--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER __________
----------------
FVNB CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
74-2871063
(I.R.S. EMPLOYER IDENTIFICATION NO.)
101 S. MAIN STREET, SUITE 508
VICTORIA, TEXAS 77901
(Address of principal executive offices, including Zip Code)
(361) 573-6321
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the bank (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the bank was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by a check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. FVNB Corp. has 2,372,892 shares
of common stock, $.01 par value, outstanding as of August 10, 2000.
--------------------------------------------------------------------------------
<PAGE>
PART 1. FINANCIAL INFORMATION
FVNB CORP. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
ASSETS
<S> <C> <C>
Cash and due from banks--Note 3 ........................................................ $ 25,732 $ 26,993
Federal funds sold ..................................................................... 2,610 38,170
Investment securities--Note 4
Available-for-sale ................................................................ 153,665 158,776
Loans and leases receivable (net of allowance for loan and lease losses
of $4,604 and $4,573 in 2000 and 1999, respectively) -- Note 5 .................... 437,242 382,834
Premises and equipment, net--Note 6 .................................................... 30,729 30,693
Accrued interest receivable ............................................................ 6,876 4,758
Goodwill and intangibles--Note 17 ...................................................... 14,543 10,719
Other assets--Note 5 ................................................................... 1,638 2,241
--------------- ---------------
TOTAL ASSETS ...................................................................... $ 673,035 $ 655,184
=============== ===============
LIABILITIES
Deposits:
Demand ................................................................................. $ 98,494 $ 90,857
Savings, IOC, and money market accounts ................................................ 166,480 182,629
Time--Note 7 ........................................................................... 297,623 281,334
--------------- ---------------
TOTAL DEPOSITS .................................................................... 562,597 554,820
--------------- ---------------
Federal funds purchased and securities sold
under agreements to repurchase .................................................... 11,900 3,750
Other borrowings--Note 14 .............................................................. 28,040 27,827
Other liabilities--Note 8 .............................................................. 8,393 8,478
--------------- ---------------
TOTAL LIABILITIES ................................................................. 610,930 594,875
--------------- ---------------
Commitments and Contingent Liabilities--Notes 9 and 10
SHAREHOLDERS' EQUITY--NOTE 15
Common stock ($.01 par value; 20,000,000 shares authorized;
2,372,892 shares issued and outstanding) .......................................... 24 24
Surplus ................................................................................ 15,686 15,682
Retained earnings ...................................................................... 50,462 47,946
Accumulated other comprehensive income -- net unrealized losses on investment
securities, net of tax ............................................................... (4,067) (3,343)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY ........................................................ 62,105 60,309
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................. $ 673,035 $ 655,184
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
FVNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and lease receivable, including fees ......................... $ 10,126 $ 8,975 $ 19,065 $ 16,154
Investment securities:
Taxable ....................................................... 2,287 2,559 4,597 5,380
Tax-exempt .................................................... 11 17 25 37
Dividends ..................................................... 76 30 113 58
Federal Funds sold ................................................. 281 387 652 700
Other .............................................................. 10 0 10 1
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME ......................................... 12,791 11,968 24,462 22,330
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits--Note 7 ................................................... 5,115 4,076 9,872 8,215
Federal funds purchased and securities sold
under agreements to repurchase ................................ 127 455 186 732
Other borrowings ................................................... 471 249 936 532
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE ........................................ 5,713 4,780 10,994 9,479
---------- ---------- ---------- ----------
NET INTEREST INCOME ........................................... 7,078 7,188 13,468 12,851
Provision (credit) for loan and lease losses--Note 5 ............... 60 (150) 110 (145)
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES ...................... 7,018 7,338 13,358 12,996
---------- ---------- ---------- ----------
NON-INTEREST INCOME:
Net realized gains on sales of investment securities ............... 0 4 0 13
Trust service fees ................................................. 492 341 947 877
Service charges and fees on deposit accounts ....................... 1,161 1,010 2,218 1,962
Gain (loss) on sale of assets--Note 5 .............................. 18 (2) 18 0
Other .............................................................. 978 359 1,899 642
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME ..................................... 2,649 1,712 5,082 3,494
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE:
Salaries and wages--Note 11 ........................................ 2,865 2,476 5,411 4,830
Employee benefits--Note 11 ......................................... 395 427 775 892
Net occupancy expense .............................................. 376 347 716 653
Furniture and equipment ............................................ 528 267 1,017 501
Communication and supplies ......................................... 398 326 774 654
Data processing .................................................... 322 299 632 593
Marketing and advertising .......................................... 176 189 363 349
Professional fees .................................................. 238 220 446 508
FDIC insurance assessment .......................................... 31 8 58 29
Amortization of goodwill and intangibles ........................... 240 62 433 322
Other .............................................................. 755 773 1,253 1,151
---------- ---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE .................................... 6,324 5,394 11,878 10,482
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES .................................... 3,343 3,656 6,562 6,008
Income Tax Expense--Note 8 ............................................... 1,228 1,351 2,386 2,193
---------- ---------- ---------- ----------
NET INCOME..................................................... $ 2,115 $ 2,305 $ 4,176 $ 3,815
========== ========== ========== ==========
Basic earnings per share--Note 15 ........................................ $ .89 $ .97 $ 1.76 $ 1.61
========== ========== ========== ==========
Diluted earnings per share--Note 15 ...................................... $ .89 $ .97 $ 1.76 $ 1.61
========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
FVNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income .......................................................................... $ 2,115 $ 2,305 $ 4,176 $ 3,815
Other comprehensive income, net of tax
Unrealized holding (losses) gains arising during the period ................... 228 (1,510) (724) (2,667)
Realized gains reflected in net income ........................................ 0 (3) 0 (9)
-------- -------- -------- --------
COMPREHENSIVE INCOME ..................................................... $ 2,343 $ 792 $ 3,452 $ 1,139
======== ======== ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ......................................................................................... $ 4,176 $ 3,815
Adjustments to reconcile net income to net cash
provided by operating activities--
Net gain on sale of investment securities ............................................... 0 (13)
Provision (credit) for loan and lease and other real estate losses ...................... 110 (145)
Depreciation ............................................................................ 1,177 667
Amortization of goodwill and intangibles ................................................ 433 322
Premium amortization and discount accretion, net ........................................ 47 105
Pension expense ......................................................................... 124 182
Net gain on sale of assets .............................................................. (18) 0
Increase in accrued interest receivable ................................................. (1,924) (407)
Net change in other assets and other liabilities ........................................ 227 (781)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................................... 4,352 3,745
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by acquisition of subsidiaries ................................................... 5,548 7,098
Proceeds from sales of investment securities, available-for-sale ................................... 0 19,583
Proceeds from maturities of investment securities, available-for-sale .............................. 4,502 23,691
Purchase of investment securities, available-for-sale .............................................. (100) (165)
Net increase in loans to customers ................................................................. (31,416) (17,227)
Additions to premises and equipment ................................................................ (929) (19,536)
Proceeds from sale of assets ....................................................................... 1,211 227
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ................................ (21,184) 13,671
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand, IOC,
savings and money market accounts ............................................................ (19,544) (20,193)
Net decrease in time deposits ...................................................................... (6,210) (17,390)
Net increase in federal funds purchased and
securities sold under agreements to repurchase ............................................... 8,150 4,525
Net increase (decrease) in other borrowed funds .................................................... (729) 9,895
Net increase in capital stock ...................................................................... 4 0
Dividends paid ..................................................................................... (1,660) (1,660)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES ................................................... (19,989) (24,823)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................................... (36,821) (7,407)
Cash and cash equivalents beginning of period ...................................................... 65,163 34,304
------------ ------------
CASH AND CASH EQUIVALENTS END OF PERIOD ................................................. $ 28,342 $ 26,897
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
(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:
BASIS OF PRESENTATION -- The consolidated financial statements have not
been audited by independent accountants, but in the opinion of management,
reflect all adjustments necessary for a fair presentation of the financial
position and results of operations. The balance sheet at December 31,1999 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Certain
reclassifications have been made to make prior periods comparable.
