[As filed with the Securities and Exchange Commission on November 20, 1998
Registration File No. ___________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form SB-2
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CITRUS FINANCIAL SERVICES, INC.
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(Name of small business issuer in its charter)
Florida 6712 65-0136504
- ------------------------- ---------------------------- ----------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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1717 Indian River Boulevard, Suite 100
Vero Beach, Florida 32960
(561) 778-4100
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(Address and telephone number
of principal executive offices)
Josh C. Cox, Jr.
President and Chief Executive Officer
1717 Indian River Boulevard, Suite 100
Vero Beach, Florida 32960
(561) 778-4100
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(Name, address and telephone number of agent for service)
Copies Requested to:
Herbert D. Haughton, Esq. Neil E. Grayson, Esq.
or A. George Igler, Esq. Nelson Mullins Riley & Scarborough, L.L.P.
Igler & Dougherty, P.A. First Union Plaza, Suite 1400
1501 Park Avenue East 999 Peachtree Street, N.E.
Tallahassee, Florida 32301 Atlanta, Georgia 30309
(850) 878-2411 Telephone (404) 817-6000 Telephone
(850) 878-1230 Facsimile (404) 817-6225 Facsimile
Approximate date of proposed sale to the public: As soon as practicable after
this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to rule 415 under the Securities Act of
1933 check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Proposed Proposed
each class Amount maximum maximum
of securities to be offering aggregate Amount of
to be registered registered price(1) offering price(2)s registration fee
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<S> <C> <C> <C> <C>
Common Stock $3.15 par value 1,200,000 $11.50 $13,800,000 $3,836.40
================================================================================================================================
</TABLE>
(1) Maximum purchase price of stock to be issued.
(2) Estimated solely for the purpose of calculating the registration fee on
the basis of the proposed maximum offering price per share.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
sthe Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to completion, November 20s, 1998
PROSPECTUS
Minimum 1,000,000 Shares -- Maximum 1,200,000 Shares
Common Stock
[Citrus Financial Services, Inc. logo]
Citrus Financial Services, Inc., a bank holding company headquartered
in Vero Beach, Florida, is offering through its sales agent, Banc Stock
Financial Services, Inc., up to 1,200,000 shares of common stock for up to 90
days following the date of this Prospectus, unless extended by our board of
directors for up to 90 additional days. We currently believe that the offering
price will be between $10.50 and $11.50 per share. See "SALES AGENT" for the
factors considered in determining the public offering price. The common stock
will be quoted on the OTC Bulletin Board. The Company has requested the symbol
"_____".
The minimum number of shares that can be subscribed for in the offering
is 100 shares. The offering will be terminated, and all subscription funds,
together with any interest earned thereon, will be promptly returned if a
minimum of 1,000,000 shares are not sold within the offering period.
Citrus Financial Services, Inc. reserves the right to reject any
subscription received in whole or in part. Once accepted a subscription cannot
be withdrawn. We may terminate the offering at any time without prior notice.
This investment involves a high degree of risk. See "Risk Factors"
beginning on page 7 for a discussion of certain risks that should be carefully
considered by prospective purchasers of the common stock offered hereby.
The securities offered hereby are not savings accounts or savings
deposits and are not insured by the Federal Deposit Insurance Corporation or any
other governmental agency. These securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission. Neither the commission nor any state securities commission has
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<TABLE>
<CAPTION>
Estimated
Subscription Underwriting Proceeds to the
Price Discounts Company(1)
----- --------- ----------
<S> <C> <C> <C>
Per share $_________ $_______ $__________
Minimum offering(2) $_________ $_______ $__________
Maximum offering(3) $_________ $_______ $__________
</TABLE>
(1) Before deducting offering expenses estimated to be $__________, including
registration fees, legal and accounting fees, printing and other
miscellaneous expenses.
(2) Amount based on the sale of 1,000,000 shares at $_____ per share.
(3) Amount based on the sale of 1,200,000 shares at $_____ per share.
[Banc Stock Financial Services, Inc. logo]
The date of this Prospectus is January __, 1999.
<PAGE>
[Inside Front Cover]
Location map of Citrus locations with highlights for Dade County
<PAGE>
AVAILABLE INFORMATION
Citrus Financial Services, Inc. ("Citrus") is subject to the
informational requirements of the Securities Exchange Act of 1934. We file
financial reports, proxy statements and other information electronically with
the Securities and Exchange Commission ("Commission") through the Commission's
EDGAR system. Financial reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at:
o 450 Fifth Street, N.W., Washington, D.C. , and
o 3475 Lennox Road, NE, Suite 1000, Atlanta, GA, or
o on the Commission's Web Site at www.sec.gov
We have filed electronically with the Commission through EDGAR a
registration statement on Form SB-2 in accordance with the requirements of the
Securities Act of 1933. This Prospectus does not contain all of the information
set forth in the registration statement and in the exhibits attached thereto.
Certain items were omitted in accordance with the rules and regulations of the
Commission. Anyone may inspect the registration statement without charge at the
above locations. Statements contained in this Prospectus which refer to a
document filed as an exhibit to the registration statement are qualified in
their entirety by reference to the copy of such document filed with the
Commission.
SALES OF CITRUS' COMMON STOCK
Our common stock is not listed on any exchange and there currently is
not an active market for the shares. Although our shares will be quoted on the
OTC Bulletin Board, there can be no assurance that an active and liquid trading
market for the common stock will develop or, that if a market is developed, it
will be maintained. It is our intent to apply to Nasdaq to have our securities
listed on the Nasdaq SmallCap Market as soon as we are able to meet the
qualification requirements. We believe it will be at least one year before we
will meet all of the requirements for listing, but no assurance can be given
that such will be the case, or that the listing requirements for the Nasdaq
Small Cap Market will not have changed by that time.
This Prospectus is not an offer to sell securities in any state where it is
unlawful to do so.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. All per share amounts have been adjusted
to reflect the April 27, 1998, 10% stock split to shareholders of record, May 8,
1998. This Prospectus contains certain forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from the
results discussed in these statements. Factors which might cause such
differences include, but are not limited to, those discussed in "Risk Factors"
beginning on Page 7.
The Company
General. Citrus is a one-bank holding company organized under the laws
of the State of Florida and headquartered in Vero Beach, Florida. We operate
primarily through our wholly-owned national banking subsidiary, Citrus Bank,
N.A. ("Citrus Bank") which commenced banking operations on April 13, 1990. In
addition, we established a non-operating subsidiary, Citrus Mortgage Corp., in
1995 which is not active. Citrus, Citrus Bank and Citrus Mortgage Corp. will be
collectively referred to as the "Company". Citrus Bank operates from three
full-service banking centers:
o the main office in Vero Beach, Florida,
o the Sebastian banking center in Sebastian, Florida, and
o the Barefoot Bay banking center, in Barefoot Bay, Florida.
In addition, Citrus Bank operates an armored car service throughout
Indian River County and south Brevard County. Citrus' primary business is
attracting deposits from the general public and using those deposits, together
with borrowings and other funds, to originate loans and to purchase investments.
Citrus Bank is one of four independent community banks headquartered in Vero
Beach.
Through Citrus Bank, Citrus engages in mortgage banking activities
which include the origination and subsequent sale of residential mortgage loans.
During 1997, we originated $29.7 million and sold $29.0 million in residential
mortgage loans. For the first nine months of 1998, we originated $116.5 million
and sold $113.7 million in mortgages. This activity provides both interest and
noninterest income to the Company.
Our current primary service area includes Indian River County and the
southern portion of Brevard County, and in particular the greater Vero Beach
area and the communities of Sebastian and Barefoot Bay, Florida. The populations
of the greater Vero Beach area and Indian River County are approximately 70,000
and 100,000, respectively. The major industries in this area include tourism,
retail trade, citrus, insurance, health care, aircraft manufacturing and related
industries, light industry, and real estate. The greater Vero Beach area has
grown dramatically in the last several years, especially in the retail industry.
A new regional mall opened in Vero Beach in 1997, along with a regional
manufacturers' discount mall in 1996.
At December 31, 1997, the Company had total assets of $69.1 million,
total deposits of $62.6 million, and total stockholders' equity of $5.8 million.
We reported consolidated net earnings of $250,000, or $0.26 per basic share and
$0.21 per diluted share, for the year ended December 31, 1997. On December 31,
1997, Citrus' loan portfolio totaled $50.6 million. The loan portfolio consisted
of 41% residential mortgage loans, 30% commercial real estate loans, 20%
commercial loans, and 9% consumer loans.
At September 30, 1998, the Company had total assets of approximately
$80.5 million, total deposits of $73.1 million, and total stockholders' equity
of $6.3 million. For the nine months ended September 30, 1998, we had
consolidated net earnings of $464,000, or $0.49 per basic share and $0.40 per
diluted share. At September 30, 1998, the loan portfolio totaled $60.2 million.
At that time, our loan portfolio consisted of 43% in residential mortgage loans,
29% in commercial real estate loans, 21% in commercial loans, and 7% in consumer
loans.
Business Strategy. We currently operate a traditional community banking
business through strategically located banking facilities and a friendly,
professional staff. Our staff is committed to developing long-term relationships
with customers by offering personalized, quality service. We offer a broad range
of retail and commercial banking services, including various types of deposit
accounts and loans for consumers and businesses. As part of our community
banking approach, we encourage our officers and directors to actively
participate in community organizations.
Expansion Goals. We intend to expand our community banking business
through the formation of new de novo banks, additional branch offices of our
existing bank, and selected acquisitions of other institutions. Our goal is to
establish ourselves as the leading community banking organization in our primary
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service areas, as we expand our presence in central and into southeast Florida.
We will achieve this goal through consistent growth and a prudent operating
strategy. As part of these strategies, we will focus on:
o Growing by opening new de novo banks, including a bank in Dade
County
o Growing by expansion of existing facilities and acquisition of other
banks
o Emphasizing mortgage banking activities
o Maintaining high credit quality
Dade County De Novo Bank. We intend to create an organization of
independently managed community banks that serve their respective local markets
and are run by local boards of directors. We have chosen Dade County for our
first new bank, in part because Dade County is the most populated county in
Florida, growing from approximately 1.9 million residents in 1990 to 2.1 million
residents in 1997. Like Citrus Bank, this de novo bank will be a national bank,
regulated by the Office of the Comptroller of the Currency (the "OCC").
We are currently searching for a site for our Dade County bank and are
focusing on growing communities which we believe lack strong local community
banks. We will look for neighborhoods which have a progressive business climate,
a local newspaper, a strong Chamber of Commerce, and a separate municipal
government. We will also seek areas with services designed to meet community
needs, such as convenient shopping areas, good medical facilities, and schools
and facilities dedicated to the arts. We believe that locating a new bank in
such a community will provide us with the greatest opportunity for continued
success. We are currently focusing our search in the Coral Gables area, but we
will also consider other communities in Dade County.
We anticipate selecting a site for the new bank by February 1999. Once
we have identified the site, we will begin selecting a local board of directors
and management team for the bank. We intend to file regulatory applications for
our new bank during the first quarter of 1999 and anticipate opening the new
bank in the third or fourth quarter of 1999.
Citrus Bank Branch Expansion. We intend to establish up to three new
branch offices of Citrus Bank in Indian River and Brevard Counties within the
next 18 to 24 months. We anticipate that the first of these branch offices will
be located in Melbourne, Florida. We are currently searching for an appropriate
site that meets the characteristics described above for our proposed Dade County
bank. Our goal is to open this branch prior to December 31, 1999. We have not
yet selected sites for the other two branches, but we intend to search for sites
that meet the characteristics described above for our proposed Dade County bank.
Acquisitions of Other Financial Institutions. We will also consider
opportunities that may arise from time to time to acquire other financial
institutions or branch offices of other financial institutions, primarily those
in the central and south Florida markets.
Use of Proceeds
We intend to use between $5 million and $6 million of the net proceeds
of this offering to capitalize our Dade County de novo bank, depending on the
amount required by the OCC. We also anticipate using approximately $3 million to
develop the three new branches of Citrus Bank, and the remainder for internal
growth and general corporate purposes. We anticipate that we would raise
additional capital for the formation of future de novo bank subsidiaries, the
establishment of other branches, or any acquisitions.
See "USE OF PROCEEDS".
Risk Factors
Prospective investors should consider the information discussed under
"RISK FACTORS" beginning on page 7 before making a decision to purchase the
shares offered.
Dividends
We have not paid a cash dividend since inception. We expect that our
earnings will be retained to support growth and expansion into new business
opportunities. We, therefore, do not expect to pay a cash dividend in the
foreseeable future. See "DIVIDENDS ON COMMON STOCK".
3
<PAGE>
The Offering
Common Stock Offered by the Company. We are offering through our sales
agent a minimum of 1,000,000 shares of common stock ("minimum offering") and a
maximum of 1,200,000 shares of common stock ("maximum offering"). The minimum
number of shares which may be purchased is 100 and the maximum number which may
be purchased without obtaining prior regulatory approval is 193,000 shares.
Preference in the Offering for Existing Shareholders. Citrus values its
relationship with its shareholders and wants to ensure that its existing
shareholders have the opportunity to participate in this offering. For this
reason, Citrus has requested that the sales agent contact each of its existing
shareholders to offer them the opportunity to purchase shares in the offering.
Some shareholders, however, may not have this opportunity because Citrus may
elect not to offer or sell shares in certain states due to state law securities
issues.
If the offering is oversubscribed, Citrus reserves the right, but will
not be required, to allocate shares among subscribers. Citrus may give a
preference to existing shareholders to the extent of one share in the offering
for each share the shareholder currently owns (excluding officers and directors
of the Company, who will be given a preference for an aggregate of _______
shares). Citrus may also take into account any other factors it considers
relevant, including the order in which subscriptions are received, a
subscriber's potential to do business with, or to direct customers to, Citrus
and Citrus' desire to have a broad distribution of stock ownership.
Common Stock Outstanding Immediately After the Offering. As of
September 30, 1998, there were 952,296 shares of common stock outstanding. Had
the minimum offering closed on that date, there would be 1,952,296 shares of
common stock outstanding. Had the maximum offering closed on that date, there
would have been 2,152,296 shares of common stock outstanding. These calculations
do not take into account the 532,385 shares which may be issued pursuant to our
outstanding warrants and stock options, which as of September 30, 1998 had not
been exercised.
Conditions of the Offering. The offering is being made on a best
efforts basis by the sales agent and will expire 90 days from the date of the
Prospectus. The offering may be extended for up to an additional 90 days or
terminated beforehand in the sole discretion of our board of directors, after
consultation with the sales agent. Funds received by us during the offering will
be deposited with the escrow agent. Funds so deposited may be released to us
only in accordance with the terms of the escrow agreement between Citrus, the
escrow agent, and the sales agent. We will terminate the offering if, by 5:00
p.m., local time, on April ___, 1999, subscriptions for a minimum of 1,000,000
shares have not been received and forwarded to the escrow agent, or we have
previously extended or canceled the offering prior to withdrawing funds from the
escrow account.
Sales Agent and Fees to Participating Broker-Dealers. We have entered
into a Sales Agency Agreement with Banc Stock Financial Services, Inc. in which
we have agreed to pay certain fees and expenses of Banc Stock Financial Services
for its services as our sales agent in the offering. Banc Stock may allow a
concession (out of the sales commission) to selected broker-dealers who
participate in the offering. See "SALES AGENT".
Offering Price. The offering price is $_____ per share. The common
stock is not publicly traded. The board of directors, after consulting with the
sales agent, determined the offering price per share after considering, among
other criteria, the Company's assets, market position, net worth, historical and
projected earnings, book value and the last private trades reported to the
Company.
Procedure for Subscribing for Common Stock. Investors who desire to
participate in the offering must properly complete the order form which
accompanies this Prospectus. The order form must be forwarded, with full payment
of the aggregate subscription price, to the escrow agent on or prior to the
expiration date. If the mail is used to forward order forms, we recommend that
insured, registered mail, return receipt requested, be used. See "THE OFFERING -
Procedures for Subscribing for Common Stock".
Subscriptions for the common stock which are accepted by us may not be
revoked. Subscription funds will be held in an escrow account established with
the Independent Bankers' Bank of Florida, 109 East Church Street, Orlando,
Florida 32801 (the "escrow agent"). See "THE OFFERING - Procedure for
Subscribing for Common Stock".
Dilution. Purchasers of common stock in the offering will experience
immediate dilution in the net tangible book value per share of the common stock
from the public offering price. In connection with our initial stock offering,
we issued purchase warrants which, when adjusted for the various stock splits
and if fully exercised, would result in an additional 469,772 shares being
issued at $6.31 per share. In addition, we have granted stock options
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periodically to officers and employees of the Company at exercise prices equal
to fair market value at the date of grant. As of September 30, 1998, there were
stock options to purchase 62,613 shares of common stock outstanding (at a
weighted average exercise price of $6.31 per share). See "RISK FACTORS -
Dilutive Effect of Purchase Warrants and Stock Options" and "DILUTION".
Purchase Limitation. We reserve the right to reject any subscriptions,
in whole or in part.
Transfer Agent and Registrar. Prior to the offering we served as our
own transfer agent for our stock. We have recently engaged Continental Stock
Transfer and Trust Company, 2 Broadway, 19th Floor, New York, New York, 10004,
to handle stock transfers, stock record keeping, and mailing of all proxy
materials. See "THE OFFERING - Transfer Agent and Registrar".
Intentions of Executive Officers and Directors. Our executive officers
and directors have preliminarily indicated that collectively they intend to
purchase approximately 25,000 shares of common stock in the offering, although
they are under no obligation to do so. Our executive officers and directors or
affiliates of the sales agent may purchase up to 100% of the shares in the
offering if necessary to help us achieve the minimum subscription level
necessary to release subscription proceeds from escrow. Any shares purchased by
these individuals in excess of their original indications will be purchased for
investment and not with a view to the resale of such shares. Because purchases
by these persons may be substantial, investors should not place any reliance on
the sales of a specified minimum offering amount as an indication of the merits
of this offering or that such a person's investment decision is shared by
unaffiliated investors. See - "BENEFICIAL OWNERSHIP OF COMMON STOCK". Our
directors and executive officers have agreed with the sales agent not to sell
any Citrus shares they own for a period of two years after the date of this
Prospectus without the prior written consent of the sales agent.
Information on the Offering. If you have questions concerning the
offering, contact the sales agent at the Stock Sales Center at (800) 733-2265.
5
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<TABLE>
<CAPTION>
SUMMARY OF FINANCIAL DATA
(Dollars in thousands, except per share figures)
At or For the Period Ended
--------------------------
September 30, December 31,
------------- ------------
1998 1997 1997 1996
---- ---- ---- ----
At the Period End:
<S> <C> <C> <C> <C>
Assets ...................................... $ 80,475 $ 68,971 $ 69,098 $ 66,416
Loans ....................................... $ 60,150 $ 50,868 $ 50,538 $ 51,024
Loans, net .................................. $ 59,729 $ 50,473 $ 50,107 $ 50,670
Deposits .................................... $ 73,124 $ 61,084 $ 62,601 $ 58,646
Stockholders' equity ........................ 6,342 $ 5,695 $ 5,822 $ 5,427
Book value per share ........................ $ 6.66 $ 5.98 $ 6.11 $ 5.77
Shares outstanding........................... 952,296 952,296(1) 952,296(1) 952,296(1)
Outstanding warrants to purchase one share of
common stock ........................... 469,772 469,772(1) 469,772(1) 469,772(1)
Vested stock options outstanding ............ 62,613 62,613(1) 62,613(1) 75,661(1)
Equity-to-assets ratio ...................... 7.88% 8.26% 8.43% 8.17%
Nonperforming assets-to-total assets ratio .. 1.03% 2.76% 2.19% 2.17%
For The Period:(2)
Total interest income ....................... $ 4,765 $ 4,096 $ 5,514 $ 4,973
Net interest income ......................... $ 2,628 $ 1,999 $ 2,763 $ 2,333
Net income .................................. $ 464 $ 121 $ 250 $ 85
Return on average assets .................... 0.81% 0.24% 0.37% 0.14%
Return on average equity .................... 11.48% 2.96% 4.46% 1.55%
Average equity-to-average assets ratio ...... 7.05% 8.10% 8.28% 8.96%
Noninterest expenses to average assets ...... 3.85% 4.14 4.10% 4.20%
Yield and Rates:(2)
Loan portfolio .............................. 9.9% 9.5% 9.7% 9.6%
Securities .................................. 5.4% 5.8% 5.7% 5.6%
Other interest-earning assets ............... 5.5% 5.3% 5.4% 5.5%
All interest-earning assets ................. 9.0% 8.8% 8.9% 8.8%
Deposits .................................... 4.8% 4.7% 4.7% 4.7%
Other borrowed funds ........................ 5.4% 5.5% 5.7% 5.6%
Net interest margin(3) ...................... 5.0% 4.8% 4.9% 4.8%
- -----------------
(1) Reflects the May 1998 10% stock split and the January 1997 20% stock
split.
(2) Percentages annualized for the nine months ended September 30, 1998 and
1997.
(3) Net interest income divided by average interest-earning assets.
</TABLE>
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RISK FACTORS
An investment in the common stock involves certain risks. In addition to the
other information contained in this Prospectus, prospective investors should
consider the following factors in evaluating an investment in the shares of
common stock. This Prospectus contains "forward-looking statements" relating to
future economic performance, plans and objectives of management for future
operations. It also contains projections of revenues and other financial items
that are based on the beliefs of the Company's management, as well as
information currently available to the Company's management. The words "expect,"
"estimate," "anticipate," and "believe," as well as similar expressions, are
intended to identify forward-looking statements. The cautionary statements set
forth in this "Risk Factors" section and elsewhere in this Prospectus identify
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
Growth by Expansion and Acquisitions
Our strategy to expand by establishing new de novo bank subsidiaries
and new branch offices is dependent on our ability to identify suitable
locations and acceptable management teams to open such banks or branches. It is
further dependent on our ability to generate new deposits and loans from those
locations that will create an acceptable level of net income for the Company.
Our strategy to grow through selective acquisitions of financial institutions or
branches of such institutions is dependent on successfully identifying,
acquiring and integrating such institutions or branches. There is a risk that
the Company may need to raise additional capital to fund future acquisitions.
There can be no assurance that we will be successful in implementing our growth
strategy or in identifying attractive acquisition candidates, acquiring such
candidates on favorable terms, or successfully integrating any acquired
institutions or branches into Citrus or its subsidiaries. See "BUSINESS -
Competition".
Risks Associated With Opening a New Bank
We will use the majority of the proceeds of the offering to support
growth and expansion, including the establishment of a new national bank in the
Dade County, Florida area. There is a risk, however, that Citrus will not
actually experience any further asset or deposit growth, or that Citrus will not
experience favorable financial results if such growth occurs.
As a bank holding company, our continued profitability will depend
entirely upon the operations of our subsidiary banks. The operation of the
proposed new bank will be subject to the risks inherent in commencing the
operation of a new business and, specifically, those of a new bank. The
likelihood of the success of the proposed new bank must be considered in light
of the problems, expenses, complications, and delays frequently encountered in
connection with the development of new banks and the competitive environment in
which they operate. Typically, new banks incur substantial initial expenses and
are not profitable for several years after commencing business.
No Assurance of Regulatory Approvals
Before the proposed new bank may open, it must obtain approval of its
charter application from the Comptroller of the Currency and its application for
deposit insurance from the Federal Deposit Insurance Corporation. Assuming we
locate a suitable site and hire an acceptable management team for the new bank,
we plan to file applications for these approvals in the first quarter of 1999.
Although Citrus anticipates that its applications will receive preliminary
approval during the second quarter of 1999, there is a risk that we will fail to
obtain either one or both of these approvals or that the approvals may not be
granted in the time periods expected.
Before Citrus may acquire the common stock of the proposed Dade County
bank, we must obtain the approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). Citrus intends to file an application to
request this approval in the first quarter of 1999. We anticipate receiving this
approval in the second quarter of 1999. There is a risk, however, that we will
fail to obtain this approval, or that the approval may not be granted by this
date.
Any significant delay in obtaining any of the approvals described above
will result in an increase in preopening expenses and may reduce the amount of
our capital, potential revenues, and income.
Interest Rate Risk
Our earnings depend, to a large extent, upon the level of the Company's
net interest income. Net interest income is primarily influenced by the
relationship between our cost of funds (deposits and borrowings) and our yield
on interest-earning assets (loans and investments). The relationship between
cost of funds and yield on interest-earning assets is known as the net interest
margin. Net interest margin is subject to fluctuation and is affected by
regulatory, economic and competitive factors which influence the level of
interest rates, the volume, rate and mix on interest-earning assets and
7
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interest-bearing liabilities. As part of its interest rate risk management
strategy, we strive to reduce our exposure to interest rate changes by matching
the maturity and repricing opportunities of interest-earning assets, with
interest-bearing liabilities.
As of September 30, 1998, total interest-earning assets maturing or
repricing within one year were less than total interest-bearing liabilities
maturing or repricing in the same period by $18.1 million. This represents a
cumulative one-year interest rate sensitivity gap as a percentage of total
interest-earning assets of negative 24.5%. As a result, the yield on the
Company's interest-earning assets should adjust to changes in market interest
rates at a slower rate than the cost of the Company's interest-bearing
liabilities. Consequently, the Company's net interest income could be adversely
affected during periods of rising interest rates. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Results of
Operations - Net Interest Income".
Credit Risk
In originating loans, there is a substantial likelihood that we will
incur credit losses. Our risk of loss varies with, among other things, general
economic conditions, the type of loan made, the creditworthiness and debt
servicing capacity of the borrower over the term of the loan. In the case of a
collateralized loan, the risk of loss varies with the value and marketability of
the collateral securing the loan. The Company maintains an allowance for credit
losses based on, among other things, historical credit loss experience, known
inherent risks in the loan portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and an evaluation of current economic conditions. Additional provision for
credit losses may be required should economic or other conditions change
substantially in the future.
As of September 30, 1998, the Company's allowance for credit losses
amounted to $421,000, which represented 0.70% of its total loans. As of
September 30, 1998, there were $436,000 in nonperforming loans in the portfolio,
making the allowance of credit losses as a percentage of nonperforming loans
equal to 0.97%. Although management believes that the Company's allowance for
credit losses is adequate, there can be no assurance that the allowance will
prove sufficient to cover future credit losses. Loan losses exceeding historical
rates or significant additions to the Company's allowance for credit losses
would have a material adverse effect on the Company's results of operations and
financial condition. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Provision and Allowance for Credit
Losses".
Competition
The banking and financial services industry is highly competitive. We
compete, in our primary service area, with other commercial banks, savings and
loan associations, credit unions, finance companies, mutual funds, insurance
companies and brokerage and investment banking firms. Many of these competitors
have substantially greater resources and lending limits than the Company and may
offer certain services that we do not or cannot provide. Our profitability
depends upon our continued ability to successfully compete in our market areas.
