10-Q 1 a2048742z10-q.txt 10-Q -------------------------------------------------------------------------------- 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 MARCH 31, 2001 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 May 10, 2001. -------------------------------------------------------------------------------- 1 PART 1. FINANCIAL INFORMATION FVNB CORP. AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 2 FVNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 3 FVNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 4 FVNB CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of FVNB Corp. (Parent Company) and subsidiaries (collectively, the Company) conform to accounting principles generally accepted in the United States of America 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 are unaudited, but include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments were of a normal and recurring nature. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in the Company's latest Annual Report on Form 10-K. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. 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 its wholly owned subsidiaries) and Citizens Bank of Texas, N.A. (collectively the Subsidiary Banks) as well as Citizens Mortgage Company and Citizens Insurance Agency of Texas. 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 March 31, 2001, both PMV, Inc. and First Victoria Community Development Corporation were inactive. 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- 5 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- maturity securities shall be classified as available-for-sale securities. Securities that would be sold in response to changes in market interest rates and the securities' prepayment risk, needs for liquidity, or changes in the availability and yield on alternative investments are classified as available-for-sale. Available-for-sale securities are reported at fair value and any unrealized holding gains and losses are excluded from earnings and recorded as a net amount as a separate component of shareholders' equity (net of tax effect) until realized. 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 nonrecourse 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 6 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- improvements which materially increase the value of the property and have a benefit over more than one accounting period are capitalized. Estimated useful lives are 15 - 40 years for premises and 3 - 10 years for equipment. INCOME TAXES -- The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". This standard allows the recognition of deferred tax assets and liabilities based on the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities. 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 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. The Company operates as a going concern and, except for its investment securities portfolio, no active market exists for its financial instruments. Much of the information used to determine fair value is highly subjective and judgmental in nature and therefore the results may not be precise. The subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts which will actually be realized or paid upon settlement or maturity of the various instruments could be significantly different. Fair value estimates, methods, and assumptions for financial instruments, are set forth in Note 17 to the consolidated financial statements. COMPREHENSIVE INCOME -- Effective January 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of this Statement requires 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 7 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123). SEGMENTS DISCLOSURE -- Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires that public business enterprises report certain information about its operating segments in order to provide information about the different types of business activities in which an enterprise engages. Management of the Company believes that the Company operates in only one segment, commercial banking, 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 three months ended March 31, 2001 and 2000 was approximately $6,516,000 and $5,125,000, respectively. The Company paid no federal income taxes during the three months ended March 31, 2001 and 2000. Non-cash transactions representing the transfer of non-performing loans to other real estate owned and foreclosed assets totaled approximately $60,000 and $25,000 for the three months ended March 31, 2001 and 2000, respectively. (3) CASH AND DUE FROM BANKS: Cash and due from banks of approximately $10,411,000 and $8,962,000 at March 31, 2001 and December 31, 2000, respectively, were maintained to satisfy regulatory reserve requirements. (4) INVESTMENT SECURITIES: As of March 31, 2001, the Company's entire investment portfolio was classified as available-for-sale and this classification resulted in an unrealized gain of approximately $322,000. This was reflected as an increase to available-for-sale securities of approximately $322,000 and a corresponding increase to shareholders' equity and a deferred tax liability of approximately $212,000 and $110,000, respectively. As of December 31, 2000, the classification resulted in an unrealized loss of approximately $1,689,000. This was reflected as a decrease to available-for-sale securities of approximately $1,689,000 and a corresponding decrease to shareholders' equity and a deferred tax asset of approximately $1,115,000 and $574,000, respectively. During the three months ended March 31, 2001, the Company sold no investment securities. During the same period in 2001, there were two bonds called with a total book value of approximately $8,700,000 resulting in no net gain or loss. During the three months ended March 31, 2000, the Company sold no investment securities. In addition, there were no called bonds during the period ended March 31, 2000. A comparison of investment securities at book and market values, as determined by an independent broker, is as follows (in thousands):

8 FVNB CORP. AND SUBSIDIARIES --------------------------------------------------------------------------------

The amortized cost and estimated market value of investment securities at March 31, 2001 and December 31, 2000, 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.