PRINCIPLES OF CONSOLIDATION -- In September 1998, FVNB Corp. was organized
as a bank holding company for First Victoria National Bank. As a result of the
reorganization, shareholders of First Victoria National 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 period shown in the consolidated financial statements. No revaluation
of the assets and liabilities was made as a result of this reorganization.
Subsequently, in May 2000, the Company made the election to become a financial
holding company. The election was effective as of May 31, 2000 and had no impact
on the Company's financial condition or results of operations. In January 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
Citizens Mortgage Company. Citizens Bank of Texas continues to operate as an
independent subsidiary of the Parent Company. Existing banking facilities
located in New Waverly, Huntsville and The Woodlands, Texas retained the name
Citizens Bank of Texas, N.A. The acquisition, which was accounted for using the
purchase method of accounting, is discussed further in Note 17 to the
consolidated financial statements.
The consolidated financial statements of the Company include the accounts
of First Victoria National Bank and Citizens Bank of Texas, N.A. (collectively
the Subsidiary Banks) and their respective wholly owned subsidiaries as well as
Citizens Mortgage Company. The wholly owned subsidiaries of First Victoria
National Bank include 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 Bank. As of June 30, 2000, both PMV, Inc. and First Victoria Community
Development Corporation were inactive. Citizens Bank of Texas, N.A. has one
wholly owned operating subsidiary, Citizens Insurance Agency of Texas, Inc.
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,
5
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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), and included in other comprehensive income until
realized. The Company used the specific identification method in computing all
realized gains and losses.
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. Subsequently, in June 1999, FASB Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No.
133" was issued. This Statement defers the effective date of FASB Statement No.
133 for one year making it effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Management of the Company has not yet assessed
the impact of the Statement on its consolidated financial statements or results
of operations.
LOANS AND LEASES RECEIVABLE -- 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 present value of expected future cash
flows for each loan discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent.
6
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
The Company accounts for leases in accordance with SFAS No. 13 "Accounting
for Leases". This standard addresses the accounting and reporting for leases by
lessees and lessors. In the case of a leveraged lease, the lessor records the
investment in the lease as the gross rental receivable (net of principal and
interest on non-recourse debt) and the estimated residual value 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. In the case of an
operating lease, the lessor records the leased property at cost in premises and
equipment on the consolidated balance sheet. The property is depreciated using
the lessor's normal depreciation policy over the useful life of the asset.
Rental income is recorded over the lease term, as it becomes receivable
according to the provision of the lease agreement.
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 furniture and
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. The Company files an annual federal
income tax return on a consolidated basis with its subsidiaries.
GOODWILL AND INTANGIBLES -- Goodwill and intangibles resulting from
acquisitions is amortized on a straight-line basis over the estimated period of
benefit, not to exceed fifteen years. The Company evaluates whether events and
circumstances have developed that warrant revision of the estimated benefit
periods.
RECOGNITION OF LOAN ORIGINATION FEES AND COSTS -- Loan origination and
commitment fees and certain direct loan origination costs are analyzed on a
quarterly basis in accordance with SFAS No. 91 "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases." This standard requires the deferral of such material
commitment fees and direct costs at origination with the net amount amortized as
an adjustment of the related loan's yield over the contractual life of the
related loan.
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.
COMPREHENSIVE INCOME -- Effective January 1, 1998 the Company adopted SFAS
No. 130, "Reporting Comprehensive Income" ("Statement 130"). Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components. The adoption of this Statement requires unrealized gains or
losses on the Company's investment portfolio be included in other comprehensive
income.
EARNINGS PER SHARE DATA -- Basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
during the year. For each period presented, fully 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.
7
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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
SFAS No. 123, "Accounting for Stock-Based Compensation" (Statement 123).
SEGMENTS DISCLOSURE -- Statement of Financial Accounting Standards 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. Management of the Company
believes that the Company operates in only one segment, and therefore, the
disclosures required by SFAS No. 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 the six months ended June 30, 2000 and 1999 was approximately $11,356,000
and $10,140,000, respectively. Cash paid for federal income taxes was
approximately $989,000 and $850,000 during the six months ended June 30, 2000
and 1999, respectively. Non-cash transactions representing the transfer of
non-performing loans to other real estate owned and foreclosed assets totaled
approximately $848,000 and $452,000 for the six months ended June 30, 2000 and
1999, respectively.
(3) CASH AND DUE FROM BANKS: Cash and due from banks of approximately
$10,318,000 and $26,993,000 at June 30, 2000 and December 31, 1999,
respectively, were maintained to satisfy regulatory reserve requirements.
(4) INVESTMENT SECURITIES: As of June 30, 2000, the Company's entire investment
portfolio was classified as available-for-sale and this classification resulted
in an unrealized loss of approximately $6,162,000. This was reflected as a
decrease to available-for-sale securities of approximately $6,162,000 and a
corresponding decrease to shareholders' equity and a deferred tax asset of
approximately $4,067,000 and $2,095,000, respectively. As of December 31, 1999,
the classification resulted in an unrealized loss of approximately $5,065,000.
This was reflected as a decrease to available-for-sale securities of
approximately $5,065,000 and a corresponding decrease to shareholders' equity
and a deferred tax asset of approximately $3,343,000 and $1,722,000,
respectively.
During the six months ended June 30, 2000, the Company sold no investment
securities. In addition, there were no called bonds during the period ended June
30, 2000. During the six months ended June 30, 1999, the Company sold various
fixed rate securities with a total book value of approximately $19,574,000
resulting in a net gain of approximately $9,000. These 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. In
addition, there were several called bonds during the same period with a total
book value of approximately $12,000,000 resulting in a net gain of approximately
$4,000.
