<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 September 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)
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(941) 467-4663
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(Registrant's telephone number including area code)
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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 November 9, 1998
- --------------- ----------------------------------
Common Stock 490,001
Par Value $0.01 per share
<PAGE> 2
BIG LAKE FINANCIAL CORPORATION
FORM 10-QSB - FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997 1
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 1998 and 1997 (Unaudited) 2
Consolidated Statements of Comprehensive Income for the Three Months
and Nine Months Ended September 30, 1998 and 1997 (Unaudited) 3
Consolidated Condensed Statements of Cash Flows for the Three Months
and Nine Months Ended September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10-17
PART II: OTHER INFORMATION 18
SIGNATURES 19
</TABLE>
<PAGE> 3
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, 1998
(Unaudited) December 31, 1997*
------------------ ------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,662 $ 6,492
Federal funds sold 8,763 3,296
Investment securities:
Available-for-sale at fair value 22,176 21,958
Held-to-maturity at amortized cost 999 801
Loans receivable less allowance for credit losses 72,126 73,972
Accrued interest receivable 755 813
Bank premises and equipment - net 2,621 2,626
Other real estate owned 182 28
Other assets 1,355 1,806
----------- ----------
TOTAL $ 113,639 $ 111,792
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand accounts $ 20,790 $ 19,793
NOW accounts 16,257 13,807
Money market accounts 6,815 6,891
Savings accounts 11,226 11,301
Time, $100,000 and over 6,341 6,252
Other time deposits 41,129 43,288
----------- ----------
Total deposits 102,558 101,332
Other accrued expenses and liabilities 745 1,037
----------- ----------
Total liabilities 103,303 102,369
----------- ----------
Commitments and contingencies -- --
----------- ----------
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 7,168 6,855
Retained earnings 3,111 2,569
Unrealized gain (loss) on available-for-sale securities 52 (6)
----------- ----------
Total stockholders' equity 10,336 9,423
----------- ----------
TOTAL $ 113,639 $ 111,792
=========== ==========
Book value per common share, adjusted for stock dividend $ 21.09 $ 19.36
=========== ==========
Common shares outstanding 490,001 486,815
=========== ==========
</TABLE>
* Condensed from December 31, 1997, audited balance sheet.
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
-1-
<PAGE> 4
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest and fees on loans $ 1,770 $ 1,002 $ 5,266 $ 2,854
Investment income on investment securities 310 223 889 690
Other interest income 160 51 532 113
--------- --------- --------- ---------
Total interest income 2,240 1,276 6,687 3,657
Interest expense on deposits 837 535 2,519 1,448
--------- --------- --------- ---------
Net interest income before provision for credit losses 1,403 741 4,168 2,209
--------- --------- --------- ---------
Provision for credit losses 18 36 126 96
--------- --------- --------- ---------
Net interest income 1,385 705 4,042 2,113
--------- --------- --------- ---------
Fees and service charges 280 163 794 467
Other income 27 44 80 95
--------- --------- --------- ---------
Total other income 307 207 874 562
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 573 315 1,695 906
Expenses of bank premises and fixed assets 213 92 549 247
Other operating expenses 373 225 1,450 678
--------- --------- ---------- ---------
Total other expenses 1,159 632 3,694 1,831
--------- --------- ---------- ---------
Income before provision for income taxes 533 280 1,222 844
Provision for income taxes 194 73 431 261
--------- ---------- ---------- ---------
Net income $ 339 $ 207 $ 791 $ 583
========= ========== ========== =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
-2-
<PAGE> 5
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 339 $ 207 $ 791 $ 583
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Unrealized holding gains arising during period 53 46 58 60
---------- ---------- ---------- ----------
Comprehensive income $ 392 $ 253 $ 849 $ 643
========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated 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)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 708 $ 495 $ 1,293 $ 1,190
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in:
Investment securities (2,814) 663 1,720 904
Loans (2,247) (537) (331) (5,717)
Other real estate owned 75 (28) (154) (28)
Purchases of premises and equipment, net (134) (290) (181) (504)
-------- --------- --------- ---------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (5,120) (192) 1,054 (5,345)
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (2,689) (1,859) 1,226 4,177
Cash paid in lieu of fractional shares -- -- (6) --
