UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
Commission File Number: 333-47939
FVNB CORP.
(Exact name of registrant as specified in its charter)
TEXAS 74-2871063
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 MAIN STREET
VICTORIA, TEXAS 77901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 573-6321
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sales price of such stock as of March 16,
1999, was $71,397,385.
The number of shares of Common Stock, par value $0.01 per share, of the
Registrant outstanding as of March 16, 1999 was 2,372,792 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by
reference in the indicated Part of this Report on Form 10-K:
Annual Report to Shareholders For the Year Ended December 31, 1998 Part II
Proxy Statement for the 1999 Annual Meeting of Shareholders Part III
<PAGE>
FVNB CORP.
ANNUAL REPORT ON FORM 10-K
PAGE
PART I.
ITEM 1. Business...........................................................2
General........................................................2
Competition....................................................3
Supervision and Regulation.....................................4
ITEM 2. Properties.........................................................9
ITEM 3. Legal Proceedings.................................................10
ITEM 4. Submission of Matters to a Vote of Security Holders...............10
PART II.
ITEM 5. Market for Registrant's Common Stock and Related Security
Holder Matters................................................10
ITEM 6. Selected Financial Data...........................................10
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................10
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risks........11
ITEM 8. Financial Statements and Supplementary Data.......................11
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................11
PART III.
ITEM 10. Directors and Executive Officers of the Registrant................11
ITEM 11. Executive Compensation............................................11
ITEM 12. Security Ownership of Certain Beneficial Owners and Management....11
ITEM 13. Certain Relationships and Related Transactions....................12
PART IV.
ITEM 14. Exhibits, Financial Schedules and Reports on Form 8-K.............12
FORWARD LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical
information, include forward-looking statements. Although the Company believes
such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. The words
"estimate," "expect," "intend" and "project," as well as other words or
expressions of similar meaning are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this report. Such statements are
based on current expectations, are inherently uncertain, are subject to risks
and should be viewed with caution. Actual results and experience may differ
materially from the forward-looking statements as a result of many factors.
Factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the Company in
forward-looking statements include among others, the following possibilities:
(i) changes in local, state, national and international economic conditions,
(ii) changes in the capital markets utilized by the Company and its
subsidiaries, including changes in the interest rate environment that may reduce
margins, (iii) changes in state and/or federal laws and regulations to which the
Company and its subsidiaries, as well as customers, competitors and potential
competitors, are subject, including banking, tax, securities, insurance and
employment laws and regulations, (iv) the loss of senior management or operating
personnel and the potential inability to hire qualified personnel at reasonable
compensation levels, (v) the Company's inability to complete its Year 2000
action plan on a timely basis, and (vi) increased competition from both within
and without the banking industry. It is not possible to foresee or identify all
such factors. The Company makes no commitment to update any forward-looking
statement, or to disclose any facts, events or circumstances after the date
hereof that may affect the accuracy of any forward-looking statements.
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
FVNB Corp. (the "Company") was organized in September 1998 as a bank
holding company for First Victoria National Bank (the "Bank"). Chartered in
1890, First Victoria National Bank is located in Victoria, Texas and offers all
usual commercial banking services. The Bank currently has three locations in
Victoria as well as full service branches in Calhoun County and Taft, Texas. In
addition, the Bank has three wholly owned operating subsidiaries: PMV, Inc.,
which is currently inactive, and was established for the purpose of acquiring,
managing and liquidating assets acquired in satisfaction of debts previously
contracted; First Victoria Community Development Corporation, which was
established for the purpose of acquiring, developing, rehabilitating, managing,
renting, and selling housing units primarily to benefit low and moderate income
residents of the local area and to promote and invest in such community
development projects; and First Victoria Leasing, Inc., which was established
for the purpose of leasing activities of the Company. As of December 31, 1998,
the Company had total assets of approximately $553,164,000; loans and leases,
net of unearned discount, of approximately $292,862,000; and total deposits of
approximately $454,740,000. The Company employed 215 people on a full-time basis
and 32 people on a part-time basis as of December 31, 1998.
On January 29, 1999, the Company completed the acquisition and merger into
FVNB Corp. of CBOT Financial Corporation, the parent company of Citizens Bank of
Texas, N.A. and CBOT Mortgage Company. Citizens Bank of Texas will continue to
operate as an independent subsidiary of the Company with its Board of Directors,
officers and staff being retained. Existing banking facilities in New Waverly,
Huntsville and The Woodlands, Texas will keep the name Citizens Bank of Texas,
N.A. As of December 31, 1998, Citizens Bank of Texas had approximately $80
million in total assets including approximately $3 million in fixed assets.
The Bank provides general commercial banking services to a variety of
businesses and individuals located in Victoria County, Texas and the surrounding
areas. Some of the loan services available to customers include: agriculture,
commercial, real estate, home improvement, automobile, and personal loans. As of
December 31, loans are classified in the following categories (in thousands).
Included in commercial and financial loans is a net lease receivable totaling
approximately $6,793,000 as of December 31, 1998.
<TABLE>
<CAPTION>
1998 1997
---- ----
Amount % Amount %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial and financial .......... $ 63,255 22% $ 57,648 22%
Mortgage real estate .............. 106,410 36 91,075 34
Construction real estate .......... 3,736 1 3,738 1
Agriculture ....................... 75,793 26 74,671 28
Consumer .......................... 43,776 15 38,996 15
--------- --------- --------- ---------
Total loans and leases ............ 292,970 100% 266,128 100%
Less
Unearned income ................... (108) -- (126) --
Allowance for loan and lease losses (3,308) -- (2,861) --
--------- ---------
Net loans and leases .............. $ 289,554 -- $ 263,141 --
========= =========
</TABLE>
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
that may require payment of a fee. The total commitment amounts do not
necessarily represent future cash requirements, since the commitments may
expire without being drawn upon. The
2
<PAGE>
Company evaluates each customer's credit-worthiness 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.
Standby letters of credit are conditional commitments issued by the Company to
guarantee performance of a customer to a third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Collateral held varies, but may include
accounts receivable, inventory, equipment or real estate. The prices and
interest rates of the commitments are determined by the market conditions
prevailing at the time the commitments are exercised.
The Bank's exposure to credit loss, in the event of non-performance by the
customer, for commitments to extend credit and standby letters of credit is
limited to the contractual amount of those instruments. As of December 31, 1998
and 1997, the Bank had commitments to extend credit of approximately
$100,204,000 and $93,148,000 and standby letters of credit of approximately
$1,534,000 and $866,000 respectively. The following is a breakdown of
commitments by type as of December 31, (in thousands):
1998 1997
-------- --------
Commercial and financial ................... $ 35,279 $ 32,699
Real estate ................................ 5,180 4,437
Agriculture ................................ 35,524 34,939
Consumer ................................... 24,221 21,073
-------- --------
Total ...................................... $100,204 $ 93,148
======== ========
While the Bank's loan portfolio is diversified, a significant portion of
the portfolio is in agriculture loans (approximately 26% of total loans) and
therefore, may be deemed seasonal with regard to funding requirements. Also,
the Bank has substantially no deposits from or loans to foreign customers.
The Company does not anticipate that compliance with federal, state, and
local provisions relating to the protection of the environment will have a
material effect upon the capital expenditures, earnings, or competitive
position of the Company.
In addition to loan services, the Company also offers deposit facilities
and certificates of deposit for commercial customers and various checking, wire
transfers, safekeeping, safe deposit, credit card, and savings and time deposit
services for individuals.
First Victoria National Bank's Trust and Investment Management Department
also offers extensive trust services including estates, guardianships, personal
trust and investment services, and pension and retirement plans. Trust assets
and other properties, except cash deposits, held by the Bank in agency or other
fiduciary capacities for its customers are not included in the Company's
financial statements. The book value of trust assets (unaudited) was
approximately $191,382,000 at December 31, 1998.
COMPETITION
The Company competes actively with other area commercial banks and
savings and loan associations, many of which are larger than the Company, as
well as with major regional banking and financial institutions headquartered in
other areas of Texas and the United States. There are nine other financial
institutions in Victoria County, including branches or subsidiaries of
out-of-state multi-bank holding companies, branches of Texas banks and savings
institutions. Deposit deregulation has intensified the competition for
deposits among banks in recent years. The Company, however, is generally
competitive with all financial institutions in its service area with respect to
interest rates paid on time and savings deposits, service charges on deposit
accounts and interest rates charged on loans. Additional competition is
derived from credit unions, finance companies, brokerage firms, insurance
companies, retailers, trust companies and other non-bank entities.
3
<PAGE>
SUPERVISION AND REGULATIONS
General - The Company. In addition to the generally applicable state and
Federal laws governing businesses and employers, the Company and its bank
subsidiaries are further extensively regulated by special Federal and state laws
governing financial institutions. These laws comprehensively regulate the
operations of the Company's bank subsidiaries and include, among other matters,
requirements to maintain reserves against deposits; restrictions on the nature
and amount of loans that may be made and the interest that may be charged
thereon; restrictions on the amounts, terms and conditions of loans to
directors, officers, large shareholders and their affiliates; restrictions
related to investments in activities other than banking; and minimum capital
requirements. With few exceptions, state and Federal banking laws have as their
principal objective either the maintenance of the safety and soundness of the
Federal deposit insurance system or the protection of consumers, rather than the
specific protection of shareholders of the Company. Further, the earningst of
the Company are affected by the fiscal and monetary policies of the Federal
Reserve System, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. These monetary policies influence to a
significant extent the overall growth of bank loans, investments and deposits
and the interest rates charged on loans or paid on time and savings deposits.
The nature of future monetary policies and the effect of such policies on the
future earnings and business of the Company cannot be predicted.
FRB APPROVALS. The Company is a registered bank holding company within the
meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is
subject to supervision by the FRB and to a certain extent the Texas Department
of Banking (the "DOB"). The Company is required to file with the FRB annual
reports and other information regarding the business operations of itself and
its subsidiaries. It is also subject to examination by the FRB. Under the BHCA,
a bank holding company is, with limited exceptions, prohibited from acquiring
direct or indirect ownership or control of any voting stock of any company which
is not a bank or bank holding company, and must engage only in the business of
banking, managing, controlling banks, and furnishing services to or performing
services for its subsidiary banks. One of the exceptions to this prohibition is
the ownership of shares of any company provided such shares do not constitute
more than 5% of the outstanding voting shares of the company and so long as the
FRB does not disapprove such ownership. Another exception to this prohibition is
the ownership of shares of a company the activities of which the FRB has
specifically determined to be so closely related to banking, managing or
controlling banks as to be a proper incident thereto.
The restrictions on the activities of bank holding companies could change
significantly if the Glass-Steagall Act of 1935 is reformed. Current
congressional debate over reforming the Glass-Steagall Act is centered around
whether enhanced bank powers should be conducted within a holding company or
through bank subsidiaries. It is impossible to predict at this time whether any
of the reform proposals will pass, or what effect the proposals would have on
the Company or its subsidiaries.
The BHCA and the Change in Bank Control Act of 1978 require that,
depending on the circumstances, either FRB approval must be obtained or notice
must be furnished to the FRB and not disapproved prior to any person or company
acquiring "control" of a bank holding company, such as the Company, subject to
certain exceptions for certain transactions. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist
if a person acquires 10% or more but less than 25% of any class of voting
securities where the bank holding company, such as the Company, has registered
Securities under Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act").
As a bank holding company, the Company is required to obtain approval
prior to merging or consolidating with any other bank holding company, acquiring
all or substantially all of the assets of any bank or acquiring ownership or
control of shares of a bank or bank holding company if, after the acquisition,
4
<PAGE>
the Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
INTERSTATE BANKING. In 1994, Congress enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act"), which
rewrote federal law governing the interstate expansion of banks in the United
States. Effective as of September 29, 1995, adequately capitalized, well managed
bank holding companies with FRB approval may acquire banks located in any state
in the United States, provided that the target bank meets the minimum age (up to
a maximum of five years, which is the maximum Texas has adopted) established by
the host state. Under the Interstate Banking Act, an anti-concentration limit
will bar interstate acquisitions that would give a bank holding company control
of more than ten percent (10%) of all deposits nationwide or thirty percent
(30%) of any one state's deposits, or such higher or lower percentage
established by the host state. The anti-concentration limit in Texas has been
set at twenty percent (20%) of all federally insured deposits in Texas. As of
December 31, 1998, many of Texas' largest bank holding companies had either
merged with or been acquired by out-of-state banking concerns.
In addition to providing for interstate acquisitions of banks by bank
holding companies, the Interstate Banking Act provides for interstate branching
by permitting mergers between banks domiciled in different states beginning June
1, 1997. The Interstate Banking Act provides that states may opt out of
interstate branching by enacting non-discriminatory legislation prohibiting
interstate bank mergers before June 1, 1997. In 1995, Texas passed legislation
opting out of the interstate branching provisions of The Interstate Banking Act
until September 1999. In May 1998, the Texas DOB determined that the Texas
opt-out statute was not effective and the Texas DOB began accepting applications
for interstate branching transactions. Currently, legislation implementing
interstate branching is pending in the Texas legislature. No accurate prediction
can be made at this time as to how this legislation will affect the Company
and/or its bank subsidiaries.
FRB ENFORCEMENT POWERS. The FRB has certain cease-and-desist and
divestiture powers over bank holding companies and non-banking subsidiaries
where their actions would constitute a serious threat to the safety, soundness
or stability of a subsidiary bank. These powers may be exercised through the
issuance of cease-and-desist orders or other actions. In the event a bank
subsidiary experiences either a significant loan loss or rapid growth of loans
or deposits, the Company may be compelled by the FRB to invest additional
capital in the bank subsidiary. Further, the Company would be required to
guaranty performance of the capital restoration plan of any undercapitalized
bank subsidiary. The FRB is also empowered to assess civil money penalties
against companies or individuals who violate the BHCA in amounts up to
$1,000,000 per day, to order termination of non-banking activities of
non-banking subsidiaries of bank holding companies and to order termination of
ownership and control of a non-banking subsidiary. Under certain circumstances
the Texas Banking Commissioner may bring enforcement proceedings against a bank
holding company in Texas.
COMPANY DIVIDENDS. The FRB's policy discourages the payment of dividends
from borrowed funds and discourages payments that would affect capital adequacy.
The FRB has issued policy statements which generally state that bank holding
companies should serve as a source of financial and managerial strength to their
bank subsidiaries, and generally should not pay dividends except out of current
earnings, and should not borrow to pay dividends if the bank holding company is
experiencing capital or other financial problems.
CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions liable
to the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports and other examination related correspondence.
In addition, financial statements prepared in accordance with generally accepted
accounting principles, management's certifications concerning responsibility for
the financial statements, internal controls and compliance with legal
requirements designated by the FDIC, and an attestation by the auditor regarding
the statements of management relating to the internal controls must be
submitted. For institutions with total assets of more than $3 billion,
independent auditors may be required to review quarterly financial statements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that independent audit committees be formed, consisting of outside
directors only. The committees of such institutions must include members with
experience in banking or financial management, must have access to outside
counsel, and must not include representatives of large customers.
5
<PAGE>
GENERAL-BANK SUBSIDIARIES. As national banking associations, the
Subsidiary Banks are principally supervised, examined and regulated by the
Office of the Comptroller of the Currency (the "OCC"). The OCC regularly
examines such areas as capital adequacy, reserves, loan portfolio, investments
and management practices. The Bank must also furnish quarterly and annual
reports to the OCC, and the OCC may exercise cease and desist and other
enforcement powers over the Bank if its actions represent unsafe or unsound
practices or violations of law. Since the deposits of the Bank are insured by
the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
(the "FDIC"), the Bank is also subject to regulation and supervision by the
FDIC. Because the FRB regulates the Company, the Federal Reserve Board has
supervisory authority which affects the Bank.
DEPOSIT INSURANCE. The deposits of the Bank are insured by the FDIC
through the BIF to the extent provided by law. Under the FDIC's risk-based
insurance system, BIF-insured institutions are currently assessed premiums of
between zero and twenty seven cents per $100 of eligible deposits, depending
upon the institution's capital position and other supervisory factors. During
1996, Congress enacted legislation that, among other things, provides for
assessments against BIF-insured institutions that will be used to pay certain
Financing Corporation ("FICO") obligations. In addition to any BIF insurance
assessments, BIF-insured banks are expected to make payments for the FICO
obligations equal to $0.01296 per $100 of eligible deposits each year during
1997 through 1999. Thereafter, BIF and Savings Association Insurance Fund payers
will be assessed pro rata for the FICO bond obligations.
CAPITAL ADEQUACY. The Company and its bank subsidiaries are currently
required to meet certain minimum regulatory capital guidelines utilizing total
capital-to-risk-weighted assets and Tier 1 Capital elements. At December 31,
1998 the Company's ratio of total capital-to-risk-weighted assets was 18.55%.
The guidelines make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, take off-balance sheet
exposure into account in assessing capital adequacy, and encourage the holding
of liquid, low-risk assets. At least one-half of the minimum total capital must
be comprised of Tier 1 Capital elements. Tier 1 Capital of the Company is
comprised of common shareholders' equity. The core deposit intangibles and
goodwill of approximately $1,821,000 booked in connection with all the financial
institution acquisitions of the Company as of December 31, 1998 are deducted
from the sum of core capital elements when determining the capital ratios of the
Company.
In addition, the FRB has established minimum leverage ratio guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
Tier 1 capital to adjusted average quarterly assets ("leverage ratio") equal to
three percent for bank holding companies that meet certain specified criteria,
including having the highest regulatory rating. All other bank holding companies
will generally be required to maintain a leverage ratio of at least four to five
percent. The Company's leverage ratio at December 31, 1998 was 11.01%. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the guidelines indicate that the FRB will
continue to consider a "tangible Tier 1 leverage ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity. The FRB has
not advised the Company of any specific minimum leverage ratio or tangible tier
1 leverage ratio applicable to it. Each of the Company's bank subsidiaries is
subject to similar capital requirements adopted by the OCC. The Bank had a
leverage ratio in excess of five percent as of December 31, 1998. As of that
date, the federal banking agencies had not advised the Bank of any specific
minimum leverage ratio applicable to it.
6
<PAGE>
Effective December 19, 1992, the federal bank regulatory agencies adopted
regulations which mandate a five-tier scheme of capital requirements and
corresponding supervisory actions to implement the prompt corrective action
provisions of FDICIA. The regulations include requirements for the capital
categories that will serve as benchmarks for mandatory supervisory actions.
Under the regulations, the highest of the five categories would be a well
capitalized institution with a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6% and a Tier 1 leverage ratio of 5%. An institution
would be prohibited from declaring any dividends, making any other capital
distribution or paying a management fee if the capital ratios drop below the
levels for an adequately capitalized institution, which are 8%, 4% and 4%,
respectively. The corresponding provisions of FDICIA mandate corrective actions
be taken if a bank is undercapitalized. Based on the Bank capital ratios as of
December 31, 1998, the Bank was classified as "well capitalized" under the
applicable regulations.