8
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
A comparison of investment securities at book and market values, as
determined by an independent broker, is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000
--------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasuries........................................................ $ 198 $ 0 $ (1) $ 197
U.S. Government Agencies .............................................. 110,357 0 (4,474) 105,883
Mortgaged-backed securities and collateralized
mortgage obligations ............................................. 44,993 1 (1,688) 43,306
State and political subdivisions ...................................... 917 3 (3) 917
Other ................................................................. 3,362 0 0 3,362
---------- ---------- ---------- ----------
Total........................................................ $ 159,827 $ 4 $ (6,166) $ 153,665
========== ========== ========== ==========
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Available-for-sale:
<S> <C> <C> <C> <C>
U.S. Treasuries........................................................ $ 193 $ 0 $ (2) $ 191
U.S. Government Agencies .............................................. 111,253 0 (3,720) 107,533
Mortgaged-backed securities and collateralized
mortgage obligations ............................................. 48,168 1 (1,335) 46,834
State and political subdivisions ...................................... 1,290 1 (10) 1,281
Other ................................................................. 2,937 0 0 2,937
---------- ---------- ---------- ----------
Total........................................................ $ 163,841 $ 2 $ (5,067) $ 158,776
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities at
June 30, 2000 and December 31, 1999, by contractual maturity, are shown below in
thousands. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
----------------------------- -----------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less ........................................ $ 859 $ 859 $ 1,883 $ 1,877
Due after one year through five years .......................... 93,280 89,674 83,892 81,258
Due after five years through ten years ......................... 20,000 19,080 30,000 28,889
Due after ten years ............................................ 45,688 44,052 48,066 46,752
------------ ------------ ------------ ------------
Total ..................................................... $ 159,827 $ 153,665 $ 163,841 $ 158,776
============ ============ ============ ============
</TABLE>
Securities with a par value of approximately $86,761,000 and $138,790,000
at June 30, 2000 and December 31, 1999, respectively, were pledged to secure
public and trust deposits as required or permitted by law.
(5) LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES AND OTHER REAL
ESTATE OWNED: The Subsidiary Banks make agriculture, commercial, real estate,
and installment loans to customers primarily in southeast Texas. Although the
Subsidiary Banks have a diversified loan and lease portfolio, a substantial
portion of their debtors' ability to honor their contracts is dependent upon the
agricultural economic sector. Loans and leases are classified in the following
categories (in thousands):
9
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
Commercial and financial ......................... $ 97,168 $ 88,660
Mortgage real estate ............................. 192,978 157,693
Construction real estate ......................... 15,731 12,887
Agriculture ...................................... 78,157 74,715
Consumer ......................................... 57,873 53,574
---------- ----------
Total loans and leases ................ 441,907 387,529
---------- ----------
Less --
Unearned income ............................ (61) (122)
Allowance for loan and lease losses ........ (4,604) (4,573)
---------- ----------
Net loans and leases .................. $ 437,242 $ 382,834
========== ==========
As of June 30, 2000 and December 31, 1999, First Victoria Leasing, Inc. a
wholly owned subsidiary of First Victoria National Bank was an equity
participant in the leveraged lease of an aircraft. As First Victoria National
Bank has no general liability for the non-recourse debt attributable to the
acquisition of such asset, the debt has been offset against the related rentals
receivable. The net investment in leveraged lease consists of the following (in
thousands):
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
Rentals receivable (net of principal and interest
on non-recourse debt) ........................... $ 5,772 $ 5,772
Estimated residual value .......................... 6,375 6,375
Unearned and deferred income ...................... (4,687) (4,887)
---------- ----------
Investment in leveraged lease ..................... 7,460 7,260
Deferred income taxes ............................. (4,687) (4,513)
---------- ----------
Net Investment ................................. $ 2,773 $ 2,747
========== ==========
A summary of the components of income from the leveraged lease follows for
the six months ended June 30, 2000 and 1999:
2000 1999
---- ----
Income before income taxes......................... $200 $248
Income tax expense................................. (68) (84)
---- ----
Net income from leveraged lease....................... $132 $164
==== ====
Transactions in the allowance for loan and lease losses for the six months
ended June 30, 2000 and 1999 were as follows (in thousands):
2000 1999
------ ------
Balance at beginning of period........................... $4,573 $3,308
Addition to reserve related to acquisitions........... 87 600
Provision (credit) for loan and lease losses.......... 110 (145)
Loans and leases charged off.......................... (581) (618)
Recoveries of loans and leases charged off............ 415 1,068
------ ------
Balance at end of period................................. $4,604 $4,213
====== ======
The allowance is maintained at a reasonable level which management
considers 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 for loans other than those with specific allowances
based upon a historical moving average and amounts for factors which are
considered areas of additional risk. Management of the Subsidiary Banks 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
10
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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, if any, 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 as a whole
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 June 30, 2000 and December 31, 1999 was adequate to cover expected losses
based on economic circumstances known or anticipated at that time.
Loans and leases receivable on which the accrual of interest has been
discontinued amounted to approximately $1,408,000 and $2,013,000 at June 30,
2000 and December 31, 1999, respectively. The effect of the reversal of
previously accrued interest on interest income was approximately $26,000 and
$58,000 for the six months ended June 30, 2000 and 1999, respectively. If during
the six months ended June 30, 2000 and 1999 interest had been accrued at the
stated rates, interest income would have increased by approximately $74,000 and
$91,000, respectively. As of June 30, 2000, the Company had restructured loans
and leases of approximately $32,000. The effect on net interest income resulting
from the difference between the interest recognized on such loans and leases and
the interest that would have been recognized at the original rate was not
material for the six months ended June 30, 2000 or 1999. As of December 31,
1999, restructured loans and leases totaled approximately $32,000.
Foreclosed assets are carried in other assets at the lower of loan balance
or estimated fair value less estimated selling costs and totaled approximately
$60,000 and $297,000 at June 30, 2000 and December 31, 1999, respectively. The
Company recorded net gains of approximately $18,000 on sales of foreclosed
assets during the six months ended June 30, 2000. The Company recorded no net
gains or losses on the sale of foreclosed assets during the first six months of
1999.
Total impaired loans and leases on the Company's books (including
non-accrual and restructured loans and leases) amounted to approximately
$1,440,000 and $1,709,000 as of June 30, 2000 and December 31, 1999,
respectively. Approximately $350,000 and $471,000 of the allowance for loan and
lease losses was allocated specifically to these loans and leases as of June 30,
2000 and December 31, 1999, respectively. The average balance of impaired loans
and leases outstanding during six months ended June 30, 2000 was approximately
$1,535,000. The average balance of impaired loans and leases outstanding during
1999 was approximately $2,191,000.
(6) PREMISES AND EQUIPMENT: The following is a summary of premises and equipment
(in thousands):
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
Land ............................................. $ 3,055 $ 2,978
Buildings ........................................ 15,528 15,031
Furniture and equipment .......................... 28,447 27,824
---------- ----------
47,030 45,833
Accumulated depreciation ......................... (16,301) (15,140)
---------- ----------
Total ...................................... $ 30,729 $ 30,693
========== ==========
11
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Furniture and equipment at June 30, 2000 includes an aircraft with a net
book value of approximately $18,045,000 purchased as a part of a lease agreement
as discussed in Note 18 to the consolidated financial statements.
(7) DEPOSITS: Time certificates of deposit of $100,000 or more amounted to
approximately $88,462,000 and $95,900,000 at June 30, 2000 and December 31,
1999, respectively. Interest expense for these deposits was approximately
$2,633,000 and $2,217,000 for the six months ended June 30, 2000 and 1999,
respectively.
(8) INCOME TAXES: The Company recorded current federal income tax expense of
approximately $1,559,000 and $1,576,000 for the six months ended June 30, 2000
and 1999, respectively. In addition, the Company recorded deferred tax expense
of approximately $827,000 and $617,000 for the six months ended June 30, 2000
and 1999, respectively. As of June 30, 2000 and December 31, 1999, the Company
had net deferred tax liabilities of approximately $4,679,000 and $4,016,000,
respectively, which were reflected in other liabilities on the consolidated
financial statements.
(9) COMMITMENTS: The Subsidiary Banks are parties 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.
