--------------------------------------------------------------------------------
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 SEPTEMBER 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 November 10, 2000.
--------------------------------------------------------------------------------
1
<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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
ASSETS
<S> <C> <C>
Cash and due from banks--Note 3 ........................................................ $ 27,762 $ 26,993
Federal funds sold ..................................................................... 25,120 38,170
Investment securities--Note 4
Available-for-sale ................................................................ 143,216 158,776
Loans and leases receivable (net of allowance for loan and lease losses
of $4,810 and $4,573 in 2000 and 1999, respectively) -Note 5 ...................... 436,095 382,834
Premises and equipment, net--Note 6 .................................................... 30,448 30,693
Accrued interest receivable ............................................................ 7,675 4,758
Goodwill and intangibles--Note 18 ...................................................... 14,280 10,719
Other assets ........................................................................... 2,046 2,241
--------------- ---------------
TOTAL ASSETS ...................................................................... $ 686,642 $ 655,184
=============== ===============
LIABILITIES
Deposits:
Demand ................................................................................. $ 108,409 $ 90,857
Savings, IOC, and money market accounts ................................................ 163,407 182,629
Time--Note 7 ........................................................................... 299,074 281,334
--------------- ---------------
TOTAL DEPOSITS .................................................................... 570,890 554,820
--------------- ---------------
Federal funds purchased and securities sold
under agreements to repurchase .................................................... 10,675 3,750
Other borrowings--Notes 14 and 19 ...................................................... 31,055 27,827
Other liabilities--Note 8 .............................................................. 9,634 8,478
--------------- ---------------
TOTAL LIABILITIES ................................................................. 622,254 594,875
--------------- ---------------
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 ...................................................................... 51,806 47,946
Accumulated other comprehensive income -
net unrealized losses on investment securities, net of tax ........................ (3,128) (3,343)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY ........................................................ 64,388 60,309
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................. $ 686,642 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and lease receivable, including fees ................... $ 10,529 $ 8,311 $ 29,594 $ 24,465
Investment securities:
Taxable ................................................. 2,128 2,422 6,725 7,802
Tax-exempt .............................................. 11 18 36 55
Dividends ............................................... 56 31 169 89
Federal Funds sold ........................................... 347 356 999 1,056
Other ........................................................ 2 0 12 1
------------ ------------ ------------ ------------
TOTAL INTEREST INCOME ................................... 13,073 11,138 37,535 33,468
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits--Note 7 ............................................. 5,315 4,373 15,187 12,588
Federal funds purchased and securities sold
under agreements to repurchase .......................... 189 391 375 1,123
Other borrowings ............................................. 503 331 1,439 863
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE .................................. 6,007 5,095 17,001 14,574
------------ ------------ ------------ ------------
NET INTEREST INCOME ..................................... 7,066 6,043 20,534 18,894
Provision (credit) for loan and lease losses--Note 5 ......... 190 91 300 (54)
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES ................ 6,876 5,952 20,234 18,948
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Net realized gains on sales of investment securities ......... (160) 37 (160) 50
Trust service fees ........................................... 445 379 1,392 1,256
Service charges and fees on deposit accounts ................. 1,238 1,103 3,456 3,065
Gain (loss) on sale of assets--Note 5 ........................ (2) (2) 16 (2)
Other ........................................................ 976 1,113 2,875 1,755
------------ ------------ ------------ ------------
TOTAL NON-INTEREST INCOME ............................... 2,497 2,630 7,579 6,124
------------ ------------ ------------ ------------
NON-INTEREST EXPENSE:
Salaries and wages--Note 11 .................................. 2,793 2,559 8,204 7,389
Employee benefits--Note 11 ................................... 212 239 987 1,131
Net occupancy expense ........................................ 389 341 1,105 994
Furniture and equipment ...................................... 516 602 1,533 1,103
Communication and supplies ................................... 393 341 1,167 995
Data processing .............................................. 325 309 957 902
Marketing and advertising .................................... 195 158 558 507
Professional fees ............................................ 251 225 697 733
FDIC insurance assessment .................................... 34 16 92 45
Amortization of goodwill and intangibles ..................... 263 186 696 508
Other ........................................................ 579 222 1,832 1,373
------------ ------------ ------------ ------------
TOTAL NON-INTEREST EXPENSE .............................. 5,950 5,198 17,828 15,680
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .............................. 3,423 3,384 9,985 9,392
Income Tax Expense--Note 8 ......................................... 1,249 1,114 3,635 3,307
------------ ------------ ------------ ------------
NET INCOME............................................... $ 2,174 $ 2,270 $ 6,350 $ 6,085