In 1995, in accordance with FDICIA, the OCC modified its risk-based
capital adequacy guidelines to explicitly include a bank's exposure to declines
in the economic value of its capital due to changes in interest rates as a
factor that it will consider in evaluating a bank's capital adequacy. In 1996,
the bank regulatory agencies introduced risk-based examination procedures.
Effective January 1, 1997, the federal banking agencies jointly adopted
regulations that amend the risk-based capital standards to incorporate measures
for market risk. Applicable banking institutions will be required to adjust
their risk-based capital ratio to reflect market risk. On December 19, 1996, the
FFIEC revised the Uniform Financial Institutions Rating System commonly referred
to as the CAMEL rating system. A sixth component addressing sensitivity to
market risk was added. Sensitivity to market risk reflects the degree to which
changes in interest rates, foreign exchange rates, commodity prices or equity
prices can adversely affect a financial institution's earnings or economic
capital.
CONSERVATOR AND RECEIVERSHIP POWERS. FDICIA significantly expanded the
authority of the federal banking regulators to place depository institutions
into conservatorship or receivership to include, among other things, appointment
of the FDIC as conservator or receiver of an undercapitalized institution under
certain circumstances. In the event the Bank is placed into conservatorship or
receivership, the FDIC is required, subject to certain exceptions, to choose the
method for resolving the institution that is least costly to the BIF, such as
liquidation.
INSOLVENCY. The OCC has articulated in a regulation the standards the OCC
uses to determine when a national bank becomes insolvent. The regulation alters
the standards such that a bank would be deemed to be insolvent for regulatory
purposes when it lacks equity capital rather than when it lacks primary capital
(principally equity capital plus the allowance for loan losses). Under the
regulatory guidelines, the OCC is also authorized to declare a national bank
insolvent when the bank is unable to meet its obligations as they mature.
DEPOSITOR PREFERENCE. Because the Company is a legal entity separate and
distinct from its bank subsidiaries, its right to participate in the
distribution of assets of any subsidiary upon the subsidiary's liquidation or
reorganization will be subject to the prior claims of the subsidiary's
creditors. In the event of a liquidation of a subsidiary bank, the claims of
depositors and other general or subordinated creditors of the bank are entitled
to a priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.
CRA. Under the Community Reinvestment Act ("CRA"), the OCC is required to
assess the record of each bank subsidiary to determine if the bank meets the
credit needs of its entire community, including low and moderate-income
neighborhoods served by the institution, and to take that record into account in
its evaluation of any application made by the bank for, among other things,
approval of the acquisition or establishment of a branch or other deposit
facility, an office relocation, a merger, or the acquisition of shares of
capital stock of another financial institution. The OCC prepares a written
evaluation of an institution's record of meeting the credit needs of its entire
community and assigns a rating. FIRREA requires federal banking agencies to make
public a rating of a bank's performance under the CRA. The Bank received either
an "outstanding" or "satisfactory" CRA rating in its most recently completed
examination. Further, there are fair lending laws which prohibit discrimination
in connection with lending decisions.
7
<PAGE>
CONSUMER LAWS. In addition to the laws and regulations discussed herein,
the Bank is also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the list set
forth herein is not exhaustive, these laws and regulations include the Truth in
Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the
Expedited Funds Availability Act, the Equal Credit Opportunity Act, and the Fair
Housing Act, among others. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans to such customers. The
subsidiary banks must comply with the applicable provisions of these consumer
protection laws and regulations as part of their ongoing customer relations.
AFFILIATE TRANSACTIONS. The Company, and its bank subsidiaries are
"affiliates" within the meaning of Section 23A of the Federal Reserve Act which
sets forth certain restrictions on loans and extensions of credit between a bank
subsidiary and affiliates, on investments in an affiliate's stock or other
securities, and on acceptance of such stock or other securities as collateral
for loans. Such restrictions prevent a bank holding company from borrowing from
any of its bank subsidiaries unless the loans are secured by specific
obligations. Further, such secured loans and investments by a bank subsidiary
are limited in amount, as to a bank holding company or any other affiliate, to
10% of such bank subsidiary's capital and surplus and, as to the bank holding
company and its affiliates, to an aggregate of 20% of such bank subsidiary's
capital and surplus. Certain restrictions do not apply to 80% or more owned
sister banks of bank holding companies. Section 23B of the Federal Reserve Act
requires that the terms of affiliate transactions be comparable to terms of
similar non-affiliate transactions.
INSIDER LOANS. The restrictions on loans to directors, executive officers,
principal shareholders and their related interests (collectively referred to
herein as "insiders") contained in the Federal Reserve Act and Regulation O
apply to all insured institutions and their subsidiaries and holding companies.
These restrictions include limits on loans to one borrower and conditions that
must be met before such a loan can be made. There is also an aggregate
limitation on all loans to insiders and their related interests. These loans
cannot exceed the institution's total unimpaired capital and surplus, and the
OCC may determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
LENDING RESTRICTIONS. The operations of the bank subsidiaries are also
subject to lending limit restrictions pertaining to the extension of credit and
making of loans to one borrower. The scope and requirements of such laws and
regulations have been expanded significantly in recent years. Further, under the
BHCA and the regulations of the FRB thereunder, the Company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements with respect to any
extension of credit or provision of property or services; however, recently the
FRB adopted a rule relaxing tying restrictions by permitting a bank holding
company to offer a discount on products or services if a customer obtains other
products or services from such company.
The interest rate and usury laws of most states, including laws of the
State of Texas, which laws are preempted to a certain extent by federal law,
generally limit the amount of interest which lenders, including the Bank, may
charge on loans. These limits may vary depending upon, among other things, the
identity, nature and location of the lender and the borrower, use of proceeds of
a loan, amount of the loan, type of collateral for the loan and the particular
state or federal law applicable thereto. However, there is currently no limit on
the rate of interest which the Bank may be charged on its liabilities, other
than on certain types of deposits. Market rates of interest, adjusted for
required reserves, on certain types of liabilities may rise to a level which may
adversely affect interest margin and/or loan growth. During 1997, the Texas
Constitution was amended to permit home equity lending effective January 1,
1998.
8
<PAGE>
DIVIDENDS. The ability of the Company to pay dividends is largely
dependent on the amount of cash derived from dividends declared by its bank
subsidiaries. The payment of dividends by any bank or bank holding company is
affected by the requirement to maintain adequate capital as discussed above. The
directors of a national bank are authorized to declare cash dividends on the
capital stock of the bank, and the amount of the dividend is within the board's
discretion. However, a dividend cannot be declared if: (1) it would exceed the
bank's profits (12 U.S.C. Sec. 60); (2) it would impair the bank's capital (12
U.S.C. Sec. 56); or (3) the bank is in default on the payment of any assessment
due to the FDIC (12 U.S.C. Sec. 1828). Net profits are defined as the remainder
of all earnings from current operations plus actual recoveries on loans,
investments, and other assets less all current operating expenses, actual
losses, accrued dividends on preferred stocks, if any, all federal and state
taxes and bad debts (12 U.S.C. Sec. 60). The OCC adopted a regulation effective
as of January 1, 1991, which prohibits the Bank from including its allowance for
loan losses as an element of net profits when calculating the dividends the Bank
may pay. Approval of the OCC will be required for any dividend paid by the Bank
to the shareholders if the total of all actual and proposed dividends declared
by the Bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus or a fund for the retirement of any preferred
stock (12 U.S.C. Sec. 60). The OCC has also issued a banking circular
emphasizing that the level of cash dividends should bear a direct correlation to
the level of a national bank's current and expected earnings stream, the bank's
need to maintain an adequate capital base and other factors. Please see Note 11
to the Notes to Consolidated Financial Statements contained in the Company's
1998 Annual Report to Shareholders for a discussion of the dividend paying
capacity of the Bank.
OPERATING SUBSIDIARIES. During 1996, the Office of the Comptroller of the
Currency (the "OCC") adopted a major overhaul of its rules governing corporate
applications, practices, and notices. The new rule incorporates a risk-based
approach to corporate applications and activities of national banks. The new
rule includes authority for operating subsidiaries to conduct for the first time
activities beyond those permitted for national banks directly. Under the new
rule, an operating subsidiary engaged in activities not permissible for the
parent bank must observe certain separateness requirements. National banks must
file applications for prior OCC approval to establish, or acquire, operating
subsidiaries engaged in activities that are not permissible for the parent bank
and the OCC may grant such approval on a case by case basis.
SUBCHAPTER S. As part of the Small Business Job Protection Act of 1996,
financial institutions are now eligible to make an S election for federal income
tax purposes. To qualify as an S corporation, a financial institution must (i)
not use the reserve method of accounting for bad debts, (ii) have only one class
of stock, (iii) have no more than seventy-five shareholders, and (iv) have no
foreign shareholders. The Company currently does not qualify for the S election.
INSTABILITY OF REGULATORY STRUCTURE. Various legislation, including
proposals to overhaul the bank regulatory system, expand the powers of banking
institutions and bank holding companies and limit the investments that a
depository institution may make with insured funds, is from time to time
introduced in Congress. Such legislation may change banking statutes and the
operating environment of the Company and the bank subsidiaries in substantial
and unpredictable ways. The Company cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon the financial condition or results of operations of the
Company or its subsidiaries.
ITEM 2. PROPERTIES
The principal executive offices of the Company and the Bank are located at
101 S. Main Street, Victoria, Texas in a building owned by the Bank. Property of
the Company consists of the main banking facility of First Victoria National
Bank and certain other properties. In addition, the Bank has two full-service
branches in the northern part of Victoria. The first was constructed and began
operations in October 1988 while the second was constructed and began operations
in August 1993. The Bank also has a full-service branch located in Calhoun
County that was constructed and began operations in August 1996 and a
full-service branch located in Taft, Texas that was purchased from The Frost
National Bank in December 1997. The Bank owns all properties on which the
banking offices are located and there are no encumbrances with respect thereto.
In addition, the Bank owns various other real estate which has been acquired
through foreclosure, but there is no individual piece of property that has
material value to the Bank.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The bank subsidiaries of the Company are involved in various routine
claims and lawsuits which have arisen in the normal course of conducting a
commercial banking business. Management does not believe that the outcome of any
of these matters will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is quoted in the National Market System (NMS)
of NASDAQ under the symbol FVNB. The number of shareholders of record of common
stock at March 16, 1999 was 652. The following table shows the range of high and
low quotes per share of common stock of the Company on the over-the-counter
market, as reported by NASDAQ. Prices quoted on the NASDAQ NMS reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
1998 1997
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter 42.250 39.000 $27.250 $23.500
Second Quarter 43.250 40.000 27.000 25.500
Third Quarter 39.500 30.000 35.250 26.000
Fourth Quarter 34.000 30.000 39.750 32.250
The average bid/ask price of the Company's common stock was $34.75 per
share on March 16, 1999. On January 19, 1999, the Board of Directors approved a
regular quarterly cash dividend of $.35 per share payable on February 11, 1999,
to shareholders of record as of January 28, 1999. The Company anticipates this
level of regular dividend payments to continue for the remainder of 1999. Total
dividends paid during 1998 and 1997 were $1.30 and $.82 per share, respectively.
See "Capital" section (page 15) in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Shareholders' Equity" (page
35) in Note 11 to the consolidated financial statements herein incorporated by
reference from FVNB Corp.'s 1998 Annual Report to Shareholders for further
discussion of the payment of dividends and restrictions.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data"
located on page 42 of FVNB Corp.'s 1998 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 4 through
19, inclusive, of FVNB Corp.'s 1998 Annual Report to Shareholders is
incorporated herein by reference.
10
<PAGE>
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth under the caption "Interest Rate Sensitivity" on
pages 5 through 6 of FVNB Corp.'s 1998 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of FVNB Corp. and Independent Public
Accountants' Report contained on pages 20 through 41, inclusive, of FVNB Corp.'s
1998 Annual Report to Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On February 16, 1999, the Board of Directors of the Company decided not to
renew the contract of Arthur Andersen LLP ("Arthur Andersen") as independent
accountants for the Company effective upon completion of the current audit for
the year ended December 31, 1998. Arthur Andersen's report on the financial
statements for the past two years did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to change accountants was
approved by the board of directors of the Company on February 16, 1999. During
the Company's two most recent fiscal years and any subsequent interim period
preceding such change in accountants, there were no disagreements with Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of Arthur Andersen, would have caused it to
make a reference to the subject matter of the disagreement(s) in connection with
its report. The Company engaged KPMG Peat Marwick LLP as the independent
accountants of the Company by action of the Board of Directors of the Company on
February 16, 1999, to be effective as of the completion by Arthur Andersen of
the current audit for the year ended December 31, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information set forth under the caption "Directors and Executive
Officers" of FVNB Corp.'s Proxy Statement, dated April 5, 1999, relating to its
1999 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation of Officers and
Directors of FVNB Corp.'s Proxy Statement, dated April 5, 1999, relating to its
1999 Annual Meeting of Shareholders (excluding the performance graph,
Compensation and Retirement Committee report, and the 1998 FVNB Corp. Stock
Incentive Plan Committee report.) is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Beneficial Ownership of Bank
Common Stock" and "Directors and Executive Officers" of FVNB Corp.'s Proxy
Statement, dated April 5, 1999, relating to its 1999 Annual Meeting of
Shareholders is incorporated herein by reference.
11
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" of FVNB
Corp.'s Proxy Statement, dated April 5, 1999, relating to its 1999 Annual
Meeting of Shareholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements and independent public accountants'
report have been incorporated in Item 8 of this report by reference to
pages 20 through 41 of FVNB Corp.'s 1998 Annual Report to Shareholders:
Consolidated Statements of Income for each of the three years
ended December 31, 1998
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity for each of the
three years ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1998
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. No financial statement schedules are required to be filed as a part of
this report.
(b) On January 28, 1999, the Company filed a Form 8-K dated January 24, 1999.
The purpose of the form was to announce that on January 19, 1999, the Bank
declared a cash dividend of $.35 per share payable on February 11, 1999 to
shareholders of record as of January 28, 1999. The form also reported
audited financial information related to the fourth quarter of 1998.
On February 3, 1999, the Company filed a Form 8-K dated January 29, 1999.
The purpose of the form was to announce the completion of the acquisition
and merger into FVNB Corp. of CBOT Financial Corporation, the parent
company of Citizens Bank of Texas, N.A. and CBOT Mortgage Company.
On February 22, 1999, the Company filed a Form 8-K dated February 16,
1999. The purpose of the form was to announce the decision of the Board of
Directors to change accountants. The Company engaged KPMG Peat Marwick LLP
as the independent accountants of the Company effective as of the
completion by Arthur Andersen of the current audit for the year ended
December 31, 1998.
(c) The following exhibits are filed as part of this report:
3.1+ Articles of Incorporation of the registrant [incorporated by
reference from exhibit 3.1 of the registrant's registration
statement on Form S-4. (333-47939) Filed on March 13, 1998.]
12
<PAGE>
3.2+ Bylaws of the registrant [incorporated by reference from
exhibit 3.2 of the registrant's registration statement on Form
S-4. (333-47939) Filed on March 13, 1998.]
10.1*+ FVNB Corp. Stock Incentive Plan [incorporated by reference from
exhibit 10.1 of the registrant's registration statement on Form
S-4. (333-47939) Filed on March 13, 1998.]
10.2+ Agreement and Plan of Merger by and between FVNB Corp. and CBOT
Financial Corporation dated as of October 8, 1998 [incorporated
by reference from exhibit 10.2 of the registrant's Quarterly
Report on Form 10-Q filed on November 13, 1998.]
10(a) *+ First Victoria National Bank Board of Directors Deferred
Compensation Plan incorporated herein as an exhibit by
reference to the Annual Report, Exhibit 10(a) therein, under
the Securities Exchange Act of 1934, filed by the Bank on Form
10-K on March 25, 1997
10(b) *+ Employees' Profit Sharing Plan incorporated herein as an
exhibit by reference to the Annual Report, Exhibit 10(b)
therein, under the Securities Exchange Act of 1934, filed by
the Bank on Form
10-K on March 25, 1997
10(c) *+ Incentive Compensation Plan incorporated herein as an
exhibit by reference to the Annual Report, Exhibit 10(c)
therein, under the Securities Exchange Act of 1934, filed by
the Bank on Form
10-K on March 25, 1997
10(d) *+ Pension Plan incorporated herein as an exhibit by reference
to the Annual Report, Exhibit 10(d) therein, under the
Securities Exchange Act of 1934, filed by the Bank on Form 10-K
on March 25, 1997
10(e) *+ Officer Annual Incentive Plan, as revised July 2, 1997,
incorporated herein as an exhibit by reference to the Quarterly
Report, Exhibit 10(e) therein, under the Securities Exchange
Act of 1934, filed by the Bank on Form 10-Q on August 8, 1997
13 ** 1998 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Accountants Consent
27 Financial Data Schedule [The required Financial Data Schedule
has been included as Exhibit 27 of the Form 10-K filed
electronically with the Securities and Exchange Commission]
* These documents constitute compensatory plans or arrangements
** Deemed filed only with respect to those portions thereof incorporated herein
by reference
+ Previously filed
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
FVNB CORP.
March 26, 1999 By: /s/ DAVID M. GADDIS
- -------------- ----------------------
Date David M. Gaddis
President and Chief Executive
Officer
March 26, 1999 By: /s/ C. DEE HARKEY
- -------------- ----------------------
Date C. Dee Harkey
Secretary and Principal
Accounting Officer
14
<PAGE>
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.
