<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR
15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File Number 333-30779
--------------------------------------------
BIG LAKE FINANCIAL CORPORATION
(Exact Name of registrant as specified in its charter)
Florida 59-2613321
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1409 S. Parrott Avenue
Okeechobee, Florida 34974
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
-------------------------------------------
(941) 467-4663
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(Registrant's telephone number including area code)
--------------------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X NO
--- ---
Indicate the number of shares of outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Class Outstanding as of August 10, 1998
- ------------ ---------------------------------
Common Stock 490,001
Par Value $0.01 per share
<PAGE> 2
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-QSB - FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets as of June 30, 1998
(Unaudited) and December 31, 1997 1
Consolidated Condensed Statements of Income for the Three Months
and for the Six Months Ended June 30, 1998 and 1997 (Unaudited) 2
Consolidated Condensed Statements of Comprehensive Income
for the Six Months Ended June 30, 1998 and 1997 (Unaudited) 3
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6-11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12-18
PART II: OTHER INFORMATION 19
SIGNATURES 20
</TABLE>
<PAGE> 3
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, 1998
(Unaudited) December 31, 1997*
--------------- ------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,572 $ 6,492
Federal funds sold 15,954 3,296
Investment securities:
Available-for-sale at fair value 17,424 21,958
Held-to-maturity at amortized cost 799 801
Loans receivable less allowance for credit losses 72,071 73,972
Accrued interest receivable 826 813
Bank premises and equipment - net 2,608 2,626
Other assets 1,664 1,834
--------- ---------
TOTAL $ 115,918 $ 111,792
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 21,831 $ 19,793
Demand deposits 16,427 13,807
Money market accounts 7,775 6,891
Savings accounts 11,362 11,301
Time, $100,000 and over 6,395 6,252
Other time deposits 41,457 43,288
--------- ----------
Total deposits 105,247 101,332
Other accrued expenses and liabilities 727 1,037
--------- ----------
Total liabilities 105,974 102,369
--------- ----------
Commitments and contingencies - -
--------- ----------
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 7,168 6,855
Retained earnings 2,772 2,569
Unrealized loss on available-for-sale securities (1) (6)
--------- ----------
Total stockholders' equity 9,944 9,423
--------- ----------
TOTAL $ 115,918 $ 111,792
========= ==========
Book value per common share, adjusted for stock dividend $ 20.30 $ 19.36
========= ==========
Common shares outstanding 490,001 486,815
========= ==========
</TABLE>
*Condensed from December 31, 1997, audited balance sheet
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 1 -
<PAGE> 4
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and fees on loans $ 1,762 $ 965 $ 3,496 $ 1,852
Investment income on investment securities 299 231 579 467
Other interest income 206 28 372 62
-------- --------- -------- --------
Total interest income
2,267 1,224 4,447 2,381
Interest expense on deposits 830 471 1,682 913
-------- --------- -------- --------
Net interest income before provision for credit losses 1,437 753 2,765 1,468
Provision for credit losses 60 36 108 60
-------- --------- -------- --------
Net interest income 1,377 717 2,657 1,408
-------- --------- -------- --------
Fees and service charges 259 148 514 304
Other income 28 27 53 51
-------- --------- -------- --------
Total other income 287 175 567 355
-------- --------- -------- --------
Other expenses:
Salaries and employee benefits 550 294 1,122 591
Expenses of bank premises and fixed assets 181 78 336 155
Other operating expenses 609 215 1,077 453
-------- --------- -------- --------
Total other expenses 1,340 587 2,535 1,199
-------- --------- -------- --------
Income before provision for income taxes 324 305 689 564
Provision for income taxes 109 101 237 188
-------- --------- -------- --------
Net income $ 215 $ 204 $ 452 $ 376
======== ========= ======== ========
Earnings per share:
Basic $ 0.44 $ 0.42 $ 0.93 $ 0.77
======== ========= ======== ========
Diluted $ 0.43 $ 0.41 $ 0.91 $ 0.76
======== ========= ======== ========
Weighted average common shares outstanding during period:
Basic 488,285 486,815 $487,554 $486,815
======== ========= ======== ========
Diluted 496,974 493,187 496,243 493,187
======== ========= ======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 2 -
<PAGE> 5
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six