Stock options exercised -- -- 70 --
-------- --------- --------- ---------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (2,689) (1,859) 1,290 4,177
-------- --------- --------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (7,101) (1,556) 3,637 22
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,526 5,980 9,788 4,402
-------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 13,425 $ 4,424 $ 13,425 $ 4,424
======== ========= ========= =========
</TABLE>
The accompanying notes to consolidated 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>
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 -- -- -- 791 --
Net change in unrealized holding
gains on securities -- -- -- -- 58
Total comprehensive income -- -- -- -- -- 849
------- ----- -------- ------- -------- --------
BALANCE, SEPTEMBER 30, 1998 490,001 $ 5 $ 7,168 $ 3,111 $ 52 $ 10,336
======= ===== ======== ======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
-5-
<PAGE> 8
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1 - SIGNIFICANT 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 consolidated financial statements for the three
months and nine months ended September 30, 1998 and 1997, have not been audited
and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash flows in
conformity with generally accepted accounting principles. However, in the
opinion of management, the accompanying consolidated financial statements
contain all adjustments, which are of a normal recurring nature, necessary for
a fair presentation. The results of operations for the interim periods are not
necessarily indicative of the results which may be expected for an entire year.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements contained in the 1997 Annual Report
to Stockholders and are incorporated herein by reference.
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 Owned"). 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 Company'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. Management does not anticipate that the allowances for credit
losses on loans and foreclosed real estate will change materially in the near
term.
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, federal funds purchased, 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 FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 2 - 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 3 - COMPUTATION OF PER SHARE EARNINGS
Basic earnings per share amounts are computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net earnings by the weighted
average number of shares and all dilutive potential shares outstanding during
the period. As discussed in Note 2 above, the Company declared a 2.5% stock
dividend. The average number of shares and dilutive potential shares have been
restated for the stock dividend. The following information was used in the
computation of earnings per share on both a basic and diluted basis for the
three months and nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Basic EPS computation:
Numerator - Net income $ 339 $ 207 $ 791 $ 583
Denominator - Weighted average shares outstanding 490 487 489 487
------ ------ ------ ------
Basic EPS $ 0.69 $ 0.43 $ 1.62 $ 1.20
====== ====== ====== ======
Diluted EPS computation:
Numerator - Net income $ 339 $ 207 $ 791 $ 583
------ ------ ------ ------
Denominator - Weighted average shares outstanding 490 487 489 487
Stock options 9 6 8 6
------ ------ ------ ------
499 493 497 493
------ ------ ------ ------
Diluted EPS $ 0.68 $ 0.42 $ 1.59 $ 1.18
====== ====== ====== ======
</TABLE>
NOTE 4 - 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.
-7-
<PAGE> 10
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 5 - LOANS
Loans consisted of (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------ ------
<S> <C> <C>
Real estate $ 59,120 $ 58,455
Installment and other loans 8,305 10,546
Commercial and agricultural loans 6,372 6,671
-------- --------
Total loans, gross 73,797 75,672
Unearned income and deferred fees and credits (418) (517)
Allowance for credit losses (1,253) (1,183)
-------- ---------
Net loans $ 72,126 $ 73,972
======== ========
</TABLE>
NOTE 6 - 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 implemented 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 sufficient to
absorb all estimated losses inherent in the loan portfolio. Activity in the
allowance for credit losses follows (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended September 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 56 63
Charge-offs (112) (54)
Provision charged to operations 126 280
------- -------
Balance, end of period $ 1,253 $ 1,183
======= =======
</TABLE>
-8-
<PAGE> 11
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 7 - 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 September 30, 1998, consisted of commitments to extend
credit approximating $4.9 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.
-9-
<PAGE> 12
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.