Director
- -------------------------------- ------------------ ---------------
Michael S. Anderson Title Date
/s/ O. D. Edwards, Jr. Director March 26, 1999
- -------------------------------- ------------------ ---------------
O. D. Edwards, Jr. Title Date
Director
- -------------------------------- ------------------ ---------------
David P. Engel Title Date
/s/ David M. Gaddis Director March 26, 1999
- -------------------------------- ------------------ ---------------
David M. Gaddis Title Date
/s/ Walter T. Haenggi Director March 26, 1999
- -------------------------------- ------------------ ---------------
Walter T. Haenggi Title Date
/s/ Robert L. Halepeska Director March 26, 1999
- -------------------------------- ------------------ ---------------
Robert L. Halepeska Title Date
/s/ Thomas Lane Keller Director March 26, 1999
- -------------------------------- ------------------ ---------------
Thomas Lane Keller Title Date
/s/ James Robert "Bob" McCan Director March 26, 1999
- -------------------------------- ------------------ ---------------
James Robert "Bob" McCan Title Date
/s/ J. E. McCord Director March 26, 1999
- -------------------------------- ------------------ ---------------
J. E. McCord Title Date
/s/ Thomas M. O'Connor Director March 26, 1999
- -------------------------------- ------------------ ---------------
Thomas M. O'Connor Title Date
/s/ Billy W. Ruddock Director March 26, 1999
- -------------------------------- ------------------ ---------------
Billy W. Ruddock Title Date
/s/ Roger Welder Director March 26, 1999
- -------------------------------- ------------------ ---------------
Roger Welder Title Date
15
EXHIBIT 13
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 % Change
- --------------------------------------------------------------------------------
FOR THE YEAR
Net Interest Income ............... $ 19,811 $ 17,491 13.26%
Net Income ........................ 6,072 4,991 21.66
Average Common Shares Outstanding * 2,372,792 2,372,792 --
- --------------------------------------------------------------------------------
PER COMMON SHARE
Basic and Diluted Net Income ...... $ 2.56 $ 2.10 21.90%
Cash Dividends Declared ........... 1.30 .82 58.54
Book Value (At Year End) .......... 25.09 23.63 6.18
- --------------------------------------------------------------------------------
AT YEAR END
Total Assets ...................... $ 553,164 $ 500,273 10.57%
Loans and Leases .................. 292,862 266,002 10.10
Allowance for Loan and Lease Losses 3,308 2,861 15.62
Deposits .......................... 454,740 416,029 9.30
Investment Securities ............. 211,918 170,360 24.39
Shareholders' Equity .............. 59,522 56,071 6.15
- --------------------------------------------------------------------------------
CAPITAL RATIOS
Leverage Ratio .................... 11.01% 11.99% 8.17%
Risk-Based Ratios -
Tier I Capital ............... 17.54 18.67 (6.05)
Total Regulatory Capital ...... 18.55 19.65 (5.60)
- --------------------------------------------------------------------------------
* ACTUAL AMOUNT, NOT IN THOUSANDS
TABLE OF CONTENTS
To Our Shareholders........................................................ 2-3
Financial Section
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 4-19
Consolidated Statements of Income and Comprehensive Income........ 20
Consolidated Balance Sheets....................................... 21
Consolidated Statements of Shareholders' Equity................... 22
Consolidated Statements of Cash Flows............................. 23
Notes to Consolidated Financial Statements........................24-40
Report of Independent Public Accountants.......................... 41
Financial Statistics..............................................42-47
Directors of FVNB Corp........................................................48
Officers of First Victoria National Bank................................... 49
<PAGE>
TO OUR SHAREHOLDERS
The year of 1998 marked a significant change for our organization with
the formation of FVNB Corp. as a bank holding company. This operational
structure provides the opportunity to grow our company's assets and earnings
through acquisitions of banks or other financial service companies while
retaining the advantages of independent identity and local decision making. It
also offers the potential for economies of scale through shared operations and
administrative functions.
In October, we reached agreement on the acquisition by FVNB Corp. of
Citizens Bank of Texas N.A. located in New Waverly, Texas with branches in
Huntsville and The Woodlands, Texas. The transaction, which was finalized in
January, combines two successful organizations with the shared values of
independence, responsiveness, and quality personal service. It provides
opportunities for both banks to offer new services to their customers.
In addition to preparing our organization for future growth, in 1998 we
also achieved excellent growth in deposits, loans, and assets under management
in our current markets, which resulted in a record level of earnings for our
company.
For the year ended December 31, 1998, net income was approximately
$6.07 million, or $2.56 per share, up almost 22% from the $4.99 million, or
$2.10 per share, reported for 1997. This marks the second year in a row that net
income has increased by over twenty percent from the previous year. Return on
average assets and return on average equity were 1.16% and 9.83% respectively,
compared to 1.10% and 9.16% in 1997. We also increased our dividend again to
$1.30 per share in 1998, compared to $.82 per share the previous year. This
represents a distribution to our shareholders of approximately 50% of net income
for the year.
Total assets at December 31, 1998 exceeded $553 million, representing
growth in excess of 10% for the year. That growth continues to reflect the
company's strong business development efforts as we continue to emphasize
relationship banking combined with world-class customer service.
During 1998, our loan portfolio grew by almost $27 million. At the same
time, our deposits grew by almost $39 million, allowing the funding of all the
new loan growth plus growth in our investment portfolio. 1998 saw the Federal
Reserve reduce interest rates on three separate occasions. These interest rate
reductions put pressure on our net interest margin, which decreased from 4.17%
in 1997 to 4.07% in 1998. In spite of the decrease in interest margin, net
interest income grew by over 13%.
Our Trust and Investment Management Division has continued the
excellent growth trends exhibited in recent years. Trust assets under management
increased by over $31 million on a cost basis and $36 million on a market value
basis during 1998. This growth continues to translate into significant increases
in fee income for the bank.
2
<PAGE>
With the new millennium rapidly approaching, we continue to address
concerns about computer problems associated with the Year 2000. The Board of
Directors has been actively involved in overseeing Year 2000 compliance to
ensure that the Company adequately handles all aspects of the century date
change. The Company's management plan for achieving Year 2000 compliance is on
schedule, and we believe is producing the appropriate level of preparedness,
consistent with federal guidelines. For a more complete discussion of the
Company's Year 2000 preparedness, please refer to Management's Discussion and
Analysis, page 17.
With the formation of FVNB Corp., it can be said that 1998 was a year
of reorganizing. Reorganizing to build value for our shareholders and bridge our
core values of strength, tradition, integrity, and service into the next
century. With the essential resources we have -- qualified, caring people;
up-to-date technology; and a strong capital base, we are well prepared to meet
future challenges.
The Directors and staff appreciate your continued support. We encourage
your review of the 1998 Annual Report and, as always, welcome your comments and
suggestions.
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
David M. Gaddis C. Dee Harkey
PRESIDENT & SECRETARY & PRINCIPAL
CHIEF EXECUTIVE OFFICER ACCOUNTING OFFICER
FVNB CORP. FVNB CORP.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides additional detail on the
operating results and financial condition of the Company for the periods
indicated. The discussion should be read in conjunction with the audited
consolidated financial statements and notes of FVNB Corp. which present the
Company's results of operations for the years 1996 through 1998 and its
financial condition as of December 31, 1998 and 1997. Taxable-equivalent
adjustments assume a 34% federal income tax rate.
RESULTS OF OPERATIONS
Net income of the Company for 1998 was approximately $6.07
million, or $2.56 per share. This compares to $4.99 million, or $2.10 per share,
for 1997 and $3.96 million, or $1.67 per share, for 1996. The return on average
assets of 1.16% and return on average equity of 9.83% for 1998 compare to 1.10%
and 9.16% for 1997 and .89% and 7.67% for 1996, respectively. The earnings
summary for the years ended December 31, is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Total interest income * ........................ $ 37,586 $ 33,089 $ 31,688
Total interest expense ......................... 17,724 15,482 15,742
-------- -------- --------
Net interest income ....................... 19,862 17,607 15,946
Provision (credit) for loan and lease losses ... 0 (300) 0
Non-interest income ............................ 5,539 4,867 4,445
Non-interest expense ........................... 16,146 15,180 14,279
-------- -------- --------
Income before income taxes ................ 9,255 7,594 6,112
Taxable-equivalent adjustment * ................ 51 116 194
Income tax expense ............................. 3,132 2,487 1,961
-------- -------- --------
Net income ................................ $ 6,072 $ 4,991 $ 3,957
======== ======== ========
Basic and diluted net income per share ......... $ 2.56 $ 2.10 $ 1.67
Return on average assets ....................... 1.16% 1.10% .89%
Return on average equity ....................... 9.83% 9.16% 7.67%
</TABLE>
* TAX-EXEMPT INCOME IS RECORDED ON A FULLY TAXABLE-EQUIVALENT (FTE) BASIS
[GRAPH OMITTED] [GRAPH OMITTED]
4
<PAGE>
[GRAPH OMITTED] [GRAPH OMITTED]
NET INTEREST INCOME
Net interest income on a taxable equivalent basis amounted to
approximately $19,862,000 in 1998 compared to $17,607,000 and $15,946,000 in
1997 and 1996, respectively. The changes in the components of net interest
income are detailed in the rate/volume analysis on page 46. The increase in net
interest income of approximately $2,255,000, or 12.81%, from 1997 to 1998 is due
primarily to overall growth in the average volume of earning assets, especially
loans. In addition to this overall growth, a continued shift in the balance
sheet mix from investments into higher yielding loans contributed to the
increase in net interest income along with a slight decrease in the cost of
funds related to interest bearing liabilities. Average earning assets increased
approximately $65,131,000, or 15.41%, from 1997 to 1998 while interest bearing
liabilities increased approximately $55,114,000, or 16.17%, over the same
period. Yields on earning assets decreased approximately 13 basis points from
7.83% in 1997 to 7.70% in 1998 while the cost of interest bearing liabilities
decreased approximately 6 basis points from 4.54% in 1997 to 4.48% in 1998.
Interest foregone on non-performing loans decreased from approximately $114,000
in 1997 to $98,000 in 1998. The effect of the reversal of previously accrued
interest on non-accrual loans decreased from approximately $39,000 in 1997 to
$31,000 in 1998.
INTEREST RATE SENSITIVITY
The Company's general strategy with regard to asset/liability and
interest rate risk management is to match maturities and amounts of interest
rate sensitive assets with maturities and amounts of interest rate sensitive
liabilities in such a manner as to minimize risk exposure resulting from changes
in market rates. While matching interest rate sensitivity will provide some
insulation from adverse changes in market rates, it will not assure a stable net
interest spread, as yields and rates may change simultaneously but in varying
degrees. Such changes in market rates and spreads could materially affect the
overall net interest income spread even in situations where asset/liability
sensitivities are perfectly matched.
The Company calculates and monitors interest rate sensitivity in
various ways. One method of calculating interest rate sensitivity is through gap
analysis. A gap is the difference between the amount of interest rate sensitive
assets and interest rate sensitive liabilities that reprice or mature in a given
time period. Positive gaps occur when interest rate sensitive assets exceed
interest rate sensitive liabilities, and negative gaps occur when interest rate
sensitive liabilities exceed interest rate sensitive assets. A positive gap
position in a period of rising interest rates should normally have a positive
effect on net interest income since assets will generally reprice faster than
liabilities. Conversely, net interest income should normally contract somewhat
in a period of declining interest rates. This type of analysis should be used
with caution, however, since gap positions at any given time may be quickly
changed by management in response to
5
<PAGE>
market conditions. At December 31, 1998, the Company's cumulative one year
repricing gap position was a negative $46 million, or 9.43% of total average
earning assets.
Since market rate changes do not affect all categories of assets
and liabilities equally or at the same time, simulation analysis is also
employed by the Company to supplement its gap analysis and further quantify
interest rate risk exposure in various rate environments. On an ongoing basis,
the Company reviews its internal pricing strategies in conjunction with its gap
position in order to appropriately price deposit and loan products in response
to anticipated market rate conditions. In addition, various investment
securities are considered for purchase that include a balance of short term
fixed rate instruments to limit exposure in a stable rate environment as well as
variable rate instruments to guard against exposure to falling interest margins
in a rising rate environment.
Based on the current structure of the balance sheet as well as
long term objectives established by management, the Company's Board of Directors
has determined policy guidelines within which changes in net interest income and
market value of portfolio equity may fall with respect to changes in interest
rate risk. (Market value of portfolio equity is defined as the difference
between the fair values of financial assets and liabilities resulting from the
discounting of their respective future cash flows at current market rates.)
Based on simulation analysis performed as of December 31, 1998, the Company
would experience an increase in net interest income of approximately $1,156,000,
or 5.67%, and a decrease in market value of portfolio equity of approximately
$9,381,000, or 22.47%, in the event of a 200 basis point rise in interest rates.
Conversely, the Company would experience a decrease in net interest income of
approximately $1,253,000, or 6.15%, and an increase in market value of portfolio
equity of approximately $10,321,000, or 24.72%, in the event of a 200 basis
point decline in interest rates. These results are within the established
limits.
While future interest rates and their effects on portfolio equity
cannot be accurately predicted, it is not expected that future changes in rates
will have a material adverse impact on the Company's net interest income or
portfolio equity. Calculations of the potential impact of hypothetical interest
rate changes are based on numerous assumptions including levels of market rates,
prepayments and deposit runoffs and should not be considered indicative of
actual results. Although certain assets and liabilities may have similar
maturity or periods of repricing they may react at different times and in
different degrees to changes in the market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. Certain assets, such as adjustable
rate mortgage loans, generally have features which restrict changes in interest
rates on a short term basis and over the life of the asset. In the event of a
change in interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making the calculations set forth above.
Additionally, increased credit risk may result as the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
LIQUIDITY
Liquidity is the Company's ability to meet potential depositor
withdrawals, to provide for customer credit needs, to maintain adequate
statutory reserve levels, and to take full advantage of investment opportunities
as they arise. The liquidity position of the Company is continuously monitored
and adjustments are made to the balance between sources and uses of funds as
deemed appropriate by management.
Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future ("liquid assets"). These
include federal funds sold, time deposits with banks, and investment securities
and loans which are nearing maturity. At December 31, 1998, the Company's
liquidity ratio,
6
<PAGE>
defined as liquid assets as a percentage of deposits, was 40.23% compared to
40.86% at December 31, 1997.
Liability liquidity is provided by access to funding sources, principally core
depositors and correspondent banks which maintain accounts with and sell federal
funds to the Company. Interest-bearing deposits (excluding certificates of
deposit of $100,000 or more) totaled approximately $302,992,000, or 66.63%, of
total deposits, at December 31, 1998 compared to $282,382,000 , or 67.88%, of
total deposits, at December 31, 1997.
NON-INTEREST INCOME
Trust service fees increased approximately $86,000, or 6.09%, from 1997
to 1998 due primarily to an overall increase in the volume of accounts serviced.
Trust service fees also increased from 1996 to 1997 by approximately $333,000,
or 30.83%, due primarily to the collection of nonrecurring oil and gas related
fees as well as continued growth in both asset and account volumes.
[GRAPHIC OMITTED]
Service charges and fees on deposit accounts increased approximately
$316,000, or 10.58%, from 1997 to 1998 due primarily to growth in the volume of
accounts being serviced as well as continued efforts to improve fee collection
rates. Service charges and fees on deposit accounts increased approximately
$204,000, or 7.33%, from 1996 to 1997 also due to increased efforts to improve
fee collection rates as well as increased fee income generated by growing ATM
activity.
Net losses on sales of assets decreased from 1997 to 1998 by
approximately $10,000, or 38.46%. This was due primarily to a nonrecurring loss
on the sale of assets by First Victoria Community Development Corporation, a
wholly owned operating subsidiary of First Victoria National Bank, during 1997.
This same transaction also resulted in the decrease in net gains on sales of
assets from 1996 to 1997 of approximately $37,000, or 336.36%.
Other non-interest income increased from 1997 to 1998 by approximately
$161,000, or 29.27%, due primarily to increased commission fee income as well as
increased income related to credit cards. In addition, the Company recognized
nonrecurring fee income of approximately $35,000 related to the transfer of
securities out of safekeeping. Other non-interest income did not change
significantly from 1996 to 1997.
NON-INTEREST EXPENSE
The Company reported non-interest expense of approximately $16,146,000
for the year ended December 31, 1998 compared to $15,180,000 and $14,279,000 in
1997 and 1996, respectively. This represents an increase of approximately
$966,000 or 6.36% from 1997 to 1998 and $901,000, or 6.31%, from 1996 to 1997.
7
<PAGE>
Salaries and wages increased approximately $550,000, or 7.73%, from 1997 to
1998. This increase is due primarily to an increase in expense recorded for the
accrual of short-term incentive programs compared to the same period in 1997.
Salaries related to the addition of the Taft Branch facility in December 1997 as
well as normal periodic salary increases for officers and employees of the
Company during 1998 contributed to this increase. Salaries and wages also
increased from 1996 to 1997 by approximately $631,000, or 9.73%. This was due
primarily to the addition of the full Calhoun County Office staff that was not
present during all of 1996 as well as expense related to the Bank's Incentive
Compensation Plan. Employee benefits increased approximately $289,000, or
28.93%, from 1997 to 1998 due primarily to increased costs related to group
medical insurance. Employee benefits decreased approximately $24,000, or 2.35%,
from 1996 to 1997 due primarily to lower costs related to group medical claims
during this period. Further discussion of the Company's employee benefit plans
is included in Note 9 to the consolidated financial statements.
[GRAPHIC OMITTED]
Net occupancy expense increased approximately $102,000, or 9.47%, in
1998 due primarily to the addition of expenses related to the operation of the
Taft Branch facility. Net occupancy expense increased approximately $78,000, or
7.81%, from 1996 to 1997 due to additional utility expense and depreciation
costs related to the operation of the Calhoun County Office as well as increased
property tax expense related to property placed in service during the first
quarter of 1997. Furniture and equipment expense increased approximately
$70,000, or 10.79%, from 1997 to 1998. This was due in part to the addition of
the Taft Branch facility in December 1997 as well as increased depreciation
costs related to new asset purchases during 1998 and expenses related to the
repair and maintenance of existing equipment. Furniture and equipment expense
decreased approximately $64,000, or 8.98%, from 1996 to 1997 due to nonrecurring
expenses recorded in the first quarter of 1996 related to the remodeling and
relocation of various departments throughout the Company. Expenses related to
communication and supplies increased approximately $79,000, or 7.94%, from 1997
to 1998 due primarily to the addition of the Taft Branch operation in December
1997 as well as the write-off of various obsolete forms and supplies during
1998. Communication and supplies expense increased approximately $102,000, or
11.42%, from 1996 to 1997 due primarily to the write-off of various obsolete
inventory items during the year as well as the presence of the Calhoun County
Office. Data processing expense increased from 1997 to 1998 by approximately
$39,000, or 4.05%. This was due primarily to an increase in depreciation expense
related to the purchase of various computer equipment as well as software
maintenance costs. Data processing expense increased approximately $40,000 in
1997 due to increases in depreciation expense related to the purchase of various
equipment late in 1996 and into 1997. Marketing and advertising expense
decreased slightly by approximately $18,000, or 3.08%, from 1997 to 1998 due to
the internal development and design of various marketing and ad campaigns
throughout the year. Marketing and advertising expense also decreased from 1996
to 1997 by approximately $146,000, or 20.00%, due primarily to nonrecurring
advertising expense incurred during 1996 related to new products and facilities.
Professional fees decreased by approximately $177,000, or 23.79%, in 1998 due
primarily to the absence of nonrecurring consulting and legal expense related to
various employee benefit plans and other issues. Professional fees increased
during 1997 by approximately $131,000, or 21.37%, due to the same nonrecurring
expense discussed above. Expense associated with the operation of other real
estate has remained steady over the last three years as the amount of property
held by the Company has been at a minimum.
8
<PAGE>
FDIC insurance premiums remained steady from 1997 to 1998 increasing only
$3,000, or 6.52%, over the period. Premiums increased approximately $45,000, or
4,400.00%, in 1997 due to an overall change in the fee structure for determining
premium assessments. The Company paid the minimum premium assessment available
under each fee structure for each of the three years presented.