Months Ended June 30,
----------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 452 $ 376
Other comprehensive income, net of tax:
Unrealized holding gains arising during period 5 14
----- -----
Total
Comprehensive income $ 457 $ 390
===== =====
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 3 -
<PAGE> 6
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 356 $ 695
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in:
Investment securities 4,534 241
Loans 1,916 (5,180)
Purchases of premises and equipment, net (47) (214)
------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,403 (5,153)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,915 6,036
Cash paid in lieu of fractional shares (6) -
Stock options exercised 70 -
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,979 6,036
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,738 1,578
CASH AND CASH EQUIVALENTS AT JANUARY 1 9,788 4,402
------- --------
CASH AND CASH EQUIVALENTS AT JUNE 30 $20,526 $ 5,980
======= ========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 4 -
<PAGE> 7
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING
COMMON STOCK ADDITIONAL GAINS TOTAL
------------------ PAID-IN RETAINED (LOSSES) ON STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SECURITIES EQUITY
------ ------ ---------- -------- ----------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 475,223 $ 5 $ 6,855 $ 2,569 $ (6) $ 9,423
Stock dividend declared 11,592 - 243 (243) - -
Cash paid in lieu of fractional shares - - - (6) - (6)
Stock options exercised 3,186 - 70 - - 70
Comprehensive income:
Net income - - - 452 -
Net change in unrealized holding
gains on securities - - - - 5
Total comprehensive income - - - - - 457
- - - - - -
------- --- ------- ------- ---- -------
Balance, June 30, 1998 490,001 $ 5 $ 7,168 $ 2,772 $ (1) $ 9,944
======= === ======= ======= ==== =======
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 5 -
<PAGE> 8
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 1 - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Big Lake
Financial Corporation (the "Company") and its wholly owned subsidiary Big Lake
National Bank (the "Bank"). The information contained in the financial
statements is unaudited. In the opinion of management, all adjustments have
been made (consisting only of normal recurring accruals) necessary to present a
fair statement of the results for interim periods. The results for interim
periods are not necessarily indicative of trends or results which may be
expected for a full year. It is suggested that these financial statements and
notes be read in conjunction with the Company's financial statements for the
year ended December 31, 1997.
On May 1, 1998, Clewiston National Bank was merged with and into Big Lake
National Bank and the transaction was accounted for as a pooling-of-interests.
Clewiston National Bank was acquired by the Company through its acquisition of
CNB Financial Corporation on October 31, 1997. The acquisition of CNB Financial
Corporation was accounted for under the purchase accounting method and all
material merger-related accounting transactions have been pushed down to the
Bank's books and records as of May 1, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of 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 those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans ("Other Real Estate"). In connection with the
determination of the allowances for credit losses on loans and foreclosed real
estate, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
Fair Value of Financial Instruments
Financial instruments of the Company consist of cash, due from banks, federal
funds sold, investment securities, loans receivable, accrued interest
receivable, deposits, accrued interest payable, and off-balance sheet
commitments such as commitments to extend credit and standby letters of credit.
On an interim basis, management considers the cost of providing estimated fair
values by each class of financial instrument to exceed the benefits derived. In
management's opinion, the carrying amount of financial instruments approximates
fair value.
- 6 -
<PAGE> 9
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 1 - ACCOUNTING POLICIES (Continued)
Investment Securities
The Company has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). SFAS 115 applies to all debt securities and to equity securities that
have readily determinable fair values. SFAS 115 requires the Company to carry
its securities classified "available-for-sale" at fair market value. The Bank's
investments in securities are classified in two categories and accounted for as
follows:
Available-for-Sale. Securities available-for-sale consist of bonds, notes,
debentures, and certain equity securities not classified as trading
securities or as securities held-to-maturity.
