SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1998
Commission File No. 33-29696-A
CITRUS FINANCIAL SERVICES, INC.
A Florida Corporation (IRS Employer Identification No. 65-0136504)
1717 Indian River Boulevard, Suite 100
Vero Beach, Florida 32960
(561) 778-4100
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
NONE
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act
of 1934:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Revenues for the fiscal year ended December 31, 1998: $ 6,873,000
The aggregate market value of the common stock of the Registrant held by
nonaffiliates of the Registrant (549,653 shares) on February 28, 1999, was
approximately $5,771,000. As of such date, no organized trading market existed
for the common stock of the Registrant. The aggregate market value was
computed by reference to the highest known recent trade of the common stock
of the Registrant at $10.50 per share. For the purposes of this response,
directors, officers and holders of 5% or more of the Registrant's common stock
are considered the affiliates of the Registrant at that date.
The number of shares outstanding of the Registrant's Common Stock, as of
February 28, 1999: 952,296 shares of $3.15 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Fiscal Year ended
December 31, 1998. (Part II )
2. Portions of Proxy Statement for the 1999 Annual Meeting of Shareholders.
(Part III)
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CITRUS FINANCIAL SERVICES, INC. AND AFFILIATES ("CITRUS")
TABLE OF CONTENTS
NOTE: Certain information required by Form 10-KSB is incorporated by reference
from the 1998 Annual Report and 1999 Annual Meeting Proxy Statement as
indicated below. Only that information expressly incorporated by reference is
deemed filed with the Commission.
PART I Page Number
Item 1 Business of Citrus 3
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 15
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations 15<F1>
Item 7 Financial Statements and Supplementary Data 15<F1>
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 9 Directors and Executive Officers of the Registrant 16<F2>
Item 10 Executive Compensation 16<F2>
Item 11 Security Ownership of Certain Beneficial Owners and
Management 16<F2>
Item 12 Certain Relationships and Related Transactions 17
Item 13 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 19
______________________________________________________________
<F1> These items are incorporated by reference from Citrus' 1998 Annual
Report pursuant to Instruction E.3. of Form 10-KSB.
<F2> The material required by Items 9 through 11 is hereby incorporated
by reference from Citrus' definitive proxy statement pursuant to
Instruction E.3. of Form 10-KSB.
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PART I
ITEM 1. BUSINESS OF CITRUS
Citrus Financial Services
Citrus is headquartered in Vero Beach, Florida, which is the county seat
for Indian River County. Citrus operates primarily through Citrus Bank.
Citrus Mortgage Corp., a mortgage brokerage company which has not yet begun
operations, is a wholly owned subsidiary of Citrus which was established in
1995. See "Business of Citrus - Non-Bank Subsidiary".
Citrus Bank
Citrus operates a traditional community banking business through its
retail banking facilities with a friendly and professional staff. Citrus'
staff is committed to developing long-term relationships with customers by
offering personalized, quality service. Citrus offers a broad range of retail
and commercial banking services, including various types of deposit accounts
and loan products for small businesses and consumers. Citrus 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. As part of its "community
banking" approach, Citrus Bank encourages its officers to actively participate
in community organizations.
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 deposits are federally insured up to applicable
limits by the FDIC under the Bank Insurance Fund. Citrus Bank's primary
sources of income are interest and fees 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.
Primary Service Area
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. Citrus 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.
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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.
Citrus considers Indian River County and the southern portion of Brevard
County as its current primary market area.
Citrus' Expansion Plans Include New Banks and New Branches
Citrus intends to expand its operations by establishing a new commercial
bank in Dade County, Florida, and by establishing new branch offices of Citrus
Bank 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 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 a community with these attributes 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. Citrus intends to locate branches in 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.
We Operate in a Competitive Business
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.
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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.
Loan Activities
General. Citrus' primary business is making commercial business, real
estate and consumer loans. Citrus also purchases loans for resale in the
secondary market. As of December 31, 1998, net loans held for investment
totaled $52.5 million, or 62.5%, of total assets. As of the same period,
loans held for sale totaled $8.3 million, or 9.9%, of total assets.
Loan Underwriting. Loan activities include credit evaluation under Citrus
Bank's 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) purchased, 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 December 31, 1998, was approximately $971,000
or approximately $1,619,000 for certain excepted loans. At December 31, 1998,
the maximum amount loaned to one borrower and related entities, including
guarantees of loans with and without recourse, totaled approximately $1,191,000,
which was within the applicable legal lending limit of $1,619,000. See
"Regulation And Supervision Governing Citrus."
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Interest rates charged on loans are affected principally by competitive
factors, the demand for 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 December 31,
1998, $18.4 million, or 34.6%, of Citrus' total loan portfolio, excluding
loans held for sale, consisted of one-to-four family residential real estate
loans. Approximately $5.6 million, or 30.3%, 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 Citrus 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 the loan. ARM loans reduce the risks to Citrus 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 Citrus 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.
Table Funding Loan Program. Citrus provides funds to a limited number of
real estate mortgage brokers who make mortgage loans in its primary market
area. These loans are closed in the name of the mortgage broker and are
immediately assigned to Citrus. Citrus acquires the residential mortgage loan
for the purpose of resale to an end investor, typically a mortgage brokerage
firm. Interest and fee income from this program totaled $159,000 in 1997 and
$879,000 in 1998. These amounts represented 2.9% of total income for 1997 and
13.6% for 1998.
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 Citrus' primary
market area. As of December 31, 1998, construction and land development loans
amounted to $4.1 million, or less than 7.8%, of loans held for investment.
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 December 31, 1998, Citrus had
one spec loan totaling $631,000.
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 these products.
Commercial Real Estate Loans. Commercial real estate loans are secured
primarily by office and retail business properties located in the primary
market area. These types of loans amounted to $12.4 million, or 23.3%, of net
loans held for investment as of December 31, 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 typically offer fixed-rate
commercial real estate or multi-family real estate loans.
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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 this type
of loan may be negatively impacted by adverse conditions in the real estate
market or the economy. At December 31, 1998, the largest commercial real
estate loan was $925,000 secured by a medical office building located in Vero
Beach, Florida, and was current. The largest multi-family real estate
relationship was $345,000 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 December 31, 1998, the largest commercial loan
was $850,000 secured by an assignment of a mortgage. At December 31, 1998,
Citrus had outstanding Small Business Administration ("SBA") loans of $241,000.
Citrus is not a designated SBA underwriter. We will consider making additional
SBA loans when the demand for SBA loans increases in our primary market area.
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 this type of loan helps maintain a
profitable spread between Citrus' 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. 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 consumer 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 these loans. As of December 31, 1998, consumer loans amounted
to $4.3 million, or 8.2%, of net loans held for investment.
Income from Lending Activities. We earn fees in connection with loan
commitments and originations, loan purchases, 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 market area.
Loan fees typically are charged at the time of loan origination or purchase
and may be a flat fee or a percentage of the amount of the loan. Under current
accounting standards the total amount of loan 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 these 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.
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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 December 31, 1998, Citrus had $390,000 in OREO properties and $500,000
in loans past due 90 days or more.
Problem Asset Classification Procedures
Commercial banks are required to review, and when appropriate, classify
their assets on a regular basis. The Comptroller of the Currency 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.
Loss assets are 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 Citrus.
At December 31, 1998, Citrus had 12 loans classified as substandard or
doubtful totaling $448,000, and no loans classified as loss.
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 factors including
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 allowance may be necessary based on changes in economic
conditions. At December 31, 1998, Citrus had a total allowance for credit
losses of $461,000, representing 0.9% of total loans held for investment.
Non-Bank Subsidiary
As of December 31, 1998, Citrus 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 December 31, 1998, Citrus'
aggregate investment in Citrus Mortgage was less than $1,000. Citrus Mortgage
is not active.
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Personnel
As of December 31, 1998, Citrus had 2 full-time employees and Citrus Bank
had 41 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 market area.
REGULATION AND SUPERVISION GOVERNING CITRUS
General
As a bank holding company registered under the BHC Act, Citrus is
regulated and supervised 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
governed by Chapter 607, Florida Business Corporation Act ("FBC Act") and the
regulations promulgated by the Florida Department of State. Citrus Bank is
regulated by the Comptroller of the Currency.
Citrus and Citrus Bank are required to file reports with the Federal
Reserve and the Comptroller of the Currency concerning their activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions including mergers with or acquisitions of
other financial institutions. Periodic examinations are performed by the
Federal Reserve and the Comptroller of the Currency 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 regulated by the Federal Reserve and the
Comptroller of the Currency 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 the 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 the
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 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, affiliate 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.
</PAGE>
<PAGE>
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 any support.
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 its 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.
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:
the default of a commonly controlled FDIC-insured depository
institution, or
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. "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. Federal Reserve Board Regulation
Y 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:
the bank holding company's securities are registered securities
under Section 12 of the Securities Exchange Act of 1934; or
no other person owns a greater percentage of that class of voting
securities.
This offering contains a purchase limitation which precludes a person
individually, or together with their associates, or with persons acting in
concert, 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. Roy Lambert, a director of Citrus, is not governed by the
purchase limitation because he has already received approval to acquire up to
100% of Citrus' 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.
</PAGE>
<PAGE>
FDIC Regulations Requiring 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.