FEDERAL INCOME TAX
[GRAPHIC OMITTED]
The Company recorded current federal income tax expense of
approximately $1,424,000, $1,209,000 and $1,998,000 for 1998, 1997, and 1996,
respectively. In addition, the Company recognized deferred tax expense of
approximately $1,708,000 and $1,278,000 for 1998 and 1997, respectively. The
Company recognized a deferred tax benefit of approximately $37,000 for the year
ended December 31, 1996.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". The statement requires the use of the asset and
liability approach for financial accounting and reporting for income taxes. As
of December 31, 1998 and 1997, the Company had net deferred tax liabilities of
approximately $3,457,000 and $1,509,000, respectively, which are reflected in
other liabilities on the consolidated financial statements.
INVESTMENT SECURITIES
During 1998, the Company sold various fixed rate securities with a
total book value of $38,236,000. The sale of the securities resulted in a net
gain of approximately $7,000. The securities were sold primarily for liquidity
purposes and to improve the overall yield of the investment portfolio as well as
the Company's potential tax position. Called bonds with a book value of
approximately $57,965,000 resulted in a gain of approximately $34,000 during
1998. During 1997, the Company sold various fixed rate securities with a total
book value of approximately $53,160,000. These securities were sold primarily
for liquidity purposes and resulted in a net loss of approximately $58,000. In
June, 1996, the Company sold a fixed rate security with a book value of
approximately $5,000,000. The security was designated available-for-sale and was
sold for liquidity purposes resulting in a loss of approximately $1,000. In
October, 1996, the Company sold two additional fixed rate securities with a
combined book value of approximately $10,000,000. These securities were also
designated available-for-sale and were sold in an effort to restructure the
portfolio and improve corresponding yields resulting in a net loss of
approximately $8,000.
9
<PAGE>
AVERAGE SECURITIES AND YIELDS
[GRAPHIC OMITTED]
The average yield of the securities portfolio for the year ended December 31,
1998 was 6.11%, compared with 6.34% for 1997. A comparison of investment
securities by category at amortized cost and approximate market value as of
December 31, is as follows (in thousands):
1998
----
Amortized Market
Cost Value
-------- --------
Available-for-sale:
U.S. Treasuries .................................. $ 2,999 $ 3,032
U.S. Government Agencies ......................... 142,780 143,014
Mortgage-backed securities and collateralized
mortgage obligations ............................ 1,180 1,206
State and political subdivisions ................. 1,972 1,972
Other ............................................ 62,908 62,694
-------- --------
Total ........................................ $211,839 $211,918
======== ========
1997
----
Amortized Market
Cost Value
-------- --------
Available-for-sale:
U.S. Treasuries ................................. $ 15,003 $ 15,103
U.S. Government Agencies ........................ 76,957 76,829
Mortgage-backed securities and collateralized
mortgage obligations ........................... 74,304 73,668
State and political subdivisions ................ 2,749 2,790
Other ........................................... 1,970 1,970
-------- --------
Total ....................................... $170,983 $170,360
======== ========
As of December 31, 1998 and 1997, the Company's entire investment
portfolio was classified as available-for-sale. As of December 31, 1998, this
classification resulted in an unrealized gain of approximately $79,000. This was
reflected as an increase to available-for-sale securities of approximately
$79,000 and a corresponding increase to shareholders' equity and a deferred tax
asset of approximately $52,000 and $27,000, respectively. As of December 31,
1997, the classification resulted in an unrealized loss of approximately
$623,000. This was reflected as a decrease to available-for-sale securities of
approximately $623,000 and a corresponding decrease to shareholders' equity and
a deferred tax asset of approximately $411,000 and $212,000, respectively.
10
<PAGE>
Securities with a par value of approximately $84,550,000 and $65,250,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public and
trust deposits as required or permitted by law.
LOANS AND LEASES
AVERAGE LOANS AND LEASES
[GRAPHIC OMITTED]
Average loans and leases increased approximately $44,929,000, or
19.29%, from 1997 to 1998. This was due primarily to strong business development
efforts primarily in the commercial and agriculture portfolios as well as
continued steady growth in the mortgage and consumer loan areas. Included in
commercial and financial loans is a net lease receivable totaling approximately
$6,793,000 as of December 31, 1998. In addition, in December 1997 the Bank
purchased a branch of the Frost National Bank located in Taft, Texas. This
transaction added approximately $2,930,000 to the existing loan portfolio. The
following table classifies loans and leases, by type, as of December 31, (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
--------- -- --------- -- --------- -- --------- -- --------- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and financial .. $ 63,255 22% $ 57,648 22% $ 34,471 17% $ 29,914 17% $ 25,444 15%
Real estate--
Mortgage ............. 106,410 36 91,075 34 79,233 39 69,377 39 65,334 39
Construction ......... 3,736 1 3,738 1 4,101 2 2,008 1 2,922 2
Agriculture ............... 75,793 26 74,671 28 55,647 28 56,074 31 54,342 32
Consumer .................. 43,776 15 38,996 15 28,187 14 21,854 12 20,167 12
--------- -- --------- -- --------- -- --------- -- --------- --
Total loans and leases 292,970 100% 266,128 100% 201,639 100% 179,227 100% 168,209 100%
=== === === === ===
Less--
Unearned income ...... (108) (126) (185) (372) (917)
Allowance for loan and
lease losses ... (3,308) (2,861) (2,475) (2,182) (2,470)
--------- --------- --------- --------- ---------
Net loans and leases . $ 289,554 $ 263,141 $ 198,979 $ 176,673 $ 164,822
========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
[GRAPHIC OMITTED]
The allowance for loan and lease losses is maintained at a level
considered appropriate by management and is based on the ongoing assessment of
the risks inherent in the loan and lease portfolio, as well as on the possible
impact of known and potential problems in certain off-balance sheet financial
instruments and uncertainties. In evaluating the adequacy of the allowance,
management incorporates such factors as local and national economic trends,
volume of past due and seriously delinquent loans, non-performing loans, loan
concentrations, and other similar factors. These considerations are not limited
to previous collection experience but also include estimates of the effect of
changing business trends and other environmental conditions. The determination
of the adequacy of the allowance for loan and lease losses can be made only on a
judgmental basis. Management of the Company believes that the allowance for loan
and lease losses at December 31, 1998 was adequate to cover expected losses
based on economic circumstances known or anticipated at that time. As conditions
are continually changing, it is necessary for management to regularly review the
loan and lease portfolio and market conditions and make appropriate adjustments
to the allowance. Any necessary changes to the allowance resulting from revised
loss estimates will be reflected in future earnings.
The allowance for loan and lease losses at December 31, 1998, was
approximately $3,308,000, or 1.14%, of outstanding loans and leases. This
compares to $2,861,000, or 1.08%, of outstanding loans at December 31, 1997. The
allowance increased approximately $447,000, or 15.62%, while total loans and
leases net of discount increased approximately $26,860,000, or 10.10%, over the
same period. The net increase in the allowance during 1998 was due entirely to
net recoveries recognized during the year. Net recoveries of approximately
$447,000 in 1998 compare to net recoveries of $686,000 and $293,000 in 1997 and
1996, respectively.
Pursuant to regulatory guidelines and as a further refinement of the
allocation process, the Company allocates the total allowance for loan and lease
losses to specific categories; however, the total allowance for loan and lease
losses was available to absorb any losses on all loans and leases in the
portfolio. The allowance for loan and lease losses was allocated to the
following categories as of December 31, (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount %(1) Amount %(1) Amount %(1) Amount %(1) Amount %(1)
------ --- ------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and financial $ 297 .1% $ 195 .1% $ 85 .0% $ 317 .2% $ 991 .6%
Real estate ............ 158 .1 175 .1 521 .3 308 .2 552 .3
Agriculture ............ 2,179 .7 1,753 .7 1,634 .8 1,285 .7 761 .5
Consumer ............... 674 .2 738 .2 235 .1 272 .1 166 .1
------ --- ------ --- ------ --- ------ --- ------ ---
$3,308 1.1% $2,861 1.1% $2,475 1.2% $2,182 1.2% $2,470 1.5%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
(1) PERCENT OF ALLOWANCE IN EACH CATEGORY TO TOTAL LOANS AND LEASES.
12
<PAGE>
Following is an analysis of the allowance for loan and lease losses for the
years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ......................... $ 2,861 $ 2,475 $ 2,182 $ 2,470 $ 4,504
(Credit) provision charged to operating expense ...... 0 (300) 0 (300) (350)
Loans and leases charged off:
Commercial and financial .................... (92) (42) (112) (5) (342)
Real estate ................................. (2) (11) (23) (231) (1,093)
Agriculture ................................. (140) 0 (9) (309) (1,063)
Consumer .................................... (290) (213) (78) (151) (120)
------- ------- ------- ------- -------
Total charged off .................................... (524) (266) (222) (696) (2,618)
------- ------- ------- ------- -------
Recoveries of loans and leases previously charged off:
Commercial and financial .................... 246 270 327 377 507
Real estate ................................. 157 619 125 161 65
Agriculture ................................. 510 16 23 96 183
Consumer .................................... 58 47 40 74 179
------- ------- ------- ------- -------
Total recoveries ..................... 971 952 515 708 934
------- ------- ------- ------- -------
Net loans and leases recovered (charged off) ......... 447 686 293 12 (1,684)
------- ------- ------- ------- -------
Balance at year end .................................. $ 3,308 $ 2,861 $ 2,475 $ 2,182 $ 2,470
======= ======= ======= ======= =======
Allowance for loan and lease losses as a
percentage of total loans ....................... 1.14% 1.08% 1.23% 1.22% 1.48%
Net charge-offs or recoveries as a percentage of
average loans and leases outstanding ............ .16% .29% .16% .01% 1.04%
</TABLE>
NON-PERFORMING ASSETS
The Company accounts for impaired loans and leases in accordance with
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" as amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosure". These standards address the accounting by creditors
for the impairment of certain loans and leases as well as the accounting for
troubled debt restructurings. A loan and lease is impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the original contractual terms of the loan
or lease agreement. The standards require that impaired loans that fall within
the scope of SFAS No. 114, as amended by SFAS No. 118, be measured based on the
present value of expected future cash flows for each loan or lease discounted at
the effective interest rate or, as a practical expedient, at the observable
market price or the fair value of the collateral if the loan is collateral
dependent. Total impaired loans and leases on the Company's books amounted to
approximately $3,459,000 and $3,373,000 as of December 31, 1998 and 1997,
respectively. Approximately $366,000 and $234,000 of the allowance for loan and
lease losses was allocated specifically to these loans as of December 31, 1998
and 1997, respectively. The average balance of impaired loans and leases
outstanding was approximately $2,692,000 and $3,169,000 during 1998 and 1997,
respectively.
13
<PAGE>
Foreclosed assets are carried in other assets at the lower of the loan balance
or estimated fair value less estimated selling costs and totalled approximately
$104,000 and $13,000 at December 31, 1998 and 1997, respectively. The Company
recorded a loss on the sale of foreclosed assets of approximately $22,000 in
1998. The Company recorded gains on sales of foreclosed assets of approximately
$29,000 and $5,000 in 1997 and 1996, respectively.
[GRAPHIC OMITTED]
Non-performing assets at December 31, 1998 totaled approximately
$3,563,000, an increase of approximately $177,000, or 5.23%, from the amount
reported in 1997. The following table presents a breakdown of past due and
non-performing assets as of December 31, (in thousands):
<TABLE>
<CAPTION>
Past due 90 days or more and still accruing: 1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commercial and financial ................... $ 1 $ 51 $ 34 $ 0 $ 5
Real estate ................................ 0 2 118 43 32
Agriculture ...................................... 134 18 12 0 20
Consumer ................................... 14 70 11 5 20
------ ------ ------ ------ ------
Total past due 90 days or more ................... $ 149 $ 141 $ 175 $ 48 $ 77
====== ====== ====== ====== ======
Non-Performing Assets:
Non-accrual:
Commercial and financial ................... $ 313 $ 77 $ 163 $ 0 $ 0
Real estate ................................ 972 898 598 757 1,287
Agriculture ................................ 700 853 871 505 1,147
Consumer ................................... 0 6 0 0 0
------ ------ ------ ------ ------
Total non-accrual ................................ 1,985 1,834 1,632 1,262 2,434
------ ------ ------ ------ ------
Restructured Loans and Leases:
Commercial and financial ................... 0 0 0 0 0
Real estate ................................ 750 750 750 0 2,631
Agriculture ................................ 724 789 811 0 0
Consumer ......................................... 0 0 0 0 0
------ ------ ------ ------ ------
Total restructured loans and leases ..... 1,474 1,539 1,561 0 2,631
------ ------ ------ ------ ------
Real estate and other collateral acquired
through foreclosure ........................... 104 13 39 239 74
------ ------ ------ ------ ------
Total non-performing assets ............. $3,563 $3,386 $3,232 $1,501 $5,139
====== ====== ====== ====== ======
Non-performing assets as a percentage of loans
and leases and other non-performing assets .... 1.22% 1.27% 1.60% .84% 3.07%
</TABLE>
14
<PAGE>
DEPOSITS
AVERAGE DEPOSITS
[GRAPHIC OMITTED]
Total average deposits increased approximately $56,169,000, or 14.99%,
from 1997 to 1998 and approximately $11,936,000, or 3.29% from 1996 to 1997. The
average amounts outstanding and average rates paid on deposits for the years
ended December 31, are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits ......... $ 60,848 0.00% $ 54,642 0.00% $ 48,283 0.00%
Savings accounts ........ 14,322 1.93 12,809 2.47 12,433 2.50
NOW accounts ............ 73,441 2.90 67,579 3.34 72,349 3.53
Money market accounts ... 63,219 3.21 52,177 3.19 51,022 3.20
Time deposits ........... 218,945 5.36 187,399 5.33 178,583 5.41
-------- ---- ------- ---- ------- ----
Total average deposits $430,775 3.76% $374,606 3.77% $362,670 3.90%
======== ==== ======= ==== ======= ====
</TABLE>
SHORT-TERM BORROWINGS
The Company's primary source of short-term borrowings is federal funds
purchased from correspondent banks and securities sold under agreements to
repurchase.
December 31,
------------
1998 1997 1996
------- ------- -------
Balance at end of period ...................... $12,255 $10,300 $ 9,700
Daily average amount outstanding .............. 8,034 7,974 13,990
Highest month-end balance ..................... 16,775 10,300 18,550
Weighted average interest rate ................ 5.18% 5.24% 5.07%
Weighted average interest rate on balance
outstanding at end of period .............. 4.80% 5.62% 6.00%
15
<PAGE>
CAPITAL
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share" and No. 129 "Disclosure of Information About
Capital Structure". These statements established standards for calculating
earnings per share and the reporting requirements for earnings per share and the
company's capital structure. The Company adopted these standards effective for
the year ended December 31, 1997 for all periods shown in the consolidated
financial statements. The adoption of the standards had no material impact on
the Company's calculation or presentation of earnings per share.
On January 19, 1999, the Company's Board of Directors declared a regular
cash dividend of $.35 per share payable on February 11, 1999 to shareholders of
record, as of January 28, 1999. The principal source of the Company's cash
revenues is dividends from the Bank, and there are certain limitations on the
payment of dividends to the Company by the Bank. The prior approval of the
Office of the Comptroller of the Currency ("OCC") is required if the total of
all dividends declared by a national bank in any calendar year would exceed the
bank's net profits, as defined, for that year combined with its retained net
profits for the preceding two calendar years less any required transfers to
surplus. In order to fund the acquisition of Citizens Bank of Texas, the Bank
paid a dividend to the Company for which it was required to receive the prior
approval of the OCC. The OCC approved the special dividend and it approved
future quarterly dividends to fund the standard cash dividend of the Company,
provided that the Bank's net income during future quarters is sufficient to
support such quarterly dividends. The weighted average number of shares
outstanding during 1998, 1997 and 1996 was 2,372,792.
CAPITAL RATIOS AT DECEMBER 31 EARNINGS PER SHARE
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
The Office of the Comptroller of the Currency ("OCC") and the Federal
Deposit Insurance Corporation ("FDIC") have issued comprehensive guidelines
implementing risk-based capital requirements. The guidelines make regulatory
capital requirements more sensitive to differences in risk profiles among
banking organizations, take off-balance sheet exposure into account in assessing
capital adequacy and encourage the holding of liquid, low-risk assets. Under
these guidelines, at December 31, 1997 and 1996, the Company was required to
maintain a minimum ratio of total capital-to-risk-weighted assets of 8.00% of
which at least 4.00% must be in the form of Tier I capital. Tier I capital is
comprised of the Company's common stock, surplus and retained earnings. At
December 31, 1998 and 1997, the percent of total capital-to-risk-weighted assets
was 18.55% and 19.65%, respectively. The Company's Tier I capital ratio as of
December 31, 1998 and 1997 was 17.54% and 18.67%, respectively, well in excess
of the required ratios.
16
<PAGE>
Tier I leverage ratio is defined as a Company's Tier I capital divided by
its adjusted average total assets (net of allowance for loan and lease losses).
The minimum leverage ratio is 3.00% for banking organizations carrying the
highest regulatory rating. Other institutions are expected to maintain a
leverage ratio of at least 4.00% to 5.00% depending upon their particular
condition. At December 31, 1998 and 1997, the Company's Tier I leverage ratio
was 11.01% and 11.99%, respectively, and exceeds the regulatory minimum.
THE YEAR 2000 ISSUE
This section contains forward-looking statements that have been prepared
on the basis of the Company's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, third-party, and regulatory uncertainties and other
contingencies, many of which are beyond the control of the Company. In addition,
these forward-looking statements are based upon the Company's current internal
assessments and remediation plans, incorporating certain representations of
third-party servicers, and are subject to change. Accordingly, there can be no
assurance that the Company's results of operations will not be adversely
affected by difficulties or delays in the Company's or third parties' year 2000
readiness efforts.
The year 2000 issue involves certain assumptions that were incorporated
into the design of many existing computer programs. To conserve expensive
computer storage space, many older computer programs determine dates using only
two digits to identify the year. In some systems, the assumption that 1900 is
the century causes these programs to treat "00" as 1900 rather than 2000. This
assumption could cause computer programs and hardware to fail entirely or create
erroneous or meaningless results. The Company relies heavily on software
applications that could be affected by Year 2000 issues.
Achieving year 2000 compliance is one of the Company's highest priorities.