Held-to-Maturity. Bonds, notes, and debentures for which the Bank has the
positive intent and ability to hold to maturity are reported at cost and
adjusted for amortization of premiums and accretion of discounts. Such
adjustments are recognized in interest income using the interest method
over the period to maturity.
Unrealized holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a separate component of
stockholders' equity until realized. Gains and losses on the sale of securities
available-for-sale are determined using the specific-identification method.
Mortgage-backed Securities
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal
balances, adjusted for unamortized premiums and unearned discounts. Premiums
and discounts are amortized using methods approximating the interest method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments. Should any be sold, cost of securities sold is determined using
the specific identification method.
Loans
Loans are stated at unpaid principal balances, less the allowance for credit
losses and net deferred loan fees and unearned discounts. Unearned discounts on
installment loans are recognized as income over the term of the loans using a
method that approximates the interest method. Nonrefundable loan fees and
certain direct loan origination costs are deferred and the net amount is
recognized into income over the life of the loans as a yield adjustment.
The Company has adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). For loans
considered impaired under SFAS 114, the Company is required to compute the
present value of expected cash flows from the impaired loan and adjust credit
losses accordingly. 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 are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
- 7 -
<PAGE> 10
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 1 - ACCOUNTING POLICIES (Continued)
The allowance for credit losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions, and other information. Allowances for impaired
loans are generally determined based on collateral values or the present value
of estimated cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense, and reduced by charge-offs, net of
recoveries.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The
provision for depreciation is computed by the straight-line method over the
estimated useful lives of the assets. For income tax purposes, the Company
utilizes straight-line and accelerated depreciation methods.
Other Real Estate
Foreclosed real estate includes formally foreclosed property and in-substance
foreclosed property. In-substance foreclosed properties are those properties
for which the Bank has taken possession, regardless of whether formal
foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the Bank's cost or the asset's fair value less costs to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at date
of acquisition are charged to the allowance for credit losses. After
foreclosure, these assets are carried at the lower of their new cost basis or
fair value less cost to sell. Costs incurred in maintaining foreclosed real
estate and subsequent write-downs to reflect declines in the fair value of the
property are included in income (loss) on foreclosed real estate.
Interest Income on Loans
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all
unpaid accrued interest is reversed.
Employee Benefits
Profit-sharing costs are charged to salaries and employee benefits expense and
are funded as accrued.
Income Taxes
Deferred income taxes are provided for temporary differences between items of
income or expense reported in the financial statements and those reported for
income tax purposes. The principal temporary differences are depreciation and
amortization, loan loss provisions, the use of cash basis accounting for income
tax purposes, and unrealized gain (loss) on securities available-for-sale.
- 8 -
<PAGE> 11
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 1 - ACCOUNTING POLICIES (Continued)
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and commercial
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated condensed statements of cash
flows, cash and cash equivalents are defined as those amounts included in the
consolidated condensed balance sheets under the captions "Cash and due from
banks" and "Federal funds sold."
Intangible Assets
Intangible assets (consisting of core deposit premium and goodwill) are
amortized on a straight-line basis over seven and fifteen years, respectively.
For income tax purposes, intangibles are amortized over fifteen years on a
straight-line basis.
Financial Reporting
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 requires the disclosure of basic earnings per share, in replacement of
primary earnings per share, and diluted earnings per share, in replacement of
fully diluted earnings per share. Primary earnings per share is based on the
weighted average number of shares of common stock outstanding and the dilutive
effect of options and other common stock equivalents. Basic earnings per share
does not consider any dilution. Diluted earnings per share is similar to fully
diluted earnings per share, which considers all potentially dilutive
securities. SFAS 128 becomes effective with annual and interim financial
statements for periods ending after December 15, 1997. Upon initial application
of SFAS 128, all earnings per share data presented for prior periods must be
restated to conform to the new standard. The Company adopted SFAS 128 during
the second quarter of 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires an entity to report its change in equity during the
period from transactions and events other than those resulting from investments
by and distributions to owners. All items that are recognized as comprehensive
income are required to be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 becomes
effective with annual and interim financial statements for periods ending after
December 15, 1997. The Company adopted SFAS 130 during the second quarter of
1998.
