UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR
15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number 33-29696-A
___________________________________________________________
CITRUS FINANCIAL SERVICES, INC.
(Exact Name of registrant as specified in its charter)
Florida 65-0136504
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 Indian River Boulevard
Suite 100
Vero Beach, Florida 32960
(Address of Principal Executive Offices) (Zip Code)
__________________________________________________________
(561) 778-4100
(Registrant's telephone number including area code)
____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 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 outstanding of each of the issuer's classes of
Common stock as of the latest practicable date:
Class Outstanding as of November 9, 1998
Common Stock 952,296
Par Value $3.15 per share
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION NUMBER
Item 1: Financial Statements:
Consolidated Balance Sheets September 30, 1998
(Unaudited) and December 31, 1997 1
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1998 and
1997 (Unaudited) 2
Consolidated Statements of Comprehensive Income for
the Three Months and Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 3
Consolidated Condensed Statements of Cash Flows for
the Three Months and Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Changes In Stockholders'
Equity for the Nine Months Ended September 30, 1998
(Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
PART II: OTHER INFORMATION 15
Signatures 16
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30, 1998
(Unaudited) December 31, 1997
(In Thousands, Except Per Share Data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,878 $ 3,742
Federal funds sold 6,700 2,500
Interest-bearing deposits in other banks 7 61
Investment securities:
Available-for-sale at fair value 5,902 5,796
Held-to-maturity at amortized cost 1,398 3,487
Loans receivable less allowance for
credit losses 59,729 50,107
Accrued interest receivable 352 292
Bank premises and equipment - net 2,780 2,471
Other real estate owned 390 390
Other assets 339 252
TOTAL $ 80,475 $ 69,098
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 9,766 $ 10,723
NOW accounts 3,282 3,701
Money market accounts 3,530 4,095
Savings accounts 7,542 5,993
Time, $100,000 and over 10,555 8,079
Other time deposits 38,449 30,010
Total deposits 73,124 62,601
Accrued interest on deposits 310 195
Federal funds purchased and FHLB advances 342 433
Other accrued expenses and liabilities 357 47
Total liabilities 74,133 63,276
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - -
Common stock 3,007 3,007
Additional paid-in capital 3,149 3,149
Retained earnings (accumulated deficit) 225 (239)
Unrealized loss on available-for-sale
securities (39) (95)
Total stockholders' equity 6,342 5,822
TOTAL $ 80,475 $ 69,098
Book value per common share $ 6.66 $ 6.11
Common shares outstanding, adjusted
for stock dividend 952,296 952,296
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest and fees on loans $ 1,480 $ 1,229 $ 4,252 $ 3,589
Investment income on investment
securities and interest-bearing
deposits in other banks 107 138 339 413
Federal funds sold 121 20 174 94
Total interest income 1,708 1,387 4,765 4,096
Interest on deposits 820 604 2,106 1,809
Other 22 25 52 51
Total interest expense 842 629 2,158 1,860
Net interest income before provision
for credit losses 866 758 2,607 2,236
Provision for credit losses 28 25 (21) 237
Net interest income 838 733 2,628 1,999
Fees and service charges 81 63 268 231
Other income 35 39 57 53
Total other income 116 102 325 284
Other expenses:
Salaries and employee benefits 369 292 1,080 944
Expenses of bank premises and
fixed assets 136 109 391 341
Other operating expenses 257 240 738 803
Total other expenses 762 641 2,209 2,088
Income before provision for income taxes 192 194 744 195
Provision for income taxes 73 74 280 74
Net income $ 119 $ 120 $ 464 $ 121
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net income $ 119 $ 120 $ 464 $ 121
Other comprehensive income, net of tax:
Unrealized holding gains
arising during period 41 25 75 65
Less: reclassification adjustment
for gains included in net
income during period - - (3) -
Total 41 25 72 65
Comprehensive income $ 160 $ 145 $ 536 $ 186
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 3,245 $ 430 $ 948 $ 3,165
Cash flows from investing activities:
