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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 333-30779
BIG LAKE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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FLORIDA 59-2613321
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification
No.)
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1409 SOUTH PARROTT AVENUE, OKEECHOBEE, FLORIDA 34974
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (941) 467-4663
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $10,299,000.
The aggregate market value of the Common Stock of the issuer held by
non-affiliates of the issuer (206,872 shares) on February 17, 1999, was
approximately $5,171,800. As of such date, no organized trading market existed
for the Common Stock of the issuer. The aggregate market value was computed by
reference the last sale of the Common Stock of the issuer at $25.00 per share on
February 17, 1999. For the purposes of this response, directors, officers and
holders of 5% or more of the issuer's Common Stock are considered the affiliates
of the issuer at that date.
As of February 17, 1999, there were issued and outstanding 490,001 shares
of the issuer's Common Stock.
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TABLE OF CONTENTS
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PART I................................................................ 1
Item 1. Business.................................................... 1
General..................................................... 1
Acquisition of Branches..................................... 2
Lending Activities.......................................... 2
Deposit Activities.......................................... 3
Investments................................................. 3
Correspondent Banking....................................... 4
Data Processing............................................. 4
Effect of Governmental Policies............................. 4
Interest and Usury.......................................... 4
Supervision and Regulation.................................. 4
Industry Restructuring...................................... 9
Competition................................................. 9
Employees................................................... 10
Statistical Profile and Other Financial Data................ 10
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II............................................................... 11
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Dividends................................................... 11
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
General..................................................... 13
Recent Developments......................................... 13
Year 2000................................................... 13
Liquidity and Capital Resources............................. 14
Results of Operations....................................... 15
Comparison of Years Ended December 31, 1998 and 1997........ 18
Asset/Liability Management.................................. 19
Financial Condition......................................... 21
Other Borrowings............................................ 29
Impact of Inflation and Changing Prices..................... 30
Future Accounting Requirements.............................. 30
Item 7. Financial Statements........................................ 31
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 31
PART III.............................................................. 32
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act....................................................... 32
Item 10. Executive Compensation...................................... 32
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 32
Item 12. Certain Relationships and Related Transactions.............. 32
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 32
SIGNATURES............................................................ 34
EXHIBIT INDEX......................................................... 35
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PART I
ITEM 1. BUSINESS
GENERAL
Big Lake Financial Corporation ("BLF") was incorporated under the laws of
the State of Florida on August 8, 1985. BLF is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHC Act") and owns
all of the voting shares of Big Lake National Bank. On October 31, 1997, BLF
closed the merger of CNB Financial Corporation ("CNB") with and into BLF (the
"BLF/CNB Merger"). As a result of the BLF/CNB Merger, the outstanding shares of
CNB common stock were converted into an aggregate of 166,512 shares of BLF
Common Stock and Clewiston National Bank (a wholly owned subsidiary of CNB)
became a wholly owned subsidiary of BLF.
BLF filed an application with the Office of the Comptroller of the Currency
(the "OCC") to merge Clewiston National Bank with and into Big Lake National
Bank, which was approved on February 13, 1998. Clewiston National Bank was
merged with and into Big Lake National Bank on the close of business on April
30, 1998. BLF has no significant operations other than owning the stock of Big
Lake National Bank. Big Lake National Bank is a national banking association an
d is the only source of revenue for BLF.
BLF provides a range of consumer and commercial banking services to
individuals, businesses and industries. The basic services offered by BLF
include: demand interest-bearing and noninterest-bearing accounts, money market
deposit accounts, NOW accounts, time deposits, safe deposit services, credit
cards, cash management, direct deposits, notary services, money orders, night
depository, travelers' checks, cashier's checks, domestic collections, savings
bonds, bank drafts, automated teller services, drive-in tellers, and banking by
mail. In addition, BLF makes secured and unsecured commercial and real estate
loans and issues stand-by letters of credit. BLF provides automated teller
machine (ATM) cards, as a part of the HONOR ATM Network, thereby permitting
customers to utilize the convenience of larger ATM networks. In addition to the
HONOR ATM Network, the Bank also provides the Presto and Cirrus systems for ATM
use. In addition to the foregoing services, the offices of BLF provide customers
with extended banking hours. BLF does not have trust powers and, accordingly, no
trust services are provided.
The revenues of BLF are primarily derived from interest on, and fees
received in connection with, real estate and other loans, and from interest and
dividends from investment and mortgage-backed securities, and short-term
investments. The principal sources of funds for BLF's lending activities are its
deposits, repayment of loans, and the sale and maturity of investment
securities. The principal expenses of BLF are the interest paid on deposits, and
operating and general administrative expenses.
As is the case with banking institutions generally, BLF's operations are
materially and significantly influenced by general economic conditions and by
related monetary and fiscal policies of financial institution regulatory
agencies, including the Board of Governors of the Federal Reserve System (the
"Federal Reserve") and the OCC. Deposit flows and costs of funds are influenced
by interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for financing of real estate and
other types of loans, which in turn is affected by the interest rates at which
such financing may be offered and other factors affecting local demand and
availability of funds. BLF faces strong competition in the attraction of
deposits (its primary source of lendable funds) and in the origination of loans.
See "Competition."
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ACQUISITION OF BRANCHES
During 1998, BLF entered into negotiations with First Union National Bank
("First Union") to acquire certain assets and assume deposit liabilities and
related accrued interest of First Union's Wauchula and Arcadia Branches
("Branch"). The Branch acquisitions were approved by the OCC and BLF's Board of
Directors, and consummated on November 19, 1998. A summary of the transaction
follows (dollars in thousands):
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Liabilities assumed....................................... $30,957
-------
Less assets purchased and other adjustments:
Core deposit premiums.................................. 1,942
All other assets....................................... 1,092
Other adjustments, net................................. (8)
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3,026
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Cash received at closing.................................. $27,931
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The closing transactions are subject to a post-closing review period that
will expire in the first quarter of 1999. Management does not anticipate any
significant adjustments will be required. The proceeds received at closing were
invested in federal funds sold and U. S. Government securities.
LENDING ACTIVITIES
BLF offers a range of lending services, including real estate, consumer and
commercial loans, to individuals and small businesses and other organizations
that are located in or conduct a substantial portion of their business in BLF's
market area. BLF's consolidated total loans at December 31, 1998 were $76.9
million, or 51.1% of total BLF consolidated assets. The interest rates charged
on loans vary with the degree of risk, maturity, and amount of the loan, and are
further subject to competitive pressures, money market rates, availability of
funds, and government regulations. BLF has no foreign loans or loans for highly
leveraged transactions.
BLF's loans are concentrated in three major areas: commercial loans, real
estate loans, and consumer loans. A majority of BLF's loans are made on a
secured basis. As of December 31, 1998, approximately 80.2% of BLF's
consolidated loan portfolio consisted of loans secured by mortgages on real
estate, of which approximately 55.5% of the total loan portfolio is secured by
1-4 family residential properties.
BLF's commercial loan portfolio includes loans to individuals and
small-to-medium sized businesses located primarily in Okeechobee, Highlands,
Hardee, DeSoto, Glades, and Hendry Counties for working capital, equipment
purchases, and various other business purposes. A majority of commercial loans
are secured by real estate, equipment, or similar assets, but these loans may
also be made on an unsecured basis. Commercial loans may be made at variable or
fixed rates of interest. Commercial lines of credit are typically granted on a
one-year basis, with loan covenants and monetary thresholds. Other commercial
loans with terms or amortization schedules of longer than one year will normally
carry interest rates which vary with the prime lending rate and will become
payable in full and are generally refinanced in three to five years. Commercial
and agricultural loans not secured by real estate amounted to approximately 8.3%
of BLF's total loan portfolio as of December 31, 1998.
BLF's real estate loans are secured by mortgages and consist primarily of
loans to individuals and businesses for the purchase, improvement of or
investment in real estate and for the construction of single-family residential
units or the development of single-family residential building lots. These real
estate loans may be made at fixed or variable interest rates. BLF generally does
not make fixed-rate commercial real estate loans for terms exceeding three
years. Loans in excess of three years are generally adjustable. BLF's
residential real estate loans generally are repayable in monthly installments
based on up to a 30-year amortization schedule with variable interest rates.
BLF's consumer loan portfolio consists primarily of loans to individuals
for various consumer purposes, but includes some business purpose loans which
are payable on an installment basis. The majority of these
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loans are for terms of less than five years and are secured by liens on various
personal assets of the borrowers, but consumer loans may also be made on an
unsecured basis. Consumer loans are made at fixed and variable interest rates,
and are often based on up to a five-year amortization schedule.
For additional information regarding BLF's loan portfolio, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition."
Loan originations are derived from a number of sources. Loan originations
can be attributed to direct solicitation by BLF's loan officers, existing
customers and borrowers, advertising, walk-in customers and, in some instances,
referrals from brokers.
Certain credit risks are inherent in making loans. These include prepayment
risks, risks resulting from uncertainties in the future value of collateral,
risks resulting from changes in economic and industry conditions, and risks
inherent in dealing with individual borrowers. In particular, longer maturities
increase the risk that economic conditions will change and adversely affect
collectibility. BLF attempts to minimize credit losses through various means. In
particular, on larger credits, BLF generally relies on the cash flow of a debtor
as the source of repayment and secondarily on the value of the underlying
collateral. In addition, BLF attempts to utilize shorter loan terms in order to
reduce the risk of a decline in the value of such collateral.
DEPOSIT ACTIVITIES
Deposits are the major source of BLF's funds for lending and other
investment activities. BLF considers the majority of its regular savings,
demand, NOW and money market deposit accounts to be core deposits. These
accounts comprised approximately 53.6% of BLF's consolidated total deposits at
December 31, 1998. Approximately 46.4% of BLF's consolidated deposits at
December 31, 1998 were certificates of deposit. Generally, BLF attempts to
maintain the rates paid on its deposits at a competitive level. Time deposits of
$100,000 and over made up approximately 6.0% of BLF's consolidated total
deposits at December 31, 1998. The majority of the deposits of BLF are generated
from Okeechobee, DeSoto, Glades, Hardee, Highlands, and Hendry Counties. BLF
does not currently accept brokered deposits. For additional information
regarding BLF's deposit accounts, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition."
INVESTMENTS
BLF invests a portion of its assets in U.S. Treasury and U.S. Government
agency obligations, certificates of deposit, collateralized mortgage obligations
("CMO's"), and federal funds sold. BLF's investments are managed in relation to
loan demand and deposit growth, and are generally used to provide for the
investment of excess funds at minimal risks while providing liquidity to fund
increases in loan demand or to offset fluctuations in deposits.
With respect to BLF's investment portfolio, BLF's total portfolio may be
invested in U.S. Treasury and general obligations of its agencies because such
securities generally represent a minimal investment risk. Occasionally, BLF
purchases certificates of deposits of national and state banks. These
investments may exceed $100,000 in any one institution (the limit of FDIC
insurance for deposit accounts). CMO's are secured with Federal National
Mortgage Association ("FNMA") mortgage-backed securities and generally have a
shorter life than the stated maturity. Federal funds sold is the excess cash BLF
has available over and above daily cash needs. This money is invested on an
overnight basis with approved correspondent banks.
BLF monitors changes in financial markets. In addition to investments for
its portfolio, BLF monitors its daily cash position to ensure that all available
funds earn interest at the earliest possible date. A portion of the investment
account is designated as secondary reserves and invested in liquid securities
that can be readily converted to cash with minimum risk of market loss. These
investments usually consist of U.S. Treasury obligations, U.S. government
agencies and federal funds. The remainder of the investment account may be
placed in investment securities of different type and longer maturity. Daily
surplus funds are sold in the federal funds market for one business day. BLF
attempts to stagger the maturities of its securities so as to produce a
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steady cash-flow in the event BLF needs cash, or economic conditions change to a
more favorable rate environment.
CORRESPONDENT BANKING
Correspondent banking involves one bank providing services to another bank
which cannot provide that service for itself from an economic or practical
standpoint. BLF is required to purchase correspondent services offered by larger
banks, including check collections, purchase of federal funds, security
safekeeping, investment services, coin and currency supplies, overline and
liquidity loan participations and sales of loans to or participation with
correspondent banks.
BLF sells loan participations to correspondent banks with respect to loans
which exceed BLF's lending limit. Management of BLF has established
correspondent relationships with Independent Bankers' Bank of Florida and
Compass Bank. BLF pays for such services.
DATA PROCESSING
BLF has a data processing department which provides a full range of data
processing services, including an automated general ledger, deposit accounting,
and commercial, mortgage and installment lending data processing.
EFFECT OF GOVERNMENTAL POLICIES
The earnings and business of BLF are and will be affected by the policies
of various regulatory authorities of the United States, especially the Federal
Reserve. The Federal Reserve, among other things, regulates the supply of credit
and deals with general economic conditions within the United States. The
instruments of monetary policy employed by the Federal Reserve for these
purposes influence in various ways the overall level of investments, loans,
other extensions of credit and deposits, and the interest rates paid on
liabilities and received on assets.
INTEREST AND USURY
BLF is subject to numerous state and federal statutes that affect the
interest rates that may be charged on loans. These laws do not, under present
market conditions, deter BLF from continuing the process of originating loans.
SUPERVISION AND REGULATION
Banks and their holding companies, and many of their affiliates, are
extensively regulated under both federal and state law. The following is a brief
summary of certain statutes, rules, and regulations affecting BLF and Big Lake
National Bank. This summary is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of BLF and Big Lake National Bank. Supervision,
regulation, and examination of banks by regulatory agencies are intended
primarily for the protection of depositors, rather than shareholders.
Bank Holding Company Regulation. BLF is a bank holding company, registered
with the Federal Reserve under the BHC Act. As such, BLF is subject to the
supervision, examination and reporting requirements of the BHC Act and the
regulations of the Federal Reserve. The BHC Act requires that a bank holding
company obtain the prior approval of the Federal Reserve before (i) acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any bank, (ii) taking any action that causes a bank to become a subsidiary of
the bank holding company, or (iii) merging or consolidating with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
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substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience, and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy and consideration of convenience and needs issues includes the parties'
performance under the Community Reinvestment Act of 1977 (the "CRA"), both of
which are discussed below.
Banks are subject to the provisions of the CRA. Under the terms of the CRA,
the appropriate federal bank regulatory agency is required, in connection with
its examination of a bank, to assess such bank's record in meeting the credit
needs of the community served by that bank, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to:
- charter a national bank,
- obtain deposit insurance coverage for a newly chartered institution,
- establish a new branch office that will accept deposits,
- relocate an office, or
- merge or consolidate with, or acquire the assets or assume the
liabilities of, a federally regulated financial institution
In the case of a bank holding company applying for approval to acquire a
bank or other bank holding company, the Federal Reserve will assess the record
of each subsidiary bank of the applicant bank holding company, and such records
may be the basis for denying the application.
The BHC Act generally prohibits a bank holding company from engaging in
activities other than banking, or managing or controlling banks or other
permissible subsidiaries, and from acquiring or retaining direct or indirect
control of any company engaged in any activities other than those activities
determined by the Federal Reserve to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In determining
whether a particular activity is permissible, the Federal Reserve must consider
whether the performance of such an activity can reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency that outweigh possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest, or unsound banking practices. For example, factoring accounts
receivable, acquiring or servicing loans, leasing personal property, conducting
securities brokerage activities, performing certain data processing services,
acting as agent or broker in selling credit life insurance and certain other
types of insurance in connection with credit transactions, and certain insurance
underwriting activities have all been determined by regulations of the Federal
Reserve to be permissible activities of bank holding companies. Despite prior
approval, the Federal Reserve has the power to order a holding company or its
subsidiaries to terminate any activity or terminate its ownership or control of
any subsidiary, when it has reasonable cause to believe that continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company.
