<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1999
Commission File Number 333-30779
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BIG LAKE FINANCIAL CORPORATION
------------------------------------------------------
(Exact Name of registrant as specified in its charter)
Florida 59-2613321
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1409 S. Parrott Avenue
Okeechobee, Florida 34974
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
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(941) 467-4663
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Class Outstanding as of November 10, 1999
- ------------------------- -------------------------------------
Common Stock 501,934
Par Value $0.01 per share
<PAGE> 2
BIG LAKE FINANCIAL CORPORATION
FORM 10-QSB - FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1998 1
Consolidated Condensed Statements of Operations and Comprehensive
Income for the Three and Nine Months Ended September 30, 1999
and 1998 (Unaudited) 2
Consolidated Condensed Statements of Cash Flows for the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) 4
Notes to Consolidated Condensed Financial Statements (Unaudited) 5-8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9-16
PART II: OTHER INFORMATION 17
SIGNATURES 18
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, 1999
(Unaudited) December 31, 1998*
------------------ ------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,775 $ 6,626
Federal funds sold 270 1,150
--------- ---------
Total cash and cash equivalents 8,045 7,776
Investment securities:
Available-for-sale at fair value 55,379 58,662
Held-to-maturity at amortized cost 1,573 898
Loans receivable less allowance for credit losses 82,471 75,103
Facilities 3,110 3,174
Accrued interest receivable 1,340 1,125
Deferred income taxes 1,200 582
Intangible assets 2,220 2,458
Other assets 934 774
--------- ---------
TOTAL $ 156,272 $ 150,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 29,718 $ 28,802
Interest-bearing 114,091 109,806
--------- ---------
Total deposits 143,809 138,608
Federal funds purchased 553 --
Other borrowings 388 500
Accrued interest payable on deposits 726 757
Accounts payable and accrued liabilities 434 207
--------- ---------
Total liabilities 145,910 140,072
--------- ---------
Commitments and contingencies -- --
--------- ---------
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 7,418 7,168
Retained earnings 3,895 3,395
Accumulated other comprehensive income:
Net unrealized holding losses on securities (956) (88)
--------- ---------
Total stockholders' equity 10,362 10,480
--------- ---------
TOTAL $ 156,272 $ 150,552
========= =========
Book value per common share $ 20.64 $ 20.88
========= =========
Common shares outstanding, adjusted for stock dividends 501,934 501,934
========= =========
</TABLE>
*Condensed from December 31, 1998, audited balance sheet
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 1 -
<PAGE> 4
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest and fees on loans $ 1,869 $ 1,770 $ 5,372 $ 5,266
Interest and dividend income from investment securities 832 310 2,517 889
Other interest income 36 160 182 532
--------- --------- --------- ---------
Total interest income 2,737 2,240 8,071 6,687
Interest expense on deposits and other 1,093 837 3,226 2,519
--------- --------- --------- ---------
Net interest income before provision for credit losses 1,644 1,403 4,845 4,168
Provision for credit losses 60 18 160 126
--------- --------- --------- ---------
Net interest income 1,584 1,385 4,685 4,042
--------- --------- --------- ---------
Service charges on deposit accounts 335 280 942 794
Other fees for customer service and other income 56 27 250 80
--------- --------- --------- ---------
Total other income 391 307 1,192 874
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 762 573 2,260 1,695
Expenses of bank premises and fixed assets 245 213 675 549
Other operating expenses 568 373 1,750 1,450
--------- --------- --------- ---------
Total other expenses 1,575 1,159 4,685 3,694
--------- --------- --------- ---------
Income before provision for income taxes 400 533 1,192 1,222
Provision for income taxes 147 194 429 431
--------- --------- --------- ---------
Net income 253 339 763 791
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period (118) 53 (868) 58
--------- --------- --------- ---------
Comprehensive income $ 135 $ 392 $ (105) $ 849
========= ========= ========= =========
Earnings per share
Basic $ 0.50 $ 0.69 $ 1.52 $ 1.62
========= ========= ========= =========
Diluted $ 0.49 $ 0.68 $ 1.49 $ 1.59
========= ========= ========= =========
Weighted average common shares outstanding during period
Basic 501,934 488,788 501,934 488,788
========= ========= ========= =========
Diluted 513,183 497,477 513,183 497,477
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 2 -
<PAGE> 5