Net (increase) decrease in:
Investment securities 792 248 1,970 44
Interest-bearing deposits in other
banks (2) (104) 54 (5)
Loans (301) 146 (9,590) (2,586)
Purchases of bank premises and
equipment, net (311) (78) (478) (109)
Net cash provided (used) in investing
activities 178 212 (8,044) (2,656)
Cash flows from financing activities:
Net increase (decrease) in deposits 2,485 2,801 10,523 2,438
Advances (repayments) of FHLB advances,
net (3,530) 270 (91) (291)
Issuance of common stock upon exercise
of stock options - - - 82
Cash paid in lieu of fractional shares 1 - - -
Net cash provided (used) by
financing activities (1,044) 3,071 10,432 2,229
Increase in cash and cash equivalents 2,379 3,713 3,336 2,738
Cash and cash equivalents at beginning
of period 7,199 1,539 6,242 2,514
Cash and cash equivalents at end of
period $ 9,578 $ 5,252 $ 9,578 $ 5,252
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
Net
Unrealized
Holding
Common Stock Retained Gains Total
Par Additional Earnings (Losses) Stock-
Value Paid-in (Accumulated on holders'
Shares (Rounded) Amount Capital Deficit) Securities Equity
(Dollars in Thousands, Except Par Value Per Share)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 865,829 $ 3.47 $ 3,007 $ 3,149 $ (239) $ (95) $ 5,822
Stock issued for stock
split and par value
reduction (rounded) 86,467 (0.32) - - - - -
Comprehensive income:
Net income - - - - 464 - -
Net change in
unrealized holding
gains on securities - - - - - 56 -
Total comprehensive
income - - - - - - 536
Balance,
September 30, 1998
(Unaudited) 952,296 $ 3.15 $ 3,007 $ 3,149 $ 225 $ (39) $ 6,342
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Citrus Financial
Services, Inc. (the "Company") and its wholly owned subsidiary Citrus Bank, N.A.
(the "Bank"). The consolidated financial statements for the three months and
nine months ended September 30, 1998 and 1997, have not been audited and do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. However, in the opinion of
management, the accompanying consolidated financial statements contain all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results which may be expected for an entire year.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements contained in the 1997 Annual Report
to Stockholders and are incorporated herein by reference.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans ("Other Real Estate Owned"). In connection with the
determination of the allowances for credit losses on loans and foreclosed
real estate, management obtains independent appraisals for significant
properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Company's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Management does not anticipate that the allowances for
credit losses on loans and foreclosed real estate will change materially in
the near term.
Fair Value of Financial Instruments
Financial instruments of the Company consist of cash, due from banks, federal
funds sold, investment securities, loans receivable, accrued interest
receivable, deposits, federal funds purchased, other borrowings, 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.
NOTE 2 - STOCK SPLIT
On April 27, 1998, the Company's Board of Directors declared a stock split
payable at a rate of 10% of shares issued and outstanding to stockholders of
record on May 8, 1998, payable May 31, 1998. Cash in lieu of fractional
shares was paid at the rate of $6.38 per share. The total cash paid in lieu
of fractional shares amounted to less than $1,000.
The majority of the Company's shareholders are either directors, officers, or
employees, and there is a presumption that these parties have intimate
knowledge of the affairs of the Company. Since the Company is a closely-held
registrant, and the Board of Directors has clearly stated that this
distribution is a stock split and their intent is such, the need to transfer
retained earnings does not exist. Accordingly, this stock split was not
accounted for as a stock dividend as is generally the case for stock splits
less than 20% to 25%.
</PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
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 10% stock split. The average number of shares and dilutive
potential shares have been restated for the stock split. The following
information was used in the computation of earnings per share on both a basic
and diluted basis for the three months and nine months ended September 30,
1998 and 1997.