Senior management and the Board of Directors have been actively involved in
overseeing Year 2000 compliance efforts to ensure that the Company adequately
handles all required aspects of the century date change, including application
systems, system interfaces, operations and facilities. To that end, the Board
adopted a Year 2000 Project Plan which was developed using the guidelines
outlined in the Federal Financial Institutions Examination Council's interagency
statement "Year 2000 Project Management Awareness". The Year 2000 Project Plan
consists of five phases: awareness, assessment, renovation, validation, and
implementation. The plan called for completion of all necessary renovation by
December 31, 1998, with validation and testing to be completed by March 31,
1999. The Company's Year 2000 Steering Committee, led by the Year 2000 Senior
Officer and the Year 2000 Project Leader, is responsible for implementing and
monitoring the Year 2000 Project Plan with the Board of Directors receiving
progress reports quarterly. Management believes that its program is producing
the appropriate level of preparedness, consistent with the guidelines issued by
federal banking regulators.
The Company has contacted its major computer service providers and
received assurances that those services will function properly on and after
January 1, 2000. Testing by the Company to validate those assurances began in
the third quarter of 1998, and was substantially complete by December 31 for
in-house applications. Testing is anticipated to be complete by March 31, 1999,
for service providers. The Company determined that certain computer hardware and
software, including some systems with embedded technology, required revisions or
replacement to be Year 2000 compliant. Those replacements and revisions
17
<PAGE>
are progressing on schedule, and are substantially complete. The Company does
not expect the costs associated with renovating those systems to be significant
or to materially impact its financial condition or results of operations.
Currently, the Company estimates the final cost of its Year 2000 compliance
plan, excluding normal salary costs for Company personnel working on the
project, to be less than $300,000. These costs, with the exception of capital
expenditures, are being expensed as incurred, and are estimated to be
approximately $275,000 for 1998, including capital expenditures. The anticipated
costs of compliance and expected completion dates are based upon management's
best estimates which were derived utilizing assumptions of future events
including the continued availability of certain resources, plans for third party
vendor remediation, availability of testing facilities, and other factors beyond
the control of the Company.
Regardless of the Year 2000 compliance of the Company's systems, there is
no complete assurance that the Company will not be adversely affected to the
extent other entities not affiliated with the Company fail to properly address
this issue. In an effort to minimize this possibility, active communication has
been ongoing between the Company and its external service providers and
intermediaries. Public awareness sessions have been hosted by the Company for
customers and other interested parties during 1998, and will continue in 1999.
In addition, the Company has sent correspondence and informational brochures to
customers and suppliers, and such communication is planned to continue
throughout the coming year. In addition, a risk reduction program was initiated
during 1998 to address potential Year 2000 exposure in the loan portfolio. An
assessment was also made to evaluate risks inherent within the depositor base.
Even with the Company's best efforts to achieve Year 2000 compliance,
significant business interruptions or failures by key business customers,
suppliers, trading partners or governmental agencies resulting from the effects
of Year 2000 issues could have a material adverse effect on the Company.
No matter how well an organization prepares, something may go wrong. As a
normal course of business, the Company has contingency plans in place to ensure
business resumption and continuation in the event of unforeseen problems.
Specifically, the Company has adopted contingency plans for the failure of its
mission critical systems in the event of unforeseen disruptions in the Company's
data processing capabilities. The Company is reviewing its contingency plans to
ensure that they adequately address possible Year 2000 disruptions as well.
Generally, the plans focus on strategies that would be implemented in the event
of Year 2000 related problems. These strategies include the ability to continue
to safely operate the Company and to execute customer transactions in the event
of area wide interruptions due to loss of power or telecommunications, or
problems with the Company's computer systems. These plans are subject to testing
and review procedures in conjunction with the Year 2000 plan.
While the Company will have contingency plans in place to address a
temporary disruption in these services, there can be no assurance that any
disruption or failure will be only temporary, that the Company's contingency
plans will function as anticipated, or that the results of operations, financial
condition, or liquidity of the Company will not be adversely affected in the
event of a prolonged disruption or failure.
Additionally, there can be no assurance that the FFIEC or other federal
regulators will not issue new regulatory requirements that require additional
work by the Company and, if issued, that new regulatory requirements will not
increase the cost or delay the completion of the Company's Year 2000 Project.
Federal bank regulators have enforcement powers with respect to Year 2000
compliance. Failure to implement an acceptable Year 2000 readiness plan could
result in the disapproval of expansion applications filed with bank regulatory
agencies or the imposition of cease and desist orders or civil money penalties.
18
<PAGE>
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding historical
information, include forward-looking statements. Although the Company believes
such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. The words
"estimate," "expect," "intend" and "project," as well as other words or
expressions of similar meaning are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this report. Such statements are
based on current expectations, are inherently uncertain, are subject to risks
and should be viewed with caution. Actual results and experience may differ
materially from the forward-looking statements as a result of many factors.
Factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the Company in
forward-looking statements include among others, the following possibilities:
(i) changes in local, state, national and international economic conditions,
(ii) changes in the capital markets utilized by the Company and its
subsidiaries, including changes in the interest rate environment that may reduce
margins, (iii) changes in state and/or federal laws and regulations to which the
Company and its subsidiaries, as well as customers, competitors and potential
competitors, are subject, including banking, tax, securities, insurance and
employment laws and regulations, (iv) the loss of senior management or operating
personnel and the potential inability to hire qualified personnel at reasonable
compensation levels, (v) the Company's inability to complete its Year 2000
action plan on a timely basis, and (vi) increased competition from both within
and without the banking industry. It is not possible to foresee or identify all
such factors. The Company makes no commitment to update any forward-looking
statement, or to disclose any facts, events or circumstances after the date
hereof that may affect the accuracy of any forward-looking statements.
19
<PAGE>
FVNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
INTEREST INCOME:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Loans and lease receivable, including fees ................ $ 24,961 $ 21,201 $ 17,123
Investment securities:
Taxable ................................................ 10,936 10,553 13,028
Tax-exempt ............................................. 99 226 376
Dividends .............................................. 118 117 119
Federal funds sold ........................................ 1,419 875 847
Other ..................................................... 2 1 1
-------- -------- --------
TOTAL INTEREST INCOME .................................. 37,535 32,973 31,494
-------- -------- --------
INTEREST
EXPENSE:
Deposits -- Note 10 ...................................... 16,176 14,221 14,158
Federal funds purchased and securities sold under
agreements to repurchase ............................. 416 424 721
Other borrowings-- Note 13 ................................ 1,132 837 863
-------- -------- --------
TOTAL INTEREST EXPENSE ................................. 17,724 15,482 15,742
-------- -------- --------
NET INTEREST INCOME .................................... 19,811 17,491 15,752
Provision (credit) for loan and lease losses-- Note 5 ..... 0 (300) 0
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION (CREDIT) FOR LOAN AND LEASE LOSSES ...... 19,811 17,791 15,752
-------- -------- --------
NON-INTEREST INCOME:
Securities gains (losses)-- Note 4 ........................ 41 (58) (9)
Trust service fees ........................................ 1,499 1,413 1,080
Service charges and fees on deposit accounts .............. 3,304 2,988 2,784
(Loss) gain on sale of assets-- Note 5 .................... (16) (26) 11
Other ..................................................... 711 550 579
-------- -------- --------
TOTAL NON-INTEREST INCOME .............................. 5,539 4,867 4,445
-------- -------- --------
NON-INTEREST EXPENSE:
Salaries and wages-- Note 9 ............................... 7,665 7,115 6,484
Employee benefits-- Note 9 ................................ 1,288 999 1,023
Net occupancy expense ..................................... 1,179 1,077 999
Furniture and equipment ................................... 719 649 713
Communication and supplies ................................ 1,074 995 893
Data processing ........................................... 1,003 964 924
Marketing and advertising ................................. 566 584 730
Professional fees ......................................... 567 744 613
FDIC insurance assessment ................................. 49 46 1
Operation of other real estate, net ....................... 3 4 4
Other ..................................................... 2,033 2,003 1,895
-------- -------- --------
TOTAL NON-INTEREST EXPENSE ............................. 16,146 15,180 14,279
-------- -------- --------
INCOME BEFORE INCOME TAXES ............................. 9,204 7,478 5,918
Income Tax Expense-- Note 7 ................................. 3,132 2,487 1,961
-------- -------- --------
NET INCOME ............................................. $ 6,072 $ 4,991 $ 3,957
======== ======== ========
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during the period 490 (106) (659)
Realized (gains) losses reflected in net income ........... (27) 38 6
COMPREHENSIVE INCOME ................................ $ 6,535 $ 4,923 $ 3,304
======== ======== ========
Basic and Diluted Net Income Per Share ....................... $ 2.56 $ 2.10 $ 1.67
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
20
<PAGE>
FVNB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C> <C>
ASSETS
Cash and due from banks-- Note 3 ........................ $ 27,504 $ 29,548
Federal funds sold ......................................... 6,800 20,200
Investment securities -- Note 4:
Available-for-sale .................................... 211,918 170,360
Loans and lease receivable-- Note 5 (net of allowance
for loan and lease losses of $3,308 and $2,861) ...... 289,554 263,141
Premises and equipment, net-- Note 6 ................... 9,404 9,753
Accrued interest receivable ............................. 4,931 4,201
Other assets-- Notes 5, 7 and 9 ......................... 3,053 3,070
--------- ---------
TOTAL ASSETS ...................................... $ 553,164 $ 500,273
========= =========
LIABILITIES
Deposits:
Demand ................................................ $ 77,302 $ 68,045
Savings, NOW, and money market accounts .............. 158,411 148,097
Time-- Note 10 ........................................ 219,027 199,887
--------- ---------
TOTAL DEPOSITS ................................... 454,740 416,029
Federal funds purchased and securities sold
under agreements to repurchase ........................ 12,225 10,300
Other borrowings-- Note 13 .............................. 19,119 12,628
Other liabilities-- Note 7 .............................. 7,558 5,245
--------- ---------
TOTAL LIABILITIES ................................. 493,642 444,202
--------- ---------
Commitments and Contingent Liabilities -- Notes 8 and 15
SHAREHOLDERS' EQUITY -- Note 11:
Common stock ($.01 par value; 20,000,000 shares
authorized, 2,372,792 shares issued and outstanding) . 24 24
Surplus ................................................. 15,682 15,682
Retained earnings ....................................... 43,764 40,776
Unrealized gain (loss) on securities .................... 52 (411)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ........................ 59,522 56,071
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $ 553,164 $ 500,273
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
21
<PAGE>
FVNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Retained Gain (Loss) Total
Common Earnings on Securities Shareholders'
Stock Surplus (Note 11) (Note 4) Equity
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 5,932 $ 9,774 $ 35,293 $ 310 $ 51,309
Net income ............... -- -- 3,957 -- 3,957
Dividends paid ........... -- -- (1,519) -- (1,519)
Change in unrealized gain
(loss) on securities -- -- -- (653) (653)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 5,932 9,774 37,731 (343) 53,094
Net income ............... -- -- 4,991 -- 4,991
Dividends paid ........... -- -- (1,946) -- (1,946)
Change in unrealized gain
(loss) on securities -- -- -- (68) (68)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 5,932 9,774 40,776 (411) 56,071
Change incident to holding
company formation ..... (5,908) 5,908 -- -- 0
Net income ............... -- -- 6,072 -- 6,072
Dividends paid ........... -- -- (3,084) -- (3,084)
Change in unrealized gain
(loss) on securities -- -- -- 463 463
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998 $ 24 $ 15,682 $ 43,764 $ 52 $ 59,522
======== ======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
22
<PAGE>
FVNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 6,072 $ 4,991 $ 3,957
Adjustments to reconcile net income to net cash provided by
operating activities --
Net (gain) loss on sale of investment securities ....... (41) 58 9
Provision (credit) for loan and lease
and other real estate losses ........................ 0 (300) 0
Depreciation ........................................... 1,205 1,207 1,197
Premium amortization and discount accretion, net ....... 235 27 435
Pension expense ........................................ 323 297 306
Loss (gain) on sale of assets .......................... 16 26 (11)
(Increase) decrease in accrued interest receivable ..... (730) (134) 465
Net change in other assets and other liabilities ....... 1,885 (347) (788)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........... 8,965 5,825 5,570
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities, available-for-sale ..... 38,243 53,208 15,049
Proceeds from maturities of securities, available-for-sale 113,122 31,013 70,419
Purchase of securities, available-for-sale ................ (192,415) (53,564) (85,115)
Net increase in loans to customers ........................ (26,577) (63,931) (22,391)
Additions to premises and equipment ....................... (861) (1,527) (1,377)
Proceeds from the sale of assets .......................... 36 72 300
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............... (68,452) (34,729) (23,115)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, savings, NOW,
and money market accounts .............................. 19,571 11,994 22,505
Net increase
in time deposits .......................................... 19,140 21,019 4,801
Net increase in federal funds purchased ................... 1,925 600 3,475
Net increase (decrease) in other borrowed funds ........... 6,491 (422) (396)
Dividends paid ............................................ (3,084) (1,946) (1,519)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........... 44,043 31,245 28,866
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS .............................. (15,444) 2,341 11,321
Cash and cash equivalents, beginning of year .............. 49,748 47,407 36,086
CASH AND CASH EQUIVALENTS, END OF YEAR .............. $ 34,304 $ 49,748 $ 47,407
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
23
<PAGE>
FVNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting
policies of FVNB Corp. (Parent Company) and subsidiaries (collectively, the
Company) conform to generally accepted accounting principles and practices
within the banking industry and require management to make certain estimates and
assumptions that affect the amounts reported in the consolidated financial
statements related to assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from the estimates. A description of the more significant accounting
policies follows:
PRINCIPLES OF CONSOLIDATION -- In September 1998, FVNB Corp. was organized
as a bank holding company for First Victoria National Bank (the Bank). As a
result of the reorganization, shareholders of the Bank became shareholders of
FVNB Corp. In addition, the par value of common stock outstanding changed from
$2.50 per share to $.01 per share. Total authorized shares outstanding also
changed from 5,000,000 to 20,000,000. These changes are reflected retroactively
for each year shown in the consolidated financial statements. No revaluation of
the assets and liabilities was made as a result of this reorganization. The
consolidated financial statements include the accounts of FVNB Corp. as well as
First Victoria National Bank and its wholly owned subsidiaries, PMV, Inc., which
was established for the purpose of acquiring, managing and liquidating assets
acquired in satisfaction of debts previously contracted; First Victoria
Community Development Corporation, which was established for the purpose of
acquiring, developing, rehabilitating, managing, renting and selling housing
units primarily to benefit low and moderate income residents of the local area
and to promote and invest in such community development projects; and First
Victoria Leasing, Inc., which was established for the purpose of transacting and
accounting for leasing activities of the Company.
INVESTMENT SECURITIES -- The Company accounts for investment securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". This
standard requires the classification of securities into one of three categories:
held-to-maturity, available-for-sale, or trading. Investments shall be
classified as held-to-maturity and measured at amortized cost only if the
reporting enterprise has the positive intent and ability to hold those
securities to maturity. Securities that are bought and held principally for the
purpose of selling them in the near term shall be classified as trading
securities. Unrealized holding gains and losses related to trading securities
shall be included in earnings. Investments not classified as trading securities
or held-to-maturity securities shall be classified as available-for-sale
securities. Securities that would be sold in response to changes in market
interest rates and the securities' prepayment risk, needs for liquidity, or
changes in the availability and yield on alternative investments are classified
as available-for-sale. Available-for-sale securities are reported at fair value
and any unrealized holding gains and losses are excluded from earnings and
recorded as a net amount as a separate component of shareholders' equity (net of
tax effect) until realized.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", effective
for all fiscal quarters of all fiscal years ending after June 15, 1999. The
Statement established accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a Company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. The Company has not yet quantified the impacts of adopting
Statement 133 on the consolidated financial statements. However, management
believes the Statement's impact on the financial statements will be immaterial.
24
<PAGE>
LOANS --Interest earned on commercial, agriculture and real estate loans
is accrued daily, based upon the principal amounts outstanding. Interest on
consumer loans is recorded on the level yield method. The recognition of income
on a loan is discontinued, and previously accrued interest is reversed, when
interest or principal payments become 90 days or more past due unless, in the
opinion of management, the outstanding principal and interest are both well
secured and in the process of collection. Loans to customers whose financial
conditions have deteriorated and for which management has serious doubt as to
the ability of the borrowers to comply with their loan repayment terms are
considered for non-accrual status whether or not the loans are 90 days or more
past due. Subsequent cash payments received are applied to the principal balance
or recorded as interest income, depending upon management's assessment of the
ultimate collectibility of the loan. If cash payments received relate to a loan
previously charged off in whole or in part, payments not applied to the
remaining principal balance are recorded as recoveries.
The Company accounts for impaired loans in accordance with SFAS No. 114
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosure". These standards address the accounting by creditors for impairment
of certain loans as well as the accounting for troubled debt restructurings. A
loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Loans that fall within the scope of
these standards are measured based on the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
The Company accounts for leveraged leases in accordance with SFAS No. 13
"Accounting for Leases". This standard addresses the accounting and reporting
for leases by lessees and lessors. The lessor records the investment in the
leveraged lease as the gross rental receivable (net of principal and interest on
nonrecourse debt) and the estimated residual value of the leased asset net of
unearned and deferred income. The investment less deferred taxes is used for
computing income earned. Income is recognized based on the cash flow over the
lease term and the rate of return on the positive net investment.
ALLOWANCE FOR LOAN AND LEASE LOSSES -- The allowance for loan and lease
losses is established by a charge to income as a provision for loan and lease
losses. Actual loan and lease losses or recoveries are charged or credited
directly to this allowance. The provision for loan and lease losses is based on
management's estimate of the amounts required to maintain an allowance adequate
to reflect losses inherent in the loan portfolio at the balance sheet date;
however, ultimate losses may vary from the current estimates. These estimates
are reviewed periodically and adjustments are reported in earnings in the period
in which they become known.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated on the straight-line
method, based on the estimated useful lives of the assets. Repairs and
maintenance are charged to expense as incurred, and expenditures for renewals
and improvements which materially increase the value of the property and have a
benefit over more than one accounting period are capitalized. Estimated useful
lives are 15 - 40 years for premises and 3 - 10 years for equipment.
INCOME TAXES -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes". This standard allows the
recognition of deferred tax assets and liabilities based on the expected future
tax consequences of existing differences between financial reporting and tax
reporting bases of assets and liabilities.
RECOGNITION OF LOAN ORIGINATION FEES AND COSTS -- Loan origination and
commitment fees and certain direct loan origination costs are deferred and the
net amount amortized as an adjustment of the related loan's yield over the
contractual life of the related loan. If a commitment expires unexercised, the
commitment fee is recognized as income.
25
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Financial instruments are defined as
cash, evidence of an ownership in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either receive or
deliver cash or another financial instrument. Fair value is defined as the
amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation,
and is best evidenced by a quoted market price if one exists.
The Company operates as a going concern and except for its investment
securities portfolio, no active market exists for its financial instruments.
Much of the information used to determine fair value is highly subjective and
judgmental in nature and therefore the results may not be precise. The
subjective factors include, among other things, estimates of cash flows, risk
characteristics, credit quality, and interest rates, all of which are subject to
change. Since the fair value is estimated as of the balance sheet date, the
amounts which will actually be realized or paid upon settlement or maturity of
the various instruments could be significantly different. Fair value estimates,
methods, and assumptions for financial instruments, are set forth in Note 16 to
the consolidated financial statements.