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 715 $ 708 $ (157) $ 1,293
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in:
Investment securities 241 (2,814) 2,608 1,720
Loans (3,176) (2,247) (7,368) (331)
Other real estate 28 75 47 (154)
Purchases of premises and equipment, net (27) (134) 64 (181)
-------- -------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (2,934) (5,120) (4,649) 1,054
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (154) (2,689) 5,201 1,226
Proceeds from other borrowings -- -- 275 --
Principal payments on other borrowings -- -- (388) --
Stock options exercised -- -- -- 70
Cash paid in lieu of fractional shares -- -- (13) (6)
-------- -------- -------- --------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (154) (2,689) 5,075 1,290
-------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (2,373) (7,101) 269 3,637
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD 10,418 20,526 7,776 9,788
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,045 $ 13,425 $ 8,045 $ 13,425
======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 3 -
<PAGE> 6
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Holding Total
Common Stock 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, 1998 490,001 $ 5 $ 7,168 $ 3,395 $ (88) $ 10,480
Stock dividend declared 11,933 -- 250 (250) -- --
Cash paid in lieu of fractional shares -- -- -- (13) -- (13)
Comprehensive income:
Net income -- -- -- 763 --
Net change in net unrealized
holding losses on securities -- -- -- -- (868)
Total comprehensive income -- -- -- -- -- (105)
-------- -------- -------- -------- -------- --------
Balance, September 30, 1999 501,934 $ 5 $ 7,418 $ 3,895 $ (956) $ 10,362
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
- 4 -
<PAGE> 7
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Big Lake
Financial Corporation (the "Company") and its wholly-owned subsidiary, Big Lake
National Bank (the "Bank"). The consolidated financial statements for the three
and nine months ended September 30, 1999 and 1998, have not been audited and do
not include information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. However, in the opinion of
management, the accompanying consolidated financial statements contain all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation. The results of operations for the interim periods of 1999 are not
necessarily indicative of the results which may be expected for an entire year.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements contained in the 1998 Annual Report
to Stockholders and are incorporated herein by reference.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans ("Other Real Estate Owned"). In connection with the
determination of the allowances for credit losses on loans and foreclosed real
estate, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
Fair Value of Financial Instruments
Financial instruments of the Company consist of cash, due from banks, federal
funds sold, investment securities, loans receivable, accrued interest
receivable, deposits, federal funds purchased, accrued interest payable, and
off-balance sheet commitments such as commitments to extend credit and standby
letters of credit. On an interim basis, management considers the cost of
providing estimated fair values by each class of financial instrument to exceed
the benefits derived. In management's opinion, the carrying amount of financial
instruments approximates fair value.
- 5 -
<PAGE> 8
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 2 - STOCK DIVIDEND
On February 17, 1999, 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 19, 1999, payable on or before March 18,
1999. Cash in lieu of fractional shares was paid at the rate of $21.39 per
share. On or about June 30, 1999, the Company refunded two stockholders for an
overpayment of stock purchased. The transaction arose when the stockholders
exercised their stock options and subsequently overpaid for the shares. The
refund was paid at a rate of $10.00 per share. This transaction is a one-time
occurrence and the Company believes it has satisfied all stockholders involved.
The total cash paid in lieu of fractional shares and for the refund of the
overpayment amounted to approximately $13,000.
NOTE 3 - COMPUTATION OF PER SHARE EARNINGS
Basic earnings per share amounts are computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net earnings by the weighted
average number of shares and all dilutive potential shares outstanding during
the period. As discussed in Note 2 above, the Company declared a 2.5% stock
dividend. The average number of shares and dilutive potential shares have been
restated for the stock dividend. The following information was used in the
computation of earnings per share on both a basic and diluted basis for the
three months and nine months ended September 30, 1999 and 1998 (in thousands
except per share data).
