<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-------------------------
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
September 30, 1999
Commission file number: 0-11916
FIRST UNITED BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Arkansas 71-0538646
(State of Incorporation) (I.R.S. Employer
Identification No.)
Main and Washington Streets
El Dorado, Arkansas 71730
(Address of principal executive offices) (Zip Code)
(870) 863-3181
(Registrant's telephone number, including area code)
-------------------------
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 periods 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
----- -----
The number of shares outstanding of registrant's common stock, par value $1.00
per share, at November 1, 1999 was 25,295,908.
================================================================================
<PAGE> 2
FIRST UNITED BANCSHARES, INC.
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Statements of Condition, September 30,
1999 and December 31, 1998. 3
Consolidated Statements of Income for the Three and
Nine Months ended September 30, 1999 and 1998. 4
Consolidated Statements of Cash Flow for the Nine
Months ended September 30, 1999 and 1998. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Change in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE> 3
Part I. FIRST UNITED BANCSHARES, INC.
Item 1 CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
------------ ------------
1999 1998
------------ ------------
<S> <C> <C>
(In thousands, except per share data)
ASSETS
Cash and Due From Banks .......................................... $ 87,316 $ 91,207
Short-Term Investments
Federal Funds Sold and Securities Purchased
Under Agreement to Resell .................................... 58,100 71,928
Other Short-Term Investments ................................... 8,639 15,696
------------ ------------
Total Short-Term Investments ..................................... 66,739 87,624
Securities Available-for-Sale .................................... 713,742 684,662
Investment Securities ............................................ 196,644 226,083
Total Loans ...................................................... 1,491,483 1,359,485
Unearned Discount .............................................. (4,669) (6,324)
Allowance for Loan Losses ...................................... (18,593) (17,302)
------------ ------------
Net Loans ..................................................... 1,468,221
Premises and Equipment ........................................... 1,335,859
Goodwill ......................................................... 43,118 42,739
Other Real Estate ................................................ 16,307 10,674
Other Assets ..................................................... 3,377 1,399
Total Assets .................................................. 42,465 36,210
------------ ------------
$ 2,637,929 $ 2,516,457
============ ============
LIABILITIES
Deposits:
Demand .........................................................
Savings and Interest-Bearing Demand ............................ $ 347,231 $ 338,414
Time ........................................................... 616,006 588,311
Total Deposits ................................................ 1,264,185 1,207,226
------------ ------------
Federal Funds Purchased and Securities Sold Under ................ 2,227,422 2,133,951
Agreements to Repurchase
Other Liabilities ................................................ 92,245 82,470
Notes Payable .................................................... 24,517 18,036
Total Liabilities ............................................. 34,896 26,367
------------ ------------
2,379,080 2,260,824
------------ ------------
CAPITAL ACCOUNTS
Preferred Stock (Par value of $1.00; 500 shares authorized in 1999
and 1998; none outstanding).....................................
Common Stock (Par value of $1.00; 50,000 shares authorized; -0- -0-
25,296 and 25,294 shares issued and outstanding in 1999
and 1998, respectively) .......................................