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 Subsidiary Banks evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, upon extension of credit, is based on management's credit
evaluation of the counterparty. Standby letters of credit are conditional
commitments issued by the Subsidiary Banks 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 Subsidiary Banks' 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 amounts of those instruments. As
of June 30, 2000 and December 31, 1999, the Subsidiary Banks had commitments to
extend credit of approximately $135,796,000 and $132,361,000 and standby letters
of credit of approximately $1,580,000 and $2,122,000, respectively. The
following is a breakdown of commitments by type (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
Commercial and financial .................... $ 47,041 $ 48,265
Real Estate ................................. 23,603 17,505
Agriculture ................................. 39,295 37,948
Consumer .................................... 25,857 28,643
---------- ----------
Total ................................. $ 135,796 $ 132,361
========== ==========
(10) 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.
12
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
(11) EMPLOYEE BENEFITS: First Victoria National Bank's Employees' Profit Sharing
Plan is a 401(k) salary deferral plan which allows employees to defer up to 15%
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, First Victoria National 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 First Victoria National 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 First Victoria National Bank and is prohibited from investing in
the common stock of the Company. Contributions to the plan by First Victoria
National Bank were approximately $68,000 for each of the six months ended June
30, 2000 and 1999, respectively. Citizens Bank of Texas maintains a 401(k)
salary deferral plan in which employees are allowed to defer up to 6% of their
compensation. Based upon the employee's contribution, Citizens Bank of Texas
contributes a matching amount equal to 25% of the employee's contribution.
Contributions to the plan by Citizens Bank of Texas during the first six months
of 2000 and 1999 were approximately $7,000 and $6,000, respectively.
First Victoria National 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 are 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 is earned. The performance units may be redeemed
equally over the three years following the award at the option of the
participant. Performance units entitle participants to receive a future payment
in cash equal to the book value of the Company common stock at the date of
redemption. Accruals of additional expense for each unredeemed performance award
will be made in future years to reflect increases in the book value per share of
common stock of the Company. Total expense of the plan recorded by the Company
for the six months ended June 30, 2000 and 1999 represented accruals for the
increase in book value per share of common stock related to previously awarded
performance units and was not material.
On July 15, 1997, the Compensation and Retirement Committee of First
Victoria National Bank 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 First Victoria
National Bank's attaining various growth and financial objectives to be
determined annually. Short term incentive expenses of approximately $93,000 and
$259,000 related to this plan were recorded during the first six months of 2000
and 1999, respectively.
First Victoria National Bank maintains a noncontributory defined benefit
pension plan that covers First Victoria National Bank employees who meet
specified age and length of service requirements and provides for a single
benefit formula that is based on the participant's final adjusted monthly
compensation. The plan holds assets comprised of U.S. Treasury bonds, U.S.
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. Accrued estimated pension expenses of approximately
$121,000 and $179,000 related to this plan were recorded during the first six
months of 2000 and 1999, respectively. Citizens Bank of Texas also maintains a
pension plan for its employees. Expenses related to the plan during the first
six months of 2000 were not material.
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 Subsidiary Banks. On September 15, 1998 a
total of 52,000
13
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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. On May 18, 1999, an additional 59,600 stock options
were granted to certain directors and officers at an exercise price of $32.50,
which equaled the market price of the underlying stock on the date of grant. On
May 16, 2000, an additional 69,600 stock options were granted to certain
directors and officers at an exercise price of $36.25, which equaled the market
price of the underlying stock on the date of grant. 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. As of June 30,
2000, options to acquire a total of 182,100 shares of common stock of the
Company remain outstanding.
(12) TRUST ASSETS: Trust assets and other properties, except cash deposits, held
by the Trust and Investment Management Department of First Victoria National
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 was approximately
$215,511,000 and $209,811,000 at June 30, 2000 and December 31, 1999,
respectively.
(13) RELATED PARTY TRANSACTIONS: In the ordinary course of business, the
Subsidiary Banks make loans to certain directors and executive officers of the
Company, 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 certain directors and executive officers of the Company and entities
related to those individuals, is provided for the six months ended June 30, in
the following table (in thousands):
2000 1999
------ ------
Balance at beginning of year............................. $3,545 $3,820
Additions............................................. 2,551 1,152
Reductions............................................ (2,153) (1,994)
------ ------
Balance at end of period................................. $3,943 $2,978
====== ======
Approximately 25.33% of the Company's outstanding stock was owned by
principal shareholders, directors, and executive officers of the Company at June
30, 2000.
The aggregate deposits owned by principal shareholders, directors, and
executive officers of the Company at June 30, 2000 and December 31, 1999
amounted to approximately 2.02% and 1.97%, respectively, of total deposits.
(14) OTHER BORROWINGS: The following table represents the contractual principal
reductions due on the other borrowings of the Company as of June 30, 2000 and
December 31, 1999, in thousands. The weighted average contractual rate on the
balances of other borrowings outstanding was 6.71% and 6.69% as of June 30, 2000
and December 31, 1999, respectively. All balances shown are comprised of Federal
Home Loan Bank advances and debt related to an aircraft leasing transaction as
described in Note 18 to the consolidated financial statements.
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
Within one year .................................. $ 5,251 $ 1,872
One to two years ................................. 2,616 5,590
Two to three years ............................... 4,547 1,951
Three to four years .............................. 4,228 4,432
Four to five years ............................... 5,101 5,069
After five years ................................. 6,297 8,913
---------- ----------
Total ...................................... $ 28,040 $ 27,827
========== ==========
14
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
(15) SHAREHOLDERS' EQUITY: On April 26, 2000, the Parent Company's Board of
Directors declared a regular cash dividend of $.35 per share that was paid on
May 19, 2000 to shareholders of record as of May 5, 2000. In addition, on July
26, 2000, the Parent Company's Board of Directors declared a regular cash
dividend of $.35 per share payable on August 18, 2000 to shareholders of record
as of August 4, 2000. The principal source of the Parent Company's cash revenues
is dividends from First Victoria National Bank. There are certain limitations on
the payment of dividends to the Parent Company by the Subsidiary Banks. 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, First Victoria National Bank paid a dividend to the Parent
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 Parent Company, provided that First
Victoria National Bank's net income during future quarters is sufficient to
support such quarterly dividends. The weighted average number of shares
outstanding during the six months ended June 30, 2000 was 2,372,870. The
weighted average number of shares outstanding during 1999 was 2,372,792.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
JUNE 30,
-------------------
2000 1999
-------- --------
NUMERATOR:
Net income, as reported ................................ $ 4,176 $ 3,815
Effect of dilutive securities .......................... 0 0
-------- --------
Numerator for diluted earnings per common share ........ $ 4,176 $ 3,815
======== ========
DENOMINATOR:
Denominator for basic earnings per share -- weighted
average shares ....................................... 2,373 2,373
Effect of dilutive securities:
Outstanding stock options ............................ 3 1
-------- --------
Denominator for diluted earnings per share -- adjusted
weighted average shares and assumed option exercises . 2,376 2,374
======== ========
Basic earnings per share ............................... $ 1.76 $ 1.61
Diluted earnings per share ............................. $ 1.76 $ 1.61
The Parent Company and the Subsidiary Banks are subject to various capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators which, if undertaken, could
have a direct material effect on the Subsidiary Banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Subsidiary Banks must meet specific capital guidelines
that involve quantitative measures of the Subsidiary Banks' assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Subsidiary Banks' capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Subsidiary Banks 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 June 30,
2000, that the Subsidiary Banks have satisfied all capital adequacy requirements
to which they are subject.