As required by the FDICIA, undercapitalized institutions must submit
recapitalization plans to their respective federal banking regulatory agencies,
and a company controlling a failing institution must guarantee that
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 operating under a regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital
measure.
"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.
"critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2%.
The FDIC is authorized effectively to downgrade a bank to a lower
capital category than the bank's capital ratios would otherwise indicate. A
decision to do so would be based upon safety and soundness considerations, such
as when the bank has received a less than satisfactory examination rating for
any of the CAMELS rating categories other than Capital:
i.e.
Asset quality
Management
Earnings
Liquidity
Sensitivity to market risk
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.
FDIC 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 Comptroller of the
Currency, 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 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.
</PAGE>
<PAGE>
FDIC 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
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:
maximum classified assets to capital ratios;
minimum earnings sufficient to absorb losses without impairing
capital;
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
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.
Limits on Loans We Can Make to One Borrower. Federal law generally
allows 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.
Restrictions on the 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. Citrus 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, Citrus 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 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 Comptroller of the Currency capital requirements
in effect at the time, and the ability of Citrus Bank to comply with those
requirements.
Limitations on Deposits Acquired From Brokers. 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 brokered deposits without restriction. The rule
requires registration of deposit brokers and imposes certain record keeping
requirements. Institutions that are not "well-capitalized", even those who
meet minimum capital requirements, must comply with regulatory limits on rates
of interest they may pay on brokered and other deposits. Citrus Bank does not
have any brokered deposits.
Assessments Required by 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 of
Citrus Bank - FDIC Insurance on Deposit Accounts".
</PAGE>
<PAGE>
Elimination of Most Restrictions on 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, so that any out-of-state
bank holding company would be able to acquire and consolidate any Florida-based
bank, but must comply with 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:
to accelerate the effective date, or
to prohibit out-of-state banks from operating interstate branches
within its territory.
Then or after June 1, 1997, adequately capitalized and managed bank
holding companies would be able to consolidate multiple interstate banks.
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 governed by applicable
state branching laws. Florida has adopted legislation which permits interstate
acquisitions and interstate branching effective June 1, 1997. Florida law
prohibits branching by out of state banks.
Annual Assessment Charged to Citrus by the Comptroller of the Currency.
National banks are required to pay assessments to the Comptroller of the
Currency to fund the operations of the Comptroller of the Currency. The general
assessment, to be paid semiannually, is computed upon a bank's total assets,
including consolidated subsidiaries, as reported in Citrus Bank's latest
quarterly call report. Citrus Bank's assessment was $31,000 for 1998 and
$28,000 for 1997.
Reserves Required by The Federal Reserve System
Federal Reserve regulations require banks to maintain
noninterest-earning reserves against their transaction accounts which are
primarily NOW and regular checking accounts. Federal Reserve regulations
generally require that reserves of 3% must be maintained against aggregate
transaction accounts of $49.3 million or less plus 10% against that portion of
total transaction accounts in excess of $49.3 million. The first $4.4 million
of otherwise reservable balances 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, interest-
earning assets of Citrus Bank are reduced.
Statistical Profile and Other Financial Data
Reference is hereby made to the statistical and financial data
contained in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations," for statistical and financial
data providing a review of Citrus' business activities.
ITEM 2. PROPERTIES
The following table sets forth information with respect to Citrus'
offices as of December 31, 1998.
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year
Facility Size of Facility Facility Net Book
Location Opened in Sq. Ft. Status Value
<S> <C> <C> <C> <C>
Main Office
Citrus Bank, N.A.
1717 Indian River Blvd.,
Ste. 100 1990 10,000 Owned $1,169,000
Vero Beach, Florida
Branches
Sebastian Office
1020 U.S. 1 1993 2,800 Owned $ 433,000
Sebastian, Florida
Barefoot Bay Office
1020 Buttonwood Street 1996 2,160 Owned $ 391,000
Barefoot Bay, Florida
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Citrus or Citrus Bank
is a party or of which any of their properties are subject; nor are there
material proceedings known to Citrus to be contemplated by any governmental
authority; nor are there material proceedings known to Citrus, pending or
contemplated, in which any director, officer, affiliate or any principal
security holder of Citrus, or any associate of any of the foregoing is a party
or has an interest adverse to Citrus or Citrus Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During the period covered by this report and to date, there has been no
established public trading market for Citrus' Common Stock.
As of February 28, 1999, the number of holders of record of Citrus' Common
Stock was 411.
To date, Citrus has not paid any dividends on its Common Stock. It is the
present policy of the Board of Directors of Citrus to reinvest earnings to
fund the growth and expansion activity of Citrus and of Citrus Bank. There are
no current plans to initiate payment of cash dividends, and future dividend
policy will depend on Citrus Bank's earnings, capital requirements, financial
condition and other factors considered relevant by the Board of Directors of
Citrus.
Citrus Bank is restricted in its ability to pay dividends under the national
banking laws and by regulations of the Comptroller. Pursuant to 12 U.S.C. 56,
a national bank may not pay dividends from its capital. All dividends must be
paid out of net profits then on hand, after deducting losses and bad checks.
Payment of dividends out of net profits is further limited by 12 U.S.C. 60(a),
which prohibits a bank from declaring a dividend on its shares of common stock
until its surplus equals its stated capital, unless there has been transferred
to surplus not less than 1/10 of Citrus Bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). Pursuant
to 12 U.S.C. 60 (b), the approval of the Comptroller is required if the total
of all dividends declared by Citrus Bank in any calendar year exceeds the total
of its net profits for that year combined with its retained net profits for
the preceding two years, less any required transfers to surplus.
In December 1990, the Comptroller promulgated regulations which affect the
level of allowable dividend payments by national banks. The intended effect
of the regulations is to make the calculation of national banks' dividend-paying
capacity consistent with generally accepted accounting principles (GAAP). In
this regard, the allowance for loan and lease losses will not be considered an
element of either "undivided profits then on hand" or "net profits". Further,
a national bank may be able to use a portion of its capital surplus account as
"undivided profits then on hand", depending on the composition of that account.
In addition, the regulations clarify that dividends on preferred stock are not
subject to the limitations of 12 U.S.C. 56, while explicitly making such
dividends subject to the constraints of 12 U.S.C. 60. The regulations do not
diminish or impair a well-capitalized bank's ability to make cash payments to
its shareholders in the form of a return of capital.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Citrus hereby incorporates by reference the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 5 through 28 of the 1998 Annual Report to Shareholders for the year ended
December 31, 1998, filed as an Exhibit under Item 14 herein.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Citrus hereby incorporates by reference the Report of the Independent Auditors
and the Consolidated Financial Statements contained in the 1998 Annual Report
to Shareholders for the year ended December 31, 1998.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None.
</PAGE>
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Citrus hereby incorporates by reference the sections entitled "Election of
Directors" and "Board of Directors Meeting" contained at pages 2 through 4 of
the Proxy Statement filed as an Exhibit under Item 14 herein.
ITEM 10. EXECUTIVE COMPENSATION
Citrus's hereby incorporates by reference the section entitled "Executive
Compensation" contained at pages 5 through 6 of the Proxy Statement filed as
an Exhibit under Item 14 herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Citrus hereby incorporates by reference the sections entitled "Election
of Directors" and "Certain Shareholders" contained at pages 2 through 4
of the Proxy Statement filed as an Exhibit under Item 14 herein.
(b) Security Ownership of Management
Citrus hereby incorporates by reference the section entitled "Election
of Directors" contained at pages 2 through 4 of the Proxy Statement
filed as an Exhibit under Item 14 herein.
Changes in Control
(c) Citrus is not aware of any arrangements, including any pledge by any
person of securities of Citrus, the operation of which may at a
subsequent date result in a change of control of Citrus.
<PAGE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Citrus Bank has outstanding loans to certain of Citrus's directors,
executive officers, their associates and members of the immediate families of
such directors and executive officers. These loans were made in the ordinary
course of business, were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with persons not affiliated with Citrus or Citrus Bank and did
not involve more than the normal risk of collectibility or present other
unfavorable features.
Set forth on the following page is certain information as of December 31,
1998 concerning loans made by Citrus Bank to each of its directors, executive
officers and their immediate families whose aggregate indebtedness to Citrus
Bank exceeded $60,000 at anytime since January 1, 1998.
[Intentionally left blank.]