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Basic EPS computation:
Numerator - Net income $ 253 $ 339 $ 763 $ 791
Denominator - Weighted average shares outstanding 502 489 502 489
----- ----- ----- -----
Basic EPS $0.50 $0.69 $1.52 $1.62
===== ===== ===== =====
Diluted EPS computation:
Numerator - Net income $ 253 $ 339 $ 763 $ 791
----- ----- ----- -----
Denominator - Weighted average shares outstanding 502 489 502 489
Stock options 11 10 11 10
----- ----- ----- -----
513 498 513 498
----- ----- ----- -----
Diluted EPS $0.49 $0.68 $1.49 $1.59
===== ===== ===== =====
</TABLE>
- 6 -
<PAGE> 9
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of instruments in debt and equity
securities were as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
---------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government agencies $56,911 $55,261 $58,486 $58,345
Mortgage-backed securities -- -- 179 179
Other 118 118 138 138
------- ------- ------- -------
$57,029 $55,379 $58,803 $58,662
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Securities to be held-to-maturity:
State and municipal $ 1,573 $ 1,564 $ 898 $ 926
========== ========== =========== ==========
</TABLE>
NOTE 5 - LOANS
Loans consisted of (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Real estate $ 69,003 $ 61,710
Installment and other loans 9,160 8,828
Commercial and agricultural 5,880 6,399
-------- --------
Total loans, gross 84,043 76,937
Unearned income and deferred fees and credits (375) (557)
Allowance for credit losses (1,197) (1,277)
-------- --------
Net loans $ 82,471 $ 75,103
======== ========
</TABLE>
- 7 -
<PAGE> 10
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 6 - ALLOWANCE FOR CREDIT LOSSES
The Company's Board of Directors monitors the loan portfolio quarterly in order
to enable it to evaluate the adequacy of the allowance for credit losses.
Management has implemented a risk system that identifies potential problem
credits as early as possible, categorizes the credits as to risk, and puts a
reporting process in place to monitor the progress of the credits. Activity in
the allowance for credit losses follows (dollars in thousands):
<TABLE>
<CAPTION>
For the Nine Months For the Twelve Months
Ended September 30, Ended December 31,
1999 1998
------------------- ---------------------
<S> <C> <C>
Balance, beginning of period $1,277 $1,183
Recoveries 32 78
Chargeoffs (272) (128)
Provision charged to expense 160 144
------ -------
Balance, end of period $1,197 $1,277
====== ======
</TABLE>
NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
Financial instruments at September 30, 1999, consisted of commitments to extend
credit approximating $6.5 million and letters of credit of $129,000.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
- 8 -
<PAGE> 11
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal asset is its ownership of Big Lake National Bank (the
"Bank"). Accordingly, the Company's results of operations are primarily
dependent upon the results of operations of the Bank. The Bank conducts a
commercial banking business consisting of attracting deposits from the general
public and applying those funds to the origination of commercial, consumer, and
real estate loans (including commercial loans collateralized by real estate).
The Bank's profitability depends primarily on net interest income, which is the
difference between interest income generated from interest-earning assets
(i.e., loans and investments) less the interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net
interest income is affected by the relative amounts of interest-earning assets
and interest-bearing liabilities, and the interest rate earned and paid on
these balances. Net interest income is dependent upon the Bank's interest-rate
spread which is the difference between the average yield earned on its
interest-earning assets and the average rate paid on its interest-bearing
liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The interest rate spread is impacted by interest rates,
deposit flows, and loan demand. Additionally, and to a lesser extent, the
Bank's profitability is affected by such factors as the level of noninterest
income and expenses, the provision for credit losses, and the effective tax
rate. Noninterest income consists primarily of service fees on deposit
accounts. Noninterest expense consists of compensation and employee benefits,
occupancy and equipment expenses, and other operating expenses.
The Company is a bank holding company with consolidated assets of $156.3
million at September 30, 1999. Since December 31, 1998, the Company's total
assets have grown $5.7 million from $150.6 million, an increase of 3.8%. During
the same period, net loans have grown by $7.4 million from $75.1 million to
$82.5 million, an increase of 9.8%.
Net income was $253,000 and $763,000 for the three and nine months ended
September 30, 1999, respectively, compared with $339,000 and $791,000 for the
same periods in 1998, a decrease of $86,000 and $28,000, respectively, or
(25.4%) and (3.5%), respectively. The decrease in net income was primarily due
to increases in the provision for credit losses and growth in deposit volume
and other expenses associated with the purchase of two First Union branches in
late 1998 offset partially by loan and investment security growth. The
Company's purchase of two branches in November 1998 provided additional deposit
funds for investment in loans, securities, and federal funds.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties including
changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as to
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
- 9 -
<PAGE> 12
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
September 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 the Company's
progress.
