<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR
15 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File Number 333-30779
----------------------------------
BIG LAKE FINANCIAL CORPORATION
------------------------------
(Exact Name of registrant as specified in its charter)
Florida 59-2613321
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1409 S. Parrott Avenue
Okeechobee, Florida 34974
---------------------- -----
(Address of Principal Executive Offices) (Zip Code)
----------------------------------
(941) 467-4663
--------------
(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 May 3, 1999
------------ -----------------------------
Common Stock 501,934
Par Value $0.01 per share
<PAGE> 2
BIG LAKE FINANCIAL CORPORATION
FORM 10-QSB - FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998 1
Consolidated Condensed Statements of Operations and Comprehensive
Income for the Three Months Ended March 31, 1999 and 1998 (Unaudited) 2
Consolidated Condensed Statements of Cash Flows for the Three Months
Ended March 31, 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 9-15
PART II: OTHER INFORMATION 16
SIGNATURES 17
</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>
March 31, 1999
(Unaudited) December 31, 1998*
-------------- ------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,045 $ 6,626
Federal funds sold 4,502 1,150
-------- --------
Total cash and cash equivalents 11,547 7,776
Investment securities:
Available-for-sale at fair value 58,997 58,662
Held-to-maturity at amortized cost 1,623 898
Loans receivable less allowance for credit losses 77,415 75,103
Facilities 3,115 3,174
Accrued interest receivable 1,333 1,125
Deferred income taxes 899 582
Intangible assets 2,357 2,458
Other assets 510 774
-------- --------
TOTAL $157,796 $150,552
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 32,698 $ 28,802
Interest-bearing 113,033 109,806
-------- --------
Total deposits 145,731 138,608
Other borrowings 775 500
Accrued interest payable on deposits 590 757
Accounts payable and accrued liabilities 237 207
-------- --------
Total liabilities 147,333 140,072
-------- --------
Commitments and contingencies -- --
-------- --------
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 7,424 7,168
Retained earnings 3,406 3,395
Accumulated other comprehensive income:
Net unrealized holding losses on securities (372) (88)
-------- --------
Total stockholders' equity 10,463 10,480
-------- --------
TOTAL $157,796 $150,552
======== ========
Book value per common share $ 20.85 $ 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
Ended March 31,
------------------------
1999 1998
<S> <C> <C>
Interest and fees on loans $ 1,746 $ 1,734
Interest and dividend income from investment securities 833 280
Other interest income 71 166
-------- --------
Total interest income 2,650 2,180
Interest expense on deposits and other 1,070 852
-------- --------
Net interest income before provision for credit losses 1,580 1,328
Provision for credit losses 40 48
-------- --------
Net interest income 1,540 1,280
-------- --------
Service charges on deposit accounts 301 255
Other fees for customer service and other income 117 25
-------- --------
Total other income 418 280
-------- --------
Other expenses:
Salaries and employee benefits 750 572
Expenses of bank premises and fixed assets 218 155
Other operating expenses 566 468
-------- --------
Total other expenses 1,534 1,195
-------- --------
Income before provision for income taxes 424 365
Provision for income taxes 151 128
-------- --------
Net income 273 237
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period (284) 3
-------- --------
Comprehensive income $ (11) $ 240
======== ========
Earnings per share
Basic $ 0.54 $ 0.48
======== ========
Diluted $ 0.53 $ 0.47
======== ========
Weighted average common shares outstanding during period
Basic 501,934 498,748
======== ========
Diluted 511,459 508,761
======== ========
</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
Ended March 31,
------------------------
1999 1998
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (819) $ 294
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in:
Investment securities (515) 750
Loans (2,334) 1,285
Other real estate 78 (202)
Purchases of premises and equipment, net (31) (8)
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (2,802) 1,825
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 7,123 4,475
Proceeds from other borrowings 275 --
Cash paid in lieu of fractional shares (6) (7)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,392 4,468
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,771 6,587
CASH AND CASH EQUIVALENTS AT JANUARY 1 7,776 9,788
-------- --------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 11,547 $ 16,375
======== ========
</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 -- 256 (256) -- --
Cash paid in lieu of fractional shares -- -- -- (6) -- (6)
Comprehensive income:
Net income -- -- -- 273 --
Net change in net unrealized
holding losses on securities -- -- -- -- (284)
Total comprehensive income -- -- -- -- -- (11)
------- --- ------ ------ ----- -------
Balance, March 31, 1999 501,934 $ 5 $7,424 $3,406 $(372) $10,463
======= === ====== ====== ===== =======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these financial statements.
4
<PAGE> 7
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 months
ended March 31, 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 period of 1998 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 FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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, which was the
estimated fair market value at that time. The total cash paid in lieu of
fractional shares amounted to approximately $6,000.