Bank Regulation. Big Lake National Bank is chartered under the national
banking laws and their deposits are insured by the FDIC to the extent provided
by law. Big Lake National Bank is subject to comprehensive regulation,
examination and supervision by the OCC and to other laws and regulations
applicable to banks. Such regulations include limitations on loans to a single
borrower and to its directors, officers and employees; restrictions on the
opening and closing of branch offices; the maintenance of required capital and
liquidity ratios; the granting of credit under equal and fair conditions; and
the disclosure of the costs and terms of such credit. Big Lake National Bank is
examined periodically by the OCC, to whom it submits periodic reports regarding
its financial condition and other matters. The OCC has a broad range of powers
to enforce regulations under its jurisdiction, and to take discretionary actions
determined to be for the protection and safety and soundness of banks, including
the institution of cease and desist orders and the
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removal of directors and officers. The OCC also has the authority to approve or
disapprove mergers, consolidations, and similar corporate actions.
There are various statutory limitations on the ability of BLF to pay
dividends. The OCC also has the general authority to limit the dividend payment
by banks if such payment may be deemed to constitute an unsafe and unsound
practice. For information on the restrictions on the right of Big Lake National
Bank to pay dividends to BLF, see Part II -- Item 5 "Market for the Registrant's
Common Equity and Related Stockholder Matters."
Under federal law, federally insured banks are subject, with certain
exceptions, to certain restrictions on any extension of credit to their parent
holding companies or other affiliates, on investment in the stock or other
securities of affiliates, and on the taking of such stock or securities as
collateral from any borrower. In addition, banks are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") imposed major regulatory reforms, stronger capital standards for
savings and loan associations and stronger civil and criminal enforcement
provisions. FIRREA also provides that a depository institution insured by the
FDIC can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with:
- the default of a commonly controlled FDIC insured depository institution;
or
- any assistance provided by the FDIC to a commonly controlled FDIC insured
institution in danger of default.
The FDIC Improvement Act of 1993 ("FDICIA") made a number of reforms
addressing the safety and soundness of deposit insurance funds, supervision,
accounting, and prompt regulatory action, and also implemented other regulatory
improvements. FDICIA also recapitalized the Bank Insurance Fund, based on an
assessment rate schedule that may extend to 15 years. Annual full-scope, on-site
examinations are required of all insured depository institutions. The cost for
conducting an examination of an institution may be assessed to that institution,
with special consideration given to affiliates and any penalties imposed for
failure to provide information requested. Insured state banks also are precluded
from engaging as principal in any type of activity that is impermissible for a
national bank, including activities relating to insurance and equity
investments. The Act also recodified current law restricting extensions of
credit to insiders under the Federal Reserve Act.
Also important in terms of its effect on banks has been the deregulation of
interest rates paid by banks on deposits and the types of deposit accounts that
may be offered by banks. Most regulatory limits on permissible deposit interest
rates and minimum deposit amounts expired several years ago. The effect of the
deregulation of deposit interest rates generally has been to increase the costs
of funds to banks and to make their costs of funds more sensitive to
fluctuations in money market rates. A result of the pressure on banks interest
margins due to deregulation has been a trend toward expansion of services
offered by banks and an increase in the emphasis placed on fee or noninterest
income.
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%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital consists of common shareholders'
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 except for 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. At December 31, 1998, Big
Lake National Bank's Tier 1 and total risk-based capital ratios were 10.59% and
11.89%, respectively, and BLF's Tier 1 and total risk-based capital ratios were
10.79% and 12.08%, respectively.
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
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minimum. At December 31, 1998, BLF's and Big Lake National Bank's leverage
ratios were 6.36% and 6.23%, respectively.
FDICIA contains "prompt corrective action" provisions pursuant to which
banks are to be classified into one of five categories based upon capital
adequacy, ranging from "well capitalized" to "critically undercapitalized" and
which require (subject to certain exceptions) the appropriate federal banking
agency to take prompt corrective action with respect to an institution which
becomes "significantly undercapitalized" or "critically undercapitalized."
The OCC has issued final regulations to implement the "prompt corrective
action" provisions of FDICIA. In general, the regulations define the five
capital categories as follows:
- an institution is "well capitalized" if it has a total risk-based capital
ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or
greater, has a leverage ratio of 5% or greater and is not subject to any
written capital order or directive to meet and maintain a specific
capital level for any capital measures;
- an institution is "adequately capitalized" if it has a total risk-based
capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of
4% or greater, and has a leverage ratio of 4% or greater;
- an institution is "undercapitalized" if it has a total risk-based capital
ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less
than 4% or has a leverage ratio that is less than 4%;
- an institution is "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based
capital ratio that is less than 3% or a leverage ratio that is less than
3%; and
- an institution is "critically undercapitalized" if its "tangible equity"
is equal to or less than 2% of its total assets.
The OCC also, after an opportunity for a hearing, has authority to
downgrade an institution from "well capitalized" to "adequately capitalized" or
to subject an "adequately capitalized" or "undercapitalized" institution to the
supervisory actions applicable to the next lower category, for supervisory
concerns.
Generally, FDICIA requires that an "undercapitalized" institution must
submit an acceptable capital restoration plan to the appropriate federal banking
agency within 45 days after the institution becomes "undercapitalized" and the
agency must take action on the plan within 60 days. The appropriate federal
banking agency may not accept a capital restoration plan unless, among other
requirements, each company having control of the institution has guaranteed that
the institution will comply with the plan until the institution has been
adequately capitalized on average during each of the three consecutive calendar
quarters and has provided adequate assurances of performance. The aggregate
liability under this provision of all companies having control of an institution
is limited to the lesser of:
- 5% of the institution's total assets at the time the institution becomes
"undercapitalized" or
- the amount which is necessary, or would have been necessary, to bring the
institution into compliance with all capital standards applicable to the
institution as of the time the institution fails to comply with the plan
filed pursuant to FDICIA.
An "undercapitalized" institution may not acquire an interest in any
company or any other insured depository institution, establish or acquire
additional branch offices or engage in any new business unless the appropriate
federal banking agency has accepted its capital restoration plan, the
institution is implementing the plan, and the agency determines that the
proposed action is consistent with and will further the achievement of the plan,
or the appropriate Federal banking agency determines the proposed action will
further the purpose of the "prompt corrective action" sections of FDICIA.
If an institution is "critically undercapitalized," it must comply with the
restrictions described above. In addition, the appropriate Federal banking
agency is authorized to restrict the activities of any "critically
undercapitalized" institution and to prohibit such an institution, without the
appropriate Federal banking agency's prior written approval, from:
- entering into any material transaction other than in the usual course of
business;
- engaging in any covered transaction with affiliates (as defined in
Section 23A(b) of the Federal Reserve Act);
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<PAGE> 10
- paying excessive compensation or bonuses; and
- paying interest on new or renewed liabilities at a rate that would
increase the institution's weighted average costs of funds to a level
significantly exceeding the prevailing rates of interest on insured
deposits in the institution's normal market areas.
The "prompt corrective action" provisions of FDICIA also provide that in
general no institution may make a capital distribution if it would cause the
institution to become "undercapitalized." Capital distributions include cash
(but not stock) dividends, stock purchases, redemptions, and other distributions
of capital to the owners of an institution.
Additionally, FDICIA requires, among other things, that:
- only a "well capitalized" depository institution may accept brokered
deposits without prior regulatory approval and
- the appropriate federal banking agency annually examine all insured
depository institutions, with some exceptions for small, "well
capitalized" institutions and state-chartered institutions examined by
state regulators.
FDICIA also contains a number of consumer banking provisions, including
disclosure requirements and substantive contractual limitations with respect to
deposit accounts.
As of December 31, 1998, BLF and Big Lake National Bank met the capital
requirements of a "well capitalized" institution.
The OCC has proposed revising its risk-based capital requirements to ensure
that such requirements provide for explicit consideration by commercial banks of
interest rate risk. Under the proposed rule, a bank's interest rate risk
exposure would be quantified using either the measurement system set forth in
the proposal or the bank's internal model for measuring such exposure, if such
model is determined to be adequate by the bank's examiner. If the dollar amount
of a bank's interest rate risk exposure, as measured by either measurement
system, exceeds 1% of the bank's total assets, the bank would be required under
the proposed rule to hold additional capital equal to the dollar amount of the
excess. It is anticipated that the regulatory agencies will issue a revised
proposed rule for further public comment. Pending issuance of such revised
proposal, BLF's management cannot determine what effect, if any, an interest
rate risk component would have on the capital of its subsidiary bank.
Enforcement Powers. Congress has provided the federal bank regulatory
agencies with an array of powers to enforce laws, rules, regulations and orders.
Among other things, the agencies may require that institutions cease and desist
from certain activities, may preclude persons from participating in the affairs
of insured depository institutions, may suspend or remove deposit insurance, and
may impose civil money penalties against institution-affiliated parties for
certain violations.
Maximum Legal Interest Rates. Like the laws of many states, Florida law
contains provisions on interest rates that may be charged by banks and other
lenders on certain types of loans. Numerous exceptions exist to the general
interest limitations imposed by Florida law. The relative importance of these
interest limitation laws to the financial operations of Big Lake National Bank
will vary from time to time, depending on a number of factors, including
conditions in the money markets, the costs and availability of funds, and
prevailing interest rates.
Bank Branching. Banks in Florida are permitted to branch state wide. Such
branch banking, however, is subject to prior approval by the OCC. Any such
approval would take into consideration several factors, including the bank's
level of capital, the prospects and economics of the proposed branch office, and
other conditions deemed relevant by the OCC for purposes of determining whether
approval should be granted to open a branch office.
Change of Control. Federal law restricts the amount of voting stock of a
bank holding company and a bank that a person may acquire without the prior
approval of banking regulators. The overall effect of such laws is to make it
more difficult to acquire a bank holding company and a bank by tender offer or
similar means than it might be to acquire control of another type of
corporation. Consequently, shareholders of BLF
8
<PAGE> 11
may be less likely to benefit from the rapid increases in stock prices that may
result from tender offers or similar efforts to acquire control of other
companies. Federal law also imposes restrictions on acquisitions of stock in a
bank holding company and a state bank. Under the federal Change in Bank Control
Act and the regulations thereunder, a person or group must give advance notice
to the Federal Reserve before acquiring control of any bank holding company and
the OCC before acquiring control of any national bank (such as Big Lake National
Bank). Upon receipt of such notice, the OCC may approve or disapprove the
acquisition. The Change in Bank Control Act creates a rebuttable presumption of
control if a member or group acquires a certain percentage or more of a bank
holding company's or state bank's voting stock, or if one or more other control
factors set forth in the Act are present.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1996, provides for nationwide interstate banking and
branching. Under the law, interstate acquisitions of banks or bank holding
companies in any state by bank holding companies in any other state will be
permissible one year after enactment. Interstate branching and consolidation of
existing bank subsidiaries in different states is permissible. Florida has a law
that allows out-of-state bank holding companies (located in states that allow
Florida bank holding companies to acquire banks and bank holding companies in
that state) to acquire Florida banks and Florida bank holding companies. The law
essentially provides for out-of-state entry by acquisition only (and not by
interstate branching) and requires the acquired Florida bank to have been in
existence for at least two years.
Effect of Governmental Policies. The earnings and businesses of BLF and
Big Lake National Bank are affected by the policies of various regulatory
authorities of the United States, especially the Federal Reserve. The Federal
Reserve, among other things, regulates the supply of credit and deals with
general economic conditions within the United States. The instruments of
monetary policy employed by the Federal Reserve for those purposes influence in
various ways the overall level of investments, loans, other extensions of
credit, and deposits, and the interest rates paid on liabilities and received on
assets.
INDUSTRY RESTRUCTURING
For well over a decade, the banking industry has been undergoing a
restructuring process which is anticipated to continue. The restructuring has
been caused by product and technological innovations in the financial services
industry, deregulation of interest rates, and increased competition from foreign
and nontraditional banking competitors, and has been characterized principally
by the gradual erosion of geographic barriers to intrastate and interstate
banking and the gradual expansion of investment and lending authorities for bank
institutions.
Members of Congress and the administration have indicated their intention
to consider additional legislation designed to institute reforms to promote the
viability of the industry. Certain of the proposals would revise the federal
regulatory structure for insured depository institutions; others would affect
the nature of products, services, and activities that bank holding companies and
their subsidiaries may offer or engage in, and the types of entities that may
control depository institutions. There can be no assurance as to whether or in
what form any such proposed legislation might be enacted, or what impact such
legislation might have upon BLF.
COMPETITION
BLF encounters strong competition both in making loans and in attracting
deposits. The deregulation of the banking industry and the widespread enactment
of state laws which permit multi-bank holding companies as well as an increasing
level of interstate banking have created a highly competitive environment for
commercial banking. In one or more aspects of its business, BLF competes with
other commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries. Most of these competitors, some
of which are affiliated with bank holding companies, have substantially greater
resources and lending limits, and may offer certain services that BLF does not
currently provide. In addition, many of BLF's non-bank competitors are not
subject to the same extensive federal regulations that govern bank holding
companies and
9
<PAGE> 12
federally insured banks. Recent federal and state legislation has heightened the
competitive environment in which financial institutions must conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly.
To compete, BLF relies upon specialized services, responsive handling of
customer needs, and personal contacts by its officers, directors, and staff.
Large multi-branch banking competitors tend to compete primarily by rate and the
number and location of branches while smaller, independent financial
institutions tend to compete primarily by rate and personal service.
EMPLOYEES
As of December 31, 1998, BLF and Big Lake National Bank collectively had
93 full-time employees (including executive officers) and 5 part-time
employees. The employees are not represented by a collective bargaining unit.
BLF and Big Lake National Bank consider relations with employees to be good.
STATISTICAL PROFILE AND OTHER FINANCIAL DATA
Reference is hereby made to the statistical and financial data contained in
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations," for statistical and financial data
providing a review of BLF's business activities.
ITEM 2. PROPERTIES
The main office of BLF and Big Lake National Bank is located at 1409 S.
Parrott Avenue, Okeechobee, Florida 34974, in a two-story building of
approximately 8,010 square feet, which is owned by BLF. Big Lake National Bank
also has banking offices located at 1801 Highway 441 SE, Okeechobee, Florida
34974, in a one-story building of approximately 1,196 square feet, which is
owned by Big Lake National Bank; a branch at 199 N. U.S. Highway 27, Lake
Placid, Florida 33852, in a one-story building of approximately 2,000 square
feet, which is owned by Big Lake National Bank; a branch at 300 South Berner
Road, Clewiston, Florida 33440, in a one-story building of approximately 5,700
square feet, which is owned by Big Lake National Bank; a branch at 401 E.
Sugarland Highway, Clewiston, Florida 33440, in a one-story building of
approximately 1,600 square feet, which is leased by Big Lake National Bank
(under a lease which, with renewal options, expires in 2001); a branch at 6th
Street and Highway 27, Moore Haven, Florida 33471, in a one-story building of
approximately 2,800 square feet, which is leased by Big Lake National Bank
(under a lease which, with renewal options, expires in 1999); a branch at 17 N.
Lee Street, LaBelle, Florida 33935, in a one-story building of approximately
1,960 square feet, which is owned by Big Lake National Bank; a branch in a one-
story building of approximately 1,491 square feet located at 1601 East Oak
Street, Arcadia, Florida 34266, which is owned by Big Lake National Bank; and a
branch at 202 North 6th Avenue, Wauchula, Florida 33874 in a one-story building
of approximately 6,878 square feet, which is leased by Big Lake National Bank
(under a lease which, with renewal options, expires in 2013). Big Lake National
Bank also has an operations center adjacent to the branch office at 1801 Highway
441 S.E., Okeechobee, Florida 34974. This facility is a one-story building of
approximately 3,600 square feet, which is owned by Big Lake National Bank.