============ ============ ============ ============
Basic earnings per share--Note 16 .................................. $ .92 $ .96 $ 2.68 $ 2.56
============ ============ ============ ============
Diluted earnings per share--Note 16 ................................ $ .91 $ .96 $ 2.67 $ 2.56
============ ============ ============ ============
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------ ------------ ------------ ------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income .......................................................... $ 2,174 $ 2,270 $ 6,350 $ 6,085
Other comprehensive income, net of tax
Unrealized holding (losses) gains arising during the period ... (830) (836) 109 (3,503)
Realized losses (gains) reflected in net income ............... 106 (24) 106 (33)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME ..................................... $ 1,450 $ 1,410 $ 6,565 $ 2,549
============ ============ ============ ============
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 31,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................................................ $ 6,350 $ 6,085
Adjustments to reconcile net income to net cash
provided by operating activities--
Net loss (gain) on sale of investment securities ............................... 160 (50)
Provision (credit) for loan and lease and other real estate losses ............. 300 (54)
Depreciation ................................................................... 1,789 1,370
Amortization of goodwill and intangibles ....................................... 696 508
Premium amortization and discount accretion, net ............................... 73 145
Pension (income) expense ....................................................... (14) 160
Net (gain) loss on sale of assets .............................................. (16) 2
Increase in accrued interest receivable ........................................ (2,723) (1,880)
Net change in other assets and other liabilities ............................... 720 (211)
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................. 7,335 6,075
--------------- ---------------
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 .......................... 9,840 24,782
Proceeds from maturities of investment securities, available-for-sale ..................... 6,539 32,108
Purchase of investment securities, available-for-sale ..................................... (289) (5,697)
Net increase in loans to customers ........................................................ (30,489) (19,338)
Additions to premises and equipment ....................................................... (1,246) (19,686)
Proceeds from sale of assets .............................................................. 1,217 337
--------------- ---------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ....................... (8,880) 19,604
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand, IOC,
savings and money market accounts ................................................... (12,702) (16,922)
Net (decrease) increase in time deposits .................................................. (4,759) 9,937
Net increase in federal funds purchased and
securities sold under agreements to repurchase ...................................... 6,925 (8,525)
Net increase (decrease) in other borrowed funds ........................................... 2,286 9,156
Net increase in capital stock ............................................................. 4 0
Dividends paid ............................................................................ (2,490) (2,490)
--------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES .......................................... (10,736) (8,844)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ...................................... (12,281) (16,835)
Cash and cash equivalents beginning of period ............................................. 65,163 34,304
--------------- ---------------
CASH AND CASH EQUIVALENTS END OF PERIOD ........................................ $ 52,882 $ 51,139
=============== ===============
</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 18 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 September 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.
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.
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.
6
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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.
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 nine months ended September 30, 2000 and 1999 was approximately
$17,201,000 and $14,642,000, respectively. Cash paid for federal
7
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
income taxes was approximately $1,764,000 and $1,987,000 during the nine months
ended September 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 $878,000 and $570,000 for the nine
months ended September 30, 2000 and 1999, respectively.
(3) CASH AND DUE FROM BANKS: Cash and due from banks of approximately $7,830,000
and $6,756,000 at September 30, 2000 and December 31, 1999, respectively, were
maintained to satisfy regulatory reserve requirements.
(4) INVESTMENT SECURITIES: As of September 30, 2000, the Company's entire
investment portfolio was classified as available-for-sale and this
classification resulted in an unrealized loss of approximately $4,738,000. This
was reflected as a decrease to available-for-sale securities of approximately
$4,738,000 and a corresponding decrease to shareholders' equity and a deferred
tax asset of approximately $3,128,000 and $1,610,000, 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 nine months ended September 30, 2000, the Company sold various
fixed rate securities with a total book value of approximately $10,000,000
resulting in a net loss of approximately $160,000. These securities were sold
primarily for liquidity purposes. There were no called bonds during the period
ended September 30, 2000. During the nine months ended September 30, 1999, the
Company sold various fixed rate securities with a total book value of
approximately $24,736,000 resulting in a net gain of approximately $46,000.
These securities were sold primarily for liquidity purposes and to improve the
overall yield of the investment portfolio. In addition, there were several
called bonds during the same period with a total book value of approximately
$17,000,000 resulting in a net gain of approximately $4,000.