- 9 -
<PAGE> 12
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 2 - LOANS
Loans consisted of (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Real estate $ 60,437 $ 58,455
Installment and other loans 8,552 10,546
Commercial and agricultural 4,736 6,671
-------- --------
Total loans, gross 73,725 75,672
Unearned income and deferred fees and credits (428) (517)
Allowance for credit losses (1,226) (1,183)
---------- --------
Net loans $ 72,071 $ 73,972
======== ========
</TABLE>
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
The Company's Board of Directors monitors the loan portfolio quarterly in order
to enable it to evaluate the adequacy of the allowance for credit losses.
Management has adopted a risk system that identifies potential problem credits
as early as possible, categorizes the credits as to risk, and puts a reporting
process in place to monitor the progress of the credits.
The Company maintains the allowance for credit losses at a level management
believes is sufficient to absorb all estimated losses inherent in the loan
portfolio. Activity in the allowance for credit losses follows (dollars in
thousands):
<TABLE>
<CAPTION>
Six months Twelve months
ended June 30, ended December 31,
1998 1997
-------------- ------------------
<S> <C> <C>
Balance, beginning of period $1,183 $ 470
Allowance for credit losses acquired
from Clewiston National Bank - 424
Recoveries 37 63
Chargeoffs (102) (54)
Provision charged to expense 108 280
------ ------
Balance, end of period $1,226 $1,183
====== ======
</TABLE>
- 10 -
<PAGE> 13
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 4 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Those
instruments involve, to varying degrees, elements of credit, and interest rate
risk in excess of the amounts recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
Financial instruments at June 30, 1998, consisted of commitments to extend
credit approximating $4.7 million and letters of credit of $105,000.
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 and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
NOTE 5 - STOCK DIVIDEND
On January 21, 1998, the Company's Board of Directors declared a stock dividend
payable at a rate of 2.5% of shares issued and outstanding to stockholders of
record on February 27, 1998, payable on or before March 19, 1998. Cash in lieu
of fractional shares was paid at the rate of $19.83 per share, which was the
estimated fair market value at that time. The total cash paid in lieu of
fractional shares amounted to approximately $6,000.
NOTE 6 - YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The issue
is whether computer systems will properly recognize date sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The
Company is utilizing both internal and external resources to identify, correct,
and test the systems for the year 2000 compliance. It is anticipated that all
necessary modifications will be completed by December 31, 1998, allowing
adequate time for testing. To date, confirmations have been received from the
Company's primary processing vendors that their software is now year 2000
compliant or that year 2000 compliant upgrades will be delivered by October,
1998. Management has not yet assessed the year 2000 compliance expense and
related potential effect on the Company's earnings. It is recognized that any
year 2000 compliance failures could result in additional expense to the
Company.
NOTE 7 - STOCK OPTIONS
On May 20, 1998, a former director exercised all of his outstanding stock
options and purchased 3,186 shares of common stock at the exercise price of
$10.00 per share. The estimated fair market value of the Company's stock based
on recent trades was $22.00 per share. A charge to earnings of approximately
$24,000 (net of income taxes of $14,000) was recorded to recognize services
provided by this director under the terms of the stock option agreement.
- 11 -
<PAGE> 14
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal asset is its ownership of Big Lake National Bank (the
"Bank"). Accordingly, the Company's results of operations are primarily
dependent upon the results of operations of the Bank. The Bank conducts
commercial banking business consisting of attracting deposits from the general
public and applying those funds to the origination of commercial, consumer, and
real estate loans (including commercial loans collateralized by real estate).