See "BUSINESS - Competition".
Local Economic Conditions
Our success is dependent, to a certain extent, upon the general
economic conditions in the geographic market we serve. Although we expect that
economic conditions will continue to be favorable in Indian River and Brevard
Counties, there is a risk that these favorable economic conditions will not
continue. Adverse changes in economic conditions in our geographic markets would
likely impair our ability to collect loans and could otherwise have a material
adverse effect on the results of operations and financial condition of the
Company.
Supervision and Regulation
We operate in a highly regulated environment and are subject to
supervision and examination by several federal and state regulatory agencies. We
are subject to the Bank Holding Company Act of 1956 ("BHCA") and to regulation
and supervision by the Federal Reserve. Citrus Bank is subject to the regulation
and supervision of the Office of the Comptroller of the Currency ("OCC").
Federal and state laws and regulations govern matters ranging from deposit
insurance premiums to the maintenance of adequate capital for our general
business operations. Federal and state laws and regulations also determine
permissible types, amounts and terms of loans and investments, the amount of
reserves against deposits, restrictions on dividends, establishment of branch
offices, and the maximum rate of interest that may be charged by law. Our
regulators have the power to conduct examinations to order us to cease unsafe or
unsound practices or violations of law. The commercial banking business is also
affected by the monetary policies of the Federal Reserve. These monetary
policies have had, and are expected to continue to have, significant effects on
the operating results of commercial banks. Changes in monetary policy may affect
the ability of Citrus Bank to attract deposits and make loans, and could, under
certain circumstances, adversely affect the Company.
8
<PAGE>
Anti-Takeover Provisions
Our Articles of Incorporation ("Articles") contain provisions requiring
a vote of more than a majority of shareholders to effect certain extraordinary
corporate transactions which have not been approved by our board of directors.
The effect of these provisions is to make it more difficult to effect a merger,
sale of control or similar transaction involving the Company even though a
majority of our shareholders may vote in favor of such a transaction. In
addition, our Articles provide for classes of directors, whereby one-third of
the members of the board of directors are elected each year and each director of
the Company will serve for a term of three years. Finally, Florida's
Control-Share Acquisition Statute will apply to acquisitions of control shares
of our common stock, as defined in that statute. The effect of these provisions
is to make it more difficult to effect a hostile change in control of the
Company through the acquisition of a large block of our common stock. See
"DESCRIPTION OF COMMON STOCK".
Absence of Shareholder Preemptive Rights
Our shareholders do not have preemptive rights to purchase shares of
any class of our stock. The total number of shares of all classes of capital
stock which Citrus has the authority to issue is 11,000,000 shares, 1,000,000
shares of preferred stock, par value $5.00 per share, and 10,000,000 shares of
common stock, par value $3.15 per share. Each share of common stock is entitled
to one vote per share in all matters requiring a vote of shareholders. Our board
of directors could, from time to time, determine to issue additional shares of
the authorized preferred stock or common stock of the Company, which may dilute
the ownership interest of the subscribers in this offering.
Voting Control
As of September 30, 1998, the Revocable Trust of Roy H. Lambert, of
which Roy H. Lambert is a beneficiary, beneficially owned approximately 13.0% of
the Company's outstanding shares of common stock and would own 21.0% if Mr.
Lambert exercised his warrants for 95,978 shares. Mr. Lambert will beneficially
own approximately 6.3% and 5.8% of the issued and outstanding common stock after
the minimum offering and the maximum offering, if he does not purchase shares in
the offering. Mr. Lambert received regulatory approval to own up to 100% of the
Company's common stock on August 11, 1995. Mr. Lambert's holdings comprise the
single largest voting block of the common stock and, after this offering, we
anticipate that he will continue to have a significant influence on the election
of members of the board of directors and other shareholder matters. The
directors and executive officers as a group own 55.3% of the outstanding shares
(and would own 69.1% if they exercised all options and warrants currently held
by them), which constitutes absolute control over election of directors and the
direction of the Company. If the directors and executive officers did not
acquire any shares in this offering they would own approximately 40.1% and 37.0%
of the issued and outstanding common stock following the minimum offering and
the maximum offering assuming no exercise of options and warrants. See
"BENEFICIAL OWNERSHIP OF COMMON STOCK".
Dilutive Effect of Purchase Warrants and Stock Options
In connection with the Company's initial stock offering, we issued
purchase warrants which, if fully exercised, would result in an additional
469,772 shares being issued at $6.31 per share (each warrant entitles the holder
to purchase one share of common stock). As of September 30, 1998, 469,772
purchase warrants (representing 469,772 shares authorized to be issued at $6.31
per share) were still outstanding. The purchase warrants will expire on April
13, 2000.
Stock options have been granted periodically to officers of the Company
at exercise prices equal to fair market value at the date of grant. As of
September 30, 1998, there were stock options to purchase 62,613 shares of common
stock outstanding (at a weighted average exercise price of $6.31 per share).
Purchasers of common stock in the offering will experience an immediate
dilution in the net tangible book value per share of the common stock from the
public offering price. Moreover, in the near-term, the Company expects that the
expenses associated with the offering and the establishment of a new bank will
result in a reduction of the Company's return on equity and earnings per share.
See "DILUTION".
Impact on Earnings Per share
The issuance of up to 1,200,000 shares offered in this offering may
adversely affect our earnings per share until such time as the net proceeds of
this offering are fully utilized to generate additional assets and deposits
through both internal and external means.See "Growth by Expansion and
Acquisition" and "USE OF PROCEEDS".
9
<PAGE>
Limited Trading Market
The price of our common stock is not currently quoted on any recognized
stock exchange or on the National Quotation Bureau System Pink Sheets. Prior to
this offering, there has been only limited trading activity. Following the
offering the common stock will be traded on the OTC Bulletin Board under the
trading symbol "____". Although we expect that an active trading market will
develop, there can be no assurance that such a market will develop at the
completion of this offering or that such a market, if developed, will continue.
It is our intent to list the common stock on the Nasdaq SmallCap Market, but we
believe it will be at least a year before we will meet the requirements for such
a listing. See "MARKET FOR COMMON STOCK".
Dependence on Senior Management; Need to Hire Additional Management
The Company's growth and development to date have been largely the
result of the contributions of certain of the senior executive officers of the
Company, including Josh C. Cox, Jr., President and Chief Executive Officer of
Citrus and President of Citrus Bank; Randy J. Riley, Senior Vice-President and
Chief Lending Officer of Citrus Bank; and Henry O. Speight, Citrus and Citrus
Bank's Chief Financial Officer. Future growth and development of the Company
will also be largely dependent on the Chief Executive Officer of the new bank,
who has yet to be identified. The loss of the services of one or more of these
individuals could have a material adverse effect on the Company's business and
development. No assurance can be given that replacements for any of these
officers could be employed if these officers' services were no longer available.
In addition, continued growth of the Company will require that the Company
attract and retain additional personnel with a variety of skills and experience.
Significant competition exists for such personnel with the skills and experience
needed to successfully manage the Company's business and operations. See
"MANAGEMENT".
Shares Eligible for Future Sale
Sales of common stock in the public market following this offering
could adversely affect the market price of the common stock. Following this
offering, approximately 420,178 shares of common stock held by current
shareholders, as well as up to 1,200,000 maximum shares offered hereby, will be
eligible for immediate sale without restriction in the public market. The
executive officers and directors of Citrus and certain officers of Citrus Bank
own the remaining 532,118 shares of common stock. The directors and executive
officers have agreed with the sales agent not to sell any Citrus shares they own
for a period of two years after the date of this Prospectus without the prior
written consent of the sales agent. After this period, shares held by officers
and directors will be eligible for sale subject to the volume and other
limitations of Rule 144 adopted under the Securities Act. See "SHARES ELIGIBLE
FOR FUTURE SALE".
USE OF PROCEEDS
Citrus estimates that the net proceeds it will receive from the sale of
the common stock in this offering, assuming a public offering price of $11.00
per share, will be approximately $10,270,534 based on the minimum offering of
1,000,000 shares and $12,316,534 based on the maximum offering of 1,200,000
shares. Offering expenses and sales agent commissions are estimated to be
approximately $729,466 and $883,466 for the minimum and maximum offerings,
respectively. The net proceeds to be raised in the offering will depend upon the
number of shares of common stock sold in the offering and the actual amount of
expenses incurred in the offering, which may differ from these estimates.
We intend to use the net proceeds to support future growth, including
at least $5 million, and perhaps as much as $6 million, for the establishment of
a de novo bank in Dade County, Florida, up to $3 million for the establishment
of up to three new branch offices of Citrus Bank, and up to $500,000 for general
corporate purposes. We expect future growth to occur both by establishing new
subsidiary banks and new branch offices and possibly through selective
acquisitions of other financial institutions or branch offices from other
institutions, primarily in the central and south Florida markets. We anticipate
that we would raise additional capital for the formation of future de novo bank
subsidiaries, the establishment of other branches, or any acquisitions. Except
for the Dade County de novo and a Melbourne, Florida branch office of Citrus
Bank, the Company currently has no specific plans for, and has not entered into
any agreement or understanding concerning, the establishment of any other new
subsidiary banks or acquisitions of other banks or branches. Because Citrus has
not yet identified any specific expansion sites or entered into any agreements
for the acquisition or the construction of facilities, we cannot determine with
certainty the cost to open each proposed branch or the proposed de novo bank.
The actual costs could be significantly higher than estimated. Citrus will use
the remainder of the proceeds to support initial loan growth at the new branch
offices, as well as new loan growth at Citrus Bank's three existing offices, and
for general corporate purposes. Management will have significant discretion
regarding how and when the balance of such proceeds will be applied toward the
expansion of the Company's business. Pending the application of proceeds in the
manner set forth above, the net proceeds will initially be invested by the
Company in short-term, interest-bearing securities.
10
<PAGE>
The following table illustrates the use of proceeds based upon a
minimum and a maximum offering:
<TABLE>
<CAPTION>
Shares Shares
Use of Proceeds 1,000,000 % 1,200,000 %
--------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Estimated Net Proceeds $10,270,534 100.0% $12,316,534 100.0%
=========== ===== =========== =====
Capital for de novo bank $5,000,000 48.7% $5,000,000 40.6%
Other expansion activities 4,770,534 46.4% 6,816,534 55.3%
General corporate purposes 500,000 4.9% 500,000 4.1%
------- --- ------- ---
Total Use of Proceeds $10,270,534 100.0% $12,316,534 100.0%
=========== ====== =========== ======
</TABLE>
The following is a schedule of estimated expenditures to be made by the
proposed Dade County bank out of the proceeds from the sale of its capital stock
to Citrus:
Organizational expenses of the proposed bank
including application, legal and consulting fees $ 150,000
Pre-opening expenses of the proposed bank
including salaries, occupancy and other expenses 100,000
Acquisition of bank premises (land and site
improvements only) ............................. 850,000
Furniture, fixtures and equipment ................ 150,000
Cash, investments and other assets ............... 3,750,000
----------
Total uses of capital ................... $5,000,000
==========
The above described expenditures are estimates only and assume the
proposed bank will commence operations sometime during the third or fourth
quarter of 1999. Actual expenses may exceed these amounts. Organizational and
pre-opening costs will be charged to expense when incurred.
11
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1998, and as adjusted to give effect to the sale of
a minimum of 1,000,000 shares and a maximum of 1,200,000 shares of common stock
offered hereby, at an assumed public offering price of $11.00 per share, net of
estimated offering expenses.
<TABLE>
<CAPTION>
As Adjusted As Adjusted
for Minimum for Maximum
Actual Offering(1) Offering(1)
------ ----------- -----------
(Dollars in Thousands)
Borrowings:
<S> <C> <C> <C>
FHLB advances, 5.26% to 5.76%,
maturing over 1 year $ 342 $ 342 $ 342
======== ======== ========
Stockholders' equity:
Preferred Stock, $5.00 par value, authorized and
unissued 1,000,000 shares $ - $ - $ -
Common Stock, $3.15 par value, 10,000,000 shares
authorized, 952,296 issued
and outstanding (1,952,296 shares
at the minimum offering and 2,152,296 shares
at the maximum offering) 3,007 6,157 6,787
Additional paid-in capital 3,149 10,270 11,686
Retained earnings 225 225 225
Net unrealized holding losses on securities (39) (39) (39)
-------- -------- --------
Total stockholders' equity $ 6,342 $ 16,613 $ 18,659
======== ======== ========
Total capitalization $ 6,684 $ 16,955 $ 19,001
======== ======== ========
</TABLE>
(1) Excludes 532,385 shares of common stock issuable pursuant to outstanding
stock options and stock warrants at an average exercise price of $6.31 per
share, assuming all options were currently exercisable.
MARKET FOR COMMON STOCK
There is currently no established public trading market in the common
stock. The Company is aware of only limited trades occurring recently in its
shares, with the range of prices between $10.00 to $11.00 per share.
Following the offering the common stock will be traded on the OTC Bulletin
Board under the trading symbol "____". The sales agent has advised Citrus that
upon completion of the offering it intends to act as a "market maker" in the
common stock. However, the sales agent is not required to do so and any such
market making activity may be discontinued at any time without notice. Making a
market in securities involves maintaining bid and ask quotations and being able,
as principal, to effect transactions at those quoted prices, subject to various
securities laws and other regulatory requirements. The development of a public
trading market depends, however, on the existence of willing buyers and sellers,
the presence of which is not within the control of the Company, the sales agent,
or any market maker.
We intend to list the common stock on the Nasdaq SmallCap Market as soon as
we meet the requirements to do so, but we do not expect to meet these listing
requirements for at least one year following the offering. The decision whether
to apply for listing remains in the discretion of the Company. There is no
assurance that we will apply for or be accepted for listing within any
particular period of time, if at all. See "RISK FACTORS - Limited Trading
Market". As of the date of this Prospectus, Citrus' shares of common stock are
held by approximately 490 shareholders of record.
DILUTION
At September 30, 1998, the Company had a net tangible book value of
approximately $6.3 million, or $6.66 per share. Net tangible book value per
share represents the amount of Citrus' stockholders' equity, less intangible
assets, divided by the number of shares of common stock outstanding. Dilution
per share to new investors represents the difference between the amount per
share paid by purchasers of shares of common stock in this offering and the pro
12
<PAGE>
forma net tangible book value per share of common stock immediately after
completion of the offering. The following table illustrates the per share
dilution to new investors after (i) giving effect to the sale by Citrus of a
minimum of 1,000,000 shares and a maximum of 1,200,000 shares of common stock in
this offering (at an assumed public offering price of $11.00 per share), (ii)
deducting estimated offering expenses, and (iii) giving effect to the
application of the estimated net proceeds as set forth under "Use of Proceeds":
<TABLE>
<CAPTION>
Minimum Maximum
Offering Offering
-------- --------
<S> <C> <C> <C> <C>
Assumed public offering price per share ...................... $ 11.00 $ 11.00
Net tangible book value per share at September 30, 1998 ...... $ 6.66 $ 6.66
Increase per share attributable to new investors ............. 1.85 2.01
------ ------
Pro forma net tangible book value per share after the offering 8.51 8.67
---- ----
Dilution per share to new investors .......................... $ 2.49 $ 2.33
========= =========
</TABLE>
The following tables set forth on a pro forma basis, as of September
30, 1998, (a) the number of shares of common stock purchased from Citrus prior
to the offering and the number of shares purchased in the offering, and (b) the
total consideration and average price per share paid to Citrus with respect to
common stock held by the existing shareholders of Citrus and to be paid by new
investors in the offering (based upon an assumed public offering price of $11.00
per share).
<TABLE>
<CAPTION>
Based on the maximum offering:
Shares Purchased Total Consideration Average Price
---------------- ------------------- -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................... 952,296 44.2% $ 6,156 31.8% $ 6.46
New investors............................... 1,200,000 55.8 13,200 68.2 $11.00
--------- ------ -------- ------
Total.............................. 2,152,296 100.0% $19,356 100.0%
========= ===== ======= =====
Based on the minimum offering:
Shares Purchased Total Consideration Average Price
---------------- ------------------- -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing shareholders....................... 952,296 48.8% $ 6,156 35.9% $ 6.46
New investors............................... 1,000,000 51.2 11,000 64.1 $11.00
--------- ------ -------- -------
Total.............................. 1,952,296 100.0% $17,156 100.0%
========== ====== ======= ======
</TABLE>
Organizers, founders and proposed directors received in the initial
offering, for no additional consideration, warrants to purchase additional
shares of common stock at $6.31 per share at any time until April 13, 2000, at
which time any warrants not exercised will expire. The foregoing tables assume
no exercise of any outstanding warrants or outstanding stock options. As of the
date of this Prospectus, there are outstanding options to purchase 62,613 shares
of common stock and outstanding warrants to purchase 469,772 shares of common
stock, all at an exercise price of $6.31 per share. If all outstanding options
and warrants are exercised, the pro forma net tangible book value per share
immediately after the minimum offering and maximum offering would be $8.51 and
$8.67, respectively, representing dilution per share to investors in this
offering of $2.49 and $2.33, respectively.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the years ended December 31,
1997 and 1996, and the nine months ended September 30, 1998 and 1997, are
derived from the financial statements and other data of the Company. The
financial statements for the years ended December 31, 1997 and 1996, were
audited by Stevens, Thomas, Schemer & Sparks, P.A., independent auditors. The
selected financial data should be read in conjunction with the financial
statements of the Company, including the accompanying notes, included elsewhere
herein (data in thousands except per share and percentages).
<TABLE>
<CAPTION>
At or for the At or for the
Nine Months Ended September 30, Year Ended December 31,
------------------------------- -----------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total interest income $ 4,765 $ 4,096 $ 5,514 $ 4,973
Total interest expense 2,158 1,860 2,482 2,288
Net interest income before provision for credit losses 2,607 2,236 3,032 2,685
Provision for credit losses (21) 237 269 352
Net interest income after provision for credit losses 2,628 1,999 2,763 2,333
Noninterest income 325 284 399 371
Noninterest expense 2,209 2,088 2,775 2,573
Provision for income taxes 280 74 137 46
Net income 464 121 250 85
Balance Sheet Data:
Total assets $ 80,475 $ 68,971 $ 69,098 $ 66,416
Earning assets 74,004 62,437 61,599 59,901
Investment securities(1) 7,300 9,520 9,283 9,499
Loans (2) 60,150 50,868 50,538 51,024
Allowance for credit losses 421 395 431 354
Deposit accounts 73,124 61,084 62,601 58,646
Stockholders' equity 6,342 5,695 5,822 5,427
Share Data (3):
Basic earnings per share (3) $ 0.49 $ 0.14 $ 0.26 $ 0.09
Diluted earnings per share (3) $ 0.40 $ 0.11 $ 0.21 $ 0.07
Book value per share (period end) (4) $ 6.66 $ 5.98 $ 6.11 $ 5.77
Tangible book value per share (period end) (4) $ 6.66 $ 5.98 $ 6.11 $ 5.77
Weighted average shares outstanding (3):
Used for basic earnings per share 952 860 948 941
Used for diluted earnings per share 1,172 1,057 1,168 1,160
Performance Ratios:
Return on average assets 0.81% 0.24% 0.37% 0.14%
Return on average equity 11.48% 2.96% 4.46% 1.55%
Interest-rate spread during the period 4.23% 4.11% 4.17% 4.09%
Net interest margin (5) 4.95% 4.81% 4.88% 4.76%
Efficiency (6) 75.42% 82.86% 80.88% 84.20%
Asset Quality Ratios:
Allowance for credit losses to period end loans (2) 0.70 % 0.78% 0.85% 0.69%
Net charge-offs to average loans (0.03)% 0.52% 0.38% 0.82%
Nonperforming assets to period end loans and
foreclosed property (2) 1.36% 2.68% 2.97% 2.81%
Nonperforming assets to period end total assets 1.03% 2.76% 2.19% 2.17%
Capital and Liquidity Ratios (7):
Average equity to average assets 7.05% 8.10% 8.28% 8.96%
Leverage (4.00% required minimum) 7.14% 7.78% 7.93% 8.07%
Risk-based capital:
Tier 1 10.17% 9.39% 10.82% 10.82%
Total 10.90% 10.10% 11.68% 11.56%
Average loans to average deposits 98.54% 97.21% 96.39% 95.72%
- --------------------
(1) Securities held-to-maturity are stated at amortized cost, and
securities for sale are stated at fair value.
(2) Loans are stated net of unearned income, before allowance for credit
losses.
(3) Net income per share is computed using the weighted average number of
shares of common stock and dilutive common stock equivalents from stock
options (using treasury stock method).
(4) Excludes the effect of any outstanding stock options.
(5) Net interest income divided by average earning assets.
(6) Noninterest expense divided by the sum of net interest income and
income, net of gains and losses on sales of assets.
(7) Capital and liquidity ratios are for the Bank, not the Company.
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Citrus 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. 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.
The Company has grown from approximately $61.5 million in total assets,
$43.4 million in loans, $53.8 million in deposits, and $5.4 million in
stockholders' equity at December 31, 1995, to approximately $80.5 million in
total assets, $60.2 million in loans, $73.1 million in deposits, and $6.3
million in stockholders' equity at September 30, 1998. The following discussion
should be read in conjunction with the preceding "Selected Consolidated
Financial Data" and the Company's Financial Statements and the Notes thereto and
the other financial data included elsewhere in this Prospectus.
Results of Operations
Net Income
The Company's net income for the nine months ended September 30, 1998,
was $464,000, or $0.49 per share, as compared to $121,000, or $0.14 per share,
for the nine months ended September 30, 1997. This improvement 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. This improvement also reflects a provision for credit
losses for the nine months ended September 30, 1998 of $(21,000) versus $237,000
for the nine months ended September 30, 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 over the
same period in 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 1997 and 1996
levels of 0.37% and 0.14%, respectively.
The Company's net income was $250,000, or $0.26 per share, for the year
ended December 31, 1997, as compared to $85,000, or $0.09 per share, for the
year ended December 31, 1996. The improvement in net income from 1996 to 1997
resulted primarily from a $347,000 increase in net interest income, which is
attributable to the Company's growth, higher net interest margins, and improved
asset quality during these periods. Total assets at December 31, 1997, were
$69.1 million as compared to $66.4 million at December 31, 1996. Average earning
assets increased to $62.2 million during 1997 as compared to $56.4 million
during 1996. Average total asset growth was principally attributable to a net
increase in average loans of $4.6 million during 1997.
A $28,000 increase in noninterest income in 1997 as compared to 1996
also contributed to the improvement in net income. Increases in noninterest
income resulted from increased deposit and related account charges associated
with an increase in deposit balances of $4.0 million from year-end 1996 to
year-end 1997. The increases in net interest income and noninterest income were
partially offset by a $202,000 increase in noninterest expense. All components
of noninterest expense increased with the exception of other miscellaneous
expenses. The increases in expenses primarily result from increases in staff
during this period, increased costs associated with the new banking center
opened in September 1996, the new courier service, and other equipment
acquisitions, upgrades, and repairs.
15
<PAGE>
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 $2.6 million for the nine months ended
September 30, 1998, as compared to $2.0 million for the nine months ended
September 30, 1997. This 31.5% increase reflected the substantial growth of the
Company's loan portfolio between these periods, which resulted in marginal
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 improvement in the average rate on loans from 9.5%
for the nine months ended September 30, 1997 to 9.9% for the first nine months
of 1998 and that loans comprised 82% of earning assets during the first nine
months ended September 30, 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.
Net interest income totaled $2.8 million in 1997 and $2.3 million in
1996. Net interest spread was 4.2% in 1997 as compared to 4.1% in 1996. The
Company's net interest margin also increased to 4.9% in 1997 as compared to 4.8%
in 1996. The net interest spread and net interest margin increased from 1996 to
1997 primarily because of a slight increase in the average yield on loans of
9.7% in 1997 as compared with 9.6% in 1996, and no change in the average rates
paid on interest-bearing liabilities. Also, the total amount of earning assets
increased by $5.8 million between the two periods.
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.
[Table Follows This Page]
16
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Income and Expenses, and Rates (dollars in thousands)
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>
17
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
---- ----
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 $ 51 $ 3 5.9% $ 100 $ 7 7.0%
Taxable securities 9,549 544 5.7% 9,981 562 5.6%
Federal funds sold 2,621 140 5.3% 1,015 54 5.3%
Net loans 49,965 4,827 9.7% 45,327 4,350 9.6%
------- ------ ------- ------
Total earning assets 62,186 5,514 8.9% 56,423 4,973 8.8%
------ ------
Non-earning assets 5,523 4,884
------ -------
Total assets $67,709 $61,307
======= =======
Interest-bearing liabilities:
NOW and money market deposits $ 3,427 43 1.3% $ 3,207 49 1.5%
Savings 8,642 256 3.0% 6,778 173 2.6%
Time deposits 39,768 2,125 5.3% 37,369 2,005 5.4%
Other borrowings 1,016 58 5.7% 1,095 61 5.6%
-------- ------ -------- -------
Total interest-bearing liabilities 52,853 2,482 4.7% 48,449 2,288 4.7%
------ --------
Noninterest-bearing liabilities 9,247 7,365
Stockholders' equity 5,609 5,493
-------- --------
Total liabilities and stockholders' equity $67,709 $61,307
======= =======
Net interest income $3,032 $2,685
====== ======
Interest-rate spread 4.2% 4.1%
==== ====
Net interest margin 4.9% 4.8%
==== ====
Ratio of average earning assets to
average interest-bearing liabilities 117.7% 116.5%
====== ======
</TABLE>
18
<PAGE>
Analysis of Changes in Net Interest Income. The following tables
present the dollar amount of changes in interest income and interest expense
attributable to changes in volume and the amount attributable to changes in
rate. The combined effect in both volume and rate which cannot be separately
identified has been allocated proportionately to the change due to volume and
due to rate.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
vs. the Nine Months Ended September 30, 1997
Increase (Decrease) Due to:
--------------------------------------------
Volume/
Volume Rate Rate Total
------ ---- ---- -----
(dollars in thousands)
Earning assets:
<S> <C> <C> <C> <C>
Interest-earning deposits $ - $ - $ - $ -
Taxable securities (46) (32) 4 (74)
Federal funds sold 74 4 2 80
Net loans 525 120 18 663
---- ---- ----- -----
Total earning assets 553 92 24 669
---- ----- ----- -----
Interest-bearing liabilities:
NOW and money-market deposits - 4 - 4
Savings 62 11 8 81
Time deposits 154 53 5 212
Other borrowings 2 (1) - 1
------ ----- ------ ------
Total interest-bearing liabilities 218 67 13 298
---- ------ ----- -----
Net interest income before provision $ 335 $ 25 $ 11 $ 371
for credit losses ===== ===== ==== =====
For the Year Ended December 31, 1997
vs. the Year Ended December 31, 1996
Increase (Decrease) Due to:
------------------------------------
Volume/
Volume Rate Rate Total
------ ---- ---- -----
(dollars in thousands)
Earning assets:
Interest-earning deposits $ (3) $ (1) $ - $ (4)
Taxable securities (25) 7 - (18)
Federal funds sold 86 - - 86
Net loans 445 29 3 477
----- ------ ----- ------
Total earning assets 503 35 3 541
----- ------ ----- ------
Interest-bearing liabilities:
NOW and money-market deposits 3 (9) - (6)
Savings 48 28 7 83
Time deposits 129 (8) (1) 120
Other borrowings (4) 2 (1) (3)
------ ------ ----- -------
Total interest-bearing liabilities 176 13 5 194
----- ------ ------ ------
Net interest income before provision $ 327 $ 22 $ (2) $ 347
===== ===== ===== =====
for credit losses
</TABLE>
19
<PAGE>
Interest Sensitivity. The Company monitors and manages the pricing and
maturity of its assets and liabilities in order to diminish the potential
adverse impact that changes in interest rates could have on its net interest
income. A monitoring technique employed by the Company is the measurement of the
Company's interest sensitivity "gap," which is the positive or negative dollar
difference between assets and liabilities that are subject to interest rate
repricing within a given period of time. The Company also performs
asset/liability modeling to assess the impact varying interest rates and balance
sheet mix assumptions will have on net interest income. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity, or
adjusting the interest rate during the life of an asset or liability. Managing
the amount of assets and liabilities repricing in the same time interval helps
to hedge the risk and minimize the impact on net interest income of rising or
falling interest rates. The Company evaluates interest sensitivity risk and then
formulates guidelines regarding asset generation and repricing, funding sources
and pricing, and off-balance sheet commitments in order to decrease interest
rate sensitivity risk.
