<PAGE> 1
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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:
June 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 August 1, 1999 was 25,294,296.
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<PAGE> 2
FIRST UNITED BANCSHARES, INC.
FORM 10-Q
JUNE 30, 1999
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Statements of Condition, June 30, 1999
and December 31, 1998. 3
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1999 and 1998. 4
Consolidated Statements of Cash Flow for the Six
Months Ended June 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. 7-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Change in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
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>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
(In thousands, except per share data)
ASSETS
Cash and Due From Banks .......................................... $ 80,881 $ 91,207
Short-Term Investments ...........................................
Federal Funds Sold and Securities Purchased
Under Agreement to Resell .................................... 34,659 71,928
Other Short-Term Investments ................................... 22,530 15,696
----------- -----------
Total Short-Term Investments ..................................... 57,189 87,624
Securities Available-for-Sale .................................... 751,553 684,662
Investment Securities ............................................ 203,358 226,083
Total Loans ...................................................... 1,372,501 1,359,485
Unearned Discount .............................................. (4,696) (6,324)
Allowance for Loan Losses ...................................... (17,636) (17,302)
----------- -----------
Net Loans ..................................................... 1,350,169 1,335,859
Premises and Equipment ........................................... 42,374 42,739
Goodwill ......................................................... 9,787 10,674
Other Real Estate ................................................ 1,803 1,399
Other Assets ..................................................... 39,702 36,210
----------- -----------
Total Assets .................................................. $ 2,536,816 $ 2,516,457
=========== ===========
LIABILITIES
Deposits:
Demand ......................................................... $ 315,060 $ 338,414
Savings and Interest-Bearing Demand ............................ 585,283 588,311
Time ........................................................... 1,223,445 1,207,226
----------- -----------
Total Deposits ................................................ 2,123,788 2,133,951
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase ....................................... 110,322 82,470
Other Liabilities ................................................ 23,419 18,036
Notes Payable .................................................... 22,775 26,367
----------- -----------
Total Liabilities ............................................. 2,280,304 2,260,824
----------- -----------
CAPITAL ACCOUNTS
Preferred Stock (Par value of $1.00; 500 shares authorized in
1999 and 1998; none outstanding) ............................... -0- -0-
Common Stock (Par value of $1.00; 50,000 shares authorized;
25,294 shares outstanding in 1999 and 1998) ................. 25,294 25,294
Surplus .......................................................... 26,610 26,610
Undivided Profits ................................................ 211,142 200,769
Accumulated Other Comprehensive Income ........................... (6,534) 2,960
----------- -----------
Total Capital Accounts ........................................ 256,512 255,633
----------- -----------
Total Liabilities and Capital Accounts ........................ $ 2,536,816 $ 2,516,457
=========== ===========
</TABLE>
3
<PAGE> 4
FIRST UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
(In thousands, except per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans ............. $30,241 $30,078 $60,405 $58,584
Interest on Securities:
Taxable Securities ................... 11,556 11,234 22,891 23,351
Nontaxable Securities ................ 1,892 1,688 3,762 3,319
Interest on Federal Funds Sold and
Securities Purchased Under
Agreements to Resell ................. 734 1,164 1,516 1,942
Interest on Deposits in Banks .......... 244 249 448 551
------- ------- ------- -------
TOTAL INTEREST INCOME .............. 44,667 44,413 89,022 87,747
------- ------- ------- -------
INTEREST EXPENSE
Interest on Deposits ................... 18,851 19,208 37,776 38,073
Interest on Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase ............. 996 985 1,831 1,985
Interest on Notes Payable .............. 346 364 693 712