<TABLE>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
(In thousands except per share data)
<S> <C> <C> <C> <C>
Basic EPS computation:
Numerator - Net income $ 119 $ 120 $ 464 $ 121
Denominator - Weighted average shares
outstanding 952 952 952 860
Basic EPS $ 0.13 $ 0.13 $ 0.49 $ 0.14
Diluted EPS computation:
Numerator - Net income $ 119 $ 120 $ 464 $ 121
Denominator - Weighted average shares
outstanding 952 952 952 860
Stock options and warrants 220 197 220 196
1,172 1,149 1,172 1,056
Diluted EPS $ 0.10 $ 0.10 $ 0.40 $ 0.11
</TABLE>
NOTE 4 - LOANS
Loans consisted of (dollars in thousands):
<TABLE>
September 30, December 31,
1998 1997
<S> <C> <C>
Real estate $ 42,847 $ 35,922
Commercial loans 12,886 10,330
Consumer loans 4,421 4,312
Total loans, gross 60,154 50,564
Unearned income and deferred fees (4) (26)
Allowance for credit losses (421) (431)
Net loans $ 59,729 $ 50,107
</TABLE>
NOTE 5 - 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.
</PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
The Company maintains the allowance for credit losses at a level sufficient to
absorb all estimated losses inherent in the loan portfolio. Activity in the
allowance for credit losses follows (dollars in thousands):
<TABLE>
Nine Months Ended Twelve Months Ended
September 30, December 31,
1998 1997
<S> <C> <C>
Balance, beginning of period $ 431 $ 354
Recoveries 49 20
Charge-offs (38) (212)
Provision charged (credited) to operations (21) 269
Balance, end of period $ 421 $ 431
</TABLE>
During the first quarter of 1998, the Company settled litigation involving a
significant problem credit. As a result of this settlement, the Company
recorded a credit provision of $96,000 for the quarter ended March 31, 1998.
The OCC had previously mandated that this credit be written down prior to
resolution of the Company's lawsuit against the borrower. While management
disagreed with the amount of the adjustment made in 1997, the effect on
financial condition and results of operations was not considered material.
NOTE 6 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Those
instruments involve, to varying degrees, elements of credit, and interest
rate risk in excess of the amounts recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
Financial instruments at September 30, 1998, consisted of commitments to
extend credit approximating $7.4 million and letters of credit of $175,000.
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.
</PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Citrus Financial Services, Inc. (the "Company") is a registered bank
holding company under the federal Bank Holding Company Act of 1956, as amended,
and owns 100% of the issued and outstanding common stock of Citrus Bank, N.A.,
Vero Beach, Florida (the "Bank" or "Citrus Bank"). The Company was
incorporated under the laws of the State of Florida on May 19, 1989, to
enhance the Bank's ability to serve its future customers' requirements for
financial services. The holding company provides flexibility for expansion of
the Company's banking business through acquisition of other financial
institutions and provision of additional banking-related services which the
traditional commercial bank may not provide under present laws.
The Bank commenced business operations on April 13, 1990, in a permanent
facility located at the corner of Indian River Boulevard and 17th Street,
Vero Beach, Florida. The facility is a three-story office condominium, the
first floor of which is owned by the Bank. The Bank operates a branch office
at 1020 U.S. 1, Sebastian, Florida, which commenced operations in February
1993 and another branch office located at 1020 Buttonwood Street, Barefoot
Bay, Florida, which commenced operations in September 1996.
Forward-looking Statements
When used in this Form 10-QSB, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project,"
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties including
changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as to
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Year 2000
The Company is aware of the issue associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Primary systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company is utilizing both internal and external resources
to identify, correct, and test their systems for the year 2000 compliance. It
is anticipated that all necessary modifications and testing will be completed
by December 31, 1998. To date, confirmations have been received from all of
the Bank's primary processing vendors that their software is now year 2000
compliant with the exception of the Bank's service provider for credit cards
that have assured compliance by December 31, 1998. Management has not yet
completed their assessment of the compliance expense for the year 2000 and
related potential effect on the Bank's earnings. It is recognized that any
year 2000 compliance failures could result in additional expense to the
Company.
The Company has established time lines for testing all ancillary systems,
such as telephone systems and security devices, by December 31, 1998. There
can be no assurances that all hardware and software that the Company uses will
be Year 2000 compliant, and the Company cannot predict with any certainty the
costs it will incur to respond to any Year 2000 issues. Factors which may
affect the amount of these costs include the Company's inability to control
third party modification plans, the Company's ability to identify and correct
all relevant computer codes, the availability and cost of engaging personnel
trained in solving Year 2000 issues, and other similar uncertainties.