NOTE 3 - COMPUTATION OF PER SHARE EARNINGS
Basic earnings per share amounts are computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net earnings by the weighted average
number of shares and all dilutive potential shares outstanding during the
period. As discussed in Note 2 above, the Company declared a 2.5% stock
dividend. The average number of shares and dilutive potential shares have been
restated for the stock dividend. The following information was used in the
computation of earnings per share on both a basic and diluted basis for the
three months ended March 31, 1999 and 1998 (in thousands except per share data).
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Basic EPS computation:
Numerator - Net income $ 273 $ 237
Denominator - Weighted average shares outstanding 502 499
----- -----
Basic EPS $0.54 $0.48
===== =====
Diluted EPS computation:
Numerator - Net income $ 273 $ 237
----- -----
Denominator - Weighted average shares outstanding 502 499
Stock options 9 10
----- -----
511 509
----- -----
Diluted EPS $0.53 $0.47
===== =====
</TABLE>
6
<PAGE> 9
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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>
March 31, 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 $59,301 $58,706 $58,486 $58,345
Mortgage-backed securities 174 173 179 179
Other 118 118 138 138
------- ------- ------- -------
$59,593 $58,997 $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 $ 1,623 $ 1,635 $ 898 $ 926
======= ======= ======= =======
</TABLE>
NOTE 5 - LOANS
Loans consisted of (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Real estate $64,797 $61,710
Installment and other loans 8,603 8,828
Commercial and agricultural 5,827 6,399
------- -------
Total loans, gross 79,227 76,937
Unearned income and deferred fees and credits (513) (557)
Allowance for credit losses (1,299) (1,277)
------- -------
Net loans $77,415 $75,103
======= =======
</TABLE>
7
<PAGE> 10
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 Three Months For the Twelve Months
Ended March 31, Ended December 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Balance, beginning of period $1,277 $1,183
Recoveries 2 78
Chargeoffs (20) (128)
Provision charged to expense 40 144
------ ------
Balance, end of period $1,299 $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 March 31, 1999, consisted of commitments to extend
credit approximating $5.9 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 $157.8 million
at March 31, 1999. Since December 31, 1998, the Company's total assets have
grown $7.2 million from $150.6 million, an increase of 4.8%. During the same
period, net loans have grown by $2.3 million from $75.1 million to $77.4
million, an increase of 3.1%.
Net income was $273,000 for the three months ended March 31, 1999, compared with
$237,000 for the same period in 1998, an increase of $36,000, or 15.2%. The
increase in net income was primarily due to growth in loan volume and investment
securities. 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 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 the Company's progress.
YEAR 2000 - THE COMPANY'S STATE OF READINESS
In accordance with OCC guidelines, the Company 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.
The Company 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. The Company 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 by the end of 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 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 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 the Company's vendors, the Company 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 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 that have responded 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
by a certain date, 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 critical have responded and are not
considered to pose a 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. The Company estimates 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.
10
<PAGE> 13
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.
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 is expected to be 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
Net earnings for the three months ended March 31, 1999, were $273,000 or $0.54
per share, compared to net earnings of $237,000, or $0.49 per share, for the
three months ended March 31, 1998. The increase in net earnings was primarily
due to an increase in earning assets of 31%, partially offset by a decline in
net interest margin due to a change in the mix of earning assets resulting from
the acquisition of two branches from First Union National Bank in late-1998.
Deposit growth associated with the acquisition of these two branches increased
liquidity. This additional liquidity was used to originate loans and invest in
securities and overnight federal funds.
Net Interest Income
Interest income increased by $470,000 from $2,180,000 for the three months ended
March 31, 1998, to $2,650,000 for the three months ended March 31, 1999.
Interest income on loans increased $12,000 due to an increase in the average
loan portfolio balance from $75.0 million for the three months ended March 31,
1998, to $76.5 million for the comparable 1999 period. Average yields on loans
declined slightly to 9.25% in 1999 versus 9.37% in 1998. Interest on investment
securities increased $553,000 due to an increase in the average balance of the
portfolio from $19.1 million in 1998 to $56.3 million in 1999. The average yield
on the investment securities portfolio for 1999 of 6.00% remained essentially
constant from the 1998 level of 5.95%. Interest on other interest-earning assets
decreased $95,000 due to a decrease of $6.0 million in average other
interest-earning assets for the quarter ended March 31, 1999, as compared with
the same period in 1998. The increases in lower yielding investment securities
and federal funds sold coupled with changes in the mix of loan growth during
1999 contributed to the overall decline in the average yield on total
interest-earning assets from 8.33% in 1998 to 7.74% in 1999.