YEAR 2000 - THE COMPANY'S STATE OF READINESS
In accordance with OCC guidelines, the Company has developed and implemented a
comprehensive plan which has resulted in timely and adequate modifications of
its systems and technology to address its Year 2000 issues. The plan
contemplates all system conversions and testing to be substantially completed
by June 30, 1999. The Company has completed a top-down assessment of its
mission critical and other systems for Year 2000 compliance and is currently in
the final phases defined by the FFIEC. The Company has assessed its
non-information technology systems and has found that most have no Year 2000
considerations. Date-sensitive systems were validated during the 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 were
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
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 reassessed during each quarter of 1999.
To determine the readiness of the Company's vendors, the Company has sent out a
letter to each vendor inquiring about their compliance with Year 2000. For
those vendors who have responded that they are compliant and that the Company
has determined to not have a material impact on Big Lake National Bank's
operations, no further work is performed. For those vendors who have responded
that they are working towards Year 2000 compliance and that the Company has
determined to be significant, including mission critical vendors, the Company
will follow up on a regular basis through 1999. If those vendors do not
demonstrate compliance, the Company 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 mission critical have responded
and are not considered to pose significant risk.
YEAR 2000 - THE COMPANY'S COSTS AND RISKS
A few of the Company's computer hardware and software applications were
modified or replaced in order to maintain their functionality as the year 2000
approaches. Management anticipates to spend less than $25,000 during 1999;
however, it is recognized that any Year 2000 compliance failures could result
in additional expense to the Company.
Ultimately, the potential impact of the Year 2000 issue will depend not only on
the corrective measures the Company 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 the Company, or whose
financial condition or operational capability is important to the Company, such
as suppliers or customers. At worst, the Company's customers and vendors will
face severe Year 2000 issues, which may cause borrowers to become unable to
service their loans. The Company may also be required to replace non-compliant
vendors with more expensive Year 2000-compliant vendors. At this time the
Company cannot determine the financial effect on the Company if significant
customer and/or vendor remediation efforts are not resolved in a timely manner.
- 10 -
<PAGE> 13
YEAR 2000 - THE COMPANY'S CONTINGENCY PLANS
The Company has created a contingency plan which would take effect should there
be circumstances preventing timely implementation. This plan addresses both the
Company's "Business Remediation Contingencies" and "Business Resumption
Contingencies." The Company'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 the Company'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 was substantially
completed during the second quarter of 1999. The Company believes 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 the Company's preparedness should
a failure occur during any of the critical dates.
RESULTS OF OPERATIONS
General Earnings
Net earnings for the three months ended September 30, 1999, were $253,000 or
$0.50 per share, compared to net earnings of $339,000, or $0.69 per share, for
the three months ended September 30, 1998. The decrease in net earnings was
primarily due to an increase in provision for credit losses and associated
staff and premise expenses resulting from the acquisition of two branches from
First Union National Bank in late 1998. This was offset by an increase in
volume of earning assets of 34% and an increase in net interest margin due to a
change in the mix of earning assets. Deposit growth associated with the
acquisition of these two branches increased liquidity as well as service charge
income on deposits. This additional liquidity was used to originate loans and
invest in securities and overnight federal funds.
Net Interest Income
Net interest income before provision for credit losses was $1,644,000 and
$4,845,000 for the three and nine months ended September 30, 1999,
respectively, as compared to $1,403,000 and $4,168,000 for the comparable
periods ended September 30, 1998, respectively. The increases of 17.2% and
16.2%, respectively, reflect the acquisition of the two branches and subsequent
investment of additional liquidity in securities, federal funds and loan
originations. Overall, the net interest margin rate decreased to 4.51% from
5.25% for the comparable period.