15
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
As of June 30, 2000, the most recent notification from the Office of the
Comptroller of the Currency categorized each of the Subsidiary Banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the banks 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
Subsidiary Banks' categories. Presented below are the capital ratios for the
Company as of June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY
ACTUAL PURPOSES
-------------------------- --------------------------------------------
AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- -----------------------------
<S> <C> <C> <C> <C>
AS OF JUNE 30, 2000:
Total Capital
(to Risk Weighted Assets):
FVNB Corp. ............................. $ 56,233 11.94% $ 37,691 greater than or equal to 8.00%
First Victoria National Bank ........... 46,402 11.54% 32,180 greater than or equal to 8.00%
Citizens Bank of Texas, N.A ............ 9,784 14.67% 5,335 greater than or equal to 8.00%
Tier I Capital
(to Risk Weighted Assets)
FVNB Corp. ............................. $ 51,629 10.96% $ 18,846 greater than or equal to 4.00%
First Victoria National Bank ........... 42,546 10.58% 16,090 greater than or equal to 4.00%
Citizens Bank of Texas, N.A ............ 9,036 13.55% 2,667 greater than or equal to 4.00%
Tier I Capital
(to Average Assets)
FVNB Corp. ............................. $ 51,629 7.88% $ 26,220 greater than or equal to 4.00%
First Victoria National Bank ........... 42,546 7.40% 22,995 greater than or equal to 4.00%
Citizens Bank of Texas, N.A ............ 9,036 10.97% 3,294 greater than or equal to 4.00%
AS OF DECEMBER 31, 1999:
Total Capital
(to Risk Weighted Assets)
FVNB Corp. ............................. $ 57,508 13.28% $ 34,634 greater than or equal to 8.00%
First Victoria National Bank ........... 48,341 13.05% 29,631 greater than or equal to 8.00%
Citizens Bank of Texas, N.A ............ 9,270 14.79% 5,016 greater than or equal to 8.00%
Tier I Capital
(to Risk Weighted Assets)
FVNB Corp. ............................. $ 52,935 12.23% $ 17,317 greater than or equal to 4.00%
First Victoria National Bank ........... 44,479 12.01% 14,816 greater than or equal to 4.00%
Citizens Bank of Texas, N.A ............ 8,559 13.65% 2,508 greater than or equal to 4.00%
Tier I Capital
(to Average Assets)
FVNB Corp. ............................. $ 52,935 8.40% $ 25,202 greater than or equal to 4.00%
First Victoria National Bank ........... 44,479 7.95% 22,378 greater than or equal to 4.00%
Citizens Bank of Texas, N.A ............ 8,559 9.43% 3,630 greater than or equal to 4.00%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION-PROVISION
---------------------------------------------------------
AMOUNT RATIO
-------------------- -------------------------------
<S> <C> <C>
AS OF JUNE 30, 2000:
Total Capital
(to Risk Weighted Assets):
FVNB Corp. ............................. $ 47,114 greater than or equal to 10.00%
First Victoria National Bank ........... 40,226 greater than or equal to 10.00%
Citizens Bank of Texas, N.A ............ 6,668 greater than or equal to 10.00%
Tier I Capital
(to Risk Weighted Assets)
FVNB Corp. ............................. $ 28,269 greater than or equal to 6.00%
First Victoria National Bank ........... 24,135 greater than or equal to 6.00%
Citizens Bank of Texas, N.A ............ 4,001 greater than or equal to 6.00%
Tier I Capital
(to Average Assets)
FVNB Corp. ............................. $ 32,775 greater than or equal to 5.00%
First Victoria National Bank ........... 28,744 greater than or equal to 5.00%
Citizens Bank of Texas, N.A ............ 4,117 greater than or equal to 5.00%
AS OF DECEMBER 31, 1999:
Total Capital
(to Risk Weighted Assets)
FVNB Corp. ............................. $ 43,293 greater than or equal to 10.00%
First Victoria National Bank ........... 37,039 greater than or equal to 10.00%
Citizens Bank of Texas, N.A ............ 6,270 greater than or equal to 10.00%
Tier I Capital
(to Risk Weighted Assets)
FVNB Corp. ............................. $ 25,976 greater than or equal to 6.00%
First Victoria National Bank ........... 22,224 greater than or equal to 6.00%
Citizens Bank of Texas, N.A ............ 3,762 greater than or equal to 6.00%
Tier I Capital
(to Average Assets)
FVNB Corp. ............................. $ 31,503 greater than or equal to 5.00%
First Victoria National Bank ........... 27,972 greater than or equal to 5.00%
Citizens Bank of Texas, N.A ............ 4,537 greater than or equal to 5.00%
</TABLE>
(16) 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.
16
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 grouping 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 grouping 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 interest-bearing checking 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, in thousands:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
--------------------------- ----------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks............................ $25,732 $25,732 $ 26,993 $ 26,993
Federal funds sold................................. 2,610 2,610 38,170 38,170
Investment securities, available-for-sale.......... 153,665 153,665 158,776 158,776
Loans and leases, net.............................. 437,242 430,899 382,834 376,572
Accrued interest receivable........................ 6,876 6,876 4,758 4,758
Financial Liabilities:
Time deposits...................................... 297,623 297,600 281,334 281,614
Other deposits..................................... 264,974 264,974 273,486 273,486
---------- ----------- ----------- -----------
Total deposits........................... 562,597 562,574 554,820 555,100
Federal funds purchased and securities
sold under agreements to repurchase........... 11,900 11,900 3,750 3,750
Other borrowings................................... 28,040 26,164 27,827 25,806
Accrued interest payable........................... 2,015 2,015 2,377 2,377
Off-Balance Sheet Instruments:
Commitments to extend credit....................... 0 135,796 0 132,361
</TABLE>
(17) ACQUISITIONS: On April 14, 2000, First Victoria National Bank paid
approximately $6,722,000 to acquire Mid-Coast Savings Bank. The Bank acquired
net loans of approximately $23,950,000 and deposits of approximately
$33,532,000. Upon completion of the transaction, Mid-Coast
17
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Savings Bank merged with First Victoria National Bank and its existing branches,
located in Edna and Ganado, Texas, began operating as branches of First Victoria
National Bank. Total intangible assets associated with the acquisition were
approximately $4,257,000. The Bank accounted for this transaction using the
purchase method.
On January 29, 1999, FVNB Corp. paid approximately $17,384,000 to acquire
CBOT Financial Corporation, the parent company of Citizens Bank of Texas, N.A.
and Citizens Mortgage Company. The Parent Company acquired net loans of
approximately $55,755,000 and deposits of approximately $82,432,000. Total
intangible assets associated with the acquisition were approximately $9,221,000.
Citizens Bank of Texas continues to operate as an independent subsidiary of the
Parent Company. The existing banking facilities located in New Waverly,
Huntsville and The Woodlands, Texas have kept the name Citizens Bank of Texas.
The Company accounted for this transaction using the purchase method.