Surplus .......................................................... 25,296 25,294
Undivided Profits ................................................ 26,636 26,610
Accumulated Other Comprehensive Income ........................... 216,572 200,769
Total Capital Accounts ........................................ (9,655) 2,960
------------ ------------
Total Liabilities and Capital Accounts ........................ 258,849 255,633
------------ ------------
$ 2,637,929 $ 2,516,457
============ ============
</TABLE>
3
<PAGE> 4
FIRST UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
(In thousands, except per share data) 1999 1998 1999 1998
--------- --------- --------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans ........... $ 32,630 $ 30,803 $ 93,035 $ 89,387
Interest on Securities:
Taxable Securities ................. 12,014 10,660 34,905 34,011
Nontaxable Securities .............. 1,876 1,934 5,638 5,253
Interest on Federal Funds Sold and
Securities Purchased Under
Agreements to Resell ............... 620 1,144 2,136 3,086
Interest on Deposits in Banks ........ 111 241 559 792
--------- --------- --------- ---------
TOTAL INTEREST INCOME ............ 47,251 44,782 136,273 132,529
--------- --------- --------- ---------
INTEREST EXPENSE
Interest on Deposits ................. 19,570 19,733 57,346 57,806
Interest on Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase ........... 1,509 894 3,340 2,879
Interest on Notes Payable ............ 317 294 1,010 1,006
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE ........... 21,396 20,921 61,696 61,691
--------- --------- --------- ---------
NET INTEREST INCOME .............. 25,855 23,861 74,577 70,838
Provision for Possible Loan Losses.... 686 513 1,861 2,180
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ........ 25,169 23,348 72,716 68,658
--------- --------- --------- ---------
OTHER INCOME
Service Charges on Deposit Accounts... 2,792 2,356 7,817 6,897
Trust Fee Income ..................... 558 527 1,822 1,648
Security Gains ....................... 0 141 213 292
Other Operating Income ............... 1,196 2,051 4,190 4,748
--------- --------- --------- ---------
TOTAL OTHER INCOME ............... 4,546 5,075 14,042 13,585
--------- --------- --------- ---------
OTHER EXPENSE
Salaries ............................. 7,349 6,756 21,283 19,914
Pension and Other Employee Benefits... 2,122 2,412 6,412 6,649
Net Occupancy Expense ................ 1,405 1,351 3,963 3,872
Equipment Expense .................... 1,066 991 3,244 2,916
Data Processing Expense .............. 864 1,659 3,163 3,666
Other Operating Expenses ............. 4,529 4,286 12,618 12,813
--------- --------- --------- ---------
TOTAL OTHER EXPENSE .............. 17,335 17,455 50,683 49,830
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ........... 12,380 10,968 36,075 32,413
INCOME TAX EXPENSE ................... 3,788 3,753 10,978 9,759
--------- --------- --------- ---------
NET INCOME ....................... $ 8,592 $ 7,215 $ 25,097 $ 22,654
========= ========= ========= =========
EARNINGS PER SHARE:
BASIC ............................ $ 0.34 $ 0.29 $ 0.99 $ 0.90
========= ========= ========= =========
DILUTED .......................... $ 0.34 $ 0.29 $ 0.99 $ 0.90
========= ========= ========= =========
CASH DIVIDENDS PER SHARE ............. $ 0.125 $ 0.115 $ 0.37 $ 0.33
========= ========= ========= =========
AVERAGE SHARES ISSUED AND
OUTSTANDING .......................... 25,295 25,294 25,295 25,294
</TABLE>
4
<PAGE> 5
FIRST UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .................................................... $ 25,097 $ 22,654
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation ............................................... 3,247 3,162
Amortization of Intangible Assets .......................... 1,154 968
Provision for Possible Loans Losses ........................ 1,861 2,180
Gain on Sales of Securities ................................ (213) (292)
Accretion of Bond Discount, Net ............................ (1,273) (125)
(Increase) Decrease in Other Assets ........................ (15,020) 1,391
Increase in Other Liabilities .............................. 3,625 3,981
---------- ----------
Net Cash Provided by Operating Activities ..................... 18,478 33,919
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities ............ 44,513 62,290
Proceeds from Maturities of Securities Available-for-Sale .... 801,599 275,059
Proceeds from Sales of Securities Available-for-Sale ......... 30,546 19,014
Purchase of Investment Securities ............................ (41,629) (48,299)
Purchase of Available-for-Sale Securities .................... (832,706) (259,780)
Increase (Decrease) in Federal Funds, Net .................... 23,603 (12,018)
(Increase) Decrease in Other Short-Term Investments .......... 7,057 (4,805)
Increase in Loans ............................................ (134,223) (116,836)
Capital Additions ............................................ (3,626) (3,924)
---------- ----------
Net Cash Used in Investing Activities ......................... (104,866) (89,299)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Demand, Savings and Interest-bearing
Demand Deposits .......................................... 36,512 10,467
Increase in Time Deposits .................................... 56,959 52,638
Repayment of Notes Payable ................................... (1,742) (81)
Dividends Paid ............................................... (9,232) (8,267)
---------- ----------
Net Cash Provided by Financing Activities ..................... 82,497 54,757
---------- ----------
Net (Decrease) in Cash and Cash Equivalents ................... (3,891) (623)
Cash and Cash Equivalents, Beginning .......................... 91,207 83,291
---------- ----------
Cash and Cash Equivalents, Ending ............................. $ 87,316 $ 82,668
========== ==========
</TABLE>
5
<PAGE> 6
FIRST UNITED BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of First United Bancshares, Inc.