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Largest
Amount Balance
Maturity Outstanding as of
Date of Date of from January December Interest
Name Loan Loan 1, 1998 31, 1998 Rate Type
<S> <C> <C> <C> <C> <C> <C>
Robert L. 5/97 6/02 $ 250,000 $ 0 8.25% Commercial
Brackett 6/97 6/02 342,458 332,247 8.25% Commercial
3/98 1/08 145,615 30,000 7.75% Commercial
8/93 1/04 97,709 0 10.0% Line of Credit
4/90 N/A 15,000 733 13.44% Credit Card
$ 850,782 $ 362,980
Earl H. 2/95 2/10 $ 68,323 $ 64,985 9.75% Real Estate
Masteller 7/93 3/00 22,223 0 9.50% Line of Credit
4/90 N/A 15,000 246 13.44% Credit Card
Masteller & 10/95 6/99 50,000 10,030 9.00% Commercial
Moler, Inc. 5/97 6/00 5,453 3,428 9.25% Commercial
6/97 6/99 2,828 982 9.25% Commercial
9/97 9/99 3,415 1,535 9.25% Commercial
4/91 N/A 5,000 551 13.44% Credit Card
4/91 N/A 5,000 2,485 13.44% Credit Card
5/97 N/A 2,500 0 15.00% Credit Card
5/97 N/A 2,500 33 15.00% Credit Card
1/98 1/23 38,000 37,675 9.00% Real Estate
Masteller, Moler 11/98 11/00 51,542 36,905 9.50% Commercial
& Reed, Inc. 2/98 6/99 34,997 10,009 9.00% Commercial
7/96 7/99 5,409 1,809 9.00% Commercial
10/95 10/99 13,898 6,573 9.00% Commercial
7/97 7/00 8,799 5,624 9.00% Commercial
Walsh Environmental 7/97 7/01 13,558 10,211 9.00% Commercial
Services, Inc. 7/97 7/99 1,242 478 9.00% Commercial
7/97 N/A 5,000 2,616 13.44% Credit Card
6/98 6/02 11,720 10,508 8.75% Commercial
11/98 11/99 18,337 18,337 9.50% Commercial
$ 384,744 $ 225,020
Louis L. Schlitt 9/93 12/00 $ 46,591 $ 46,591 9.50% Line of Credit
10/90 N/A 5,000 2,218 13.44% Credit Card
10/90 N/A 5,000 110 13.44% Credit Card
CFC Unit 201
Corp. 5/97 5/02 522,141 515,842 8.50% Real Estate
Schlitt Insurance 6/98 6/99 50,000 45,000 9.00% Commercial
Services, Inc. 10/90 N/A 5,000 2,396 13.44% Credit Card
$ 633,732 $ 612,157
Walter E.
Smith, Jr. 3/94 3/99 $ 199,000 $ 189,000 8.50% Commercial
7/90 N/A 50,000 1,957 13.44% Credit Card
Walter E. Smith, 12/96 2/01 322,266 0 7.5% Home Equity
Jr. Revocable
Trust
Sherry Smith & 1/92 N/A 6,000 4,529 13.44% Credit Card
Walter Smith
Walter Smith & 10/90 N/A 8,000 0 13.44% Credit Card
Sheila Gallira
Southeast 6/95 N/A 15,000 1,914 13.44% Credit Card
Interstate 6/95 N/A 15,000 1,498 13.44% Credit Card
Services 6/95 N/A 10,000 1,149 13.44% Credit Card
6/95 N/A 5,000 1,756 13.44% Credit Card
6/95 N/A 5,000 1,078 13.44% Credit Card
11/98 11/99 0 0 7.875% Letter of Credit
$ 635,266 $ 202,881
</TABLE>
<PAGE>
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with or incorporated by
reference into this report. The exhibits which are denominated by an
asterisk (*) were previously filed as a part of, and are hereby
incorporated by reference from either (i) a Registration Statement on
Form - 18 under the Securities Act of 1933 for Citrus, as filed with
the Securities and Exchange Commission on June 30, 1989, Registration
No. 33-29696-A (referred to as "S-18"), (ii) an Annual Report on Form
10-KSB (10-K) or (iii) The quarterly report filed on Form 10-QSB for
the quarter ended March 31, 1995 (10-Q). The exhibit numbers
correspond to the exhibit numbers in the referenced documents.
Exhibit No. Description of Exhibit
*3.1 Articles of Incorporation dated May 19, 1989 (S-18)
*3.2 By-laws adopted June 29, 1989 (S-18)
*3.3 Amendments to bylaws adopted March 16, 1995 (1995 10-Q)
*10.3 Employment Agreement dated July 11, 1991 between Registrant
and Randy J. Riley (1992 10-K)
*10.4 Employment Agreement dated July 11, 1991 between Registrant
and Henry O. Speight (1993 10-K)
22.1 Citrus's 1999 Annual Meeting Proxy Statement.
22.2 Citrus's 1998 Annual Report for the year ended December 31, 1998.
23.1 Consent of Independent Auditors
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed by Citrus during the last fiscal
quarter covered by this report.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CITRUS FINANCIAL SERVICES, INC.
Dated: March 23, 1999 By: /s/ Josh C. Cox, Jr.
Josh C. Cox, Jr.
President and Chief Executive Officer
Dated: March 23, 1999 By: /s/ Henry O. Speight
Henry O. Speight
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Robert L. Brackett March 23, 1999
ROBERT L. BRACKETT
Class II Director
/s/ Josh C. Cox, Jr. March 23, 1999
JOSH C. COX, JR.
President, Chief Executive Officer
and Class III Director
/s/ Hubert Graves, Jr. March 23, 1999
HUBERT GRAVES, JR.
Class I Director
/s/ Roy H. Lambert March 23, 1999
ROY H. LAMBERT
Class II Director
/s/ Earl H. Masteller March 23, 1999
EARL H. MASTELLER
Class I Director
/s/ Louis L. Schlitt March 23, 1999
LOUIS L. SCHLITT
Secretary and Class III Director
/s/ Walter E. .Smith, Jr. March 23, 1999
WALTER E. SMITH, JR.
Class I Director
/s/ James R. Thompson March 23, 1999
JAMES R. THOMPSON
Class II Director
</PAGE>
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders as of the
date of filing this report. An annual report and proxy materials will be
furnished to security holders subsequent to the filing of this Annual Report
on Form 10-KSB. Citrus's Proxy Statement and 1998 Annual Report are included
as Exhibits 22.1 and 22.2 of this filing.
<PAGE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We agree to the incorporation by reference into this Form 10-KSB of our report,
dated January 22, 1999, on our audit of the consolidated financial statements
of Citrus Financial Services, Inc. and Subsidiary included in the Citrus Annual
Report for the year ended December 31, 1998.
/s/ STEVENS, SPARKS & COMPANY, P. A.
STEVENS, SPARKS & COMPANY, P. A.
Jacksonville, Florida
March 17, 1999
<PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC.
1717 Indian River Boulevard
Vero Beach, Florida 32960
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 26, 1999
NOTICE IS HEREBY GIVEN, that the 1999 Annual Meeting of Shareholders
("Annual Meeting") of Citrus Financial Services, Inc. ("Citrus"or the "Company")
will be held on Monday, April 26, 1999 at 5:00 p.m., Local Time, at the
Courthouse Executive Center, 2145 14th Avenue, Vero Beach, Florida, for the
following purposes, all of which are more completely set forth in the
accompanying Proxy Statement.
1. To elect a total of two Class III directors, each to serve for a term of
three years (Proposal I);
2. To ratify the Board of Directors' appointment of the Company's independent
auditors for the fiscal year ended December 31, 1999 (Proposal II);
3. To approve the adjournment of the Annual Meeting to solicit additional
proxies in the event that there are not sufficient votes to approve any
one or more of the proposals (Proposal III); and
4. To transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
Note: The Board of Directors is not aware of any other business to come before
this Annual Meeting.
Pursuant to the Bylaws, the Board of Directors has fixed the close of
business on March 12, 1999, as the "Record Date" for the determination of
shareholders entitled to notice of and to vote at the Annual Meeting or any
adjournment thereof.
By Order of the Board of Directors
Josh C. Cox, Jr.
President and Chief Executive Officer
Vero Beach, Florida
March 29, 1999
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN AND DATE
THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE.
<PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC.
1717 Indian River Boulevard
Vero Beach, Florida 32960
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
April 26, 1999
Solicitation and Voting of Proxies
This Proxy Statement and the accompanying Proxy Card are being furnished to
shareholders of Citrus Financial Services, Inc. ("Citrus" or the "Company") in
connection with the solicitation of proxies by the Board of Directors to be used
at the Company's Annual Meeting of Shareholders ("Annual Meeting") or any
adjournment thereof. The Annual Meeting will be held on Monday, April 26, 1999,
at 5:00 p.m., Local Time, at the Courthouse Executive Center, 2145 14th Avenue,
Vero Beach, Florida.
Regardless of the number of shares of common stock owned, it is important
that shareholders be represented by proxy or in person at the Annual Meeting.
Shareholders are requested to vote by completing the enclosed Proxy Card and
returning it signed and dated in the enclosed postage prepaid envelope.
Shareholders are urged to indicate the way they wish to vote in the space
provided on the Proxy Card. Proxies solicited by the Board of Directors of the
Company will be voted in accordance with the directions given therein. Where
no instructions are indicated, proxies will be voted "FOR" the management
director nominees set forth below; "FOR" the ratification of Stevens, Sparks &
Company, P.A., as the independent auditors of Citrus for the fiscal year ended
December 31, 1998; and if necessary, "FOR" approval to adjourn the Annual
Meeting to further solicit Proxies.
Revocation of Proxy
A shareholder's presence at this Annual Meeting will not automatically
revoke his or her proxy. Shareholders may revoke a proxy at any time prior to
its exercise by filing with the Secretary of the Company a written notice of
revocation, by delivering to the Company a duly executed proxy bearing a later
date, or by attending the Annual Meeting and voting in person.