ITEM 3. LEGAL PROCEEDINGS
BLF and Big Lake National Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, claims involving the making and servicing of real
property loans, and other issues incident to their respective businesses.
Management does not believe that there is any pending or threatened proceeding
against BLF or Big Lake National Bank which, if determined adversely, would have
a material adverse effect on BLF's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of BLF security holders during the
fourth quarter of the year ended December 31, 1998.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The shares of BLF Common Stock are not actively traded, and such trading
activity, as it occurs, takes place in privately negotiated transactions. There
is no established public trading market for the shares of BLF Common Stock.
Management of BLF is aware of certain transactions in its shares that have
occurred since January 1, 1997, although the trading prices of all stock
transactions are not known. The following sets forth the high and low trading
prices for certain trades of BLF Common Stock that occurred in transactions
known to BLF management in the respective periods during 1997 and 1998:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
HIGH LOW SHARES HIGH LOW SHARES
----- ----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter................................. 21.00 21.00 972 15.00 15.00 212
2nd Quarter................................. 23.00 22.00 15,271 -- -- --
3rd Quarter................................. 24.00 22.00 10,669 -- -- --
4th Quarter................................. 24.00 23.00 883 22.50 22.50 2,680
</TABLE>
BLF had approximately 562 shareholders of record as of December 31, 1998.
DIVIDENDS
BLF has not paid any cash dividends in the past. BLF intends that, for the
foreseeable future, it will retain earnings to finance continued growth rather
than pay cash dividends on BLF Common Stock. If at any time BLF's Board
determines to pay dividends on the BLF Common Stock, the timing and the extent
to which dividends are paid by BLF will be determined by such Board in light of
then-existing circumstances, including BLF's rate of growth, profitability,
financial condition, existing and anticipated capital requirements, the amount
of funds legally available for the payment of cash dividends, regulatory
constraints and such other factors as the Board determines relevant. The source
of funds for payment of dividends by BLF will be dividends received from Big
Lake National Bank. Payments by Big Lake National Bank to BLF are limited by law
and regulations of the bank regulatory authorities. There are various statutory
and contractual limitations on the ability of Big Lake National Bank to pay
dividends to BLF. The OCC also has the general authority to limit the dividends
paid by national banks if such payment may be deemed to constitute an unsafe and
unsound practice. As a national bank, Big Lake National Bank may not pay
dividends from their paid-in surplus. All dividends must be paid out of
undivided profits then on hand, after deducting expenses, including reserves for
losses and bad debts. In addition, a national bank is prohibited from declaring
a dividend on its shares of common stock until its surplus equals its stated
capital, unless there has been transferred to surplus no less than one/tenth of
the bank's net profits of the preceding two consecutive half-year periods (in
the case of an annual dividend). The approval of the OCC is required if the
total of all dividends declared by a national bank in any calendar year exceeds
the total of its net profits for that year combined with its retained net
profits for the preceding two years, less any required transfers to surplus.
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<PAGE> 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of earnings and related financial data
are presented herein to assist investors in understanding the financial
condition of BLF at, and results of operations of BLF for the years ended,
December 31, 1998 and 1997. This discussion should be read in conjunction with
the consolidated financial statements and related footnotes of BLF presented
elsewhere herein.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 9,094 $ 5,491 $ 4,229 $ 3,195 $ 2,548
Interest expense............................ 3,464 2,204 1,736 1,211 781
-------- -------- -------- -------- --------
Net interest income before provision for
credit losses............................. 5,630 3,287 2,493 1,984 1,767
Provision for credit losses................. 144 280 132 70 14
-------- -------- -------- -------- --------
Net interest income after provision for
credit losses............................. 5,486 3,007 2,361 1,914 1,753
Noninterest income.......................... 1,205 814 589 518 385
Noninterest expenses........................ 5,043 2,847 2,112 1,574 1,575
-------- -------- -------- -------- --------
Earnings before income taxes................ 1,648 974 838 858 563
Provision for income taxes.................. 574 316 287 308 188
-------- -------- -------- -------- --------
Net earnings...................... $ 1,074 $ 658 $ 551 $ 550 $ 375
======== ======== ======== ======== ========
Per share data(1):
Earnings per share........................ $ 2.20 $ 1.91 $ 1.74 $ 1.74 $ 1.18
Cash dividends declared................... $ -- $ -- $ -- $ -- $ --
Book value at end of period............... $ 21.39 $ 19.36 $ 15.34 $ 13.86 $ 11.83
Common shares outstanding at end of period
(1)....................................... 490,001 486,815 316,429 316,429 316,429
Weighted average common shares outstanding
during period (1)......................... 488,779 344,875 316,429 316,429 318,810
Total assets at end of period............... $150,552 $111,792 $ 59,518 $ 55,824 $ 37,175
Cash and cash equivalents................... $ 7,776 $ 9,788 $ 4,402 $ 12,520 $ 4,582
Investment securities....................... $ 59,560 $ 22,759 $ 16,015 $ 11,922 $ 6,507
Loans, net.................................. $ 75,103 $ 73,972 $ 36,262 $ 28,663 $ 24,580
Deposits.................................... $138,608 $101,332 $ 54,245 $ 50,793 $ 33,299
Other borrowings............................ $ 500 $ -- $ -- $ -- $ --
Stockholders' equity........................ $ 10,480 $ 9,423 $ 4,854 $ 4,386 $ 3,744
Total loans before allowance for credit
losses.................................... $ 76,380 $ 75,155 $ 36,732 $ 29,026 $ 24,904
Allowance for credit losses................. $ 1,277 $ 1,183 $ 470 $ 363 $ 323
Nonperforming loans......................... $ 1,049 $ 1,536 $ 111 $ 30 $ 291
Nonperforming loans and other assets........ $ 1,221 $ 1,797 $ 111 $ 126 $ 299
Allowance for credit losses as a percentage
of period-end total loans................. 1.67% 1.57% 1.28% 1.25% 1.30%
Allowance for credit losses as a percentage
of nonperforming loans.................... 121.73% 77.02% 423.42% 1210.00% 111.00%
Total nonperforming loans as a percentage of
total loans............................... 1.37% 2.04% 0.30% 0.10% 1.17%
Total nonperforming loans as a percentage of
total assets.............................. 0.70% 1.37% 0.19% 0.05% 0.78%
Total nonperforming loans and real estate
owned as a percentage of total assets..... 0.81% 1.61% 0.19% 0.23% 0.80%
</TABLE>
- ---------------
(1) Adjusted for the 2.5% stock dividends in shares of BLF Common Stock in 1994
through 1998.
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<PAGE> 15
GENERAL
BLF's principal asset is its ownership of Big Lake National Bank.
Accordingly, BLF's results of operations are primarily dependent upon the
results of operations of Big Lake National Bank. BLF 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). BLF'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 BLF'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, BLF'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, deposit insurance premiums paid to
the FDIC, and other operating expenses.
RECENT DEVELOPMENTS
During 1998, BLF entered into negotiations with First Union National Bank
("First Union") to acquire certain assets and assume deposit liabilities and
related accrued interest of First Union's Wauchula and Arcadia Branches
("Branch"). The Branch acquisitions were approved by the OCC and the Company's
Board of Directors, and consummated on November 19, 1998. For a more detailed
discussion, see "Business Acquisition of Branches" and the Notes to Consolidated
Financial Statements contained herein.
YEAR 2000 OVERVIEW
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date using "00" as the
year 1900 rather than the year 2000.
This could result in a system failure or other disruption of operations and
impede normal business activities. In June 1996, the Federal Financial
Institutions Examination Council ("FFIEC") alerted the banking industry of the
serious challenges that would be encountered with Year 2000 issues. The OCC has
also implemented a plan to require compliance with Year 2000 issues and
regularly examines our progress.
YEAR 2000 -- BLF'S STATE OF READINESS
In accordance with OCC guidelines, BLF has developed a comprehensive plan
which it believes will result in timely and adequate modifications of its
systems and technology to address its Year 2000 issues, which contemplates all
system conversions and testing to be substantially completed by June 30, 1999.
BLF has completed a top-down assessment of its mission-critical and other
systems for Year 2000 compliance and is currently in the third and fourth of
five phases for compliance, "renovation and validation," as defined by the
FFEIC. BLF has assessed its non-information technology systems and has found
that most have no Year 2000 considerations. Those systems that are
date-sensitive will be validated during the first or second quarter of 1999.
To determine the readiness of its lending customers, Big Lake National Bank
utilizes a Year 2000 compliance agreement which is produced by its lending
software. This document addresses the Year 2000 problem, and requires each
customer to satisfy certain requirements. While many of its commercial borrowers
renew on an annual basis and will sign the agreement, letters will be mailed to
those not on file as having been assessed. The allowance for credit losses,
liquidity, and contingencies are reviewed on a quarterly basis and will
13
<PAGE> 16
be modified as necessary. Significant depositors are identified as those with a
combined relationship of over $100,000, and any who may represent a Year 2000
high risk will be re-assessed during each quarter of 1999.
To determine the readiness of BLF's vendors, BLF has sent out a letter to
each vendor inquiring about their compliance with Year 2000. For those vendors
that have responded that they are compliant and that BLF has determined to not
have a material impact on Big Lake National Bank's operations, no further work
is performed. For those vendors that have responded they are working towards
Year 2000 compliance and that we BLF has determined to be significant, including
mission critical vendors, BLF will follow up on a regular basis through 1999. If
those vendors do not demonstrate compliance by a certain date, BLF will seek
other alternatives in accordance with its contingency plan, which may include
seeking replacement vendors. To date all vendors who have been identified as
critical have responded and are not considered to pose a significant risk.
YEAR 2000 -- BLF'S COSTS AND RISKS
A few of BLF's computer hardware and software applications were modified or
replaced in order to maintain their functionality as the year 2000 approaches.
BLF has spent approximately $28,000 as of December 31, 1998, to address its Year
2000 issues and estimate its total costs over the two-year period 1998 -- 1999
to be approximately $36,000, which will come from its general funds. None of
these costs, however, are expected to materially impact its results of
operations in any one reporting period.
Ultimately, the potential impact of the year 2000 issue will depend not
only on the corrective measures BLF undertakes, but also on the way in which the
year 2000 issue is addressed by governmental agencies, businesses, and other
entities who provide data to it, receive data from BLF, or whose financial
condition or operational capability is important to BLF, such as suppliers or
customers. At worst, BLF's customers and vendors will face severe Year 2000
issues, which may cause borrowers to become unable to service their loans. BLF
may also be required to replace non-compliant vendors with more expensive Year
2000-compliant vendors. At this time BLF cannot determine the financial effect
on BLF if significant customer and/or vendor remediation efforts are not
resolved in a timely manner.
YEAR 2000 -- BLF'S CONTINGENCY PLANS
BLF has created a contingency plan which would take effect should there be
circumstances preventing timely implementation. This plan addresses both BLF's
"Business Remediation Contingencies" and "Business Resumption Contingencies."
BLF's main computer and software have undergone multiple rounds of user group
testing, with two such tests monitored by on-site personnel from Big Lake
National Bank. These tests, along with the resultant documentation, show that
BLF's software and hardware are Year 2000 compliant. Independent review of the
testing has been contracted with external consultants as an added measure of
assurance and is expected to be completed during the first quarter of 1999. It
is believed that all mission critical issues are compliant based upon testing
performed and that no Business Remediation Contingencies will be necessary.
Business Resumption Contingencies will be kept current to ensure BLF's
preparedness should a failure occur during any of the critical dates.
LIQUIDITY AND CAPITAL RESOURCES
A national bank is required to maintain a liquidity reserve of at least 3%
of its net transaction deposit accounts under $47.8 million. Where net
transaction deposit accounts exceed $47.8 million, the reserve requirements are
$1,434,000 plus 10% of the amount over $47.8 million. The liquidity reserve may
consist of cash on hand, cash on demand deposit with other correspondent banks,
and other investments and short-term marketable securities as determined by the
rules of the OCC, such as federal funds sold and United States securities or
securities guaranteed by the United States. As of December 31, 1998 and 1997,
Big Lake National Bank had liquidity ratios of 38.0% and 56.6%, respectively.
BLF's principal sources of funds are those generated by Big Lake National
Bank, including net increases in deposits, principal and interest payments on
loans, and proceeds from sales and maturities of investment securities.
14
<PAGE> 17
BLF uses its capital resources principally to fund existing and continuing
loan commitments and to purchase investment securities. At December 31, 1998 and
1997, BLF had commitments to originate loans totaling $6.8 million and $4.7
million, respectively, and had issued but unused letters of credit of $129,000
and $103,000, respectively. In addition, scheduled maturities of certificates of
deposit during the 12 months following December 31, 1998 and 1997 totaled $47.1
million and $39.1 million, respectively. Management believes that BLF 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
BLF can adjust the rates and terms on certificates of deposit and other deposit
accounts to retain deposits in a changing interest rate environment.
In accordance with risk capital guidelines issued by the OCC and Federal
Reserve, Big Lake National Bank and BLF are required to maintain a minimum
standard of total capital to risk-weighted assets of 8.0%. Additionally,
regulatory agencies require banks and holding companies to maintain a minimum
leverage-capital ratio of Tier 1 capital (as defined) to average assets. The
leverage-capital ratio ranges from 3.0% to 5.0% based on the bank's and bank
holding company's rating under the regulatory rating system.
During 1998, BLF entered into a line-of-credit agreement with Independent
Bankers' Bank of Florida that enables BLF to borrow up to $1.0 million. The
purpose of this loan was to provide additional capital to Big Lake National Bank
in connection with its acquisition of two branches from First Union. Advances of
$500,000 were used by BLF to increase the capital of Big Lake National Bank in
order to maintain Big Lake National Bank's capital ratios at levels requested by
the OCC's approval of the acquisition of the First Union branches.
The following table summarizes the regulatory capital levels and ratios for
Big Lake National Bank and BLF:
<TABLE>
<CAPTION>
ACTUAL RATIOS
------------------------------
BIG LAKE
NATIONAL REGULATORY
BANK BLF REQUIREMENT
-------- ----- -----------
<S> <C> <C> <C>
At December 31, 1998
Total capital to risk-weighted assets................... 11.89% 12.08% 8.00%
Tier I capital to risk-weighted assets.................. 10.59% 10.79% 4.00%
Tier I capital to average assets -- leverage assets..... 6.23% 6.36% 4.00%
</TABLE>
RESULTS OF OPERATIONS
Net interest income before provision for credit losses, which constitutes
the principal source of income for BLF, represents the difference between
interest income on interest-earning assets and interest expense on
interest-bearing liabilities. The principal interest-earning assets are
investment securities and loans made to businesses and individuals.
Interest-bearing liabilities primarily consist of time deposits,
interest-bearing checking accounts ("NOW accounts"), retail savings deposits and
money market accounts. Funds attracted by these interest-bearing liabilities are
invested in interest-earning assets. Accordingly, net interest income depends
upon the volume of average interest-earning assets and average interest-bearing
liabilities and the interest rates earned or paid on them.
Net interest income before provision for credit losses was $5,630,000 for
BLF for the year ended December 31, 1998, compared with $3,287,000 for the year
ended December 31, 1997. This improvement in net interest income was a result of
a higher volume of net interest-earning assets, primarily due to the 1997
acquisition of CNB, offset in part by a lower interest-rate spread.