("First United") include the accounts of the parent company and its wholly-owned
subsidiaries, First United Trust Company, N.A., El Dorado, Arkansas, The First
National Bank of El Dorado, Arkansas, First National Bank of Magnolia, Arkansas,
Merchants and Planters Bank, N.A. of Camden, Arkansas, City National Bank of
Fort Smith, Arkansas, Commercial Bank at Alma, Arkansas, The Bank of North
Arkansas, Melbourne, Arkansas, FirstBank, Texarkana, Texas, First United Bank,
Stuttgart, Arkansas, Fredonia State Bank, Nacogdoches, Texas, City Bank and
Trust, Shreveport, Louisiana, Citizens National Bank, Hope, Arkansas, and First
Republic Bank, Rayville, Louisiana. All material intercompany transactions have
been eliminated.
The consolidated statements of condition as of September 30, 1999 and the
related consolidated statements of income for the three and nine month periods
ended September 30, 1999 and 1998 and the consolidated statements of cash flows
for the nine month period ended September 30, 1999 and 1998 are unaudited.
Certain information, accounting policies and footnote disclosures normally
included in complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted in accordance with
such rules and regulations. It is therefore suggested that these consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in First United's annual report
on Form 10-K for the year ended December 31, 1998.
In the opinion of management, all adjustments necessary for a fair
presentation of the financial statements are included. Operating results for the
three and nine months ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the full year.
2. BUSINESS COMBINATIONS
On July 9, 1999, Fredonia State Bank, a wholly owned subsidiary of First
United, located in Nacogdoches, Texas, acquired substantially all of the assets
and liabilities of East Texas National Bank of Marshall, Texas, which included
approximately $90 million in deposits and approximately $70 million in loans. In
connection with this transaction, First United recorded intangibles of
approximately $7 million attributable to core deposit premiums and other
unidentified intangibles. However, the final allocation of the purchase price
has not been finalized and is subject to ongoing evaluation by First United.
3. RESULTS OF OPERATIONS
The results for the three and nine month periods ended September 30, 1999
are not necessarily indicative of the results for the entire year of 1999. This
report should be read in conjunction with First United's 1998 Annual Report to
Shareholders for a complete understanding of First United's accounting policies
and their effect on the financial statements as a whole.
4. CAPITAL ACCOUNTS
Basic EPS was computed by dividing net income by the weighted average
shares of common stock outstanding of 25,295,102 and 25,294,296 for the third
quarter of 1999 and 1998, respectively. 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 45,000 in 1999 and 84,000 in
1998.
5. COMPREHENSIVE INCOME (LOSS)
In January 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting comprehensive income and its
components. Comprehensive income is defined as all changes in the equity of a
business enterprise from transactions and other events and circumstances, except
those resulting from investments by owners and
6
<PAGE> 7
distributions to owners. The Company's comprehensive income, which includes net
income and the change in unrealized gain(loss) on securities available for sale,
net of tax, was $5.47 million and $9.32 million for the three months ended
September 30, 1999 and 1998, respectively, and $12.48 million and $24.70
million, for the nine months ended September 30, 1999 and 1998, respectively.
6. SUPPLEMENTARY DATA FOR CASH FLOWS
Interest paid on notes payable during the nine months ended September 30,
1999 and 1998 amounted to $477,000 and $602,000 respectively.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and review of First United Bancshares, Inc.