Securities with a par value of approximately $58,550,000 and $93,750,000 at March 31, 2001 and December 31, 2000, respectively, were pledged to secure public and trust deposits as required or permitted by law. (5) LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES AND OTHER REAL ESTATE OWNED: The Subsidiary Banks make agriculture, commercial, real estate, and installment loans to customers primarily in southeast Texas. Although the Subsidiary Banks have a diversified loan and lease portfolio, a substantial portion of their debtors' ability to honor their contracts is dependent upon the agricultural economic sector. Loans and leases are classified in the following categories (in thousands):

9 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- As of March 31, 2001 and December 31, 2000, 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):

A summary of the components of income from the leveraged lease follows for the three months ended March 31, 2001 and 2000 (in thousands):

Transactions in the allowance for loan and lease losses for the three months ended March 31, 2001 and 2000 were as follows (in thousands):

The Company's allowance for loan and lease losses is based on the ongoing assessment of risks inherent in the loan and lease portfolio as well as the potential impact of certain off-balance sheet financial instruments. The components that comprise the allowance include: (1) specific allowances based upon the performance of individual loans and leases, and (2) a general allowance based upon such factors as economic trends; volume of past due and non-performing loans; changes in loan portfolio volume, composition and concentrations; loss factors based on a historical moving average of the actual loss history and performance of the loan portfolio as a whole over a period of time; and experience, ability, and effectiveness of lending management and staff. In addition, management considers historical loss factors established throughout the industry for companies of similar size and function as an additional means of evaluating the reasonableness of the allowance. Based on these factors, management of the Company believes that the allowance for loan and lease losses was adequate to cover expected losses at March 31, 2001 and December 31, 2000 and remains within the levels reported throughout the industry. As conditions are continually changing, it is necessary for management to regularly review the loan and lease portfolio as well as industry trends and economic factors to ensure that the allowance remains at a reasonable level and to make adjustments as appropriate. Any changes to the allowance resulting from subsequent assessments and revised loss estimates will be reflected in future earnings. Loans and leases receivable on which the accrual of interest has been discontinued amounted to approximately $1,819,000 and $1,937,000 at March 31, 2001 and December 31, 2000, respectively. The effect of the reversal of previously accrued interest on interest income was approximately $4,000 and $21,000 for the three months ended March 31, 2001 and 2000, respectively. If during the three months ended March 31, 2001 and 2000 interest had been accrued at the stated rates, interest income would have increased by approximately $47,000 and $35,000, respectively. The Company had restructured loans and 10 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- leases of approximately $51,000 and $31,000 as of March 31, 2001 and December 31, 2000, respectively. 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 three months ended March 31, 2001 or 2000. Foreclosed assets are carried in other assets at the lower of loan balance or estimated fair value less estimated selling costs and totaled approximately $25,000 and $19,000 at March 31, 2001 and December 31, 2000, respectively. The Company recorded net losses of approximately $10,000 on sales of foreclosed assets during the three months ended March 31, 2001. The Company recorded no gains or losses on sales of foreclosed assets during the same period in 2000. Total impaired loans and leases on the Company's books (including non-accrual and restructured loans and leases) amounted to approximately $1,870,000 and $1,969,000 as of March 31, 2001 and December 31, 2000, respectively. Approximately $265,000 and $496,000 of the allowance for loan and lease losses was allocated specifically to these loans and leases as of March 31, 2001 and December 31, 2000, respectively. The average balance of impaired loans outstanding during the three months ended March 31, 2001 was approximately $1,617,000. The average balance of impaired loans outstanding during 2000 was approximately $1,515,000. (6) PREMISES AND EQUIPMENT: The following is a summary of premises and equipment (in thousands):

Furniture and equipment at March 31, 2001 includes an aircraft with a net book value of approximately $17,285,000 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 $117,647,000 and $100,316,000 at March 31, 2001 and December 31, 2000, respectively. Interest expense for these deposits was approximately $1,636,000 and $1,261,000 for the three months ended March 31, 2001 and 2000, respectively. (8) INCOME TAXES: The Company recorded current federal income tax expense of approximately $1,017,000 and $738,000 for the three months ended March 31, 2001 and 2000, respectively. In addition, the Company recorded deferred tax expense of approximately $268,000 and $420,000 for the three months ended March 31, 2001 and 2000, respectively. As of March 31, 2001 and December 31, 2000, the Company had net deferred tax liabilities of approximately $7,867,000 and $6,915,000, which are 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. 11 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. The total commitment amounts do not necessarily represent future cash requirements, since the commitments may expire without being drawn upon. The Subsidiary Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit, is based on management's credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Subsidiary Banks to guarantee performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies, but may include accounts receivable, inventory, equipment or real estate. The Subsidiary Banks' exposure to credit loss, in the event of non-performance by the customer, for commitments to extend credit and standby letters of credit is limited to the contractual amounts of those instruments. As of March 31, 2001 and December 31, 2000, the Subsidiary Banks had commitments to extend credit of approximately $122,650,000 and $130,103,000 and standby letters of credit of approximately $1,918,000 and $1,705,000, respectively. The following is a breakdown of commitments by type (in thousands).