COMPREHENSIVE INCOME -- Effective January 1, 1998 the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of this Statement requires
changes in the unrealized gains or losses on the Company's investment portfolio
be included as a component of other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130.
EARNINGS PER SHARE DATA -- Basic net income per share is computed by
dividing net income by the weighted average number of common shares outstanding
during the year. For 1998, diluted earnings per share was computed by dividing
net income by the weighted average number of common shares outstanding plus the
incremental shares that would have been outstanding under the 1998 FVNB Corp.
Stock Incentive Plan, upon the assumed exercise of these dilutive stock options.
The incremental shares that would have been outstanding under the 1998 Stock
Incentive Plan were not material, and therefore the basic earnings per share is
not materially different from diluted earnings per share.
STOCK BASED COMPENSATION -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123).
SEGMENTS DISCLOSURE -- Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires that public business enterprises report certain
information about its operating segments in order to provide information about
the different types of business activities in which an enterprise engages. FVNB
Corp. operates in only one segment, commercial banking, and therefore the
disclosures required by SFAS 131 are not applicable. ` (2) STATEMENT OF CASH
FLOWS: For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods. Cash paid for interest during 1998, 1997
and 1996 amounted to approximately $17,320,000, $15,423,000 and $15,656,000,
respectively. Cash paid for federal income taxes amounted to approximately
$1,190,000, $1,598,000 and $1,968,000, during 1998, 1997 and 1996, respectively.
Noncash transactions representing the transfer of non-performing loans to other
real estate owned and foreclosed assets totaled approximately $164,000, $69,000
and $85,000 during 1998, 1997 and 1996, respectively.
(3) CASH AND DUE FROM BANKS: Cash and due from banks of approximately $7,522,000
and $8,635,000 at December 31, 1998 and 1997, respectively, were maintained to
satisfy regulatory reserve requirements.
26
<PAGE>
(4) INVESTMENT SECURITIES: During 1998, the Company sold various fixed rate
securities with a total book value of approximately $38,236,000. The sale of the
securities resulted in a net gain of approximately $7,000. The securities were
sold primarily for liquidity purposes and to improve the overall yield of the
investment portfolio as well as the Company's potential tax position. Called
bonds with a book value of approximately $57,965,000 resulted in a gain of
approximately $34,000 during 1998. During 1997, the Company sold various fixed
rate securities with a total book value of approximately $53,160,000. These
securities were sold primarily for liquidity purposes and resulted in a net loss
of approximately $58,000. In June, 1996, the Company sold a fixed rate security
with a book value of approximately $5,000,000. The security was designated
available-for-sale and was sold for liquidity purposes resulting in a loss of
approximately $1,000. In October, 1996, the Company sold two additional fixed
rate securities with a combined book value of approximately $10,000,000. These
securities were also designated available-for-sale and were sold in an effort to
restructure the portfolio and improve corresponding yields resulting in a net
loss of approximately $8,000.
Securities with a par value of approximately $84,550,000 and $65,250,000
at December 31, 1998 and 1997, respectively, were pledged to secure public and
trust deposits as required or permitted by law.
A comparison of investment securities at amortized cost and estimated
market values, as determined by an independent broker, is as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasuries ............................. $ 2,999 $ 33 $ 0 $ 3,032
U.S. Government Agencies .................... 142,780 485 (251) 143,014
Mortgage-backed securities and collateralized
mortgage obligations ................... 1,180 26 0 1,206
State and political subdivisions ............ 1,972 0 0 1,972
Other ....................................... 62,908 197 (411) 62,694
-------- -------- -------- --------
Total .................................... $211,839 $ 741 $ (662) $211,918
======== ======== ======== ========
<CAPTION>
December 31, 1997
-----------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- -------- --------
Available-for-sale:
U.S. Treasuries ............................. $ 15,003 $ 100 $ 0 $ 15,103
U.S. Government Agencies .................... 76,957 114 (242) 76,829
Mortgage-backed securities and collateralized
mortgage obligations ................... 74,304 250 (886) 73,668
State and political subdivisions ............ 2,749 41 0 2,790
Other ....................................... 1,970 0 0 1,970
-------- -------- -------- --------
Total .................................... $170,983 $ 505 $ (1,128) $170,360
======== ======== ======== ========
</TABLE>
As of December 31, 1998 and 1997, the Company's entire investment
portfolio was classified as available-for-sale. As of December 31, 1998, this
classification resulted in an unrealized gain of approximately $79,000. This was
reflected as an increase to available-for-sale securities of approximately
$79,000 and a corresponding increase to shareholders' equity and a deferred tax
asset of approximately $52,000 and $27,000,
27
<PAGE>
respectively. As of December 31, 1997, the classification resulted in an
unrealized loss of approximately $623,000. This was reflected as a decrease to
available-for-sale securities of approximately $623,000 and a corresponding
decrease to shareholders' equity and a deferred tax asset of approximately
$411,000 and $212,000, respectively.
The amortized cost and estimated market value of available-for-sale
securities at December 31, by contractual maturity, are shown below, in
thousands. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Amortized Market Amortized Market
Cost Value Cost Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Due in one year or less .............. $ 70,514 $ 70,853 $ 67,302 $ 67,166
Due after one year through five years 72,909 73,010 27,616 27,724
Due after five years through ten years 8,285 8,179 6,892 6,881
Due after ten years .................. 60,131 59,876 69,173 68,589
-------- -------- -------- --------
Total ............................. $211,839 $211,918 $170,983 $170,360
</TABLE>
(5) LOANS AND LEASES AND ALLOWANCES FOR LOAN AND LEASE LOSSES AND OTHER REAL
ESTATE OWNED: The Bank grants agriculture, commercial, real estate, and
installment loans to customers primarily in Victoria and surrounding counties.
Although the Bank has a diversified loan and lease portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon the
agricultural economic sector. As of December 31, loans and leases are classified
in the following categories (in thousands).
1998 1997
--------- ---------
Commercial and financial ....................... $ 63,255 $ 57,648
Mortgage real estate ........................... 106,410 91,075
Construction real estate ....................... 3,736 3,738
Agriculture .................................... 75,793 74,671
Consumer ....................................... 43,776 38,996
--------- ---------
Total loans and leases ......................... 292,970 266,128
Less --
Unearned income ............................. (108) (126)
Allowance for loan and lease losses ......... (3,308) (2,861)
--------- ---------
Net loans and leases ..................... $ 289,554 $ 263,141
========= =========
Transactions in the allowance for loan and lease losses for the years
ended December 31, were as follows (in thousands):
1998 1997 1996
------- ------- -------
Balance at beginning of year .................. $ 2,861 $ 2,475 $ 2,182
Provision (credit) for loan and lease losses 0 (300) 0
Loans and leases charged off ............... (524) (266) (222)
Recoveries of loans and leases charged off . 971 952 515
------- ------- -------
Balance at end of year ........................ $ 3,308 $ 2,861 $ 2,475
======= ======= =======
28
<PAGE>
During 1997, the Bank became an equity participant in the leveraged lease
of an aircraft. As the Bank has no general liability for the nonrecourse debt
attributable to the acquisition of such asset, the debt has been offset against
the related rentals receivable. The net investment in leveraged lease consist of
(in thousands):
1998 1997
------- -------
Rentals receivable (net of principal and
interest on nonrecourse debt) ..... $ 5,772 $ 5,772
Estimated residual value ............... 6,375 6,375
Unearned and deferred income ........... (5,354) (5,982)
------- -------
Investment in leveraged leases ......... 6,793 6,165
Deferred income taxes .................. (3,329) (1,388)
Net investment ......................... $ 3,464 $ 4,777
======= =======
A summary of the components of income from leveraged lease follows:
1998 1997
------- -------
Income before income taxes ............. $ 628 $ 446
Income tax benefit (expense)
Current ........................... 1,727 1,236
Deferred .......................... (1,941) (1,388)
------- -------
Net income from leveraged lease ........ $ 414 $ 294
======= =======
Minimum annual rentals receivable (net of principal and interest on
nonrecourse debt) under leveraged leases for the next five years beginning with
1999 are $244,000 and an aggregate of approximately $5,528,000 thereafter.
The allowance for loan and lease losses is maintained at a reasonable
level which management considers to be adequate to cover estimated losses
inherent in the loan and lease portfolio. The Company's methodology is based on
the ongoing assessment of the risks inherent in the loan and lease portfolio, as
well as on the possible impact of known and potential problems in certain
off-balance sheet financial instruments and uncertainties. The components that
comprise the allowance include basically two areas - (1) specific allowances on
loans and leases, and (2) a general allowance based upon a historical moving
average and amounts for factors which are considered areas of additional risk.
Management of the Bank assesses the adequacy of the allowance for loan and lease
losses quarterly using a three step procedure. First, loans and leases are
reviewed and categorized as to potential risk based upon an internal grading.
Specific allowances are then established for any loans and leases with
identified loss potential after consideration of third-party appraisals of
collateral value and management assessments of current economic conditions,
guarantor support, cash flows, and other circumstances, as appropriate. Second,
a general allowance is determined based upon the historical loss experience of
the portfolio as a whole. These estimates are based upon historical data related
to type of loan, risk assessment, historical loss experience and other factors.
Third, the historical loss experience is adjusted based on estimates of losses
in the portfolio that cannot be identified with specific loans and leases,
taking into consideration local and national economic trends, volume of past due
and seriously delinquent loans and leases, non-performing loans and leases, loan
and lease concentrations, and other similar factors. These considerations are
not limited to previous collection experience and include estimates of the
effect of changing business trends and other environmental conditions. As
conditions are continually changing, it is necessary for management to review
the loan portfolio and market conditions quarterly and make appropriate
adjustments to the allowance. Management believes that the allowance for loan
and lease losses at December 31, 1998 and 1997 was adequate to cover expected
losses based on economic circumstances known or anticipated at that time.
29
<PAGE>
Loans and leases on which the accrual of interest has been discontinued
amounted to approximately $1,985,000 and $1,834,000 at December 31, 1998 and
1997, respectively. The effect of the reversal of previously accrued interest on
interest income was approximately $31,000, $39,000, and $46,000 for 1998, 1997
and 1996, respectively. If during 1998, 1997 and 1996, interest had been accrued
at the contractual rates, interest income would have been increased by
approximately $98,000, $114,000 and $62,000, respectively. The Bank haad
restructured loans and leases of approximately $1,474,000 and $1,539,000 as of
December 31, 1998 and 1997, respectively. The effect on net interest income
resulting from the difference between the interest recognized on such
restructured loans and leases and the interest that would have been recognized
at the original rate was approximately $20,000, $68,000 and $56,000 for 1998,
1997 and 1996, respectively. Interest income recorded on restructured loans and
leases for 1998, 1997 and 1996 was approximately $129,000, $75,000 and $85,000,
respectively.
Foreclosed assets are carried in other assets at the lower of the loan
balance or estimated fair value less estimated selling costs and totalled
approximately $104,000 and $13,000 at December 31, 1998 and 1997, respectively.
The Company recorded a loss on the sale of foreclosed assets of approximately
$22,000 in 1998. The Company recorded gains on sales of foreclosed assets of
approximately $29,000 and $5,000 in 1997, and 1996, respectively.
Total impaired loans and leases on the Company's books (including
non-accrual and restructured loans and leases) amounted to approximately
$3,459,000 and $3,373,000 as of December 31, 1998 and 1997, respectively.
Approximately $366,000 and $234,000 of the allowance for loan and lease losses
was allocated specifically to these loans and leases as of December 31, 1998 and
1997, respectively. The average balance of impaired loans and leases outstanding
was approximately $2,692,000 and $3,169,000 during 1998 and 1997, respectively.
(6) PREMISES AND EQUIPMENT: The following is a summary of premises and equipment
as of December 31, (in thousands):
1998 1997
---- ----
Land $ 2,008 $1,957
Buildings 13,146 13,099
Equipment and furniture 7,572 7,534
------- ------
22,726 22,590
Less-- Accumulated depreciation (13,322) (12,837)
------- ------
$ 9,404 $9,753
======= ======
(7) INCOME TAXES: The following represents a consolidated reconciliation between
tax computed by applying the 34% statutory federal income tax rate to income
before income taxes and reported federal income tax expense for the years ended
December 31, (dollars in thousands):
1998 1997 1996
-------------- ---------------- ---------------
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Calculated tax expense $3,129 34.0% $2,543 34.0% $2,012 34.0%
Increase (decrease)
in taxes--
Tax-exempt interest (29) (.3) (67) (.9) (111) (1.9)
Other, net 32 .3 11 .2 60 1.0
$3,132 34.0% $2,487 33.3% $1,961 33.1%
30
<PAGE>
The Company recorded current federal income tax expense of approximately
$1,424,000, $1,209,000 and $1,998,000 for 1998, 1997 and 1996, respectively. In
addition, the Company recognized deferred tax expense of approximately
$1,708,000, and $1,278,000 for 1998 and 1997, respectively. The Company
recognized a deferred tax benefit of approximately $37,000 for the year ended
December 31, 1996.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". The statement requires the use of the asset and
liability approach for financial accounting and reporting for income taxes. As
of December 31, 1998 and 1997, the Company had net deferred tax liabilities of
approximately $3,457,000 and $1,509,000, respectively, which are reflected in
other liabilities in the consolidated financial statements. The tax effect of
significant temporary differences at December 31, is as follows (in thousands):
1998 1997
------- -------
Allowance for loan and lease losses ......... $ (362) $ (548)
Deferred compensation ....................... 198 266
Discount accretion .......................... (93) (98)
Pension plan ................................ 208 107
Premises and equipment ...................... (57) (83)
Lease income ................................ (3,329) (1,388)
Other ....................................... 5 23
------- -------
Net deferred tax liability from operations (3,430) (1,721)
Unrealized (gain) loss on securities ........ (27) 212
Net deferred tax liability ............... $(3,457) $(1,509)
------- -------
(8) COMMITMENTS: The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financial
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve elements
of credit and interest rate risk which are not recognized in the consolidated
financial statements.
The Bank's exposure to credit loss, in the event of nonperformance by the
customer, for commitments to extend credit and standby letters of credit is
limited to the contractual amounts of those instruments. As of December 31, 1998
and 1997, the Bank had commitments to extend credit of approximately
$100,204,000 and $93,148,000 and standby letters of credit of approximately
$1,534,000 and $866,000, respectively. The following is a breakdown of
commitments by type as of December 31, (in thousands):
1998 1997
-------- --------
Commercial and financial ................... $ 35,279 $ 32,699
Real Estate ................................ 5,180 4,437
Agriculture ................................ 35,524 34,939
Consumer ................................... 24,221 21,073
-------- --------
Total ................................ $100,204 $ 93,148
======== ========
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
that may require payment of a fee. The total commitment amounts do not
necessarily represent future cash requirements, since the commitments may expire
without being drawn upon. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
31
<PAGE>
the counterparty. Standby letters of credit are conditional commitments issued
by the Bank to guarantee performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held varies, but
may include accounts receivable, inventory, equipment or real estate.
(9) EMPLOYEE BENEFITS: The Bank's Employees' Profit Sharing Plan is a 401(k)
salary deferral plan, and, prior to January 1, 1998, employees were eligible to
defer up to 7% of their compensation. As of January 1, 1998, employees were
eligible to defer up to 10% of their compensation. In addition, participants are
allowed to borrow up to 50% of their vested portion for specific purposes
identified in the plan. Based upon the employee's contribution, the Bank
contributes a matching amount equal to 50% of the employee's contribution, not
to exceed 5% of compensation. At the discretion of the Board of Directors,
additional amounts can be contributed annually to the plan by the Bank. All
employees with at least one year of service are eligible to participate in the
plan and employer contributions become fully vested after 7 years of service by
the employee. The plan is administered by the Trust and Investment Management
Department of the Bank and is prohibited from investing in the common stock of
the Company. Contributions to the plan by the Bank for 1998, 1997 and 1996 were
approximately $131,000, $94,000 and $82,000, respectively.
The Bank's Incentive Compensation Plan is administered by the Compensation
and Retirement Committee of the Board of Directors (the "Committee"). The
Committee determines which officers may participate in the plan and the extent
of their participation. All awards are contingent upon the Bank's attaining
certain financial objectives established annually by the Committee. Prior to
1997, the plan provided for a portion of an annual award to be distributed in
cash with the remainder in the form of performance units. Performance units were
determined by dividing the portion of the award to be paid in performance units
by the book value per share of common stock at the end of the year in which the
award was earned. The performance units could be redeemed equally over the three
years following the award at the option of the participant. Performance units
entitled participants to receive a future payment in cash equal to the book
value of the Company common stock at the date of redemption. As of January 1,
1997, no further awards will be made pursuant to the Incentive Compensation
Plan. Accruals of additional expense for each unredeemed performance award will
continue to be made in future years to reflect increases in the book value per
share of common stock of the Company. Total expense of this plan recorded by the
Bank for 1998 and 1997 was approximately $18,000 and $20,000, respectively
representing accruals for the increase in book value per share of common stock
related to previously awarded performance units. No expense was recorded for
cash awards or performance units during 1997 or 1998 under this plan. During
1996, the Bank recorded negative expense related to the plan of approximately
$34,000 as the result of the reversal of previously accrued expense for officers
who resigned from the Bank during 1996 and were no longer entitled to receive
future payment for non-vested performance units awarded in prior years. In
addition, during the same period, the Bank recorded expense of approximately
$31,000 related to the plan representing accruals for the increase in book value
per share of common stock. The Bank's performance during 1996 did not meet the
funding targets established by the Committee; therefore no accruals for cash
awards or additional performance share units were recorded.
On July 15, 1997, the Compensation and Retirement Committee approved an
Officer Annual Incentive Plan effective as of January 1, 1997. The revised plan
is administered by the Committee and all awards are payable entirely in cash and
are contingent upon the Bank's attaining various growth and financial objectives
to be determined annually. The Bank recorded expense of approximately $548,000
and $310,000 during 1998 and 1997, respectively, related to this plan.
A noncontributory defined benefit pension plan covers the Bank's employees
who meet specified age and length of service requirements. The plan holds assets
comprised of U.S.
Treasury bonds, U.S.
32
<PAGE>
Government agency securities, corporate bonds, notes and common stock. Funding
is limited to the maximum amounts that are available for deduction for federal
income tax purposes.
The plan provides for a single benefit formula that is based on the
participant's final adjusted monthly compensation.