15
<PAGE> 18
The following table shows selected ratios for the periods ended or at the
dates indicated:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Average equity as a percentage of average assets............ 8.47% 8.50%
Equity to total assets at end of period..................... 6.96% 8.43%
Return on average assets.................................... 0.90% 0.92%
Return on average equity.................................... 10.68% 10.82%
Noninterest expense to average assets....................... 4.25% 3.98%
</TABLE>
The rates and yields at the dates indicated were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE YIELD
OR RATE AT
DECEMBER 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Loans....................................................... 9.48% 9.68%
Investment securities....................................... 5.80% 5.85%
Other interest-earning assets............................... 5.49% 5.13%
All interest-earning assets................................. 8.24% 8.45%
Money market deposits....................................... 2.45% 2.26%
NOW accounts................................................ 2.87% 2.62%
Savings deposits............................................ 2.27% 2.67%
Certificates of deposit..................................... 5.16% 6.10%
All interest-bearing liabilities............................ 4.10% 4.73%
Interest-rate spread........................................ 4.14% 3.72%
</TABLE>
16
<PAGE> 19
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest and dividend income of BLF
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; (v) net interest margin. Average balances were based on average daily
balances.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
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)....................................... $ 74,223 $7,033 9.48% $ 44,735 $4,332 9.68%
Investment and mortgage-backed securities...... 24,520 1,422 5.80% 16,765 981 5.85%
Other interest-earning assets(2)............... 11,630 639 5.49% 3,470 178 5.13%
-------- ------ -------- ------
Total interest-earning assets........... 110,373 9,094 8.24% 64,970 5,491 8.45%
------ ------
Noninterest-earning assets....................... 8,404 6,549
-------- --------
Total assets............................ $118,777 $ 71,519
======== ========
Interest-bearing liabilities:
Demand, money market and NOW deposits.......... $ 24,291 665 2.74% $ 11,977 299 2.50%
Savings........................................ 10,730 244 2.27% 6,066 162 2.67%
Certificates of deposit........................ 49,421 2,551 5.16% 28,556 1,742 6.10%
Other.......................................... 90 4 4.44% 25 1 4.00%
-------- ------ -------- ------
Total interest-bearing liabilities...... 84,532 3,464 4.10% 46,624 2,204 4.73%
------ ------
Noninterest-bearing liabilities.................. 24,185 18,813
Stockholders' equity............................. 10,060 6,082
-------- --------
Total liabilities and stockholders'
equity................................ $118,777 $ 71,519
======== ========
Net interest income before provision for credit
losses......................................... $5,630 $3,287
====== ======
Interest-rate spread(3).......................... 4.14% 3.72%
==== ====
Net interest margin(4)........................... 5.10% 5.06%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 130.57% 139.35%
======== ========
</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.
17
<PAGE> 20
The following table sets forth certain information regarding changes in
interest income and interest expense of BLF for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in interest rate
(change in rate multiplied by prior volume), (2) changes in the volume (change
in volume multiplied by prior rate) and (3) changes in rate-volume (change in
rate multiplied by change in volume):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 VS. 1997
INCREASE (DECREASE) DUE TO
-------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans................................................ $(93) $2,856 $ (62) $2,701
Investment and mortgage-backed securities............ (9) 454 (4) 441
Other interest-earning assets........................ 13 419 29 461
---- ------ ------ ------
Total interest-earning assets................ (89) 3,729 (37) 3,603
---- ------ ------ ------
Interest-bearing liabilities:
Demand, money market and NOW deposits................ 29 307 30 366
Savings.............................................. (24) 125 (19) 82
Certificates of deposit.............................. (268) 1,273 (196) 809
Other................................................ -- 3 -- 3
---- ------ ------ ------
Total interest-bearing liabilities........... (263) 1,708 (185) 1,260
---- ------ ------ ------
Net interest income before provision for credit
losses............................................... $174 $2,021 $ 148 $2,343
==== ====== ====== ======
</TABLE>
Comparison of Years Ended December 31, 1998 and 1997
General
Net earnings for the year ended December 31, 1998, were $1,074,000, or
$2.20 per share, compared to net earnings of $658,000, or $1.91 per share, for
the year ended December 31, 1997. Net earnings for 1998 versus 1997 increased
$416,000, or 63.2%. The acquisition of CNB in late-1997 and improvements in the
level of nonperforming loans, which resulted in a lower provision for credit
losses in 1998 versus 1997, contributed to increased earnings in 1998 over 1997.
The acquisition of CNB, the merger of Clewiston National Bank with and into Big
Lake National Bank on April 30, 1998, and the acquisition of the First Union
branches in late-1998 contributed to the higher levels of operating expenses in
1998 as compared with 1997.
Interest Income and Expense
Interest income increased by $3,603,000 from $5,491,000 for the year ended
December 31, 1998, to $9,094,000 for the year ended December 31, 1998. Interest
income on loans increased $2,701,000 due to an increase in the average loan
portfolio balance from $44.7 million for the year ended December 31, 1997, to
$74.2 million for the comparable 1998 period, partially offset by a decrease of
20 basis points in the weighted average yield of loans. Substantially all of the
increase in loans from 1997 to 1998 resulted from the acquisition of Clewiston
National Bank.
Interest on investment securities increased $441,000 due to an increase in
the average investment securities portfolio to $24.5 million in 1998 from $16.8
million in 1997, partially offset by a decrease in the average yield earned from
5.85% in 1997 to 5.80% in 1998. Interest on other interest-earning assets
increased $461,000 due to an increase from $3.5 million in average other
interest-earning assets in 1997 to $11.6 million in 1998, and an increase in the
weighted average yield of 36 basis points. The increases in investment
securities and other interest-earning assets were attributable to the
acquisitions of Clewiston National Bank and the First Union branches.
Interest expense increased to $3,464,000 for the year ended December 31,
1998, from $2,204,000 for the year ended December 31, 1997. Interest expense on
deposit accounts increased because of an increase in the
18
<PAGE> 21
average balance from $46.6 million in 1997 to $84.4 million in 1998, partially
offset by a decrease in the average rates paid on interest-bearing liabilities
of 63 basis points. The increase in average deposits resulted primarily from the
acquisition of Clewiston National Bank and the First Union Branches. The
improvement in average rates paid on deposits is due in part to replacing higher
cost deposits from Clewiston National Bank with the lower rates paid by Big Lake
National Bank.
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 BLF, the
amounts of nonperforming loans, general economic conditions, particularly as
they relate to BLF's market area, and other factors related to the
collectibility of BLF's loan portfolio. For the two months ended December 31,
1997, BLF recorded provisions for credit losses totaling $148,000 to strengthen
its allowance for credit losses and address potential exposure from
nonperforming loans acquired from Clewiston National Bank on October 31, 1997.
In 1998, management reduced the level of the provision for credit losses
consistent with its level of nonperforming loans.
Other Income
Total noninterest income increased $391,000 primarily as a result of the
acquisitions of Clewiston National Bank and the First Union branches.
Other Expense
Total noninterest expense increased $2,196,000 to $5,043,000 for the year
ended December 31, 1998, from $2,847,000 for the year ended December 31, 1997,
primarily due to increases in compensation and employee benefits of $960,000,
occupancy expense of expenses of bank premises and fixed assets of $369,000, and
other operating expenses of $867,000, principally due to the acquisition of
Clewiston National Bank and the First Union branches. Also contributing to the
overall growth in expenses at Big Lake National Bank were personnel additions in
its lending and retail banking areas and the full year impact of the 1997
expansion to its drive-in facilities at the main office and the construction of
a new operations center.
ASSET/LIABILITY MANAGEMENT
A principal objective of BLF'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 which are 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.
As a part of BLF's interest rate risk management policy, the ALCO Committee
examines the extent to which its assets and liabilities are "interest rate
sensitive" and monitors the bank's interest rate sensitivity "gap." An asset or
liability is considered to be interest rate sensitive if it will reprice or
mature within the time period analyzed, usually one year or less. The interest
rate sensitivity gap is the difference between interest-earning assets and
interest-bearing liabilities scheduled to mature or reprice within such time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to
adversely affect net interest income. If the repricing of each bank's
19
<PAGE> 22
assets and liabilities were equally flexible and moved concurrently, the impact
of any increase or decrease in interest rates on net interest income would be
minimal.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the ALCO Committee also evaluates how the repayment of
particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or period of
repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market interest rates, while interest rates on
other types may lag behind changes in general market rates. In addition, certain
assets, such as adjustable rate mortgage loans, have features (generally
referred to as "interest rate caps") which limit changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment (on loans) and early withdrawal (of deposit accounts)
levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also may
decrease in the event of an interest rate increase.
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. BLF's cumulative one-year gap at December 31, 1998, was a
negative 21.4% of assets.
Management generally attempts to maintain a one-year gap range of negative
20% to positive 20%; however, the recent acquisition of the First Union branches
resulted in the negative one-year gap of 21.4%.
Principal among BLF's asset/liability management strategies has been the
emphasis on managing its interest rate sensitive liabilities in a manner
designed to attempt to reduce BLF's exposure during periods of fluctuating
interest rates. Management believes that the type and amount of BLF's interest
rate sensitive liabilities may reduce the potential impact that a rise in
interest rates might have on BLF's net interest income. BLF seeks to maintain a
core deposit base by providing quality services to its customers without
significantly increasing its cost of funds or operating expenses. BLF's demand,
money market, and NOW deposit accounts approximated 41.0% and 39.9% of total
deposits at December 31, 1998 and 1997, respectively. These accounts bore a
weighted average cost of deposits of 1.39% and 0.99% during the years ended
December 31, 1998 and 1997, respectively. Management anticipates that these
accounts will continue to comprise a significant portion of BLF's total deposit
base. BLF also maintains a portfolio of liquid assets in order to reduce its
overall exposure to changes in market interest rates. At December 31, 1998 and
1997, approximately 12.7% and 17.0%, respectively, of BLF's total assets
consisted of cash and due from banks, federal funds sold, and short-term
investment securities. In addition, at December 31, 1998 and 1997, Big Lake
National Bank's liquidity ratio was approximately 38.0% and 56.6%, respectively.
BLF also maintains a "floor," or minimum rate, on certain of its floating or
prime based loans. These floors allow BLF to continue to earn a higher rate when
the floating rate falls below the established floor rate.
20
<PAGE> 23
The following table sets forth certain information relating to BLF's
interest-earning assets and interest-bearing liabilities at December 31, 1998,
that are estimated to mature or are scheduled to reprice within the period
shown:
<TABLE>
<CAPTION>
UNDER 3 TO 12 OVER
3 MONTHS MONTHS 1-5 YEARS 5 YEARS TOTALS
-------- -------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal funds sold............... $ 1,150 $ -- $ -- $ -- $ 1,150
Loans(1)......................... 12,508 35,259 20,420 7,701 75,888
Securities(2).................... 6,203 5,165 44,007 4,185 59,560
-------- -------- -------- ------- --------
Total rate-sensitive
assets (earning
assets).............. $ 19,861 $ 40,424 $ 64,427 $11,886 $136,598
======== ======== ======== ======= ========
Money market and NOW
deposits(2).................... $ 28,061 $ -- $ -- $ -- $ 28,061
Savings deposits(2).............. 17,399 -- -- -- 17,399
Certificates of deposit(2)....... 20,041 27,046 17,259 -- 64,346
-------- -------- -------- ------- --------
Total rate-sensitive
liabilities.......... $ 65,501 $ 27,046 $ 17,259 $ -- $109,806
======== ======== ======== ======= ========
Gap (repricing differences)...... $(45,640) $ 13,378 $ 47,168 $11,886 $ 26,792
======== ======== ======== ======= ========
Cumulative Gap................... $(45,640) $(32,262) $ 14,906 $26,792
======== ======== ======== =======
Cumulative GAP/total assets...... (30.3)% (21.4)% 9.9% 17.8%
======== ======== ======== =======
Cumulative GAP/total earning
assets......................... (33.4)% (23.6)% 10.9% 19.6%
======== ======== ======== =======
Total Assets........... $150,552
========
</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.
(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 based on their remaining maturity or repricing frequency.
FINANCIAL CONDITION
Lending Activities
A significant source of income for BLF is the interest earned on loans. At
December 31, 1998, BLF's total assets were $150.6 million and its net loans were
$75.1 million or 49.9% of total assets. At December 31, 1997, BLF's total assets
were $111.8 million and its net loans were $74.0 million or 66.2% of total
assets. The decline in the percentage of net loans to total assets is a result
of the recent acquisition of the First Union branches. The acquired assets
consisted principally of cash, which was converted to securities, and other
assets.
Big Lake National Bank's primary market area consists of Okeechobee,
Clewiston, Moore Haven, LaBelle, Arcadia, Wauchula, and Lake Placid, Florida.
This region's economy is primarily dependent upon agriculture, light industry,
and tourism. Okeechobee is located on the northern end of Lake Okeechobee in
South Central Florida and is the seat of government for Okeechobee County.
Okeechobee County has a diverse group of employers. Lake Okeechobee, located in
the southern portion of the County, is a 750 square mile lake bordered by four
other counties. The lake serves as a tourist attraction. Big Lake National
Bank's primary market area also includes Lake Placid, Florida, which is located
approximately 70 miles east of Fort Myers in Highlands County. Agriculture is
the main income producing industry around the city. The area also supports the
citrus and cattle industries. In the early 1980s, Hendry County was essentially
a rural community, dependent on several seasonal or cyclical industries. As the
Fort Myers and West Palm Beach business markets have experienced expansion over
the past ten years, Hendry County's location between these two
21
<PAGE> 24
metropolitan areas has afforded relocation and business opportunities for
industries desiring a proximate location to two of Florida's major growth
regions.
There is no assurance that the Bank's market area will continue to
experience economic growth. Adverse conditions in any one or more of the
industries operating in such markets or slow-down in general economic conditions
could have an adverse effect on BLF.
Lending activities are conducted pursuant to a written policy which has
been adopted by BLF. Each loan officer has defined lending authority beyond
which loans, depending upon their type and size, must be reviewed and approved
by a loan committee comprised of certain directors of Big Lake National Bank.
The following table sets forth information concerning BLF's loan portfolio
by type of loan at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1998 1997
--------------- ---------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans................................... $61,710 80.2% $58,455 77.3%
Installment and other loans......................... 8,828 11.5 10,546 13.9
Commercial and agricultural loans................... 6,399 8.3 6,671 8.8
------- ----- ------- -----
Total loans............................... 76,937 100.0% 75,672 100.0%
===== =====
Less:
Deferred loan and unearned fees................... 557 517
Allowance for credit losses.................... 1,277 1,183
------- -------
Loans, net........................................ $75,103 $73,972
======= =======
</TABLE>
The following table reflects the contractual principal repayments by period
of BLF's loan portfolio at December 31, 1998 (excluding nonaccrual loans):
<TABLE>
<CAPTION>
1 YEAR 1 THROUGH AFTER
OR LESS 5 YEARS 5 YEARS TOTAL
------- --------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans................................ $ 7,742 $13,744 $39,651 $61,137
Installment loans................................ 2,113 6,340 373 8,826
Commercial and all other loans................... 2,971 2,053 901 5,925
------- ------- ------- -------
Total loans............................ $12,826 $22,137 $40,925 $75,888
======= ======= ======= =======
Loans with maturities over one year:
Fixed rate..................................... $26,200
Variable rate.................................. 36,862
-------
Total maturities greater than one
year................................. $63,062
=======
</TABLE>
22
<PAGE> 25
The following table sets forth total loans originated and repaid during the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Originations:
Mortgage loan systems..................................... $ 8,908 $ 14,340
Installment loan system................................... 4,975 6,080
Commercial loan system.................................... 14,602 9,468
-------- --------
Total loans originated............................ 28,485 29,888
Acquisition of Clewiston National Bank loans.............. -- 34,726
Principal reductions...................................... (27,220) (25,735)
-------- --------
Increase in total loans................................... $ 1,265 $ 38,879
======== ========
</TABLE>
Asset Quality
Management seeks to maintain a high quality of assets through conservative
underwriting and sound lending practices. The majority of the loans in BLF's
loan portfolio are collateralized by residential and commercial real estate
mortgages. As of December 31, 1998 and 1997, approximately 80.2% and 77.3%,
respectively, of the total loan portfolio was collateralized by real estate of
which 22.3% and 18.0% of the total loan portfolio was secured by commercial real
estate as of December 31, 1998 and 1997, respectively. The level of delinquent
loans and real estate owned also is relevant to the credit quality of a loan
portfolio. As of December 31, 1998, total nonperforming assets were $1,221,000
or 0.8% of total assets, compared to $1,797,000 or 1.6% of total assets at
December 31, 1997.
