p.m. (CDT) in the Board
of Directors Room of the First National Bank, Main and
Washington Streets, El Dorado, Arkansas
CORPORATE HEADQUARTERS
Main and Washington Streets
El Dorado, Arkansas 71730
COMMON STOCK
NASDAQ Symbol: UNTD
Listed: NASDAQ System National Market List
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Jackson, Mississippi.
FINANCIAL AND GENERAL INFORMATION
First United's Annual Report to the Securities
and Exchange Commission on Form 10-K is
available upon request. Additional copies
and other financial reports or information are
available without charge upon request by writing:
John E. Burns, First United Bancshares, Inc.,
P. O. Box 751, El Dorado, Arkansas 71731-0751
STOCKHOLDER INFORMATION
Stockholders seeking any information concerning their
shares or dividends should contact the transfer agent,
First United Trust Company, N.A., as follows:
ATTN: First United Trust Company, N.A.,
P. O. Box 751, El Dorado, Arkansas 71731-0751,
Telephone (870) 863-3181, Extension 242.
[41]
<PAGE> 52
First United Bancshares, Inc.
El Dorado, Arkansas
And its wholly-owned subsidiaries
First National Bank of El Dorado, Arkansas
City National Bank of Fort Smith, Arkansas
First National Bank of Magnolia, Arkansas
Merchants and Planters Bank, N.A. of Camden, Arkansas
Commercial Bank at Alma, Arkansas
The Bank of North Arkansas, Melbourne, Arkansas
First United Bank, Stuttgart, Arkansas
FirstBank, Texarkana, Texas
Fredonia State Bank, Nacogdoches, Texas
City Bank & Trust, Shreveport, Louisiana
First United Trust Company, N.A.
Citizens National Bank, Hope, Arkansas (Pending)
First Republic Bank, Monroe, Louisiana (Pending)
<PAGE> 53
[AXLEY & RODE LLP LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Fredonia Bancshares, Inc.
Nacogdoches, Texas
We have audited the consolidated balance sheets of Fredonia Bancshares,
Inc. and Subsidiary at December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fredonia
Bancshares, Inc. and Subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
As discussed more fully in Note 10, Fredonia Bancshares, Inc. has adopted
the accrual method of accounting for certain salary continuation agreements.
Previously the Bank accounted for these agreements using the cash basis method
of accounting.
/s/ AXLEY & RODE LLP
----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Lufkin, Texas
February 20, 1997
<PAGE> 54
APPENDIX
TO THE
1997 ANNUAL REPORT TO STOCKHOLDERS
This Appendix is provided in accordance with Regulation S-T, Item 304.
Graphic and Image Material. It shall list all such graphic and image information
in the First United Bancshares, Inc. ("First United") 1997 Annual Report to
Stockholders ("Report") and is intended to provide a fair and accurate narrative
description of such information.
1. The Cover Page of the Report is titled "First United Bancshares,
Inc. 1997 Annual Report"
2. Page 3 of the Report contains a bar graph titled "Earnings Per
Share" which discloses First United's earnings per share (in dollars) of $1.74,
$1.79, $1.97, $ 2.27 and $2.42 for the years ended December 31, 1993, 1994,
1995, 1996 and 1997, respectively.
3. Page 4 of the Report contains a double bar graph titled "Book
Value-Market Value at Year End (Dollars)" which discloses the book value of a
share of First United common stock to be $13.25, $13.43, $16.07, $17.55 and
$19.17 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997,
respectively. The graph also discloses the market value of a share of First
United common stock to be $19.67, $20.17, $27.67, $33.00, and $40.00 for the
years ended December 31, 1993, 1994, 1995, 1996, and 1997, respectively.
4. Page 4 of the Report contains a line graph titled "Interest Margin
Analysis" which discloses the "Break-Even Yield", "Net Interest Margin" and "Net
Interest Spread". The Break-Even Yield" is disclosed as 3.62%, 3.66%, and 3.62%,
the Net Interest Margin" is disclosed as 4.30%, 4.28%, and 4.45%, the "Net
Interest Spread" is disclosed as , 3.37%, 3.47%, and 3.61%, for the years ended
December 31, 1995, 1996, and 1997, respectively.
5. Page 5 of the Report contains a bar graph titled "Loan Loss
Provision" which discloses the dollar amount (in thousands) that has been
allocated to the loan loss reserve account, which is disclosed as $1,815, $334,
$574, $725, and $2,448, for the years ended December 31, 1993, 1994, 1995, 1996,
and 1997, respectively.