Further, the business of many of the Company's customers may be negatively
affected by the Year 2000 issue, and any financial difficulties incurred by
the Company's customers in solving Year 2000 issues could negatively affect
those customers' ability to repay any loans which the Company may have
extended. Therefore, even if the Company does not incur significant direct
costs in connection with responding to the Year 2000 issue, there can be no
assurance that the failure or delay of the Company's customers or other third
parties in addressing the Year 2000 issue or the costs involved in such
process will not have a material adverse effect on the Company's business,
financial condition, or results of operations.
</PAGE>
<PAGE>
Future Accounting Requirements
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which addresses
the accounting for derivative instruments and provides for matching the
timing of gain or loss recognition on the hedging instrument. Guidance on
identifying derivative instruments is also provided as well as additional
disclosures. SFAS 133 becomes effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. Earlier application is permitted with
certain exceptions. Management does not anticipate that adoption of SFAS 133
will have a material impact on the financial condition or results of
operations of the Company.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, "Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held-for-Sale
by a Mortgage Banking Enterprise" ("SFAS 134"), which amends existing
pronouncements to clarify the classification of mortgage-backed securities
retained after the securitization of mortgage loans held-for-sale. SFAS 134
becomes effective for fiscal quarters beginning after December 15, 1998.
Earlier application is permitted. Management does not anticipate that adoption
of SFAS 134 will have a material impact on the financial condition or results
of operations of the Company.
Impact of Inflation
The consolidated financial statements and related data presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which require the measurements of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.
As discussed previously, management seeks to manage the relationships between
interest sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
Results of Operations
Net Income
The Company's net income decreased $1,000 for the three months ended
September 30, 1998, and increased $343,000 for the nine months ended
September 30, 1998, over the comparable periods in 1997. This improvement
in the nine months of 1998 versus 1997 reflects the Company's continued
growth, as average earning assets increased to $70.2 million during the first
nine months of 1998 as compared to $62.0 million during the first nine months
of 1997. The increase in average earning assets resulted in an increase in
net interest income before provision for credit losses of $371,000, or 16.6%,
in the first nine months of 1998 as compared to the first nine months of 1997.
In addition, noninterest income increased 14.4%, to $325,000 in the first nine
months of 1998 as compared to $284,000 in the first nine months of 1997. This
improvement resulted primarily from deposit account charges resulting from the
growth in deposits. The increases in net interest income and noninterest
income were partially offset by an increase of $121,000 in noninterest expense
in the first nine months of 1998 as compared to the first nine months of 1997.
The return on average assets for the nine months ended September 30, 1998,
improved to 0.81% annualized as compared with the return of average assets of
0.37% for 1997.
For the three months ended September 30, 1998, as compared with the
comparable period in 1997, increases in total interest income of $321,000
were offset by increases in interest expense of $213,000 and other expenses
of $121,000. The increases in the components of net income reflect the
general growth of the Company during this period.
Net Interest Income
The largest component of net income for the Company is net interest income,
which is the difference between the income earned on assets and interest paid
on deposits and borrowings used to support such assets. Net interest income
is determined by the rates earned on the Company's interest-earning assets
and the rates paid on its interest-bearing liabilities, the relative amounts
of interest-earning assets and interest-bearing liabilities, and the degree
of mismatch and the maturity and repricing characteristics of its interest-
earning assets and interest-bearing liabilities.
Net interest income was $838,000 and $2,628,000 for the three months and
nine months ended September 30, 1998, respectively, as compared to $733,000
and $1,999,000 for the three months and nine months ended September 30, 1997,
respectively. The increases of 14.3% and 31.5%, respectively, reflected the
</PAGE>
</PAGE>
growth of the Company's loan portfolio between these periods, which resulted
in improvements in the Company's net interest spread and net interest margin.