Interest income increased $497,000 and $1,384,000 for the three and nine months
ended September 30, 1999, respectively, from $2,240,000 and $6,687,000 for the
three and nine months ended September 30, 1998, respectively, to $2,737,000 and
$8,071,000 for the three and nine months ended September 30, 1999,
respectively. The majority of the improvement is related to the investment of
additional liquidity in government securities. Interest and fee income on loans
increased $99,000 for the three months ended September 30, 1999, and increased
$106,000 for the nine months ended September 30, 1999. The variations in
interest and fee income on loans reflect changes in the types of loans
originated during the period. This decline was primarily attributable to
changes in the mix of average earning assets with lower yielding investment
securities and federal funds sold comprising 44% of total average earning
assets for the nine months ended September 30, 1999, versus 30% for the same
period in 1998. Subsequent to the acquisition of the two First Union branches,
the Company reinvested funds in short-term and lower yielding assets. The
company will continue its efforts to redeploy these funds into higher yielding
loans throughout the remainder of 1999.
Interest expense increased $256,000 and $707,000 for the three and nine months
ended September 30, 1999, respectively, from $837,000 and $2,519,000 for the
three and nine months ended September 30, 1998, respectively, to $1,093,000 and
$3,226,000 for the three and nine months ended September 30, 1999,
respectively. This increase was primarily due to growth in average
interest-bearing deposits from $81.6 million at September 30, 1998, to $112.8
million for the comparable 1999 period. The majority of growth stems from the
acquisition of two branches from First Union National Bank in mid-November
1998. The average rate paid on interest-bearing deposits decreased 74 basis
points. This decline was primarily attributed to declining interest rates in
the market for rates
- 11 -
<PAGE> 14
paid on deposits. The net interest margin for the nine months ended September
30, 1999, was 4.51% as compared with 5.25% for the same period in 1998.
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. This level is based upon
historical experience, the volume and type of lending conducted by the Company,
the amounts of nonperforming loans, general economic conditions as they relate
to the Company's market area, as well as other factors relating to the
collectibility of the Company's loan portfolio. For the three months ended
September 30, 1999, loan charge-offs increased to $272,000 from $112,000 for
the same period in 1998. For the nine months ended September 30, 1999,
recoveries declined to $32,000 from $56,000 for the same period in 1998. The
provision for the three and nine months ended September 30, 1999, was $60,000
and $160,000, respectively, as compared with $18,000 and $126,000 for the three
and nine months ended September 30, 1998, respectively.
Other Income
Total other income increased $84,000, or 27%, and $318,000, or 36%, for the
three and nine months ended September 30, 1999, respectively, compared to the
same periods in 1998. This increase correlates to the increased deposit base
and management's efforts to cultivate fee income from products that are
competitive and innovative as the customer base expands and customer needs
change.
Other Expense
Total other expense increased $416,000, or 36%, and $991,000, or 27%, for the
three and nine months ended September 30, 1999, respectively, compared to the
same periods in 1998, reflecting the growth associated with the acquisition of
the two First Union National Bank branches in late 1998. Annualized operating
expenses were 4.07% and 4.03% of average assets for the three and nine months
ended September 30, 1999, respectively, versus 4.04% and 4.29%, respectively,
for the comparable periods in 1998. The improvement in the year-to-date ratio
is a result of management's continued efforts in holding down costs, merging
the systems of Clewiston National Bank (in the second quarter of 1998) and the
addition of the two First Union National Bank branches into Big Lake National
Bank in late 1998.
FINANCIAL CONDITION
Average total loans for the nine months ended September 30, 1999, were $79.9
million versus $73.6 million for the same period in 1998, an increase of $6.3
million, or 8.6%. Total average interest-bearing deposits for the nine months
ended September 30, 1999, were $112.8 million versus $81.6 million for the same
period in 1998, an increase of $31.2 million, or 38.2%. The increases in
average interest-bearing deposits reflect the acquisition of two new branches
in November 1998.
Since December 31, 1998, total loans have grown $7.4 million, or 9.9%, and
investment securities decreased by $2.6 million, or 4.4%. Total deposits
increased $5.2 million, or 3.8%, from December 31, 1998, to September 30, 1999.
The excess funds generated from the deposit growth have been used to fund loan
growth, primarily. Total interest-bearing deposits have grown $4.3 million, or
3.9%. Noninterest-bearing deposits have grown $916,000, or 3.2%, since December
31, 1998.