(18) OPERATING LEASES: In June 1999, First Victoria Leasing, Inc., a wholly
owned subsidiary of First Victoria National Bank, became a participant in an
operating lease of an aircraft. As a result, the Company's consolidated balance
sheet reflects the aircraft at a book value of approximately $18,045,000 and
$18,551,000 at June 30, 2000 and December 31, 1999, respectively. In addition,
the Bank recorded related non-recourse debt of approximately $12,136,000 and
$12,831,000 as of June 30, 2000 and December 31, 1999, respectively. The debt
calls for monthly payments of $190,000 over an original term of approximately
seven years with a final balloon payment of approximately $2,285,000 due in
April 2006. The average rate on the debt is 7.09%. The following table
represents the contractual future rental income related to this transaction that
was receivable as of June 30, 2000 and December 31, 1999, in thousands:
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
Within one year .................................. $ 2,280 $ 2,280
One to two years ................................. 2,280 2,280
Two to three years ............................... 2,280 2,280
Three to four years .............................. 2,280 2,280
Four to five years ............................... 2,280 2,280
After five years ................................. 1,710 3,040
---------- ----------
Total ............................................ $ 13,110 $ 14,440
========== ==========
18
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FVNB CORP. AND SUBSIDIARIES
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents the significant changes in
the results of operations and financial condition for the periods indicated. The
discussion should be read in conjunction with the consolidated financial
statements and notes and supplemental data included in this report.
ACQUISITIONS
On April 14, 2000, First Victoria National Bank paid approximately
$6,722,000 to acquire Mid-Coast Savings Bank. The Bank acquired net loans of
approximately $23,950,000 and deposits of approximately $33,532,000. Upon
completion of the transaction, Mid-Coast Savings Bank merged with First Victoria
National Bank and its existing branches, located in Edna and Ganado, Texas,
began operating as branches of First Victoria National Bank. Total intangible
assets associated with the acquisition were approximately $4,257,000.
RESULTS OF OPERATIONS
For the six months ended June 30, 2000, the Company recorded net income of
approximately $4,176,000, or $1.76 basic earnings per share, compared to
approximately $3,815,000, or $1.61 basic earnings per share, for the same period
in 1999. The return on average assets of 1.28% and return on average equity of
13.95% for the first six months of 2000 compare to amounts of 1.22% and 13.22%,
respectively, for the same period in 1999.
NET INTEREST INCOME
Net interest income, for the six months ended June 30, 2000, amounted to
approximately $13,468,000 compared to $12,851,000 for the same period in 1999.
This represents an increase of approximately $617,000, or 4.80% due primarily to
an overall increase in the yields on earning assets as well as a shift in the
mix of earning assets from investment securities into higher yielding loans.
Average earning assets increased approximately $17,262,000, or 2.97%, from
$580,399,000 at June 30, 1999, to $597,661,000 at June 30, 2000. The
corresponding yields on these assets increased approximately 47 basis points
from 7.77% to 8.24% over the same period. Average interest bearing liabilities
also increased approximately $8,569,000 or 1.80%, from $476,728,000 at June 30,
1999 to $485,297,000 at June 30, 2000. The corresponding cost of funds increased
over the same period approximately 36 basis points from 4.01% to 4.37%.
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
19
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
with caution, however, since gap positions at any given time may be quickly
changed by management in response to market conditions.
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.
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. Additionally, an
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. During the
six months ended June 30, 2000, there have been no material changes in the
Company's market risk.
NON-INTEREST INCOME
Total non-interest income for the six months ended June 30, 2000, was
approximately $5,082,000 compared to $3,494,000 for the same period in 1999.
This represents an increase of approximately $1,588,000, or 45.45%. During the
six months ended June 30, 2000, the Company sold no investment securities. In
addition, there were no called bonds during the period ended June 30, 2000.
During the six months ended June 30, 1999, the Company sold several fixed rate
securities resulting in a net gain of approximately $9,000. In addition there
were several called bonds during the same period resulting in a net gain of
approximately $4,000. These transactions are discussed in further detail in Note
4 to the consolidated financial statements. Trust service fees increased
approximately $70,000, or 7.98% from 1999 to 2000 due to overall growth in the
volume of assets and accounts being serviced. Service charges and fees on
deposit accounts increased approximately $256,000, or 13.05%, due to an increase
in the volume of insufficient funds charges and check card transaction fees as
well as additional fee income recorded by the Company as a result of the
acquisition of Citizens Bank of Texas and Citizens Mortgage Company in 1999.
Other non-interest income increased approximately $1,257,000, or 195.79%. This
increase was due to growth in commission fee income as well as the addition of
rental income related to the operating lease of an aircraft discussed in detail
in Note 18 to the consolidated financial statements. Gains or losses recorded by
the Company related to the sale of assets were not material during the six
months ended June 30, 2000 or 1999.
NON-INTEREST EXPENSE
Total non-interest expense for the six months ended June 30, 2000, was
approximately $11,878,000 compared to $10,482,000 for the same period in 1999.
This represents an increase of approximately $1,396,000, or 13.32%. Salaries and
wages increased approximately $581,000, or 12.03%, from 1999 to 2000 due
primarily to the acquisition of Citizens Bank of Texas and Citizens Mortgage
Company as well as normal ongoing merit increases and staff growth. Employee
benefits decreased approximately $117,000, or 13.12%, due primarily to lower
costs associated with group medical insurance and pension plans recorded during
the first six months of 2000 by First Victoria National Bank.
20
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Furniture and equipment expense increased approximately $516,000, or 102.99% due
primarily to additional depreciation expense recognized on the aircraft recorded
on the Company's books as a result of the operating lease transaction discussed
in Note 18 to the consolidated financial statements. Communication and supplies
expense increased approximately $120,000 , or 18.35%, from 1999 to 2000 due
primarily to increased supply usage as well as increased telephone expense at
Citizens Bank of Texas related to the installation and usage of new telephone
lines. Professional fees decreased approximately $62,000, or 12.20% from 1999 to
2000 due primarily to the write-off of organizational costs by the Company in
January 1999 related to legal services performed during the formation of the
Parent Company as required by AICPA Statement of Position 98-5. Additional
professional fees were also recognized in 1999 as a result of the acquisition of
Citizens Bank of Texas. Amortization of goodwill and intangibles increased
approximately $111,000, or 34.47%, from 1999 to 2000 due directly to the
amortization of goodwill recognized as a result of the acquisition of Citizens
Bank of Texas in 1999 and Mid-Coast Savings Bank in April 2000. Other components
of non-interest expense include net occupancy expense, marketing and advertising
and FDIC insurance premiums. Each of these categories changed only nominally
from 1999 to 2000 as the result of normal operations and growth of the Company.
ALLOWANCE FOR LOAN AND LEASE LOSSES
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 June 30, 2000 and December 31, 1999 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
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 was approximately $4,604,000 or
1.04%, of total loans and leases at June 30, 2000, compared to $4,573,000, or
1.18%, of total loans and leases at December 31, 1999. Net loans charged-off
were approximately $166,000 compared to net loans recovered of approximately
$450,000 for the six months ended June 30, 2000 and 1999, respectively.
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 allow impaired loans that fall within the scope of SFAS
No. 114, as amended by SFAS No. 118, to 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 (including non-accrual and
restructured loans) amounted to approximately $1,440,000 and $1,709,000 as of
June 30, 2000 and December 31, 1999, respectively. As of June 30, 2000 and
December 31, 1999, approximately $350,000 and $471,000, respectively, of the
allowance for loan and lease losses was allocated specifically to these loans.