(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: Effective January 1, 2001, the Company and its Subsidiary Banks adopted the FVNB Corp. Employees' Profit Sharing Plan. The plan is a 401(k) salary deferral plan under which participants are allowed 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. The Company contributes a matching amount equal to 100% of the participant's contribution on all deferrals up to 3% of compensation and an additional 50% of the participant's contribution on all deferrals that exceed 3% but do not exceed 5%. This equates to a maximum employer matching contribution of 4% of the participant's compensation. Contributions to the plan by the Company for the three months ended March 31, 2001 were approximately $73,000. Prior to January 1, 2001, each Subsidiary Bank maintained a separate 401(k) salary deferral plan. First Victoria National Bank's Employees' Profit Sharing Plan was a 401(k) salary deferral plan which allowed employees to defer up to 15% of their compensation. In addition, participants were 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 contributed 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 could 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 was administered by the Trust and Investment Management Department of First Victoria National Bank and was prohibited from investing in the common stock of the Company. Contributions to the plan by First Victoria National Bank for the three months ended March 31, 2000 were approximately $34,000. Citizens Bank of Texas maintained a 401(k) salary deferral plan in which employees were allowed to defer up to 6% of their compensation. Based upon the employee's contribution, Citizens Bank of Texas contributed a matching amount equal to 25% of the employee's contribution. Expenses related to the plan during the first three months of 2000 were approximately $4,000. 12 FVNB CORP. AND SUBSIDIARIES ------------------------------------------------------------------------------- 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 payable entirely in cash and are contingent upon First Victoria National Bank's attaining various growth and financial objectives to be determined annually. No expense related to this plan was recorded during the three months ended March 31, 2001. Expenses of approximately $39,000 related to this plan were recorded during the first three months of 2000. 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. No expense related to this plan was recorded during the three months ended March 31, 2001. Expenses of approximately $61,000 related to this plan were recorded during the first three months of 2000. Citizens Bank of Texas also maintains a pension plan for its employees. Expenses related to the plan during the first three months of 2001 and 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 market price of the underlying stock on the date of grant. Finally, 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 at 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 March 31, 2001, 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 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 $226,484,000 and $221,022,000 at March 31, 2001 and December 31, 2000, 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 three months ended March 31, in the following table (in thousands):

13 FVNB CORP. AND SUBSIDIARIES ------------------------------------------------------------------------------- Approximately 25.46% of the Company's outstanding stock was owned by principal shareholders, directors, and executive officers of the Company at March 31, 2001. The aggregate deposits owned by principal shareholders, directors, and executive officers of the Company at March 31, 2001 and December 31, 2000 amounted to approximately 2.07% and 2.35%, 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 March 31, 2001 and December 31, 2000, in thousands. The weighted average contractual rate on the balances of other borrowings outstanding was 6.77% and 6.73% as of March 31, 2001 and December 31, 2000, 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.

(15) SHAREHOLDERS' EQUITY: On January 24, 2001, the Parent Company's Board of Directors declared a regular cash dividend of $.35 per share that was paid on February 16, 2001 to shareholders of record as of February 2, 2001. In addition, on April 25, 2001 the Parent Company's Board of Directors declared a regular cash dividend of $.35 per share payable on May 18, 2001 to shareholders of record as of May 4, 2001. The principal source of the Parent Company's cash revenues is dividends from First Victoria National Bank. There are certain limitations on the payment of dividends to the Parent Company by the Subsidiary Banks. The prior approval of the Office of the Comptroller of the Currency ("OCC") is required if the total of all dividends declared by a national bank in any calendar year would exceed the bank's net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years less any required transfers to surplus. In order to fund the acquisition of Citizens Bank of Texas, First Victoria National Bank paid a dividend to the Parent Company for which it was required to receive the prior approval of the OCC. The OCC approved the special dividend and it approved future quarterly dividends to fund the standard cash dividend of the Parent Company, provided that First Victoria National Bank's net income during future quarters is sufficient to support such quarterly dividends. The weighted average number of shares outstanding during the three months ended March 31, 2001 was 2,372,892. The weighted average number of shares outstanding during 2000 was 2,372,848. The Parent Company and the Subsidiary Banks are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators which, if undertaken, could have a direct material effect on the Subsidiary Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Subsidiary Banks must meet specific capital guidelines that involve quantitative measures of the Subsidiary Banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Subsidiary Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 14 FVNB CORP. AND SUBSIDIARIES ------------------------------------------------------------------------------- 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 March 31, 2001, that the Subsidiary Banks have satisfied all capital adequacy requirements to which they are subject.