In an effort to maintain the quality of the loan portfolio, management
seeks to minimize higher risk types of lending. In view of the relative
significance of real estate related loans, a downturn in the value of the real
estate could have an adverse impact on BLF's profitability. However, as part of
its loan portfolio management strategy, BLF generally limits its loans to a
maximum of 80% of the value of the underlying real estate as determined by
appraisal. In addition, knowledgeable members of management make physical
inspections of properties being considered for mortgage loans. Management
believes that such precautions reduce BLF's exposure to the risk associated with
a downturn in real estate values.
Commercial loans also entail risks since repayment is usually dependent
upon the successful operation of the commercial enterprise. They also are
subject to adverse conditions in the economy. Commercial loans are generally
riskier than mortgage loans because they are typically underwritten on the basis
of the ability to repay from the cash flow of a business rather than on the
ability of the borrower or guarantor to repay. Further, the collateral
underlying a commercial loan may depreciate over time, cannot be appraised with
as much precision as real estate, and may fluctuate in value based on the
success of the business.
The repayment of consumer installment loans and other loans to individuals
is closely linked to the economic conditions of the communities in which BLF
operates (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition Lending Activities"). For the most
part, these local economies enjoy diverse labor forces. The majority of these
consumer installment loans are secured by collateral which limits, to a degree,
any loss BLF would suffer upon default.
23
<PAGE> 26
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities which would cause them to be similarly impacted by
economic or other conditions. BLF, on a routine basis, monitors these
concentrations in order to consider adjustments in its lending practices to
reflect economic conditions, loan to deposit ratios, and industry trends.
Concentrations of loans in the following categories constituted the total loan
portfolio as of December 31, 1998:
<TABLE>
<S> <C>
Real estate mortgage loans.................................. 80.2%
Installment and other loans................................. 11.5%
Commercial and agricultural loans........................... 8.3%
-----
100.0%
=====
</TABLE>
The Loan Committee of the Board of Directors of Big Lake National Bank
concentrates its efforts and resources, and that of its senior management and
lending officers, on loan review and underwriting procedures. Internal controls
include ongoing reviews of loans made to monitor documentation and the existence
and valuations of collateral. In addition, management of BLF has established a
review process with the objective of identifying, evaluating, and initiating
necessary corrective action for marginal loans. The goal of the loan review
process is to address classified and nonperforming loans as early as possible.
Classification of Assets
Generally, interest on loans accrues and is credited to income based upon
the principal balance outstanding. It is management's policy to discontinue the
accrual of interest income and classify a loan as nonaccrual when principal or
interest is past due 90 days or more and the loan is not adequately
collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. Consumer
installment loans are generally charged-off after 90 days of delinquency unless
adequately collateralized and in the process of collection. Loans are not
returned to accrual status until principal and interest payments are brought
current and future payments appear reasonably certain. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent payments received are applied to the outstanding
principal balance.
Real estate acquired by BLF as a result of foreclosure or by deed in lieu
of foreclosure is classified as other real estate owned ("OREO"). OREO
properties are recorded at the lower of cost or fair value less estimated
selling costs, and the estimated loss, if any, is charged to the allowance for
credit losses at the time it is transferred to OREO. Further allowances for
losses in OREO are recorded at the time management believes additional
deterioration in value has occurred.
Management has adopted SFAS No. 114, which considers a loan to be impaired
if it is probable that BLF will be unable to collect all amounts due under the
contractual terms of the loan agreement. If a loan is considered impaired, its
value generally should be measured based on the present value of expected cash
flows discounted at the loan's effective interest rate. As a practical
expedient, however, the loan's value may be based on:
- the loan's market price; or
- the fair value of the loan's collateral, less discounted estimated costs
to sell, if the collateral is expected to be the sole source of
repayment.
If the value of the loan is less than the recorded investment in the loan,
a loss should be recognized by recording a valuation allowance and a
corresponding increase to the provision for credit losses charged to operating
expenses.
Situations may occur where:
- BLF receives physical possession of a debtor's assets regardless of
whether formal foreclosure proceedings have been initiated or completed;
or
- the debtor has effectively surrendered control of the underlying
collateral in contemplation of foreclosure.
24
<PAGE> 27
These situations are referred to as "in-substance foreclosures." SFAS No.
114 recognizes the practical problems of accounting for the operation of an
asset the creditor does not possess, and states that a loan for which
foreclosure is probable should continue to be accounted for as a loan.
At December 31, 1998 and 1997, loans considered by management to be
impaired or in-substance foreclosed totaled $1,049,000 and $1,529,000,
respectively. The impaired loans for 1998 and 1997 were also classified as
nonaccrual loans.
The following tables sets forth certain information on nonaccrual loans and
real estate owned, the ratio of such loans and real estate owned to total assets
as of the dates indicated, and certain other related information (as classified
for regulatory reporting purposes):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans:
Real estate............................................... $ 573 $1,057
Installment loans......................................... 2 59
Commercial and all other loans............................ 474 413
------ ------
Total nonaccrual loans............................ 1,049 1,529
Accruing loans over 90 days delinquent
Real estate loans......................................... -- --
Installment loans......................................... -- 7
Commercial and all other loans............................ -- --
------ ------
Total accrual loans over 90 days delinquent....... -- 7
------ ------
Troubled debt restructurings not included above............. -- --
------ ------
Total nonperforming loans......................... 1,049 1,536
------ ------
Other real estate owned:
Real estate acquired by foreclosure or deed in lieu of
foreclosure............................................ 172 261
------ ------
Total nonperforming loans and other real estate
owned........................................... $1,221 $1,797
====== ======
Total nonperforming loans as a percentage of total loans.... 1.37% 2.04%
====== ======
Total nonperforming loans as a percentage of total assets... 0.70% 1.37%
====== ======
Total nonperforming loans and real estate owned as a
percentage of total assets................................ 0.81% 1.61%
====== ======
</TABLE>
Allowance for Credit Losses
In originating loans, BLF recognizes that credit losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan and,
in the case of a collateralized loan, the quality of the collateral for the loan
as well as general economic conditions. It is management's policy to attempt to
maintain an adequate allowance for credit losses based on, among other things,
BLF's historical loan loss experience, evaluation of economic conditions and
regular reviews of any delinquencies and loan portfolio quality. Specific
allowances are provided for individual loans when ultimate collection is
considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the collateral for the loan. Management recognizes the greater inherent risks
in connection with commercial and consumer lending. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Provision for
Credit Losses."
Management continues to actively monitor BLF's asset quality and to
charge-off loans against the allowance for credit losses when appropriate or to
provide specific loss allowances when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for credit losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in making
the initial determinations. BLF's allowance for credit
25
<PAGE> 28
losses at December 31, 1997, was $1,183,000. BLF increased the allowance to
$1,277,000 as of December 31, 1998, consistent with the level of nonperforming
loans as a percentage of total assets (principally from Clewiston National
Bank). Management considers several factors in determining the reserves,
including the favorable charge off history, the relatively low level of
nonperforming assets prior to the acquisition of Clewiston National Bank, and
the value of the underlying collateral. Furthermore, nonperforming loans at
December 31, 1998, have declined to 1.37% of total loans. Without expectation of
any significant losses from the liquidation of the underlying collateral,
management believes its net additions to the allowance for credit losses of
$94,000 from December 31, 1997, to December 31, 1998, are adequate when compared
with BLF's nonperforming loans and total loans.
The following table sets forth information with respect to activity in
BLF's allowance for credit losses during the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance at beginning of period, adjusted for Clewiston
National Bank............................................. $1,183 $ 894
------ ------
Charge-offs:
Real estate loans......................................... 59 16
Installment loans......................................... 58 36
Commercial and all other loans............................ 11 2
------ ------
Total charge-offs................................. 128 54
------ ------
Recoveries:
Real estate loans......................................... 40 --
Installment loans......................................... 25 6
Commercial and all other loans............................ 13 57
------ ------
Total recoveries.................................. 78 63
------ ------
Provision for credit losses charged to operations........... 144 280
------ ------
Allowance at end of period.................................. $1,277 $1,183
====== ======
Ratio of net charge-offs during the period to average loans
outstanding during the period............................. 0.07% (0.02)%
====== ======
Allowance for credit losses as a percentage of total
period-end loans.......................................... 1.67% 1.57%
====== ======
Allowance for credit losses as a percentage of nonperforming
loans..................................................... 121.73% 77.02%
====== ======
</TABLE>
BLF classifies its loan portfolio for internal purposes as mortgage loans,
installment loans and commercial loans. BLF prepares its quarterly computation
of allowance for losses in this manner. The following table presents information
regarding the BLF's total allowance for losses as well as the allocation of such
amounts to the various categories of loans (dollars in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------
1998 1997
----------------- -----------------
% OF % OF
LOANS TO LOANS TO
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
------ -------- ------ --------
<S> <C> <C> <C> <C>
Mortgage loan system................................. $ 453 50.4% $ 586 49.5%
Installment loan system.............................. 416 10.7 327 27.6
Commercial loan system............................... 408 38.9 270 22.9
------ ----- ------ -----
Total allowance for credit losses.......... $1,277 100.0% $1,183 100.0%
====== ===== ====== =====
</TABLE>
26
<PAGE> 29
The allowance for credit losses represented 1.67% of the total loans
outstanding as of December 31, 1998, compared with 1.57% of the total loans
outstanding as of December 31, 1997, which reflects the increase in
nonperforming loans associated with the acquisition of Clewiston National Bank.
Investment Securities
BLF's investment securities portfolio at December 31, 1998, primarily
consisted of United States Government agency obligations. The following table
sets forth the amortized cost of the BLF's investment portfolio at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1998 1997
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Investment securities:
Available-for-sale:
U.S. Government agency obligations..................... $58,486 $21,484
Mortgage-backed securities............................. 179 250
Obligations of states and municipalities............... -- 95
Other securities....................................... 138 138
------- -------
Total available-for-sale.......................... 58,803 21,967
Held-to-maturity:
Obligations of states and municipalities............... 898 801
------- -------
Total investment securities, at amortized cost.... $59,701 $22,768
======= =======
</TABLE>
The following table sets forth, by maturity distribution, certain
information pertaining to the investment securities portfolio as follows:
<TABLE>
<CAPTION>
ONE YEAR OR AFTER ONE YEAR AFTER FIVE YEARS
LESS TO FIVE YEARS TO TEN YEARS
------------------ ------------------ ------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD YIELD YIELD
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
U.S. Government and agency
securities................... $11,318 5.47% $43,707 5.67% $3,499 6.00%
Obligations of states and
municipalities............... 50 4.25% 300 6.20% 50 4.80%
Other securities............... -- 0.00% -- 0.00% -- 00.0%
------- ------- ------
Total.................... $11,368 5.47% $44,007 5.70% $3,549 5.98%
======= ======= ======
December 31, 1997:
U.S. Government and agency
securities................... $ 9,027 5.68% $12,480 5.86% $ -- 0.00%
Obligations of states and
municipalities............... 245 6.79% 450 6.02% 50 4.80%
Other securities............... -- 0.00% -- 0.00% -- 00.0%
------- ------- ------
Total.................... $ 9,272 5.71% $12,930 5.87% $ 50 4.80%
======= ======= ======
<CAPTION>
AFTER TEN YEARS TOTAL
------------------ ------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Government and agency
securities................... $ -- 0.00% $58,524 5.67%
Obligations of states and
municipalities............... 498 5.18% 898 5.45%
Other securities............... 138 5.42% 138 5.42%
---- -------
Total.................... $636 5.23% $59,560 5.67%
==== =======
December 31, 1997:
U.S. Government and agency
securities................... $218 5.82% $21,725 5.78%
Obligations of states and
municipalities............... 151 6.95% 896 6.32%
Other securities............... 138 4.16% 138 4.16%
---- -------
Total.................... $507 5.70% $22,759 5.79%
==== =======
</TABLE>
Deposit Activities
Deposits are the major source of BLF's funds for lending and other
investment purposes. Deposits are attracted principally from within BLF's
primary market area through the offering of a broad variety of deposit
instruments including checking accounts, money market accounts, regular savings
accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more) and retirement savings plans.
Maturity terms, service fees and withdrawal penalties are established by
BLF on a periodic basis. The determination of rates and terms is predicated on
funds acquisition and liquidity requirements, rates paid by competitors, growth
goals and federal regulations.
27
<PAGE> 30
FDIC regulations limit the ability of certain insured depository
institutions to accept, renew, or rollover deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having the same type
of charter in such depository institutions' normal market area. Under these
regulations, "well capitalized" depository institutions may accept, renew, or
rollover deposits at such rates without restriction, "adequately capitalized"
depository institutions may accept, renew or rollover deposits at such rates
with a waiver from the FDIC (subject to certain restrictions on payments of
rates), and "undercapitalized" depository institutions may not accept, renew or
rollover deposits at such rates. The regulations contemplate that the
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" will be the same as the definitions adopted by the agencies
to implement the prompt corrective action provisions of applicable law. See
"Business -- Supervision, Regulation -- Capital Requirements." As of December
31, 1998, Big Lake National Bank met the definition of a "well capitalized"
depository institution.
The following table shows the distribution of, and certain other
information relating to, BLF's deposit accounts by type:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------
1998 1997
------------------ ------------------
% OF % OF
AMOUNT DEPOSIT AMOUNT DEPOSIT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand deposits................................. $ 28,802 20.8% $ 19,793 19.5%
NOW deposits.................................... 20,991 15.1 13,807 13.6
Money market deposits........................... 7,070 5.1 6,891 6.8
Savings deposits................................ 17,399 12.6 11,301 11.2
-------- ----- -------- -----
Subtotal.............................. 74,262 53.6 51,792 51.1
-------- ----- -------- -----
Certificates of deposit:
Under 3.99%................................... 1,670 1.2 -- 0.0
4.00% -- 4.99%................................ 21,371 15.4 14,983 14.8
5.00% -- 5.99%................................ 35,481 25.6 21,363 21.1
6.00% -- 6.99%................................ 5,132 3.7 12,640 12.5
Over 7.00%.................................... 692 0.5 554 .5
-------- ----- -------- -----
Total certificates of deposit (1)..... 64,346 46.4 49,540 48.9
-------- ----- -------- -----
Total deposits........................ $138,608 100.0% $101,332 100.0%
======== ===== ======== =====
</TABLE>
- ---------------
(1) Includes individual retirement accounts ("IRAs") totaling $6,169 and $3,650
at December 31, 1998 and 1997, respectively, all of which are in the form of
certificates of deposit.
The following tables show the average amount outstanding and the average
rate paid on each of the following deposit account categories during the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand, money market and NOW..................... $ 47,781 1.39% $30,144 0.99%
Savings deposits................................. 10,730 2.27% 6,066 2.67%
Certificates of deposit.......................... 49,421 5.16% 28,556 6.10%
-------- -------
Total deposits......................... $107,932 3.21% $64,766 3.40%
======== =======
</TABLE>
BLF does not have a concentration of deposits from any one source, the loss
of which would have a material adverse effect on BLF. Management believes that
substantially all of BLF's depositors are residents in its primary market areas.