Total pension expense for the years ended December 31, was as follows
(in thousands):
1998 1997 1996
----- ----- -----
Service cost .................................. $ 422 $ 312 $ 309
Interest on projected benefit obligation ...... 462 458 467
Actual return on plan assets .................. (577) (488) (508)
Net amortization and deferral ................. 16 15 38
----- ----- -----
Net periodic pension expense ............... $ 323 $ 297 $ 306
===== ===== =====
Assumptions used in the accounting for the years ended December 31, were:
1998 1997
---- ----
Discount rates ......................................... 6.75% 7.00%
Expected long-term rate of return on assets ............ 8.50% 8.50%
Rates of increase in compensation levels ............... 4.50% 5.50%
The following table sets forth the plan's funded status as of December
31, (in thousands):
1998 1997
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year ................ $ 6,175 $ 6,071
Service cost ......................................... 422 312
Interest cost ........................................ 462 458
Plan amendments ...................................... 0 0
Actuarial loss (gain) ................................ 12 565
Benefits paid ........................................ (392) (1,231)
------- -------
Benefit obligation, end of year ...................... $ 6,679 $ 6,175
======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year ......... $ 7,622 $ 7,431
Actual return on plan assets ......................... 1,643 1,422
Company contribution ................................. 26 0
Benefits paid ........................................ (392) (1,231)
------- -------
Fair value of plan assets, end of year ............... $ 8,899 $ 7,622
======= =======
Funded status of plan ................................ $ 2,220 $ 1,447
Unrecognized actuarial loss .......................... (3,277) (2,265)
Unrecognized prior service cost ...................... 446 504
Unrecognized net transition obligation ............... 0 0
------- -------
Net amount recognized ................................ $ (611) $ (314)
======= =======
Amounts recognized in the statement of financial
position consist of:
Accrued benefit cost .............................. $ (611) $ (314)
Accrued benefit liability ......................... 0 0
Intangible asset .................................. 0 0
Accumulated other comprehensive income ............ 0 0
------- -------
Net amount recognized ................................ $ (611) $ (314)
======= =======
33
<PAGE>
The discount rates utilized to project the benefit obligations for services
rendered to date were 6.75% and 7.00% for 1998 and 1997, respectively.
In March 1998 the Company adopted the 1998 FVNB Corp. Stock Incentive Plan
(the "1998 Plan") which provides for the granting of incentive stock options,
stock appreciation rights, restricted stock and other stock-based awards to
directors, officers and key employees responsible for the direction and
management of the Company or the Bank.
On September 15, 1998, a total of 52,000 stock options were granted to
certain directors and officers at an exercise price of $33.00, which equaled
market price of the underlying stock on September 15, 1998. An additional 1,000
options were granted on December 15, 1998 at an exercise price of $34.00, which
also equaled market price of the underlying stock on December 15, 1998. Options
have a six-month vesting period for directors and a ratable three-year vesting
period for officers. All options expire ten years from the date of grant.
A summary of the status of the stock options as of December 31, 1998:
Weighted Avg.
# of Shares Exercise Price
----------- --------------
Balance at beginning of year $ 0 $ 0
Granted ................. 53,000 33.00
Exercised ............... 0 0
Forfeited ............... 0 0
Balance at end of year ..... 53,000 $33.00
In accordance with Statement 123, the fair value of stock options is
estimated on the date of the grant using the Black-Scholes option pricing model
for proforma footnote purposes with the following assumptions; dividend yield of
4.21%, risk-free interest rate of 5.29%, and expected option life of 10 years.
Expected volatility was assumed to be 17.31% over the term of the options.
At December 31,1998, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $33.00 to $34.00, and
approximately 10 years, respectively. No options were exercisable at December
31, 1998.
As allowed by Statement 123, the Company applies APB No. 25 and related
interpretations in accounting for its stock compensation plans. Accordingly, no
compensation expense has been recognized for its stock options granted. Had the
fair value method of accounting under Statement 123 been applied to the
Company's stock option plans, the tax-effective impact would be as follows:
1998
-------
Net income as reported .............. $ 6,072
Estimated fair value of the
year's options granted, net of tax (182)
-------
Net income adjusted .............. $ 5,890
=======
Adjusted basic earnings per share . $ 2.48
=======
Adjusted diluted earnings per share . $ 2.48
=======
(10) DEPOSITS: Time certificates of deposit of $100,000 or more amounted to
approximately $74,446,000 and $65,584,000 at December 31, 1998 and 1997,
respectively. Interest expense for these deposits was approximately $4,199,000,
$3,421,000 and $3,332,000 for 1998, 1997 and 1996, respectively.
34
<PAGE>
(11) SHAREHOLDERS' EQUITY: On January 19, 1999, the Company's Board of Directors
declared a regular cash dividend of $.35 per share payable on February 11, 1999
to shareholders of record, as of January 28, 1999. The principal source of the
Company's cash revenues is dividends from the Bank, and there are certain
limitations on the payment of dividends to the Company by the Bank. The prior
approval of the Office of the Comptroller of the Currency ("OCC") is required if
the total of all dividends declared by a national bank in any calendar year
would exceed the bank's net profits, as defined, for that year combined with its
retained net profits for the preceding two calendar years less any required
transfers to surplus. In order to fund the acquisition of Citizens Bank of
Texas, the Bank paid a dividend to the Company for which it was required to
receive the prior approval of the OCC. The OCC approved the special dividend and
it approved future quarterly dividends to fund the standard cash dividend of the
Company, provided that the Bank's net income during future quarters is
sufficient to support such quarterly dividends. The weighted average number of
shares outstanding during 1998, 1997, and 1996 was 2,372,792.
As of December 31, 1998, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based capital, Tier I
risk-based capital and Tier I leverage ratios as set forth in the table below
(dollars in thousands). There are no conditions or events since that
notification that management believes have changed the Bank's category.
Presented below are the capital ratios for the Company as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION-PROVISION
---------------- ---------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital .......... $60,957 18.55% $26,288 > or = 8.00% $32,860 > or = 10.00%
(to Risk Weighted Assets)
Tier I Capital ......... 57,649 17.54% 13,144 > or = 4.00% 19,716 > or = 6.00%
(to Risk Weighted Assets)
Tier I Capital ......... 57,649 11.01% 20,935 > or = 4.00% 26,169 > or = 5.00%
(to Average Assets)
As of December 31, 1997:
Total Capital .......... $57,395 19.65% $23,361 > or = 8.00% $29,202 > or = 10.00%
(to Risk Weighted Assets)
Tier I Capital ......... 54,534 18.67% 11,681 > or = 4.00% 17,521 > or = 6.00%
(to Risk Weighted Assets)
Tier I Capital ......... 54,534 11.99% 18,189 > or = 4.00% 22,736 > or = 5.00%
(to Average Assets)
</TABLE>
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share" and No. 129 "Disclosure of Information About
Capital Structure". These statements established standards for calculating
earnings per share and the reporting requirements for earnings per share and the
Company's capital structure. The Company adopted these standards effective for
the year ended December 31, 1997 for all periods shown in the consolidated
financial statements. The adoption of the standards had no material impact on
the Company's calculation or presentation of earnings per share or disclosure.
The Company and the Bank are subject to various capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and
35
<PAGE>
possibly additional discretionary -- actions by regulators which, if undertaken,
could have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Company has satisfied all capital adequacy requirements to which it is subject.
(12) RELATED PARTY TRANSACTIONS: In the ordinary course of business, the Bank
makes loans to certain directors and executive officers of the Company and the
Bank and entities related to those individuals, on substantially the same terms
and conditions as loans to unrelated parties (see Note 5). An analysis of loans
to directors and executive officers of the Company and the Bank and entities
related to those individuals, is provided for the years ended December 31, in
the following table (in thousands):
1998 1997 1996
------- ------- -------
Balance at the beginning of year ........ $ 3,882 $ 1,631 $ 2,681
Additions ............................ 3,633 8,030 1,350
Reductions ........................... (3,695) (5,779) (2,400)
Balance at the end of year .............. $ 3,820 $ 3,882 $ 1,631
Approximately 24.11% of the Company's outstanding stock was owned by
principal shareholders, directors, and executive officers of the Company and the
Bank at December 31, 1998. In addition, approximately 10.59% of the stock was
held by Oster and Company at December 31, 1998. Oster and Company is the nominee
for stock held in trust by the Trust Department of the Bank.
The aggregate deposits owned by principal shareholders, directors, and
executive officers of the Company and the Bank at December 31, 1998 and 1997
amounted to approximately 2.66% and 2.66%, respectively, of total deposits.
(13) OTHER BORROWINGS: The following table represents the contractual principal
reductions due on other borrowings of the Company as of December 31, in
thousands. The weighted average contractual rate on the balances of other
borrowings outstanding was 6.30% and 6.53% as of December 31, 1998 and 1997,
respectively. The balances are comprised entirely of Federal Home Loan Bank
advances.
1998 1997
------- -------
Within one year ... $ 4,124 $ 411
One to two years .. 456 4,042
Two to three years 4,071 357
Three to four years 320 3,982
Four to five years 2,682 210
After 5 years ..... 7,466 3,626
------- -------
Total .......... $19,119 $12,628
======= =======
36
<PAGE>
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
The fair values of investment securities are based on quoted market prices
or dealer quotes, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
The fair values of loans and leases are determined by dividing the loan
portfolio into various groups having similar characteristics. The expected
future cash flows of each group are then discounted using current period end
market rates for similar loans. The assigned discount rate may or may not be the
contractual rate in effect with the obligor. The rate is that at which a loan
with similar credit risk and terms would be entered into at the balance sheet
date and is determined using the Company's internal credit quality ranking and
pricing system.
The fair values of time deposits are determined by dividing the deposits
into groups having similar characteristics. The expected future cash flows of
each group are then discounted using current period end market rates for similar
deposits.
The fair values of other borrowings are determined by dividing the
borrowings into groups having similar characteristics. The future cash flows of
each grouping are then discounted using current period end market rates for
similar borrowings.
The fair values of cash and due from banks, federal funds sold, federal
funds purchased and securities sold under agreements to repurchase, and accrued
interest payable and receivable are assumed to approximate book value due to
their short term nature. The fair values of demand deposits, savings deposits,
and money market and NOW accounts are also assumed to approximate book value and
reflect the amounts payable on demand as of the period end date.
The fair values of letters of credit and loan commitments are estimated
using fees charged to enter into similar agreements. The estimated fair values
of these instruments are not deemed to be significant.
The following table represents the estimated fair values of the Company's
financial instruments as of December 31, in thousands:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks ............... $ 27,504 $ 27,504 $ 29,548 $ 29,548
Federal funds sold .................... 6,800 6,800 20,200 20,200
Investment securities:
Available-for-sale ................. 211,918 211,918 170,360 170,360
Loans and leases, net ................. 289,554 288,201 263,141 260,139
Accrued interest receivable ........... 4,931 4,931 4,201 4,201
Financial Liabilities:
Time deposits ......................... 219,027 220,762 199,887 200,139
Other deposits ........................ 235,713 235,713 216,142 216,142
-------- -------- -------- --------
Total deposits ..................... 454,740 456,475 416,029 416,281
Federal funds purchased and securities
sold under agreements to repurchase 12,225 12,225 10,300 10,300
Other borrowings ......................... 19,119 19,694 12,628 12,587
Accrued interest payable ................. 2,130 2,130 1,725 1,725
</TABLE>
37
<PAGE>
(15) LITIGATION: In the normal course of business, the Company has become
involved in routine claims and lawsuits, but management does not believe that
the outcome of any of these matters will have a material adverse effect on the
Company's financial condition or results of operations.
(16) TRUST ASSETS: Trust assets and other properties, except cash deposits, held
by the Bank in agency or other fiduciary capacities for its customers are not
assets of the Company and, accordingly, are not included in the accompanying
consolidated financial statements. The book value of trust assets (unaudited)
was approximately $191,382,000 and $164,907,000 at December 31, 1998 and 1997,
respectively.
(17) PARENT COMPANY ONLY FINANCIALS: In September 1998, FVNB Corp. was formed as
a bank holding company for First Victoria National Bank. Presented below are
separate condensed financial statements for the holding company for the year
ended December 31, 1998, in thousands.
Year Ended December 31,
1998
----
(IN THOUSANDS)
BALANCE SHEET
ASSETS:
Cash held in Bank .............................................. $17,405
Investment in and note receivable from subsidiary .............. 40,743
Interest receivable ............................................ 1,223
Other assets ................................................... 155
-------
TOTAL ASSETS ................................................ $59,526
=======
LIABILITIES
Other Accounts Payable ......................................... 4
Federal Income Tax Payable ..................................... 0
-------
Total Liabilities ........................................... 4
-------
SHAREHOLDERS' EQUITY:
Common Stock ................................................... 24
Capital Surplus ................................................ 15,682
Retained Earnings .............................................. 43,764
Unrealized Gain (loss) on Securities ........................... 52
-------
TOTAL SHAREHOLDERS' EQUITY .................................. 59,522
-------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY .................... $59,526
=======
38
<PAGE>
Year Ended December 31,
1998
----
(IN THOUSANDS)
INCOME STATEMENT
INCOME:
Dividends from subsidiaries ...................................... $ 20,933
Interest Income .................................................. 1,409
--------
TOTAL INCOME .................................................. 22,342
--------
EXPENSES:
Professional fees ................................................ 46
--------
Other expense .................................................... 8
--------
TOTAL EXPENSE ................................................. 54
Earnings before undistributed equity in
losses of subsidiaries and income tax expense .............. 22,288
Income tax expense ................................................. 0
--------
EARNINGS BEFORE UNDISTRIBUTED EQUITY IN LOSSES OF SUBSIDIARIES 22,288
Undistributed equity in subsidiaries ............................... (16,216)
NET INCOME .................................................... $ 6,072
========
STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 6,072
Adjustments to reconcile net income
to net cash provided by operating activities -
Undistributed equity in subsidiaries .......................... 16,216
Net change in other liabilities ............................... 4
Net change in other assets .................................... (1,378)
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 20,914
--------
Cash flows from investing activities:
Payments for investments in and advances to subsidiaries ........... (425)
--------
NET CASH USED IN INVESTING ACTIVITIES ..................... (425)
--------
Cash flows from financing activities:
Proceeds from short term borrowings ................................ 240
Repayments of short term borrowings ................................ (240)
Dividends paid ..................................................... (3,084)
--------
NET CASH USED IN FINANCING ACTIVITIES ..................... (3,084)
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................. 17,405
Cash and cash equivalents, beginning of year ....................... 0
--------
CASH AND CASH EQUIVALENTS, END OF YEAR .................... $ 17,405
========
39
<PAGE>
(18) SUBSEQUENT EVENTS (UNAUDITED): On January 29, 1999, the Company completed
the acquisition and merger into FVNB Corp. of CBOT Financial Corporation, the
parent company of Citizens Bank of Texas, N.A. and CBOT Mortgage Company.
Citizens Bank of Texas will continue to operate as an independent subsidiary of
the Company with its Board of Directors, officers and staff being retained.
Existing banking facilities located in New Waverly, Huntsville and The Woodlands
will keep the name Citizens Bank of Texas, N.A. As of December 31, 1998,
Citizens Bank of Texas had approximately $80 million in total assets.
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of FVNB Corp.:
We have audited the consolidated balance sheets of FVNB Corp. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income and comprehensive income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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 financial position of FVNB Corp. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 22, 1999
41
<PAGE>
FINANCIAL STATISTICS
The following unaudited schedules and statistics are presented for
additional information and analysis.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total interest income * ....... $ 37,586 $ 33,089 $ 31,688 $ 31,204 $ 28,808
Total interest expense ........ 17,724 15,482 15,742 14,804 12,308
----------- ----------- ----------- ----------- -----------
Net interest income ........ 19,862 17,607 15,946 16,400 16,500
Provision (credit) for loan and
lease losses ............. 0 (300) 0 (300) (350)
----------- ----------- ----------- ----------- -----------
Net interest income after
provision (credit) ..... 19,862 17,907 15,946 16,700 16,850
Non-interest income ........... 5,498 4,925 4,454 4,156 3,817
Securities gains (losses) ..... 41 (58) (9) 0 (18)
Non-interest expense .......... 16,146 15,180 14,279 13,882 13,778
----------- ----------- ----------- ----------- -----------
Income before income taxes . 9,255 7,594 6,112 6,974 6,871
Taxable-equivalent
adjustment * ............. 51 116 194 154 270
Income tax expense ............ 3,132 2,487 1,961 2,200 2,003
----------- ----------- ----------- ----------- -----------
Net income ................. $ 6,072 $ 4,991 $ 3,957 $ 4,620 $ 4,598
=========== =========== =========== =========== ===========
Per share data:
Dividends payout ratio ..... 50.81% 38.99% 38.39% 37.51% 32.25%
Basic and diluted
earnings per share ..... $ 2.56 $ 2.10 $ 1.67 $ 1.95 $ 1.94
Dividends per share $1.30 .. $ .820 $ .640 $ .730 $ .625
Total assets .................. $ 553,164 $ 500,273 $ 462,265 $ 430,795 $ 415,498
Weighted average number of
shares outstanding ** .... 2,372,792 2,372,792 2,372,792 2,372,792 2,372,792
Return on average assets ...... 1.16% 1.10% .89% 1.10% 1.08%
Return on average equity ...... 9.83% 9.16% 7.67% 9.57% 10.19%
</TABLE>
* TAX EXEMPT INCOME IS RECORDED ON A FULLY TAXABLE-EQUIVALENT BASIS.
** ACTUAL AMOUNTS, NOT IN THOUSANDS.
42
<PAGE>
LOAN AND LEASE MATURITY AND SENSITIVITY
The following table presents the principal maturities and rate sensitivity
of the loan and lease portfolio as of December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- --------------------------------------------
One to After One to After
One Five Five One Five Five
Year Years Years Total Year Years Years Total
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
financial ..................... $ 33,195 $ 21,595 $ 8,465 $ 63,255 $ 34,646 $ 16,240 $ 6,762 $ 57,648
Real estate ........................ 35,472 45,616 29,058 110,146 35,203 41,877 17,733 94,813
Agriculture ........................ 68,851 6,055 887 75,793 69,205 4,414 1,052 74,671
Consumer ........................... 12,838 29,794 1,144 43,776 12,254 26,402 340 38,996
Total ......................... $150,356 $103,060 $ 39,554 $292,970 $151,308 $ 88,933 $ 25,887 $266,128
======== ======== ======== ======== ======== ======== ======== ========
Fixed interest rates ............... $ 22,688 $ 37,343 $ 18,586 $ 78,617 $ 24,916 $ 33,418 $ 17,687 $ 76,021
======== ======== ======== ======== ======== ======== ======== ========
Variable interest rates ............ $127,668 $ 65,717 $ 20,968 $214,353 $126,392 $ 55,515 $ 8,200 $190,107
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
INVESTMENT SECURITIES PORTFOLIO ANALYSIS
Set forth below is a breakdown of the total investment portfolio by
maturity (or anticipated call date) and yield at December 31, 1998 (dollars in
thousands). The restatement of municipal bond yields on a taxable-equivalent
basis has been computed using a 34% federal income tax rate. All balances are
reflected at amortized cost.