Interest expense increased to $1,070,000 for the three months ended March 31,
1999, from $852,000 for the three months ended March 31, 1998. This increase was
primarily due to growth in average interest-bearing deposits from $81.1 million
for the three months ended March 31, 1998, to $110.5 million for the comparable
1999 period. The majority of growth stemmed from the acquisition of two branches
from First Union National Bank in mid-November 1998. The average rate paid on
interest-bearing deposits decreased 44 basis points. This decline was primarily
attributed to declining interest rates in the market for rates paid on deposits.
11
<PAGE> 14
The net interest margin for the three months ended March 31, 1999, was 4.64% as
compared with 5.02% for the same period in 1998. This decline was primarily
attributable to changes in the mix of average earning assets with lower yielding
investment securities and federal funds sold comprising 45% of total average
earning assets for the quarter ended March 31, 1999, versus 29% for the same
quarter 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 March
31, 1999, loan charge-offs of $20,000 remained stable over the same period in
1998. For the three months ended March 31, 1999, recoveries declined to $2,000
from $17,000 for the same period in 1998. The provision for the three months
ended March 31, 1999, was $40,000 as compared with $48,000 for the three months
ended March 31, 1998.
Other Income
Total other income increased $138,000, or 49%, for the three months ended March
31, 1999, compared to 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 $339,000, or 28%, for the three months ended March
31, 1999, compared to 1998, reflecting the growth associated with the
acquisition of the two First Union National Bank branches in late-1998.
Operating expenses were 4.03% of average assets for the three months ended March
31, 1999, versus 4.16% for the comparable period in 1998. The decrease is a
result of the Company's success in merging the systems of Clewiston National
Bank (in the second quarter of 1998) and the two First Union National Bank
branches into Big Lake National Bank.
FINANCIAL CONDITION
Average total loans for the three months ended March 31, 1999, were $76.5
million versus $75.0 million for the same period in 1998, an increase of $1.5
million, or 2.0%. Total average interest-bearing deposits for the three months
ended March 31, 1999, were $110.5 million versus $81.1 million for the same
period in 1998, an increase of $29.4 million, or 36.2%. The increases in average
interest-bearing deposits reflect the acquisition of two new branches, as of
November 1998.
Since December 31, 1998, total loans have grown $2.3 million, or 3.0%, and
investment securities increased by $1.1 million, or 1.8%. Total deposits
increased $7.1 million, or 5.1%, from December 31, 1998, to March 31, 1999. The
excess funds generated from the deposit growth have been invested in federal
funds sold, which have grown from $1.2 million at December 31, 1998, to $4.5
million at March 31, 1999, an increase of $3.3 million. Total interest-bearing
deposits have grown $3.2 million, or 2.9%.
Noninterest-bearing deposits have grown $3.9 million, or 13.5%, since December
31, 1998. The growth in noninterest-bearing deposits (which continues to outpace
total deposit growth) and continued attrition of certain higher priced
interest-bearing deposits such as certificates of deposit (which have declined
$1.4 million since December 31, 1998) have helped moderate the overall decrease
in average yield on interest-bearing deposits from 4.20% to 3.93%. Management
seeks to maintain a favorable mix of deposits and expects to continue its
marketing of less costly deposit relationships.
12
<PAGE> 15
The components of Big Lake National Bank's average loans (as classified for
regulatory reporting) for the periods ended March 31, 1999 and 1998, follow
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
Dollar Percent
1999 1998 Change Change
------- ------- ------ -------
<S> <C> <C> <C> <C>
Real estate loans $37,996 $37,162 $ 834 2.2%
Installment loans 8,118 9,026 (908) -10.1%
Commercial and all other loans 30,400 28,838 1,562 5.4%
------- -------- ------
$76,514 $75,026 $1,488 2.0%
======= ======= ======
</TABLE>
The following schedule sets forth the liability mix of Big Lake National Bank
using monthly average deposit aggregates (dollars in thousands):
<TABLE>
<CAPTION>
Three months Three months
Ended Percent Ended Percent
Deposit Types March 31, 1999 of Total March 31, 1998 of Total
- ------------- -------------- -------- -------------- --------
<S> <C> <C> <C> <C>
Interest-bearing demand, money market,
and NOW deposits $ 30,308 21.6% $ 22,846 21.7%
Savings 16,533 11.8 10,720 10.1
Certificates of deposit 63,613 45.3 47,536 45.1
Noninterest-bearing liabilities 29,921 21.3 24,322 23.1
-------- ----- -------- -----
$140,375 100.0% $105,424 100.0%
======== ===== ======== =====
</TABLE>
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, condition, and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes a specific reserve for the full amount of the portion of
the asset classified as loss. All or a portion of general credit loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for credit losses generally do not qualify
as regulatory capital. Assets that do not warrant classification in the
aforementioned categories, but possess weaknesses, are classified as special
mention and are monitored by the Company.