------- ------- ------- -------
TOTAL INTEREST EXPENSE ............. 20,193 20,557 40,300 40,770
------- ------- ------- -------
NET INTEREST INCOME ................ 24,474 23,856 48,722 46,977
Provision for Possible Loan Losses ..... 487 1,350 1,175 1,667
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES .......... 23,987 22,506 47,547 45,310
------- ------- ------- -------
OTHER INCOME
Service Charges on Deposit Accounts .... 2,630 2,285 5,025 4,541
Trust Fee Income ....................... 645 595 1,264 1,121
Security Gains ......................... 26 49 213 151
Other Operating Income ................. 1,417 1,202 2,994 2,697
------- ------- ------- -------
TOTAL OTHER INCOME ................. 4,718 4,131 9,496 8,510
------- ------- ------- -------
OTHER EXPENSE
Salaries ............................... 6,964 6,664 13,934 13,158
Pension and Other Employee Benefits .... 2,152 2,114 4,290 4,237
Net Occupancy Expense .................. 1,291 1,297 2,558 2,521
Equipment Expense ...................... 1 109 947 2,178 1,925
Data Processing Expense ................ 1,120 997 2,299 2,007
Other Operating Expenses ............... 4,062 4,411 8,089 8,527
------- ------- ------- -------
TOTAL OTHER EXPENSE ................ 16,698 16,430 33,348 32,375
------- ------- ------- -------
INCOME BEFORE INCOME TAXES ............. 12,007 10,207 23,695 21,445
INCOME TAX EXPENSE ..................... 3,625 2,942 7,190 6,006
------- ------- ------- -------
NET INCOME ......................... $ 8,382 $ 7,265 $16,505 $15,439
======= ======= ======= =======
EARNINGS PER SHARE:
BASIC .............................. $ 0.33 $ 0.29 $ 0.65 $ 0.61
======= ======= ======= =======
DILUTED ............................ $ 0.33 $ 0.29 $ 0.65 $ 0.61
======= ======= ======= =======
CASH DIVIDENDS PER SHARE ............... $ 0.125 $ 0.115 $ 0.24 $ 0.215
======= ======= ======= =======
AVERAGE SHARES ISSUED AND
OUTSTANDING ............................ 25,294 25,294 25,294 25,294
</TABLE>
4
<PAGE> 5
FIRST UNITED BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------
1999 1998
---- ----
<S> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ...................................................... $ 16,505 $ 15,439
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation ................................................. 2,138 1,827
Amortization of Goodwill ..................................... 653 627
Provision for Possible Loans Losses .......................... 1,175 1,667
Gain on Sales of Securities .................................. (213) (151)
Accretion of Bond Discount, Net .............................. (752) (654)
(Increase) Decrease in Other Assets .......................... (3,662) 2,411
Increase (Decrease) in Other Liabilities ..................... 2,527 (7,635)
--------- ---------
Net Cash Provided by Operating Activities ....................... 18,371 13,531
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities .............. 34,493 44,267
Proceeds from Maturities of Securities Available-for-Sale ...... 459,997 202,027
Proceeds from Sales of Securities Available-for-Sale ........... 25,033 5,953
Purchase of Investment Securities .............................. (17,264) (26,393)
Purchase of Available-for-Sale Securities ...................... (567,156) (150,973)
Increase (Decrease) in Federal Funds, Net ...................... 65,121 (56,524)
(Increase) Decrease in Other Short-Term Investments ............ (6,834) 8,201
Increase in Loans .............................................. (15,485) (82,190)
Capital Additions .............................................. (1,773) (1,912)
--------- ---------
Net Cash Used in Investing Activities ........................... (23,868) (57,544)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Demand, Savings and Interest-bearing
Demand Deposits ............................................ (26,382) 50,908
Increase in Time Deposits ....................................... 16,219 9,999
Repayment of Notes Payable ...................................... (736) (1,534)
Exercise of Stock Options ....................................... 0 17
Dividends Paid .................................................. 6,070 (5,359)
--------- ---------
Net Cash Provided by (Used in) Financing Activities ............. (4,829) 54,031
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ............ (10,326) 10,018
Cash and Cash Equivalents, Beginning ............................ 91,207 83,291
--------- ---------
Cash and Cash Equivalents, Ending ............................... $ 80,881 $ 93,309
========= =========
</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, Peoples Bank and Trust Co., Lewisville, Arkansas, and First
Republic Bank, Rayville, Louisiana. All material intercompany transactions have
been eliminated.