15 FVNB CORP. AND SUBSIDIARIES ------------------------------------------------------------------------------- (16) EARNINGS PER SHARE: The weighted average number of shares outstanding for the three months ended March 31, 2001 and 2000 was 2,372,892 and 2,372,848, respectively. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

(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. 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. 16 FVNB CORP. AND SUBSIDIARIES ------------------------------------------------------------------------------- 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:

(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 the First Victoria National Bank. Total intangible assets associated with the acquisition were approximately $4,257,000. (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 $17,285,000 and $17,538,000 at March 31, 2001 and December 31, 2000, respectively. In addition, the Bank recorded related non-recourse debt of approximately $11,046,000 and $11,415,000 as of March 31, 2001 and December 31, 2000, respectively. The debt calls for monthly payments of $190,000 over an original term of approximately seven years with a final balloon payment of approximately $2,285,000 due in April 2006. The average rate on the debt was 7.09%. The following table represents the contractual future rental income related to this transaction that was receivable as of March 31, 2001 and December 31, 2000, in thousands:

17 FVNB CORP. AND SUBSIDIARIES ------------------------------------------------------------------------------- (20) ADOPTION OF SFAS NO. 133: SFAS NO. 133 "Accounting for Derivative Instruments and for Hedging Activities," requires companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure all derivatives at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. For fair value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability, or firm commitment, changes in the derivative instrument's fair value will generally be offset in the statement of operations by changes in the hedged item's fair value. For cash flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current period earnings. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," deferred the effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," amended the accounting and reporting under SFAS No. 133 for certain derivative instruments, hedging activities, and decisions made by the Derivatives Implementation Group ("DIG"). The Company adopted these statements on January 1, 2001, and the adoption of these statements had no material impact on its consolidated financial statements or results of operations. (21) SUBSEQUENT EVENTS: On April 27, 2001, the Board of Directors of the Company announced, through a press release, the postponement of the Annual Meeting of Shareholders to a date to be determined so that the shareholders may consider a proposal for a going private transaction as an agenda item for shareholder approval at the meeting. In addition, on April 27, 2001, the Company filed a Preliminary Proxy Statement and a Schedule 13E-3 with the Securities Exchange Commission in conjunction with the proposed transaction. 18 FVNB CORP. AND SUBSIDIARIES ------------------------------------------------------------------------------- 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. The Company recorded this transaction using the purchase method of accounting. RESULTS OF OPERATIONS For the three months ended March 31, 2001, the Company recorded net income of approximately $2,224,000, or $.94 basic earnings per share, compared to approximately $2,061,000, or $.87 basic earnings per share, for the same period in 2000. The return on average assets of 1.23% and return on average equity of 13.08% for the first three months of 2001 compare to amounts of 1.28% and 13.74%, respectively, for the same period in 2000. NET INTEREST INCOME Net interest income, for the three months ended March 31, 2001, amounted to approximately $6,906,000 compared to $6,390,000 for the same period in 2000. This represents an increase of approximately $516,000, or 8.08% due primarily to an overall increase in the yields on earning assets as well as a shift in the mix of earning assets from investment securities into higher yielding loans. Average earning assets increased approximately $75,173,000, or 12.85%, from $585,228,000 at March 31, 2000, to $660,401,000 at March 31, 2001. The corresponding yields on these assets increased approximately 28 basis points from 8.03% to 8.31% over the same period. Average interest bearing liabilities also increased approximately $62,626,000 or 13.20%, from $474,507,000 at March 31, 2000 to $537,133,000 at March 31, 2001. The corresponding cost of funds increased over the same period approximately 56 basis points from 4.29% to 4.85%. A portion of the increase in both earning assets and interest bearing liabilities is due to the acquisition of Mid-Coast Savings Bank by First Victoria National Bank in April 2000. At the time of acquisition, Mid-Coast Savings Bank had net loans of approximately $23,950,000 and deposits of approximately $33,532,000. Further discussion of the acquisition of Mid-Coast Savings Bank may be found in Note 18 to the consolidated financial statements. 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. 