A comparison of investment securities at book and market values, as
determined by an independent broker, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasuries .............................................. $ 189 $0$ 0 $ 189
U.S. Government Agencies ..................................... 100,357 0 (3,461) 96,896
Mortgaged-backed securities and collateralized
mortgage obligations .................................... 43,130 0 (1,279) 41,851
State and political subdivisions ............................. 915 4 (2) 917
Other ........................................................ 3,363 0 0 3,363
------------ ------------ ------------ ------------
Total .............................................. $ 147,954 $ 4 $ (4,742) $ 143,216
============ ============ ============ ============
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available-for-sale:
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>
8
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities at
September 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>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
----------------------------- -----------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less ........................................ $ 778 $ 779 $ 1,883 $ 1,877
Due after one year through five years .......................... 83,169 80,443 83,892 81,258
Due after five years through ten years ......................... 20,000 19,241 30,000 28,889
Due after ten years ............................................ 44,007 42,753 48,066 46,752
------------ ------------ ------------ ------------
Total ..................................................... $ 147,954 $ 143,216 $ 163,841 $ 158,776
============ ============ ============ ============
</TABLE>
Securities with a par value of approximately $85,440,000 and $138,790,000
at September 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):
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
Commercial and financial .................... $ 96,174 $ 88,660
Mortgage real estate ........................ 199,571 157,693
Construction real estate .................... 16,102 12,887
Agriculture ................................. 70,274 74,715
Consumer .................................... 58,826 53,574
-------------- --------------
Total loans and leases ................ 440,947 387,529
-------------- --------------
Less -
Unearned income .......................... (42) (122)
Allowance for loan and lease losses ...... (4,810) (4,573)
-------------- --------------
Net loans and leases .................. $ 436,095 $ 382,834
============== ==============
As of September 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):
SEPTEMBER 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 .............. (4,587) (4,887)
-------------- --------------
Investment in leveraged lease ............. 7,560 7,260
Deferred income taxes ..................... (4,774) (4,513)
-------------- --------------
Net Investment ......................... $ 2,786 $ 2,747
============== ==============
9
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
A summary of the components of income from the leveraged lease follows for
the nine months ended September 30, 2000 and 1999:
2000 1999
---- ----
Income before income taxes......................... $301 $361
Income tax expense................................. (102) (123)
---- ----
Net income from leveraged lease....................... $199 $238
==== ====
Transactions in the allowance for loan and lease losses for the nine
months ended September 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.......... 300 (54)
Loans and leases charged off.......................... (635) (683)
Recoveries of loans and leases charged off............ 485 1,146
------ ------
Balance at end of period................................. $4,810 $4,317
====== ======
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 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 September 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 $1,361,000 and $2,013,000 at September
30, 2000 and December 31, 1999, respectively. The effect of the reversal of
previously accrued interest on interest income was approximately $29,000 and
$60,000 for the nine months ended September 30, 2000 and 1999, respectively. If
during the nine months ended September 30, 2000 and 1999 interest had been
accrued at the stated rates, interest income would have increased by
approximately $107,000 and $121,000, respectively. As of September 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 nine months ended
September 30, 2000 or 1999. As of December 31, 1999, restructured loans and
leases totaled approximately $32,000.
10
<PAGE>
Foreclosed assets are carried in other assets at the lower of loan balance
or estimated fair value less estimated selling costs and totaled approximately
$68,000 and $297,000 at September 30, 2000 and December 31, 1999, respectively.
The Company recorded net gains of approximately $16,000 on sales of foreclosed
assets during the nine months ended September 30, 2000 and net losses of
approximately $1,000 during the same period in 1999.
Total impaired loans and leases on the Company's books (including
non-accrual and restructured loans and leases) amounted to approximately
$1,391,000 and $1,709,000 as of September 30, 2000 and December 31, 1999,
respectively. Approximately $330,000 and $471,000 of the allowance for loan and
lease losses was allocated specifically to these loans and leases as of
September 30, 2000 and December 31, 1999, respectively. The average balance of
impaired loans and leases outstanding during nine months ended September 30,
2000 was approximately $1,492,000. 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):
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
Land ..................................... $ 3,057 $ 2,978
Buildings ................................ 15,549 15,031
Furniture and equipment .................. 28,724 27,824
--------------- ---------------
47,330 45,833
Accumulated depreciation ................. (16,882) (15,140)
--------------- ---------------
Total .............................. $ 30,448 $ 30,693
=============== ===============
Furniture and equipment at September 30, 2000 includes an aircraft with a
net book value of approximately $17,791,000 purchased as a part of a lease
agreement as discussed in Note 19 to the consolidated financial statements.
(7) DEPOSITS: Time certificates of deposit of $100,000 or more amounted to
approximately $95,021,000 and $95,900,000 at September 30, 2000 and December 31,
1999, respectively. Interest expense for these deposits was approximately
$4,026,000 and $3,408,000 for the nine months ended September 30, 2000 and 1999,
respectively.