The consolidated statements of condition as of June 30, 1999 and the
related consolidated statements of income for the three and six months period
ended June 30, 1999 and 1998 and the consolidated statements of cash flows for
the six month period ended June 30, 1999 and 1998 are unaudited; in the opinion
of management, all adjustments necessary for a fair presentation of the
financial statements are included.
2. BUSINESS COMBINATIONS
On April 8, 1999, Peoples Bank & Loan Company was merged with and into
The Citizens National Bank of Hope. First United acquired both Peoples Bank &
Loan Company and The Citizens National Bank of Hope on March 30, 1998.
3. RESULTS OF OPERATIONS
The results for the three and six months period ended June 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
On May 26, 1998, First United declared a two-for-one stock split. The
additional shares were issued on June 30, 1998 to shareholders of record on
June 1, 1998. All per share data and number of shares outstanding have been
retroactively restated to reflect the effect of this stock split.
Basic EPS was computed by dividing net income by the weighted average
shares of common stock outstanding of 25,294,296 for 1999 and 1998. 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 58,000 in 1999 and 99,000 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
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 $1.48 million and $7.10 million for the three months ended
June 30, 1999 and 1998, respectively and $7.01 million and $15.38 million for
the six months ended June 30, 1999 and 1998, respectively.
6. SUPPLEMENTARY DATA FOR CASH FLOWS
Interest paid on notes payable during the six months ended June 30,
1999 and 1998 amounted to $328,000 and $401,000 respectively.
6
<PAGE> 7
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"), Peoples Bank
and Trust Co. ("Lewisville"), 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. 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 risks; 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 June 30, 1999.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 1999 was $8.38 million,
or $.33 per share compared with $7.27 million, or $ .29 per share during the
same period in 1998. Net income for the six months ended June 30, 1999 was
$16.51 million, or $.65 per share compared with $15.44 million, or $.61 per
share during the same period in 1998. The annualized return on average assets
from continuing operations for the six months ended June 30, 1999 and 1998 was
1.33% and 1.32% respectively, while the annualized return on average equity was
13.01% and 13.33% respectively for the same periods.
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 six
months of 1999 was $50.82 million compared with $48.76 million in the first six
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 June 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 $22.78 million at June 30, 1999
and interest expense associated with this debt totaled $.69 million during the
first six months of 1999 compared with $.71 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.
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 matures in August of 1999.
Interest is payable quarterly on both notes.
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
7
<PAGE> 8
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>
June 30, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Yield on Earning Assets 7.80 8.00 8.17
Break-even Yield 3.45 3.66 3.74
Net Interest Margin 4.35 4.34 4.43
Net Interest Spread 3.53 3.45 3.60
</TABLE>
LOANS AND LEASES
First United's gross loans and leases totaled $1.37 billion at
June 30, 1999 compared with $1.36 billion at December 31, 1998. 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.
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>
June 30, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(In thousands)
Non-performing loans:
Non-accrual loans:
Commercial & Financial $ 4,809 $ 3,020 $1,570
Real Estate 5,092 3,236 2,010
Consumer 634 521 365
------- ------- ------
$10,535 $ 6,777 $3,945
------- ------- ------
Past due 90 days or more
and still accruing:
Commercial $ 1,034 $ 1,225 $1,235
Real Estate 1,103 1,293 2,034
Consumer 353 294 548
------- ------- ------
$ 2,490 $ 2,812 $3,817
------- ------- ------
Renegotiated Loans: $ 754 $ 1,068 $ 878
------- ------- ------
Total non-performing Loans: $13,779 $10,657 $8,640
Other Real Estate, Net 1,988 1,399 983
------- ------- ------
Total non-performing
Assets: $15,767 $12,056 $9,623
======= ======= ======
Non-Performing Loans as a %
of Outstanding Loans 1.00% .78% .71%
Non-Performing Assets as a
% of Equity Capital 6.15% 4.72% 4.10%
</TABLE>
8
<PAGE> 9
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 June
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 AND LEASE 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 six months of 1999, First United made provisions for
loan losses of $1.18 million compared with $1.67 million for the same period in
1998. Total non-performing loans increased $3.12 million from $10.66 million at
December 31, 1998 to $13.78 million at June 30, 1999. Net charge-offs through
June 30, 1999 totaled $.84 million.