At March 31, 1999, the Company had 61 loans classified as substandard, doubtful,
or loss totaling $2.424 million.
13
<PAGE> 16
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 March 31, 1999, the allowance for credit losses amounted to $1,299,000, or
1.64% 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 $78,000 for the three months ended March 31, 1999 to $94,000,
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.
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 March 31, 1999, was a
positive .13% of assets. This falls within the Company's policy of a cumulative
one-year gap range of negative 20% to positive 20%.
SHORT-TERM INVESTMENTS. Short-term investments, which consist of federal funds
sold and securities purchased under agreements to resell and interest-bearing
deposits, averaged $6.1 million in the first three months of 1999 as compared to
$12.1 million in the same period of 1998. At March 31, 1999, and December 31,
1998, short-term investments totaled $4.5 million 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.
14
<PAGE> 17
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 $137.8
million at March 31, 1999, and $130.2 million at December 31, 1998. Management
anticipates that a stable base of deposits will be the Company's primary source
of funding to meet both its short-term and long-term liquidity needs in the
future.
Customers with large certificates of deposit tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits. Some financial institutions fund
their balance sheets in part through large certificates of deposit obtained
through brokers. These brokered deposits are generally expensive and are
unreliable as long-term funding sources. Accordingly, the Company no longer
accepts brokered deposits.
The Company uses its resources principally to fund existing and continuing loan
commitments and to purchase investment securities. At March 31, 1999, the
Company had commitments to originate loans totaling $5.9 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 March 31, 1999, totaled $46.0 million. Management believes 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% (the Federal Reserve grants an
exemption from these requirements for bank holding companies with less than $150
million in consolidated assets, and therefore the Company's capital is currently
measured only at the Bank level). Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital consists of common stockholders'
equity, excluding the unrealized gain (loss) on available-for-sale securities,
minus certain intangible assets. Tier 2 capital consists of the general
allowance for credit losses subject to certain limitations. An institution's
qualifying capital base for purposes of its risk-based capital ratio consists of
the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements
are 4% for Tier 1 and 8% for total risk-based capital.
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 March 31, 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) $9,412 12.59% $5,982 8.00% $7,472 10.00%
Tier I Capital (to Risk-Weighted Assets) $8,478 11.34% $2,988 4.00% $4,488 6.00%
Tier I Capital (to Average Assets) $8,478 5.58% $6,078 4.00% $7,598 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) $9,512 12.84% $5,927 8.00% $7,412 10.00%
Tier I Capital (to Risk-Weighted Assets) $8,586 11.59% $2,966 4.00% $4,447 6.00%
Tier I Capital (to Average Assets) $8,586 5.65% $6,086 4.00% $7,596 5.00%
</TABLE>
15
<PAGE> 18
BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of Company shareholders held on
March 18, 1999, John W. Abney, Sr., Mary Beth Cooper,
Joe G. Mullins, and Edwin E. Walpole, III were reelected
as directors. John B. Boy, Jr., H. Gilbert Culbreth, Jr.,
Curtis S. Fry, Thomas A. Smith and Bobby H. Tucker
continued their respective term of office as a director
of the Company after the meeting.
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.
16
<PAGE> 19
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: May 7, 1999 /s/ Joe G. Mullins
------------------------------ --------------------------------------
Joe G. Mullins
Executive Vice President and
Chief Administrative Officer
Date: May 7, 1999 /s/ Anita DeWitt
------------------------------ -----------------------------------
Anita DeWitt
Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BIG LAKE FINANCIAL CORPORATION AND SUBSIDIARY FOR THE
THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,045
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,502
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,997
<INVESTMENTS-CARRYING> 1,623
<INVESTMENTS-MARKET> 1,635
<LOANS> 78,714
<ALLOWANCE> 1,299
<TOTAL-ASSETS> 157,796
<DEPOSITS> 145,731
<SHORT-TERM> 0
<LIABILITIES-OTHER> 827
<LONG-TERM> 775
0
0
<COMMON> 5
<OTHER-SE> 10,458
<TOTAL-LIABILITIES-AND-EQUITY> 157,796
<INTEREST-LOAN> 1,746
<INTEREST-INVEST> 833
<INTEREST-OTHER> 71
<INTEREST-TOTAL> 2,650
<INTEREST-DEPOSIT> 1,060
<INTEREST-EXPENSE> 1,070
<INTEREST-INCOME-NET> 1,580
<LOAN-LOSSES> 40
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,534
<INCOME-PRETAX> 424
<INCOME-PRE-EXTRAORDINARY> 424
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.53
<YIELD-ACTUAL> 4.64
<LOANS-NON> 733
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 733
<ALLOWANCE-OPEN> 1,277
<CHARGE-OFFS> 20
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,299
<ALLOWANCE-DOMESTIC> 1,299
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