(8) INCOME TAXES: The Company recorded current federal income tax expense of
approximately $2,262,000 and $1,793,000 for the nine months ended September 30,
2000 and 1999, respectively. In addition, the Company recorded deferred tax
expense of approximately $1,373,000 and $1,514,000 for the nine months ended
September 30, 2000 and 1999, respectively. As of September 30, 2000 and December
31, 1999, the Company had net deferred tax liabilities of approximately
$5,709,000 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
11
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 September 30, 2000 and December 31, 1999, the Subsidiary Banks had
commitments to extend credit of approximately $128,428,000 and $132,361,000 and
standby letters of credit of approximately $1,594,000 and $2,122,000,
respectively. The following is a breakdown of commitments by type (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
Commercial and financial ................... $ 44,298 $ 48,265
Real Estate ................................ 18,493 17,505
Agriculture ................................ 40,598 37,948
Consumer ................................... 25,039 28,643
--------------- ---------------
Total ................................ $ 128,428 $ 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.
(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 $103,000 for each of the nine months ended
September 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 nine months
of 2000 and 1999 were approximately $13,000 and $11,000, 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 nine months ended September 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.
12
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 $98,000 and
$392,000 related to this plan were recorded during the first nine 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 income of approximately $19,000
was recorded for the first nine months of 2000. Accrued estimated pension
expense of approximately $155,000 related to this plan was recorded during the
first nine months of 1999. 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 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
September 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
$219,081,000 and $209,811,000 at September 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 nine months ended September
30, in the following table (in thousands):
2000 1999
------ ------
Balance at beginning of year............................. $3,545 $3,820
Additions............................................. 3,533 2,477
Reductions............................................ (2,858) (3,583)
------ ------
Balance at end of period................................. $4,220 $2,714
====== ======
13
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Approximately 25.37% of the Company's outstanding stock was owned by
principal shareholders, directors, and executive officers of the Company at
September 30, 2000.
The aggregate deposits owned by principal shareholders, directors, and
executive officers of the Company at September 30, 2000 and December 31, 1999
amounted to approximately 2.12% 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 September 30, 2000
and December 31, 1999, in thousands. The weighted average contractual rate on
the balances of other borrowings outstanding was 6.73% and 6.69% as of September
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 19 to the consolidated financial statements.
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
Within one year ............................ $ 6,064 $ 1,872
One to two years ........................... 2,104 5,590
Two to three years ......................... 4,728 1,951
Three to four years ........................ 5,047 4,432
Four to five years ......................... 4,680 5,069
After five years ........................... 8,432 8,913
--------------- ---------------
Total ................................ $ 31,055 $ 27,827
=============== ===============
(15) SHAREHOLDERS' EQUITY: On July 26, 2000, the Parent Company's Board of
Directors declared a regular cash dividend of $.35 per share that was paid on
August 18, 2000 to shareholders of record as of August 4, 2000. In addition, on
October 25, 2000, the Parent Company's Board of Directors declared a regular
cash dividend of $.35 per share payable on November 17, 2000 to shareholders of
record as of November 3, 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.
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 September 30, 2000, that
the Subsidiary Banks have satisfied all capital adequacy requirements to which
they are subject.
As of September 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
14
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
have changed the Subsidiary Banks' categories. Presented below are the capital
ratios for the Company and the Subsidiary Banks as of September 30, 2000 and
December 31, 1999.
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY
ACTUAL PURPOSES
--------------------------------- --------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
--------------- --------------- --------------- ------------------------------
<S> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 2000:
Total Capital
(to Risk Weighted Assets):
FVNB Corp. ................. $ 58,046 12.47% $ 37,235 greater than or equal to 8.00%
First Victoria National Bank 47,702 12.16% 31,384 greater than or equal to 8.00%
Citizens Bank of Texas, N.A 10,275 14.88% 5,523 greater than or equal to 8.00%
Tier I Capital
(to Risk Weighted Assets)
FVNB Corp. ................. $ 53,236 11.44% $ 18,618 greater than or equal to 4.00%
First Victoria National Bank 43,821 11.17% 15,692 greater than or equal to 4.00%
Citizens Bank of Texas, N.A 9,412 13.63% 2,761 greater than or equal to 4.00%
Tier I Capital
(to Average Assets)
FVNB Corp. ................. $ 53,236 8.04% $ 26,494 greater than or equal to 4.00%
First Victoria National Bank 43,821 7.54% 23,262 greater than or equal to 4.00%
Citizens Bank of Texas, N.A 9,412 11.19% 3,363 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%
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION-PROVISION
--------------------------------------------------------
AMOUNT RATIO
--------------- -------------------------------
<S> <C> <C>
AS OF SEPTEMBER 30, 2000:
Total Capital
(to Risk Weighted Assets):
FVNB Corp. ................. $ 46,544 greater than or equal to 10.00%
First Victoria National Bank 39,230 greater than or equal to 10.00%
Citizens Bank of Texas, N.A 6,904 greater than or equal to 10.00%
Tier I Capital
(to Risk Weighted Assets)
FVNB Corp. ................. $ 27,926 greater than or equal to 6.00%
First Victoria National Bank 23,538 greater than or equal to 6.00%
Citizens Bank of Texas, N.A 4,142 greater than or equal to 6.00%
Tier I Capital
(to Average Assets)
FVNB Corp. ................. $ 33,117 greater than or equal to 5.00%
First Victoria National Bank 29,077 greater than or equal to 5.00%
Citizens Bank of Texas, N.A 4,204 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>
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
15
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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.