21
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Following is an analysis of the allowance for loan and lease losses for
the six months ended June 30, (in thousands):
2000 1999
-------- --------
Balance at beginning of period ......................... $ 4,573 $ 3,308
Addition to reserve related to acquisitions ............ 87 600
Provision (credit) charged to operating expense ........ 110 (145)
Loans and leases charged off:
Commercial and financial ......................... (244) (421)
Real estate ...................................... (0) (0)
Agriculture ...................................... (174) (13)
Consumer ......................................... (163) (184)
-------- --------
Total charged off .......................... (581) (618)
-------- --------
Recoveries of loans and leases previously charged off:
Commercial and financial ......................... 64 965
Real estate ...................................... 222 6
Agriculture ...................................... 79 31
Consumer ......................................... 50 66
-------- --------
Total recoveries ........................... 415 1,068
-------- --------
Net loans and leases (charged off) recovered ........... (166) 450
-------- --------
Balance at end of period ............................... $ 4,604 $ 4,213
======== ========
Allowance for loan and lease losses as a percentage
of total loans and leases ............................ 1.04% 1.15%
Net (charge-offs) recoveries as a percentage of average
loans and leases outstanding ......................... (.04)% .13%
JUNE 30,
---------------------
2000 1999
-------- --------
NON-PERFORMING ASSETS
Past due 90 days or more and still accruing:
Commercial and financial ......................... $ 16 $ 14
Real estate ...................................... 120 129
Agriculture ...................................... 17 52
Consumer ......................................... 36 24
-------- --------
Total past due 90 days or more ................. $ 189 $ 219
======== ========
Non-accrual:
Commercial and financial ......................... $ 187 $ 348
Real estate ...................................... 876 603
Agriculture ...................................... 342 790
Consumer ......................................... 3 0
-------- --------
Total non-accrual ................................ 1,408 1,741
-------- --------
Restructured Loans:
Commercial and financial ......................... 0 0
Real estate ...................................... 32 0
Agriculture ...................................... 0 0
Consumer ......................................... 0 0
-------- --------
Total restructured loans ....................... 32 0
Real estate and other collateral acquired through
foreclosure .......................................... 60 450
-------- --------
Total non-performing assets ...................... $ 1,500 $ 2,191
======== ========
Non-performing assets as a percentage of
loans and leases and other non-performing assets ..... .34% .60%
22
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Foreclosed assets are carried in other assets at the lower of the loan
balance or estimated fair value less estimated selling costs and totaled
approximately $60,000 and $297,000 at June 30, 2000 and December 31, 1999,
respectively. The Company recorded net gains of approximately $18,000 and 2,000
during the six months ended June 30, 2000. The Company recorded no net gains or
losses on the sale of foreclosed assets during the first six months of 1999.
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.
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 in banks, investment securities and
loans which are nearing maturity. At June 30, 2000, the Company's liquidity
ratio defined as liquid assets as a percentage of deposits was 21.11%. 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 Subsidiary Banks.
CAPITAL
On April 26, 2000, the Parent Company's Board of Directors declared a
regular cash dividend of $.35 per share payable on May 19, 2000 to shareholders
of record as of May 5, 2000. In addition, on July 26, 2000, the Parent Company's
Board of Directors declared a regular cash dividend of $.35 per share payable on
August 18, 2000 to shareholders of record as of August 4, 2000. The principal
source of the Parent Company's cash revenues is dividends from First Victoria
National Bank, and there are certain limitations on the payment of dividends to
the Parent Company by the Subsidiary Banks. 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, First
Victoria National Bank paid a dividend to the Parent 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 Parent Company, provided that First Victoria National Bank's net
income during future quarters is sufficient to support such quarterly dividends.
The federal banking agencies 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 June 30, 2000 and December 31, 1999, 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 exclusive of goodwill. As of June 30, 2000 the Company had recorded
goodwill of approximately $14,543,000 related to branch and bank acquisitions.
At June 30, 2000 and December 31, 1999, the percent of total
capital-to-risk-weighted assets was 11.94% and 13.28%, respectively, and
currently exceeds the regulatory requirements. The Company's Tier I capital
ratio as of June 30, 2000 and December 31, 1999 was 10.96% and 12.23%,
respectively, and well in excess of the required ratios.
Tier I leverage ratio is defined as the Company's Tier I capital divided
by its adjusted average total assets (net of allowance for loan 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 June
30, 2000 and
23
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
December 31, 1999, the Company's Tier I leverage ratio was 7.88% and 8.40%,
respectively, which exceeds the regulatory minimum.
THE YEAR 2000 ISSUE
The Year 2000 issue involved 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 was one of the Company's highest
priorities. Senior management and the Board of Directors were actively involved
in overseeing Year 2000 compliance efforts to ensure that the Company adequately
handled 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 ("FFIEC")
interagency statement "Year 2000 Project Management Awareness". The Year 2000
Project Plan consisted of five phases: awareness, assessment, renovation,
validation and implementation. The program produced the appropriate level of
preparedness, consistent with the guidelines issued by federal banking
regulators.
As of the date of this filing, the Company has not experienced any Year
2000 problems that have affected its operations, the realization of financial
assets, or its results of operations. The Company will continue to monitor its
operations to ensure that there are no undetected Year 2000 problems that could
have a material adverse effect on the Company or its operations. The Company
believes that there is no remaining significant risk or exposure to the Company
as a result of the Year 2000 issue.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 ("GLBA"). This comprehensive legislation
eliminates the barriers to affiliations among banks, securities firms, insurance
companies and other financial service providers. GLBA provides for a new type of
financial holding company structure under which affiliations among these
entities may occur. Under GLBA, a financial holding company may engage in a
broad list of financial activities and any non-financial activity that the FRB
determines is complementary to a financial activity and poses no substantial
risk to the safety and soundness of depository institutions or the financial
system. In addition, GLBA permits certain non-banking financial and financially
related activities to be conducted by financial subsidiaries of a national bank.
Additionally, GLBA imposes strict new privacy disclosure and opt-out
requirements regarding the ability of financial institutions to share personal
non-public customer information with third parties. Under the GLBA, a bank
holding company may become certified as a financial holding company by filing a
declaration with the FRB, together with a certification that each of its
subsidiary banks is well capitalized, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act of 1977. The Company
has elected to become a financial holding company under GLBA and the election
was made effective by the FRB as of May 31, 2000. To date, the Company has not
engaged in any additional financial activities permitted by GLBA.
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
24
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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, and (v) 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.