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. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
YEAR 2000
The Company is aware of the issue 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. Primary 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 their systems for the year 2000 compliance. It is anticipated that all
necessary modifications and testing will be completed by December 31, 1998. To
date, confirmations have been received from the Bank's Mission Critical
processing vendors that their software is now year 2000 compliant. Management
has not yet completed their assessment of the compliance expense for the year
2000 and related potential effect on the Bank's earnings. It is recognized that
any year 2000 compliance failures could result in additional expense to the
Company.
-10-
<PAGE> 13
The Company has established time lines for testing all ancillary systems, such
as telephone systems and security devices, by December 31, 1998. There can be
no assurances that all hardware and software that the Company uses will be Year
2000 compliant, and the Company cannot predict with any certainty the costs it
will incur to respond to any Year 2000 issues. Factors which may affect the
amount of these costs include the Company's inability to control third party
modification plans, the Company's ability to identify and correct all relevant
computer codes, the availability and cost of engaging personnel trained in
solving Year 2000 issues, and other similar uncertainties.
Further, the business of many of the Company's customers may be
negatively affected by the Year 2000 issue, and any financial difficulties
incurred by the Company's customers in solving Year 2000 issues could
negatively affect those customers' ability to repay any loans which the Company
may have extended. Therefore, even if the Company does not incur significant
direct costs in connection with responding to the Year 2000 issue, there can be
no assurance that the failure or delay of the Company's customers or other
third parties in addressing the Year 2000 issue or the costs involved in such
process will not have a material adverse effect on the Company's business,
financial condition, or results of operations.
FUTURE ACCOUNTING REQUIREMENTS
In September 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.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, "Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held-for-Sale by
a Mortgage Banking Enterprise" ("SFAS 134"), which amends existing
pronouncements to clarify the classification of mortgage-backed securities
retained after the securitization of mortgage loans held-for-sale. SFAS 134
becomes effective for fiscal quarters beginning after December 15, 1998.
Earlier application is permitted. Management does not anticipate that adoption
of SFAS 134 will have a material impact on the financial condition or results
of operations of the Company.
IMPACT OF INFLATION
The consolidated financial statements and related data presented
herein have been prepared in accordance with Generally Accepted Accounting
Principles ("GAAP"), which require the measurements of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation. Unlike
most industrial companies, substantially all of the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.
As discussed previously, management seeks to manage the relationships between
interest sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
-11-
<PAGE> 14
RESULTS OF OPERATIONS
NET INCOME
The Company's net income increased $132,000 for the three months ended
September 30, 1998, and increased $208,000 for the nine months ended September
30, 1998, over the comparable periods in 1997. This improvement in the nine
months of 1998 versus 1997 reflects the Company's continued growth principally
resulting from the acquisition of Clewiston National Bank as of October 31,
1997. Average earning assets increased to $105.8 million during the first nine
months of 1998 as compared to $58.8 million during the first nine months of
1997. The increase in average earning assets resulted in an increase in net
interest income before provision for credit losses of $1,959,000, or 88.7%, in
the first nine months of 1998 as compared to the first nine months of 1997. In
addition, noninterest income increased 55.5%, to $874,000 in the first nine
months of 1998 as compared to $562,000 in the first nine months of 1997. This
improvement resulted primarily from deposit account charges resulting from the
growth in deposits associated with the acquisition of Clewiston National Bank.
The increases in net interest income and noninterest income were partially
offset by an increase of $1,863,000 in noninterest expense in the first nine
months of 1998 as compared to the first nine months of 1997. The annualized
return on average assets for the nine months ended September 30, 1998, remained
constant from the 1997 level of 0.92%.
For the three months ended September 30, 1998, as compared with the
comparable period in 1997, increases in total interest income of $964,000 and
other income of $100,000 were offset by increases in interest expense of
$302,000 and other expenses of $527,000. The increases in the components of net
income reflect the impact of the acquisition of Clewiston National Bank.
NET INTEREST INCOME
The largest component of net income for the Company is net interest
income, which is the difference between the income earned on assets and
interest paid on deposits and borrowings used to support such assets. Net
interest income is determined by the rates earned on the Company's
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch and the maturity and repricing
characteristics of its interest-earning assets and interest-bearing
liabilities.