(16) EARNINGS PER SHARE: The weighted average number of shares outstanding
during the nine months ended September 30, 2000 was 2,372,877. 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):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
NUMERATOR:
Net income, as reported .......................................................................... $ 6,350 $ 6,085
Effect of dilutive securities .................................................................... 0 0
---------- ----------
Numerator for diluted earnings per common share .................................................. $ 6,350 $ 6,085
========== ==========
DENOMINATOR:
Denominator for basic earnings per share-- weighted average shares ............................... 2,373 2,373
Effect of dilutive securities:
Outstanding stock options ................................................................... 4 0
---------- ----------
Denominator for diluted earnings per share-- adjusted weighted average
shares and assumed option exercises ........................................................... 2,377 2,373
========== ==========
Basic earnings per share ......................................................................... $ 2.68 $ 2.56
Diluted earnings per share ....................................................................... $ 2.67 $ 2.56
</TABLE>
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value.
The fair values of investment securities are based on quoted market prices
or dealer quotes, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
The fair values of loans and leases are determined by dividing the loan
portfolio into various groups having similar characteristics. The expected
future cash flows of each 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.
16
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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>
SEPTEMBER 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 ..................................... $ 27,762 $ 27,762 $ 26,993 $ 26,993
Federal funds sold .......................................... 25,120 25,120 38,170 38,170
Investment securities, available-for-sale ................... 143,216 143,216 158,776 158,776
Loans and leases, net ....................................... 436,095 429,921 382,834 376,572
Accrued interest receivable ................................. 7,675 7,675 4,758 4,758
Financial Liabilities:
Time deposits ............................................... 299,074 299,390 281,334 281,614
Other deposits .............................................. 271,816 271,816 273,486 273,486
------------ ------------ ------------ ------------
Total deposits .................................... 570,890 571,206 554,820 555,100
Federal funds purchased and securities
sold under agreements to repurchase .................... 10,675 10,675 3,750 3,750
Other borrowings ............................................ 31,055 28,988 27,827 25,806
Accrued interest payable .................................... 2,176 2,176 2,377 2,377
Off-Balance Sheet Instruments:
Commitments to extend credit ................................ 0 128,428 0 132,361
</TABLE>
(18) 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. 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.
(19) 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 $17,791,000 and
$18,551,000 at September 30, 2000 and December 31, 1999, respectively. In
addition, the Bank recorded related non-recourse debt of approximately
$11,779,000 and $12,831,000 as of September 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
17
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 September 30, 2000 and December 31, 1999, in thousands:
SEPTEMBER 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 ........................... 1,330 3,040
--------------- ---------------
Total ...................................... $ 12,730 $ 14,440
=============== ===============
(20) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: 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. Management of the Company is currently assessing
the potential impact that the Statement will have on its consolidated financial
statements and results of operations. The Company will implement the Statement
on January 1, 2001 and anticipates that such adoption will not have a material
impact on its consolidated financial statements or results of operations.
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 nine months ended September 30, 2000, the Company recorded net
income of approximately $6,350,000, or $2.68 basic earnings per share, compared
to approximately $6,085,000, or $2.56 basic earnings per share, for the same
period in 1999. The return on average assets of 1.27% and return on average
equity of 13.82% for the first nine months of 2000 compare to amounts of 1.30%
and 13.85%, respectively, for the same period in 1999.
18
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income, for the nine months ended September 30, 2000,
amounted to approximately $20,534,000 compared to $18,894,000 for the same
period in 1999. This represents an increase of approximately $1,640,000, or
8.68% due primarily to an overall increase in the volume and 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 $27,171,000, or 4.71%, from $576,794,000 at September 30, 1999, to
$603,965,000 at September 30, 2000. The corresponding yields on these assets
increased approximately 55 basis points from 7.76% to 8.31% over the same
period. Average interest bearing liabilities also increased approximately
$18,251,000 or 3.88%, from $470,975,000 at September 30, 1999 to $489,226,000 at
September 30, 2000. The corresponding cost of funds increased over the same
period by approximately 41 basis points from 4.05% to 4.46%.