The following table illustrates the Company's interest rate sensitivity
at September 30, 1998, as well as the cumulative gap position at September 30,
1998, and December 31, 1997 (dollars in thousands).
<TABLE>
<CAPTION>
September 30, 1998
------------------
More Than
Three More Than
Three Months One Year
Months to One to Five Over Five
Or Less Year Years Years Total
------- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Assets
Earning assets
Interest-bearing deposits $ 7 $ - $ - $ - $ 7
Federal funds sold 6,700 - - - 6,700
Securities (1) 511 - 6,112 677 7,300
Loans (2) 23,169 9,349 20,834 6,645 59,997
------- -------- ------- ------- -------
Total earning assets 30,387 9,349 26,946 7,322 74,004
------- -------- ------- ------- -------
Liabilities
Interest-bearing deposits
Money market and NOW deposits (1) 6,812 - - - 6,812
Savings deposits (1) 7,542 - - - 7,542
Certificates of deposit 7,187 36,328 5,489 - 49,004
-------- -------- ------- ----------- -------
Total interest-bearing deposits 21,541 36,328 5,489 - 63,358
Other borrowings - - 342 - 342
------------ ------------- --------- ------------ ---------
Total interest-bearing liabilities 21,541 36,328 5,831 - 63,700
-------- --------- -------- ------------ -------
Interest-sensitive gap per period $ 8,846 $(26,979) $21,115 $ 7,322 $10,304
======= ======== ======= ======== =======
Cumulative gap at September 30, 1998 $ 8,846 $(18,133) $ 2,982 $10,304
======= ======== ======== =======
Ratio of cumulative gap to total earning assets
at September 30, 1998 12.0% (24.5)% 4.0% 13.9%
===== ======= ==== =====
Ratio of cumulative gap to total assets
at September 30, 1998 11.0% (22.5)% 3.7% 12.8%
===== ======= ==== =====
Cumulative gap at December 31, 1997 $(5,970) $ (6,643) $ 259 $ 9,314
======= ========= ========= ========
Ratio of cumulative gap to total earning assets
at December 31, 1997 (9.7)% (10.8)% 0.4% 15.1%
====== ======= ==== =====
Ratio of cumulative gap to total assets
at December 31, 1997 (8.6)% (9.6)% 0.4% 13.5%
====== ====== ==== =====
- --------------------
(1) Investments were scheduled through their contractual maturity dates.
Excludes noninterest-bearing deposit accounts. Money market, NOW, and
savings deposits were regarded as maturing immediately. All other time
deposits were scheduled through the maturity dates.
(2) In preparing the table above, adjustable-rate loans were included in the
period in which the interest rates are next scheduled to adjust rather than
in the period in which the loans mature. Fixed-rate loans were scheduled
according to their contractual maturities. Nonaccrual loans of $153,000
were excluded from above.
</TABLE>
20
<PAGE>
The Company generally would benefit from increasing market rates of
interest when it has an asset-sensitive gap and generally from decreasing market
rates of interest when it is liability sensitive. The Company currently is
liability sensitive over the three months to one year time frame. However, the
Company's gap analysis is not a precise indicator of its interest sensitivity
position. The analysis presents only a static view of the timing of maturities
and repricing opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally. For example,
rates paid on a substantial portion of core deposits may change contractually
within a relatively short time frame, but those rates are viewed by management
as significantly less interest-sensitive than market-based rates such as those
paid on non-core deposits. Accordingly, management believes a liability
sensitive position is not as indicative of the Company's true interest
sensitivity as it would be for an organization which depends to a greater extent
on purchased funds to support earning assets. Net interest income is also
affected by other significant factors, including changes in the volume and mix
of earning assets and interest-bearing liabilities.
Provision and Allowance for Credit 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 allowance for credit
losses 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 credit losses charged against income. Loans
are charged against the provision when management believes that the
collectibility of the principal is unlikely. The provision is an estimated
amount that management believes will be adequate to absorb losses inherent in
the loan portfolio based on evaluations of its collectibility. The evaluations
take into consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, specific problem loans and commitments,
and current anticipated economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to
recognize losses on loans, future additions to the provision may be necessary
based on changes in economic conditions.
At September 30, 1998, the allowance for credit losses amounted to
$421,000, or 0.70%, of outstanding loans. At December 31, 1997 and 1996, the
allowance for credit losses amounted to $431,000 and $354,000, respectively. The
allowance represented 0.85% and 0.69% of outstanding loans at December 31, 1997
and 1996, respectively. The Company's provision for credit losses was $(21,000),
$269,000, and $352,000 for the nine months ended September 30, 1998, and for the
years ended December 31, 1997 and 1996, respectively. The provision was made
based on management's assessment of general credit loss risk and asset quality.
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.
21
<PAGE>
The Company discontinues accrual of interest on loans when management
believes, after considering economic and business conditions and collection
efforts, that a borrower's financial condition is such that the collection of
interest is doubtful. Generally, the Company will place a delinquent loan in
nonaccrual status when the loan becomes 90 days or more past due. At the time a
loan is placed in nonaccrual status, all interest which has been accrued on the
loan but remains unpaid is reversed and deducted from earnings as a reduction of
reported interest income. No additional interest is accrued on the loan balance
until the collection of both principal and interest becomes reasonably certain.
A potential problem loan is one in which management has serious doubts
about the borrower's future performance under the terms of the loan contract.
These loans are current as to principal and interest and, accordingly, they are
not included in nonperforming assets categories. The level of potential problem
loans is one factor used in the determination of the adequacy of the allowance
for credit losses.
The following table sets forth the information with respect to activity
in the Company's allowance for credit losses during the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Allowance at beginning of period $ 431 $ 354 $ 373
------- ------- -------
Charge-offs:
Real estate loans - 167 776
Installment loans 33 19 67
Credit cards and related plans 5 16 33
Commercial and all other loans - 10 3
--------- -------- --------
Total charge-offs 38 212 879
-------- ------- -------
Recoveries:
Real estate loans 41 - 506
Installment loans 7 15 1
Credit cards and related plans - 5 1
Commercial and all other loans 1 - -
--------- --------- ---------
Total recoveries 49 20 508
-------- -------- -------
Provision for credit losses charges (credited) to operations (21) 269 352
-------- ------- -------
Allowance at end of period $ 421 $ 431 $ 354
======= ======= =======
Ratio of net charge-offs during the period to average
loans outstanding during the period 0.0% 0.4% 0.8%
==== ==== ====
</TABLE>
22
<PAGE>
The following table sets forth certain information on nonaccrual loans
and real estate owned, the ratio of such loans and real estate owned to total
assets as of the dates indicated, and certain other related information (dollars
in thousands):
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans:
Real estate loans $ - $ 601 $ 413
Installment loans 2 10 -
Credit cards and related plans - - -
Commercial and all other loans 151 172 315
------ ------ ------
Total nonaccrual loans 153 783 728
------ ------ ------
Accruing loans over 90 days delinquent:
Real estate loans 228 336 260
Installment loans 15 5 9
Credit cards and related plans - - 6
Commercial and all other loans 40 - 50
------- -------- -------
Total nonaccrual loans over 90 days delinquent 283 341 325
------ ------ ------
Troubled debt restructurings past due over 30 days
and not included above - - -
------- -------- --------
Total nonperforming loans 436 1,124 1,053
------ ------ ------
Other real estate owned:
Real estate acquired by foreclosure or deed in lieu
of foreclosure 390 390 390
------ ------- -------
Total nonperforming loans and other real estate owned $ 826 $1,514 $1,443
====== ====== ======
Total nonperforming loans as a percentage of total loans 0.7% 2.2% 2.1%
==== ==== ====
Total nonperforming loans as a percentage of total assets 0.5% 1.6% 1.6%
==== ==== ====
Total nonperforming loans and other real estate owned
as a percentage of total assets 1.0% 2.2% 2.2%
==== ==== ====
Troubled debt restructurings and modified loans:
Current $ 685 $1,525 $1,795
Past due over 30 days and less than 90 days - - -
Past due over 90 days and included above - 303 413
-------- ------- -------
$ 685 $1,828 $2,208
====== ====== ======
</TABLE>
Loans on which interest was not being accrued totaled $153,000,
$783,000, and $728,000 at September 30, 1998, December 31, 1997 and 1996,
respectively. Had interest been accrued on these nonaccrual loans at originally
contracted rates, interest income (before income taxes) would have been
increased by approximately $9,000, $100,000, and $69,000, respectively.
A loan is considered impaired when, according to the contractual terms
of the contract, it is probable that the Company will be unable to collect all
amounts due. At September 30, 1998, the Company had no loans classified as
impaired.
23
<PAGE>
The following table presents information regarding the Company's total
allowance for credit losses as well as the allocation of such amounts to the
various categories of loans (dollars in thousands):
<TABLE>
<CAPTION>
At September 30, At December 31,
------------------------ --------------------------------
1998 1997 1996
---- ---- ----
Loans Loans Loans
to to to
Total Total Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Commercial real estate loans $ 104 29% $ 103 30% $ 120 26%
Residential real estate loans 42 43% 28 41% 36 48%
Commercial loans 211 21% 218 20% 122 18%
Consumer loans 64 7% 82 9% 76 8%
------ ---- ------ ----- ------ -----
Total allowance for credit losses $ 421 100% $ 431 100% $ 354 100%
===== ==== ===== ==== ===== ====
Allowance for credit losses as a
percentage of the total loans
outstanding 0.70% 0.85% 0.69%
===== ===== =====
</TABLE>
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 $41,000 during the first nine
months of 1998 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 $268,000 for the first nine months of 1998 as compared to
$231,000 for the first nine months of 1997. Noninterest income for the year
ended December 31, 1997, was $399,000 as compared to $371,000 for 1996. This
increase is primarily a result of the growth in deposit account balances and the
related deposit account fees. These fees amounted to $327,000 in 1997 as
compared to $316,000 in 1996. The increase in fees and service charges is
reflected in the overall growth in deposit accounts with transaction fees.
Noninterest- bearing deposit accounts increased from $6.7 million at December
31, 1995, to $9.8 million at September 30, 1998.
Noninterest Expense. Total noninterest expense increased by $121,000
during the first nine months of 1998 as compared to the same period in 1997 as a
result of the Company's continued growth. 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 due to lower legal and
professional costs associated with the resolution of two problem credits.
Noninterest expense increased from $2.6 million for the year ended
December 31, 1996, to $2.8 million for the year ended December 31, 1997.
Salaries and benefits were up $138,000 to $1,280,000 reflecting additions to
staff for the new armored car service as well as several staff additions to
complement loan and deposit growth. This increase also reflects a full year's
staff expense on the Bank's Barefoot Bay Center that opened in September, 1996.
Occupancy expenses increased $12,000 from 1996 largely representing expenses
related to the new banking center. Furniture and equipment expenses were up
$53,000 primarily attributable to the new banking center and the armored car
service as well as computer equipment repairs and upgrading. Miscellaneous
expenses remained largely unchanged at $1,043,000. Legal expenses, primarily for
the aforementioned problem credits, increased to $221,000 from $155,000 in 1996
and make up the largest single other operating expense. Offsite computer
services accounted for $178,000 of the expenses and was up from $156,000 in
1996.
24
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth the primary components of other
operating expenses for the periods indicated (dollars in thousands):
For the Nine Months Ended For the Years Ended
September 30 December 31,
---------------------- ----------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Advertising and public relations $ 49 $ 42 $ 69 $ 54
Professional fees 123 272 288 266
Data processing 144 134 153 140
Stationery, printing, and supplies 45 45 58 57
Insurance 44 38 24 47
Telephone 36 28 40 37
Other miscellaneous expenses 297 244 411 443
--------- --------- --------- ---------
$ 738 $ 803 $ 1,043 $ 1,044
======= ======= ======= =======
</TABLE>
Income Tax Expense
The income tax provision was $280,000 for the first nine months of
1998, or an effective rate of 37.6%. This compares with an effective rate of
37.9% for the same period in 1997.
The income tax provisions for the years ended December 31, 1997 and
1996, were $137,000 and $46,000, respectively. The effective rates for 1997 and
1996 were 35.4% and 35.1%, respectively.
Analysis of Financial Condition
Earning Assets
Loans. Loans typically provide higher yields than the other types of
earning assets, and thus one of the Company's goals is for loans to be the
largest category of the Company's earning assets. At September 30, 1998, loans
accounted for 82% of earning assets, as compared to 80% of earning assets at
both December 31, 1997 and 1996. Management attempts to control and
counterbalance the inherent credit and liquidity risks associated with the
higher loan yields without sacrificing asset quality to achieve its asset mix
goals. Loans averaged $50.0 million during 1997, as compared to $45.3 million in
1996. Since 1997, loans have averaged $57.5 million.
The following table shows the composition of the Bank's loan portfolio
by category (dollars in thousands):
<TABLE>
<CAPTION>
Composition of Loan Portfolio
-----------------------------
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
------ ------ -----
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Commercial real estate $17,275 29% $15,008 30% $13,591 26%
Residential real estate 25,572 43% 20,914 41% 24,389 48%
Commercial loans 12,886 21% 10,330 20% 9,139 18%
Consumer loans 4,421 7% 4,312 9% 3,939 8%
--------- ------ --------- ------ --------- -----
60,154 100% 50,564 100% 51,058 100%
==== ==== ====
Add (subtract):
Deferred costs (fees) net (4) (26) (34)
Allowance for credit losses (421) (431) (354)
-------- -------- --------
Loans, net $59,729 $50,107 $50,670
======= ======= =======
</TABLE>
25
<PAGE>
In the context of this discussion, a "real estate mortgage loan" is
defined as any loan, other than loans for construction purposes, secured by real
estate, regardless of the purpose of the loan. The Company follows the common
practice of financial institutions in the Company's market area of obtaining a
security interest in real estate whenever possible, in addition to any other
available collateral. This collateral is taken to reinforce the likelihood of
the ultimate repayment of the loan and tends to increase the magnitude of the
real estate loan portfolio component. Generally, the Company limits its
loan-to-value ratio to 80%. The Company's largest category of loans, residential
mortgage loans, totaled $25.6 million and represented 43% of the loan portfolio
at September 30, 1998, compared to $20.9 million and 41% at December 31, 1997
and $24.4 million and 48% at December 31, 1996. A significant portion of
mortgage loans are made to finance owner-occupied real estate. Management
attempts to maintain a conservative philosophy regarding its underwriting
guidelines and believes it will reduce the risk elements of its loan portfolio
through strategies that diversify the lending mix.
The following table reflects the contractual principal repayments
(excluding nonaccrual loans of $153,000) by period of the Company's loan
portfolio at September 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
More Than
Three More Than
Months One Year
Three to One to Five Over Five
Months Year Years Years Total
------ ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Commercial real estate $ 3,304 $2,600 $ 10,063 $1,157 $17,124
Residential real estate 10,713 5,058 4,742 5,059 25,572
Commercial loans 7,443 1,419 3,699 325 12,886
Consumer loans 1,713 272 2,330 104 4,419
--------- -------- --------- -------- --------
Total loans $23,173 $9,349 $20,834 $6,645 $60,001
======= ====== ======= ====== =======
Loans maturing after one year with:
Fixed interest rates $17,356
Floating interest rates 10,123
------
$27,479
=======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans historically has been
substantially less than their average contractual terms due to prepayments. In
addition, due-on-sale clauses on mortgage loans generally give the Company the
right to declare a conventional loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates are substantially higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
rates. Of the $27.5 million in loans due after September 30, 1999, 63% of such
loans have fixed interest rates and 37% have adjustable interest rates.
Origination, Sale, and Repayment of Loans. The Company generally
originates loans on real estate located in its primary market area, defined as
Indian River County and Barefoot Bay, a retirement community in South Brevard
County. Residential mortgage loan originations by the Company are attributable
to depositors, other existing customers, advertising, mortgage brokers, and
referrals from real estate brokers and developers. The Company's residential
mortgage loans generally are originated to ensure compliance with documentation
and underwriting standards which permit their sale to the Federal National
Mortgage Association ("Fannie Mae") and other investors in the secondary market.
The Company has engaged in the sale of whole loans. The Company engages
in the sale of fixed-rate loans and ARM loans to provide liquidity and funding
sources for higher yielding loans.
26
<PAGE>
The following table sets forth total loans originated, repaid, and sold
during the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
At September 30, December 31,
---------------- ------------
1998 1997 1996
---- ---- ----
Originations:
<S> <C> <C> <C>
Commercial real estate loans $ 4,331 $ 8,277 $ 3,997
Residential real estate loans 113,664 29,747 81,231
Commercial loans 10,528 7,027 16,993
Consumer loans 3,191 3,425 1,992
--------- ------- ---------
Total loans originated 131,714 48,476 104,213
Less:
Loans sold 116,501 29,034 66,315
Principal reductions 5,623 19,936 30,242
---------- ---------- --------
Increase (decrease) in total loans $ 9,590 $ (494) $ 7,656
========= ========= ========
</TABLE>
Investment Securities. The investment securities portfolio is a
significant, although declining, component of the Company's total earning
assets. Total securities averaged $8.4 million and $9.4 million for the first
nine months of 1998 and 1997, respectively, and $9.5 million in 1997, as
compared to $10.0 million in 1996. This represents 12% and 15% of the average
earning assets for the nine months ended September 30, 1998 and 1997,
respectively, and 15% and 18% of the average earning assets for the years ended
December 31, 1997 and 1996, respectively. The Company attempts to maintain a
portfolio of high quality, highly liquid investments with returns competitive
with short term U.S. Treasury or agency obligations. This objective is
particularly important as the Company continues to emphasize increasing the
percentage of the loan portfolio to total earning assets. The Company primarily
invests in U.S. Treasury securities and securities of other U.S. Government
agencies with maturities up to five years.
The investment portfolio is comprised primarily of U.S. Treasury and
U.S. Government agency securities and mortgage-backed securities. According to
Financial Accounting Standards No. 115, investment portfolio is categorized as
either "held-to- maturity," "available-for-sale," or "trading." Investments
held-to-maturity represent those investments which the Company has the positive
intent and ability to hold to maturity. These investments are carried at
amortized cost. Investments available-for-sale represent those investments which
may be sold for various reasons including changes in interest rates and
liquidity considerations. These investments are reported at fair market value
with unrealized gains and losses being reported as a separate component of
stockholders' equity, net of income taxes. Trading securities are held primarily
for resale and are recorded at their fair values. Unrealized gains or losses on
trading securities are included immediately in earnings. At September 30, 1998,
the Company had no securities categorized as trading.
27
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio. The following table sets forth the carrying value
of the Company's investment portfolio (dollars in thousands):
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Securities available-for-sale:
U. S. Government agency securities $ 2,118 $ 1,104 $ 495
Mortgage-backed securities 3,107 4,265 4,427
Other 677 427 374
-------- -------- ---------
Total $ 5,902 $ 5,796 $ 5,296
======= ======= =======
Securities held-to-maturity:
U. S. Government agency securities $ 479 $ 1,474 $ 1,499
Mortgage-backed securities 919 1,762 2,452
Other - 251 252
---------- -------- --------
Total $ 1,398 $ 3,487 $ 4,203
======= ======= =======
The following table sets forth the amortized cost of the Company's investment
portfolio at the dates indicated (dollars in thousands):
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Securities available-for-sale:
U. S. Government agency securities $ 2,100 $ 1,101 $ 500
Mortgage-backed securities 3,168 4,396 4,643
Other 677 427 374
--------- --------- ---------
Total $ 5,945 $ 5,924 $ 5,517
======= ======= =======
Securities held-to-maturity:
U. S. Government agency securities $ 479 $ 1,474 $ 1,499
Mortgage-backed securities 919 1,762 2,452
Other - 251 252
--------- --------- ---------
Total $ 1,398 $ 3,487 $ 4,203
======= ======= =======
</TABLE>
28
<PAGE>
Investment Maturities. The following table sets forth, by maturity
distribution, certain information pertaining to the securities held to maturity
portfolio as follows (dollars in thousands):
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less to Five Years to Ten Years Over Ten Years Total
---------------- ------------- ------------ -------------- -----
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1998:
U. S. Government
agency securities $ 500 5.4% $2,097 5.0% $ - 0.0% $ - 0.0% $2,597 5.1%
Mortgage-backed securities 11 5.3% 629 5.4% 1,795 5.7% 1,591 5.1% 4,026 5.4%
Other - 0.0% - 0.0% - 0.0% 677 6.0% 677 6.0%
------- ------ ------ ------- -------
Total $ 511 5.4% $2,726 5.1% $1,795 5.7% $2,268 5.4% $7,300 5.4%
======= ====== ====== ====== ======
December 31, 1997:
U. S. Government
agency securities $1,496 4.5% $ 605 6.2% $ 477 3.9% $ - 0.0% $2,578 4.8%
Mortgage-backed securities 599 5.1% 859 5.6% 197 5.8% 4,372 5.6% 6,027 5.6%
Other 251 5.2% - 0.0% - 0.0% 427 6.6% 678 6.1%
------- ------ ------- ------ ------
Total $2,346 4.7% $1,464 5.9% $ 674 4.5% $4,799 5.7% $9,283 5.4%
====== ====== ======= ====== ======
December 31, 1996:
U. S. Government
agency securities $ 995 5.2% $ 499 3.8% $ 500 4.2% $ - 0.0% $1,994 4.6%
Mortgage-backed securities - 0.0% 1,275 5.9% 400 4.6% 5,204 5.8% 6,879 5.7%
Other - 0.0% 252 5.2% - 0.0% 374 6.7% 626 6.1%
------- ------ ------- ------ ------
Total $ 995 5.2% $2,026 5.3% $ 900 4.4% $5,578 5.8% $9,499 5.5%
======= ====== ======= ====== ======
</TABLE>
Short-Term Investments. Short-term investments, which consist of
federal funds sold and securities purchased under agreements to resell and
interest-bearing deposits, averaged $2.7 million in 1997 as compared to $1.1
million in 1996. Since December 31, 1997, short-term investments averaged $4.3
million. At September 30, 1998, and December 31, 1997, short-term investments
totaled $6.7 million and $2.6 million, respectively. During 1998, management has
intentionally sought to increase certificates of deposit to support expected
loan growth. The additional funds generated from recent certificate of deposit
promotions will be deployed into higher earning assets during the remainder of
1998 and into 1999. These funds are a primary source of the Company's liquidity
and are generally invested in an earning capacity on an overnight basis.
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities grew to $59.7 for the first nine
months of 1998, which reflects the general growth in the Bank. Average
interest-bearing liabilities increased approximately $4.4 million, or 9%, to
$52.9 million in 1997, from $48.4 million in 1996.
Deposits. Average interest-bearing deposits increased approximately
$4.5 million, or 9%, to $51.8 million in 1997, from $47.4 million in 1996, and
end of period total noninterest-bearing deposits increased $2.6 million, or 32%,
to $10.7 million in 1997 from $8.1 million in 1996. At September 30, 1998, total
deposits were $73.1 million, compared to $62.6 million at December 31, 1997, an
increase of 17%.
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.
29
<PAGE>
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.
Deposits. Deposits are attracted principally from the Company's primary
market area. The Company offers a broad selection of deposit instruments
including demand deposit accounts, NOW accounts, money market accounts, regular
savings accounts, term certificate accounts, and retirement savings plans (such
as IRA accounts). Certificate of deposit rates are set to encourage longer
maturities as cost and market conditions will allow. Deposit account terms vary,
with the primary differences being the minimum balance required, the time period
the funds must remain on deposit and the interest rate offered.
The Company has emphasized commercial banking relationships in an
effort to increase demand deposits as a percentage of total deposits. The
Company's courier service began operations in the fourth quarter of 1997. The
courier service will serve the Company's business customers primarily in Indian
River County.
Management sets the deposit interest rates weekly based on a review of
deposit flows for the previous week, and a survey of rates among direct
competitors and other financial institutions in Florida.
The following table shows the distribution of, and certain other
information relating to, the Company's deposit accounts by type at the date
indicated (dollars in thousands):
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
---- ---- ----
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 9,766 13.4% $10,723 17.1% $ 8,136 13.9%
NOW deposits 3,282 4.5% 3,701 5.9% 3,386 5.8%
Money-market deposits 3,530 4.8% 4,095 6.5% 3,889 6.6%
Savings deposits 7,542 10.3% 5,993 9.6% 2,987 5.1%
------- ----- ------- ----- ------- -----
Subtotal 24,120 33.0% 24,512 39.1% 18,398 31.4%
------- ----- ------- ----- ------- -----
Certificates of deposit:
3.00% - 3.99% 437 0.6% 192 0.3% 998 1.7%
4.00% - 4.99% 682 0.9% 3,669 5.9% 6,938 11.8%
5.00% - 5.99% 46,595 63.7% 33,934 54.2% 30,885 52.7%
6.00% - 6.99% 1,290 1.8% 294 0.5% 1,427 2.4%
------- ----- ------- ----- ------- -----
Total certificates of deposit (1) 49,004 67.0% 38,089 60.9% 40,248 68.6%
------- ----- ------- ----- ------- -----
Total deposits (2) $73,124 100.0% $62,601 100.0% $58,646 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
(1) Includes individual retirement accounts ("IRA") totaling $3,215,000,
$3,117,000, and $2,511,000 at September 30, 1998, December 31, 1997,
and December 31, 1996, respectively, all of which are in the form of
certificates of deposit.