("First United") and its subsidiaries, The First National Bank of El Dorado ("El
Dorado"), City National Bank of Fort Smith ("Ft. Smith"), First National Bank of
Magnolia ("Magnolia"), Merchants and Planters Bank, N.A. of Camden ("Camden"),
Commercial Bank at Alma ("Alma"), The Bank of North Arkansas ("Melbourne"),
FirstBank ("Texarkana"), First United Bank ("Stuttgart"), First United Trust
Company, N.A. ("FUTC"), Fredonia State Bank ("Nacogdoches"), City Bank and Trust
("Shreveport"), Citizens National Bank ("Hope"), and First Republic Bank
("Republic"), focuses on the results from operations which are not otherwise
apparent from the consolidated financial statements. Reference should be made to
these financial statements and the notes to the financial statements for an
understanding of this review and discussion.
FORWARD LOOKING STATEMENTS
This 10-Q contains forward looking statements based on current expectations
that involve a number of risks and uncertainties. Actual future performance,
outcomes and results may differ materially from those expressed in
forward-looking statements made by the Company and its management due to certain
risks, uncertainties and assumptions. The factors that could cause actual
results to differ materially from those we are projecting include the following:
general economic conditions; competitive factors and pricing pressure; changes
in product mix; changes in interest rates; changes in legal and regulatory
requirements; and the risk factors listed from time to time in the Company's SEC
reports, including but not limited to the report on Form 10-Q for the quarter
ended September 30, 1999.
Words such as "anticipate," "believe," "estimate," "expect," "intend" and
similar expressions, as they relate to First United or its management, identify
forward-looking statements. Forward-looking statements made by First United and
its management are based on estimates, projections, beliefs and assumptions of
management at the time of such statements and are not guarantees of future
performance. First United disclaims any obligation to update or revise any
forward-looking statement based on the occurrence of future events, the receipt
of new information, or otherwise.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1999 was $8.59 million,
or $0.34 per share compared with $7.22 million, or $0.29 per share during the
same period in 1998. Net income for the nine months ended September 30, 1999 was
$25.10 million, or $0.99 per share compared with $22.65 million, or $0.90 per
share during the same period in 1998. The annualized return on average assets
from continuing operations for the nine months ended September 30, 1999 and 1998
was 1.31% and 1.28% respectively, while the annualized return on average equity
was 12.98% and 12.84% respectively for the same periods.
7
<PAGE> 8
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 referred to in this
discussion, is presented on a fully tax-equivalent basis, which adjusts for the
tax-exempt status of income earned on certain loans and investments. The
reported interest income for the tax-free assets is increased by the amount of
tax savings less the nondeductible portion of interest expense incurred to
acquire the tax-free assets. Net interest income is affected by variations in
both interest rates and the volume of interest-earning assets and
interest-bearing liabilities.
On a tax equivalent basis, net interest income for the first nine months of
1999 was $77.83 million compared with $74.09 million in the first nine months of
1998. Net interest income also increased when compared with 1997. This increase
in net interest income was primarily the result of higher loan volumes. The net
interest margin through September 30, 1999 was 4.35% compared with 4.34% and
4.43% for the years ended December 31, 1998 and 1997, respectively. First United
expects no material change in the net interest margin through the remainder of
1999.
First United has debt of approximately $34.90 million at September 30, 1999
and interest expense associated with this debt totaled $1.01 million during the
first nine months of 1999 compared with $1.01 million during the same period in
1998. First United will make a principal payment of $1.10 million on its
installment note payable to an unaffiliated bank in November of this year.
Interest is payable quarterly. These borrowings contain financial covenants
relating to the issuance of additional debt and maintenance of minimum tangible
net worth. First United's $ 5.00 million note payable to an unaffiliated company
matured and was paid in August of 1999.
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, the Company and its subsidiary banks are required to comply with the
Arkansas usury laws on loans made within the State of Arkansas.