BLF currently does not accept brokered deposits. As shown in the tables below, a
28
<PAGE> 31
significant amount of BLF's certificates of deposit will mature during the year
ending December 31, 1999. The high volume of maturities during this period is
primarily due to customer demand for certificates of deposit having original
maturities of 12 months or less. Based upon current and anticipated levels of
interest rates and past practice, BLF management anticipates that substantially
all of BLF's certificates of deposit maturing during this time period will be
renewed or replaced by certificates of deposit issued to other customers at
competitive market rates, which may be higher or lower than the rates currently
being paid. Consequently, BLF management does not believe that the maturity of
BLF's certificates of deposit during the year ending December 31, 1999, will
have a material adverse effect on BLF's liquidity. However, if BLF is required
to pay substantially higher rates to obtain the renewal of these or other
certificates of deposit or alternative sources of funds, the higher net interest
expense could have a material adverse effect on BLF's net income.
The following tables present by various interest rate categories the
amounts of certificates of deposit at December 31, 1998 and 1997 which mature
during the periods indicated:
<TABLE>
<CAPTION>
DUE DUE DUE DUE
UNDER THREE 3 MONTHS TO 1 YEAR TO OVER
MONTHS 12 MONTHS 3 YEARS 3 YEARS TOTAL
----------- ----------- --------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
At December 31, 1998:
Under 3.99%......................... $ 778 $ 709 $ 181 $ 2 $ 1,670
4.00% - 4.99%....................... 1,145 17,045 2,596 585 21,371
5.00% - 5.99%....................... 17,123 7,721 7,505 3,132 35,481
6.00% - 6.99%....................... 870 1,310 1,943 1,009 5,132
Over 7.00%.......................... 125 261 306 -- 692
------- ------- ------- ------ -------
Total certificates of
deposit................... $20,041 $27,046 $12,531 $4,728 $64,346
======= ======= ======= ====== =======
</TABLE>
Jumbo certificates ($100,000 and over) mature as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due in three months or less................................. $2,873 $2,639
Due from three months to one year........................... 3,698 2,840
Due from twelve months to three years....................... 1,539 515
Due over three years........................................ 275 258
------ ------
$8,385 $6,252
====== ======
</TABLE>
The following table sets forth the net deposit flows of BLF during the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net increase before interest credited....................... $33,818 $2,471
Net interest credited....................................... 3,458 1,965
------- ------
Net deposit increase...................................... $37,276 $4,436
======= ======
</TABLE>
Of the $33.8 million net increase in deposits before interest credited,
$30.9 million in deposits were attributable to BLF's acquisition of the First
Union branches.
OTHER BORROWINGS
BLF has a line of credit agreement with Independent Bankers' Bank of
Florida dated November 25, 1998, that enables BLF to borrow up to $1,000,000.
This credit facility matures on November 25, 2003, and requires annual principal
repayments of up to $200,000, plus annual interest payments at 6.5% per year.
The purpose of this loan was to provide additional capital to Big Lake National
Bank in connection with its
29
<PAGE> 32
acquisition of two branches from First Union. All of the outstanding common
stock of Big Lake National Bank has been pledged as collateral for this loan.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data concerning BLF
presented in this Proxy Statement have been prepared in accordance with
generally accepted accounting principles, which require the measurement 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. The primary impact of inflation on the operations of BLF is reflected
in increased operating costs. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, changes in interest rates have a more significant impact on the
performance of a financial institution than do the effects of changes in the
general rate of inflation and changes in prices. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services.
FUTURE ACCOUNTING REQUIREMENTS
SFAS No. 125 and its amendment SFAS No. 127 apply to certain transfers and
servicing of financial assets and extinguishments of liabilities effective
January 1, 1997 (except as deferred by SFAS No. 127). BLF has not transferred
and serviced significant financial assets nor does it anticipate that these
Statements will have any material impact on the financial statements of BLF.
SFAS Nos. 128 and 129 addressing earnings per share and disclosure of
information about the capital structure, respectively, are effective for BLF's
financial statements issued after December 15, 1997. SFAS No. 128 establishes
standards for the computation and presentation of earnings per share ("EPS").
This statement is not expected to have a material impact on the financial
statements of BLF. SFAS No. 129 requires only additional disclosure and will not
have any material impact on the financial statements of BLF. Two other
accounting pronouncements, SFAS Nos. 130 and 131, which address reporting of
comprehensive income and business segments, respectively, also become effective
for financial statements issued after December 15, 1997. Likewise, these
statements are not expected to have any material impact on BLF's financial
position, results of operations, or disclosures presented herein.
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 BLF.
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 BLF.
30
<PAGE> 33
ITEM 7. FINANCIAL STATEMENTS
The financial statements of BLF as of and for the years ended December 31,
1998 and 1997 are set forth in this Form 10-KSB as Exhibit 13.1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
<PAGE> 34
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained under the sections captioned "Directors" and
"Executive Officers" under "Election of Directors" in the registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
March 18, 1999, to be filed with the SEC pursuant to Regulation 14A within 120
days of their registrant's fiscal year end (the "Proxy Statement"), as
incorporated herein by reference.
SECTION 16(a) REPORTING REQUIREMENTS
Under Section 16(a) of the Securities Exchange Act of 1934, directors and
executive officers of BLF, and persons who beneficially own more than 10% of BLF
Common Stock, are required to make certain filings on a timely basis with the
Securities and Exchange Commission. Reporting persons are required by SEC
regulations to furnish the BLF with copies of all Section 16(a) forms filed by
them. Based on its review of the copies of Section 16(a) forms received by it,
and on written representations from reporting persons concerning the necessity
of filing a Form 5 Annual Statement of Changes in Beneficial Ownership, BLF
believes that, during 1998, all filing requirements applicable to reporting
persons were met except that Mr. Joe G. Mullins did not report three
transactions (involving the purchase of 741 shares) in a timely manner, and Mr.
H. Gilbert Culbreth, Jr. did not report three transactions (involving the
purchase of 13,932 shares) in a timely manner. Messrs. Mullins and Culbreth
identified this error and filed amended reports covering the transactions on
February 2, 1999. Neither of Messrs. Mullins nor Culbreth have sold any shares
of BLF Common Stock since the BLF was formed in 1986.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the sections captioned "Information About the
Board of Directors and Its Committees," "Executive Compensation and Benefits"
and "Information on Benefit Plans and Policies" under "Election of Directors" in
the Proxy Statement, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained in the sections captioned "Directors" and "Management
and Principal Stock Ownership" under "Election of Directors," in the Proxy
Statement, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section entitled "Certain Transactions"
under "Election of Directors" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations and Comprehensive Income for the
years ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity for the years
ended December 31, 1998 and 1997
32
<PAGE> 35
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
3. Exhibits
<TABLE>
<S> <C> <C>
3.1 -- Restated Articles of Incorporation of Big Lake Financial
Corporation (Incorporated by reference to Exhibit 3.1 to
BLF's Registration Statement No. 333-30779 (the
"Registration Statement"))
3.2 -- Bylaws of Big Lake Financial Corporation (Incorporated by
reference to Exhibit 3.2 to the Registration Statement)
4.1 -- Specimen Stock Certificate of Big Lake Financial Corporation
(Incorporated by reference to Exhibit 4.1 to the
Registration Statement)
10.1 -- Big Lake Financial Corporation 1987 Stock Option Plan and
amendment thereto (Incorporated by reference to Exhibit 10.1
to the Registration Statement)*
10.2 -- Lease dated December 11, 1989 between AAA Warehouse, Inc.
and Clewiston National Bank and Amendment thereto dated
November 28, 1995 (Incorporated by reference to Exhibit 10.2
to the Registration Statement)
10.3 -- Lease dated April 1, 1981 between Earl R. Gamer and
Clewiston National Bank and Modification and Lease Extension
Agreement thereto dated April 1, 1996 (Incorporated by
reference to Exhibit 10.3 to the Registration Statement)
13.1 -- Big Lake Financial Corporation 1998 Annual Report
21.1 -- List of Subsidiaries of Big Lake Financial Corporation
23.1 -- Consent of Stevens, Sparks & Company, P.A. (formerly
Stevens, Thomas, Schemer & Sparks, P.A.)
27 -- Financial Data Schedule
</TABLE>
- ---------------
* Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by BLF during the last fiscal
quarter covered by this report.
33
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be duly signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Okeechobee, State of Florida, on the 22nd day of February, 1999.
BIG LAKE FINANCIAL CORPORATION
By: /s/ Edwin E. Walpole, III
------------------------------------
Edwin E. Walpole, III
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on February 22, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Edwin E. Walpole, III Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer and Director
Edwin E. Walpole, III
/s/ Anita DeWitt Treasurer (Principal Financial Officer and
- ----------------------------------------------------- Principal Accounting Officer)
Anita DeWitt
/s/ Joe G. Mullins Executive Vice President and Chief
- ----------------------------------------------------- Administrative Officer and Director
Joe G. Mullins
/s/ John W. Abney, Sr. Director
- -----------------------------------------------------
John W. Abney, Sr.
/s/ Mary Beth Cooper Director
- -----------------------------------------------------
Mary Beth Cooper
/s/ H. Gilbert Culbreth, Jr. Director
- -----------------------------------------------------
H. Gilbert Culbreth, Jr.
/s/ Bobby H. Tucker Director
- -----------------------------------------------------
Bobby H. Tucker
/s/ John B. Boy Director
- -----------------------------------------------------
John B. Boy
/s/ Thomas A. Smith Director
- -----------------------------------------------------
Thomas A. Smith
/s/ Curtis S. Fry Director
- -----------------------------------------------------
Curtis S. Fry
</TABLE>
34
<PAGE> 37
BIG LAKE FINANCIAL CORPORATION
FORM 10-KSB
FOR FISCAL YEAR ENDING DECEMBER 31, 1998
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
- ------- ------- ----
<S> <C> <C> <C>
13.1 -- Big Lake Financial Corporation 1998 Annual Report
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Stevens, Sparks & Company, P.A. (formerly
Stevens, Thomas, Schemer & Sparks, P.A.)
27 -- Financial Data Schedule
</TABLE>
35
<PAGE> 1
Exhibit 13.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Big Lake Financial Corporation and Subsidiary
Okeechobee, Florida
We have audited the consolidated balance sheets of Big Lake Financial
Corporation and Subsidiary (the "Company") as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive income, cash
flows, and changes in stockholders' equity for each of the two years in the
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Big Lake
Financial Corporation and Subsidiary as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
STEVENS, SPARKS & COMPANY, P.A.
January 15, 1999
<PAGE> 2
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks................................... $ 6,626 $ 6,492
Federal funds sold........................................ 1,150 3,296
-------- --------
Total cash and cash equivalents................... 7,776 9,788
Securities available-for-sale............................... 58,662 21,958
Securities held-to-maturity (market value of $926 for 1998
and $823 for 1997)........................................ 898 801
Loans....................................................... 75,103 73,972
Facilities.................................................. 3,174 2,626
Accrued interest receivable................................. 1,125 813
Deferred income taxes....................................... 582 424
Intangible assets........................................... 2,458 616
Other assets................................................ 774 794
-------- --------
Total assets...................................... $150,552 $111,792
======== ========
LIABILITIES
Deposits:
Noninterest-bearing demand deposits....................... $ 28,802 $ 19,793
Demand deposits........................................... 20,991 13,807
Money market accounts..................................... 7,070 6,891
Savings accounts.......................................... 17,399 11,301
Time, $100,000 and over................................... 8,385 6,252
Other time deposits....................................... 55,961 43,288
-------- --------
Total deposits.................................... 138,608 101,332
Other borrowings............................................ 500 --
Accrued interest payable on deposits........................ 757 755
Accounts payable and accrued liabilities.................... 207 282
-------- --------
Total liabilities................................. 140,072 102,369
-------- --------
Commitments and contingencies............................... -- --
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 1,000,000 shares,
issued 490,001 shares in 1998 and 475,223 shares in
1997...................................................... 5 5
Additional paid-in capital.................................. 7,168 6,855
Retained earnings........................................... 3,395 2,569
Net unrealized holding losses on securities................. (88) (6)
-------- --------
Total stockholders' equity........................ 10,480 9,423
-------- --------
Total liabilities and stockholders' equity........ $150,552 $111,792
======== ========
Book value per common share................................. $ 21.39 $ 19.36
======== ========
Common shares outstanding, adjusted for stock dividends..... 490,001 486,815
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> 3
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans................................ $7,033 $4,332
Interest and dividend income from investment securities... 1,422 981
Income on federal funds sold.............................. 639 177
Interest on deposits with other banks..................... -- 1
------ ------
Total interest income............................. 9,094 5,491
------ ------
INTEREST EXPENSE
Interest on deposits...................................... 3,460 2,203
Other..................................................... 4 1
------ ------
Total interest expense............................ 3,464 2,204
------ ------
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES...... 5,630 3,287
PROVISION FOR CREDIT LOSSES................................. 144 280
------ ------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES....... 5,486 3,007
------ ------
OTHER INCOME
Service charges on deposit accounts....................... 1,067 718
Other fees for customer service and other income.......... 138 96
------ ------
Total other income................................ 1,205 814
------ ------
OTHER EXPENSES
Salaries and employee benefits............................ 2,335 1,375
Expenses of bank premises and fixed assets................ 736 367
Other operating expenses.................................. 1,972 1,105
------ ------
Total other expenses.............................. 5,043 2,847
------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 1,648 974
PROVISION FOR INCOME TAXES.................................. 574 316
------ ------
NET INCOME.................................................. 1,074 658
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
Unrealized holding gains (losses) on securities arising
during period.......................................... (82) 63
------ ------
COMPREHENSIVE INCOME........................................ $ 992 $ 721
====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> 4
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1998 1997
--------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 1,074 $ 658
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses.............................. 144 280
Depreciation and amortization.......................... 386 225
Deferred income tax.................................... (105) (30)
Net premium amortization and discount accretion........ (16) (13)
Compensation recorded on stock options exercised....... 38 --
(Increase) decrease in assets:
Accrued interest receivable.......................... (312) (51)
Other assets......................................... (69) (3)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities............. (73) 268
-------- -------
Net cash provided by operating activities......... 1,067 1,334
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Purchases.............................................. (59,826) (3,729)
Proceeds from maturities............................... 23,000 3,249
Securities held-to-maturity:
Purchases.............................................. (398) --
Proceeds from maturities............................... 304 --
Proceeds from sale of other real estate................... 563 34
Increase in loans......................................... (1,749) (6,756)
Purchases of facilities................................... (834) (544)
Premium paid on acquisition of branch deposits............ (1,942) --
-------- -------
Net cash used in investing activities............. (40,882) (7,746)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits:
Noninterest-bearing.................................... 9,009 3,059
Interest-bearing....................................... 28,267 1,377
Proceeds from other borrowings............................ 500 --
Proceeds from stock options exercised..................... 32 --
Cash paid in lieu of fractional shares.................... (5) --
-------- -------
Net cash provided by financing activities......... 37,803 4,436
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (2,012) (1,976)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 9,788 11,764
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 7,776 $ 9,788
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash received during the year for interest and
dividends.............................................. $ 8,782 $ 5,426
======== =======
Cash paid during the year for interest.................... $ 3,462 $ 1,986
======== =======
Cash paid during the year for income taxes................ $ 897 $ 234
======== =======
Cash and cash equivalents acquired in the acquisition of
CNB Financial Corporation's common stock............... $ -- $ 5,386
======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> 5
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING
CAPITAL 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, 1996.......... 313,435 $ 3 $3,070 $1,852 $(71) $ 4,854
Stock issued to acquire CNB
Financial Corporation............. 166,512 2 3,785 -- 2 3,789
Treasury stock canceled............. (4,724) -- -- 59 -- 59
Comprehensive income:
Net income........................ -- -- -- 658 --
Net change in net unrealized
holding gains on securities.... 63
Total comprehensive
income.................. -- -- -- -- -- 721
-------- --- ------ ------ ---- -------
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............................ -- -- -- (5) -- (5)
Stock options exercised............. 3,186 -- 70 -- -- 70
Comprehensive income:............... -- -- -- -- --
Net income........................ -- -- -- 1,074 --
Net change in net unrealized
holding losses on securities... (82)
Total comprehensive
income.................. -- -- -- -- -- 992
-------- --- ------ ------ ---- -------
BALANCE, DECEMBER 31, 1998.......... 490,001 $ 5 $7,168 $3,395 $(88) $10,480
======== === ====== ====== ==== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> 6
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
GENERAL:
The consolidated financial statements include the accounts and transactions
of Big Lake Financial Corporation (the "Company") and its wholly-owned
subsidiary, Big Lake National Bank ("BLNB"). All significant intercompany
accounts and transactions have been eliminated in consolidation. The accounting
and reporting policies of BLNB and the Company conform with generally accepted
accounting principles and with general practices within the banking industry.