Net interest spread, the difference between the yield on earning assets and
the rate paid on interest-bearing liabilities, was 4.2% for the nine months
ended September 30, 1998 as compared to 4.1% for the nine months ended
September 30, 1997. Net interest margin (which is net interest income
divided by average interest-earning assets) increased to 5.0% for the nine
months ended September 30, 1998, as compared to 4.8% for the nine months
ended September 30, 1997. These increases reflect the fact that loans
comprised 82% of earning assets during the first nine months of 1998 as
compared to only 81% during the first nine months of 1997. Loans typically
provide a higher yield than the other types of earning assets and thus one of
the Company's goals is to continue to grow the loan portfolio as a percentage
of total earning assets. The increase in the yield on average earning assets
was partially offset by an increase in the rate paid on interest-bearing
liabilities to 4.8% in first nine months of 1998 as compared to 4.7% in the
first nine months of 1997. Increases in average savings and time deposits of
$2.9 million and $3.8 million, respectively, which typically pay higher rates,
contributed to the increase in overall rates on interest-bearing liabilities.
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.
Average Balances, Income and Expenses, and Rates (dollars in thousands)
<TABLE>
For the Nine Months Ended September 30,
1998 1997
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Interest-earning
deposits $ 48 $ 2 5.6% $ 40 $ 2 6.7%
Taxable securities 8,380 337 5.4% 9,425 411 5.8%
Federal funds sold 4,250 174 5.5% 2,385 94 5.3%
Net loans 57,534 4,252 9.9% 50,186 3,589 9.5%
Total earning assets 70,212 4,765 9.0% 62,036 4,096 8.8%
Non-earning assets 6,269 5,244
Total assets $ 76,481 $ 67,280
Interest-bearing liabilities:
NOW and money market
deposits $ 7,316 116 2.1% $ 7,288 112 2.0%
Savings 7,176 173 3.2% 4,281 92 2.9%
Time deposits 43,897 1,817 5.5% 40,058 1,605 5.3%
Other borrowings 1,280 52 5.4% 1,238 51 5.5%
Total interest-bearing
liabilities 59,669 2,158 4.8% 52,865 1,860 4.7%
Noninterest-bearing
liabilities 11,423 8,966
Stockholders' equity 5,389 5,449
Total liabilities
and stockholders'
equity $ 76,481 $ 67,280
Net interest income $ 2,607 $ 2,236
Interest-rate spread 4.2% 4.1%
Net interest margin 5.0% 4.8%
Ratio of average earning
assets to average
interest-bearing
liabilities 117.7% 117.3%
</TABLE>
</PAGE>
<PAGE>
Provision and Allowance for Loan Losses
The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem loans. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there
can be no assurance that charge-offs in future periods will not exceed the
allowance for credit losses or that additional increases in the credit loss
allowance will not be required.
Asset Classification. Commercial banks are required to review and, when
appropriate, classify their assets on a regular basis. The OCC has the
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, condition, and values questionable, and
there is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes a specific reserve for the full
amount of the portion of the asset classified as loss. All or a portion of
general loan 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 loan
losses generally do not qualify as regulatory capital. Assets that do not
warrant classification in the aforementioned categories, but possess weaknesses,
are classified as special mention and are monitored by the Company.
At September 30, 1998, the Company had 10 loans classified as substandard,
doubtful, or loss totaling $351,000.
Allowance for Credit Losses. The allowance for credit losses is
established through a provision for loan losses charged against income. Loans
are charged against the provision when management believes that the
collectibility of the principal is unlikely. The provision is an estimated
amount that management believes will be adequate to absorb losses inherent in
the loan portfolio based on evaluations of its collectibility. The evaluations
take into consideration such factors as changes in the nature and volume of
the portfolio, overall portfolio quality, specific problem loans and
commitments, and current anticipated economic conditions that may affect the
borrower's ability to pay. While management uses the best information
available to recognize losses on loans, future additions to the provision may
be necessary based on changes in economic conditions.
At September 30, 1998, the allowance for credit losses amounted to
$421,000, or 0.70% of outstanding loans. At December 31, 1997, the allowance
for credit losses amounted to $431,000, or 0.85% of outstanding loans. The
Company's provision for credit losses was $28,000 and $(21,000) for the three
months and nine months ended September 30, 1998, respectively. For the same
three months and nine months periods in 1997, the provision for credit losses
was $25,000 and $237,000, respectively. The provision was made based on
management's assessment of general credit loss risk and asset quality. The
decline in the allowance for credit losses as a percentage of outstanding
loans reflects the overall improvement in the quality of the loan portfolio
as further discussed in the next paragraph.