<TABLE>
<CAPTION>
Within Over One to Over Five to Over
One Year Five Years Ten Years Ten Years
---------------- ---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Total
-------- ----- -------- ----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasuries .......... $ 2,999 6.03% $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 2,999
U.S. Government
Agencies ............. 67,270 6.32 67,225 5.57 8,285 5.29 0 0.00 142,780
Mortgage-backed
securities and
collateralized
mortgage obligations 0 0.00 4,749 5.88 0 0.00 58,159 5.81 62,908
State and political
subdivisions ........ 245 6.85 935 7.34 0 0.00 0 0.00 1,180
Other .................... 0 0.00 0 0.00 0 0.00 1,972 6.01 1,972
-------- ---- -------- ---- -------- ---- -------- ---- --------
Total ....................... $ 70,514 6.31% $ 72,909 5.61% $ 8,285 5.29% $ 60,131 5.82% $211,839
======== ==== ======== ==== ======== ==== ======== ==== ========
</TABLE>
43
<PAGE>
AVERAGE BALANCE SHEETS AND INTEREST RATES (1)
<TABLE>
<CAPTION>
1998
------------------------------
(4) Interest
Average Income/ Yield/
ASSETS Balance Expense Cost
------------------------------
<S> <C> <C> <C>
Earning assets:
Due from banks ................................ $ 36 $ 2 5.48%
Federal funds sold ............................ 26,726 1,419 5.24
Investment securities, available-for-sale:
Taxable .................................... 181,303 11,054 6.10
Tax-exempt (2) ............................. 2,036 150 7.37
Loans and lease receivable (3) ................ 277,795 24,961 8.99
--------- --------- ----
Total earning assets .................... 487,896 37,586 7.70%
--------- --------- ----
Less allowance for loan and lease losses ......... (3,062) -- --
Non-earning assets ............................... 40,737 -- --
---------
TOTAL ASSETS .................................. $ 525,571 -- --
=========
LIABILITIES
Interest bearing liabilities:
Deposits:
Savings, NOW, and money market
accounts .............................. $ 150,982 $ 4,434 2.94%
Time deposits .............................. 218,945 11,742 5.36
Total interest bearing deposits ......... 369,927 16,176 4.37
Federal funds purchased and securities sold
under agreement to repurchase ........... 8,033 416 5.11
Other borrowings .............................. 17,915 1,132 6.23
Total interest bearing liabilities....... 395,875 17,724 4.48
Non-interest bearing liabilities:
Demand deposits ............................... 60,848 -- --
Other liabilities ............................. 6,923 -- --
Total non-interest bearing liabilities .. 67,771 -- --
Shareholders' Equity ............................. 61,925 -- --
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ..................... $ 525,571 -- --
=========
Net Interest Income .............................. -- $ 19,862 --
=========
Interest Differential ............................ -- -- 3.22%
====
Net Interest Margin .............................. -- -- 4.07%
====
</TABLE>
(1) DOLLARS IN THOUSANDS; INCOME AND RATES ON TAXABLE-EQUIVALENT BASIS;
AVERAGES COMPUTED ON A DAILY YEAR-TO-DATE BASIS.
(2) INCLUDES TAXABLE-EQUIVALENT ADJUSTMENTS BASED ON 34%.
(3) INCLUDES LOANS PLACED ON NON-ACCRUAL.
(4) ALL AMOUNTS SHOWN AT AMORTIZED COST.
44
<PAGE>
----------------------------------- ------------------------------
(4) Interest (4) Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
----------------------------------- ------------------------------
$ 15 $ 1 6.76% $ 14 $ 1 7.03%
16,118 875 5.35 15,989 847 5.21
169,353 10,670 6.30 206,461 13,147 6.37
4,413 343 7.77 7,058 570 8.08
232,866 21,201 9.10 185,005 17,123 9.26
---------- --------- ---- --------- --------- ----
422,765 33,090 7.83 414,527 31,688 7.64
---------- --------- ---- --------- --------- ----
(2,749) (2,389)
34,816 33,981
---------- ---------
$ 454,832 $ 446,119
========== =========
$ 132,565 $ 4,237 3.20% $ 135,804 $ 4,502 3.32%
187,399 9,984 5.33 178,583 9,656 5.41
---------- --------- ---- --------- --------- ----
319,964 14,221 4.44 314,387 14,158 4.50
7,974 424 5.24 13,990 721 5.07
12,823 837 6.44 13,234 863 6.41
---------- --------- ---- --------- --------- ----
340,761 15,482 4.54 341,611 15,742 4.61
---------- --------- ---- --------- --------- ----
54,642 48,283
4,296 3,989
---------- ---------
58,938 52,272
55,133 52,236
---------- ---------
$ 454,832 $ 446,119
========== =========
$ 17,608 $ 15,946
========= =========
3.29% 3.03%
==== ====
4.17% 3.85%
==== ====
45
<PAGE>
RATE/VOLUME ANALYSIS
The following table analyzes the change in net interest income for each of
the last two years. Non-accruing loans have been included in assets for these
computations, thereby reducing yields on these investments. The allocation of
the rate/volume variance has been made, consistently for both periods presented,
pro-rata on the percentage that volume and rate variances produce (dollars in
thousands).
<TABLE>
<CAPTION>
Increase (Decrease) due to
-----------------------------
Increase Rate/
(Decrease) Volume Rate Volume
---------- ------- ------- -------
<S> <C> <C> <C> <C>
1998 compared to 1997:
Interest income:
Due from banks ....................................... $ 1 $ 1 $ 0 $ 0
Federal funds sold ................................... 544 575 (19) (12)
Investment securities-taxable ........................ 384 763 (349) (30)
Investment securities-tax-exempt * ................... (193) (187) (18) 12
Loans and leases ..................................... 3,760 4,244 (346) (138)
------- ------- ------- -------
Total ................................................... 4,496 5,396 (732) (168)
------- ------- ------- -------
Interest expense:
Deposits ............................................. 1,955 2,149 (179) (15)
Federal funds purchased and securities sold
under agreements to repurchase .................. (8) 3 (11) 0
Other borrowings ..................................... 295 332 (27) (10)
------- ------- ------- -------
Total ................................................... 2,242 2,484 (217) (25)
------- ------- ------- -------
Net interest income before allocation of rate/volume ....... 2,254 2,912 (515) (143)
Allocation of rate/volume .................................. 0 (174) 31 143
------- ------- ------- -------
Change in net interest income ........................... $ 2,254 $ 2,738 $ (484) $ 0
======= ======= ======= =======
1997 compared to 1996:
Interest income:
Due from banks ....................................... $ 0 $ 0 $ 0 $ 0
Federal funds sold ................................... 28 7 23 (2)
Investment securities-taxable ........................ (2,477) (2,397) (146) 66
Investment securities-tax-exempt * ................... (228) (217) (22) 11
Loans and leases ..................................... 4,078 4,126 (362) 314
------- ------- ------- -------
Total ................................................... 1,401 1,519 (507) 389
------- ------- ------- -------
Interest expense:
Deposits ............................................. 63 285 (227) 5
Federal funds purchased and securities sold
under agreements to repurchase .................. (297) (309) 25 (13)
Other borrowings ..................................... (26) (27) 4 (3)
------- ------- ------- -------
Total ................................................... (260) (51) (198) (11)
------- ------- ------- -------
Net interest income before allocation of rate/volume ....... 1,661 1,570 (309) 400
Allocation of rate/volume .................................. 0 498 (98) (400)
Change in net interest income ........................... $ 1,661 $ 2,068 $ (407) $ 0
======= ======= ======= =======
</TABLE>
TAXABLE-EQUIVALENT ADJUSTMENT BASED ON A 34% FEDERAL INCOME TAX RATE
46
<PAGE>
REMAINING MATURITY OF CERTIFICATES OF DEPOSITS OF $100,000 OR MORE
December 31,
------------
Remaining Maturity 1998 1997
- ------------------ ---- ----
(IN THOUSANDS)
3 months or less $14,891 $13,113
3 through 6 months 17,719 7,970
6 through 12 months 13,912 13,759
Over 12 months 27,924 30,742
------- -------
Total $74,446 $65,584
======= =======
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's common stock is listed on the over-the-counter market,
symbol FVNB, and is quoted in the National Market System (NMS) of NASDAQ. The
number of shareholders of record of common stock at December 31, 1998 was 652.
The following table shows the range of high and low quotes per share of common
stock of the Company on the over-the-counter market, as reported by NASDAQ.
Over-the-counter market quotations reflect inter-dealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
1998 1997
---- ----
High Low High Low
---- --- ---- ---
First Quarter $42.250 $39.000 $27.250 $23.500
Second Quarter 43.250 40.000 27.000 25.500
Third Quarter 39.500 30.000 35.250 26.000
Fourth Quarter 34.000 30.000 39.750 32.250
Total dividends paid during 1998 and 1997 were $1.30 and $.82 per share,
respectively. See "Capital" section (page 16) in the Financial Section and
"Shareholders' Equity" (page 35) in Note 11 to the consolidated financial
statements for further discussion of the payment of dividends and restrictions.
47
<PAGE>
DIRECTORS OF FVNB CORP.
<TABLE>
<CAPTION>
<S> <C>
[GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED]
Michael S. Anderson Roger Welder O. D. Edwards, Jr. David P. Engel
Chairman of the Board Vice-Chairman of the Board RANCHING, FARMING, OIL & GAS PRESIDENT
ATTORNEY AT LAW RANCHING, OIL & GAS AIRGAS TEXAS, INC.
[GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED]
David M. Gaddis Robert L. Halepeska Walter T. Haenggi R. L. Keller +
PRESIDENT & EXECUTIVE VICE PRESIDENT RANCHING CERTIFIED PUBLIC ACCOUNTANT
CHIEF EXECUTIVE OFFICER M. G. & LILLIE JOHNSON
FOUNDATION
[GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED]
Thomas Lane Keller James Robert McCan J. E. McCord Thomas M. O'Connor
CERTIFIED PUBLIC ACCOUNTANT RANCHING RETIRED, RANCHING, FARMING
REAL ESTATE DEVELOPMENT
[GRAPHIC OMITTED]
Billy W. Ruddock + Retired from the Board, December 31, 1998.
RETIRED, FORMERLY
EXEC. ASST. TO THE PRESIDENT
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
OFFICERS OF FIRST VICTORIA NATIONAL BANK BRANCH LENDING AUDIT & REVIEW
Michael S. Anderson * Charles H. Heger Amy A. Crain
CHAIRMAN OF THE BOARD SR. VICE PRESIDENT VICE PRESIDENT & AUDITOR
J. Robert "Bob" Edwards
David M. Gaddis * LOAN OPERATIONS VICE PRESIDENT - LOAN REVIEW &
PRESIDENT & Molly A. Summerlin COMPLIANCE OFFICER
CHIEF EXECUTIVE OFFICER VICE PRESIDENT Kenneth E. Burnside
ASST. VICE PRESIDENT
John E. "Buddy" Billups * HUMAN RESOURCES
EXECUTIVE VICE PRESIDENT & H. Allen Jones + * FINANCIAL SERVICES
BUSINESS DEVELOPMENT MANAGER SR. VICE PRESIDENT M. Grace Pantel
Karen W. Jones SR. VICE PRESIDENT
C. Dee Harkey * VICE PRESIDENT Judith E. Hanzelka
EXECUTIVE VICE PRESIDENT & VICE PRESIDENT &
CHIEF OPERATING OFFICER OPERATIONS FIRST GENTLEMEN BANKING OFFICER
Sammie L. Price Bertha M. McDowell
M. Russell Marshall * VICE PRESIDENT & CASHIER VICE PRESIDENT
EXECUTIVE VICE PRESIDENT & Raquel Hernandez
SENIOR TRUST OFFICER TRUST ASST. VICE PRESIDENT
Richard T. "Terry" Cullen Merril A. "Chris" Stuck
Kenneth L. Vickers * SR. VICE PRESIDENT & TRUST OFFICER ASST. VICE PRESIDENT &
EXECUTIVE VICE PRESIDENT & Steve W. Meacham FIRST LADIES BANKING OFFICER
CHIEF LENDING OFFICER SR. VICE PRESIDENT & TRUST OFFICER Maria M. Moreno
Robert M. "Rob" Angerstein PERSONAL BANKING OFFICER
LENDING VICE PRESIDENT & TRUST OFFICER
COMMERCIAL Shelia D. Dierschke MARKETING
Craig G. Friemel VICE PRESIDENT & TRUST OFFICER Beverly K. Kahanek
SR. VICE PRESIDENT Jeffrey T. Drost VICE PRESIDENT & MARKETING OFFICER
Herschel G. Vansickle VICE PRESIDENT & TRUST OFFICER
SR. VICE PRESIDENT David S. Sather ADMINISTRATIVE
James K. Gips VICE PRESIDENT & TRUST OFFICER Gayle V. Baecker
VICE PRESIDENT Melanie Thompson ADMINISTRATIVE OFFICER
ASST. VICE PRESIDENT
GENERAL COLONY CREEK BRANCH
Fred L. Lynch FINANCE Thomas J. Curtis
SR. VICE PRESIDENT Dana K. Fowler VICE PRESIDENT & MANAGER
SR. VICE PRESIDENT & CONTROLLER
CONSUMER R. Sue Jurischk * NORTH BRANCH
Fabian Ramirez SR. VICE PRESIDENT Kelly R. Park
VICE PRESIDENT Cynthia A. Vivian VICE PRESIDENT & LOAN OFFICER
Cy T. Rogers ASST. VICE PRESIDENT Jennifer L. Yancey
VICE PRESIDENT Johnny R. Stafford BRANCH MANAGER
Chad E. McAfee ACCOUNTING OFFICER Lisa L. Kristynik
GENERAL LENDING OFFICER BANKING OFFICER
Barbara L. Allen BUSINESS DEVELOPMENT
CREDIT SERVICES OFFICER Jeannine G. Adams CALHOUN COUNTY OFFICE
Ronald G. Peterson VICE PRESIDENT Mary M. Clark
CREDIT SERVICES OFFICER VICE PRESIDENT & MANAGER
DATA SERVICES Carol B. Crist
AGRICULTURE Dale R. Hayden BANKING OFFICER
John E. Zacek * SR. VICE PRESIDENT Christi J. Pergrem
SR. VICE PRESIDENT James P. "Jim" Kaiser BANKING OFFICER
James P. "Jim" Johnson VICE PRESIDENT
VICE PRESIDENT Mary M. "Maudie" Wickliffe FIRST VICTORIA NATIONAL
Wayne A. Kucera ASST. VICE PRESIDENT BANK - TAFT
VICE PRESIDENT Tammy S. Webb W. Clay Davenport
David H. Schroeter ASST. VICE PRESIDENT SR. VICE PRESIDENT
VICE PRESIDENT Thomas A. Laza Carol Dohmann
DATA SERVICES OFFICER BRANCH MANAGER
REAL ESTATE Sylvia A. Medrano
Bernice K. Brown OPERATIONS OFFICER * EXECUTIVE OFFICER
VICE PRESIDENT + SECRETARY TO THE BOARD
Gail Kolle Hoad
VICE PRESIDENT
</TABLE>
49
<PAGE>
TRANSFER AGENT AND REGISTRANT
ChaseMellon Shareholder Services, L.L.C.
(1-800-635-9270)
85 Challenger Road
Overpeck Centre
Richfield Park, NJ 07660-2104
NASDAQ Symbol: FVNB
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
711 Louisiana, Suite 1300
Houston, Texas 77002
NOTICE OF ANNUAL MEETING
The Annual Meeting of Shareholders is scheduled for 2:00 P.M., Thursday, May 13,
1999 in Town Hall of First Victoria National Bank, 101 S. Main Street, Victoria,
Texas.
FORM 10-K
A copy of FVNB Corp.'s Form 10-K, as filed with the Securities and Exchange
Commission including the financial statements and schedules thereto (but not
including exhibits thereto), is available to shareholders at no charge. Please
direct requests to: C. Dee Harkey, Secretary, FVNB Corp., 101 S. Main Street,
P.O. Box 1338, Victoria, Texas 77902.
INVESTOR INQUIRIES
FVNB Corp. news releases, including earnings announcements, are available by fax
by calling 1-800-758-5804. The six digit code is 124759. This electronic,
menu-driven system allows callers to receive specific FVNB Corp. releases via
fax within minutes of request.
News releases from FVNB Corp. are also available on the World Wide Web at
http://www.prnewswire.com.
50
EXHIBIT 21
FVNB CORP. & SUBSIDIARIES
Organizational Structure as of March 29, 1999
1. FVNB Corp
A. FVNB Delaware Corporation, and its subsidiaries
1) First Victoria National Bank, and its subsidiaries
a) First Victoria Leasing
b) First Victoria Community Development Corporation
c) PMV, Inc.
2) Citizens Bank of Texas, and its subsidiary
a) Citizens Insurance Agency of Texas
3) CBOT Mortgage (dba Citizens Mortgage)
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
of FVNB Corp.:
We consent to the incorporation by reference in Registration Statement No.
333-75029 on FormS-8 of FVNB Corp. filed on March 25, 1999, of our report dated
January 22, 1999, relating to the consolidated balance sheets of FVNB Corp. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income and comprehensive income, shareholders equity and cash
flows for each of the years in the three-year period ended December 31, 1998,
which report is included in this December 31, 1998 annual report on Form 10-K of
FVNB Corp.
/s/ Arthur Andersen LLP
Houston, Texas
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM 12-31-98 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,504
<INT-BEARING-DEPOSITS> 377,438
<FED-FUNDS-SOLD> 6,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 211,918
<INVESTMENTS-CARRYING> 211,918
<INVESTMENTS-MARKET> 211,918
<LOANS> 289,554
<ALLOWANCE> 3,308
<TOTAL-ASSETS> 553,124
<DEPOSITS> 454,740
<SHORT-TERM> 12,225
<LIABILITIES-OTHER> 7,558
<LONG-TERM> 19,119
0
0
<COMMON> 24
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 553,164
<INTEREST-LOAN> 24,961
<INTEREST-INVEST> 12,572
<INTEREST-OTHER> 2
<INTEREST-TOTAL> 37,535
<INTEREST-DEPOSIT> 16,176
<INTEREST-EXPENSE> 17,724
<INTEREST-INCOME-NET> 19,811
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (16)
<EXPENSE-OTHER> 16,146
<INCOME-PRETAX> 9,204
<INCOME-PRE-EXTRAORDINARY> 6,072
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,072
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 2.56
<YIELD-ACTUAL> 7.70
<LOANS-NON> 1,985
<LOANS-PAST> 149
<LOANS-TROUBLED> 1,474
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,861
<CHARGE-OFFS> 524
<RECOVERIES> 971
<ALLOWANCE-CLOSE> 3,308
<ALLOWANCE-DOMESTIC> 3,308
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,942
</TABLE>