(2) The deposit portfolio does not contain a concentration from any one
depositor or related group of depositors.
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 and $47.9 million at December
31, 1997 and 1996, respectively. 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.
30
<PAGE>
Jumbo certificates ($100,000 and over) mature as follows (dollars in thousands):
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Due three months or less $ 1,429 $ 2,850 $ 2,619
Due over three months to twelve months 7,747 3,681 6,297
Due over twelve months to three years 1,202 1,548 1,853
Due over three years 177 - -
------- ------- -------
Total $10,555 $ 8,079 $10,769
======= ======= =======
Other time deposits under $100,000 mature as follows (dollars in thousands):
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
---- ---- ----
Due three months or less $ 5,758 $ 8,803 $ 8,938
Due over three months to twelve months 28,581 11,604 14,892
Due over twelve months to three years 3,690 9,603 5,649
Due over three years 420 - -
------- ------- -------
Total $38,449 $30,010 $29,479
======= ======= =======
The following table sets forth the net deposit flows of the Company during the
periods indicated (dollars in thousands):
At September 30, At December 31,
---------------- ---------------
1998 1997 1996
---- ---- ----
Net increase before interest credited $ 8,532 $ 1,498 $ 2,647
Net interest credited 1,991 2,457 2,196
------- ------- -------
Net deposit increase $10,523 $ 3,955 $ 4,843
======= ======== ========
</TABLE>
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>
<CAPTION>
At September 30, At December 31,
---------------- ---------------
Maturity Date Interest Rate 1998 1997 1996
------------- ------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
2000 5.26% $ 113 $ 167 $ 238
2003 5.76% 229 266 317
------- ------- -------
$ 342 $ 433 $ 555
====== ====== ======
</TABLE>
Interest expense on the line of credit and other FHLB advances amounted
to approximately $52,000, $56,000, and $57,000, for the nine months ended
September 30, 1998, and for the years ended December 31, 1997 and 1996,
respectively.
31
<PAGE>
Capital
Total stockholders' equity as of December 31, 1997, was $5.8 million,
an increase of $395,000 or approximately 7% compared with stockholders' equity
of $5.4 million as of December 31, 1996. This increase was attributable to net
income for the year ended December 31, 1997, of $250,000, a $63,000 increase in
the market value of investment securities available-for-sale, and $82,000 in net
proceeds from the issuance of common stock pursuant to the exercise of
outstanding stock options.
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 shareholders'
equity, excluding the unrealized gain (loss) on available-for-sale securities,
minus certain intangible assets. Tier 2 capital consists of the general
allowance for credit losses 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 September 30, 1998, and December 31, 1997 and 1996, as reflected in
the following table.
<TABLE>
<CAPTION>
The following table sets forth the Bank's regulatory capital position
(dollars in thousands):
Actual Minimum(1) Well-Capitalized(2)
Amount % Amount % Amount %
------ - ------ - ------ -
As of September 30, 1998:
<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%
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets) $ 5,859 11.68% $ 4,014 8.00% $ 5,018 10.00%
Tier I Capital (to Risk-Weighted Assets) $ 5,428 10.82% $ 2,007 4.00% $ 3,011 6.00%
Tier I Capital (to Average Assets) $ 5,428 7.93% $ 2,737 4.00% $ 3,421 5.00%
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets) $ 5,508 11.56% $ 3,812 8.00% $ 4,765 10.00%
Tier I Capital (to Risk-Weighted Assets) $ 5,154 10.82% $ 1,906 4.00% $ 2,859 6.00%
Tier I Capital (to Average Assets) $ 5,154 8.07% $ 2,555 4.00% $ 3,194 5.00%
- -------------------
(1) The minimum required for adequately capitalized purposes.
(2) To be "well-capitalized" under the FDIC's Prompt Corrective Action
regulations.
</TABLE>
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
32
<PAGE>
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.
The Company's federal funds sold position, which is typically its
primary source of liquidity, averaged $2.6 million during the year ended
December 31, 1997, and was $2.5 million at December 31, 1997. The Company also
maintains federal funds purchased lines with several financial institutions, in
the aggregate amount of $1,750,000, although these have not been utilized during
the first nine months of 1998.
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. The Company intends
to use the net proceeds of the offering to finance the formation of de novo
banks or the acquisition of existing banks, as well as to support the continued
growth of the Company. See "Use of Proceeds". The Company anticipates that the
net proceeds of the offering will be adequate for the establishment of these
branches and the Company's capital needs for the foreseeable future. However,
should the Company need additional capital to support the branches or the
Company's growth, the Company would likely obtain loans from third parties.
Financial Reporting
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share ("SFAS
128"). SFAS 128 requires the disclosure of basic earnings per share, in
replacement of primary earnings per share, and diluted earnings per share, in
replacement of fully diluted earnings per share. Primary earnings per share is
based on the weighted average number of shares of common stock outstanding and
the dilutive effect of options and other common stock equivalents. Basic
earnings per share does not consider any dilution. Diluted earnings per share is
similar to fully diluted earnings per share, which considers all potentially
dilutive securities. SFAS 128 becomes effective with annual and interim
financial statements for periods ending after December 15, 1997. Upon initial
application of SFAS 128, all earnings per share data presented for prior periods
must be restated to conform to the new standard. The Company has adopted SFAS
128 in 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income
("SFAS 130"). SFAS 130 requires an entity to report its change in equity during
the period from transactions and events other than those resulting from
investments by and distributions to owners. All items that are recognized as
comprehensive income are required to be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
becomes effective with annual and interim financial statements for periods
ending after December 15, 1997. The Company has adopted SFAS 130 in 1998.
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. One remaining vendor
processing credit cards has confirmed that year 2000 compliant upgrades will be
delivered by December 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.
33
<PAGE>
Further, the business of many of the Company's customers may be
negatively affected by the Year 2000 issue, and any financial difficulties
incurred by the Company's customers in solving Year 2000 issues could negatively
affect those customers' ability to repay any loans which the Company may have
extended. Therefore, even if the Company does not incur significant direct costs
in connection with responding to the Year 2000 issue, there can be no assurance
that the failure or delay of the Company's customers or other third parties in
addressing the Year 2000 issue or the costs involved in such process will not
have a material adverse effect on the Company's business, financial condition,
or results of operations.
Future Accounting Requirements
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which addresses the accounting
for derivative instruments and provides for matching the timing of gain or loss
recognition on the hedging instrument. Guidance on identifying derivative
instruments is also provided as well as additional disclosures. SFAS 133 becomes
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Earlier application is permitted with certain exceptions. Management does
not anticipate that adoption of SFAS 133 will have a material impact on the
financial condition or results of operations of the Company.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, "Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held-for-Sale by a Mortgage
Banking Enterprise" ("SFAS 134"), which amends existing pronouncements to
clarify the classification of mortgage-backed securities retained after the
securitization of mortgage loans held-for-sale. SFAS 134 becomes effective for
fiscal quarters beginning after December 15, 1998. Earlier application is
permitted. Management does not anticipate that adoption of SFAS 134 will have a
material impact on the financial condition or results of operations of the
Company.
Impact of Inflation
The consolidated financial statements and related data presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which require the measurements of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates. As
discussed previously, management seeks to manage the relationships between
interest sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
BUSINESS
The Company
Citrus is a one-bank holding company headquartered in Vero Beach,
Florida, which operates primarily through its wholly-owned banking subsidiary,
Citrus Bank. Citrus Mortgage Corp., a mortgage brokerage company which has not
yet commenced operations is a wholly owned subsidiary of Citrus which was
established in 1995.
The Bank
Citrus Bank commenced its operations on April 13, 1990. It currently
operates from three full-service offices, its main office in Vero Beach,
Florida, its Sebastian Office which opened in February 1993, and its Barefoot
Bay Office which opened in September 1996. Citrus Bank's deposits are federally
insured up to applicable limits by the FDIC under the Bank Insurance Fund.
The principal sources of funds for Citrus Bank's lending and investing
activities traditionally have been deposits, repayment of loans and earnings
from operations. Citrus Bank's primary sources of income are interest and fees
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on loans, fees on transaction accounts and other activities, gains on sales of
mortgage loans in the secondary market, and interest and dividends on U.S.
Treasury and mortgage-backed securities and other investments. Citrus Bank's
principal costs are interest paid on deposit accounts and operating expenses.
Citrus Bank operates a traditional community banking business through
its retail banking facilities with a friendly and professional staff. Citrus
Bank staff is committed to developing long-term relationships with customers by
offering personalized, quality service. Citrus Bank offers a broad range of
retail and commercial banking services, including various types of deposit
accounts and loan products for small businesses and consumers. The Bank offers
an armored car service to its commercial customers located in Indian River and
Brevard Counties. This service provides deposit pickup and deliveries to present
and prospective customers of Citrus Bank. As part of its "community banking"
approach, Citrus Bank encourages its officers to actively participate in
community organizations.
As of September 30, 1998, Citrus Bank had total assets of $80.2
million, total deposits of $73.3 million and total stockholder's equity of $5.9
million. Citrus Bank is considered a "well-capitalized" financial institution
under regulations adopted by the FDIC. See "REGULATION AND SUPERVISION - Prompt
and Corrective Action."
Primary Service Area
Citrus and Citrus Bank are headquartered in Vero Beach, Florida which
is the county seat for Indian River County. Vero Beach is located approximately
15 miles north of Ft. Pierce and 35 miles south of Melbourne. The City of Vero
Beach has a permanent population of approximately 18,000 while the greater Vero
Beach area has a population of approximately 70,000. Indian River County has a
population of approximately 100,000. The greater Vero Beach area consists of the
land mass located between the Atlantic Ocean and Interstate 95 extending from
the St. Lucie/Indian River County line approximately 10 miles north, and
containing approximately 100 square miles. The Company considers the greater
Vero Beach area as one of its primary service areas.
The greater Vero Beach area has experienced dramatic growth the last
several years, especially in the retail industry. A new regional mall opened in
Vero Beach in 1997, along with a regional manufacturer's discount mall in 1996.
The greater Vero Beach area has also experienced an influx of light industry and
small manufacturing facilities relocating or establishing themselves in the
area. This is due mainly to the high quality of life of the community. Vero
Beach's viable industry base coupled with the reemergence of the New Piper
Aircraft Company gives the area a growing manufacturing base.
Indian River County has a land area of approximately 503 square miles.
It has more than 26 miles of coastline and is served by the Melbourne Regional
Airport in Melbourne, Orlando International Airport in Orlando and Vero Beach
Airport which accommodates private and chartered flights. Indian River County is
one of the fastest growing areas in the State of Florida. The primary business
sectors in Indian River County include citrus, retail and manufacturing, as well
as service-related trades with increasing new business from computer software
companies. Based upon the latest statistical data, the median family income for
Indian River County is $29,612.
Citrus Bank's Sebastian branch is located in northern Indian River
County, Florida. Sebastian has a population of approximately 14,500 residents.
Citrus Bank's Barefoot Bay Branch is located in south Brevard County,
approximately 20 miles north of Vero Beach. Barefoot Bay has a population of
approximately 9,000 residents, most of whom are retired. Both Indian River
County and Barefoot Bay have a seasonal fluctuation of residents. Citrus
estimates that these areas experience an approximate 30% increase in residents
during the winter months.
The Company considers Indian River County and the southern portion of
Brevard County as its current primary geographic market area.
Market Expansion
Citrus intends to expand its operations by establishing a new
commercial bank in Dade County, Florida, and by establishing new branch offices
in Indian River and Brevard counties. We have chosen Dade County for our first
new bank, in part because Dade County is the most populated county in Florida,
growing from approximately 1.9 million residents in 1990 to 2.1 million
residents in 1997. We are currently searching for a site for our Dade County
bank and are focusing on growing communities which we believe lack strong local
community banks. We will look for neighborhoods which have a progressive
business climate, a local newspaper, a strong Chamber of Commerce, and a
separate municipal government. We will also seek areas with services designed to
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meet community needs, such as convenient shopping areas, good medical
facilities, and schools and facilities dedicated to the arts. We believe that
locating a new bank in such a community will provide us with the greatest
opportunity for continued success. We are currently focusing our search in the
Coral Gables area, but we will also consider other communities in Dade County.
Following is certain demographic information with respect to Dade
County, Florida which has been obtained from the University of Florida, Bureau
of Economics and Business Research, and from the FDIC.
Dade County includes, among others, the cities of Miami, Miami Beach,
Kendall, Coral Gables and Homestead. The population of Dade County increased
from approximately 1.9 million people in 1990 to approximately 2.1 million in
1997, representing a 10.5% increase. Dade County is the most populated county in
Florida. Dade County's population is expected to increase to approximately 2.24
million people by the year 2005. In 1994, the Dade County per capita income was
approximately $20,400. As of June 30, 1997, there were 74 financial institutions
with 519 offices operating in Dade County, with $34.1 billion in deposits. This
represents an increase of approximately $1.1 billion from June 30, 1994.
Citrus intends to concentrate on similar locations for its new branch
locations, but will more than likely have multiple branch locations in each
community. These branch locations will be targeted towards business and
population centers within each community. We intend to establish up to three new
branch offices of Citrus Bank in Indian River and Brevard Counties within the
next 18 to 24 months. We anticipate that the first of these branch offices will
be located in Melbourne, Florida. We are currently searching for an appropriate
site that meets the characteristics described above for our proposed Dade County
bank. Our goal is to open this branch prior to December 31, 1999. We have not
yet selected sites for the other two branches, but we intend to search for sites
that meet the characteristics described above for our proposed Dade County bank.
Citrus' ability to expand into these markets will be dependent upon,
among other things, its success in assembling a local management team and local
board of directors for each proposed market. See "USE OF PROCEEDS".
Competition
Citrus experiences competition for attracting deposits and making loans
from other financial institutions, including larger regional bank holding
companies, commercial banks, savings banks, and credit unions. Additional
competition for deposits comes from government securities, money market funds,
mutual fund and securities brokerage firms. The primary factors in competing for
deposits are interest rates, the range of financial services offered,
convenience of office locations, and the flexibility of office hours. The
primary factors in competing for loans include interest rates, loan fees,
flexible terms, and timely loan decisions.
Citrus competes for deposits by offering a variety of deposit programs
geared to its potential customers. We have responded to our competition by
developing strong ties in the local community and providing a high quality of
personal banking services to families, professionals, retirees, and
owner-operated businesses with an emphasis on flexibility and timely responses
to customer demands.
Since January 1996, we have placed an emphasis on originating
commercial loans. We have targeted small- to medium-sized businesses as our
potential customer base, as management believes that large out-of-state
financial institutions that have acquired several local banks have shifted the
focus of the acquired banks away from these business opportunities. We also
originate residential loans by offering various adjustable-rate and fixed-rate
mortgage loan products.
Geographic deregulation has also had a material impact on the financial
industry. As for commercial banks, to date, all but three states have enacted
some form of interstate banking legislation. The most common form of interstate
banking statutes have either regional limitations or reciprocity requirements. A
growing number of states, however, now provide for unrestricted entry. A bank
holding company is now permitted to acquire existing banks across state lines
and may consolidate its interstate subsidiary banks into branches and merge with
a bank in another state, depending upon state laws. Florida has removed most of
the final barriers to interstate banking.
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Lending Activities
General. The Company's primary business is making commercial business,
real estate and consumer loans. As of September 30, 1998, the loan portfolio
totaled $60.2 million, or 75%, of total assets. See "MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Loan Portfolio
Composition."
Loan Underwriting. Loan activities are subject to underwriting
standards and loan origination procedures prescribed by the board of directors
and management. Loan applications are obtained from borrowers to determine the
borrower's ability to repay, and the more significant items on these
applications are verified through the use of credit reports, financial
statements and confirmations. Our loan policy for real estate loans generally
requires that collateral be appraised by an independent, outside appraiser
approved by the board of directors.
Loans are approved at various management levels up to and including the
board of directors, depending on the amount of the loan. Loan approvals are made
in accordance with a chart of delegated authority approved by the board of
directors. Generally, loans of $100,000 or less may be approved by various
authorized individual officers or loan underwriters. Loans over $100,000 usually
require approval by the Loan Committee or board of directors.
General Loan Policies. For real estate loans, Citrus requires a valid
mortgage lien on real estate and a title insurance policy which insures the
validity and priority of the lien. Borrowers must also obtain hazard insurance
policies prior to closing, and when the property is in a flood prone area, flood
insurance is required.
Citrus is permitted to lend up to 100% of the appraised value of the
real property securing a mortgage loan. However, if the amount of a conventional
residential loan (including a construction loan or a combination construction
and permanent loan) originated or refinanced exceeds 90% of the appraised value
or of the purchase price, whichever is less, Citrus is required by federal
regulations to obtain private mortgage insurance on that portion of the
principal amount of the loan that exceeds 90% of the value of the property or
must secure other readily marketable collateral. Citrus will originate
single-family residential mortgage loans with up to a 90% loan-to-value ratio.
Loans over 95% loan-to-value ratio are limited to special community support
programs or one of the FHA, VA, or Farmers Home Administration ("FmHA")
guarantee or insurance programs. The loan-to-value ratio on a home secured by a
junior lien generally does not exceed 85%, including the amount of the first
mortgage on the collateral. With respect to home loans granted for construction
or combination construction/permanent financing, Citrus will lend up to 80% of
the appraised value of the property on an "as completed" basis. Citrus generally
limits the loan-to-value ratio on multi-family residential and commercial real
estate loans to 75% of value. Consumer loans are considered to be loans to
natural persons for personal, family or household purposes, and these loans may
be unsecured, secured by personal property or secured by liens on real estate
which, when aggregated with prior liens, equals or exceeds the appraised value
of the collateral property.
The maximum amount which Citrus could have loaned to one borrower and
the borrower's related entities as of September 30, 1998, was approximately $1.0
million. See "REGULATION AND SUPERVISION - Regulation of Citrus Bank."
Interest rates charged on loans are affected principally by competitive
factors, the demand for such loans and the supply of funds available for lending
purposes. These factors are, in turn, affected by general economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, legislative tax policies and government budgetary matters.
Residential Loans. Citrus currently originates fixed-rate residential
mortgage loans and ARM loans for terms of up to 30 years. As of September 30,
1998, $25.3 million, or 42%, of the Company's total loan portfolio consisted of
one-to-four family residential real estate loans. As of such date, approximately
$5.3 million, or 21%, of these loans were ARM loans.
The residential ARM loans currently being offered have interest rates
that are fixed for a period of one, three or five years and then after the
initial period the interest rate is adjusted annually based upon an index such
as the yield on treasury securities adjusted to a one-year maturity, plus a
margin. Most of Citrus' ARM programs limit the amount of any increase or
decrease in the interest rate at each adjustment and over the life of the loan.
Typical limitations are 2% for each adjustment with a limit of 6% over the life
of the loan. While the Company usually offers an initial rate on ARM loans below
a fully indexed rate, the loan is typically underwritten based on the borrower's
ability to pay at the interest rate which would be in effect after adjustment of
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the loan. ARM loans reduce the risks to the Company concerning changes in
interest rates, but involve other risks because as interest rates increase, the
borrower's required payments increase, thus increasing the potential for
default. Marketability of real estate loans is also affected by the level of
interest rates.
Most of Citrus' fixed rate home loans are originated for 30-year
amortization terms. Borrowers requesting a term of 15 years or less are usually
granted an interest rate slightly lower than is offered for a 30-year amortizing
loan. These loans are originated in compliance with documentation and
underwriting standards in order to permit their sale in the secondary market to
institutional investors such as Fannie Mae. Fixed-rate home loans include a "Due
on Sale" clause which provides the Bank with the contractual right to declare
the loan immediately due and payable in the event the borrower transfers
ownership of the property without Citrus' consent.
Construction Loans. Citrus has and continues to offer adjustable and
fixed-rate residential construction loans to owners wishing to construct their
primary residence and to selected builders/developers in the Company's primary
geographic market. As of September 30, 1998, construction and land development
loans amounted to $4.5 million, or less than 8%, of the total loan portfolio.
Construction loans to individuals usually are originated in connection with the
permanent loan on the property. Construction-permanent loans typically provide
for a construction term of six months to one year followed by the permanent loan
term of up to 30 years. Loans to builders/developers are restricted to homes
that are pre-sold or are constructed on a speculative basis. Loans to builders
for the construction of a home for which there is no immediate buyer at the time
of construction are considered spec loans. Spec loans are typically for one year
and provide for interest only payments during the loan term. The financial
capacity of the builder, the builder's experience, and the credit history of the
builder, as well as present market conditions are reviewed when considering spec
loans. As of September 30, 1998, Citrus had one spec loan totaling $89,000.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of construction cost and of the initial
estimate of the property's value upon completion. During construction, a number
of factors could result in delays and cost overruns. Repayment of Spec Loans
usually depends upon the builder successfully negotiating a sale for the
property. Sales of spec homes are affected by market conditions, interest rates,
and the supply and demand for such products.
Commercial Real Estate Loans. Commercial real estate loans are secured
primarily by office and retail business properties located in the primary
geographic market. These types of loans amounted to $17.3 million, or 29%, of
the total loan portfolio as of September 30, 1998. Commercial real estate loans
may be for a term of up to 25 years, but frequently include a maturity in three
to six years. Citrus generally does not offer fixed-rate commercial real estate
or multi-family real estate loans.
Commercial and multi-family real estate loans are originated with a
loan-to-value ratio generally not exceeding 75%. Loans secured by this type of
collateral will continue to be a part of our future loan program. Commercial and
multi-family real estate loans are generally larger and involve a greater degree
of risk than residential mortgage loans. Because payments on loans secured by
commercial property depend to a large degree on results of operations and
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
At September 30, 1998, the largest commercial real estate loan was $924,000
secured by motel property located in Okeechobee, Florida, and was current. The
largest multi-family real estate relationship was $268,000 secured by rental
units, primarily in Melbourne, Florida, and was current.
Commercial Loans. Citrus' commercial loans are business loans that are
not secured by real estate. At September 30, 1998, the largest commercial loan
was $822,000 secured by boat inventory. At September 30, 1998, Citrus had
outstanding Small Business Administration ("SBA") loans of $247,000. Citrus is
not a designated SBA underwriter. We will consider making additional SBA loans
when the demand for such loans arise in our primary geographic market. SBA
loans, which are guaranteed in part by the SBA, typically include a higher loan
balance relative to the value of the collateral, as opposed to loans originated
without a government guarantee.
Consumer Loans. Citrus makes various types of consumer loans, including
automobile and boat loans, but primarily home equity loans. Consumer loans are
originated in order to provide a range of financial services to customers and to
create stronger ties to its customers and because the shorter term and normally
higher interest rates on such loans help maintain a profitable spread between
the Company's average loan yield and its cost of funds. The terms of consumer
loans generally range from one to five years. Underwriting standards for
consumer loans include an assessment of the applicant's repayment history on
other debts and ability to meet existing obligations and payments on the
proposed loans. Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, to the proposed loan amount. Consumer loans generally
involve more credit risks than mortgage loans because of the type and nature of
the collateral or absence of collateral. Consumer loan repayments are dependent
on the borrower's continuing financial stability, and are likely to be adversely
affected by job loss, divorce and illness.
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Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. In most cases, any repossessed collateral will not
provide an adequate source of repayment of the outstanding loan balance.
Management believes that the yields earned on consumer loans are commensurate
with the credit risk associated with such loans. As of September 30, 1998,
consumer loans amounted to $4.4 million, or 7%, of the total loan portfolio.
Income from Lending Activities. We earn fees in connection with loan
commitments and originations, loan modifications, late payments, changes of
property ownership and for miscellaneous services related to loans. Income from
these activities varies from period to period with the volume and type of loans
originated, sold and purchased. Our volume is dependent upon prevailing mortgage
interest rates and their effect on the demand for loans in our primary
geographic market.
Loan fees typically are charged at the time of loan origination and may
be a flat fee or a percentage of the amount of the loan. Under current
accounting standards the total amount of such fees cannot typically be
recognized as current income and a portion of the fees are deferred and taken
into income over the contractual life of the loan, using a level yield method.
If a loan is prepaid or refinanced, all remaining deferred fees with respect to
such loans are taken into income at that time.
Nonperforming Loans and Real Estate Owned. When a borrower fails to
make a required payment on a loan, we attempt to collect the payment by
contacting the borrower. If a payment on a loan has not been received by the end
of a grace period (usually 10 days from the payment due date), notices are sent
at that time, with follow-up contacts made thereafter. In most cases,
delinquencies are cured promptly. If the delinquency exceeds 29 days and is not
cured through normal collection procedures, Citrus will institute more formal
measures to remedy the default, including the commencement of foreclosure
proceedings. Citrus will then attempt to negotiate with the delinquent borrower
to establish a satisfactory payment schedule.
If the loan is secured by real estate and foreclosure is required, the
property will be sold at a public auction in which Citrus may participate as a
bidder. If Citrus is the successful bidder, the acquired real estate property is
then included in the other real estate owned "OREO" account until it is sold.
Citrus is permitted under federal regulations to finance sales of real estate
owned with loans which may involve more favorable interest rates and terms than
generally would be granted under normal underwriting guidelines. As of September
30, 1998, Citrus had $390,000 in OREO properties and $436,000 loans past due 90
days or more.
Asset Classification
Commercial banks are required to review, and when appropriate, classify
their assets on a regular basis. The OCC has the authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution establishes a
specific reserve for the full amount of the portion of the asset classified as
loss. All or a portion of general loan loss allowances established to cover
possible losses related to assets classified 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 one of 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 allowance when
management believes that the collectibility of the principal is unlikely. The
allowance 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
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may affect the borrower's ability to pay. While management uses the best
information available to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. At September
30, 1998, the Company had a total allowance for credit losses of $421,000,
representing 0.70% of total loans. See "MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Credit Risk" for the table
showing Citrus' allowance for credit losses.
Non-Bank Subsidiary
As of September 30, 1998, the Company had one wholly-owned non-bank
subsidiary, Citrus Mortgage Corp. Citrus Mortgage Corp. was established on
August 3, 1995, to be a mortgage brokerage company. As of September 30, 1998,
the Company's aggregate investment in Citrus Mortgage was less than $1,000.
Citrus Mortgage is not active.
Personnel
As of September 30, 1998, Citrus had 2 full-time employees and Citrus
Bank had 38 full-time and 3 part-time employees. The employees are not
represented by any collective bargaining group. We believe our relations with
our employees are good.
We currently maintain a comprehensive employee benefit program
providing, among other benefits, hospitalization and major medical insurance,
long-term disability insurance, life insurance, 401(k) and education assistance.