Net interest income before provision for credit losses was $1,403,000
and $4,168,000 for the three months and nine months ended September 30, 1998,
respectively, as compared to $741,000 and $2,209,000 for the three months and
nine months ended September 30, 1997, respectively. The increases of 89.3% and
88.7%, respectively, reflected the substantial growth of the Company's loan
portfolio from the acquisition of Clewiston National Bank and a shift in the
mix of earning assets, which resulted in improvements in the Company's net
interest spread and net interest margin. Net interest spread, the difference
between the yield on earning assets and the rate paid on interest-bearing
liabilities, was 4.32% for the nine months ended September 30, 1998 as compared
to 4.05% for the nine months ended September 30, 1997. Net interest margin
(which is net interest income divided by average interest-earning assets)
increased to 5.25% for the nine months ended September 30, 1998, as compared to
5.01% for the nine months ended September 30, 1997. These increases reflect the
fact that loans comprised 69.6% of earning assets during the first nine months
of 1998 as compared to only 68.3% percent during the first nine months of 1997.
Loans typically provide a higher yield than the other types of earning assets
and thus one of the Company's goals is to continue to grow the loan portfolio
as a percentage of total earning assets. The increase in the yield on average
earning assets was also attributable to an overall lower average rate paid on
interest-bearing liabilities to 4.11% in first nine months of 1998 as compared
to 4.24% in the first nine months of 1997.
Average Balances, Income and Expenses, and Rates. The following table
depicts, for the periods indicated, certain information related to the
Company's average balance sheet and its average yields on assets and average
costs of liabilities. Such yields are derived by dividing income or expense by
the average balance of the corresponding assets or liabilities. Average
balances have been derived from daily averages.
-12-
<PAGE> 15
Average Balances, Income and Expenses, and Rates (dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1998 1997
---- ----
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 73,602 $ 5,266 9.54% $40,196 $ 2,854 9.47%
Investment and mortgage-backed securities 20,134 889 5.89% 15,816 690 5.82%
Other interest-earning assets (2) 12,050 532 5.89% 2,814 113 5.35%
-------- --------- ------- --------
Total interest-earning assets 105,786 6,687 8.43% 58,826 3,657 8.29%
--------- --------
Noninterest-earning assets 8,950 4,609
-------- -------
Total assets $114,736 $63,435
======== =======
Interest-bearing liabilities:
Demand, money market and NOW deposits $ 23,318 513 2.93% $11,074 184 2.22%
Savings 10,670 169 2.11% 5,747 109 2.53%
Certificates of deposit 47,644 1,837 5.14% 28,733 1,155 5.36%
Other borrowings -- -- 0.00% 6 -- 0.00%
-------- --------- ------- --------
Total interest-bearing liabilities 81,632 2,519 4.11% 45,560 1,448 4.24%
--------- --------
Noninterest-bearing liabilities 23,203 12,828
Stockholders' equity 9,901 5,047
-------- --------
Total liabilities and stockholders' equity $114,736 $63,435
======== =======
Net interest/dividend income $ 4,168 $ 2,209
========= ========
Interest-rate spread (3) 4.32% 4.05%
==== ====
Net interest margin (4) 5.25% 5.01%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 129.59% 129.12%
======= =======
</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.
-13-
<PAGE> 16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem loans. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there can
be no assurance that charge-offs in future periods will not exceed the
allowance for credit losses or that additional increases in the credit loss
allowance will not be required.
Asset Classification. Commercial banks are required to review and,
when appropriate, classify their assets on a regular basis. The OCC has the
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, condition, and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes a specific reserve for the full amount of the portion
of the asset classified as loss. All or a portion of general credit loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for credit losses
generally do not qualify as regulatory capital. Assets that do not warrant
classification in the aforementioned categories, but possess weaknesses, are
classified as special mention and are monitored by the Company.
At September 30, 1998, the Company had 78 loans classified as
substandard, doubtful, or loss totaling $3.3 million.