The Bank's profitability depends primarily on net interest income, which is the
difference between interest income generated from interest-earning assets
(i.e., loans and investments) less the interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net
interest income is affected by the relative amounts of interest-earning assets
and interest-bearing liabilities, and the interest rate earned and paid on
these balances. Net interest income is dependent upon the Bank's interest-rate
spread which is the difference between the average yield earned on its
interest-earning assets and the average rate paid on its interest-bearing
liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The interest rate spread is impacted by interest rates,
deposit flows, and loan demand. Additionally, and to a lesser extent, the
Bank's profitability is affected by such factors as the level of noninterest
income and expenses, the provision for credit losses, and the effective tax
rate. Noninterest income consists primarily of service fees on deposit
accounts. Noninterest expense consists of compensation and employee benefits,
occupancy and equipment expenses, and other operating expenses.
The Company is a one-bank holding company with consolidated assets of $115.9
million at June 30, 1998. Since December 31, 1997, the Company's total assets
have grown $4.1 million from $111.8 million, an increase of 4%. During the same
period, loans have decreased by $1.9 million from $74.0 million to $72.1
million, a decrease of 3%.
Net income was $452,000 for the six months ended June 30, 1998, compared with
$376,000 for the same period in 1997, an increase of 76%. The increase in net
income was due to increases in average interest-earning assets, improvements in
the average yield on interest-earning assets, and a decline in the average cost
of interest-bearing liabilities. The favorable increase in net interest margin
of 12 basis points from 5.09% to 5.21% was partially offset by increases in
other expenses, which outpaced the growth in interest-earning assets. The
increase in other expenses was due to the acquisition of Clewiston National
Bank and the merger-related costs that were expensed.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties including
changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as to
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
- 12 -
<PAGE> 15
STATEMENT OF CONDITION ANALYSIS
Average total loans for the six months ended June 30, 1998, were $74.4 million
versus $39.2 million for the same period in 1997, an increase of $35.2 million,
or 90%. This growth has been funded primarily with the increase in
interest-bearing deposits of $37.8 million acquired with the acquisition of
Clewiston National Bank. Management seeks to maintain a favorable mix of
deposits and expects to continue its marketing of less costly deposit
relationships. As a result, while total deposits have grown 4% from $101.3
million at December 31, 1997, to $105.2 million at June 30, 1998, noninterest
and interest-bearing deposits have grown 10% and 19%, respectively, over the
same period. Savings accounts have grown 13% over this period, while
certificates of deposit have declined 3%.
The following tables sets forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest and dividend income of the
Company from interest-earning assets and the resultant average yield; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest/dividend income; (iv) interest-rate
spread; and (v) net interest margin. Average balances were based on average
daily balances.
[TABLE FOLLOWS THIS PAGE]
- 13 -
<PAGE> 16
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-------------------------------------------------------------------------
1998 1997
----------------------------------- ---------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 74,374 $3,496 9.40% $39,236 $1,852 9.44%
Investment and mortgage-
backed securities 19,404 579 5.97% 16,007 467 5.83%
Other interest-earning assets (2) 12,440 372 5.98% 2,374 62 5.22%
--------- ------ ------- ------
Total interest-earning assets 106,218 4,447 8.37% 57,617 2,381 8.26%
------ ------
Noninterest-earning assets 9,223 4,621
-------- -------
Total Assets $115,441 $62,238
======== =======
Interest-bearing liabilities:
Demand, money market
and NOW deposits $ 23,524 354 3.01% $11,434 123 2.15%
Savings 11,041 112 2.03% 5,762 72 2.50%
Certificates of deposit 47,695 1,216 5.10% 27,231 718 5.27%
Other borrowings - - 0.00% 9 - 6.06%
--------- ------ ------- ------
Total interest-bearing
liabilities 82,260 1,682 4.09% 44,436 913 4.11%
------ ------
Noninterest-bearing liabilities 23,497 12,788
Stockholders' equity 9,684 5,014
--------- -------
Total liabilities and
stockholders' equity $115,441 $62,238
======== =======
Net interest/dividend income $2,765 $1,468
====== ======
Interest-rate spread (3) 4.28% 4.15%
===== =====
Net interest margin (4) 5.21% 5.09%
===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 129.12% 129.66%
======= =======
</TABLE>
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits due from other banks and federal funds
sold.