The following table is a comparison of the net interest margin:
<TABLE>
<CAPTION>
September 30, December 31,
------------- -------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Yield on Earning Assets 7.79 8.00 8.17
Break-even Yield 3.44 3.66 3.74
Net Interest Margin 4.35 4.34 4.43
Net Interest Spread 3.52 3.45 3.60
</TABLE>
LOANS
First United's loans totaled $1.49 billion at September 30, 1999
compared with $1.36 billion at December 31, 1998. Most of the increase in
total loans was attributable to the acquisition of East Texas National Bank of
Marshall, Texas. See Item 5. Other Information. The Company has no foreign
loans or leases and it is the policy of the Company to avoid out of
territory loans.
A sound credit policy combined with periodic and independent credit reviews
is the key factor of the credit risk management program. All affiliate banks
operate under written loan policies that help maintain a consistent lending
function and provide sound credit decisions. 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, a loan
review staff operates independently of the affiliate banks. This review team
performs periodic examinations of each bank's loans and related documentation.
Results of these examinations are reviewed with the Chairman and Chief Executive
Officer, the management and board of the respective affiliate banks and the
Audit Committees.
8
<PAGE> 9
The following table lists those loans and leases by type which are on
non-accrual status; loans by type 90 days or more past due and still accruing;
renegotiated loans by type and loans transferred to other real estate:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ----------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Non-performing loans:
Non-accrual loans:
Commercial & Financial $ 3,949 $ 3,020 $ 1,570
Real Estate 4,386 3,236 2,010
Consumer 1,096 521 365
-------- -------- --------
$ 9,431 $ 6,777 $ 3,945
-------- -------- --------
Past due 90 days or more
and still accruing:
Commercial $ 742 $ 1,225 $ 1,235
Real Estate 1,040 1,293 2,034
Consumer 510 294 548
-------- -------- --------
$ 2,292 $ 2,812 $ 3,817
-------- -------- --------
Renegotiated Loans: $ 605 $ 1,068 $ 878
-------- -------- --------
Total non-performing Loans: $ 12,328 $ 10,657 $ 8,640
Other Real Estate, Net 3,657 1,399 983
-------- -------- --------
Total non-performing
Assets: $ 15,985 $ 12,056 $ 9,623
======== ======== ========
Non-Performing Loans as a %
of Outstanding Loans 0.83% 0.78% 0.71%
Non-Performing Assets as a
% of Equity Capital 6.18% 4.72% 4.10%
</TABLE>
All loans listed above as non-accrual, 90 days or more past due and
renegotiated were classified as either substandard, doubtful or loss as of
September 30, 1999.
Management remains committed to reducing the level of non-performing assets
and to minimize future risks by continuous review of the loan portfolio.
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents management's evaluation of the
overall loan portfolio quality and loss experience. During management's periodic
review of the provision throughout each quarter, the amount to be provided is
determined by the level of net charge-offs, the size of the loan portfolio,
non-performing assets, anticipated and current economic conditions and specific
reviews of performing and non-performing loans.
During the first nine months of 1999, First United made provisions for loan
losses of $1.86 million compared with $2.18 million for the same period in 1998.
Total non-performing loans increased $1.67 million from $10.66 million at
December 31, 1998 to $12.33 million at September 30, 1999. This increase is
primarily attributable to loans acquired in connection with the Marshall
acquisition. Net charge-offs through September 30, 1999 totaled $1.57 million.
Allowance for purchased loans at Marshall, TX is $1.00 million. The increase in
the allowance attributable to purchased loans at Marshall, Texas is $1.00
million.
<TABLE>
<CAPTION>
September 30, Year Ended December 31,
------------- -----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Allowance as a percentage of total loans 1.25% 1.27% 1.45%
</TABLE>
9
<PAGE> 10
The allowance for loan losses as a percentage of non-performing loans was
approximately 151% at September 30, 1999 compared with 162% at December 31,
1998.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
September 30, December 31,
------------- -------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Market Value $ 713,742 $ 684,662 $ 664,482
Amortized Cost 728,555 680,107 660,599
---------- ---------- ----------
Difference $ (14,813) $ 4,555 $ 3,883
========== ========== ==========
</TABLE>
INVESTMENT SECURITIES
During the first nine months of 1999, First United had security gains of
approximately $0.21 million.