<TABLE>
<CAPTION>
June 30, Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Allowance as a percentage of total
loans and leases 1.29% 1.27% 1.45%
</TABLE>
The allowance for loan losses as a percentage of non-performing loans
was approximately 128% at June 30, 1999 compared with 162% at December 31,
1998.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
(In thousands)
Market Value $ 751,553 $684,662 $664,482
Amortized Cost 760,896 680,107 660,599
--------- -------- --------
Difference $ (9,343) $ 4,555 $ 3,883
========= ======== ========
</TABLE>
INVESTMENT SECURITIES
During the first six months of 1999, First United had security gains
of approximately $.21 million.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
(In thousands)
Market Value $203,977 $228,614 $239,766
Amortized Cost 203,358 226,083 237,424
-------- -------- --------
Difference $ 619 $ 2,531 $ 2,342
======== ======== ========
</TABLE>
At June 30, 1999, First United's securities portfolio classified as
Investment Securities was composed primarily of municipal and short-term fixed
rate CMO securities.
9
<PAGE> 10
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>
Six Months Ended
June 30, Change
1999 1998 $ %
---- ---- --- --
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Service Charges on Deposit
Accounts $5,025 $4,541 $484 10.66%
Trust Income 1,264 1,121 143 12.76%
Security Gains (Losses) 213 151 62 41.06%
Other Income 2,994 2,697 297 11.01%
------ ------ ---- -----
Total Other Income $9,496 $8,510 $986 11.59%
====== ====== ==== =====
</TABLE>
Excluding security gains and losses, non-interest income increased
approximately $.92 million when comparing 1999 with 1998 results. First United
is focusing on non-interest income revenues and opportunities to increase fee
income.
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>
Six Months Ended
June 30, Change
1999 1998 $ %
---- ---- --- --
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Salaries $13,934 $13,158 $ 776 5.90%
Pension and Employee Benefits 4,290 4,237 53 1.25%
Net Occupancy Expense 2,558 2,521 37 1.47%
Equipment Expense 2,178 1,925 253 13.14%
Data Processing Expense 2,299 2,007 292 14.55%
Other Operating Expense 8,089 8,527 (438) (5.14)%
------- ------- ----- -----
Total Non-Interest Expense $33,348 $32,375 $ 973 3.01%
======= ======= ===== =====
</TABLE>
INCOME TAXES
The effective tax rate of First United for the six month period ended
June 30, 1999 was 30.34% compared to 28.01% 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.
10
<PAGE> 11
First United's equity capital totaled $256.51 million at June 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>
June 30, December 31,
1999 1998 1997
-------- ----- -----
<S> <C> <C> <C>
Equity Capital to Total Assets 10.37% 10.05% 9.86%
Primary Capital to Total Assets 10.99% 10.66% 10.53%
</TABLE>
The table presented below is a comparison of First United's capital
position with regulatory capital requirements:
<TABLE>
<CAPTION>
June 30, Regulatory
1999 Requirements
------- ------------
<S> <C> <C>
Total Capital/Total Assets 10.37% 6.00%
Primary Capital/Total Assets 10.99% 5.50%
Total Risk Based Capital 18.01% 8.00%
Tier 1 Capital 16.83% 4.00%
Leverage Ratio 10.00% 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 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 six months ended June 30, 1999:
<TABLE>
<CAPTION>
June 30, Year Ended,
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Dividend payout ratio 36.78% 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
11
<PAGE> 12
"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 having all systems and applications Year 2000 ready by
June 30, 1999. First United does not anticipate that it will need to replace
any mission critical systems to achieve Year 2000 readiness.