We believe our employee benefit programs are generally competitive with employee
benefits provided by other major employers in our primary geographic market
area.
Legal Proceedings
There are no material pending legal proceedings to which Citrus or
Citrus Bank is a party or to which any of their property is subject.
Properties
The following table sets forth information with respect to the
Company's offices as of September 30, 1998.
<TABLE>
<CAPTION>
Year Facility Size of Facility Net Book
Location Opened in Sq. Ft. Facility Status Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Main Office
- -----------
Citrus Bank, N.A.
1717 Indian River Blvd., Ste. 100 1990 10,000 Owned $1,182,000
Vero Beach, Florida
Branches
- --------
Sebastian Office
1020 U.S. 1 1993 2,800 Owned $435,000
Sebastian, Florida
Barefoot Bay Office
1020 Buttonwood Street
Barefoot Bay, Florida 1996 2,160 Owned $394,000
</TABLE>
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REGULATION AND SUPERVISION
General
As a one-bank holding company registered under the BHC Act, Citrus is
subject to regulation and supervision by the Federal Reserve. Under the BHC Act,
Citrus' activities and those of Citrus Bank are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. As a Florida corporation, Citrus is also
subject to Chapter 607, Florida Business Corporation Act ("FBC Act") and the
regulations promulgated thereunder by the Florida Department of State. As a
national bank, Citrus Bank is subject to extensive regulation by the Office of
the Comptroller of the Currency.
Citrus and Citrus Bank are required to file reports with the Federal
Reserve and the OCC concerning their activities and financial condition, in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with or acquisitions of other financial
institutions. Periodic examinations are performed by the Federal Reserve and the
OCC to monitor Citrus' compliance with the various regulatory requirements.
Citrus Bank's deposits are insured up to the applicable limits by the FDIC under
the Bank Insurance Fund ("BIF"). Citrus Bank is subject to regulation by the
Federal Reserve and the OCC with respect to reserves required to be maintained
against transaction deposit accounts and certain other matters.
Regulation of Citrus
General. The BHC Act prohibits Citrus from acquiring direct or indirect
control of more than 5% of any class of outstanding voting stock or acquiring
substantially all of the assets of any bank or merging or consolidating with
another bank holding company without prior approval of the Federal Reserve. The
BHC Act also prohibits Citrus from acquiring control of any bank operating
outside the State of Florida, unless such action is specifically authorized by
the statutes of the state where the bank to be acquired is located.
Additionally, the BHC Act prohibits Citrus from engaging in or from acquiring
ownership or control of more than 5% of the outstanding voting stock of any
company engaged in a non-banking business, unless such business is determined by
the Federal Reserve to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. The BHC Act generally does
not place territorial restrictions on the activities of such non-banking related
activities.
Transactions between Citrus and Citrus Bank. Citrus' authority to
engage in transactions with related parties or "affiliates," or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
which apply to all transactions by a FDIC-insured, state non-member bank or a
holding company with any affiliate. Sections 23A and 23B generally define an
"affiliate" as any company that controls or is under common control with an
institution. Subsidiaries of a financial institution, however, are generally
exempted from the definition of "affiliate." Section 23A limits the aggregate
amount of transactions with any individual affiliate to 10% of the capital and
surplus of Citrus and also limits the aggregate amount of transactions with all
affiliates to 20% of Citrus' capital and surplus. Certain transactions with
affiliates, such as loans to affiliates or guarantees, acceptances and letters
of credit issued on behalf of affiliates, are required to be collateralized by
collateral in an amount and of a type described in the statute. The purchase of
low quality assets from affiliates is generally prohibited. Section 23B provides
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In the absence of comparable transactions, such transactions may only
occur under terms and circumstances, including credit standards, that in good
faith would be offered to or would apply to non-affiliated companies.
Support of Subsidiary Depository Institutions. In accordance with
Federal Reserve policy, Citrus is expected to act as a source of financial
strength and to commit resources to support Citrus Bank. This support may be
required at times when Citrus might not be inclined to provide such support.
Such support would include the infusion of additional capital into an
undercapitalized bank subsidiary in situations where an additional investment in
a troubled bank might not ordinarily be made by a prudent investor. In addition,
any capital loans by a bank holding company to any of its subsidiary banks must
be subordinate in right of payment to depositors and to certain other
indebtedness of such subsidiary banks. In the event of bankruptcy, any
commitment by a bank holding company to a federal bank regulatory agency to
maintain the capital of its subsidiary bank will be assumed by the bankruptcy
trustee and will be entitled to a priority of payment.
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Under the Federal Deposit Insurance Act ("FDIA") a subsidiary bank of a
bank holding company can be held liable by the FDIC for any loss incurred or
reasonably expected to be incurred in connection with: (i) the default of a
commonly controlled FDIC-insured depository institution, or (ii) any assistance
provided by the FDIC to any commonly controlled FDIC-insured depository
institution "in danger of default". "Default" is defined generally as the
appointment of a conservator or a receiver and "in danger of default" is defined
generally as the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance.
Control of a Bank Holding Company. FRB Regulation Y, adopted pursuant
to Section 225.41 of 12 U.S.C. Section 1817(j), requires persons acting directly
or indirectly or in concert with one or more persons to give the Board of
Governors of the Federal Reserve 60 days advanced written notice before
acquiring control of a bank holding company. Under the Regulation, control is
defined as the ownership or control with the power to vote 25 % or more of any
class of voting securities of the bank holding company. The Regulation also
provides for a presumption of control if a person owns, controls, or holds with
the power to vote 10 % or more (but less than 25%) of any class of voting
securities, and if: (i) the bank holding company's securities are registered
securities under Section 12 of the Securities Exchange Act of 1934; or (ii) no
other person owns a greater percentage of that class of voting securities. This
offering is subject to a Purchase Limitation which precludes a person
(individually, or together with associates of, or persons acting in concert
with, such person) from purchasing shares which when aggregated with current
holdings would exceed 9.9% of the total number of shares outstanding at the
conclusion of the offering, with the exception of purchases to be made by Mr.
Lambert who has already received approval to acquire up to 100% of the Company's
shares.
Regulation of Citrus Bank
General. From time to time, various bills are introduced in the United
States Congress with respect to the regulation of financial institutions. Recent
banking legislation, particularly the FIRREA and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), has broadened the regulatory
powers of the federal bank regulatory agencies and restructured the nation's
banking system. The following is a brief discussion of certain portions of these
laws and how they affect Citrus or Citrus Bank.
The FDICIA revised sections of the FDIA affecting bank regulation,
deposit insurance and provisions for funding of the BIF administered by the
FDIC. The FDICIA also revised bank regulatory structures embodied in several
other federal banking statutes, strengthened the bank regulators' authority to
intervene in cases of deterioration of a bank's capital level, placed limits on
real estate lending and imposed detailed audit requirements.
Prompt and Corrective Action. The FDICIA required the federal banking
regulatory agencies to set certain capital and other criteria which would define
the category under which a particular financial institution would be classified.
The FDICIA imposes progressively more restrictive constraints on operations,
management, and capital distributions depending on the category in which an
institution is classified. Pursuant to the FDICIA, undercapitalized institutions
must submit recapitalization plans to their respective federal banking
regulatory agencies, and a company controlling a failing institution must
guarantee such institution's compliance with its plan in order for the plan to
be accepted.
The FDIC's prompt and corrective action regulations define, among other
things, the relevant capital measures for the five capital categories. For
example, a bank is deemed to be "well-capitalized" if it has a total risk-based
capital ratio (total capital to risk- weighted assets) of 10% or greater, a Tier
1 risk-based capital ratio (Tier 1 capital to risk-weighted assets) of 6% or
greater, and a Tier 1 leverage capital ratio (Tier 1 capital to adjusted total
assets) of 5% or greater, and is not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
A bank is deemed to be "adequately capitalized" if it has a total risk-based
capital ratio of 8% or greater, and (generally) a Tier 1 leverage capital ratio
of 4% or greater, and the bank does not meet the definition of a
"well-capitalized" institution. A bank is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%. In addition, the
FDIC is authorized effectively to downgrade a bank to a lower capital category
than the bank's capital ratios would otherwise indicate, based upon safety and
soundness considerations (such as when the bank has received a less than
satisfactory examination rating for any of the CAMEL rating categories other
than capital: i.e., Asset Quality, Management, Earnings or Liquidity). As a bank
drops to lower capital levels, the extent of action to be taken by the
appropriate regulator increases, restricting the types of transactions in which
the bank may engage. The regulatory capital standards are designed to bolster
and protect the deposit insurance fund. Citrus Bank is considered to be
"well-capitalized" based upon its current capital.
42
<PAGE>
Insurance on Deposit Accounts. In response to the requirements of the
FDICIA, the FDIC established a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The FDIC
assigns a financial institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. These categories consist of
well-capitalized, adequately capitalized or undercapitalized, and one of three
supervisory subcategories within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the financial institution's primary regulator, in Citrus Bank's
case the OCC, and information which the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. A financial institution's assessment rate depends on the capital category
and supervisory category to which it is assigned. There are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. BIF assessment rates range from
0 basis points on deposits for a financial institution in the highest category
(i.e., well-capitalized and financially sound with only a few minor weaknesses)
to 31 basis points on deposits for an institution in the lowest category (i.e.,
undercapitalized and posing a substantial probability of loss to the BIF, unless
effective corrective action is taken). Citrus Bank has not been assessed a
deposit insurance premium since January 1, 1996. See "Deposit Insurance Funds
Act of 1996".
Standards for Safety and Soundness. The FDICIA requires each federal
banking agency to prescribe for all insured depository institutions and their
holding companies standards relating to internal controls, information systems
and audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. In
addition, the federal banking regulatory agencies are required to prescribe by
regulation standards specifying: (i) maximum classified assets to capital
ratios; (ii) minimum earnings sufficient to absorb losses without impairing
capital; (iii) to the extent feasible, a minimum ratio of market value to book
value for publicly traded shares of depository institutions or the depository
institution holding companies; and (iv) such other standards relating to asset
quality, earnings and valuation as the agency deems appropriate. Finally, each
federal banking agency is required to prescribe standards for employment
contracts and other compensation arrangements of executive officers, employees,
directors and principal shareholders of insured depository institutions that
would prohibit compensation and benefits and other arrangements that are
excessive or that could lead to a material financial loss for the institution.
If an insured depository institution or its holding company fails to meet any of
its standards described above, it will be required to submit to the appropriate
federal banking agency a plan specifying the steps that will be taken to cure
the deficiency. If an institution fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will require the
institution or holding company to correct the deficiency and, until corrected
may impose restrictions on the institution or the holding company including any
of the restrictions applicable under the prompt corrective action provisions of
the FDICIA.
Loans to One Borrower. Federal law generally allows a national bank
such as Citrus Bank to extend credit to any one borrower in an amount up to 15%
of its capital accounts, which are defined as unimpaired capital, surplus and
undivided profits. Up to an additional 10 percent of capital and surplus may be
extended if this amount is served by readily marketable collateral. The law
permits exemptions for loans collateralized by accounts maintained with Citrus
Bank and for loans secured by or guaranteed by U.S. obligations, and certain
Federal agencies and general obligations of a state.
Payment of Dividends. While not the only source of income, a major
source of income to Citrus in the future will be dividends from Citrus Bank.
Since commencing operations in May 1989, Citrus has not received any dividends
from Citrus Bank. A national bank may not pay cash dividends that would cause
the bank's capital to fall below the minimum amount required by federal law or
which are in excess of the bank's undivided profits. Otherwise, a national bank
may pay a dividend out of the total of current net profits plus retained net
profits of the preceding two years to the extent it deems expedient, except as
described below. Ten percent of the net profits in the preceding year may not be
paid in dividends, but must be retained to increase capital surplus until such
surplus equals the amount of common and preferred stock issued and outstanding.
The ability of Citrus Bank to pay dividends to Citrus depends in part on the OCC
capital requirements in effect at such time and the ability of Citrus Bank to
comply with such requirements.
Brokered Deposits. In accordance with the FDICIA, the FDIC has
implemented restrictions on the acceptance of brokered deposits. In general, an
"undercapitalized" institution may not accept, renew or roll over any brokered
deposits. "Adequately capitalized" institutions may request a waiver from the
FDIC to do so, while "well-capitalized" institutions may accept, renew or roll
over such deposits without restriction. The rule requires registration of
deposit brokers and imposes certain record keeping requirements. Institutions
that are not "well-capitalized" (even if meeting minimum capital requirements)
are subject to limits on rates of interest they may pay on brokered and other
deposits. Citrus Bank does not have any brokered deposits.
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<PAGE>
Deposit Insurance Funds Act of 1996. In 1996, Congress passed and the
President signed into law the Deposit Insurance Funds Act of 1996 ("DIFA").
Among other things, the DIFA, and rules promulgated thereunder by the FDIC,
provide for banks and thrifts to share the annual interest expense for the
Finance Corp. Bonds which were issued in the late 1980s to help pay the costs of
the savings and loan industry restructuring. The approximate annual interest
expense is $780 million of which BIF insured banks are expected to pay
approximately $322 million, or 41%, while SAIF insured thrifts will pay
approximately $458 million or 59% of the interest expense. It is estimated that
the annual assessment for BIF insured institutions will be approximately 1.2
cents per $100 of deposits, while SAIF insured institutions will pay 6.5 cents
per $100 of deposits. These payments begin in 1997 and run through 1999.
Beginning in the year 2000 and continuing through the year 2017, banks and
thrifts will each pay $2.43 cents per $100 of deposits. These assessments will
be in addition to any regular deposit insurance assessments imposed by the FDIC
under FDICIA. See "REGULATION AND SUPERVISION Insurance on Deposit Accounts".
Interstate Banking. Under the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Efficiency Act"), restrictions on interstate
acquisitions of banks by bank holding companies were repealed on September 29,
1995, such that any out-of-state bank holding company would be able to acquire
and consolidate any Florida-based bank, subject to certain deposit percentage
and other restrictions on or after the effective date of the Efficiency Act. The
legislation also provided that, unless an individual state elected beforehand
either: (i) to accelerate the effective date, or (ii) to prohibit out-of-state
banks from operating interstate branches within its territory, on or after June
1, 1997, adequately capitalized and managed bank holding companies will be able
to consolidate multiple interstate banks. De novo branching by an out-of-state
bank would be permitted only if it is expressly permitted by the laws of the
host state. The authority of a bank to establish and operate branches within a
state will continue to be subject to applicable state branching laws. Florida
has adopted legislation which permits interstate acquisitions and interstate
branching effective June 1, 1997. Florida law prohibits de novo branching by out
of state banks.
Annual Assessment. National banks are required to pay assessments to
the OCC to fund the operations of the OCC. The general assessment, to be paid
semiannually, is computed upon a bank's total assets, including consolidated
subsidiaries, as reported in the bank's latest quarterly call report. Citrus
Bank's assessment for 1997 was $28,000 and for the first nine months of 1998 was
$23,000.
The Federal Reserve System
Federal Reserve regulations require banks to maintain
noninterest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations generally
require that reserves of 3% must be maintained against aggregate transaction
accounts of $49.3 million or less (subject to adjustment by the Federal Reserve)
plus 10% (subject to adjustment by the Federal Reserve between 8% and 14%)
against that portion of total transaction accounts in excess of $49.3 million.
The first $4.4 million of otherwise reservable balances (subject to adjustments
by the Federal Reserve) are exempted from the reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Because required reserves must be
maintained in the form of either vault cash, a noninterest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve, interest-earning assets of Citrus Bank are reduced.
Federal Securities Laws
Citrus, in connection with this offering, filed with the Commission a
registration statement under the Securities Act for the registration of Citrus'
common stock. The registration under the Securities Act of shares of the common
stock issued in this offering does not cover the resale of such shares. Shares
of the common stock purchased by persons who are not affiliates of Citrus may be
resold without further registration. Shares purchased by an affiliate of Citrus
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If Citrus meets the current public information requirements of Rule 144 under
the Securities Act, each affiliate of Citrus who complies with the other
conditions of Rule 144 (including the holding period and those that require the
affiliate's sale to be aggregated with those of certain other persons) may be
able to sell in the public market, without additional registration, a number of
shares not to exceed, in any three-month period, the greater of: (i) 1% of the
outstanding shares of Citrus, or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks. Provision may be made in
the future by Citrus to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
The scope of regulation, supervision and permissible activities of
Citrus is subject to change by future federal and state legislation.
44
<PAGE>
MANAGEMENT
Directors and Executive Officers
The boards of directors of Citrus and Citrus Bank currently consist of
nine directors and ten directors, respectively. The board of directors of Citrus
is currently divided into three classes, with the members of each class serving
three-year terms. The directors of Citrus Bank serve one-year terms. The
Company's and Citrus Bank's executive officers are the same three persons.
The following sets forth information regarding the directors of Citrus
and Citrus Bank.
Robert L. Brackett, age 63, a class II director, has served as Chairman
of the Board of Citrus and Citrus Bank since May 1990 and as a director since
May 1989. Mr. Brackett has been the Treasurer and a director of Credit Data
Services, Inc., a credit reporting firm, since 1977.
Josh C. Cox, Jr., age 56, has been a class III director of Citrus and a
director of Citrus Bank since October 1993. He has served as President and Chief
Executive Officer of both Citrus and Citrus Bank since July 1994. Mr. Cox began
his banking career in February 1962 with the Bank of Virginia (SIGNET) in
Richmond, Virginia where he worked until August 1968. At that time he joined
Southern Bank & Trust Company, also in Richmond, where he worked until April
1991, at which time he became President and CEO of Williamsburg National Bank.
Both Southern Bank and Trust and Williamsburg National Bank were subsidiaries of
Southern Bankshares, Inc. In January 1972 Mr. Cox joined Irwin Bank and Trust in
Columbus, Indiana where he served as Sr. Vice President and Retail Division
Administrator until March 1976. From March 1976 to March 1993, Mr. Cox served as
a bank consultant to various troubled or under achieving banks or bank holding
companies throughout the Southeast and Midwest.
S. Hallock duPont, Jr., age 62, has served as a director of Citrus Bank
since February 1996 and as President of Europa Corp. since 1962.
Hubert Graves, Jr., age 67, has been a class I director of Citrus and a
director of Citrus Bank since May 1989. Mr. Graves has been engaged in the
citrus business for over 30 years. Since 1965, Mr. Graves has served as
President of Hubert Graves Citrus, Inc., a citrus production company; since
1977, he has served as President of HGX, Inc., a citrus growing company since
1980.
Roy H. Lambert, age 67, has been a class II director of Citrus since
April 1994. Mr. Lambert has served as Chairman of Regency Windsor Capital, Inc.,
a full-service real estate company since 1974.
Earl H. Masteller, age 59, has been a class I director of Citrus and a
director of Citrus Bank since May 1989. Mr. Masteller has served as President of
Masteller & Moler Associates, Inc., a consulting civil engineering firm, since
1985. In addition, Mr. Masteller has served as Vice President of Masteller,
Moler and Reed, Inc., a land surveying firm, since January 1987, and as
Secretary of Walsh Environmental Services, Inc., since 1996.
John A. Purdie, age 55, has been a director of Citrus Bank since
August, 1997. Mr. Purdie has served as President of Regency Windsor Capital,
Inc., a full-service real estate company, since 1984.
Randy J. Riley, age 48, has been Senior Vice President of the Company
and Senior Vice President/Chief Lending Officer of the Bank since September
1989. From May 1987 until September 1989, Mr. Riley was Senior Vice President of
Community National Bank in Mims, Florida. Mr. Riley was Vice President of M&I
Western State Bank in Oshkosh, Wisconsin from October 1985 until February 1987.
Louis L. Schlitt, age 62, has been a class III director of Citrus and a
director of Citrus Bank since May 1989. Mr. Schlitt has served as the President
of Schlitt Insurance Services, Inc. since 1983 and Louis Schlitt, Inc., a real
estate investment company, since 1984. From 1983 to 1989, he served as the
President of Schlitt Investor Services, Inc., a securities firm.
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<PAGE>
Walter E. Smith, Jr., age 57, has been a class I director of Citrus and
a director of Citrus Bank since March 1990. Mr. Smith has served as the owner
and operator of Unocal 76 truck stops, located in Florida and Georgia, since
1973 and director of Travel Centers of America, Inc., since 1996.
Henry O. Speight, age 50, has been Senior Vice President of the Company
and Senior Vice President/Cashier of the Bank since September 1989. Mr. Speight
has also served as Secretary of the Company since May 1990. From September 1983
until September 1989, Mr. Speight was Senior Vice President and Cashier of
Community National Bank in Mims, Florida.
James R. Thompson, age 69, has been a class II director of Citrus and a
director of Citrus Bank since March 1990. Mr. Thompson has served as a
consulting engineer for Regency Windsor Capital, Inc., a full-service real
estate company, since 1988. From 1980 to 1988, he served as President of Regency
Acquisitions, Inc., a real estate acquisition company.
Jeffrey L. Velde, age 55, has been a director of Citrus Bank since
February 1996. Mr. Velde has served as the President of Velde Ford, a car
dealership, since March 1997.
Director Compensation
Citrus presently compensates directors who do not also serve on Citrus
Bank's board, $500.00 for board meetings attended. Citrus Bank compensates its
directors $500.00 for each board meeting attended. Citrus paid director fees of
$3,500 and $4,000 to its directors for the twelve month and six month periods
ended December 31, 1997 and September 30, 1998, respectively, and Citrus Bank
paid director fees of $44,500 and $33,500 for the same periods.
Employment Contracts
Neither Citrus nor Citrus Bank has employment agreements with any of
its officers.
Non-Qualified Stock Options
The Company does not have an incentive stock option plan. The Company
has granted non-qualified stock options to its three key employees, Mr. Cox, Mr.
Riley and Mr. Speight, in accordance with the following schedule (rounded to
whole shares):
<TABLE>
<CAPTION>
Date of No. of Exercise No. of Expiration
Officers Grant Shares(1) Price(1) Shares Vested Date
-------- ----- --------- -------- ------------- ----
<S> <C> <C> <C> <C> <C>
Josh Cox, Jr. December 14, 1995 26,400 6.31 26,400 July 11, 2001
Randy J. Riley April 13, 1990 9,394 6.31(2) 9,394 April 13, 2000
July 11, 1991 8,712 6.31(2) 8,712 July 11, 2001
Henry O. Speight April 13, 1990 9,394 6.31(2) 9,394 April 13, 2000
July 11, 1991 8,712 6.31(2) 8,712 July 11, 2001
- -----------------
(1) Adjusted for stock splits and rounded to the nearest whole share for
illustration purposes only.
(2) As amended on November 16, 1995.
</TABLE>
EXECUTIVE COMPENSATION
The table below identifies the Chief Executive Officer and other
principal officers of Citrus or of its wholly owned subsidiary Citrus Bank,
whose total annual cash compensation exceeded $100,000 during the fiscal year
ended December 31, 1997.
46
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long-term
Annual Compensation compensation
------------------- ------------
Name and Other annual All other
principal position Year Salary(1) Bonus compensation(2) Stock options compensation
------------------ ---- --------- ----- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Josh C. Cox, Jr. 1997 $160,000 None $18,852 None None
President and Chief 1996 $160,000 None $17,853 26,400(3) None
Executive Officer 1995 $160,000 None $ 8,701 None None
since July 1, 1994
(1) Mr. Cox's annual base salary for the fiscal year 1998 is $160,000. This
base salary is considered to be compensation for Mr. Cox's service as
President and Chief Executive Officer of both the Company and the Bank.
(2) Other annual compensation includes an annual automobile allowance of
$9,000, director fees of $6,000 and annual club dues of $3,852.
(3) As adjusted for stock splits.
</TABLE>
Benefits
Insurance: Citrus Bank's full-time officers and employees are provided
hospitalization, major medical, short and long-term disability, dental insurance
and term life insurance under group plans on generally the same basis to all
full-time employees. The Bank pays 95% of the costs of this insurance.
Bonuses: Neither the Company nor the Bank has an established bonus
policy for employees; however, based upon Citrus' operating results for 1997,
the Bank's board of directors awarded $9,505 in bonuses to employees of the Bank
during the year ended December 31, 1997. The payment of any bonus is at the sole
discretion of the board of directors.
401(k) Plan: During 1990, Citrus Bank adopted a 401(k) Plan which
covers all of the employees of the Bank who have completed at least one year of
service and who are at least 20 years of age. The effective date of the 401(k)
was January 1, 1990. Eligible employees who choose to participate in the 401(k)
may contribute from 1% to 20% of their annual base salary to the 401(k). The
Bank may match up to 100% of all employee contributions which are equal to or
less than $9,500 of base salary. In addition, the Bank may elect to make
additional contributions to the 401(k) based upon the Bank's annual profit.
Contributions made by the Bank do not vest in an individual employee until that
employee has 2 years of service, at which time 25% of contributions made are
earned. For each additional year of service, an employee will earn another 25%
until the end of year five when an employee will be 100% vested. The Bank
contributed $10,549 for a 25% match to employee contributions in 1997 to the
401(k) for the fiscal year ended December 31, 1997. This was the first employer
match since the plan's inception. No contributions have been made for the nine
month period ended September 30, 1998.
CERTAIN TRANSACTIONS
Indebtedness of Management
Certain of the Company's directors and executive officers and their
immediate family members are also customers of Citrus Bank and it is anticipated
that such individuals will continue to be customers of Citrus Bank in the
future. All transactions between Citrus Bank and Citrus' directors, executive
officers and their immediate family members, and any principal shareholders
(persons owning more than 5% of Citrus' outstanding common stock) were made, and
all future transactions will be made, in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with non-affiliated persons
and, in the opinion of management, did not and will not involve more than the
47
<PAGE>
normal risk of collectibility or present other unfavorable features. As of
September 30, 1998, loans to directors, executive officers and their immediate
family members represented approximately $2.9 million, or 5%, of the total loan
portfolio.
Schlitt Insurance Services, Inc. ("Schlitt") serves as one of the
insurance agents for the Company. The Company purchases all general commercial
insurance policies, as well as employee benefit insurance policies since
December 1, 1997, through Schlitt. The Company paid Schlitt premiums amounting
to approximately $51,000 during the 1997 fiscal year and approximately $111,000
during the first nine months of 1998. Louis L. Schlitt, a director of the
Company, is the Chief Executive Officer of Schlitt.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table indicates certain information regarding the current
beneficial ownership of common stock by each of the Company's directors and
executive officers, and all of the directors and executive officers as a group.
As required by Rule 13d-3, under the Securities Act of 1933, the number and
percentage of shares held by each person reflects the number of shares that
person currently owns plus the number of shares that person has the right to
acquire within the next 60 days pursuant to currently outstanding options or
warrants. Citrus anticipates that 25,000 shares of the offering will be
purchased by the Company's executive officers and directors, but there has been
no formal commitment to purchase shares as of the date of this Prospectus.