Voting Securities
The securities which may be voted at this Annual Meeting consist of shares
of common stock of Citrus ("Common Stock") with each share entitling its owner
to one vote for the election of directors and any other matters that may come
before the Annual Meeting. The close of business on March 12, 1999, has been
fixed by the Board of Directors as the record date ("Record Date") for the
determination of shareholders entitled to notice of and to vote at this Annual
Meeting and any adjournment thereof. The total number of shares of the
Company's Common Stock outstanding on the Record Date was 952,296 shares which
are held by approximately 411 shareholders.
</PAGE>
<PAGE>
The presence, in person or by proxy, of at least a majority of the total
number of outstanding shares of Common Stock is necessary to constitute a
quorum at the Annual Meeting. In the event there are not sufficient votes for
a quorum to approve any Proposal at the time of the Annual Meeting, this Annual
Meeting may be adjourned in order to permit further solicitation of proxies.
Certain Shareholders
As of March 12, 1999, no persons or apparent groups of persons, other than
Officers or Directors of the Company and Citrus Bank, N.A. (the "Bank"), are
known by management to own beneficially five percent or more of the outstanding
shares of Citrus' Common Stock.
PROPOSAL I - ELECTION OF DIRECTORS
The Board of Directors of Citrus, as proposed herein, will be composed of
eight members. The Board of Directors is divided into three classes and the
terms of each class are staggered so that approximately one-third of the
directors are elected each year. Terms for directors are three years.
Currently there are three Class I directors, three Class II directors, and two
Class III directors. Two Class III directors have been nominated by the Board
to stand for election at this Annual Meeting.
Management's nominees to fill the three-year terms are Josh C. Cox, Jr., and
Louis L. Schlitt, both of which are presently directors of Citrus.
It is intended that the proxies solicited by the Board of Directors will be
voted "FOR" the election of said nominees. If any nominee is unable to serve,
the shares represented by all valid proxies will be voted for the election of
such substitute as the Board may recommend. At this time the Board of Directors
knows of no reason why any nominee might not be able to serve.
The Board of Directors recommends that shareholders
vote "FOR" election of the nominees.
The following table describes the period that each nominee has served as a
director of Citrus, his position and offices held with the Company, his
principal occupation or employment, and further contains information as of
March 12, 1999, with respect to the beneficial ownership (as such term is
defined under the Rules and Regulations of the Securities Exchange Commission)
of the Company's Common Stock held by each nominee, each director, and all
directors as a group.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name, age, principal Amount and nature
occupation, director- Current of beneficial
ships and business Director term ownership of Percent
experience since expires Common Stock of class<F1>
Management's nominees for three-year terms:
<S> <C> <C> <C> <C>
Class III Directors
Josh C. Cox, Jr., Age 56. 1993 1999 26,558 2.7%
President and Chief Executive
Officer of the Company since
June 1994. Vice Chairman and
Chief Executive Officer of the
Bank currently. Bank Consultant
since 1976. President and
Chief Executive Officer of First
Guaranty Bank, Hammond,
Louisiana from 1986 to 1991.
Louis L. Schlitt, Age 62. 1989 1999 72,128 7.1%
President of Schlitt Insurance
Services, Inc. since 1983.
President of Louis Schlitt, Inc.
since 1984.
Continuing Directors:
Class I Directors
Hubert Graves, Jr., Age 67. 1989 2000 149,657 14.8%
President of Hubert Graves
Citrus, Inc. since 1965.
President of HGX, Inc. since
1977.
Earl H. Masteller, Age 59. 1989 2000 45,062 4.6%
President of Masteller &
Moler Associates, Inc., since
1985. Vice President of
Masteller, Moler and Reed,
Inc., since 1987. Secretary
of Walsh Environmental
Services, Inc. since 1997.
Walter E. Smith, Jr., 1990 2000 121,231 12.0%
Age 57.
Owner and operator of
Unocal 76 Truck stops in
Florida and Georgia since 1973.
Director of Travel Centers of
America, Inc. and Subsidiaries
since 1997.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name, age, principal Amount and nature
occupation, director- Current of beneficial
ships and business Director term ownership of Percent
experience since expires Common Stock of class<F1>
Class II Directors
<S> <C> <C> <C> <C>
Robert L. Brackett, Age 63. 1989 2001 111,279<F2> 11.4%
Chariman of the Board of the
Company and the Bank since
Treasurer and Director
of Credit Data Services, Inc.
Since 1977.
Roy H. Lambert, Age 67. 1994 2001 219,900<F3> 21.0%
Chairman of Regency Windsor,
Inc. since 1974.
James R. Thompson, Age 69 1990 2001 222,437<F4> 21.2%
Consulting Engineer for Regency
Windsor Capital, Inc. since 1988.
President of Regency Acquisitions,
Inc. from 1980 to 1988. Advisor
To Chairman of Regency Windsor
Management Co. since 1996.
All Directors and Executive Officers
as a group (13 persons). 953,913<F5> 69.1%
<F1> Percentage computed on 952,296 shares issued and outstanding, plus 469,772
shares subject to presently exercisable stock purchase warrants granted
in connection with Citrus' stock offering, and 62,613 shares subject to
presently exercisable stock options for a total of 1,484,681 beneficial
shares.
<F2> Includes 21,734 shares subject to presently exercisable stock purchase
warrants granted in connection with Citrus' initial stock offering.
Includes 7,372 shares owned by Mr. Brackett individually, 288 shares owned
by his wife, and 71,770 shares owned by Mr. Brackett as Trustee.
<F3> 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.
<F4> Includes 1,111 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. Thompson is the sole Trustee, and 1,584 shares owned
individually.
<F5> Includes 526,407 shares owned plus 364,893 shares subject to presently
exercisable stock purchase warrants granted in connection with Citrus'
initial stock offering and 62,613 shares which may be acquired under
presently exercisable stock options.
Board of Directors Meetings
Citrus conducts its business through meetings of the Board of Directors.
During the fiscal year ended December 31, 1998, the Board of Directors held
five meetings. No director of the Company attended fewer than 75% of the
total meetings of the Board of Directors.
</PAGE>
<PAGE>
Committees of the Board of Directors
The Board of Directors of the Company does not have standing Committees.
Directors' Compensation
Citrus paid director fees of $5,500 to its Directors for the period ended
December 31, 1998, and Citrus Bank paid director fees of $45,500 to its
Directors for the same period.
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, 1998.
Summary Compensation Table
</TABLE>
<TABLE>
<CAPTION>
Long-term
Annual Compensation compensation
Name and principal Other annual Stock All other
position Year Salary<F1> Bonus compensation<F2> options compensation
<S> <C> <C> <C> <C> <C>
Josh C. Cox, Jr. 1998 $160,000 None $ 20,285 None None
President and 1997 $160,000 None $ 18,852 None None
Chief Executive 1996 $160,000 None $ 17,853 26,400 None
Officer since
July 1, 1994
</TABLE>
<F1> Mr. Cox's annual base salary for the fiscal year 1999 is $160,000. This
base salary is considered to be compensation for Mr. Cox's service as
President and Chief Executive Officer of the Company and Vice Chairman
and Chief Executive Officer of the Bank.
<F2> Other annual compensation includes $8,447 which is the value of the cost
to Citrus of the use of a Bank owned automobile, director fees of $6,000,
annual club dues of $5,162 and miscellaneous employee benefits of $676.
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 1998, the
Bank's Board of Directors awarded $20,500 in bonuses to employees of the Bank
during the year ended December 31, 1998. The payment of any bonus is at the
sole discretion of the Board of Directors.
</PAGE>
<PAGE>
401(k) Plan: During 1990 Citrus Bank adopted a 401(k) Plan (the "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 Plan was January 1, 1990. Eligible employees who choose to participate in
the Plan may contribute from 1% to 15% of their annual base salary to the Plan.
The Bank may match up to 100% of all employee contributions which are equal to
or less than $10,000 of base salary. In addition, the Bank may elect to make
additional contributions to the Plan 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 $11,000 to match 25% of employees' 1998 contributions to the Plan
for the fiscal year ended December 31, 1998.
PROPOSAL II - APPOINTMENT OF AUDITORS
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
Citrus' independent auditors for the fiscal year ended December 31, 1998,
were Stevens, Sparks & Company, P.A. (formerly Stevens, Thomas, Schemer &
Sparks, P.A.). The Board of Directors appointed Stevens, Sparks & Company, P.A.
to be its independent auditors for the fiscal year ending December 31, 1999,
subject to shareholder approval. A member of the firm will be present at the
Annual Meeting to respond to shareholders questions and will have the
opportunity to make a statement if he so desires.
The Board of Directors recommends that shareholders
vote "FOR" the ratification of the appointment of
Stevens, Sparks & Company, P.A. as independent
auditors for the fiscal year ending December 31, 1999.
PROPOSAL III - ADJOURNMENT OF ANNUAL MEETING
The Board of Directors of Citrus seeks your approval to adjourn the Annual
Meeting in the event that the number of proxies sufficient to approve Proposals
I and II are not received by April 27, 1999. In order to permit proxies that
have been received by Citrus at the time of the Annual Meeting to be voted, if
necessary, for adjournment, Citrus is submitting the question of adjournment
to permit further solicitation of proxies as a separate matter for your
consideration. If it is necessary to adjourn the Annual Meeting and the
adjournment is for a period of less than 30 days, no notice of the time and
place of the adjourned meeting need be given the shareholders, other than an
announcement made at the Annual Meeting.