<TABLE>
<CAPTION>
September 30, December 31,
------------- -------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Market Value $ 194,691 $ 228,614 $ 239,766
Amortized Cost 196,644 226,083 237,424
---------- ---------- ----------
Difference $ (1,953) $ 2,531 $ 2,342
========== ========== ==========
</TABLE>
At September 30, 1999, First United's securities portfolio classified as
Investment Securities was composed primarily of municipal and short-term fixed
rate CMO securities.
NON-INTEREST INCOME
Management continues to emphasize the growth of non-interest income in
providing new revenue to the income stream. Future profitability depends upon
income derived from providing loan and deposit services, discount brokerage
fees, trust service income, mortgage service fees and service charges on deposit
accounts.
The table represented below is a comparison of the dollar and percentage
change for each component of non-interest income:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Change
--------------------- ----------------------
1999 1998 $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Service Charges on Deposit
Accounts $ 7,817 $ 6,897 $ 920 13.34%
Trust Income 1,822 1,648 174 10.56%
Security Gains (Losses) 213 292 (79) (27.05)%
Other Income 4,190 4,748 (558) (11.75)%
-------- -------- -------- --------
Total Other Income $ 14,042 $ 13,585 $ 457 3.36%
======== ======== ======== ========
</TABLE>
Excluding security gains and losses, non-interest income increased approximately
$0.54 million when comparing 1999 with 1998 results. First United is focusing on
non-interest income revenues and opportunities to increase fee income.
10
<PAGE> 11
NON-INTEREST EXPENSE
Control of non-interest expenses continues to be one of First United's
major objectives. Non-interest expenses include salaries, employee benefits,
occupancy costs, equipment and other operating expenses:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Change
--------------------- ----------------------
1999 1998 $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Salaries $ 21,283 $ 19,914 $ 1,369 6.87%
Pension and Employee Benefits 6,412 6,649 (237) (3.56)%
Net Occupancy Expense 3,963 3,872 91 2.35%
Equipment Expense 3,244 2,916 328 11.25%
Data Processing Expense 3,163 3,666 (503) (13.72)%
Other Operating Expense 12,618 12,813 (195) 1.52%
-------- -------- -------- --------
Total Non-Interest Expense $ 50,683 $ 49,830 $ 853 1.71%
======== ======== ======== ========
</TABLE>
INCOME TAXES
The effective tax rate of First United for the nine month period ended
September 30, 1999 was 30.43% compared to 30.11% for the same period in 1998.
CAPITAL AND LIQUIDITY
The assessment of capital adequacy depends primarily on a number of factors
which include asset quality, liquidity, stability of earnings, changing
competitive forces, economic conditions in the various markets served and
strength of management. Management of capital focuses on achieving a rate of
return for shareholders while following guidelines set forth by bank regulators.
First United's equity capital totaled $258.85 million at September 30,
1999, compared to the December 31, 1998 level of $255.63 million. The growth and
retention of earnings continues to be First United's primary source of
additional capital. Currently, First United does not have any plans for issuing
subordinated notes and First United has not issued any new common or preferred
stock during the past twelve months.
The table presented below is a comparison of capital ratios:
<TABLE>
<CAPTION>
September 30, December 31,
------------- -----------------
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Equity Capital to Total Assets 10.18% 10.05% 9.86%
Primary Capital to Total Assets 10.81% 10.66% 10.53%
</TABLE>
The table presented below is a comparison of First United's capital
position with regulatory capital requirements:
<TABLE>
<CAPTION>
September 30, Regulatory
------------- ------------
1999 Requirements
----- ------------
<S> <C> <C>
Total Capital/Total Assets 10.18% 6.00%
Primary Capital/Total Assets 10.81% 5.50%
Total Risk Based Capital 16.87% 8.00%
Tier 1 Capital 15.62% 4.00%
Leverage Ratio 9.58% 3.00%
</TABLE>
Note: Unrealized gains on securities available-for-sale have been excluded when
computing capital ratios.