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 currently expected to be Year 2000 ready, a contingency
plan has been developed that will mitigate the risks associated with the
failure of any mission critical systems at critical Year 2000 dates.
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 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.
12
<PAGE> 13
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 1999, the Company held its annual stockholders
meeting to elect the Board of Directors who will serve until the next annual
meeting of the stockholders and to ratify the appointment of Arthur Andersen LLP
as independent auditors of First United until the next annual meeting of
stockholders. The Board of Directors of the Company also submitted to the
shareholders at the annual meeting a proposal to consider and adopt the First
United Bancshares, Inc. 1999 Employee's Long-Term Incentive Plan ("Incentive
Plan"). The fifteen (15) directors were elected as proposed as well as the
ratification of appointment of Arthur Andersen, LLP and the adoption of the
Incentive Plan.
The vote results in the election for directors were as
follows:
<TABLE>
<CAPTION>
AUTHORITY
NAME OF DIRECTOR FOR WITHHELD
<S> <C> <C>
E. Larry Burrow 20,949,204 314,735
Claiborne P. Deming 20,701,796 562,143
Al Graves, Jr. 20,948,944 314,995
Tommy Hillman 20,949,982 313,957
James V. Kelley 20,950,174 313,765
Roy E. Ledbetter 20,951,104 312,835
Michael F. Mahony 20,949,204 314,735
Richard H. Mason 20,950,604 313,335
Jack W. McNutt 20,951,604 312,335
George F. Middlebrook, III 20,951,344 312,595
R. Madison Murphy 20,951,344 313,595
Robert C. Nolan 20,951,344 312,595
Cal Partee, Jr. 20,699,656 564,283
Carolyn Tennyson 20,951,604 312,335
John D. Trimble, Jr. 20,949,204 314,735
</TABLE>
At the annual meeting, 21,183,440 shares were voted in favor of ratification of
Arthur Andersen LLP, 21,148 against, and 59,351 abstained from voting. A total
of 19,980,703 shares were voted in favor of the Incentive Plan, 547,199 shares
were voted against, and 736,037 shares abstained from voting.
13
<PAGE> 14
Item 5. OTHER INFORMATION
On April 8, 1999, Peoples Bank & Loan Company was merged with and into
The Citizens National Bank of Hope. First United acquired both Peoples Bank &
Loan company and The Citizens National Bank of Hope on March 30, 1998.
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.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
27 Financial Data Schedule.
REPORTS ON FORM 8-K
Not applicable.
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: August 13, 1999
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 80,881
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 34,659
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 751,553
<INVESTMENTS-CARRYING> 203,358
<INVESTMENTS-MARKET> 203,977
<LOANS> 1,372,501
<ALLOWANCE> 17,636
<TOTAL-ASSETS> 2,536,816
<DEPOSITS> 2,123,788
<SHORT-TERM> 110,322
<LIABILITIES-OTHER> 23,419
<LONG-TERM> 22,775
0
0
<COMMON> 25,294
<OTHER-SE> 231,218
<TOTAL-LIABILITIES-AND-EQUITY> 2,536,816
<INTEREST-LOAN> 60,405
<INTEREST-INVEST> 26,653
<INTEREST-OTHER> 1,964
<INTEREST-TOTAL> 89,022
<INTEREST-DEPOSIT> 37,776
<INTEREST-EXPENSE> 40,300
<INTEREST-INCOME-NET> 48,722
<LOAN-LOSSES> 1,175
<SECURITIES-GAINS> 213
<EXPENSE-OTHER> 33,348
<INCOME-PRETAX> 23,695
<INCOME-PRE-EXTRAORDINARY> 23,695
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,505
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 7.80
<LOANS-NON> 10,535
<LOANS-PAST> 2,490
<LOANS-TROUBLED> 754
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,302
<CHARGE-OFFS> 1,503
<RECOVERIES> 662
<ALLOWANCE-CLOSE> 17,636
<ALLOWANCE-DOMESTIC> 17,636
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