The Board of Directors recommends that
shareholders vote "FOR" approval to
adjourn the Meeting.
<PAGE>
<PAGE>
Solicitation
The cost of soliciting proxies on behalf of the Board of Directors for
the Annual Meeting will be borne by Citrus. Proxies may be solicited by
directors, officers, or regular employees of the Company or Citrus Bank in
person or by telephone, telegraph or mail. Citrus will request persons, firms
and corporations holding shares in their names, or in the names of their
nominees, which are beneficially owned by others, to send proxy materials to
and obtain proxies from such beneficial owners, and will reimburse such holders
for their reasonable out-of-pocket expenses in doing so.
Shareholder Proposals
In order to be eligible for inclusion in Citrus' proxy material for next
year's Annual Meeting of Shareholders, any shareholder proposal to take action
at such Annual Meeting must be received at the Corporate Office of the Company,
1717 Indian River Boulevard, Suite 100, Vero Beach, Florida 32960, on or
before January 22, 2000. Proposals must comply with the provisions of 17
C.F.R. Section 240.14a-8 ("Rule 14a") of the rules and regulations of the
Securities and Exchange Commission in order to be included in the Company's
proxy materials.
New business may be taken up at the Annual Meeting, provided the proposal
is stated in writing and filed with the Secretary of the Company at least five
days before the Annual Meeting. Any shareholder may make any other proposal
at the Annual Meeting and the same may be discussed and considered, but unless
stated in writing and filed with the Company's Secretary by the above date,
such proposal shall be laid over for action at an adjourned Annual Meeting or
at a Special Meeting taking place 30 or more days thereafter. This provision
does not prevent the consideration and approval or disapproval at the Annual
Meeting of reports of officers, directors, and committees; but in connection
with such reports, no new business shall be acted upon at such Annual Meeting
unless stated and filed as provided herein.
Financial Statements
A copy of the Annual Report for the fiscal year ended December 31, 1998,
accompanies this Proxy Statement. The Annual Report includes Financial
Statements, which information is incorporated herein by reference.
Report on Form 10-KSB
Shareholders of Citrus can obtain a copy of the Company's Annual Report
for the fiscal year ended December 31, 1998, on Form 10-KSB as filed with the
Securities and Exchange Commission by making a written request therefor to the
Company, Attention: Henry O. Speight, Executive Vice President and Chief
Financial Officer, 1717 Indian River Boulevard, Suite 100, Vero Beach, Florida
32960. Copies of exhibits and basic documents filed with that Report or
referenced therein will be furnished to shareholders of record upon request.
Copies may also be obtained from the Securities and Exchange Commission's
internet website located at www.sec.gov.
<PAGE>
<PAGE>
Other Matters
The Board of Directors knows of no other matters to be brought before the
Annual Meeting. However, if other matters should come before the Annual
Meeting, it is the intention of the persons named in the enclosed form of
Proxy to vote the Proxy in accordance with their judgment of what is in the
best interest of the Company.
Citrus Financial Services, Inc.
Vero Beach, Florida
March 29, 1999
<PAGE>
Corporate Profile
Citrus Financial Services, Inc. (Citrus), the parent company of Citrus Bank,
National Association, has three full-service banking offices. Two of the offices
are located in Indian River County, one in Vero Beach and one in Sebastian. The
third location is in Barefoot Bay which is in adjacent Brevard County. Citrus
has $84 million in consolidated assets. The principal business activities for
Citrus Bank, National Association, include a wide range of FDIC insured deposit
products and commercial, real estate and consumer loans, as well as full service
mortgage banking activities. In addition, Citrus offers armored car services
for its commercial clientele. Citrus' stock is closely held and not traded on
any national market.
Contents
To Our Stockholders and Friends. . . . . . . .2
Consolidated Financial Highlights. . . . . . .3
What's New with Services and Markets . . . . .4
Management's Discussion and Analysis . . . . .5
Independent Auditors' Report . . . . . . . . 36
Consolidated Financial Statements. . . . . . 37
Notes to Consolidated Financial Statements . 41
Board of Directors . . . . . . . . . . . . . 63
Officers . . . . . . . . . . . . . . . . . . 65
Shareholder Information. . . . . . . . . . . 66
<PAGE>
To Our Stockholders and Friends
Growth, Our Focus for 1998 : In 1998, your Board of Directors directed
Management to focus on growth in size and growth in profitability. Rising to
this challenge, we began 1998 with a new focus. By the year's end, the Company
had gathered total assets of $84 million, having grown $15 million or 22%, and
net income grew 126% to $564 thousand. Stockholders' equity grew from $5.8
million to $6.4 million, reflecting a book value per share of $6.77, an
increase of $.66 per share. We have also continued to expand our reach.
Through our armored car service and our personal banking commitment to the
community, we continue to focus on our local banking customers. Our message
remains the consistent: meeting the needs of our local communities, with our
emphasis on small business customers.
Investing in the Future: Early in 1998, the Board of Directors called on
Management to establish internal computer operations and to provide state-of-
the-art computer services to the community. In October 1998, Citrus Bank
began computer operations, processing all customer accounts internally. This
investment provides the Bank with the latest in banking technology, as well as
the flexibility to meet customer demands for quality banking services.
Sensitive to Year 2000 computer issues, this new system provides the Bank with
computer systems that are ready to operate in the new millennium. This new
software and hardware has been declared compliant by the vendor and has been
tested within the Bank and found compliant. This system provides our customers
with the assurance that their money is safe and available.
New Opportunities, Going Further: The Company has filed a registration
statement with the Securities and Exchange Commission to offer 1,000,000 to
1,200,000 shares of its common stock to the public. While the offering must be
declared effective by the SEC and depends on favorable market conditions, it
is the intention to raise additional capital to expand the Company's community
banking operations. Community banking business will be expanded through the
formation of new 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 service areas as
we expand our presence from Melbourne to Miami. We will achieve this goal
through consistent growth and a prudent operating strategy.
Thank You: The support we have received from our stockholders and our local
community has been an important ingredient in our success. On behalf of your
Staff, Officers and Board of Directors, thank you. Sincerely,
Robert L. Brackett, Chairman of the Board Josh C. Cox, Jr., President & CEO
<PAGE>
<PAGE>
Consolidated Financial Highlights: Citrus Bank
<TABLE>
<CAPTION>
SUMMARY OF FINANCIAL DATA
(Dollars in thousands, except per share figures)
At or For the Period Ended
December 31,
At the Period End: 1998 1997
<S> <C> <C>
Assets $ 84,051 $ 69,098
Loans held for investment $ 53,009 $ 49,691
Loans held for investment,
net of allowance for credit losses $ 52,548 $ 49,260
Deposits $ 76,703 $ 62,601
Stockholders' equity $ 6,447 $ 5,822
Book value per share $ 6.77 $ 6.11
Shares outstanding 952,296 952,296
Outstanding warrants to purchase one share of
common stock 469,772 469,772
Vested stock options outstanding 62,613 62,613
Equity-to-assets ratio 7.67% 8.43%
Nonperforming assets-to-total assets ratio 1.06% 2.19%
For the Period: Year Ended December 31,
1998 1997
Total interest income $ 6,452 $ 5,514
Net interest income before provision $ 3,511 $ 3,032
Net income $ 564 $ 250
Return on average assets 0.72% 0.37%
Return on average equity 9.93% 4.46%
Average equity-to-average assets ratio 7.29% 8.28%
Noninterest expenses to average assets 3.86% 4.10%
Yield and Rates:
Loans held for investment 9.9% 9.6%
Securities 5.4% 5.7%
Other interest-earning assets 7.9% 7.2%
All interest-earning assets 9.0% 8.9%
Deposits 4.8% 4.7%
Other borrowed funds 5.5% 5.7%
Net interest margin 4.9% 4.9%
</TABLE>
<PAGE>
What's New with Services and Markets
Pickups and Deliveries: The Company completed its first year by introducing
its uniquely competitive, fully staffed, professional armored car service
designed to cater to commercial clientele. As a result, many new corporate
clients have been added that include small retail clients up to large
"entertainment center" clients. The armored car has proven to be multi-faceted,
meeting the needs of the small family business as well as the large corporate
client. Our focus has been, since our inception, to be a full service
commercial banking enterprise specializing in small to medium business, and our
armored car service clearly demonstrates that commitment. Other "commercial"
banking operations claim they are commercial banks; however, at Citrus Bank,
we show our commitment to our commercial clients through our actions, programs
and policies.
Developing Our Markets: Our Barefoot Bay Center, opened in late 1996, provides
full service banking to this retirement community. By the end of 1998, this
newest Center had garnered $16 million in deposits. Our Sebastian Center,
which opened a few years earlier, had deposits of $17 million at the end of
December 1998. Our Vero Beach Center reached $44 million at the end of the
year. These Centers provide the source of funding for our loan programs in the
local community. The local residents have been very supportive of these Centers
and have welcomed Citrus Bank into their marketplace.