Allowance for Credit Losses. The allowance for credit losses is
established through a provision for credit losses charged against income. Loans
are charged against the provision when management believes that the
collectibility of the principal is unlikely. The provision is an estimated
amount that management believes will be adequate to absorb losses inherent in
the loan portfolio based on evaluations of its collectibility. The evaluations
take into consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, specific problem loans and commitments,
and current anticipated economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to
recognize losses on loans, future additions to the provision may be necessary
based on changes in economic conditions.
At September 30, 1998, the allowance for credit losses amounted to
$1,253,000, or 1.71% of outstanding loans. At December 31, 1997, the allowance
for credit losses amounted to $1,183,000, or 1.57% of outstanding loans. The
Company's provision for credit losses was $18,000 and $126,000 for the three
months and nine months ended September 30, 1998, respectively. For the same
three months and nine months periods in 1997, the provision for credit losses
was $36,000 and $96,000, respectively. The provision was made based on
management's assessment of general credit loss risk and asset quality.
Increases in other real estate owned of $154,000 for the first nine months of
1998 as compared with $28,000 at December 31, 1998, have been reflected in the
overall allowance recorded by management.
NONINTEREST INCOME AND EXPENSE
Noninterest Income. The Company's primary source of noninterest income
is service charges on deposit accounts. Other sources of noninterest income
include bankcard fees, commissions on check sales, safe deposit box rent, wire
transfer, and official check fees.
Total noninterest income increased by $100,000 and $312,000 during the
three months and nine months ended September 30, 1998, respectively, as
compared to the same period in 1997, reflecting increased activity fees related
to increases in deposit. Fees and service charges were $280,000 and $794,000
for the three months and nine months ended September 30, 1998, respectively, as
compared to $163,000 and $467,000 for the comparable periods in 1997. The
increase in fees and service charges is a direct result of the acquisition of
Clewiston National Bank in the fourth quarter of 1997.
-14-
<PAGE> 17
Noninterest Expense. Total noninterest expense increased by $527,000
and $1,863,000 during the three months and nine months ended September 30,
1998, respectively, as compared to the same period in 1997, as a result of the
Company's acquisition of Clewiston National Bank in 1997. For the first nine
months in 1998, this increase includes a $789,000 increase in salary and
benefits expense, as the Company acquired additional employees with the
acquisition of Clewiston National Bank and provided normal salary and benefit
increases. Occupancy-related expenses increased $302,000 in the first nine
months of 1998 as compared with the same period in 1997, principally due to
higher maintenance expenses, depreciation, and operating costs associated with
the acquisition of Clewiston National Bank. All other expenses increased
$772,000 in the first nine months of 1998 as compared with the same period in
1997 as a result of the Clewiston National Bank acquisition.
INCOME TAX EXPENSE
The income tax provision was $194,000 and $431,000 for the three
months and nine months ended September 30, 1998, respectively, or an effective
rate of 36.4% and 35.3%, respectively. This compares with an effective rate of
26.1% and 30.9% for the same period in 1997, respectively.
FINANCIAL CONDITION
The Company's total assets at September 30, 1998, were $113.6 million,
increasing from $111.8 million at December 31, 1997. The increase of
approximately $1.8 million resulted from the modest growth in deposits of
$1.2 million. Increases in federal funds sold and investment securities of $5.5
million and $416,000, respectively, from December 31, 1997, to September 30,
1998, was partially offset by a moderate decline in loans of $1.8 million, or
2.5%, and a decline in cash and due from banks of $1.8 million. The reduction
in loans was due to an intentional decrease in the loan portfolio of Clewiston
National Bank, particularly in loans classified as substandard, doubtful, or
loss and other loans classified as special mention and monitored by the
Company.
The Company expects to close during the fourth quarter of 1998 on the
acquisition of two First Union National Bank branches in Wauchula and Arcadia,
Florida. The total assets expected to be acquired in this transaction
approximate $32.0 million. Goodwill and core deposit premium of $1.8 million
will be recorded in this transaction and amortized over approximately ten years.