On May 1, 1998, Clewiston National Bank ("CNB") was merged with and into
BLNB and the transaction was accounted for as a pooling-of-interests. CNB 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. See Note 21 to the Consolidated Financial
Statements.
On November 19, 1998, BLNB purchased certain assets and assumed certain
liabilities from two branches owned by First Union National Bank ("First
Union"). See Note 22 to the Consolidated Financial Statements.
BLNB, a national banking association, and the Company are subject to
regulations issued by certain regulatory agencies and undergo periodic
examinations by those agencies. BLNB provides a wide range of banking services
to individual and corporate customers through its branch network, which
includes:
- Its main office, which opened in July, 1986, at 1409 South Parrott
Avenue, Okeechobee, Florida,
- Taylor Creek Branch, also located in Okeechobee, Florida, which opened in
November, 1992,
- Lake Placid Branch, which was acquired from First America
Bank -- Florida, FSB in December, 1995,
- Former CNB branches located in Clewiston, LaBelle, and Moore Haven,
Florida, and
- Former First Union branches located in Wauchula and Arcadia, Florida.
At December 31, 1998, BLNB's primary trade area encompassed Okeechobee,
Highlands, Hendry, Glades, Hardee, and DeSoto Counties. The majority of BLNB's
loans are currently to customers located in these counties.
USE OF ESTIMATES:
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses, the fair value of
financial instruments, 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.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, including
independent appraisals for significant properties, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the allowance based on their judgments about information
available to them at the time of their examination.
<PAGE> 7
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS:
Statement of Financial Accounting Standards No. 115 ("FAS No. 115"),
Accounting for Certain Investments in Debt and Equity Securities, sets the
standard for classification of and accounting for investments in equity
securities that have readily determinable fair values, and all investments in
debt securities which are to be classified as held-to-maturity securities,
available-for-sale securities, or trading securities.
Debt securities that an enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported at
amortized cost. Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings. Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity.
BLNB classifies its investments at the purchase date in accordance with the
above-described guidelines. Premiums or discounts on securities at the date of
purchase are being amortized or accreted, respectively, over the estimated life
of the security using a method which approximates the level yield method. Gains
and losses realized on the disposition of securities are based on the specific
identification method and are reflected in other income.
LOANS:
Loans receivable 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.
Interest income on loans is accounted for on the accrual basis. Generally,
the BLNB's policy is to discontinue the accrual of interest on loans delinquent
over ninety days unless fully secured and in the process of collection. The
accrued and unpaid interest is reversed from current income and thereafter
interest is recognized only to the extent payments are received. A nonaccrual
loan may be restored to accrual basis when interest and principal payments are
current and prospects for future recovery are no longer in doubt.
In 1995, the Company adopted Statement of Financial Accounting Standards
No. 114 ("FAS No. 114"), Accounting by Creditors for Impairment of a Loan, which
sets the standard for recognition of loan impairment and the measurement methods
for certain impaired loans and loans whose terms are modified in troubled debt
restructurings.
Under FAS No. 114, a loan is impaired when it is probable that a creditor
will be unable to collect the full amount of principal and interest due
according to the contractual terms of the loan agreement. When a loan is
impaired, a creditor has a choice of ways to measure the impairment. The
measurement of impairment may be based on (1) the present value of the expected
future cash flows of the impaired loan discounted at the loan's original
effective interest rate, (2) the observable market price of the impaired loan,
or (3) the fair value of the collateral of a collateral-dependent loan.
Creditors may select the measurement method on a loan-by-loan basis, except that
collateral-dependent loans for which foreclosure is probable must be measured at
the fair value of the collateral. A creditor in a troubled debt restructuring
involving a restructured loan should measure impairment by discounting the total
expected future cash flows at the loan's original effective rate of interest. If
the value of the loan is less than the recorded investment in the loan, a loss
should be recognized by recording a valuation allowance and a corresponding
increase to the provision for credit losses charged to operating expenses.
<PAGE> 8
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR CREDIT LOSSES:
The provision for credit losses charged to operating expenses is based upon
management's judgment of the adequacy of the allowance giving consideration to
its loan loss experience and an evaluation of the current loan portfolio.
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, and economic conditions. 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 credit losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
FACILITIES:
Facilities are stated at cost, less accumulated depreciation and
amortization. Charges to income for depreciation and amortization are computed
on the straight-line method over the assets' estimated useful lives.
When properties are sold or otherwise disposed of, the gain or loss
resulting from the disposition is credited or charged to income. Expenditures
for maintenance and repairs are charged against income and renewals and
betterments are capitalized.
OTHER REAL ESTATE OWNED:
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in loss on
foreclosed real estate.
INTANGIBLE ASSETS:
Intangible assets (consisting of core deposit premium and goodwill) are
amortized on a straight-line basis over a period of seven to fifteen years. For
income tax purposes, intangibles are amortized over fifteen years on a
straight-line basis.
The amortization for core deposit premium and goodwill totaled $100,000 in
1998 and $85,000 in 1997.
OFF-BALANCE SHEET INSTRUMENTS:
In the ordinary course of business, the BLNB has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
EMPLOYEE BENEFITS:
Profit-sharing costs are charged to salaries and employee benefits expense
and are funded as accrued.
INCOME TAXES:
Provisions for income taxes are based on amounts reported in the statements
of operations, after exclusion of non-taxable income such as interest on state
and municipal securities, and include deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
The
<PAGE> 9
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal temporary differences are depreciation and amortization, credit loss
provision, CNB merger expenses and purchase accounting adjustments, and
unrealized holding gains (losses) on securities. Deferred taxes are computed on
the liability method as prescribed in FAS No. 109, Accounting for Income Taxes.
EARNINGS PER SHARE:
Earnings per share ("EPS") of common stock is computed by dividing net
income by the weighted-average number of shares of common stock outstanding
during the period. 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 15 to the Consolidated Financial
Statements, the Company declared a 2.5% stock dividend in 1998. 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 years ended December 31, 1998
and 1997.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Basic EPS computation:
Numerator -- Net income................................... $1,074 $ 658
------ ------
Denominator -- Weighted average shares outstanding........ 489 345
------ ------
Basic EPS................................................. $ 2.20 $ 1.91
====== ======
Diluted EPS computation:
Numerator -- Net income................................... $1,074 $ 658
------ ------
Denominator -- Weighted average shares outstanding........ 489 345
Stock options............................................. 9 11
------ ------
498 356
------ ------
Diluted EPS............................................... $ 2.16 $ 1.85
====== ======
</TABLE>
STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts on deposit in noninterest-bearing accounts with other
commercial banks, and federal funds sold.
RECLASSIFICATION OF ACCOUNTS:
Certain items in the financial statements for 1997 have been reclassified
to conform to the classifications used for the current year.
<PAGE> 10
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTMENT SECURITIES
The amortized cost and estimated fair value of instruments in debt and
equity securities at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government agencies..................... $58,486 $10 $151 $58,345
Mortgage-backed securities................... 179 -- -- 179
Other........................................ 138 -- -- 138
------- --- ---- -------
$58,803 $10 $151 $58,662
======= === ==== =======
Securities to be held-to-maturity:
State and municipal.......................... $ 898 $28 $ -- $ 926
======= === ==== =======
</TABLE>
The amortized cost and estimated fair value of instruments in debt and
equity securities at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government agencies..................... $21,484 $11 $ 21 $21,474
Mortgage-backed securities................... 250 1 -- 251
State and municipal.......................... 95 -- -- 95
Other........................................ 138 -- -- 138
------- --- ---- -------
$21,967 $12 $ 21 $21,958
======= === ==== =======
Securities to be held-to-maturity:
State and municipal.......................... $ 801 $22 $ - $ 823
======= === ==== =======
</TABLE>
The fair value of securities fluctuates during the investment period. No
provision for loss has been made in connection with the decline of fair value
below book value, because the securities are purchased for investment purposes
and the decline is not deemed to be other than temporary. Temporary declines in
fair value of securities available-for-sale at December 31, 1998, of $88,000
(net of deferred income taxes of $53,000) are regarded as an adjustment to
stockholders' equity. The estimated fair value of securities is determined on
the basis of market quotations. At December 31, 1998, securities with carrying
value of approximately $4,196,000, and market values of approximately
$4,236,000, were pledged to secure deposits and for other operating purposes.
There were no gross realized gains or losses in 1998 or 1997.
<PAGE> 11
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost and estimated fair value of debt and equity securities at December
31, 1998, by contractual maturities, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES SECURITIES TO BE
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less......................... $11,307 $11,318 $ 50 $ 50
Due from one to five years...................... 43,861 43,707 300 309
Due from five to ten years...................... 3,497 3,499 50 52
Due after ten years............................. -- -- 498 515
Other........................................... 138 138 -- --
------- ------- ---- ----
$58,803 $58,662 $898 $926
======= ======= ==== ====
</TABLE>
NOTE 3 -- LOANS
The loan portfolio is classified as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial and agricultural................................. $ 6,399 $ 6,671
Real estate................................................. 61,710 58,455
Installment and other loans................................. 8,828 10,546
------- -------
Total loans....................................... 76,937 75,672
Less, unearned income and deferred fees and credits......... (557) (517)
Less, allowance for credit losses........................... (1,277) (1,183)
------- -------
$75,103 $73,972
======= =======
</TABLE>
The following is a summary of the transactions in the allowance for credit
losses:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year.................................. $1,183 $ 470
Allowance for credit losses acquired from CNB............... -- 424
Provisions charged to operating expenses.................... 144 280
Loans charged-off........................................... (128) (54)
Recoveries.................................................. 78 63
------ ------
Balance, end of year........................................ $1,277 $1,183
====== ======
</TABLE>
Loans on which interest was not being accrued (nonaccrual loans) were also
classified by management as impaired. Impairment of loans having recorded
investments of $1,049,000 and $1,529,000 at December 31, 1998 and 1997,
respectively, has been recognized in conformity with FAS No. 114. The average
recorded investment in such impaired loans during 1998 and 1997 was
approximately $1,018,000 and $220,000, respectively. The total allowance for
loan losses related to these loans was $163,000 and $192,000 in 1998 and 1997,
respectively, and the amount of recorded investment for which there is no
related allowance for loan losses totaled $886,000 and $971,000, respectively.
<PAGE> 12
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The interest income earned but not recorded by BLNB pursuant to its
nonaccrual policy totaled $82,000 and $34,000 in 1998 and 1997, respectively.
Interest income received on impaired and nonaccrual loans during 1998 and 1997
and included in income on a cash basis totaled $54,000 and $6,000, respectively.
Interest income on impaired loans resulting from the passage of time was not
considered material and no such amount was recognized in 1998 or 1997.
Loans having carrying values of $474,000 and $77,000 were transferred to
foreclosed real estate in 1998 and 1997, respectively.
NOTE 4 -- FACILITIES
Facilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 943 $ 688
Buildings................................................... 2,163 2,030
Furniture, fixtures, and equipment.......................... 2,297 1,949
Other fixed assets.......................................... 270 171
------- -------
Total............................................. 5,673 4,838
Less accumulated depreciation............................... (2,499) (2,212)
------- -------
Premises and equipment -- net............................... $ 3,174 $ 2,626
======= =======
</TABLE>
Depreciation expense amounted to $286,000 and $140,000 for the years ended
December 31, 1998 and 1997, respectively.
BLNB leases property at three branch locations under noncancelable
operating leases expiring in 1999 through 2008. Minimum future rental payments
under these leases as of December 31, 1998, are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1999................................................. $102
2000................................................. 86
2001................................................. 76
2002................................................. 72
2003................................................. 72
Thereafter........................................... 324
----
$732
====
</TABLE>
Lease payments charged to operations for the above leases were
approximately $24,000 and $2,000 for the years ended December 31, 1998 and 1997,
respectively.
<PAGE> 13
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- OTHER ASSETS
Other assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other real estate owned..................................... $172 $261
Capital lease receivable.................................... -- 153
Prepaid expenses............................................ 364 304
Income tax receivable....................................... 226 43
Miscellaneous............................................... 12 33
---- ----
$774 $794
==== ====
</TABLE>
NOTE 6 -- TIME DEPOSITS
Included in interest bearing deposits are certificates of deposit issued in
amounts of $100,000 or more. These certificates and their remaining maturities
at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less........................................ $2,873 $2,639
Over three through twelve months............................ 3,698 2,840
Over twelve months through three years...................... 1,539 515
Over three years............................................ 275 258
------ ------
$8,385 $6,252
====== ======
</TABLE>
NOTE 7 -- OTHER BORROWINGS
The Company has a line of credit agreement with Independent Bankers' Bank
of Florida dated November 25, 1998, that enables the Company to borrow up to
$1,000,000. This credit facility matures on November 25, 2003, and requires
annual principal repayments of up to $200,000, plus annual interest payments at
6.5% per year. The purpose of this loan was to provide additional capital to
BLNB in connection with its acquisition of two branches from First Union. All of
the outstanding common stock of BLNB has been pledged as collateral for this
loan.
NOTE 8 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and other accrued expenses................. $160 $250
Income taxes payable........................................ -- 18
Miscellaneous............................................... 47 14
---- ----
$207 $282
==== ====
</TABLE>
<PAGE> 14
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INCOME TAXES
The provision (credit) for income taxes on income is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current:
Federal................................................... $ 581 $ 391
State..................................................... 99 67
----- -----
680 458
----- -----
Deferred:
Federal................................................... (91) (122)
State..................................................... (15) (20)
----- -----
(106) (142)
----- -----
Total income tax provision........................ $ 574 $ 316
===== =====
</TABLE>
A reconciliation of the income tax computed at the Federal statutory rate
of 34% and the income tax provision shown on the statements of operations,
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
AMOUNT % AMOUNT %
------ ---- ------ ----
<S> <C> <C> <C> <C>
Tax computed at statutory rate........................ $560 34.0 $331 34.0
Increase (decrease) resulting from:
Effect of tax-exempt income......................... (33) (2.0) (19) (2.0)
State tax -- net of federal benefit................. 40 2.4 23 2.4
Other (net)......................................... 7 0.4 (19) (2.0)
---- ---- ---- ----
Income tax provision........................ $574 34.8 $316 32.4
==== ==== ==== ====
</TABLE>
The components of the deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax asset:
Federal................................................... $694 $667
State..................................................... 119 113
---- ----
813 780
---- ----
Deferred tax liability:
Federal................................................... 197 304
State..................................................... 34 52
---- ----
231 356
---- ----
Net deferred income tax asset..................... $582 $424
==== ====
</TABLE>
<PAGE> 15
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of each type of significant item that gave rise to deferred
taxes are:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net unrealized gains on securities available-for-sale....... $ 53 $ 5
Depreciation and amortization............................. (46) (115)
Allowance for credit losses............................... 405 379
CNB merger................................................ 258 302
Other..................................................... (88) (147)
---- ----
Net deferred income tax asset.......................... $582 $424
==== ====
</TABLE>
NOTE 10 -- EMPLOYEE BENEFIT PLAN
BLNB sponsors a 401(k) Profit Sharing Plan that covers substantially all
employees. BLNB contributions under this plan are made at the discretion of the
Board of Directors. During 1998 and 1997, the employer contribution approved by
the Board of Directors amounted to 50% of a participant's contributions, subject
to a maximum of 3% of the participant's salary. The 401(k) Profit Sharing Plan
is a prototype plan and has been approved by the Internal Revenue Service.