Average Balances, Income and Expenses, and Rates. The following table depicts,
for the periods indicated, certain information related to the Company's average
balance sheet and its average yields on assets and average costs of
liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
- 12 -
<PAGE> 15
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE AND YIELD/ AVERAGE AND YIELD/
($ IN THOUSANDS) BALANCE DIVIDENDS RATE MIX BALANCE DIVIDENDS RATE MIX
-------- --------- ------- --- ------- --------- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 79,875 $ 5,372 8.99% 56% $ 73,602 $ 5,266 9.54% 70%
Investment and mortgage-
backed securities 58,782 2,517 5.72% 41% 20,134 889 5.89% 19%
Other interest-earning
assets 5,082 182 4.79% 3% 12,050 532 5.89% 11%
-------- ------- -------- ------- ---
Total interest-earning
assets 143,739 8,071 7.51% 100% 105,786 6,687 8.43% 100%
------- === ------- ===
Noninterest-earning assets 11,008 8,950
-------- --------
Total Assets $154,747 $114,736
======== ========
Interest-bearing liabilities:
Demand, money market and
NOW deposits $ 31,487 629 2.67% 28% $ 23,318 513 2.93% 29%
Savings 17,646 296 2.24% 16% 10,670 169 2.11% 13%
Certificates of deposit 63,649 2,272 4.77% 56% 47,644 1,837 5.14% 58%
Other borrowings 573 29 6.77% 0% -- -- 0.00% 0%
-------- ------- --- -------- ------- ---
Total interest-bearing
liabilities $113,355 3,226 3.81% 100% $ 81,632 2,519 4.11% 100%
======== ------- === ======== ------- ===
Interest rate spread 3.70% 4.32%
Net interest margin $ 4,845 4.51% $ 4,168 5.25%
======= =======
Interest-bearing deposit $112,782 $ 3,197 3.79% 79% $ 81,632 $ 2,519 4.13% 78%
Noninterest-bearing deposits 30,613 -- 0.00% 21% 23,203 -- 0.00% 22%
-------- ------- --- -------- ------- ---
Total deposits $143,395 $ 3,197 2.98% 100% $104,835 $ 2,519 3.21% 100%
======== ======= === ======== ======= ===
Demand, money market and
NOW deposits $ 31,487 $ 629 2.67% 51% $ 23,318 $ 513 2.93% 50%
Noninterest-bearing deposits 30,613 -- 0.00% 49% 23,203 -- 0.00% 50%
-------- ------- --- -------- ------- ---
Total transaction
deposit accounts $ 62,100 $ 629 1.35% 100% $ 46,521 $ 513 1.47% 100%
======== ======= === ======== ======= ===
Ratio of average interest-earning
assets to average interest-bearing
liabilities 126.80% 129.59%
======== ========
</TABLE>
- 13 -
<PAGE> 16
Loan Portfolio
The Company has developed policies and procedures for evaluating the overall
quality of its credit portfolio and the timely identification of potential
problem loans. Management's judgment as to the adequacy of the allowance is
based upon a number of assumptions about future events which it believes to be
reasonable, but which may or may not be valid. Thus, there can be no assurance
that charge-offs in future periods will not exceed the allowance for credit
losses or that additional increases in the credit loss allowance will not be
required.
Asset Classification. Commercial banks are required to review and, when
appropriate, classify their assets on a regular basis. The OCC has the
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful, assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions, and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. If an asset, or portion thereof, is classified as loss, the insured
institution establishes a specific reserve for the full amount of the portion
of the asset classified as loss. All or a portion of general credit loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for credit losses
generally do not qualify as regulatory capital. Assets that do not warrant
classification in the aforementioned categories, but possess weaknesses, are
classified as special mention and are monitored by the Company. At September
30, 1999, the Company had 49 loans classified as substandard, doubtful, or loss
totaling $1.5 million, a reduction of $400,000 since June 30, 1999.