The Bank's capital ratios will be maintained at or above the well-capitalized
level through a capital infusion of approximately $1.0 million from the holding
company. The holding company expects to borrow the amount of the capital
infusion prior to closing of this transaction at terms that are expected to
reflect current market rates.
Total stockholders' equity as of September 30, 1998, was $10.3
million, an increase of $913,000 or approximately 9.7% compared with
stockholders' equity of $9.4 million as of December 31, 1997. This increase was
attributable to net income for the nine months of 1998 of $791,000, a $58,000
increase in the market value of investment securities available-for-sale, a
reduction of $6,000 for cash paid in lieu of fractional shares in connection
with a 2.5% stock dividend, and $70,000 increase for stock options exercised.
The following table shows selected ratios for the periods ended or at
the dates indicated (annualized for the nine months ended September 30, 1998):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
------------------- --------------
<S> <C> <C>
Return on average assets 0.92% 0.92%
Return on average equity 10.65% 10.82%
Interest-rate spread during the period 4.32% 3.72%
Net interest margin 5.25% 5.06%
Allowance for credit losses to period end loans 1.71% 1.57%
Net charge-offs to average loans 0.10% 0.02%
Nonperforming assets to period end loans and foreclosed property 1.01% 2.37%
Nonperforming assets to period end total assets 0.66% 1.61%
</TABLE>
-15-
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Management. Liquidity management involves monitoring the
Company's sources and uses of funds in order to meet its day-to-day cash flow
requirements while maximizing profits. Liquidity represents the ability of a
company to convert assets into cash or cash equivalents without significant
loss and to raise additional funds by increasing liabilities. Liquidity
management is made more complicated because different balance sheet components
are subject to varying degrees of management control. For example, the timing
of maturities of the investment portfolio is very predictable and subject to a
high degree of control at the time investment decisions are made. However, net
deposit inflows and outflows are far less predictable and are not subject to
the same degree of control. Asset liquidity is provided by cash and assets
which are readily marketable, which can be pledged, or which will mature in the
near future. Liability liquidity is provided by access to core funding sources,
principally the ability to generate customer deposits in the Company's market
area. In addition, liability liquidity is provided through the ability to
borrow against approved lines of credit (federal funds purchased) from
correspondent banks and to borrow on a secured basis through securities sold
under agreements to repurchase.
Short-Term Investments. Short-term investments, which consist of
federal funds sold and securities purchased under agreements to resell and
interest-bearing deposits, averaged $12.1 million in the first nine months of
1998 as compared to $2.8 million in the same period of 1997. At September 30,
1998, and December 31, 1997, short-term investments totaled $8.8 million and
$3.3 million, respectively. These funds are a primary source of the Company's
liquidity and are generally invested in an earning capacity on an overnight
basis.
Management regularly reviews the liquidity position of the Company and
has implemented internal policies which establish guidelines for sources of
asset-based liquidity and limit the total amount of purchased funds used to
support the balance sheet and funding from non-core sources.
Deposits and Other Sources of Funds. In addition to deposits, the
sources of funds available for lending and other business purposes include loan
repayments, loan sales, and securities sold under agreements to repurchase.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows are influenced significantly by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in other sources, such as deposits at less than projected levels
and are also used to fund the origination of mortgage loans designated to be
sold in the secondary markets.
Core Deposits. Core deposits, which exclude certificates of deposit of
$100,000 or more, provide a relatively stable funding source for the Company's
loan portfolio and other earning assets. The Company's core deposits were $96.2
million at September 30, 1998, and $95.1 million at December 31, 1997.
Management anticipates that a stable base of deposits will be the Company's
primary source of funding to meet both its short-term and long-term liquidity
needs in the future.
Customers with large certificates of deposit tend to be extremely
sensitive to interest rate levels, making these deposits less reliable sources
of funding for liquidity planning purposes than core deposits. Some financial
institutions fund their balance sheets in part through large certificates of
deposit obtained through brokers. These brokered deposits are generally
expensive and are unreliable as long-term funding sources. Accordingly, the
Company no longer accepts brokered deposits.