Liquidity management is concerned with meeting the cash requirements of
customers, including the withdrawal of funds by depositors or drawing down of
approved lines of credit and commitments by borrowers. First United is aided
significantly in
11
<PAGE> 12
meeting its short term liquidity needs by its strong capital position, its high
rate of internal capital generation and its level of loan loss reserves.
DIVIDEND POLICY
First United strives to maintain a balance between the retention of
earnings for the support of growth and expansion and a dividend payout that
meets the required return for investors. First United anticipates continuing its
policy of regular cash dividends, although there is no assurance as to future
increases in dividends because they are dependent upon future earnings, capital
requirements and economic conditions.
The following table sets forth the dividend payout ratio for the last two
years and for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
September 30, Year Ended,
------------- -----------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Dividend payout ratio 36.79% 36.92% 38.28%
</TABLE>
ASSET - LIABILITY MANAGEMENT
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.
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. There have been no material changes in First United's asset-liability
position since December 31, 1998.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" has arisen due to the fact that many computer
hardware and software systems along with components of certain automated
equipment utilize only the last two digits of a date to refer to the year,
failing to distinguish dates within the twentieth century from those of the
twenty-first or other centuries. If not corrected, these systems could fail or
produce erroneous results with the advent of the twenty-first century.
First United has identified its systems, including computer-based systems
and applications and other systems with date sensitive embedded chips, and
assessed whether they will function properly in the Year 2000. This assessment
is part of a comprehensive action plan ("Year 2000 Readiness Project") approved
by the Board of Directors and Management documenting First United's approach to
making all systems and applications Year 2000 ready.
Implementation of upgrades required to make mission critical systems Year
2000 ready and testing of mission critical systems were completed prior to June
30, 1999. Testing of the core banking systems for the majority of First United's
banks was completed by December 31, 1998, and the testing of the remainder of
the banks was completed by March 31, 1999. While all mission critical systems
are Year 2000 ready, a contingency plan has been developed and tested that will
mitigate the risks associated with the failure of any mission critical systems
at critical Year 2000 dates.
12
<PAGE> 13
Ultimately, the potential impact of the Year 2000 Issue will depend not
only on the corrective measures First United undertakes, but also on the way in
which the Year 2000 Issue is addressed by governmental agencies, businesses and
other entities who provide data to, or receive data from, First United, or whose
financial condition or operational capability is important to First United as
borrowers, vendors, customers or investment opportunities. Therefore,
communications with these parties has commenced to heighten their awareness of
the Year 2000 Issue. Over the next several months, the plans of such third
parties to address the Year 2000 Issue will be monitored and any identified
impact on First United will be evaluated.
First United estimates that the cumulative cost of the Year 2000 Readiness
Project will be approximately $2 million. As of December 31, 1998, First United
had incurred $1.2 million of that amount. The revenue of Year 2000 Readiness
Project costs have been reflected in the year-to-date September 30, 1999
results. The cost estimates include personnel cost related to all aspects of the
Project, including testing of mission-critical systems, as well as the cost to
purchase upgrades or replacement hardware and software and other out-of-pocket
expenses. The purchase of hardware and software will be capitalized according to
normal policy.Costs associated with personnel and out-of-pocket expenses will be
expensed in the period incurred.
First United established a new data processing center in 1996 and converted
nine of its banks to its new data processing system between 1996 and 1998. The
new system and equipment have been successfully tested as Year 2000 compliant.
The acquisition of the equipment was allocated to premises and equipment while
conversion costs were charged to expense. If such costs and equipment necessary
for the new system had been included as Year 2000 costs, First United's Year
2000 compliance costs incurred and cost estimates would be substantially higher.