Ultimate purchases by these persons may be more or less than indicated depending
upon individual circumstances.
<TABLE>
<CAPTION>
Amount Owned at % of Ownership % of Ownership
September 30, % of Based on the Based on the
Name 1998 Ownership Total Minimum Total Maximum
- -------------------------------------- ------ ----------- --------------- -------------
<S> <C> <C> <C> <C>
Robert L. Brackett(1) 111,279 11.4 5.6 5.1
Josh C. Cox, Jr.(2) 26,558 2.7 1.3 1.2
S. Hallock DuPont, Jr.(3) 112,351 11.4 5.7 5.1
Hubert Graves, Jr.(4) 149,657 14.8 7.4 6.8
Roy H. Lambert(5) 219,900 21.0 10.7 9.8
Earl H. Masteller(6) 45,062 4.6 2.3 2.1
John A. Purdie(7) 53,909 5.5 2.7 2.5
Randy Riley(8) 18,991 2.0 1.0 0.9
Louis L. Schlitt(9) 72,128 7.1 3.6 3.3
Walter E. Smith, Jr.(10) 121,231 12.0 6.0 5.5
Henry O. Speight(11) 18,832 1.9 1.0 0.9
James R. Thompson(12) 222,437 21.2 10.9 9.9
Jeffrey L. Velde(13) 1,320 0.1 0.1 0.1
All Directors and Executive Officers
as a Group (13 persons)(14) 953,913 69.1% 40.1% 37.0%
</TABLE>
(1) Includes 23,907 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 8,109 shares owned by Mr. Brackett individually, 316 shares
owned by his wife, and 78,947 shares owned by Mr. Brackett as Trustee.
(2) Includes 26,400 shares subject to presently exercisable stock options
granted by the Citrus on December 14, 1995. Includes 158 shares owned
by Mr. Cox individually.
(3) Includes 29,288 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 83,063 shares owned by Mr. du Pont individually.
(4) Includes 58,577 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 75,240 shares owned jointly by Mr. Graves and his spouse,
7,920 shares owned by Hubert Graves Citrus, Inc. and 7,920 shares owned
by HGX, Inc. Mr. Graves is the President and principal shareholder of
each of these companies.
(5) Includes 95,978 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 123,764 shares owned by the Revocable Trust of Roy H. Lambert
of which Mr. Lambert is the beneficiary, and 158 shares owned by Mr.
Lambert individually.
(6) Includes 19,532 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 4,048 shares held by his individual retirement account and 205
shares held in his wife's individual retirement account and 21,277
shares owned by the Revocable Trust of Earl H. Masteller of which his
wife is Trustee.
(7) Includes 22,229 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 31,680 shares owned by Mr. Purdie individually.
(Footnotes continued on other page)
48
<PAGE>
(8) Includes 9,395 shares and 8,712 shares subject to presently exercisable
stock options granted by Citrus on April 13, 1990 and July 11, 1991
respectively. Includes 299 shares subject to presently exercisable
stock purchase warrants granted in connection with Citrus' initial
stock offering. Includes 585 shares owned jointly by Mr. Riley and his
wife, and one share owned by Mr. Riley individually.
(9) Includes 57,876 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 672 shares owned individually by Mr. Schlitt, 8,646 shares
held by the Schlitt Insurance Services, Inc. Profit Sharing Plan, 4,367
shares held by his wife's individual retirement account, 83 shares
owned in trust for Mr. Schlitt's son, David J. Schlitt for whom Mr.
Schlitt is trustee and 484 shares held by his individual retirement
account.
(10) Includes 55,797 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 65,434 shares in the Walter E. Smith Revocable Trust.
(11) Includes 9,394 shares and 8,712 shares subject to presently exercisable
stock options granted by Citrus on April 13, 1990 and July 11, 1991
respectively. Includes 299 shares subject to presently exercisable
stock purchase warrants granted in connection with Citrus' initial
stock offering. Includes 426 shares held in Mr. Speight's individual
retirement account and one share owned by Mr. Speight individually.
(12) Includes 1,111 shares subject to presently exercisable stock purchase
warrants granted to Mr. Thompson in connection with Citrus' initial
offering; includes 95,978 shares subject to presently exercisable stock
purchase warrants granted to the Revocable Trust of Roy H. Lambert, of
which Mr. Thompson is the sole Trustee; includes 123,764 shares owned
by the Revocable Trust of Roy H. Lambert, of which Mr. Thompson is the
sole Trustee; and includes 1,584 owned jointly by Mr. Thompson and his
wife.
(13) Represents shares owned individually by Mr. Velde.
(14) Table computed on 526,407 shares actually owned, plus 364,893 shares
subject to presently exercisable stock purchase warrants granted in
connection with Citrus' initial stock offering, and 62,613 shares
subject to presently exercisable stock options.
Principal Holders of Voting Securities. As of September 30, 1998, no
persons or apparent group of persons, other than officers and directors of
Citrus, are known by management to own beneficially five percent or more of the
outstanding shares of Citrus' common stock.
DESCRIPTION OF CAPITAL STOCK
Citrus has authorized 11,000,000 shares of authorized capital stock,
consisting of 10,000,000 shares of common stock, par value $3.15 per share, and
1,000,000 shares of preferred stock, par value of $5.00 per share. As of
September 30, 1998, 952,296 shares of common stock were issued and outstanding
and 532,385 shares were subject to issuance pursuant to options and warrants. No
shares of preferred stock were issued. The Company will not, in the future,
issue preferred stock to insiders on terms more favorable than to others.
Common Stock
Each share of Citrus common stock has the same relative rights and is
identical in all respects with every other share of common stock. The holders of
common stock are entitled to elect the members of the board of directors of the
Company and such holders are entitled to vote as a class on all matters required
or permitted to be submitted to the shareholders of the Company. No holder of
any class of stock of the Company has preemptive rights with respect to the
issuance of shares of that or any other class of stock and the common stock is
not entitled to cumulative voting rights with respect to the election of
directors.
The holders of common stock are entitled to dividends and other
distributions if, as, and when declared by the board of directors out of assets
legally available therefor. Upon the liquidation, dissolution or winding up of
the Company, the holder of each share of common stock is entitled to share
equally in the distribution of the Company's assets. The holders of common stock
are not entitled to the benefit of any sinking fund provision. The shares of
common stock are not subject to any redemption provisions, nor are they
convertible into any other security or property of the Company. All shares of
common stock outstanding are fully paid and non-assessable.
Preferred Stock
Citrus is authorized to issue 1,000,000 shares of preferred stock. The
board of directors may issue the preferred stock in series and fix the
particular designation of and the rights, preferences, privileges and
restrictions granted to and imposed upon each series, all without approval of
the shareholders. Citrus has no plans at this time to issue any of the preferred
stock authorized and will not issue preferred stock to insiders on terms more
favorable than to others.
49
<PAGE>
Outstanding Warrants
Each organizer, founder, and proposed director who purchased stock
during Citrus' initial offering period received pro rata warrants which were
exercisable one year following commencement of operations by Citrus Bank,
entitling the investor to purchase additional shares of common stock. The number
of warrants issued were equal to 50% of the total number of shares outstanding
upon the completion of the initial offering. There are 469,772 warrants
outstanding as of the date of this Prospectus.
SUMMARY OF ARTICLES OF INCORPORATION OF CITRUS
The following is a summary of the material provisions of the articles
of incorporation of Citrus. The full text of the articles of incorporation may
be obtained without charge. In order to obtain a copy of the articles of
incorporation contact, Henry O. Speight, Senior Vice President at (561)
778-4100.
The power to issue additional shares of common stock rests with the
board of directors of Citrus, which may help delay or deter a change in control
by increasing the number of shares needed to gain control. The following
provisions of Citrus' articles of incorporation may also have the effect of
preventing, discouraging or delaying any change in control of Citrus.
Staggered Terms for Directors
Citrus' articles of incorporation provide that directors shall be
elected to three-year terms with terms divided into three classes. The number of
directors in each class shall be as nearly equal as possible. Only one class of
directors is elected by the shareholders each year at Citrus' annual meeting.
Requirements for Super Majority Approval of Transactions
The articles of incorporation of Citrus contain provisions requiring
super majority shareholder approval to effect certain extraordinary corporate
transactions which are not approved by the board of directors. The articles of
incorporation require the affirmative vote or consent of the holders of at least
two-thirds of the shares of each class of common stock entitled to vote in
elections of directors to approve any merger, consolidation, disposition of all
or a substantial part of the assets of Citrus or a subsidiary of Citrus,
exchange of securities requiring shareholder approval or liquidation of the
Company, if any person who together with his affiliates and associates owns
beneficially 5% or more of any voting stock of Citrus is a party to the
transaction; provided that three quarters of the disinterested directors of
Citrus have not approved the transaction.
In addition, the articles of incorporation require the separate
approval by the holders of a majority of the shares of each class of stock
entitled to vote in elections of directors which are not beneficially owned,
directly or indirectly, by an interested shareholder, of any merger,
consolidation, disposition of all or a substantial part of the assets of Citrus
or a subsidiary of Citrus, or exchange of securities requiring shareholder
approval, if an interested shareholder is a party to such transaction; provided,
that such approval is not required if:
(i) the consideration to be received by the holders of the stock of the
Company meets certain minimal levels determined by a formula under the
Citrus Articles (generally the highest price paid by the Interested
Shareholder for any shares acquired);
(ii) there has been no reduction in the average dividend rate from that
which was obtained prior to the time the Interested Shareholder became
such; and
(iii) the consideration to be received by the shareholders who are not
interested shareholders shall be paid in cash or in the same form as
the interested shareholder previously paid for shares of such class of
stock.
50
<PAGE>
This article, as well as the article establishing a classified board of
directors, may be amended, altered, or repealed only by the affirmative vote or
consent of the holders of at least 75% of the shares of each class of stock
entitled to vote in elections of directors.
Acquisition Offers
The board of directors, when evaluating any offer of another person to:
(i) make a tender or exchange offer for any equity security of Citrus; (ii)
merge or consolidate the Company with another corporation or entity; or (iii)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Company, shall, in connection with the exercise of its business
judgment in determining what is in the best interest of the Company and its
shareholders, give due consideration to all relevant factors, including, without
limitation: (i) the consideration being offered; (ii) the social and economic
effect of acceptance of such offer on the Company's present and future customers
and employees and those of its subsidiaries, as well as on the communities in
which the Company and its subsidiaries operate or are located; (iii) the ability
of the Company to fulfill its corporate objectives as a financial institution
holding company; and (iv) the desirability of maintaining independence from any
other business entity.
Control Share Acquisitions
Our articles of incorporation do not exempt us from the Florida
Statutes governing control-share acquisitions. Generally, under the statute, a
person intending to acquire 20% or more of our shares must give us notice of
such intent and request approval of the acquisition by the board of directors.
If the board of directors fails to approve the acquisition then such persons may
request a meeting of the shareholders at which shareholders will be given an
opportunity to vote on whether such shares will be accorded full voting rights.
Refusal by the shareholders to accord full voting rights would result in the
proposed acquiror obtaining shares which could not be voted on any matters to
come before the shareholders. Certain acquisitions are exempt from the effects
of the statute, such as mergers, business combinations or other acquisitions
which have been approved by the board of directors, as well as acquisitions of
shares issued by Citrus in its original offering or in subsequent offerings
approved by the Board.
The effect of all of the above provisions is to make it more difficult
for a person, entity or group to effect a change in control of Citrus through
the acquisition of a large block of Citrus' voting stock.
Indemnification
The FBC Act authorizes Florida corporations to indemnify any person who
was or is a party to any proceeding (other than an action by, or in the right
of, the corporation) by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation or other entity, against liability incurred in connection with such
proceeding, including any appeal thereof, if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
In the case of an action by or on behalf of a corporation, indemnification may
not be made if the person seeking indemnification is adjudged liable, unless the
court in which such action was brought determines such person is fairly and
reasonably entitled to indemnification. The indemnification provisions of the
FBC Act require indemnification if a director or officer has been successful on
the merits or otherwise in defense of any action, suit or proceeding to which he
or she was a party by reason of the fact that he or she is or was a director or
officer of the corporation. The indemnification authorized under Florida law is
not exclusive and is in addition to any other rights granted to officers and
directors under the articles of incorporation or bylaws of the corporation or
any agreement between officers and directors and the corporation. A corporation
may purchase and maintain insurance or furnish similar protection on behalf of
any officer or director against any liability asserted against the director or
officer and incurred by the director or officer in such capacity, or arising out
of the status, as an officer or director, whether or not the corporation would
have the power to indemnify him or her against such liability under the FBC Act.
Citrus' bylaws provide for the indemnification of directors and
executive officers to the maximum extent permitted by Florida law as authorized
by the board of directors and for the advancement of expenses incurred in
connection with the defense of any action, suit or proceeding that the director
or executive officer was a party to by reason of the fact that he or she is or
was a director of Citrus upon the receipt of an undertaking to repay such
amount, unless it is ultimately determined that such director is not entitled to
indemnification.
51
<PAGE>
SALES AGENT
Citrus has entered into a Sales Agency Agreement with Banc Stock
Financial Services, Inc., pursuant to which the sales agent has agreed to offer
and sell to the public as the Company's agent a minimum of 1,000,000 shares of
common stock on a "best efforts, all or none" basis, and an additional 200,000
shares of common stock on a "best efforts" basis. The sales agent is required to
use its best efforts through the expiration date to sell the shares. The sales
agent and Citrus have agreed that with respect to shares purchased by directors
(expected to aggregate ___,000 shares), no commission will be payable by Citrus
to the sales agent. With respect to shares purchased by certain persons
introduced to the sales agent by Citrus, the commission will be 2.5% of the
aggregate price of such shares. The sales agent's commission will be 7% on all
other shares it sells in the offering. The sales agent may select other dealers
who are members of the National Association of Securities Dealers, Inc. to sell
shares and who will receive a selling concession not to exceed ___% of the gross
offering proceeds. Citrus has agreed to reimburse the sales agent for its
reasonable out-of-pocket expenses incurred in connection with the engagement
including (i) the filing and legal fees associated with securing the review of
the NASD of the terms of the offering; and (ii) reasonable out-of-pocket
expenses incurred in connection with the sales agent's engagement, including
legal fees, advertising, promotion, syndication and travel expenses. Unless
approved in writing by Citrus, which approval shall not be unreasonably
withheld, legal fees and disbursements related solely to the underwriting
process may not exceed $30,000 and the sales agent's out-of-pocket expenses may
not exceed $40,000.
The sales agent has the right to terminate the Sales Agency Agreement
under certain circumstances (for example, if conditions exist in the
over-the-counter market which cause the sales agent to believe that no favorable
public market exists for the sale of the shares). In such event, offers and
sales may be made on behalf of Citrus by certain of its officers and directors,
or Citrus may engage one or more other broker/dealers to make sales on its
behalf. Citrus does not, however, currently have any other arrangements in
place. As described herein, until the minimum number of shares have been sold,
all funds received by the sales agent or Citrus in connection with the sale of
shares will be promptly transmitted to the escrow agent.
The Sales Agency Agreement provides for reciprocal indemnification
between Citrus and the sales agent against liabilities under the Securities Act
of 1933. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted pursuant to the Sales Agency Agreement, the Company has
been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed by the Securities Act and
is, therefore, unenforceable.
Prior to the date of this Prospectus, there has been no public market
for the shares. The offering price of the shares offered hereby has been
established by Citrus based upon its assessment of the capital needs and the
commercial potential of the Company. Citrus has had discussions with the sales
agent regarding the establishment and maintenance of a market for the shares
after the offering. Following the offering the common stock will be traded on
the OTC Bulletin Board under the trading symbol "_____". The sales agent has
advised Citrus that upon completion of the offering it intends to act as a
"market maker" in the common stock. The development of a public trading market
depends, however, on the existence of willing buyers and sellers, the presence
of which is not within the control of the Company, the sales agent, or any
market maker. In general, if a secondary market develops, the shares will be
freely transferable and assignable by the holder thereof (except shares held by
affiliates), and nonaffiliate shareholders may sell any number of shares in such
secondary market. In addition, factors such as the degree to which the secondary
market is active will determine the willingness of the market makers, once a
secondary market is established, to continue to maintain the secondary market.
Citrus and its officers and directors have agreed with the sales agent not to
sell any shares for a period of two years after the date of this Prospectus
without the prior written consent of the sales agent. It is anticipated that
affiliates of the sales agent will purchase ________ shares at the public
offering price for their own accounts.
THE OFFERING
Offering
Citrus is offering through its sales agent a minimum of 1,000,000
shares and a maximum of 1,200,000 shares of common stock. The minimum number of
shares which may be purchased is 100 shares and the maximum number of shares
which may be purchased is 193,000 shares without regulatory approval. To
subscribe for shares of common stock in the offering, the appropriate sections
of the order form must be completed, and payment in full must accompany the
order form. See "Purchase Limitation" and "Procedures for Subscribing for Common
Stock".
52
<PAGE>
Preference for Existing Shareholders
If the offering is oversubscribed, Citrus reserves the right, but will
not be required, to allocate shares among subscribers. Citrus may give a
preference to existing shareholders to the extent of one share in the offering
for each share the shareholder currently owns (excluding officers and directors
of the company, who will be given a preference for an aggregate of _______
shares). Citrus may also take into account any other factors it considers
relevant, including the order in which subscriptions are received, a
subscriber's potential to do business with, or to direct customers to, Citrus
and Citrus' desire to have a broad distribution of stock ownership.
Expiration Date of the Offering
The offering will expire at 5:00 p.m., local time, on April ___, 1999
or on July ___, 1999, unless the offering is terminated beforehand at the sole
discretion of the board of directors.
Conditions to Consummation of the Offering
The offering will not be consummated and all funds received by the
escrow agent will be promptly returned with interest if the minimum offering
(1,000,000 shares of common stock) is not sold by the expiration of the offering
period.
Procedures for Subscribing for Common Stock
Persons who wish to participate in the offering must deliver to the
escrow agent a properly completed and executed order form, together with payment
of the aggregate subscription price for the shares of common stock subscribed
for in the offering. Payment must be by: check or money order payable to "IBBF
as Escrow Agent for Citrus". Payment may also be made by wire transfer of funds
to the escrow agent. Payment should be made sufficiently in advance of the
expiration of any offering period to ensure that payment is received and clears
by such date. All funds received by Citrus shall be forwarded to the escrow
agent.
The address to which the order form and payment of the subscription
price should be delivered is:
Independent Bankers' Bank of Florida
Attention: Escrow Department
109 E. Church Street, Suite BB
Orlando, Florida 32801
The instructions accompanying the order form should be read carefully
and followed in detail.
Subscriptions for the common stock which are received by the Company
from persons in the offering may not be revoked once accepted by the Company.
Purchase Limitations
The minimum number of shares of common stock any person may purchase in
the offering is 100 shares. Participants in the offering may purchase
individually or together with their related party a maximum of 193,000 shares of
common stock. Except for Roy H. Lambert, who already owns in excess of 9.9% of
the Company's common stock, no person shall be allowed to purchase, individually
or together with their related party, shares of common stock in the offering
which, when aggregated, would exceed 9.9% of the total number of shares
outstanding at the conclusion of the offering, unless such person or persons has
received prior regulatory approval.
Under FRB regulations a rebuttable presumption of concerted action will
occur, but is not limited to these situations: (1) a person will be presumed to
be acting in concert with the members of the person's immediate family (which
includes a person's spouse, father, mother, step-parent, children,
step-children, brothers, step-brothers, sisters, step-sisters and grandchildren;
the father, mother, brother and sisters of the person's spouse; and the spouse
of the foregoing); (2) in addition, the following persons will be presumed to be
acting in concert: (i) a company and any controlling shareholder, partner,
53
<PAGE>
trustee, or management official of the company, if both the company and the
person own voting securities of the state member bank or bank holding company;
(ii) companies under common control; (iii) persons that are parties to any
agreement, contract, understanding, relationship, or other arrangement, whether
written or otherwise, regarding the acquisition, voting, or transfer of control
of voting securities of a state member bank or bank holding company, other than
through a revocable proxy as described in ss.225.42(a)(5); (iv) persons that
have made, or propose to make, a joint filing under sections 13 or 14 of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and the rules
promulgated thereunder by the Securities and Exchange Commission; and (v) a
person and any trust for which the person serves as trustee.
Issuance of Common Stock
Provided that the conditions necessary to consummate the offering are
satisfied, certificates representing shares of common stock purchased, pursuant
to the offering, will be delivered to purchasers as soon as practical after the
expiration date of the minimum offering.
Intention of Directors and Executive Officers
None of the Company's directors or officers has entered into any
agreement or arrangement that obligates them to purchase any shares of common
stock. However, the directors and executive officers of the Company as a group
(13 persons) have indicated to Citrus that they intend to subscribe for, in the
aggregate, 25,000 shares of common stock in the offering. Our executive officers
and directors, or affiliates of the sales agent, may purchase up to 100% of the
shares in the offering if necessary to help Citrus achieve the minimum
subscription level necessary to release subscription proceeds from escrow. Any
shares purchased by these individuals in excess of their original commitment
will be purchased for investment and not with a view to the resale of such
shares. Because purchases by these persons may be substantial, investors should
not place any reliance on the sales of a specified minimum offering amount as an
indication of the merits of this offering or that such a person's investment
decision is shared by unaffiliated investors.
Transfer Agent and Registrar
Prior to the offering, the Company served as transfer agent for the
common stock. The Company has retained Continental Stock Transfer and Trust
Company, 2 Broadway, 19th Floor, New York, New York, 10004 to handle stock
transfers, stock record keeping, and mailing of all proxy materials.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, Citrus will have 1,952,296 shares of
common stock outstanding assuming the sale of the minimum offering and 2,152,296
assuming the sale of the maximum offering. These shares will be freely tradeable
without restriction or further registration under the Securities Act, except for
shares held or purchased by "affiliates" of the Company. Affiliates are defined
in Rule 144 to mean a person who directly or indirectly through the use of one
or more intermediaries controls, is controlled by, or is under common control
with the Company.
Citrus' executive officers and directors, and certain directors of
Citrus Bank, holding in the aggregate, 526,407 shares of common stock (978,913
assuming full exercise of their warrants, options and intended purchases in this
offering as affiliates of the Company) have agreed with the sales agent not to
sell any Citrus shares they own for period of two years after the date of this
Prospectus without the prior written consent of the sales agent. After this
period, these individuals will be permitted to sell their shares of common stock
in the public market, subject to the volume and other limitations on sale
imposed by Rule 144, unless the sale of the shares is registered under the
Securities Act or is made pursuant to an exemption from the registration
requirements.
In general, under Rule 144, a person (or affiliates whose shares are
aggregated) would be entitled to sell within any three month period that number
of shares which does not exceed the greater of: (i) 1% of the number of shares
of common stock then outstanding (19,523 shares based on the minimum offering
and 21,523 shares based on the maximum offering); or (ii) the average weekly
trading volume of the common stock during the four calendar weeks preceding such
sale. Sales pursuant to Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not deemed to have been an affiliate of the Company at any time during
the 90 days preceding a sale would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above.
54
<PAGE>
LEGAL MATTERS
Certain legal matters, including, among other things, the validity of
the shares of common stock offered hereby have been passed upon by Igler &
Dougherty, P.A., Tallahassee, Florida, counsel to Citrus. In addition, certain
legal matters in connection with the offering will be passed upon for the sales
agent by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia.
EXPERTS
The consolidated financial statements of Citrus set forth herein as of
December 31, 1997 and 1996, and for each of the years in the two-year period
ended December 31, 1997, have been included herein and in the registration
statement in reliance upon the report of Stevens, Thomas, Schemer & Sparks, P.A.
appearing elsewhere herein, and upon the authority of this firm as experts in
accounting and auditing.
55
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 F-1
Consolidated Statements of Operations for the Nine Months Ended September 30, 1998
and 1997 (unaudited) and for the Years Ended December 31, 1997 and 1996 F-2
Consolidated Statements of Comprehensive Income for the Nine Months Ended
September 30, 1998 and 1997 (unaudited) and the Years Ended
December 31, 1997 and 1996 F-3
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (unaudited) and the Years Ended
December 31, 1997 and 1996 F-4
Consolidated Statement of Changes in Stockholders' Equity F-5
Notes to Consolidated Financial Statements F-6 - F-21
</TABLE>
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Citrus Financial Services, Inc. and Subsidiary
Vero Beach, Florida
We have audited the accompanying consolidated balance sheets of Citrus Financial
Services, Inc. and Subsidiary (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, comprehensive income,
cash flows, and changes in stockholders' equity for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements, referred to above, present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996, and the consolidated results of its operations,
comprehensive income, and cash flows for the years then ended, in conformity
with generally accepted accounting principles.
STEVENS, THOMAS, SCHEMER & SPARKS, P.A.
/S/STEVENS, THOMAS, SCHEMER & SPARKS, P.A.