What's in the Future? In the new century, a dynamic organization will be a
prerequisite for continued success. Our Company is no different. To ensure
our success, we are mapping out a progressive future with expansive goals that
will encompass locations from Melbourne to Miami. This kind of vision will
require capital investment to support growth. To provide this capital growth
we have embarked on a capitalization effort led by a public offering to raise
approximately $10,000,000 in 1999. While this effort requires regulatory
approval and favorable market conditions, such capitalization will be needed
to meet our vision for the future. Our future, like the future of all service
industries, relies on the vision of its leadership and the delivery of quality
service. At Citrus, we deliver both.
Thanks to You: No business, regardless of its size, is an island unto itself.
The commitment of our staff, management and Board of Directors is only part of
our success. Our shareholders have been there from the beginning through it
all. Thank you for your continued support. Now - on to the best of times!
</PAGE>
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for Citrus Bank
Management's discussion and analysis of earnings and related financial data are
presented herein to assist investors in understanding the financial condition
of Citrus at, and results of operations of Citrus for the years ended, December
31, 1998 and 1997. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes of Citrus presented
elsewhere herein.
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
At or For the Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total interest income $ 6,452 $ 5,514 $ 4,973 $ 4,830 $ 3,756
Total interest expense 2,941 2,482 2,288 2,398 1,616
Net interest income before
provision for credit losses 3,511 3,032 2,685 2,432 2,140
Provision for credit losses 23 269 352 100 160
Net interest income after
provision for credit losses 3,488 2,763 2,333 2,332 1,980
Noninterest income 421 399 371 328 262
Noninterest expense 3,007 2,775 2,573 2,090 2,117
Provision for income taxes 338 137 46 (94) (55)
Net income 564 250 85 664 180
Balance Sheet Data:
Total assets $84,051 $69,098 $66,416 $61,498 $57,599
Earning assets 76,470 61,599 59,901 56,708 52,543
Investment securities 5,982 9,283 9,499 10,318 13,228
Loans held for investment 53,009 49,691 46,463 41,841 37,584
Allowance for credit losses 461 431 354 373 299
Loans held for sale 8,291 847 4,561 1,559 625
Deposit accounts 76,703 62,601 58,646 53,803 48,283
Stockholders' equity 6,447 5,822 5,427 5,371 4,250
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
At or For the Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Share Data:
Basic earnings per share $0.59 $0.26 $0.09 $0.71 $0.19
Book value per share (period end) 6.77 6.11 5.77 5.71 4.52
Weighted average shares outstanding 952 948 940 940 940
Performance Ratios:
Return on average assets 0.72% 0.37% 0.14% 1.13% .35%
Return on average equity 9.93% 4.46% 1.55% 13.79% 4.17%
Interest-rate spread during period 4.20% 4.17% 4.19% 4.08% 4.12%
Net interest margin 4.92% 4.88% 4.54% 4.41% 4.52%
Efficiency 76.53% 80.88% 84.20% 75.72% 88.13%
Asset Quality Ratios:
Allowance for credit losses to
period end held for investment 0.87% 0.87% 0.76% 0.89% 0.80%
Net charge-offs to average loans
held for investment (0.01)% 0.40% 0.84% 0.07% 0.15%
Nonperforming assets to period
end loans held for investment 1.67% 3.02% 3.08% 1.68% 1.31%
and foreclosed property
Nonperforming assets to period
end total assets 1.06% 2.19% 2.17% 1.15% 0.86%
Capital and Liquidity Ratios (Citrus Bank)
Average equity to average assets 7.29% 8.28% 8.96% 8.17% 8.39%
Leverage (4% minimum required) 7.33% 7.93% 8.07% 8.49% 7.86%
Risk-based capital:
Tier I 9.94% 10.82% 10.82% 11.88% 11.19%
Total 10.71% 11.68% 11.56% 12.76% 11.95%
</TABLE>
<PAGE>
<PAGE>
Overview
Citrus is a bank holding company and owns 100% of the common stock of Citrus
Bank. Citrus was incorporated under the laws of the State of Florida on
May 19, 1989 to enhance Citrus Bank's ability to serve its future customers'
requirements for financial services.
Citrus Bank began its 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 Citrus Bank. Citrus Bank operates a branch office
at 1020 U.S. 1, Sebastian, Florida, which began operations in February 1993 and
another branch office located at 1020 Buttonwood Street, Barefoot Bay, Florida,
which began operations in September 1996.
<TABLE>
<CAPTION>
We have grown over the last two years:
December 31,
1996 1998
(dollars in thousands)
<S> <C> <C>
Assets $ 66,416 $ 84,051
Loans held for investment 46,463 53,009
Loans held for sale 4,561 8,291
Deposits 58,646 76,703
Stockholders equity 5,427 6,447
</TABLE>
The following discussion should be read in conjunction with the preceding
"Selected Consolidated Financial Data" and Citrus' financial statements and
the financial statement notes and the other financial data included elsewhere
in this report.
Results of Operations
Net Income: Citrus' net income for the year ended December 31, 1998, was
$564,000, or $0.59 per share, as compared to $250,000, or $0.26 per share, for
the year ended December 31, 1997. This improvement reflects Citrus' continued
growth as average earning assets increased to $71.4 million during 1998 as
compared to $62.2 million during 1997. This improvement also reflects a
provision for credit losses for the year ended December 31, 1998 of $23,000
versus $269,000 for the year ended December 31, 1997. The increase in average
earning assets resulted in an increase in net interest income before provision
for credit losses of $479,000, or 15.8%, for 1998 over 1997. In addition,
noninterest income increased 5.5%, to $421,000, in 1998 as compared to $399,000
in 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 $232,000 in
non-interest expense for 1998 as compared to 1997, which resulted from increases
in staffing costs, a full year of the courier service and general growth
experienced at Citrus Bank. The return on average assets for the year ended
December 31, 1998, improved to 0.72% as compared with 0.37% in 1997.
</PAGE>
<PAGE>
Citrus' 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 Citrus' 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 non-interest income in 1997 as compared to 1996 also
contributed to the improvement in net income. Increases in non-interest 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 non-interest income were
partially offset by a $202,000 increase in non-interest expense. All components
of non-interest 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.
Net Interest Income: The largest component of net income for Citrus is net
interest income, which is the difference between the income earned on assets
and interest paid on deposits and borrowings used to support its assets. Net
interest income is determined by the rates earned on Citrus' interest-earning
assets and the rates paid on its interest-bearing liabilities, the relative
amounts of interest-earning assets and interest-bearing liabilities, the degree
of mismatch and the maturity and repricing characteristics of its
interest-earning assets and interest-bearing liabilities.
Net interest income was $3.5 million for the year ended December 31, 1998, as
compared to $2.8 million for the year ended December 31, 1997. This 26.2%
increase reflected the substantial growth of Citrus' loan portfolio between
these periods. Net interest spread, the difference between the yield on earning
assets and the rate paid on interest-bearing liabilities, was 4.2% for both
1998 and 1997. Net interest margin, net interest income divided by average
interest-earning assets, remained at 4.9% for 1998 and 1997. Total average
loans, including loans held for sale and investment, grew at a faster pace in
1998 versus 1997 than other earning assets. During 1998, total average loans
increased 17.6% over 1997 total average loans as compared with 3.4% for all
other earning assets over the same period. This resulted in a moderate increase
in the average yield on total earning assets from 8.9% in 1997 to 9.0% in 1998.
Loans typically provide a higher yield than the other types of earning assets
and thus it is one of Citrus' goals 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 1998 as compared to 4.7% in 1997.
Increases in average savings of $3.0 million and average time deposits of
$5.4 million, both of which typically pay higher rates than transaction
accounts, 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. Citrus' net
interest margin also increased to 4.9% in 1997 as compared to 4.8% in 1996.
</PAGE>
<PAGE>
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 held for
investment of 9.6% in 1997 as compared with 9.5% 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 Citrus' average
balance sheet and its average yields on assets and average costs of liabilities.