(3) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
- 14 -
<PAGE> 17
The following table sets forth certain information relating to the Company's
interest-earning asset and interest-bearing liabilities at June 30, 1998, that
are estimated to mature or are scheduled to reprice within the period shown:
<TABLE>
<CAPTION>
Three
Under Months One Year
Three to Twelve to Five Over Five
Months Months Years Years Total
-------- --------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
Federal funds sold $ 15,954 $ - $ - $ - $ 15 954
Loans (1) 15,144 33,657 18,206 5,492 72,499
Securities (2) 1,953 5,177 10,051 1,042 18,223
-------- -------- -------- -------- --------
Total rate-sensitive assets $ 33,051 $ 38,834 $ 28,257 $ 6,534 $106,676
======== ======== ======== ======== ========
Money-market and NOW accounts (2) $ 24,202 $ - - - 24,202
Savings accounts (2) 11,362 - - - 11,362
Certificates of deposit (2) 11,878 25,761 10,213 - 47,852
-------- -------- -------- -------- --------
Total rate-sensitive liabilities $ 47,442 $ 25,761 $ 10,213 $ - $ 83,416
======== ======== ======== ======== ========
GAP (repricing differences) $(14,391) $ 13,073 $ 18,044 $ 6,534 $ 23,260
======== ======== ======== ======== ========
Cumulative GAP $(14,391) $ (1,318) $ 16,726 $ 23,260
======== ======== ======== ========
Total assets $115,918
========
Cumulative GAP/total assets -12.41% -1.14% 14.43% 20.07%
======== ======== ======== ========
</TABLE>
(1) In preparing the table above, adjustable-rate loans were included in the
period in which the interest rates are next scheduled to adjust rather
than in the period in which the loans mature. Fixed-rate loans were
scheduled according to their contractual maturities. Nonaccrual loans of
$1.2 million were excluded from above.
(2) Excludes noninterest-bearing deposit accounts. Money market, NOW, and
savings deposits were regarded as maturing immediately. All other time
deposits were scheduled through the maturity dates. Investments were
scheduled through their contractual maturity dates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's management monitors liquidity ratios. The Company's principal
sources of funds are those generated by the Bank, including net increases in
deposits, principal and interest payments on loans, and proceeds from sales and
maturities of investment securities.
A principal objective of the Company's asset/liability management strategy is
to minimize its exposure to changes in interest rates by matching the maturity
and repricing horizons of interest-earning assets and interest-bearing
liabilities. This strategy is overseen in part through the direction of an
Asset and Liability Committee (the "ALCO Committee"), which establishes
policies and monitors results to control interest rate sensitivity.
Management evaluates interest rate risk and then formulates guidelines
regarding asset generation and repricing, funding sources and pricing, and
off-balance sheet commitments in order to maintain interest rate risk within
target levels for the appropriate level of risk as determined by the ALCO
Committee. The ALCO Committee uses internally generated reports to measure the
Bank's interest rate sensitivity. From these reports, the ALCO Committee can
estimate the net income effect of various interest rate scenarios.
- 15 -
<PAGE> 18
Management's strategy is to maintain a balanced interest rate risk position to
protect its net interest margin from market fluctuations. To this end, the ALCO
Committee reviews, on a monthly basis, the maturity and repricing of assets and
liabilities. The Company's cumulative one-year gap at June 30, 1998, was a
negative 1.14% of assets. This falls within the ALCO Committee's policy of a
cumulative one-year gap range of negative 20% to positive 20%.
The Company uses its resources principally to fund existing and continuing loan
commitments and to purchase investment securities. At June 30, 1998, the
Company had commitments to originate loans totaling $4.7 million, and had
issued but unused letters of credit of $105,000 for the same period. In
addition, scheduled maturities of certificates of deposit during the 12 months
following June 30, 1998, total $37.6 million. Management believes that the
Company has adequate resources to fund all its commitments, that substantially
all of its existing commitments will be funded within 12 months and, if so
desired, that the Company can adjust the rates and terms on certificates of
deposit and other deposit accounts to retain deposits in a changing interest
rate environment.