January 30, 1998
Jacksonville, Florida
<PAGE>
<TABLE>
<CAPTION>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998
(Unaudited) December 31, 1997
----------- -----------------
(In Thousands, Except Per Share Data)
ASSETS
<S> <C> <C>
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 notes to financial statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended For the Years Ended
September 30, December 31,
------------- ------------
(Unaudited)
1998 1997 1997 1996
---- ---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest and fees on loans $ 4,252 $ 3,589 $ 4,827 $ 4,350
Investment income on investment securities
and interest-bearing deposits in other banks 339 413 547 569
Federal funds sold 174 94 140 54
---------- ----------- ---------- -----------
Total interest income 4,765 4,096 5,514 4,973
--------- --------- ---------- ----------
Interest on deposits 2,106 1,809 2,424 2,227
Other 52 51 58 61
----------- ----------- ----------- -----------
Total interest expense 2,158 1,860 2,482 2,288
--------- --------- ---------- ----------
Net interest income before provision for credit losses 2,607 2,236 3,032 2,685
--------- --------- ---------- ----------
Provision for credit losses (21) 237 269 352
---------- ---------- ---------- ----------
Net interest income 2,628 1,999 2,763 2,333
--------- --------- --------- ---------
Fees and service charges 268 231 327 316
Other income 57 53 72 55
---------- ----------- ----------- -----------
Total other income 325 284 399 371
---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 1,080 944 1,280 1,142
Expenses of bank premises and fixed assets 391 341 452 387
Other operating expenses 738 803 1,043 1,044
---------- ---------- ---------- ----------
Total other expenses 2,209 2,088 2,775 2,573
--------- --------- ---------- ----------
Income before provision for income taxes 744 195 387 131
Provision for income taxes 280 74 137 46
---------- ----------- ---------- -----------
Net income $ 464 $ 121 $ 250 $ 85
========= ========== ========== ==========
Weighted average common shares outstanding during period:
Basic 952 860 948 941
========== ========== ========== ==========
Fully diluted 1,172 1,056 1,168 1,160
========= ========= ========= =========
Earnings per share:
Basic $ 0.49 $ 0.14 $ 0.26 $ 0.09
========= ========= ========= =========
Fully diluted $ 0.40 $ 0.11 $ 0.21 $ 0.07
========= ========= ========= =========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Dollars in Thousands)
For the Nine Months Ended For the Years Ended
September 30, December 31,
------------- ------------
(Unaudited)
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 464 $ 121 $ 250 $ 85
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period 59 65 47 (28)
Less: reclassification adjustment for gains
included in net income during period ( 3) - - -
----------- ------------ ------------ ------------
Total 56 65 47 (28)
----------- ----------- ----------- ------------
Comprehensive income $ 520 $ 186 $ 297 $ 57
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended For the Years Ended
September 30, December 31,
------------- ------------
(Unaudited)
1998 1997 1997 1996
---- ---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Net cash provided (used) by operating activities $ 948 $ 3,165 $ 4,544 $ (2,253)
---------- --------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in:
Investment securities 1,970 44 291 772
Interest-bearing deposits in other banks 54 (5) 45 18
Loans (9,590) (2,586) (3,420) (5,434)
Proceeds from the sale of other real estate - - - 158
Purchases of bank premises and equipment, net (478) (109) (147) (570)
---------- ---------- ---------- ----------
Net cash used in investing activities (8,044) (2,656) (3,231) (5,056)
--------- --------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 10,523 2,438 3,955 4,842
Advances (repayments) of FHLB advances, net (91) (291) (1,122) (521)
Advances (repayments) of federal funds purchased - - (500) 500
Issuance of common stock upon exercise of stock options - 82 82 -
------------ ----------- ----------- ------------
Net cash provided by financing activities 10,432 2,229 2,415 4,821
--------- ---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 3,336 2,738 3,728 (2,488)
Cash and cash equivalents at beginning of period 6,242 2,514 2,514 5,002
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 9,578 $ 5,252 $ 6,242 $ 2,514
========= ========= ========= =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Retained Holding
Par Additional Earnings Gains Total
Value Paid-in (Accumulated (Losses) on Stockholders'
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, 1995 853,967 $ 3.47 $ 2,966 $ 3,108 $ (574) $ (130) $ 5,370
Comprehensive income:
Net income - - - - 85 -
Net change in unrealized holding
gains on securities - - - - - (28)
Total comprehensive income - - - - - - 57
----------- ----------- ----------- ----------- --------- --------- ----------
Balance, December 31, 1996 853,967 3.47 2,966 3,108 (489) (158) 5,427
Stock options exercised 11,862 - 41 41 - - 82
Comprehensive income:
Net income - - - - 250 -
Net change in unrealized holding
gains on securities - - - - - 63
Total comprehensive income - - - - - - 313
----------- ----------- ----------- ----------- --------- --------- ---------
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 - - - - - - 520
----------- ----------- ----------- ----------- --------- --------- ---------
Balance, September 30, 1998
(Unaudited) 952,296 $ 3.15 $ 3,007 $ 3,149 $ 225 $ (39) $ 6,342
======= ======== ======== ======== ======= ======= ========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
General:
The consolidated financial statements include the accounts and transactions of
Citrus Financial Services, Inc. (the "Company") and its wholly-owned subsidiary,
Citrus Bank, National Association (the "Bank"). All significant intercompany
accounts and transactions have been eliminated in consolidation. For financial
statement presentation, Citrus Mortgage Corp., a wholly-owned inactive company,
has been excluded from the consolidation.
The Bank provides a wide range of banking services to individual and corporate
customers primarily in Indian River County, Florida.
The Company and the Bank are subject to regulations issued by certain regulatory
agencies and undergo periodic examinations by those agencies.
Interim Financial Information:
Interim financial information at September 30, 1998 and 1997, and for the nine
months ended September 30, 1998 and 1997, is unaudited. In the opinion of
management, all adjustments have been made (consisting only of normal recurring
accruals) necessary to present a fair statement of the results for interim
periods. The results for interim periods are not necessarily indicative of
trends or results which may be expected for a full year.
Basis of Financial Statement Presentation:
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and with general practices within the banking
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses, the fair value
of financial instruments, and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans ("Other Real Estate
Owned"). In connection with the determination of the allowances for loan losses
and foreclosed real estate, management obtains independent appraisals for
significant properties.
Management believes that the allowance for credit losses is adequate. While
management uses available information to recognize losses on loans, including
independent appraisals for significant properties, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the allowance based on their judgments about information
available to them at the time of their examination.
Investments:
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS No. 115"), sets the standard
for classification of and accounting for investments in equity securities that
have readily determinable fair values, and all investments in debt securities
that are to be classified as held-to-maturity securities, available-for-sale
securities, or trading securities.
Debt securities that an enterprise has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost. Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings. Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity.
F-6
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
The Bank classifies its investments at the purchase date in accordance with the
above-described guidelines. Premiums or discounts on securities at the date of
purchase are being amortized or accreted, respectively, over the estimated life
of the security using a method which approximates the level yield method. Gains
and losses realized on the disposition of securities are based on the specific
identification method and are reflected in other income.
Loans:
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan fees and unearned discounts. Unearned
discounts on installment loans are recognized as income over the term of the
loans using a method that approximates the interest method.
Interest on loans is accounted for on the accrual basis. Generally, the
Company's policy is to discontinue the accrual of interest on loans delinquent
over ninety days unless fully secured and in the process of collection. The
accrued and unpaid interest is reversed from current income and thereafter
interest is recognized only to the extent payments are received. A nonaccrual
loan may be restored to accrual basis when interest and principal payments are
current and prospects for future recovery are no longer in doubt.
In 1995, the Company adopted Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"), which
sets the standard for recognition of loan impairment and the measurement methods
for certain impaired loans and loans whose terms are modified in troubled debt
restructurings.
Under SFAS No. 114, a loan is impaired when it is probable that a creditor will
be unable to collect the full amount of principal and interest due according to
the contractual terms of the loan agreement. When a loan is impaired, a creditor
has a choice of ways to measure the impairment. The measurement of impairment
may be based on (1) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan, or (3) the fair value of the
collateral of a collateral-dependent loan. Creditors may select the measurement
method on a loan-by-loan basis, except that collateral- dependent loans for
which foreclosure is probable must be measured at the fair value of the
collateral. A creditor in a troubled debt restructuring involving a restructured
loan should measure impairment by discounting the total expected future cash
flows at the loan's original effective rate of interest. If the value of the
loan is less than the recorded investment in the loan, a loss should be
recognized by recording a valuation allowance and a corresponding increase to
the provision for credit losses charged to operating expenses.
Loan Fees:
Loan origination and commitment fees and certain direct loan origination costs
are deferred and recognized over the term of the related loans as a yield
adjustment using the level-yield method (loan-by-loan basis). Amortization of
deferred fees and costs is discontinued when collectibility of the related loan
is deemed uncertain. Fees and direct loan origination costs for unexercised
commitments are recognized in income upon expiration of commitment.
Organizational Costs:
Certain costs incurred in organizing the Company have been deferred and are
being amortized to expense on the straight-line method over five years from the
date of opening for business. These costs were fully amortized as of December
31, 1996.
Allowance for Credit Losses:
The provision for credit losses charged to operating expenses is based upon
management's judgment of the adequacy of the allowance giving consideration to
its credit loss experience and an evaluation of the current loan portfolio. Such
provisions, less net charge-offs, comprise the allowance, which is deducted from
loans and is available for future charge-offs.
F-7
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
Facilities:
Facilities are stated at cost, less accumulated depreciation and amortization.
Charges to income for depreciation and amortization are computed on the
straight-line method over the assets' estimated useful lives.
When properties are sold or otherwise disposed of, the gain or loss resulting
from the disposition is credited or charged to income. Expenditures for
maintenance and repairs are charged against income and renewals and betterments
are capitalized.
Other Real Estate Owned:
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed real
estate.
Off-Balance Sheet Instruments:
In the ordinary course of business the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they become payable.
Income Taxes:
Provisions for income taxes are based on amounts reported in the statements of
operations, after exclusion of non-taxable income such as interest on state and
municipal securities, and include deferred taxes on temporary differences in the
recognition of income and expense for tax and financial statement purposes.
Deferred taxes are computed on the liability method as prescribed in SFAS No.
109, Accounting for Income Taxes.
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. The average number of shares and dilutive potential shares have been
restated for the 10% stock split on April 27, 1998. The following information
was used in the computation of earnings per share on both a basic and diluted
basis for the nine months ended September 30, 1998 and 1997, and the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
September 30, December 31,
1998 1997 1997 1996
---- ---- ---- ----
(In thousands except per share data)
Basic EPS computation:
<S> <C> <C> <C> <C>
Numerator - Net income $ 464 $ 121 $ 250 $ 85
Denominator - Weighted average shares outstanding 952 860 948 941
------- ------- ------- -------
Basic EPS $ 0.49 $ 0.14 $ 0.26 $ 0.09
====== ====== ====== ======
Diluted EPS computation:
Numerator - Net income $ 464 $ 121 $ 250 $ 85
----- ------ ------ -------
Denominator - Weighted average shares outstanding 952 860 948 941
Stock options and warrants 220 196 220 219
------- ------- ------- -------
1,172 1,056 1,168 1,160
------ ------ ------ ------
Diluted EPS $ 0.40 $ 0.11 $ 0.21 $ 0.07
====== ====== ====== ======
</TABLE>
F-8
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
Statement of Cash Flows:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts on deposit in noninterest-bearing accounts with other commercial
banks, and federal funds sold.
Reclassification of Accounts:
Certain items in the financial statements for 1996 have been reclassified to
conform to the classifications used for the current year.
F-9
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of instruments in debt and equity
securities at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government agencies $ 1,101 $ 5 $ 2 $ 1,104
Mortgage-backed securities 4,396 - 131 4,265
Other 427 - - 427
--------- --------- --------- ---------
$ 5,924 $ 5 $ 133 $ 5,796
======= ======== ====== =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Securities held-to-maturity:
U.S. Government agencies $ 1,474 $ - $ 45 $ 1,429
Mortgage-backed securities 1,762 - 15 1,747
Other 251 - 1 250
--------- --------- --------- ---------
$ 3,487 $ - $ 61 $ 3,426
======= ======== ======= =======
The amortized cost and estimated fair value of instruments in debt and equity
securities at December 31, 1996, are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Securities available-for-sale:
U.S. Government agencies $ 500 $ - $ 5 $ 495
Mortgage-backed securities 4,643 - 216 4,427
Other 374 - - 374
--------- --------- --------- ---------
$ 5,517 $ - $ 221 $ 5,296
======= ======== ====== =======
</TABLE>
F-10
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
NOTE 2 - INVESTMENT SECURITIES (Continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Securities held-to-maturity:
<S> <C> <C> <C> <C>
U.S. Government agencies $ 1,499 $ - $ 177 $ 1,322
Mortgage-backed securities 2,452 2 12 2,442
Other 252 - 3 249
--------- --------- --------- ---------
$ 4,203 $ 2 $ 192 $ 4,013
======= ======== ======= =======
</TABLE>
The fair value of securities fluctuates during the investment period. No
provision for loss has been made in connection with the decline of fair value
below book value, because the securities are purchased for investment purposes
and the decline is not deemed to be other than temporary. Temporary declines in
fair value of securities available-for-sale at December 31, 1997, of $95,000
(net of deferred income taxes of $33,000) are regarded as an adjustment to
stockholders' equity. The estimated fair value of securities is determined on
the basis of market quotations. At December 31, 1997, securities with carrying
value of approximately $107,000, and market values of approximately $108,000,
were pledged to secure deposits and for other operating purposes.
At December 31, 1997, the carrying value of collateralized mortgage obligations
included in securities available-for-sale and securities to be held-to-maturity
was approximately $3,998,000 and $7,000, respectively.
The estimated fair value of instruments in debt and equity securities classified
as held-to-maturity at September 30, 1998, totaled $1,367,000.
No investment securities were sold during 1997 or 1996.
The cost and estimated fair value of debt and equity securities at December 31,
1997, by contractual maturities, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Securities to be
Available-for-sale Held-to-Maturity
------------------ ----------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 500 $ 498 $ 1,848 $ 1,837
Due from one to five years 601 606 858 849
Due from five to ten years 206 197 477 441
Due after ten years 4,190 4,068 304 299
Other 427 427 - -
--------- --------- ----------- -----------
$ 5,924 $ 5,796 $ 3,487 $ 3,426
======= ======= ======= =======
</TABLE>
F-11
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
NOTE 3 - LOANS
The loan portfolio is classified as follows:
December 31,
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Commercial and agricultural $ 10,316 $ 9,133
Real estate 35,922 37,980
Installment and other loans 4,326 3,945
--------- ---------
Total loans 50,564 51,058
Less, unearned income (26) (34)
Less, allowance for credit losses (431) (354)
--------- ---------
$ 50,107 $ 50,670
======== ========
The following is a summary of the transactions in the allowance for credit
losses:
December 31,
1997 1996
---- ----
(In Thousands)
Balance, beginning of year $ 354 $ 373
Provisions charged to operating expenses 269 352
Loans charged-off (212) (879)
Recoveries 20 508
------- ------
Balance, end of year $ 431 $ 354
===== =====
</TABLE>
Loans on which interest was not being accrued totaled $783,000 and $728,000 at
December 31, 1997 and 1996, respectively. Had interest been accrued on these
nonaccrual loans at originally contracted rates, interest income (before income
taxes) would have been increased by approximately $100,000 for 1997 and $69,000
for 1996.
A loan is considered impaired when, according to the contractual terms of the
contract, it is probable that the Bank will be unable to collect all amounts
due. At December 31, 1997, the Bank had classified $256,000 as impaired. Such
amounts are also included in nonaccrual loans.
F-12
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 4 - FACILITIES
<TABLE>
<CAPTION>
Facilities are summarized as follows:
Accumulated Estimated
Depreciation and Net Book Useful
Cost Amortization Value Lives
---- ------------ ----- -----
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1997
Land and land improvements $ 278 $ - $ 278
Bank building and improvements 2,200 434 1,766 31.5 years
Furniture, fixtures, and equipment 1,178 751 427 2 - 15 years
-------- --------- ---------
$ 3,656 $ 1,185 $ 2,471
======= ======= =======
Accumulated Estimated
Depreciation & Net Book Useful
Cost Amortization Value Lives
---- ------------ ----- -----
(In Thousands)
December 31, 1996
Land and land improvements $ 278 $ - $ 278
Bank building and improvements 2,200 363 1,837 31.5 years
Furniture, fixtures, and equipment 1,099 664 435 2 - 15 years
------- ------ -------
$ 3,577 $ 1,027 $ 2,550
======= ======= =======
</TABLE>
Other expenses for the years ended December 31, 1997 and 1996, included
depreciation and amortization of facilities of $226,000 and $189,000,
respectively.
NOTE 5 - FHLB ADVANCES
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 with no expiration date. 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.
Advances on the line of $1,000,000 were outstanding as of December 31, 1996,
with interest at 5.57%. All advances under this line were repaid in 1997. In
addition to the line of credit arrangement, the Bank had fixed FHLB advances
outstanding as follows:
Maturity Date Interest Rate 1997 1996
- ------------- ------------- -------- --------
2000 5.26% $166,667 $238,095
2003 5.76% $266,666 $316,667
Interest expense on the line of credit and other FHLB advances amounted to
approximately $56,000 and $57,000 for the years ended December 31, 1997 and
1996, respectively.
F-13
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 6 - TIME DEPOSITS
Time deposits at December 31, 1997, totaled $38,089,000. Maturities of such
deposits are as follows:
<TABLE>
<CAPTION>
Time, $100,000 Other Time
And Over Deposits
-------- --------
(In Thousands)
<S> <C> <C>
Three months or less $ 2,850 $ 8,803
Over three through twelve months 3,681 11,604
Over twelve months through three years 1,548 9,603
Over three years - -
------------- -----------
$ 8,079 $ 30,010
======== ========
Interest expense on certificates of deposit of $100,000 or more for 1997 and
1996 were approximately $504,000 and $520,000, respectively.
NOTE 7 - INCOME TAXES
The provision for income taxes on income is summarized as follows:
December 31,
1997 1996
---- ----
(In Thousands)
Current:
Federal $ 87 $ -
State 1 -
-------- ---------
88 -
------- ---------
Deferred:
Federal 41 38
State 8 8
------- --------
49 46
------ -------
Total income tax provision $ 137 $ 46
===== ======
A reconciliation of the income tax computed at the Federal statutory rate of 34%
and the income tax provision shown on the statement of operations, follows:
December 31,
1997 1996
---- ----
(In Thousands)
Tax computed at statutory rate $ 132 $ 45
Increase (decrease) resulting from:
Utilization of net operating loss carryforwards (2) (27)
Recognition of deferred income tax assets - 23
Other 7 5
-------- --------
Income tax provision $ 137 $ 46
===== ======
</TABLE>
F-14
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 7 - INCOME TAXES (Continued)
The components of the deferred income tax assets included in other assets on the
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
(In Thousands)
Deferred tax asset:
<S> <C> <C>
Federal $ 111 $ 236
State 19 41
------- -------
130 277
------ -------
Deferred tax liability:
Federal (80) (56)
State (14) (10)
-------- -------
( 94) (66)
-------- ------
36 211
Valuation allowance - (12)
--------- -------
Net deferred tax asset $ 36 $ 199
====== ======
The tax effects of each type of significant item that gave rise to deferred
taxes are:
December 31,
1997 1996
---- ----
(In Thousands)
Net unrealized holding losses on securities $ 33 $ 96
Depreciation (94) (45)
Net operating loss carryover - 84
Allowance for loan losses 97 76
Valuation allowance - (12)
--------- -------
Net deferred tax asset $ 36 $ 199
====== ======
</TABLE>
As of December 31, 1996, the Company had a net operating loss carryforward of
$222,000 for Federal and State income tax purposes, which was fully utilized in
1997.
NOTE 8 - DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) Profit Sharing Plan (the "Plan") that covers
substantially all employees. The Company, at its sole discretion, may make
matching and discretionary contributions to eligible participants. The Plan is a
prototype plan and has been approved by the Internal Revenue Service.
During 1996, no contributions were made by the Company to this Plan. For 1997,
the Company expensed approximately $12,000.
F-15
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The financial statements do not reflect various commitments and contingent
liabilities which arise in the normal course of business and which involve
elements of credit risk, interest rate risk, and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit. A summary of these commitments and contingent
liabilities follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Commitments to extend credit $ 7,400 $ 7,098 $ 7,115
Standby letters of credit $ 75 $ 75 $ 175
Commercial letters of credit $ 100 $ 100 $ 198
</TABLE>
The Bank uses the same credit policies in making commitments to extend credit
and in issuing standby letters of credit as it does for extensions of credit
shown on the balance sheets.
The Company is party to litigation, outstanding commitments, and other
contingent liabilities arising in the normal course of business. In the opinion
of management, the resolution of such matters will not have a material effect on
the consolidated financial statements.
At September 30, 1998, the Bank had $1,750,000 unfunded lines-of-credit
available from other banks for the purchase of Federal funds.
NOTE 10 - CONCENTRATIONS OF CREDIT
Substantially all of the Bank's loans, commitments, and standby letters of
credit have been granted to customers in south Florida. The concentrations of
credit by type of loan are set forth in Note 3. The distribution of commitments
to extend credit approximates the distribution of loans outstanding. Standby
letters of credit were granted primarily to commercial borrowers.
NOTE 11 - RELATED PARTIES
The Bank holds loans and engages in transactions in the ordinary course of
business with certain of the directors and senior officers of the Bank. Total
loans to such persons and their affiliates amounted to $3,543,000 and $2,230,000
at December 31, 1997 and 1996, respectively.
Following is a summary of activity for 1996 and 1997 for such loans:
<TABLE>
<CAPTION>
Beginning End of
of Year Year
Balance Additions Reductions Balance
------- --------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1996 $ 1,791 $ 1,610 $ 1,171 $ 2,230
1997 $ 2,230 $ 1,973 $ 660 $ 3,543
</TABLE>
At September 30, 1998, the aggregate amount of all extensions of credits to
related parties totaled $2.9 million.
F-16
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 12 - STOCKHOLDERS' EQUITY
The Company has authorized 11,000,000 shares of authorized capital stock,
consisting of 10,000,000 shares of common stock, par value $3.15 (as adjusted
for stock splits) per share, and 1,000,000 shares of preferred stock, par value
of $5.00 per share. As of September 30, 1998, 952,296 shares of common stock
were issued and outstanding and 532,385 shares were subject to issuance pursuant
to options and warrants. No shares of preferred stock were issued.
A summary of changes (as rounded) from the original issue of $5.00 par value and
$10.00 option price follows:
<TABLE>
<CAPTION>
Record Date Action Par Value Option Price
----------- ------ --------- ------------
<S> <C> <C> <C> <C>
April 13, 1990 Initial Offering $5.00 $10.00
March 15, 1995 20% Stock Split (.83) (1.67)
January 15, 1997 20% Stock Split (.70) (1.39)
May 8, 1998 10% Stock Split (.32) (.63)
-------- ---------
At September 30, 1998 $3.15 $ 6.31
===== =======
</TABLE>
In connection with the Company's 1990 offering, organizers were granted warrants
to purchase 427,065 shares of common stock at $6.31 (as adjusted for stock
splits) per share. The warrants are exercisable for a ten-year period commencing
April 13, 1990.
As part of an employment agreement, in 1990 the Company granted stock options to
one of its organizing directors for 5,931 shares of common stock at $10.00 per
share. In addition, the director received stock options in each of the second
and fourth years of his employment agreement for an aggregate total of 5,931
shares at an option price of $10.00 per share. On April 28, 1997, the directors
amended the employment agreement to be consistent with all other options and
warrants. This action reduced the exercise price per option from $10.00 per
share to $6.31 (as adjusted for stock splits) per share. On May 15, 1997, all of
these options were exercised.
In addition to stock options granted to the director, the Company granted stock
options to officers equal to 2% of the number of shares sold in the initial
public offering. The stock options totaling 17,081, are exercisable at $6.31 (as
adjusted for stock splits) per share starting with the fifth anniversary of Bank
operations and expire on the tenth anniversary.
The Company has also entered into employment agreements with its officers
providing for the granting of 39,840 non-statutory stock options. Such options
are exercisable at $6.31 (as adjusted for stock splits) per share.
For the year ended December 31, 1996, Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
became effective. SFAS No. 123 permits application of the accounting
requirements of an earlier issued APB Opinion No. 25 and, accordingly, no
compensation cost has been recognized in 1997 and 1996. However, the Company
must comply with certain additional disclosures under SFAS No. 123. The
following is a summary of the activity relating to the options.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Fair Value of
Shares(1) Price Granted Options
--------- ----- ---------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 44,783(2) $ 7.75(2)
Granted 24,000(2) $ 6.94(2) $ 3.27(2)
--------
Outstanding at December 31, 1996 68,783 (2) $ 7.47(2)
Exercised (11,862)(2) $ 6.94(2)
--------
Outstanding at December 31, 1997 56,921(2) $ 6.94(2)
========
Outstanding at September 30, 1998 62,631(3) $ 6.31(3)
========
</TABLE>
(1) No options were granted during 1997.
(2) Unadjusted for 1998 10% stock split.
(3) Adjusted for 1998 10% stock split.
F-17
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
The following is a summary of the status of the plans at September 30, 1998:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Remaining Exercise
Price Number Contractual Life Price
----- ------ ---------------- -----
<S> <C> <C> <C> <C>
$ 6.31 17,081 28 months $ 6.31
$ 6.31 39,840 43 months $ 6.31
</TABLE>
All outstanding options were fully vested and exercisable at December 31, 1997.
Under SFAS No. 123, compensation cost is the fair value of the stock options at
the grant date less any amounts paid by the employee or director for the stock
options. The fair value of the stock options granted in 1996 were estimated
using a Black-Scholes option pricing model and the following assumptions:
1996
----
Dividend yield 0%
Risk-free interest rate 5%
Expected life 55 months
Expected volatility 15%
Based on the above assumptions, pro forma net income would have declined by
approximately $49,000 for 1996 as compared with reported results for the same
periods. Pro forma net income per share would have declined by $0.06.
The ability of the Company to pay dividends to stockholders depends primarily on
dividends received by the Company from the Bank. The Bank's ability to pay
dividends is limited by Federal banking regulations based upon the Bank's
profitability and other factors. At December 31, 1997, approximately $120,000 of
retained earnings of the Bank was available for payment of dividends to the
Company without prior regulatory approval.
On December 19, 1996, the Board of Directors approved a 20% stock split payable
on January 31, 1997, for shareholders of record on January 15, 1997. All stock
related data in the financial statements reflects the stock split for all
periods presented.
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%.
F-18
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
NOTE 13 - NONINTEREST OPERATING EXPENSES
Other expenses were as follows:
December 31,
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Advertising and public relations $ 69 $ 54
Professional fees 288 266
Data processing 153 140
Stationery, printing, and supplies 58 57
Amortization of organizational costs - -
Insurance 24 47
Telephone 40 37
Other miscellaneous expenses 411 443
--------- ---------
$ 1,043 $ 1,044
======= =======
</TABLE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-term Investments:
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities:
For securities held as investments, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loans Receivable:
For loans subject to repricing and loans intended for sale within six
months, fair value is estimated at the carrying amount plus accrued
interest.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposit Liabilities:
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of long-term fixed maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturities.
Short-term Debt:
For short-term debt, including accounts and demand notes payable, the
carrying amount is a reasonable estimate of fair value.
F-19
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bank's financial instruments at December 31,
1997, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
(In Thousands)
Financial Assets
<S> <C> <C>
Cash and deposits in other banks $ 3,803 $ 3,803
Federal funds sold 2,500 2,500
Investment securities 9,283 9,222
Loans 50,107 49,956
-------- ---------
Total assets valued $ 65,693 $ 65,481
======== ========
Financial Liabilities
Deposits $ 62,601 $ 62,754
FHLB advances 433 433
----------- -----------
Total liabilities valued $ 63,034 $ 63,187
======== ========
</TABLE>
NOTE 15 - REGULATORY CAPITAL MATTERS
The Federal Reserve Board and other bank regulatory agencies have adopted
risk-based capital guidelines for banks and bank holding companies. The main
objectives of the risk-based capital framework are to provide a more consistent
system for comparing capital positions of banking organizations and to take into
account the different risks among banking organizations' assets, liabilities,
and off-balance sheet items. Bank regulatory agencies have supplemented the
risk-based capital standard with a leverage ratio for Tier I capital to total
reported assets.
Failure to meet the capital adequacy guidelines and the framework for prompt
corrective actions could initiate actions by the regulatory agencies, which
could have a material effect on the financial statements.