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 and non-accrual loans have been included in net loans held for
investment.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Income and Expenses, and Rates (dollars in thousands)
Years Ended December 31,
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 $ 42 $ 2 4.8% $ 51 $ 3 5.9%
Taxable securities 7,990 430 5.4% 9,549 544 5.7%
Federal funds sold 4,600 245 5.3% 2,621 140 5.3%
Loans held for sale 9,546 879 9.2% 1,540 159 10.3%
Loans held for
investment, net 49,223 4,896 9.9% 48,425 4,668 9.6%
Total earning assets 71,401 6,452 9.0% 62,186 5,514 8.9%
Non-earning assets 6,568 5,523
Total assets $77,969 $67,709
Interest-bearing liabilities:
NOW and money market
deposits $ 7,237 $ 141 1.9% $ 7,578 $ 152 2.0%
Savings 7,441 248 3.3% 4,491 147 3.3%
Time deposits 45,120 2,496 5.5% 39,768 2,125 5.3%
Other borrowings 1,017 56 5.5% 1,016 58 5.7%
Total interest-bearing
liabilities 60,815 2,941 4.8% 52,853 2,482 4.7%
Noninterest-bearing
liabilities 11,472 9,247
Stockholders' equity 5,682 5,609
Total liabilities
and stockholders'
equity $77,969 $67,709
Net interest income
before provision
for credit losses $ 3,511 $ 3,032
Interest-rate spread 4.2% 4.2%
Net interest margin 4.9% 4.9%
Ratio of average earning
assets to average
interest-bearing
liabilities 117.4% 117.7%
</TABLE>
</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 Year Ended December 31, 1998
vs. the Year Ended December 31, 1997
Increase (Decrease) Due to:
Volume/
Volume Rate Rate Total
(dollars in thousands)
<S> <C> <C> <C> <C>
Earning assets:
Interest-earning deposits $ (1) $ (1) $ 1 $ (1)
Taxable securities (89) (30) 5 (114)
Federal funds sold 106 - (1) 105
Loans held for sale 827 (17) (90) 720
Loans held for investment, net 77 149 2 228
Total earning assets 920 101 (83) 938
Interest-bearing liabilities:
NOW and money market deposits (7) (4) - (11)
Savings 97 3 1 101
Time deposits 286 75 10 371
Other borrowings - (2) - (2)
Total interest-bearing
liabilities 376 72 11 459
Net interest income before $ 544 $ 29 $ (94) $ 479
provision for credit losses
</TABLE>
</PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
Earning assets:
Interest-earning deposits $ (3) $ (1) $ - $ (4)
Taxable securities (25) 7 - (18)
Federal funds sold 86 - - 86
Loans held for sale (167) (12) 6 (173)
Loans held for investment, net 590 53 7 650
Total earning assets 481 47 13 541
Interest-bearing liabilities:
NOW and money market deposits (10) (8) - (18)
Savings 71 10 14 95
Time deposits 129 (8) (1) 120
Other borrowings (5) 2 - (3)
Total interest-bearing
liabilities 185 (4) 13 194
Net interest income before $ 296 $ 51 $ - $ 347
provision for credit losses
</TABLE>
Interest Sensitivity: Citrus 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 Citrus is the measurement of Citrus' interest
sensitivity "gap," which is the positive or negative dollar difference between
assets and liabilities whose interest rates may be repriced within a given
period of time. Citrus also performs asset/liability modeling to assess the
impact varying interest rates and balance sheet mix assumptions will have on
net interest income. Citrus can manage interest rate sensitivity 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. Citrus
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
table on the following page illustrates Citrus' interest rate sensitivity at
December 31, 1998, as well as the cumulative gap position at December 31, 1998
and 1997 (dollars in thousands). Footnotes listed on page following table.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 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-earning deposits $ 9 $ - $ - $ - $ 9
Federal funds sold 9,200 - - - 9,200
Securities<F1> - - 5,596 386 5,982
Loans held for sale 8,291 - - - 8,291
Loans held for investment<F2> 14,945 7,206 24,359 6,478 52,988
Total earning assets 32,445 7,206 29,955 6,864 76,470
Liabilities
Interest-bearing deposits
NOW and money market
deposits<F1> 7,147 - - - 7,147
Savings deposits <F1> 8,423 - - - 8,423
Certificates of deposit 15,235 28,784 3,721 - 47,740
Total interest-bearing
deposits 30,805 28,784 3,721 - 63,310
Other borrowings - - 217 - 217
Total interest-bearing
liabilities 30,805 28,784 3,938 - 63,527
Interest-sensitive gap
per period $ 1,640 $(21,578) $26,017 $ 6,864 $12,943
Cumulative gap at
December 31, 1998 $ 1,640 $(19,938) $ 6,079 $12,943
Ratio of cumulative gap to
total earning assets at
December 31, 1998 2.1% (26.1)% 7.9% 16.9%
Ratio of cumulative gap to
total assets at
December 31, 1998 2.0% (23.7)% 7.2% 15.4%
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%
</TABLE>
</PAGE>
<F1> Investments were scheduled through their contractual maturity dates.
Excludes non-interest-bearing deposit accounts. Money market, NOW and
savings deposits were regarded as maturing immediately. All other time
deposits were scheduled through the maturity dates.
<F2> 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. Non-accrual loans
of $141,000 were excluded from above.
Citrus 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. Citrus currently is liability
sensitive over the three months to one year time frame. This negative
sensitivity gap of $21.6 million results principally from the growth in
six-month certificates of deposit used to fund increases in variable-rate
loans. Management anticipates that as the mix of fixed-rate to variable-rate
loans stabilizes over the next few months, this negative gap will decline to be
more consistent with historical levels. However, Citrus' 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 Citrus' 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: Citrus 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, we cannot give assurances 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 Comptroller of the
Currency 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, questionable values
and the 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.
</PAGE>
<PAGE>
All or a portion of general credit loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining an institution's regulatory capital, while specific
valuation allowances for credit losses generally do not qualify as regulatory
capital. Assets that do not warrant classification in the aforementioned
categories, but possess weaknesses, are classified as special mention and are
monitored by Citrus.
At December 31, 1998, Citrus had 12 loans totaling $448,000 that were classified
as substandard or doubtful. At December 31, 1998, Citrus had no loss assets
to be charged-off.
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 certain factors including 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 December 31, 1998, the allowance for credit losses amounted to $461,000, or
0.87%, of outstanding loans held for investment. The allowance for credit
losses for loans held for investment amounted to $431,000 at December 31, 1997,
or 0.87%, of loans held for investment. Citrus' provision for credit losses
was $23,000 for the year ended December 31, 1998, and $269,000 for the year
ended December 31, 1997. The provisions were made based on management's
assessment of general credit loss risk and asset quality. For 1998, the
provision includes the credit adjustment discussed in the following paragraph.
During the first quarter of 1998, Citrus settled litigation involving a
significant problem loan. As a result of this settlement, Citrus recorded a
credit provision of $96,000 for the quarter ended March 31, 1998. The
Comptroller of the Currency had previously mandated that this credit be written
down prior to resolution of Citrus' 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.
No separate allowance for credit losses has been established for loans held
for sale since these loans are purchased for amounts up to 98% of the note
amount. Substantially all of these loans have take-out commitments in place at
the time purchased by Citrus, and these loans meet Citrus' guidelines.
Citrus discontinues accrual of interest on loans when management believes, after
considering economic and business conditions and collection efforts, that a
borrower's financial condition has deteriorated to the point that the collection
of interest is doubtful. Generally, Citrus 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.
</PAGE>
<PAGE>
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
Citrus' allowance for credit losses for loans held for investment during the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997
<S> <C> <C>
Allowance at beginning of period $ 431 $ 354
Charge-offs:
Real estate loans - 167
Installment loans 35 19
Credit cards and related plans 10 16
Commercial and all other loans - 10
Total charge-offs 45 212
Recoveries:
Real estate loans 43 -
Installment loans 8 15
Credit cards and related plans - 5
Commercial and all other loans 1 -
Total recoveries 52 20
Provision for credit losses charged
to operations 23 269
Allowance at end of period $ 461 $ 431
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.0% 0.4%
</TABLE>
<PAGE>
<PAGE>
The following table sets forth certain information on nonaccrual loans and
real estate owned, the ratio of nonaccrual loans and real estate owned to total
assets as of the dates indicated and certain other related information (dollars
in thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997
<S> <C> <C>
Nonaccrual loans held for investment:
Real estate loans $ - $ 601
Installment loans 2 10
Credit cards and related plans - -
Commercial and all other loans 139 172
Total nonaccrual loans held for investment 141 783
Accruing loans held for investment over 90 days delinquent:
Real estate loans 228 336
Installment loans 23 5
Credit cards and related plans - -
Commercial and all other loans 108 -
Total accrual loans held for investment
over 90 days delinquent 359 341
Troubled debt restructurings not included above - -
Total nonperforming loans held for investment 500 1,124
Other real estate owned:
Real estate acquired by foreclosure or deed in lieu
of foreclosure 390 390
Total nonperforming loans held for investment and
other real estate owned $ 890 $1,514
Total nonperforming loans held for investment
as a percentage of total loans 0.9% 2.3%
Total nonperforming loans held for investment
as a percentage of total assets 0.6% 1.6%
Total nonperforming loans held for investment
and other real estate owned as a percentage
of total assets 1.1% 2.2%
Troubled debt restructurings and modified loans
held for investment:
Current $ 685 $1,525
Past due over 30 days and less than 90 days - -
Past due over 90 days and included above - 303
$ 685 $1,828
</TABLE
<PAGE>
Loans on which interest was not being accrued totaled $141,000 at December 31,
1998, and $783,000 at December 31, 1997. Had interest been accrued on these
nonaccrual loans at originally contracted rates, interest income, before
income taxes, would have been increased by approximately $13,000 at December 31,
1998, and $100,000 at December 31, 1997.
The nonaccrual commercial loans held for investment at December 31, 1997,
totaling $172,000, were not classified impaired. Citrus' Management anticipated
a settlement of litigation in early-1998 covering the single largest nonaccrual
commercial loan of $154,000, which represented approximately 90% of the total
nonaccrual commercial loans held for investment at December 31, 1997. The
settlement in excess of $154,000 was received, which resulted in Citrus
recording a credit provision of $96,000 for the quarter ended March 31, 1998,
as previously mentioned.
Of the $141,000 in nonaccrual loans held for investment at December 31, 1998,
loans totaling $85,000 were classified by management as impaired. The remaining
nonaccrual loans held for investment totaling $56,000 were considered adequately
capitalized by Citrus' management and were not classified as impaired because
management expects to recover substantially all of the balances owed. However,
these loans remain on nonaccrual status in accordance with Citrus' policy.