25
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FVNB CORP. AND SUBSIDIARIES
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AVERAGE BALANCE SHEETS AND INTEREST RATES (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------
2000 1999
---------------------------------------- -----------------------------------------
(5) INTEREST (5) INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST BALANCE EXPENSE COST
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Due from banks ...................... $ 602 $ 10 6.57% $ 18 $ 0 0.00%
Federal funds sold .................. 18,205 281 6.11 32,965 387 4.64
Investment securities,
available-for-sale:
Taxable ........................ 159,690 2,363 5.92 180,274 2,589 5.74
Tax-exempt (2) ................. 982 17 6.92 1,663 26 6.25
Loans and leases (3) ................ 430,484 10,126 9.46 362,849 8,975 9.92
------------ ------------ ------------ ------------ ------------ ------------
Total earning assets ...... 609,963 12,797 8.44 577,769 $ 11,977 8.31
------------ ------------ ------------ ------------ ------------ ------------
Less allowance for loan and lease losses .. (4,412) (4,729)
Non-earning assets ........................ 78,376 59,461
------------ ------------
TOTAL ASSETS ......... $ 683,927 $ 632,501
============ ============
LIABILITIES
Interest bearing liabilities:
Deposits:
Savings, IOC, & MMA accounts ... $ 169,488 1,092 2.59 $ 170,732 1,207 2.84
Time deposits .................. 302,617 4,023 5.35 247,425 2,869 4.65
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing
deposits ................ 472,105 5,115 4.36 418,157 4,076 3.91
Federal funds purchased and
securities sold under agreements
to repurchase.................... . 8,047 127 6.24 36,923 455 4.88
Other borrowings (4) ................ 15,602 251 6.36 20,198 249 4.88
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing
liabilities.............. 495,754 5,493 4.46 475,278 4,780 4.03
------------ ------------ ------------ ------------ ------------ ------------
Non-interest bearing liabilities:
Demand deposits ..................... 98,057 86,618
Other liabilities ................... 24,370 9,560
------------ ------------
Total non-interest
bearing liabilities ..... 122,427 96,178
Shareholders' Equity ...................... 65,746 61,045
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .... $ 683,927 $ 632,501
============ ============
Net Interest Income ....................... $ 7,304 $ 7,197
============ ============
Interest Differential ..................... 3.98% 4.28%
============ ============
Net Interest Margin ....................... 4.82% 5.00%
============ ============
</TABLE>
(1) DOLLARS IN THOUSANDS; INCOME AND RATES ON TAXABLE-EQUIVALENT BASIS;
COMPUTED ON A DAILY YEAR-TO-DATE BASIS.
(2) INCLUDES TAXABLE-EQUIVALENT ADJUSTMENTS BASED ON 34%
(3) INCLUDES LOANS PLACED ON NON-ACCRUAL.
(4) EXCLUDES BORROWINGS RELATED TO AIRCRAFT DEBT FOR PRESENTATION PURPOSES.
(5) ALL AMOUNTS SHOWN AT AMORTIZED COST.
26
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND INTEREST RATES (1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------
2000 1999
----------------------------------------- ------------------------------------------
(5) INTEREST (5) INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST BALANCE EXPENSE COST
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Due from banks .......................... $ 310 $ 10 6.38% $ 18 $ 1 11.05%
Federal funds sold ...................... 22,405 652 5.76 31,670 700 4.40
Investment securities, available-for-sale:
Taxable ............................. 160,577 4,710 5.87 189,628 5,438 5.74
Tax-exempt (2) ...................... 1,093 38 6.93 1,713 56 6.54
Loans and leases (3) .................... 413,276 19,065 9.28 357,370 16,154 9.12
------------ ------------ ------------ ------------ ------------ ------------
Total earning assets .............. 597,661 24,475 8.24 580,399 22,349 7.77
------------ ------------ ------------ ------------ ------------ ------------
Less allowance for loan and lease losses .. (4,481) (4,333)
Non-earning assets ........................ 74,614 56,292
------------ ------------
TOTAL ASSETS ......... $ 667,794 $ 632,358
============ ============
LIABILITIES
Interest bearing liabilities:
Deposits:
Savings, IOC, & MMA accounts .......... $ 173,404 2,281 2.65 178,056 2,216 2.51
Time deposits ......................... 290,308 7,591 5.26 249,544 5,999 4.85
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing deposits ... 463,712 9,872 4.28 427,600 8,215 3.87
Federal funds purchased and
securities sold under agreements
to repurchase ....................... 6,156 186 5.98 30,009 732 4.85
Other borrowings ...................... 15,429 492 6.31 19,119 532 5.53
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing liabilities 485,297 10,550 4.37 476,728 9,479 4.01
------------ ------------ ------------ ------------ ------------ ------------
Non-interest bearing liabilities:
Demand deposits ......................... 94,630 87,831
Other liabilities ....................... 22,710 8,631
------------ ------------
Total non-interest bearing
liabilities ..................... 117,340 96,462
Shareholders' Equity ...................... 65,157 59,168
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .............. $ 667,794 $ 632,358
============ ============
Net Interest Income ....................... $ 13,925 $ 12,870
============ ============
Interest Differential ..................... 3.87% 3.76%
============ ============
Net Interest Margin ....................... 4.69% 4.47%
============ ============
</TABLE>
(1) DOLLARS IN THOUSANDS AND INCOME AND RATES ON TAX-EQUIVALENT BASIS.
(2) INCLUDES TAX EQUIVALENT ADJUSTMENTS BASED ON 34%
(3) INCLUDES LOANS PLACED ON NON-ACCRUAL.
(4) ALL AMOUNTS SHOWN AT AMORTIZED COST.
27
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During six months ended June 30, 2000, there have been no material
changes in the Company's market risk. For further information regarding the
Company's market risk, refer to the Company's Annual Report to Shareholders for
the year ended December 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A description of legal proceedings is presented in Part I of this June 30,
2000 Form 10-Q in Note 10 to the financial statements (page 12).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Bank was held May 11, 2000, for the
purpose of voting on the following items:
1) The election of twelve (12) directors of the Bank to serve until the
next Annual Meeting of Shareholders and until their successors are
elected and qualified.
2) The approval of the firm KPMG LLP as the independent public accountants
of the Company for the current fiscal year.
The following table summarizes the tabulation of votes with respect to the
foregoing matters:
PROPOSAL 1:
FOR WITHHELD
--------- --------
Election of twelve (12) directors as follows:
Michael S. Anderson 1,745,894 120
O. D. Edwards, Jr. 1,745,894 120
David P. Engel 1,745,894 120
David M. Gaddis 1,745,894 120
Walter T. Haenggi 1,745,894 120
Robert L. Halepeska 1,745,894 120
Thomas Lane Keller 1,745,894 120
James R. McCan 1,745,894 120
J. E. McCord 1,745,894 120
Thomas M. O'Connor 1,745,894 120
Billy W. Ruddock 1,745,894 120
Roger Welder 1,745,894 120
PROPOSAL 2: FOR AGAINST ABSTAIN
--------- ------- -------
Approval of appointment of KPMG LLP as
independent public accountants for the
Bank for the 2000 fiscal year 1,966,790 40 5,040
28
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) On June 12, 2000, the Company filed a Form 8-K dated June 12, 2000. The
purpose of the form was to announce that FVNB Corp. made the election to
become a financial holding company. This election was effective as of May
31, 2000.
On July 31, 2000, the Company filed a Form 8-K dated July 28. The purpose
of the form was to announce that on July 26, 2000, the Board of Directors
of FVNB Corp. declared a cash dividend of $.35 per share payable on August
18, 2000 to shareholders of record as of August 4, 2000. The form also
reported unaudited financial information related to the second quarter of
2000.
b) The following exhibits are filed as part of this report:
3 FVNB Corp. By-laws, as restated May 16, 2000.
27 Financial Data Schedule
29
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FVNB Corp.
AUGUST 10, 2000 By: /s/ DAVID M. GADDIS
--------------- -----------------------------------
Date David M. Gaddis
President and Chief Executive Officer
AUGUST 10, 2000 By: /s/ C. DEE HARKEY
--------------- -----------------------------------
Date C. Dee Harkey
Secretary,
Principal Accounting and Financial Officer
30