Capital. The Federal Reserve Board and bank regulatory agencies
require bank holding companies and financial institutions to maintain capital
at adequate levels based on a percentage of assets and off-balance sheet
exposures, adjusted for risk weights ranging from 0% to 100% (the Federal
Reserve grants an exemption from these requirements for bank holding companies
with less than $150 million in consolidated assets, and therefore the Company's
capital is currently measured only at the Bank level). Under the risk-based
standard, capital is classified into two tiers. Tier 1 capital consists of
common stockholders' equity, excluding the unrealized gain (loss) on
available-for-sale securities, minus certain intangible assets. Tier 2 capital
consists of the general allowance for credit losses subject to certain
limitations. An institution"s qualifying capital base for purposes of its
risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital.
The regulatory minimum requirements are 4% for Tier 1 and 8% for total
risk-based capital.
-16-
<PAGE> 19
Bank holding companies and banks are also required to maintain capital
at a minimum level based on total assets, which is known as the leverage ratio.
The minimum requirement for the leverage ratio is 3%, but all but the highest
rated institutions are required to maintain ratios 100 to 200 basis points
above the minimum. The Company and the Bank exceeded their minimum regulatory
capital ratios as of September 30, 1998, as reflected in the following table.
The following table sets forth the Bank's regulatory capital position
(dollars in thousands):
<TABLE>
<CAPTION>
Actual Minimum(1) Well-Capitalized(2)
Amount % Amount % Amount %
------ ----- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets) $10,079 11.96% $6,740 8.00% $8,425 10.00%
Tier I Capital (to Risk-Weighted Assets) $ 9,023 10.71% $3,370 4.00% $5,055 6.00%
Tier I Capital (to Average Assets) $ 9,023 7.97% $4,529 4.00% $5,661 5.00%
</TABLE>
(1) The minimum required for adequately capitalized purposes.
(2) To be "well-capitalized" under the FDIC's Prompt Corrective Action
regulations.
-17-
<PAGE> 20
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
PART II: OTHER INFORMATION
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
(for SEC use only).
b) Reports on Form 8-K.
None.
-18-
<PAGE> 21
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: November 12, 1998 /s/ Joe G. Mullins
-------------------- ------------------------------------------
Joe G. Mullins
Executive Vice President and
Chief Administrative Officer
Date: November 12, 1998 /s/ Anita DeWitt
-------------------- ------------------------------------------
Anita DeWitt
Treasurer and Principal Accounting Officer
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BIG LAKE FINANCIAL CORPORATION FOR THE PERIOD ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,662
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,763
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,176
<INVESTMENTS-CARRYING> 999
<INVESTMENTS-MARKET> 1,030
<LOANS> 73,379
<ALLOWANCE> 1,253
<TOTAL-ASSETS> 113,639
<DEPOSITS> 102,558
<SHORT-TERM> 0
<LIABILITIES-OTHER> 745
<LONG-TERM> 0
0
0
<COMMON> 5
<OTHER-SE> 10,331
<TOTAL-LIABILITIES-AND-EQUITY> 113,639
<INTEREST-LOAN> 5,266
<INTEREST-INVEST> 889
<INTEREST-OTHER> 532
<INTEREST-TOTAL> 6,687
<INTEREST-DEPOSIT> 2,519
<INTEREST-EXPENSE> 2,519
<INTEREST-INCOME-NET> 4,168
<LOAN-LOSSES> 126
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,694
<INCOME-PRETAX> 1,222
<INCOME-PRE-EXTRAORDINARY> 1,222
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 791
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.59
<YIELD-ACTUAL> 5.25
<LOANS-NON> 525
<LOANS-PAST> 40
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 525
<ALLOWANCE-OPEN> 1,183
<CHARGE-OFFS> 112
<RECOVERIES> 56
<ALLOWANCE-CLOSE> 1,253
<ALLOWANCE-DOMESTIC> 1,253
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