CNB sponsored a defined contribution pension plan that covered
substantially all employees of CNB. A favorable determination letter had been
received from the Internal Revenue Service that the plan was qualified. In 1998,
this plan was terminated and all former CNB employees were included in BLNB's
401(k) Profit Sharing Plan.
The amounts included in salaries and employee benefits as pension expense
for 1998 and 1997 totaled $27,000 and $22,000, respectively.
NOTE 11 -- RELATED PARTY TRANSACTIONS
BLNB has entered into transactions with its directors, executive officers,
significant stockholders, and their affiliates (Related Parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features.
The aggregate extensions of credit to such related parties at December 31,
1998 and 1997, were $2,263,000 and $2,372,000, respectively. Unfunded
commitments to the same parties totaled $403,000 at December 31, 1998.
Following is a summary of activity for 1997 and 1998 for such loans:
<TABLE>
<CAPTION>
BEGINNING END OF
OF YEAR YEAR
BALANCE ADDITIONS REDUCTIONS BALANCE
--------- --------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1997............................................. $2,683 $732 $1,043 $2,372
1998............................................. $2,372 $990 $1,099 $2,263
</TABLE>
<PAGE> 16
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities that arise in the normal course of
business and involve elements of credit risk, interest rate risk, and liquidity
risk. These commitments and contingent liabilities of BLNB, which include
unfunded commitments to related parties, are commitments to extend credit and
commercial and standby letters of credit. A summary of the BLNB's commitments
and contingent liabilities at December 31, 1998, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit
Secured by real estate.................................... $3,516 $1,824
Other..................................................... 3,291 2,845
Commercial and standby letters of credit.................. 129 103
------ ------
$6,936 $4,772
====== ======
</TABLE>
Commitments to extend credit and commercial letters of credit all include
exposure to some credit loss in the event of non-performance of the customer.
BLNB's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extension of credit instruments that are
recorded in the consolidated financial statements. In the opinion of management,
these instruments do not generally present any significant liquidity risk to
BLNB. BLNB's experience has been that approximately 70% to 80% of loan
commitments are drawn upon by customers. BLNB did not incur any losses on its
commitments in either 1998 or 1997.
The Company is a party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims will not
be material to the financial position of the Company.
At December 31, 1998, BLNB had $1,500,000 unfunded lines of credit from
other banks for the purchase of overnight federal funds.
NOTE 13 -- CONCENTRATIONS OF CREDIT
Substantially all of BLNB's loans, commitments, and commercial and standby
letters of credit have been granted to customers in BLNB's market area.
Substantially all such customers are depositors of the BLNB. The concentrations
of credit by type of loan are set forth in Note 3. The distribution of
commitments to extend credit approximates the distribution of loans outstanding.
Letters of credit were granted to commercial borrowers. BLNB, as a matter of
policy, do not extend credit to any single borrower or group of related
borrowers in excess of its legal lending limit.
NOTE 14 -- REGULATORY MATTERS
BLNB is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At December 31, 1998,
approximately $2.3 million of BLNB's retained earnings were available for
dividend declaration without prior regulatory approval.
BLNB is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
BLNB's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, BLNB must meet specific
capital guidelines that involve quantitative measures of BLNB's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. BLNB's
<PAGE> 17
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require BLNB to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that BLNB
meets all capital adequacy requirements applicable to BLNB.
As of December 31, 1998, the most recent notification from the Office of
the Comptroller of the Currency ("OCC") categorized BLNB as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, BLNB must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed BLNB's category.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
-------------- --------------------- --------------------
AMOUNT RATIO >=AMOUNT >=RATIO >=AMOUNT >=RATIO
------ ----- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BIG LAKE NATIONAL BANK
As of December 31, 1998:
Total Risk-Based Capital
(To Risk-Weighted Assets)......... $8,872 11.89% >=$5,971 >=8.0% >=$7,463 >=10.0%
Tier I Capital
(To Risk-Weighted Assets)......... $7,904 10.59% >=$2,985 >=4.0% >=$4,478 >= 6.0%
Tier I Capital
(To Adjusted Total Assets)........ $7,904 6.23% >=$5,079 >=4.0% >=$6,348 >= 5.0%
BIG LAKE FINANCIAL CORPORATION:
As of December 31, 1998:
Total Risk-Based Capital
(To Risk-Weighted Assets)......... $9,084 12.08% >=$6,014 >=8.0% >=$7,517 >=10.0%
Tier I Capital
(To Risk-Weighted Assets)......... $8,110 10.79% >=$3,007 >=4.0% >=$4,510 >= 6.0%
Tier I Capital
(To Adjusted Total Assets)........ $8,110 6.36% >=$5,100 >=4.0% >=$6,375 >= 5.0%
</TABLE>
NOTE 15 -- 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 $5,000.
NOTE 16 -- STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (as amended) that permits
certain directors to purchase additional shares of the Company's common stock at
a purchase price of $10.00 per share. The number of shares permitted for
purchase by each participant originated at 2,750 shares, and has been adjusted
for subsequent stock dividends according to the terms of the plan. At December
31, 1998, the approximate
<PAGE> 18
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
number of shares under this plan totaled 3,186 shares per participant. Options
totaling approximately 15,930 shares are outstanding and exercisable until the
expiration date, which has been extended until June 30, 2001.
For the year ended December 31, 1996, Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("FAS No. 123"),
became effective. FAS No. 123 permits application of the accounting requirements
of an earlier issued APB Opinion No. 25 and, accordingly, no compensation cost
were recognized in 1997. 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.
The Company must comply with certain additional disclosures under FAS No.
123. A summary of the disclosures follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1997 and 1996................... 18,660 $10.00
======
Increase due to stock dividend, 1998...................... 456 $10.00
======
Stock options exercised, 1998............................. (3,186) $10.00
------ ======
Outstanding at December 31, 1998.......................... 15,930 $10.00
====== ======
</TABLE>
All outstanding options were fully vested and exercisable at December 31,
1998 and 1997, with a weighted average remaining contractual life of thirty
months at December 31, 1998. Since no additional options have been granted in
1998 or 1997, and the compensation recorded in 1998 for the stock options
exercised amounted to approximately 2% of net income, net income and earnings
per share would not materially differ from reported results had the Company
adopted the accounting treatment under FAS No. 123.
NOTE 17 -- PREFERRED STOCK
In addition to the 1,000,000 shares of authorized common stock, the
Company's articles of incorporation authorize up to 500,000 shares of non-voting
preferred stock at $1.00 par value. The Board of Directors are further
authorized to establish designations, powers, preferences, rights, and other
terms for preferred stock by resolution.
On March 26, 1986, the Board of Directors, designated 2,000 shares as
Redeemable Preferred Stock, Series 1 ("Series 1"). Series 1 shares have no
voting or conversion rights and pay no dividends. However, Series 1 shares have
preference on liquidation at the rate of $10 per share after January 1, 1987.
No shares of preferred stock, including Series 1 shares, have been issued.
<PAGE> 19
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- NONINTEREST OPERATING EXPENSES
Other expenses for 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Advertising and public relations............................ $ 105 $ 64
Data processing fees and service charges.................... 197 194
Telephone................................................... 120 43
Postage..................................................... 127 73
Stationary, printing, and supplies.......................... 243 113
FDIC and OCC assessments.................................... 117 50
Director fees............................................... 116 80
Professional and legal expenses............................. 170 73
Amortization................................................ 100 85
Merger-related expenses..................................... 45 149
Other....................................................... 632 181
------ ------
$1,972 $1,105
====== ======
</TABLE>
NOTE 19 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS:
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES:
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
LOANS RECEIVABLE:
For loans subject to repricing and loans intended for sale within six
months, fair value is estimated at the carrying amount plus accrued interest.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES:
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of long-term fixed maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
SHORT-TERM DEBT:
For short-term debt, including accounts and demand notes payable, the
carrying amount is a reasonable estimate of fair value.
<PAGE> 20
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER BORROWINGS:
Since this borrowing is at a recent market interest rate, the carrying
amount is a reasonable estimate of fair value.
The estimated fair values of the BLNB's financial instruments at December
31, 1998, are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Financial Assets
Cash and cash equivalents................................. $ 7,776 $ 7,776
Investment securities..................................... 59,560 59,588
Loans..................................................... 75,103 76,602
-------- --------
Total assets valued............................... $142,439 $143,966
======== ========
Financial Liabilities
Deposits.................................................. $138,608 $138,969
Other borrowings.......................................... 500 500
-------- --------
Total liabilities valued.......................... $139,108 $139,469
======== ========
</TABLE>
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that, were BLNB to have
disposed of such items at December 31, 1998, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1998, should not necessarily be considered to apply at subsequent dates.
NOTE 20 -- PARENT COMPANY FINANCIAL INFORMATION
Presented below are condensed financial statements for Big Lake Financial
Corporation (dollars in thousands):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS (PARENT ONLY) AS OF DECEMBER 31: 1998 1997
- --------------------------------------------------------- ------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 68 $ 76
Investment in subsidiary bank, net........................ 10,274 9,148
Facilities................................................ 536 556
Other assets.............................................. 4 333
------- -------
Total............................................. $10,882 $10,113
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Equity Liabilities........................................ $ 402 $ 690
Stockholders' equity...................................... 10,480 9,423
------- -------
Total............................................. $10,882 $10,113
======= =======
</TABLE>
<PAGE> 21
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS AND STOCKHOLDERS' EQUITY (PARENT ONLY)
YEARS ENDED DECEMBER 31: 1998 1997
- ------------------------------------------------------------------------- ------- -------
<S> <C> <C>
Equity in net income of subsidiary bank........................... $ 1,129 $ 721
Other income...................................................... 51 70
Other expenses.................................................... (106) (133)
------- -------
Net income........................................................ 1,074 658
Stockholders' Equity:
Beginning of year............................................... 9,423 4,854
Cash paid in lieu of fractional shares.......................... (5) --
Stock issued to acquire CNB Financial Corporation............... -- 3,789
Treasury stock canceled......................................... -- 59
Stock options exercised......................................... 70 --
Net change in unrealized holding gains (losses) on securities in
subsidiary bank.............................................. (82) 63
------- -------
End of year..................................................... $10,480 $ 9,423
======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS (PARENT ONLY)
YEARS ENDED DECEMBER 31: 1998 1997
- ------------------------------------------------ ------- ------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income........................................................ $ 1,074 $ 658
Adjustment to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary bank............. (1,129) (721)
Other........................................................... 6 34
------- ------
Total................................................... (49) (29)
------- ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital contribution to subsidiary bank......................... (500) --
------- ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from other borrowings.................................. 500 --
Proceeds from stock options exercised........................... 46 --
Cash paid in lieu of fractional shares.......................... (5) --
------- ------
Total................................................... 541 --
------- ------
DECREASE IN CASH AND CASH EQUIVALENTS............................. (8) (29)
CASH AND CASH EQUIVALENTS:
Beginning of year............................................... 76 105
------- ------
End of year..................................................... $ 68 $ 76
======= ======
</TABLE>
NOTE 21 -- ACQUISITION OF CNB FINANCIAL CORPORATION
The Company consummated its merger with CNB Financial Corporation on
October 31, 1997. The merger was accounted for as a purchase by the Company. The
purchase was based on the fair market values of the Company and CNB Financial
Corporation determined by independent experts, which resulted in a cost of $3.8
million. The Company acquired from CNB Financial Corporation total assets valued
at $46.9 million, total net loans valued at $31.3 million, and total deposits
valued at $42.6 million.
The purchase method of accounting, which requires (1) no restatement of the
Company's historical financial statements, and (2) the inclusion of the acquired
company's historical financial information on a fair value basis only from the
date of consummation, was used in this transaction. With respect to this
transaction,
<PAGE> 22
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company issued 166,512 shares of its common stock in exchange for the common
stock of CNB Financial Corporation. This transaction resulted in an increase to
stockholders' equity of $3.8 million. The net book value of CNB Financial
Corporation exceeded the fair value of the net assets acquired by $.4 million
(net of deferred income tax asset of $.3 million); therefore, no goodwill was
recorded as a result of this transaction. All adjustments to fair value of loans
and deposits will be amortized over the estimated remaining maturities of the
underlying loans and deposits on a straight-line basis, which is not materially
different from the interest method.
Total acquired assets related to the Company's purchase accounting
acquisition of CNB Financial Corporation amounted to 79% of the Company's total
assets at December 31, 1996. The pro forma income per common share amount was
slightly dilutive. The following summarized pro forma (unaudited) information
assumes the acquisition had occurred on January 1, 1997 (dollars in thousands,
except per share data):
<TABLE>
<S> <C>
Net interest income......................................... $5,104
======
Net income.................................................. $1,004
======
Earnings per share.......................................... $ 2.11
======
</TABLE>
NOTE 22 -- BRANCH ACQUISITIONS
During 1998, BLNB entered into negotiations with First Union National Bank
("First Union") to acquire certain assets and assume deposit liabilities and
related accrued interest of First Union's Wauchula and Arcadia Branches
("Branch"). The Branch acquisitions were approved by the OCC and the Company's
Board of Directors, and consummated on November 19, 1998. A summary of the
transaction follows (dollars in thousands):
<TABLE>
<S> <C>
Liabilities assumed......................................... $30,957
-------
Less assets purchased and other adjustments:
Core deposit premium...................................... 1,942
All other assets.......................................... 1,092
Other adjustments, net.................................... (8)
-------
3,026
-------
Cash received at closing.......................... $27,931
=======
</TABLE>
The closing transactions are subject to a post-closing review period that
will expire in the first quarter of 1999. Management does not anticipate any
significant adjustments will be required. The proceeds reserved at closing were
invested in federal funds sold and U. S. Government securities.
<PAGE> 1
EXHIBIT 21.1
Big Lake Financial Corporation
Form 10-KSB
For Fiscal Year Ended December 31, 1998
Subsidiaries of Registrant
Big Lake National Bank, incorporated under the laws
of the United States
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We agree to the inclusion in this Form 10-KSB of our report, dated January 15,
1999, on our audit of the consolidated financial statements of Big Lake
Financial Corporation and Subsidiary.
/s/ STEVENS, SPARKS & COMPANY, P.A.
- -----------------------------------
STEVENS, SPARKS & COMPANY, P.A.
Jacksonville, Florida
February 17, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BIG LAKE FINANCIAL CORPORATION FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,626
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,662
<INVESTMENTS-CARRYING> 898
<INVESTMENTS-MARKET> 926
<LOANS> 76,380
<ALLOWANCE> 1,277
<TOTAL-ASSETS> 150,552
<DEPOSITS> 138,608
<SHORT-TERM> 0
<LIABILITIES-OTHER> 964
<LONG-TERM> 500
0
0
<COMMON> 5
<OTHER-SE> 10,475
<TOTAL-LIABILITIES-AND-EQUITY> 150,552
<INTEREST-LOAN> 7,033
<INTEREST-INVEST> 1,422
<INTEREST-OTHER> 639
<INTEREST-TOTAL> 9,094
<INTEREST-DEPOSIT> 3,460
<INTEREST-EXPENSE> 3,464
<INTEREST-INCOME-NET> 5,630
<LOAN-LOSSES> 144
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,043
<INCOME-PRETAX> 1,648
<INCOME-PRE-EXTRAORDINARY> 1,648
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,074
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.16
<YIELD-ACTUAL> 5.10
<LOANS-NON> 1,049
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,049
<ALLOWANCE-OPEN> 1,183
<CHARGE-OFFS> 128
<RECOVERIES> 78
<ALLOWANCE-CLOSE> 1,277
<ALLOWANCE-DOMESTIC> 1,277
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