During the first quarter of 1998, the Company settled litigation involving
a significant problem credit. As a result of this settlement, the Company
recorded a credit provision of $96,000 for the quarter ended March 31, 1998.
The OCC had previously mandated that this credit be written down prior to
resolution of the Company's lawsuit against the borrower. While management
disagreed with the amount of the adjustment made in 1997, the effect on
financial condition and results of operations was not considered material.
Noninterest Income and Expense
Noninterest Income. The Company's primary source of noninterest income is
service charges on deposit accounts. In addition, the Company originates
mortgage loans, which are closed in the name of a third party, for which the
Company receives a fee. Other sources of noninterest income include bankcard
fees, commissions on check sales, safe deposit box rent, wire transfer, and
official check fees.
Total noninterest income increased by $14,000 and $41,000 during the three
months and nine months ended September 30, 1998, respectively, as compared to
the same period in 1997, reflecting increased activity fees related to
increases in deposit and loan balances. Fees and service charges were $81,000
and $268,000 for the three months and nine months ended September 30, 1998,
respectively, as compared to $63,000 and $231,000 for the comparable periods
in 1997. The increase in fees and service charges is a direct result of the
overall growth in deposit accounts with transaction fees.
</PAGE>
<PAGE>
Noninterest Expense. Total noninterest expense increased by $121,000 and
$121,000 during the three months and nine months ended September 30, 1998
respectively, as compared to the same period in 1997, as a result of the
Company's continued growth. For the first nine months in 1998, this increase
includes a $136,000 increase in salary and benefits expense, as the Company
employed additional employees and provided normal salary and benefit increases.
Occupancy-related expenses increased $50,000 in the first nine months of 1998
as compared with the same period in 1997, principally due to higher maintenance
expenses, depreciation, and operating costs for the new courier service. All
other expenses were generally flat or moderately higher, except that a
significant reduction in professional fees of $149,000 was realized in the
first nine months of 1998, due to lower legal and professional costs associated
with the resolution of two problem credits. The trends for the first nine
months of 1998 as compared with the same period of 1997 were indicative of the
results shown for the three months ended September 30, 1998, versus the
comparable period in 1997.
Income Tax Expense
The income tax provision was $73,000 and $280,000 for the three months and
nine months ended September 30, 1998, respectively, or an effective rate of
37.9% and 37.6%, respectively. This compares with an effective rate of 38.1%
and 38.0% for the same period in 1997, respectively.
Financial Condition
The Company's total assets at September 30, 1998, were $80.5 million,
increasing from $69.1 million at December 31, 1997. The increase of
approximately $11.4 million was due to an intentional increase in
interest-earning assets in an effort to increase net interest income and was
primarily due to a net increase in loans receivable of $9.6 million and
increases of $4.2 million in federal funds sold, partially offset by principal
repayments, matured securities, and sales of securities. The net increase in
total assets was funded by an increase of $10.9 million in certificates of
deposit. The Company does not currently anticipate significant additional
growth for the remainder of 1998.
Total stockholders' equity as of September 30, 1998, was $6.3 million, an
increase of $520,000 or approximately 9% compared with stockholders' equity
of $5.8 million as of December 31, 1997. This increase was attributable to
net income for the nine months of 1998 of $464,000 and a $56,000 increase in
the market value of investment securities available-for-sale.
The following table shows selected ratios for the periods ended or at the
dates indicated (annualized for the nine months ended September 30, 1998):
<TABLE>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
<S> <C> <C>
Return on average assets 0.81% 0.37%
Return on average equity 11.48% 4.46%
Interest-rate spread during the period 4.23% 4.17%
Net interest margin 4.95% 4.88%
Allowance for loan losses to period end loans 0.70% 0.85%
Net charge-offs to average loans -0.03% 0.38%
Nonperforming assets to period end loans and
foreclosed property 1.36% 2.97%
Nonperforming assets to period end total assets 1.03% 2.19%
</TABLE>
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.