Allowance for Credit Losses. The allowance for credit losses is established
through a provision for credit losses charged against income. Loans are charged
against the provision when management believes that the collectibility of the
principal is unlikely. The provision is an estimated amount that management
believes will be adequate to absorb losses inherent in the loan portfolio based
on evaluations of its collectibility. The evaluations take into consideration
such factors as changes in the nature and volume of the portfolio, overall
portfolio quality, specific problem loans and commitments, current anticipated
economic conditions that may affect the borrower's ability to pay, and other
information. While management uses the best information available to recognize
losses on loans, future additions to the provision may be necessary based on
changes in economic conditions.
At September 30, 1999, the allowance for credit losses amounted to $1,197,000,
or 1.43% of outstanding loans. At December 31, 1998, the allowance for credit
losses amounted to $1,277,000, or 1.66% of outstanding loans. Other real estate
owned decreased $47,000 to $125,000 for the nine months ended September 30,
1999, as compared to $172,000 at December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Management. Liquidity management involves monitoring the Company's
sources and uses of funds in order to meet its day-to-day cash flow
requirements while maximizing profits. Liquidity represents the ability of a
company to convert assets into cash or cash equivalents without significant
loss and to raise additional funds by increasing liabilities. Liquidity
management is made more complicated because different balance sheet components
are subject to varying degrees of management control. For example, the timing
of maturities of the investment portfolio is very predictable and subject to a
high degree of control at the time investment decisions are made. However, net
deposit inflows and outflows are far less predictable and are not subject to
the same degree of control. Asset liquidity is provided by cash and assets
which are readily marketable, which can be pledged, or which will mature in the
near future. Liability liquidity is provided by access to core funding sources,
principally the ability to generate customer deposits in the Company's market
area. In addition, liability liquidity is provided through the ability to
borrow against approved lines of credit (federal funds purchased) from
correspondent banks and to borrow on a secured basis through securities sold
under agreements to repurchase.
- 14 -
<PAGE> 17
Management's strategy is to maintain a balanced interest rate risk position to
protect its net interest margin from market fluctuations. To this end,
management reviews, on a monthly basis, the maturity and repricing of assets
and liabilities. The Company's cumulative one-year gap at September 30, 1999,
was a negative 28% of assets. This falls outside the Company's policy of a
cumulative one-year gap range of negative 10% to positive 10%. The Company's
board of directors was informed of this out of policy position. Although the
bank's policy calls for a one-year gap between positive and negative 10%, the
company typically operates between a range of positive or negative 20%. The
company's management believes the current position to be temporary and not
having a negative impact on earnings.
Short-Term Investments. Short-term investments, which consist of federal funds
sold and securities purchased under agreements to resell and interest-bearing
deposits, averaged $5.1 million in the first nine months of 1999 as compared to
$12.1 million in the same period of 1998. At September 30, 1999, and December
31, 1998, short-term investments totaled $270,000 and $1.2 million,
respectively. These funds are a primary source of the Company's liquidity and
are generally invested in an earning capacity on an overnight basis.
Management regularly reviews the liquidity position of the Company and has
implemented internal policies which establish guidelines for sources of
asset-based liquidity and limit the total amount of purchased funds used to
support the balance sheet and funding from non-core sources.
Deposits and Other Sources of Funds. In addition to deposits, the sources of
funds available for lending and other business purposes include loan
repayments, loan sales, and securities sold under agreements to repurchase.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows are influenced significantly by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in other sources, such as deposits at less than projected levels
and are also used to fund the origination of mortgage loans designated to be
sold in the secondary markets.
Core Deposits. Core deposits, which exclude certificates of deposit of $100,000
or more, provide a relatively stable funding source for the Company's loan
portfolio and other earning assets. The Company's core deposits were $132
million at September 30, 1999, and $130.2 million at December 31, 1998.
Customers with large certificates of deposit tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding
for liquidity planning purposes than core deposits. Some financial institutions
fund their balance sheets in part through large certificates of deposit
obtained through brokers. These brokered deposits are generally expensive and
are unreliable as long-term funding sources. Accordingly, the Company no longer
accepts brokered deposits.
The Company uses its resources principally to fund existing and continuing loan
commitments and to purchase investment securities. At September 30, 1999, the
Company had commitments to originate loans totaling $6.5 million, and had
issued but unused letters of credit of $129,000 for the same period. In
addition, scheduled maturities of certificates of deposit during the twelve
months following September 30, 1999, totaled $49.5 million. Management believes
substantially all of the commitments will be funded within twelve months. The
Company can adjust the rates and terms on certificates of deposit and other
deposit accounts to retain deposits in a changing interest rate environment, if
desired.