INTEREST RATE SENSITIVITY
The Company's general strategy with regard to asset/liability and interest
rate risk management is to match maturities and amounts of interest rate
sensitive assets with maturities and amounts of interest rate sensitive
liabilities in such a manner as to minimize risk exposure resulting from changes
in market rates. While matching interest rate sensitivity will provide some
insulation from adverse changes in market rates, it will not assure a stable net
interest spread, as yields and rates may change simultaneously but in varying
degrees. Such changes in market rates and spreads could materially affect the
overall net interest income spread even in situations where asset/liability
sensitivities are perfectly matched.
The Company calculates and monitors interest rate sensitivity in various
ways. One method of calculating interest rate sensitivity is through gap
analysis. A gap is the difference between the amount of interest rate sensitive
assets and interest rate sensitive liabilities that reprice or mature in a given
time period. Positive gaps occur when interest rate sensitive assets exceed
interest rate sensitive liabilities, and negative gaps occur when interest rate
sensitive liabilities exceed interest rate sensitive assets. A positive gap
position in a period of rising interest rates should normally have a positive
effect on net interest income since assets will generally reprice faster than
liabilities. Conversely, net interest income should normally contract somewhat
in a period of declining interest rates. This type of analysis should be used
with caution, however, since gap positions at any given time may be quickly
changed by management in response to 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
19
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 nine months ended September 30, 2000,
was approximately $7,579,000 compared to $6,124,000 for the same period in 1999.
This represents an increase of approximately $1,455,000, or 23.76%. During the
nine months ended September 30, 2000, the Company sold various fixed rate
investment securities resulting in a net loss of approximately $160,000. There
were no called bonds during the period ended September 30, 2000. During the nine
months ended September 30, 1999, the Company sold various fixed rate securities
resulting in a net gain of approximately $46,000. 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
$136,000, or 10.83% 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 $391,000, or 12.76%, 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 implementation of new
deposit products at Citizens Bank of Texas. Other non-interest income increased
approximately $1,120,000, or 63.82%. 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 19 to the
consolidated financial statements. Gains or losses recorded by the Company
related to the sale of assets were not material during the nine months ended
June 30, 2000 or 1999.
NON-INTEREST EXPENSE
Total non-interest expense for the nine months ended September 30, 2000,
was approximately $17,828,000 compared to $15,680,000 for the same period in
1999. This represents an increase of approximately $2,148,000, or 13.70%.
Salaries and wages increased approximately $815,000, or 11.03%, from 1999 to
2000 due primarily to the acquisition of Mid-Coast Savings Bank as well as
normal ongoing merit increases and staff growth. Employee benefits decreased
approximately $144,000, or 12.73%, due primarily to lower costs associated with
group medical insurance and pension plans recorded during the first nine months
of 2000 by First Victoria National Bank. Furniture and equipment expense
increased approximately $430,000, or 38.98% 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 19 to the
consolidated financial statements. Communication and supplies expense increased
approximately $172,000 , or 17.29%, 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 $36,000, or 4.91% 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. Amortization of goodwill and intangibles
increased approximately $188,000, or 37.01%, 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.
20
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 September 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 $4,810,000 or
1.09%, of total loans and leases at September 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 $150,000 for the nine months ended September 30, 2000. Net
loans recovered were approximately $463,000 for the nine months ended September
30, 1999.
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 $1,391,000 and $1,709,000 as of
September 30, 2000 and December 31, 1999, respectively. As of September 30, 2000
and December 31, 1999, approximately $330,000 and $471,000, respectively, of the
allowance for loan and lease losses was allocated specifically to these loans.