RESULTS OF OPERATIONS
Comparison of Six Months Ended June 30, 1998 and 1997
General
Net earnings for the six months ended June 30, 1998, were $452,000 or $ .93 per
share, compared to net earnings of $376,000, or $ .77 per share, for the six
months ended June 30, 1997. The increase in net earnings was primarily due to
an increase in earning assets, particularly the increase in loans having a
higher yield than other earning assets. This change in mix of earning assets
also contributed to an overall increase in the average yield of earning assets.
Interest Income and Expense
Interest income increased by $2,066,000 from $2,381,000 for the six months
ended June 30, 1997, to $4,447,000 for the six months ended June 30, 1998.
Interest income on loans increased $1,644,000 due to an increase in the average
loan portfolio balance from $39.2 million for the six months ended June 30,
1997, to $74.4 million for the comparable 1998 period, partially offset by a
decrease in the average yield of 4 basis points, rather than a material change
in the loan composition. Interest on investment securities increased $112,000
due to an increase in the average investment securities portfolio from $16.0
million in 1997 to $19.4 million in 1998, and an increase in the average yield
on the investment securities portfolio of 14 basis points. Interest on other
interest-earning assets increased $310,000 due to an increase from $2.4 million
in average other interest-earning assets in 1997 to $12.4 million in 1998 and
an increase in the weighted average yield of 76 basis points.
Interest expense increased to $1,682,000 for the six months ended June 30,
1998, from $913,000 for the six months ended June 30, 1997. Interest expense on
deposit accounts increased because the average interest-bearing deposits
increased from $44.4 million for the six months ended June 30, 1997 to $82.3
million for the comparable 1998 period. The average rate paid on
interest-bearing deposits decreased 2 basis points.
Provision for Credit Losses
The provision for credit losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by the Company,
the amounts of nonperforming loans, general economic conditions, particularly
as they relate to the Company's market area, and other factors related to the
collectibility of the Company's loan portfolio. The provision for credit losses
increased $48,000 from 1997 to 1998 as a result of the acquisition of Clewiston
National Bank.
- 16 -
<PAGE> 19
Other Income
Total other income increased $212,000 for the six months ended June 30, 1998,
compared to 1997, principally due to an increase in service fees on deposit
accounts associated with the increase in the number of deposit accounts subject
to service fees.
Other Expense
Total other expense increased $1,336,000 to $2,535,000 for the six months ended
June 30, 1998, from $1,199,000 for the six months ended June 30, 1997,
primarily due to the acquisition of CNB Financial Corporation and Clewiston
National Bank in late 1997. Annualized other expenses as a percent of average
assets increased 54 basis points form 3.85% to 4.39% for the six months ended
June 30, 1998, as compared with the same period in 1997, primarily due to
expenses associated with the merger of Clewiston National Bank with and into
Big Lake National Bank on May 1, 1998.
Comparison of Three Months Ended June 30, 1998 and 1997
General
Net earnings for the three months ended June 30, 1998, were $215,000 or $0.44
per share, compared to net earnings of $204,000, or $0.42 per share, for the
three months ended June 30, 1997. The increase in net earnings was primarily
due to an increase in earning assets, particularly the increase in loans having
a higher yield than other earning assets.
Interest Income and Expense
Interest income increased by $1,043,000 from $1,224,000 for the three months
ended June 30, 1997, to $2,267,000 for the three months ended June 30, 1998.
Interest income on loans increased $797,000 due to an increase in the average
loan portfolio balance from $40.4 million for the three months ended June 30,
1997, to $73.7 million for the comparable 1998 period. Average yields on loans
remained relatively stable in 1998 versus 1997. Interest on investment
securities increased $68,000 due to an increase in the average investment
securities portfolio from $15.9 million in 1997 to $19.6 million in 1998, and
by an increase in the average yield on the investment securities portfolio of
29 basis points. Interest on other interest-earning assets increased $178,000
due to an increase from $2.1 million in average other interest-earning assets
in 1997 to $12.8 million in 1998.