19 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- 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 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 three months ended March 31, 2001, there have been no material changes in the Company's market risk. NON-INTEREST INCOME Total non-interest income for the three months ended March 31, 2001, was approximately $2,763,000 compared to $2,433,000 for the same period in 2000. This represents an increase of approximately $330,000, or 13.56%. Trust service fees increased approximately $87,000, or 19.12% from 2000 to 2001 due primarily to the recognition and timing of various annual fee assessments as well as overall growth in account volume. Service charges and fees on deposit accounts increased approximately $227,000, or 21.48%, due to an increase in the volume of insufficient funds charges as well as increased fee income related to growth in the volume of ATM and check card activity. Other non-interest income did not change significantly from 2000 to 2001. Net gains or losses related to the sale of assets were not material during the three months ended March 31, 2001 or 2000. NON-INTEREST EXPENSE Total non-interest expense for the three months ended March 31, 2001, was approximately $6,160,000 compared to $5,554,000 for the same period in 2000. This represents an increase of approximately $606,000, or 10.91%. Salaries and wages increased approximately $157,000, or 6.17%, from 2000 to 2001 due primarily to the acquisition of Mid-Coast Savings Bank by First Victoria National Bank in April 2000 as well as normal ongoing merit increases. Employee benefits increased approximately $106,000, or 27.89%, due primarily to higher costs associated with group medical insurance as well as increased 401(k) matching expense related to the conversion of the individual 20 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- Subsidiary Banks' 401(k) plans to a single Company plan. Net occupancy expense increased approximately $53,000, or 15.59%, due primarily to costs associated with the operation of facilities acquired from Mid-Coast Savings Bank in April 2000. Professional fees increased approximately $83,000, or 39.90% from 2000 to 2001 due primarily to increased legal expenses incurred by the Company related to the potential going private transaction discussed in further detail in Note 21 to the consolidated financial statements. Amortization of goodwill and intangibles increased approximately $67,000, or 34.72%, from 2000 to 2001 due directly to the amortization of goodwill recognized as a result of the acquisition of Mid-Coast Savings Bank. Other components of non-interest expense include net communication and supplies expense, marketing and advertising and FDIC insurance premiums. Each of these categories changed only nominally from 2000 to 2001 as the result of normal operations and growth of the Company. ALLOWANCE FOR LOAN AND LEASE LOSSES The Company's allowance for loan and lease losses is based on the ongoing assessment of risks inherent in the loan and lease portfolio as well as the potential impact of certain off-balance sheet financial instruments. In evaluating the adequacy of the allowance, management incorporates such factors as economic trends; volume of past due and non-performing loans; changes in loan portfolio volume, composition and concentrations; historical loss factors based on actual performance over a period of time; and experience, ability and effectiveness of lending management and staff. In addition, management considers historical allowance for loan and lease loss factors established throughout the industry for companies of similar size and function as an additional means of evaluating the reasonableness of the allowance. Based on these factors, management of the Company believes that the allowance for loan and lease losses was adequate to cover expected losses at March 31, 2001 and remains within the levels reported throughout the industry. As conditions are continually changing, it is necessary for management to regularly review the loan and lease portfolio as well as industry trends and economic factors to ensure that the allowance remains at a reasonable level and make adjustments as appropriate. Any changes to the allowance resulting from subsequent assessments and revised loss estimates will be reflected in future earnings. The allowance for loan and lease losses was approximately $5,276,000 or 1.06%, of total loans and leases at March 31, 2001, compared to $5,080,000, or 1.08%, of total loans and leases at December 31, 2000. Net recoveries of loans previously charged off were approximately $196,000 compared to net loans charged off of approximately $130,000 for the three months ended March 31, 2001 and 2000, respectively. The Company accounts for impaired loans and leases in accordance with SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosure". These standards address the accounting by creditors for the impairment of certain loans and leases as well as the accounting for troubled debt restructurings. A loan and lease is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the original contractual terms of the loan or lease agreement. The standards allow impaired loans that fall within the scope of SFAS No. 114, as amended by SFAS No. 118, to be measured based on the present value of expected 21 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- 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 $1,870,000 and $1,969,000 as of March 31, 2001 and December 31, 2000, respectively. As of March 31, 2001 and December 31, 2000, approximately $265,000 and $496,000, respectively, of the allowance for loan and lease losses was allocated specifically to these loans. Following is an analysis of the allowance for loan and lease losses for the three months ended March 31, (in thousands):