21
<PAGE>
FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Following is an analysis of the allowance for loan and lease losses for
the nine months ended September 30, (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Balance at beginning of period ....................................................................... $ 4,573 $ 3,308
Addition to reserve related to acquisitions .......................................................... 87 600
Provision (credit) charged to operating expense ...................................................... 300 (54)
Loans and leases charged off:
Commercial and financial .................................................................. (246) (451)
Real estate ............................................................................... 0 (1)
Agriculture ............................................................................... (174) (13)
Consumer .................................................................................. (215) (218)
-------- --------
Total charged off ............................................................... (635) (683)
-------- --------
Recoveries of loans and leases previously charged off:
Commercial and financial .................................................................. 94 998
Real estate ............................................................................... 242 24
Agriculture ............................................................................... 83 33
Consumer .................................................................................. 66 91
-------- --------
Total recoveries ................................................................ 485 1,146
-------- --------
Net loans and leases (charged off) recovered ......................................................... (150) 463
-------- --------
Balance at end of period ............................................................................. $ 4,810 $ 4,317
======== ========
Allowance for loan and lease losses as a percentage of total loans and leases ........................ 1.09% 1.19%
Net (charge-offs) recoveries as a percentage of average
loans and leases outstanding ...................................................................... (.04)% .13%
NON-PERFORMING ASSETS
<CAPTION>
SEPTEMBER 30,
-----------------------
Past due 90 days or more and still accruing: 2000 1999
-------- --------
<S> <C> <C>
Commercial and financial .................................................................. $ 76 $ 18
Real estate ............................................................................... 197 471
Agriculture ............................................................................... 30 91
Consumer .................................................................................. 47 64
-------- --------
Total past due 90 days or more .......................................................... 350 644
-------- --------
Non-accrual:
Commercial and financial .................................................................. 169 281
Real estate ............................................................................... 864 1,106
Agriculture ............................................................................... 325 260
Consumer .................................................................................. 3 0
-------- --------
Total non-accrual ......................................................................... 1,361 1,647
-------- --------
Restructured Loans: ..................................................................................
Commercial and financial .................................................................. 0 0
Real estate ............................................................................... 32 32
Agriculture ............................................................................... 0 0
Consumer .................................................................................. 0 0
-------- --------
Total restructured loans ................................................................ 32 32
Real estate and other collateral acquired through foreclosure ........................................ 68 443
-------- --------
Total non-performing assets ............................................................... $ 1,811 $ 2,766
======== ========
Non-performing assets as a percentage of
loans and leases and other non-performing assets .................................................. .41% .75%
</TABLE>
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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 $68,000 and $297,000 at September 30, 2000 and December 31, 1999,
respectively. The Company recorded net gains of approximately $16,000 on sales
of foreclosed assets during the nine months ended September 30, 2000 and net
losses of approximately $1,000 during the same period in 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 September 30, 2000, the Company's liquidity
ratio defined as liquid assets as a percentage of deposits was 24.42%. 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 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. In addition, on October 25, 2000,
the Parent Company's Board of Directors declared a regular cash dividend of $.35
per share payable on November 17, 2000 to shareholders of record as of November
3, 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 September 30, 2000 the Company had
recorded goodwill of approximately $14,280,000 related to branch and bank
acquisitions. At September 30, 2000 and December 31, 1999, the percent of total
capital-to-risk-weighted assets was 12.47% and 13.28%, respectively, and
currently exceeds the regulatory requirements. The Company's Tier I capital
ratio as of September 30, 2000 and December 31, 1999 was 11.44% 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
23
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 September 30, 2000 and December 31, 1999, the
Company's Tier I leverage ratio was 8.04% 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.
24
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FVNB CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding historical
information, include forward-looking statements. Although the Company believes
such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. The words
"estimate", "expect", "intend" and "project", as well as other words or
expressions of similar meaning are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this report. Such statements are
based on current expectations, are inherently uncertain, are subject to risks
and should be viewed with caution. Actual results and experience may differ
materially from the forward-looking statements as a result of many factors.
Factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the Company in
forward-looking statements include among others, the following possibilities:
(i) changes in local, state, national and international economic conditions,