6. Page 6 of the Report contains a line graph titled "Non-Performing
Assets and Allowance for Loan Losses" which discloses (in thousands) the
"Non-Performing Assets" as $6,649, $5,210, $6,174, $5,636, and $5,889, the
"Non-Performing Loans" as, $4,667, $3,909, $4,867, $4,546, and $5,143, and the
"Allowance for Loan Losses" as $12,704, $12,250, $12,882, $12,655, and $14,522,
for the years ended December 31, 1993, 1994, 1995, 1996, and 1997, respectively.
7. Page 9 of the Report contains a graph titled "Average 1997 Deposit
Composition" which discloses the make-up of the deposits as 31.13% of "Savings
and Interest-Bearing Demand" deposits, 37.06% of "Other Time Deposits", 16.92%
of "Non-Interest Bearing Demand" deposits and 14.89% of "Time Deposits of
$100,000 or More".
8. Page 10 of the Report contains a bar graph titled "Stockholders
Equity at Year-End" which discloses the shareholders equity (in millions) as
approximately $123.9, $125.5, $150.2, $ 172.8, and $197.0, for the years ended
December 31, 1993, 1994, 1995, 1996, and 1997, respectively.
9. Page 11 of the Report contains a graph titled "1997 Risked Based
Capital Ratios" which discloses "Tier 1 Capital" and "Total Risk-Based Capital"
of First United as 16.52% and 17.77% respectively, and the regulatory
requirements of "Tier 1 Capital" and "Total Risked-Based Capital" as 4.0% and
8.0%, respectively.
<PAGE> 1
EXHIBIT 21
FIRST UNITED BANCSHARES, INC.
Subsidiaries
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
The First National Bank United States
of El Dorado, El Dorado
Arkansas
First United Trust Company, N.A. United States
El Dorado, Arkansas
City National Bank United States
of Fort Smith, Fort Smith
Arkansas
First National Bank United States
of Magnolia, Magnolia
Arkansas
Merchants and Planters Bank United States
N.A., Camden, Arkansas
Commercial Bank at Alma Arkansas
Alma, Arkansas
The Bank of North Arkansas Arkansas
Melbourne, Arkansas
First United Bank Arkansas
Stuttgart, Arkansas
City Bank & Trust of Shreveport Louisiana
Shreveport, Louisiana
FirstBank Texas
Texarkana, Texas
Fredonia State Bank Texas
Nacogdoches, Texas
</TABLE>
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 20, 1998 included in the First United Bancshares, Inc. Form
10-K for the year ended December 31, 1997, into the Company's previously filed
Registration Statement on Form S-8 (File No. 033-56387).
ARTHUR ANDERSEN LLP
Jackson, Mississippi
March 27, 1998.
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the use of our
report dated February 20, 1997 included in the First United Bancshares, Inc.
Form 10-K for the year ended December 31, 1996, into the Company's previously
filed Registration Statement on Form S-4 (File No. 033-56387).
/s/ Axley & Rode LLP
--------------------------
CERTIFIED PUBLIC ACCOUNTANTS
March 25, 1998
Lufkin, Texas
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 70,557
<INT-BEARING-DEPOSITS> 22,221
<FED-FUNDS-SOLD> 48,002
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 495,184
<INVESTMENTS-CARRYING> 237,424
<INVESTMENTS-MARKET> 239,766
<LOANS> 1,003,308
<ALLOWANCE> 14,522
<TOTAL-ASSETS> 1,938,236
<DEPOSITS> 1,633,222
<SHORT-TERM> 72,112
<LIABILITIES-OTHER> 14,805
<LONG-TERM> 21,091
0
0
<COMMON> 10,277
<OTHER-SE> 186,729
<TOTAL-LIABILITIES-AND-EQUITY> 1,938,236
<INTEREST-LOAN> 87,613
<INTEREST-INVEST> 46,595
<INTEREST-OTHER> 3,582
<INTEREST-TOTAL> 137,790
<INTEREST-DEPOSIT> 58,402
<INTEREST-EXPENSE> 62,964
<INTEREST-INCOME-NET> 74,826
<LOAN-LOSSES> 2,448
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 53,097
<INCOME-PRETAX> 34,583
<INCOME-PRE-EXTRAORDINARY> 34,583
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,905
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 2.42
<YIELD-ACTUAL> 8.07
<LOANS-NON> 2,756
<LOANS-PAST> 1,863
<LOANS-TROUBLED> 524
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,655
<CHARGE-OFFS> 2,591
<RECOVERIES> 1,584
<ALLOWANCE-CLOSE> 14,522
<ALLOWANCE-DOMESTIC> 14,522
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