</PAGE>
<PAGE>
Short-Term Investments. Short-term investments, which consist of federal
funds sold and securities purchased under agreements to resell and
interest-bearing deposits, averaged $4.3 million in the first nine months of
1998 as compared to $2.4 million in the same period of 1997. At September 30,
1998, and December 31, 1997, short-term investments totaled $6.7 million and
$2.6 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
$62.6 million at September 30, 1998 and $54.5 million at December 31, 1997.
Management anticipates that a stable base of deposits will be the Company's
primary source of funding to meet both its short-term and long-term liquidity
needs in the future.
Customers with large certificates of deposit tend to be extremely
sensitive to interest rate levels, making these deposits less reliable sources
of funding for liquidity planning purposes than core deposits. Some financial
institutions fund their balance sheets in part through large certificates of
deposit obtained through brokers. These brokered deposits are generally
expensive and are unreliable as long-term funding sources. Accordingly, the
Company does not accept brokered deposits.
Borrowings. The Bank has a line of credit master agreement with the FHLB
of Atlanta that enables the Bank to borrow up to $10,000,000. These advances
are collateralized by the Bank's FHLB stock and a blanket floating lien
consisting of wholly-owned residential (1-4 units) first mortgage loans. At
September 30, 1998, there were no advances outstanding under this line. In
addition to the line of credit arrangement, the Bank had fixed FHLB advances
outstanding as follows (dollars in thousands):
<TABLE>
At September 30, At December 31,
<S> <C> <C> <C>
Maturity Date Interest Rate 1998 1997
2000 5.26% $ 113 $ 167
2003 5.76% 229 266
$ 342 $ 433
</TABLE>
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
captial.
Bank holding companies and banks are also required to maintain capital at
a minimum level based on total assets, which is known as the leverage ratio.
The minimum requirement for the leverage ratio is 3%, but all but the highest
rated institutions are required to maintain ratios 100 to 200 basis points
above the minimum. The Company and the Bank exceeded their minimum regulatory
capital ratios as of September 30, 1998, as reflected in the following table.
The following table sets forth the Bank's regulatory capital position
(dollars in thousands):
<TABLE>
Well-
Actual Minimum(1) Capitalized(2)
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) $ 6,330 10.90% $ 4,647 8.00% $ 5,809 10.00%
Tier I Capital
(to Risk-Weighted Assets) $ 5,909 10.17% $ 2,324 4.00% $ 3,485 6.00%
Tier I Capital
(to Average Assets) $ 5,909 7.14% $ 3,312 4.00% $ 4,140 5.00%
</TABLE>
(1) The minimum required for adequately capitalized purposes.
(2) To be "well-capitalized" under the FDIC's Prompt Corrective Action
regulations.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes In Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registered has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Citrus Financial Services, Inc.
Date: November 9, 1998 /s/ Josh C. Cox, Jr.
Josh C. Cox, Jr.
President and CEO
Date: November 9, 1998 /s/ Henry O. Speight
Henry O. Speight
Chief Financial Officer
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,878
<INT-BEARING-DEPOSITS> 7
<FED-FUNDS-SOLD> 6,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,902
<INVESTMENTS-CARRYING> 1,398
<INVESTMENTS-MARKET> 1,367
<LOANS> 60,150
<ALLOWANCE> 421
<TOTAL-ASSETS> 80,475
<DEPOSITS> 73,124
<SHORT-TERM> 0
<LIABILITIES-OTHER> 667
<LONG-TERM> 342
0
0
<COMMON> 3,007
<OTHER-SE> 3,335
<TOTAL-LIABILITIES-AND-EQUITY> 80,475
<INTEREST-LOAN> 4,252
<INTEREST-INVEST> 339
<INTEREST-OTHER> 174
<INTEREST-TOTAL> 4,765
<INTEREST-DEPOSIT> 2,106
<INTEREST-EXPENSE> 2,158
<INTEREST-INCOME-NET> 2,607
<LOAN-LOSSES> (21)
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 2,209
<INCOME-PRETAX> 744
<INCOME-PRE-EXTRAORDINARY> 744
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 4.95
<LOANS-NON> 153
<LOANS-PAST> 283
<LOANS-TROUBLED> 685
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 431
<CHARGE-OFFS> 38
<RECOVERIES> 49
<ALLOWANCE-CLOSE> 421
<ALLOWANCE-DOMESTIC> 421
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