(ii) changes in the capital markets utilized by the Company and its
subsidiaries, including changes in the interest rate environment that may reduce
margins, (iii) changes in state and/or federal laws and regulations to which the
Company and its subsidiaries, as well as customers, competitors and potential
competitors, are subject, including banking, tax, securities, insurance and
employment laws and regulations, (iv) the loss of senior management or operating
personnel and the potential inability to hire qualified personnel at reasonable
compensation levels, 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 SEPTEMBER 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 .................................... $ 140 $ 2 5.59% $ 18 0 0.00%
Federal funds sold ................................ 21,115 347 6.43 27,840 356 5.00
Investment securities, available-for-sale:
Taxable ...................................... 148,734 2,184 5.87 170,663 2,453 5.75
Tax-exempt (2) ............................... 916 17 7.42 1,603 27 6.74
Loans and leases (3) .............................. 445,561 10,529 9.40 369,186 8,311 8.93
------------ ------------ ------ ------------ ----------- --------
Total earning assets .................... 616,466 13,079 8.44 569,310 11,147 7.77
------------ ------------ ------ ------------ ----------- --------
Less allowance for loan and lease losses ................ (4,687) (4,237)
Non-earning assets ...................................... 78,519 74,304
------------ ------------
TOTAL ASSETS ....................... $ 690,298 $ 639,377
============ ============
LIABILITIES Interest bearing liabilities:
Deposits:
Savings, IOC, & MMA accounts ................. $ 167,426 1,109 2.64 $ 174,035 1,198 2.73
Time deposits ................................ 300,407 4,206 5.57 262,075 3,175 4.81
------------ ------------ ------ ------------ ----------- --------
Total interest bearing deposits ......... 467,833 5,315 4.52 436,110 4,373 3.98
Federal funds purchased and securities sold
under agreements to repurchase ............... 11,364 189 6.51 12,869 163 4.96
Other borrowings (4) .............................. 17,798 290 6.38 15,142 242 6.25
------------ ------------ ------ ------------ ----------- --------
Total interest bearing liabilities ...... 496,995 5,794 4.64 464,121 4,778 4.08
------------ ------------ ------ ------------ ----------- --------
Non-interest bearing liabilities:
Demand deposits ................................... 102,851 90,114
Other liabilities ................................. 23,427 22,628
------------ ------------
Total non-interest bearing liabilities .. 126,278 112,742
Shareholders' Equity .................................... 67,025 62,514
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .................. $ 690,298 $ 639,377
============ ============
Net Interest Income ..................................... $ 7,285 6,369
============ ===========
Interest Differential ................................... 3.80% 3.69%
====== ========
Net Interest Margin ..................................... 4.70% 4.44%
====== ========
</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>
NINE MONTHS ENDED SEPTEMBER 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 .................................... $ 253 $ 12 6.23% $ 18 $ 1 7.33%
Federal funds sold ................................ 21,972 999 5.97 30,379 1,056 4.58
Investment securities, available-for-sale:
Taxable ...................................... 156,590 6,894 5.87 183,346 7,891 5.74
Tax-exempt (2) ............................... 1,034 55 7.09 1,699 83 6.54
Loans and leases (3) .............................. 424,116 29,594 9.32 361,352 24,465 9.05
------------ ------------ ----- ------------ ------------ -------
Total earning assets .................... 603,965 37,554 8.31 576,794 33,496 7.76
------------ ------------ ----- ------------ ------------ -------
Less allowance for loan and lease losses ................ (4,550) (4,301)
Non-earning assets ...................................... 75,928 56,207
------------ ------------
TOTAL ASSETS ....................... $ 675,343 $ 628,700
============ ============
LIABILITIES Interest bearing liabilities:
Deposits:
Savings, IOC, & MMA accounts ................. $ 171,397 3,391 2.64 176,701 3,414 2.58
Time deposits ................................ 293,699 11,796 5.36 253,767 9,174 4.83
------------ ------------ ----- ------------ ------------ -------
Total interest bearing deposits ......... 465,096 15,187 4.36 430,468 12,588 3.91
Federal funds purchased and securities sold
under agreements to repurchase ............... 7,905 375 6.23 24,233 895 4.87
Other borrowings .................................. 16,225 781 6.32 16,274 774 6.27
------------ ------------ ----- ------------ ------------ -------
Total interest bearing liabilities ...... 489,226 16,343 4.46 470,975 14,257 4.05
------------ ------------ ----- ------------ ------------ -------
Non-interest bearing liabilities:
Demand deposits ................................... 97,390 82,226
Other liabilities ................................. 23,055 15,139
------------ ------------
Total non-interest bearing liabilities .. 120,445 97,365
Shareholders' Equity .................................... 65,672 60,360
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .................... $ 675,343 $ 628,700
============ ============
Net Interest Income ..................................... $ 21,211 $ 19,239
============ ============
Interest Differential ................................... 3.85% 3.71%
===== =======
Net Interest Margin ..................................... 4.69% 4.46%
===== =======
</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 nine months ended September 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 September
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
No matters were submitted to a vote of security holders during the period
covered by this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) On November 2, 2000, the Company filed a Form 8-K dated November 2. The
purpose of the form was to announce that on October 25, 2000, the Board of
Directors of FVNB Corp. declared a cash dividend of $.35 per share payable
on November 17, 2000 to shareholders of record as of November 3, 2000. The
form also reported unaudited financial information related to the third
quarter of 2000 as well as the designation of Dana K. Fowler as the
Secretary and Principal Accounting Officer of the Company as of October
25, 2000.
b) The following exhibits are filed as part of this report:
27 Financial Data Schedule
28
<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.
NOVEMBER 10, 2000 By: /s/ DAVID M. GADDIS
--------------------- -----------------------------------
Date David M. Gaddis
President and Chief Executive Officer
NOVEMBER 10, 2000 By: /s/ DANA K. FOWLER
--------------------- -----------------------------------
Date Dana K. Fowler
Secretary,
Principal Accounting and Financial Officer
29