As of December 31, 1997, the most recent notification from the FDIC, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, it will have to
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as disclosed in the table below. There are no conditions or events since the
most recent notification that management believes have changed the prompt
corrective action category.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
less than less than less than less than
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Risk-Based Capital
(To Risk-Weighted Assets) $ 5,859 11.68% $ 4,014 8.00% $ 5,018 10.00%
Tier I Capital
(To Risk-Weighted Assets) $ 5,428 10.82% $ 2,007 4.00% $ 3,011 6.00%
Tier I Capital
(To Adjusted Total Assets) $ 5,428 7.93% $ 2,737 4.00% $ 3,421 5.00%
</TABLE>
F-20
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION
Presented below are condensed financial statements for Citrus Financial
Services, Inc. (parent only):
<TABLE>
<CAPTION>
Condensed Balance Sheets as of December 31: 1997 1996
---- ----
(In Thousands)
Assets
<S> <C> <C>
Cash and cash equivalents $ 264 $ 263
Investment in subsidiary bank, net 5,333 4,997
Other assets 225 178
--------- --------
Total $ 5,822 $ 5,438
======= =======
Liabilities and Stockholders' Equity
Liabilities $ - $ 11
Stockholders' equity 5,822 5,427
-------- --------
Total $ 5,822 $ 5,438
======= =======
Condensed Statements of Operations and Stockholders' Equity
Years Ended December 31: 1997 1996
---- ----
(In Thousands)
Equity in net income of subsidiary bank $ 273 $ 121
Other income 43 67
Other expenses (66) (103)
--------- --------
Net income 250 85
Stockholders' Equity:
Beginning of year 5,427 5,371
Stock options exercised 82 -
Acquisition of treasury stock - (1)
Net change in unrealized holding losses on
securities in subsidiary bank 63 (28)
---------- ----------
End of year $ 5,822 $ 5,427
======= =======
Condensed Statements of Cash Flows
Years Ended December 31: 1997 1996
---- ----
(In Thousands)
Operating Activities
Net income $ 250 $ 85
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (273) (121)
Deferred income taxes 68 23
Other (44) (85)
---------- ---------
Net Cash Provided By (Used In) Operating Activities 1 (98)
Cash and cash equivalents:
Beginning of year 263 361
--------- ---------
End of year $ 264 $ 263
======== ========
</TABLE>
F-21
<PAGE>
================================================================================
You should rely only on the information contained in this Prospectus or
information that we have referred to you. We have not authorized anyone to
provide you with other or different information. Although information contained
in this Prospectus was, to the best of our knowledge, correct when it was
printed, some of the information will change because the Company continues to
engage in its usual and customary business activities. The accidental or
improper delivery of this Prospectus to persons to whom it is unlawful to make
an offer, because of state securities laws, shall not constitute an offer to buy
the securities. Until [40 days from the date of this prospectus] all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS:
- --------------------------------------------------------------------------------
Prospectus Summary ........................................................ 2
Summary of Financial Data ................................................. 6
Risk Factors .............................................................. 7
Use of Proceeds ........................................................... 10
Capitalization ............................................................ 12
Market for Common Stock ................................................... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................................................... 15
Business .................................................................. 34
Regulation and Supervision ................................................ 41
Management ................................................................ 45
Executive Compensation .................................................... 46
Certain Transactions ...................................................... 47
Beneficial Ownership of Common Stock ...................................... 48
Description of Capital Stock .............................................. 49
Summary of the
Articles of Incorporation of Citrus .................................. 50
The Offering .............................................................. 52
Shares Eligible for Future Sale ........................................... 54
Legal Matters ............................................................. 55
Experts ................................................................... 55
Index to Consolidated Financial Statements ................................ 56
- --------------------------------------------------------------------------------
Minimum 1,000,000 Shares
Maximum 1,200,000 Shares
[Citrus Financial Services, Inc. Logo]
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
January ___, 1999
[Banc Stock Financial services, Inc. Logo]
- --------------------------------------------------------------------------------
PART-II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24: Indemnification of Directors and Officers
As provided under Florida law, the Company's directors shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of duty of care or any other duty owed to the Company as a director,
unless the breach of or failure to perform those duties constitutes: (i) a
violation of criminal law, unless the director had reasonable cause to believe
his conduct was lawful, or had no reasonable cause to believe his conduct was
unlawful; (ii) a transaction from which the director received an improper
personal benefit; (iii) for unlawful corporate distributions; or (iv) an act or
omission which involves a conscious disregard for the best interests of the
Corporation or which involves willful misconduct; or (v) an act of recklessness
or an act or omission which was committed in bad faith or with malicious purpose
or in a manner exhibiting wanton and willful disregard of human rights, safety,
or property.
Article IX of the Company's Bylaws provides that the Company shall
indemnify a director who has been successful in the defense of any proceeding to
which he was a party or in defense of any claim, issue or matter therein because
he is or was a director of the Company, against reasonable expenses incurred by
him in connection with such defense.
The Company's Bylaws also provide that the Company is required to
indemnify any director, officer, employee or agent made a party to a proceeding
because he is or was a director, employee or agent against liability incurred in
the proceeding if he acted in a manner he believed in good faith or to be in or
not opposed to the best interests of the Company and, in the case of any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. Determination concerning whether or not the applicable standard of
conduct has been met can be made by: (i) a disinterested majority of the Board
of Directors; (ii) a majority of a committee of disinterested directors; (iii)
independent legal counsel; or (iv) an affirmative vote of a majority of shares
held by disinterested stockholders.
<PAGE>
Item 25: Other Expenses of Issuance and Distribution
The following table sets forth all expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered, other than the sales agent's commissions assuming a maximum offering
price of $11.50. All of the amounts shown are estimated except for the
registration fees of the Commission.
SEC Registration Fees ........................... $ 3,836
NASD Filing Fee ................................. 1,880
Blue Sky Registration Fees & Expenses ........... 7,500
Legal fees and expenses ......................... 95,000
Accounting Fees ................................. 40,000
Printing and Engraving expenses ................. 15,000
Transfer Agent and Registration Fees and Expenses 4,000
Escrow Fees ..................................... 2,500
Advertising ..................................... 2,000
Miscellaneous ................................... 5,000
--------
Total .................................... $176,716
========
Item 26: Recent Sales of Unregistered Securities.
On December 14, 1995, the Company granted its President, Josh C. Cox, Jr.,
an option to purchase 25,000 shares of the Company's common stock adjusted to
26,400 shares following the 10% stock split. The grant was made in reliance upon
the exemption contained in Section 4(2) of the Securities Act.
<PAGE>
<TABLE>
<CAPTION>
Item 27: Exhibits and Financial Statement Schedules
The following exhibits are filed as part of this Registration Statement:
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
*1.1 Form of Sales Agency Agreement with Banc Stock Financial Services, Inc.
**3.1 Articles of Incorporation of the Company
**3.2 By-Laws of the Company
3.3 Amendments to Bylaws adopted March 16, 1995 (1995 1st Quarter 10Q)
4.1 Specimen Common Stock Certificate
4.2 Form of Escrow Agreement with Independent Bankers' Bank of Florida
5.1 Opinion of Igler & Dougherty, P.A.
21.1 Subsidiaries of the Company
23.1 Consent of Igler & Dougherty, P.A., included in the Opinion Letter
23.2 Consent of Stevens, Thomas, Schemer & Sparks, P.A.
24.1 Power of Attorney (included in signature page to this Registration Statement)
27.1 Financial Data Schedule
- ------------------------------------
* To be filed by amendment.
** Denotes previously filed as part of the Company's S-18 Registration Statement,
File No. 33-29696-A.
</TABLE>
<PAGE>
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) (ss. 230.424[b] of this
chapter) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the 33 Act, the Registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form SB-2 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of Vero
Beach, State of Florida, on the 19th day of November 1998.
CITRUS FINANCIAL SERVICES, INC.
By: /s/ Josh C. Cox, Jr.
----------------------------------------------
Josh C. Cox, Jr., President and
Chief Executive Officer
By: /s/ Henry O. Speight
----------------------------------------------
Henry O. Speight,
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Josh C. Cox, Jr., and Henry O. Speight their true
and lawful attorneys-in-fact and agent, with full power of substitution and
resubstitution for him in his name, place and stead, in any and all capacities,
to sign any and all amendments (including post effective amendments) to this
Registration Statement, and to file same, with all exhibits thereto, and other
documents in connection therewith, with the SEC, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
as fully and to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the 33 Act, this Registration Statement has
been signed by the following persons in the capacities and as of the dates
indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
--------- ----- ----
Chairman of the Board November __, 1998
- -----------------------------
Robert L. Brackett
/s/ Josh C. Cox, Jr. Director November 19, 1998
- -----------------------------
Josh C. Cox, Jr.
/s/ Hubert Graves, Jr. Director November 19, 1998
- -----------------------------
Hubert Graves, Jr.
/s/ Roy H. Lambert Director November 19, 1998
- -----------------------------
Roy H. Lambert
/s/ Earl H. Masteller Director November 19, 1998
- -----------------------------
Earl H. Masteller
/s/ Louis L. Schlitt Director November 19, 1998
- -----------------------------
Louis L. Schlitt
/s/ Walter E. Smith, Jr. Director November 19, 1998
- -----------------------------
Walter E. Smith, Jr.
Director November , 1998
- -----------------------------
James R. Thompson
</TABLE>
Exhibit 4.1
------------------
Specimen Common Stock Certificate
------------------------------------
<PAGE>
Number Shares
[LOGO]
A FLORIDA CORPORATION
CUSIP 177482 10 6
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASESSABLE SHARES OF
THE COMMON SHARES, PAR VALUE $3.15 EACH, OF
CITRUS FINANCIAL SERVICES, INC.
transferable on the books of the Corporation by the holder hereof, in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed.
WITNESS the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated:
1989 Corporate Seal
Secretary President
<PAGE>
CITRUS FINANCIAL SERVICES, INC.
The following abbreviations, when used in the inscription of the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _______ Custodian ________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minor
survivorship and not as tenants in common Act_________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received __________ hereby sell, assign and transfer unto
Please insert social security number
or other identifying number of assignee:
-----------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated,
X -----------------------------------------------------------------------
NOTICE: The signature to this assignment must correspond with
the name as written upon the face of the Certificate in every
particular without alteration or enlargement or any change whatever.
<PAGE>
Exhibit 4.2
------------------
Form of Escrow Agreement
With
Independent Bankers' Bank of Florida
------------------------------------
<PAGE>
[Independent Bankers' Bank of Florida Logo]
ESCROW AGREEMENT
This Escrow Agreement is entered into and effective this 20th day of
October, 1998, by and between Citrus Financial Services, Inc., a Florida
corporation ( the "Company") and the Independent Bankers' Bank of Florida
("Escrow Agent" or "Agent").
WITNESSETH:
WHEREAS, the Company, proposes to offer for sale up to 1,200,000 shares
of its common stock (the "Common Stock"), which shares shall be registered under
the Securities Act of 1933, as amended, at a per share price to be determined,
in minimum subscriptions of 100 shares ("Offering"); and
WHEREAS, the Company has requested the Escrow Agent to serve as the
depository for the payment of subscription proceeds ("Payments") received by the
Company from investor(s) who are subscribing to purchase shares of Common Stock
in the Company pursuant to, and in accordance with, the terms and conditions
contained in the Company's Prospectus and Subscription Agreements thereto; and
WHEREAS, the Offering will terminate at 5:00 P.M. Eastern Time, 90 days
after the Effective Date of the Company's Registration Statement, unless
extended by the Company for up to an additional 90 days ( "Initial Offering
Period"), and, if during the Initial Offering Period the minimum number of
shares have been subscribed to, the Offering will continue until the earlier of:
(i) the maximum number of shares are subscribed to, or (ii) one year after the
Effective Date of the Company's Registration Statement.
NOW THEREFORE, in consideration of the premises and understandings contained
herein, the parties agree as follows:
(1) The Company hereby appoints and designates the Escrow Agent for the
purposes set forth herein. The Escrow Agent acknowledges and accepts said
appointment and designation. The Company understands that the Escrow Agent, by
accepting said appointment and designation, in no way endorses the merits of the
offering of the shares described herein. The Company agrees to notify any person
acting on its behalf that the position of Escrow Agent does not constitute such
an endorsement, and to prohibit said persons from the use of the Agent's name as
an endorser of such offering. The Company further agrees to allow the Escrow
Agent to review any sales literature in which the Agent's name appears and which
is used in connection with such offering.
(2) The Company shall deliver all payments received (the "Subscription
Funds") to the Escrow Agent (Independent Bankers' Bank of Florida, Attn.:
Customer Service Group) in the form in which they are received by noon of the
fifth (5th) business day after their receipt by the Company, and the Company
shall deliver to the Escrow Agent within ten (10) calendar days copies of
written acceptances of the Company for shares in the Company for which the
Subscription Funds represent payment. Upon receipt of such written acceptance by
the Company, the Escrow Agent shall deposit such funds into the escrow account.
The Company shall also deliver to the Escrow Agent completed copies of
Subscription Agreements for each
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<PAGE>
subscriber, along with such subscriber's name, address, number of shares
subscribed and social security or taxpayer identification number.
(3) Subscription Funds shall be held and disbursed by the Escrow Agent
in accordance with the terms of this Agreement.
(4) In the event any Subscription Funds are dishonored for payment for
any reason, the Escrow Agent agrees to orally notify the Company thereof as soon
as practicable and to confirm same in writing and to return due dishonored
Subscription Funds to the Company in the form in which they were delivered.
(5) Should the Company elect to accept a subscription for less than the
number of shares shown in the purchaser's Subscription Agreement, by indicating
such lesser number of shares on the written acceptance of the Company
transmitted to the Escrow Agent, the Agent shall deposit such payment in the
escrow account and then, upon separate instruction from the Company, remit
within ten (10) days after such deposit to such subscriber at the address shown
in his Subscription Agreement that amount of his Subscription Funds in excess of
the amount which constitutes full payment for the number of subscribed shares
accepted by the Company as shown in the Company's written acceptance, without
interest or diminution. Said address shall be provided by the Company to the
Escrow Agent as requested.
(6) Definitions as used herein:
(a) "Total Receipts" shall mean the sum of all Subscription
Funds delivered to the Escrow Agent pursuant to Paragraph (2) hereof, less (i)
all Subscription Funds returned pursuant to Paragraphs (4) and (5) hereof and
(ii) all Subscription Funds which have not been paid by the financial
institution upon which they are drawn.
(b) "Expiration Date" shall mean 5:00 P.M., Eastern Time, 90
days after the Effective Date of the Company's Registration Statement; provided,
however, in the event that the Escrow Agent is given oral notification followed
in writing, by the Company that it has elected to extend the offering to a date
not later than 90 additional days, then the Expiration Date shall mean 5:00
P.M., Eastern Time, on the date to which the offering has been extended. The
Company will notify the Escrow Agent of the effective date of the Prospectus as
soon as practicable after such date has been determined.
(c) "Closing Date" shall mean the business day on which the
Company, after determining that all of the Offering conditions have been met,
selects in its sole discretion. The Closing Date shall be confirmed to the
Escrow Agent in writing by the Company.
(d) "Escrow Release Conditions" shall mean that (i) the Company
has not canceled the Offering, and (ii) that the Company has accepted the
minimum volume of new shares of the subscription identified in the Company's
Registration Statement.
(7) If, on or before the Expiration Date, (i) the Total Receipts held
by the Escrow Agent equal or exceed the amount determined by multiplying the
minimum number of shares times the offering price and (ii) the Company has
certified to the Escrow Agent that, the Escrow Release Conditions have been met,
the Escrow Agent shall:
(a) No later than 10:00 A.M., Eastern Time, one day prior to
Closing Date (as that term is defined herein), deliver to the Company all
Subscription Agreements provided to the Escrow Agent; and
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(b) On the Closing Date, no later than 10:00 A.M., Eastern Time,
upon receipt of 24-hour written instructions from the Company, remit all amounts
representing Subscription Funds, plus any profits or earnings, held by the
Escrow Agent pursuant hereto to the Company in accordance with such
instructions.
(8) If (i) the Escrow Release Conditions are not met by the Expiration
Date, or (ii) the offering is canceled by the company at any time prior to the
Expiration Date, then the Escrow Agent shall promptly remit to each subscriber
at the address set forth in his Subscription Agreement an amount equal to the
amount of his Subscription Funds thereunder, plus any profits or earnings
thereon. The earnings accruing to any individual subscriber under this paragraph
shall be a prorated share of the gross earnings on all funds under escrow,
weighted by the amount and the duration of the funds tendered for the individual
subscription. Under no circumstances will earnings accrue to any subscription
canceled for any reason other than those provided for in this paragraph.
(9) Pending disposition of the Subscription Funds under this Agreement,
the Escrow Agent will invest collected Subscription Funds, in $1,000 increments
above a maintained balance of $50,000, in overnight repurchase agreements
collateralized at 102% with obligations of the United States Treasury or United
States Government Agencies. These repurchase agreement transactions will earn
interest at a rate of 35 basis points below the daily Overnight Fed Funds Sold
rate.
(10) The obligations as Escrow Agent hereunder shall terminate upon the
Agents transferring all funds held hereunder pursuant to the terms of Paragraphs
(7) or (8) herein, as applicable.
(11) The Escrow Agent shall be protected in acting upon any written
notice, request, waiver, consent, certificate, receipt, authorization, or other
paper or document which the Agent believes to be genuine and what it purports to
be.
(12) The Escrow Agent shall not be liable for anything which the Agent
may do or refrain from doing in connection with this Escrow Agreement, except
for the Agent's own gross negligence or willful misconduct.
(13) The Escrow Agent may confer with legal counsel in the event of any
dispute or questions as to the construction of any of the provisions hereof, or
the Agent's duties hereunder, and shall incur no liability and shall be fully
protected in acting in accordance with the opinions and instructions of such
counsel. Any and all expenses and legal fees in this regard will be paid by the
Company.
(14) In the event of any disagreement between the Company and any other
person resulting in adverse claims and demands being made in connection with any
Subscription Funds involved herein or affected hereby, the Agent shall be
entitled to refuse to comply with any such claims or demands as long as such
disagreement may continue, and in so refusing, shall make no delivery or other
disposition of any Subscription Funds then held under this Agreement, and in so
doing shall be entitled to continue to refrain from acting until (a) the right
of adverse claimants shall have been finally settled by binding arbitration or
finally adjudicated in a court in Orange County, Florida assuming and having
jurisdiction of the Subscription Funds involved herein or affected hereby or (b)
all differences shall have been adjusted by agreement and the Agent shall have
been notified in writing of such agreement signed by the parties hereto. In the
event of such disagreement, the Agent may, but need not, tender into the
registry or custody of any court of competent jurisdiction in Orange County,
Florida all money or property in the Agent's hands under the terms of this
Agreement, together with such legal proceedings as the Agent deems
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appropriate and thereupon to be discharged from all further duties under this
Agreement. The filing of any such legal proceeding shall not deprive the Agent
of compensation earned prior to such filing. The Escrow Agent shall have no
obligation to take any legal action in connection with this Agreement or towards
its enforcement, or to appear in, prosecute or defend any action or legal
proceeding which would or might involve the Agent in any cost, expense, loss or
liability unless indemnification shall be furnished.
(15) The Escrow Agent may resign for any reason, upon thirty (30) days
written notice to the Company. Upon the expiration of such thirty (30) day
notice period, the Escrow Agent may deliver all Subscription Funds and
Subscription Agreements in possession under this Escrow Agreement to any
successor Escrow Agent appointed by the Company, or if no successor Escrow Agent
has been appointed, to any court of competent jurisdiction. Upon either such
delivery, the Escrow Agent shall be released from any and all liability under
this Escrow Agreement. A termination under this paragraph shall in no way change
the terms of Paragraphs (14) and (16) affecting reimbursement of expenses,
indemnity and fees.
(16) The Escrow Agent will charge the Company for services hereunder a
fee of $1,500.00, plus an additional fee of $5.00 for each check issued, $10.00
for each wire and $.50 for each photo copy necessitated in the performance of
duties, with total fees for services not to exceed $2,000.00. All actual
expenses and costs incurred by the Agent in performing obligations under this
Escrow Agreement will be paid by the Company. All fees and expenses shall be
paid on the Closing Date by the Company. Any subsequent fees and expenses will
be paid by the Company upon receipt of invoice.
(17) All notices and communications hereunder shall be in writing and
shall be deemed to be duly given if sent by registered or certified mail, return
receipt requested, to the respective addresses set forth herein. The Escrow
Agent shall not be charged with knowledge of any fact, including but not limited
to performance or non-performance of any condition, unless the Escrow Agent has
actually received written notice thereof from the Company or its authorized
representative clearly referring to this Escrow Agreement.
(18) The rights created by this Escrow agreement shall inure to the
benefit of, and the obligations created hereby shall be binding upon the
successors and assigns of the Escrow Agent and the parties hereto.
(19) This Escrow Agreement shall be construed and enforced according to
the laws of the State of Florida.
(20) This Escrow Agreement shall terminate and the Escrow Agent shall
be discharged of all responsibility hereunder at such time as the Escrow Agent
shall have completed all duties hereunder.
(21) This Escrow Agreement may be executed in several counterparts,
which taken together shall constitute a single document.
(22) This Escrow Agreement constitutes the entire understanding and
agreement of the parties hereto with respect to the transactions described
herein and supersedes all prior agreements or understandings, written or oral,
between the parties with respect thereto.
(23) If any provision of this Escrow Agreement is declared by a court
of competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way.
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(24) The Company shall provide the Escrow Agent with its Employer
Identification Number as assigned by the Internal Revenue Service. Additionally,
the Company shall complete and return to the Escrow Agent any and all tax forms
or reports required to be maintained or obtained by the Escrow Agent.
(25) The authorized signature of the Escrow Agent hereto is consent
that a signed copy hereof may be filed with the various regulatory authorities
of the State of Florida and with any Federal Government agencies or regulatory
authorities.
In Agreement and acceptance of the Escrow Agreement between Citrus Financial
Services, Inc. (Company), the parent company of Citrus Bank, National
Association, and the Independent Bankers' Bank of Florida (Escrow Agent).
<TABLE>
<CAPTION>
<S> <C> <C>
CITRUS FINANCIAL SERVICES, INC.
Address: 1717 Indian River Blvd., Suite 100
Vero Beach, Florida 32960-5626
Fax: (561) 567-8301
Phone: (561) 778-4100
By: ___________________________________
Authorized Signature
Title: Josh C. Cox, President and CEO
(Type Name and Title)
Attest:_____________________
Date ADDITIONAL AUTHORIZED SIGNER
By: Henry O. Speight Name:___________________________________
Additional Authorized Signature
Title: Senior Vice-Preisent Title: Randy J. Riley, Senior Vice President
(Type Name and Title)
(SEAL)
INDEPENDENT BANKERS' BANK OF FLORIDA
Address: 109 E. Church Street, Suite BB,
or
P.O. Box 4998
Orlando, Florida 32802-4998
Attest_________________________
Date Fax: (407) 843-4817
By: ______________________ By: _______________________________________
Authorized Signature
Title: ______________________ Title: James H. McKillop, III, Executive Vice President
-------------------------------------------------
(Type Name and Title)
(CORPORATE SEAL)
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</TABLE>
<PAGE>
Exhibit 5.1
------------------
Opinion of Igler & Dougherty, P.A.
------------------------------------
<PAGE>
<TABLE>
<CAPTION>
IGLER & DOUGHERTY, P.A.
Attorneys at Law
1501 PARK AVENUE EAST
TALLAHASSEE, FLORIDA 32301
--------
Winter Park Office Tampa Office
- ------------------ ------------
<S> <C> <C>
Federal Trust Bank Building (850) 878-2411 TELEPHONE Park Tower - Suite 2625
1211 Orange Avenue (850) 878-1230 FACSIMILE 400 North Tampa Street
Winter Park, Florida 32789 Tampa, Florida 33602
(407) 647-0822 - Telephone REPLY TO: TALLAHASSEE OFFICE (813) 307-0510 - Telephone
(407) 647-8089 - Facsimile (813) 307-0415 - Facsimile
</TABLE>
November 20, 1998
Board of Directors
Citrus Financial Services, Inc.
1717 Indian River Boulevard, Suite 100
Vero Beach, Florida 32960
Gentlemen:
You have requested our opinion in connection with the proposed stock
offering of up to 1,200,000 shares of Common Stock, par value $3.15 per share
(the "Common Stock") by Citrus Financial Services, Inc., ("Company") through a
public offering.
In preparation of this opinion, we have reviewed the Company's Articles
of Incorporation, its Bylaws, Registration Statement on Form SB-2 filed on
behalf of the Company with the Securities and Exchange Commission ("SEC") on
November 20, 1998, and all exhibits thereto (the "Registration Statement"). We
have also examined the originals or copies, certified or otherwise identified to
our satisfaction, of such documents and corporate and other records, have
obtained such certificates, letters, representations, and information from the
officers and directors of the Company and from others, and made such
examinations of law as we have deemed necessary. In connection with rendering
the opinions set forth below, we have assumed that the Company will conduct
business primarily in Florida.
Based upon the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of Florida, with corporate power and
authority to own its property and conduct its business as now conducted as
described in the Registration Statement;
2. The shares of Common Stock of the Company to be issued in accordance
with the terms set forth in the Prospectus constituting a part of the
Registration Statement are validly authorized and, when (a) the pertinent
provisions of the Securities Act of 1933 and such "blue- sky" and securities law
as may be applicable have been complied with, (b) the subscription agreements
for such shares have been properly accepted, and (c) such shares have been duly
delivered against payment therefore as contemplated by the Prospectus, such
shares will be validly issued, fully paid, and nonassessable.
<PAGE>
We understand that you may wish to include this Opinion as an exhibit
to the Registration Statement, and we consent to such inclusion. Furthermore, we
consent to the references to this firm's name in the Company's Prospectus and
any and all amendments thereto.
Sincerely,
/s/ IGLER & DOUGHERTY, P.A.
<PAGE>
Exhibit 21.1
------------------
Subsidiaries of the Company
------------------------------------
o Citrus Bank, N.A.
o Citrus Mortgage Corporation
<PAGE>
Exhibit 23.2
------------------
Consent of
Stevens, Thomas, Schemer & Sparks, P.A.
------------------------------------
<PAGE>
Consent of Independent Auditors
We consent to the inclusion of our report, dated January 30, 1998, on our audit
of the consolidated financial statements of Citrus Financial Services, Inc. and
Subsidiary, and to the use of our name under the caption "Experts" in this
Registration Statement of Citrus Financial Services, Inc., on Form SB-2.
/S/STEVENS, THOMAS, SCHEMER & SPARKS, P.A.
STEVENS, THOMAS, SCHEMER & SPARKS, P. A.
Jacksonville, Florida
November 19, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 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>