Interest expense increased to $830,000 for the three months ended June 30,
1998, from $471,000 for the three months ended June 30, 1997. Interest expense
on deposit accounts increased because the average interest-bearing deposits
increased from $44.9 million for the three months ended June 30, 1997, to $83.4
million for the comparable 1998 period. The average rate paid on
interest-bearing deposits declined approximately 20 basis points primarily due
to a shift in the deposit mix as the interest rate environment remained
relatively stable.
Provision for Credit Losses
The provision for credit losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by the Company,
the amounts of nonperforming loans, general economic conditions, particularly
as they relate to the Company's market area, and other factors related to the
collectibility of the Company's loan portfolio. The provision for credit losses
increased $24,000 from 1997 to 1998 as a result of the acquisition of Clewiston
National Bank.
- 17 -
<PAGE> 20
Other Income
Total other income increased $112,000 for the three months ended June 30, 1998,
compared to 1997, principally due to an increase in service fees on deposit
accounts associated with the increase in the number of deposit accounts subject
to service fees and recoveries from the sale of other real estate.
Other Expense
Total other expense increased $753,000 to $1,340,000 for the three months ended
June 30, 1998, from $587,000 for the three months ended June 30, 1997,
primarily due to the acquisition of CNB Financial Corporation and Clewiston
National Bank in late 1997. Annualized other expenses as a percent of average
assets increased 89 basis points from 3.73% to 4.62%, primarily due to expenses
associated with the merger of Clewiston National Bank with and into Big Lake
National Bank as of May 1, 1998.
Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which addresses the accounting for
derivative instruments and provides for matching the timing of gain or loss
recognition on the hedging instrument. Guidance on identifying derivative
instruments is also provided as well as additional disclosures. SFAS 133
becomes effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. Earlier application is permitted with certain exceptions.
Management does not anticipate that adoption of SFAS 133 will have a material
impact on the financial condition or results of operations of the Company.
- 18 -
<PAGE> 21
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
PART II: OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K.
None.
</TABLE>
- 19 -
<PAGE> 22
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
SIGNATURE
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.
Big Lake Financial Corporation
Date: August 14, 1998 /s/ Joe G. Mullins
-------------------------- ------------------
Joe G. Mullins
Executive Vice President and
Chief Administrative Officer
Date: August 14, 1998 /s/ Anita DeWitt
-------------------------- ----------------
Anita DeWitt
Treasurer and Principal Accounting Officer
- 20 -
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,572
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,954
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,424
<INVESTMENTS-CARRYING> 799
<INVESTMENTS-MARKET> 817
<LOANS> 73,297
<ALLOWANCE> 1,226
<TOTAL-ASSETS> 115,918
<DEPOSITS> 105,247
<SHORT-TERM> 0
<LIABILITIES-OTHER> 727
<LONG-TERM> 0
0
0
<COMMON> 5
<OTHER-SE> 9,939
<TOTAL-LIABILITIES-AND-EQUITY> 115,918
<INTEREST-LOAN> 3,496
<INTEREST-INVEST> 579
<INTEREST-OTHER> 372
<INTEREST-TOTAL> 4,447
<INTEREST-DEPOSIT> 1,682
<INTEREST-EXPENSE> 1,682
<INTEREST-INCOME-NET> 2,765
<LOAN-LOSSES> 108
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,535
<INCOME-PRETAX> 689
<INCOME-PRE-EXTRAORDINARY> 689
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 452
<EPS-PRIMARY> .93
<EPS-DILUTED> .91
<YIELD-ACTUAL> 5.21
<LOANS-NON> 1,226
<LOANS-PAST> 4
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,230
<ALLOWANCE-OPEN> 1,183
<CHARGE-OFFS> 102
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 1,226
<ALLOWANCE-DOMESTIC> 1,226
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