Capital. The Federal Reserve Board and bank regulatory agencies require bank
holding companies and financial institutions to maintain capital at adequate
levels based on a percentage of assets and off-balance sheet exposures,
adjusted for risk weights ranging from 0% to 100%. Under the risk-based
standard, capital is classified into two tiers. Tier 1 capital consists of
common stockholders' equity, excluding the unrealized gain (loss) on
available-for-sale securities, minus certain intangible assets. Tier 2 capital
consists of the general allowance for credit losses subject to certain
limitations. An institution's qualifying capital base for purposes of its
risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital.
The regulatory minimum requirements are 4% for Tier 1 and 8% for total
risk-based capital.
- 15 -
<PAGE> 18
Bank holding companies and banks are also required to maintain capital at a
minimum level based on total assets, which is known as the leverage ratio. The
minimum requirement for the leverage ratio is 3%, but all but the highest rated
institutions are required to maintain ratios 100 to 200 basis points above the
minimum. The Company and the Bank exceeded their minimum regulatory capital
ratios as of September 30, 1999, as reflected in the following table.
The following table sets forth the Company's regulatory capital position
(dollars in thousands):
<TABLE>
<CAPTION>
Actual Minimum Well-Capitalized
Amount % Amount % Amount %
------- ------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets) $10,088 12.75% $ 6,327 8.00% $ 7,907 10.00%
Tier I Capital (to Risk-Weighted Assets) $ 9,099 11.50% $ 3,163 4.00% $ 3,072 6.00%
Tier I Capital (to Average Assets) $ 9,099 5.86% $ 6,208 4.00% $ 7,758 5.00%
</TABLE>
The following table sets forth Big Lake National Bank's regulatory capital
position (dollars in thousands):
<TABLE>
<CAPTION>
Actual Minimum Well-Capitalized
Amount % Amount % Amount %
------- ------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets) $ 9,792 12.75% $ 6,142 8.00% $ 7,682 10.00%
Tier I Capital (to Risk-Weighted Assets) $ 8,832 11.50% $ 3,072 4.00% $ 4,612 6.00%
Tier I Capital (to Average Assets) $ 8,832 5.77% $ 6,122 4.00% $ 7,662 5.00%
</TABLE>
- 16 -
<PAGE> 19
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
PART II: OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K.
None.
</TABLE>
- 17 -
<PAGE> 20
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Big Lake Financial Corporation
Date: November 10, 1999 /s/ Joe G. Mullins
----------------- ----------------------------
Joe G. Mullins
Executive Vice President and
Chief Administrative Officer
Date: November 10, 1999 /s/ Anita DeWitt
----------------- ----------------------------
Anita DeWitt
Treasurer
- 18-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,775
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 270
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,379
<INVESTMENTS-CARRYING> 1,573
<INVESTMENTS-MARKET> 1,564
<LOANS> 82,471
<ALLOWANCE> 1,197
<TOTAL-ASSETS> 156,272
<DEPOSITS> 143,809
<SHORT-TERM> 553
<LIABILITIES-OTHER> 1,160
<LONG-TERM> 388
0
0
<COMMON> 5
<OTHER-SE> 10,357
<TOTAL-LIABILITIES-AND-EQUITY> 156,272
<INTEREST-LOAN> 5,372
<INTEREST-INVEST> 2,517
<INTEREST-OTHER> 182
<INTEREST-TOTAL> 8,071
<INTEREST-DEPOSIT> 3,198
<INTEREST-EXPENSE> 3,226
<INTEREST-INCOME-NET> 4,845
<LOAN-LOSSES> 160
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,685
<INCOME-PRETAX> 1,192
<INCOME-PRE-EXTRAORDINARY> 1,192
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 763
<EPS-BASIC> 1.52
<EPS-DILUTED> 1.49
<YIELD-ACTUAL> 4.51
<LOANS-NON> 583
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 583
<ALLOWANCE-OPEN> 1,277
<CHARGE-OFFS> 272
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 1,197
<ALLOWANCE-DOMESTIC> 1,197
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