NON-PERFORMING ASSETS

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 $25,000 and $19,000 at March 31, 2001 and December 31, 2000, respectively. The Company recorded net losses of approximately $10,000 on sales of foreclosed assets during the three months ended March 31, 2001. The Company recorded no gains or losses on sales of foreclosed assets during the three months ended March 31, 2000. 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 March 31, 2001, the Company's liquidity ratio defined as liquid assets as a percentage of deposits was 21.63%. 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 January 24, 2001, the Parent Company's Board of Directors declared a regular cash dividend of $.35 per share that was paid on February 16, 2001 to shareholders of record as of February 2, 2001. In addition, on April 25, 2001, the Parent Company's Board of Directors declared a regular cash dividend of $.35 per share payable on May 18, 2001 to shareholders of record as of May 4, 2001. 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 March 31, 2001 and December 31, 2000, 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 March 31, 2001 the Company had recorded goodwill of approximately $13,556,000 related to branch and bank acquisitions. At March 31, 2001 and December 31, 2000, the percent of total capital-to-risk-weighted assets was 11.92% and 12.28%, respectively, and which exceed the regulatory 23 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- requirements. The Company's Tier I capital ratio as of March 31, 2001 and December 31, 2000 was 10.90% and 11.24%, respectively, and well in excess of the required ratios. Tier I leverage ratio is defined as the Company's Tier I capital divided by its adjusted average total assets (net of allowance for loan losses). The minimum leverage ratio is 3.00% for banking organizations carrying the highest regulatory rating. Other institutions are expected to maintain a leverage ratio of at least 4.00% to 5.00% depending upon their particular condition. At March 31, 2001 and December 31, 2000, the Company's Tier I leverage ratio was 7.82% and 8.18%, respectively, which exceeds the regulatory minimum. 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. 24 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- AVERAGE BALANCE SHEETS AND INTEREST RATES (1)

------------------------- (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. 25 FVNB CORP. AND SUBSIDIARIES -------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK While future interest rates and their effects on portfolio equity cannot be accurately predicted, it is not expected that future changes in rates will have a material adverse impact on the Company's net interest income or portfolio equity. Calculations of the potential impact of hypothetical interest rate changes are based on numerous assumptions including levels of market rates, prepayments and deposit runoffs and should not be considered indicative of actual results. Although certain assets and liabilities may have similar maturity or periods of repricing they may react at different times and in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable rate mortgage loans, generally have features which restrict changes in interest rates on a short term basis and over the life of the asset. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. During the three months ended March 31, 2001, there have been no material changes in the Company's market risk. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A description of legal proceedings is presented in Part I of this March 31, 2001 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 February 1, 2001 the Company filed a Form 8-K dated February 1, 2001. The purpose of the form was to announce that on January 24, 2001, the Board of Directors of FVNB Corp. declared a cash dividend of $.35 per share payable on February 16, 2001 to shareholders of record as of February 2, 2001. On February 8, 2001, the Company filed a Form 8-K dated February 8, 2001. The purpose of the form was to announce FVNB Corp.'s earnings for 2000 and provide a consolidated financial summary for 2000 and unaudited financial information related to the fourth quarter of 2000. On April 27, 2001, The Company filed a Schedule 13E-3 dated April 27, 2001. The form was filed in conjunction with the Preliminary Proxy Statement also filed with the Securities Exchange Commission on April 27, 2001 regarding the proposed going private transaction discussed in further detail in Note 21 to the consolidated financial statements. On May 7, 2001, the Company filed a Form 8-K dated May 7, 2001. The purpose of the form was to announce that on April 25, 2001, the Board of Directors of FVNB Corp. declared a cash dividend of $.35 per share payable on May 18, 2001 to shareholders of record as of May 4, 2001. In addition, the Company announced its earnings for the first quarter of 2001 and provided unaudited financial information related to the first quarter of 2001. b) The following exhibits are filed as part of this report: 3.2 FVNB Corp. Bylaws Amended and Restated as of April 19, 2001 10.1(a) 1998 FVNB Corp. Stock Incentive Plan Amendment dated January 24, 2001 26 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. May 10, 2001 By: /s/ DAVID M. GADDIS --------------------- --------------------------------------------- Date David M. Gaddis President and Chief Executive Officer May 10, 2001 By: /s/ DANA K. FOWLER --------------------- --------------------------------------------- Date Dana K. Fowler Secretary, Principal Accounting and Financial Officer 27

FVNB CORP 10-Q