The forward-looking statements contained herein with regard to the timing
and overall cost estimates of First United's efforts to address the Year 2000
Issue are based upon First United's experience thus far in this effort. Should
First United encounter unforeseen difficulties either in the continuing review
of its computerized systems, their ultimate remediation, or the responses of its
business partners, the actual results could vary significantly from the
estimates contained in these forward-looking statements.
RECENT PRONOUNCEMENTS
Recently, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an Amendment of FASB Statement No. 133." This statement
amends the effective date for SFAS No. 133 which establishes accounting and
reporting standards for derivative instruments and hedging activities. The FASB
concluded that it is appropriate to defer the effective date of SFAS No. 133
one year, from fiscal years beginning after June 15, 1999, to fiscal years
beginning after June 15, 2000. The FASB continues to encourage early
application of SFAS No. 133. The adoption of this statement will not have a
material impact on First United's consolidated financial statements.
13
<PAGE> 14
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable
Item 2. CHANGES IN SECURITIES
On August 16, 1999, First United issued 1,612 shares as a result of
the exercise of a non-statutory stock option grant in connection with
First United's 1999 Equity Participation Plan which increased the issued
and outstanding shares of First United from 25,294,296 to 25,295,908
shares.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
On July 9, 1999, Fredonia State Bank, a wholly owned subsidiary of
First United, located in Nacogdoches, Texas, acquired substantially all
of the assets and liabilities of East Texas National Bank of Marshall,
Texas, which included approximately $90 million in deposits and acquired
approximately $70 million in loans. As a result of the transaction, the
total assets of Fredonia State Bank increased to approximately $360
million.
In July, 1999, First United and First Arkansas Insurance formed
First Bankers Insurance Services, LLC ("FBIS") as a joint venture for
the purpose of selling and servicing various types of insurance. Upon
formation, FBIS offered only property and casualty insurance. However,
FBIS intends to also offer health insurance, life insurance, and
personal line insurance in the future. First United has a 51% ownership
interest in FBIS.
On October 22, 1999, Commercial Bank at Alma was merged with and
into City National Bank of Fort Smith.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this report or are
incorporated by references to previously filed materials.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
27 Financial Data Schedule.
</TABLE>
REPORTS ON FORM 8-K
First United did not file any reports on Form 8-K during the
quarter for which this report is filed.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST UNITED BANCSHARES, INC.
BY /s/ James V. Kelley
--------------------------------------
James V. Kelley
Chairman, President and Chief
Executive Officer
BY /s/ John G. Copeland
--------------------------------------
John G. Copeland
Chief Financial Officer and
Principal Accounting Officer
Date: November 12, 1999
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 87,316
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 58,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 713,742
<INVESTMENTS-CARRYING> 196,644
<INVESTMENTS-MARKET> 194,691
<LOANS> 1,491,483
<ALLOWANCE> 18,593
<TOTAL-ASSETS> 2,637,929
<DEPOSITS> 2,227,422
<SHORT-TERM> 92,245
<LIABILITIES-OTHER> 24,517
<LONG-TERM> 34,896
0
0
<COMMON> 25,296
<OTHER-SE> 233,553
<TOTAL-LIABILITIES-AND-EQUITY> 2,637,929
<INTEREST-LOAN> 93,035
<INTEREST-INVEST> 40,543
<INTEREST-OTHER> 2,695
<INTEREST-TOTAL> 136,273
<INTEREST-DEPOSIT> 57,346
<INTEREST-EXPENSE> 61,696
<INTEREST-INCOME-NET> 74,577
<LOAN-LOSSES> 1,861
<SECURITIES-GAINS> 213
<EXPENSE-OTHER> 50,683
<INCOME-PRETAX> 36,075
<INCOME-PRE-EXTRAORDINARY> 36,075
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,097
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 7.79
<LOANS-NON> 9,431
<LOANS-PAST> 2,292
<LOANS-TROUBLED> 605
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,302
<CHARGE-OFFS> 2,699
<RECOVERIES> 1,128
<ALLOWANCE-CLOSE> 18,593
<ALLOWANCE-DOMESTIC> 18,593
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