The following table sets forth the recorded investment in impaired loans and the
related valuation allowance for each loan category as of December 31, 1998.
At December 31, 1997, no loans held for investment were classified as impaired
and for December 31, 1998 and 1997, no loans held for sale were classified as
impaired.
</TABLE>
<TABLE>
<CAPTION>
Total Amount of
Impaired Valuation
Loans Allowance
<S> <C> <C>
December 31, 1998:
Commercial real estate $ - $ -
Residential real estate - -
Commercial loans 85 43
Consumer loans - -
Total impaired loans held
for investment $ 85 $ 43
</TABLE>
All of the impaired loans at December 31, 1998 were measured using management's
current estimate of fair value of the collateral. The average loans held for
investment classified as impaired totaled $4,000 in 1998 and $-0- in 1997. No
material amounts of interest were recorded in 1998 or 1997 for impaired loans.
</PAGE>
<PAGE>
The following table presents information regarding Citrus' total allowance for
credit losses on loans held for investment as well as the allocation of specific
amounts to the various categories of loans (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997
Loans Loans
to to
Total Total
Amount Loans Amount Loans
<S> <C> <C> <C> <C>
Loans held for investment:
Commercial real estate loans $ 101 33% $ 103 30%
Residential real estate loans 31 35% 28 40%
Commercial loans 257 24% 218 21%
Consumer loans 72 8% 82 9%
Total allowance for credit losses $ 461 100% $ 431 100%
Allowance for credit losses as a
percentage of the total loans
held for investment outstanding 0.87% 0.87%
</TABLE>
Noninterest Income and Expense:
Noninterest Income: Citrus' primary source of noninterest income is service
charges on deposit accounts. 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 $22,000 during 1998 as compared to the
same period in 1997, reflecting increased activity fees related to increases
in deposit balances. Fees and service charges were $350,000 for 1998 as
compared to $327,000 for 1997, an increase of $23,000. 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 $13.4 million at December 31, 1998.
</PAGE>
<PAGE>
Noninterest Expense: Total noninterest expense increased by $232,000 during
1998 as compared to the same period in 1997 as a result of Citrus' continued
growth. This increase includes a $186,000 increase in salary and benefits
expense as Citrus employed additional employees and provided normal salary and
benefit increases. Occupancy-related expenses increased $92,000 in 1998 as
compared with the same period in 1997, principally due to higher maintenance
expenses, depreciation, operating costs for the new courier service and Year
2000 expenses. All other expenses were generally flat or moderately higher,
except that a significant reduction in professional fees of $155,000 was
realized due to lower legal and professional costs associated with the
resolution of two problem credits, which contributed to the overall decrease
in other operating expenses of $46,000 from 1997 to 1998.
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.
The following table sets forth the primary components of other operating
expenses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997
<S> <C> <C>
Advertising and public relations $ 72 $ 69
Professional fees 133 288
Data processing 158 153
Stationery, printing, and supplies 73 58
Insurance 30 24
Telephone 50 40
Other miscellaneous expenses 481 411
$ 997 $1,043
</TABLE>
Income Tax Expense: The income tax provision was $338,000 for the year ended
December 31, 1998, an effective rate of 37.5%. The income tax provision for
the year ended December 31, 1997 was $137,000, an effective rate of 35.4%.
</PAGE>
<PAGE>
Analysis of Financial Condition
Earning Assets
Loans: Loans typically provide higher yields than the other types of earning
assets. Thus one of Citrus' goals is for loans to be the largest category of
Citrus' earning assets. At December 31, 1998 and 1997, loans (including loans
held for sale and investment) accounted for 80% of earning assets. 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 held for investment averaged $49.2 million
during 1998, as compared to $48.4 million in 1997. Loans held for sale have
averaged $9.5 million during 1998, as compared with $1.5 million in 1997. The
growth in average loans held for sale reflects Management's emphasis on
expanding Citrus' table funding loan program and a favorable market for
mortgage loan originations and refinancings during 1998. See discussion at
"Origination, Purchase, Sale and Repayment of Loans".
The following table shows the composition of the Citrus' loan portfolio by
category (dollars in thousands):
Composition of Loan Portfolio:
<TABLE>
<CAPTION>
At December 31,
1998 1997
Percent of Percent of
Amount Total Amount Total
<S> <C> <C> <C> <C>
Loans held for investment:
Commercial real estate $17,556 33% $15,008 30%
Residential real estate 18,358 35% 20,067 40%
Commercial loans 12,868 24% 10,330 21%
Consumer loans 4,347 8% 4,312 9%
53,129 100% 49,717 100%
Deferred fees, net (120) (26)
Allowance for credit losses (461) (431)
Loans held for investment, net $52,548 $49,260
Residential real estate:
Loans held for sale $ 8,291 $ 847
</TABLE>
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. Citrus follows the common practice of
financial institutions in Citrus' 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, Citrus limits its loan-to-value ratio to 80%.
Citrus' largest category of loans, residential mortgage loans, totaled $18.4
million and represented 35% of the loan portfolio at December 31, 1998, compared
to $20.1 million and 40% at December 31, 1997. 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.
</PAGE>
<PAGE>
The following table reflects the contractual principal repayments (excluding
nonaccrual loans of $141,000) by period of Citrus' loan portfolio at December
31, 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>
Loans held for investment:
Commercial real estate $ 4,282 $1,009 $ 11,356 $ 909 $17,556
Residential real estate 2,682 3,707 6,858 5,111 18,358
Commercial loans 6,298 2,238 3,837 356 12,729
Consumer loans 1,683 252 2,308 102 4,345
Total before unearned
income $14,945 $7,206 $ 24,359 $ 6,478 $52,988
Loans held for sale:
Residential real estate $ 8,291 $ - $ - $ - $ 8,291
Loans held for investment with
maturities over one year:
Fixed rate $17,590
Variable rate 13,247
Total maturities greater
than one year - loans held
for investment $30,837
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the actual
life of our loans. 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 Citrus the
right to declare a conventional loan immediately due and payable in the event,
among other things, that the borrower sells the real property secured by 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 $30.8 million in loans held for investment due after December
31, 1999, 57% of these loans have fixed interest rates and 43% have adjustable
interest rates.
</PAGE>
<PAGE>
Origination, Purchase, Sale and Repayment of Loans: Citrus generally originates
loans on real estate located in its primary market area. Residential mortgage
loan originations by Citrus are attributable to depositors, other existing
customers, advertising, mortgage brokers and referrals from real estate brokers
and developers. Citrus' residential mortgage loans generally are originated
to ensure compliance with documentation and underwriting standards which permit
their sale to the Federal National Mortgage Association and other investors in
the secondary market.
Citrus also purchases loans from real estate mortgage brokers located in
Florida. These loans conform to the same underwriting guidelines as those for
loans originated by Citrus. Substantially all of these loans are purchased
with takeout commitments from unrelated third party investors and are generally
sold to these investors within 30 days of acquisition.
Citrus engages in the sale of fixed-rate loans and ARM loans to provide
liquidity and funding sources for higher yielding loans. The following table
sets forth total loans purchased, originated, repaid and sold during the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997
<S> <C> <C>
Originations - loans held for investment:
Commercial real estate loans $ 4,623 $ 8,277
Residential mortgage loans 6,571 4,427
Commercial loans 16,156 7,027
Consumer loans 3,675 3,425
Total originations of loans held for investment 31,025 23,156
Less:
Principal reductions 27,613 19,936
Increase in total loans held for investment $ 3,412 $ 3,220
Originations and purchases - loans held for sale $171,223 $ 25,320
Less: loans sold 163,779 29,034
Increase (decrease) in total loans held for sale $ 7,444 $(3,714)
</TABLE>
</PAGE>
<PAGE>
Investment Securities: The investment securities portfolio is a significant,
although declining, component of Citrus' total earning assets. Total
securities averaged $8.0 million for 1998 and $9.5 million in 1997, as compared
to $10.0 million in 1996. This represents 11% of the average earning assets
for 1998, 15% of the average earning assets for 1997, and 18% of the average
earning assets for 1996. Citrus 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 Citrus continues to emphasize increasing the percentage of the loan portfolio
to total earning assets. Citrus 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 Citrus 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
December 31, 1998 and 1997, Citrus had no securities categorized as trading.
<PAGE>
<PAGE>
Investment Portfolio: The following table sets forth the carrying value of
Citrus' investment portfolio (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997
<S> <C> <C>
Securities available-for-sale:
U. S. Government agency securities $ 1,618 $ 1,104
Mortgage-backed securities 2,671 4,265
Other 386 427
Total $ 4,675 $ 5,796
Securities held-to-maturity:
U. S. Government agency securities $ 481 $ 1,474
Mortgage-backed securities 826 1,762
Other - 251
Total $ 1,307 $ 3,487
</TABLE>
The following table sets forth the amortized cost of Citrus' investment
portfolio at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997
<S> <C> <C>
Securities available-for-sale:
U. S. Government agency securities $ 1,600 $ 1,101
Mortgage-backed securities 2,734 4,396
Other 386 427
Total $ 4,720 $ 5,924
Securities held-to-maturity:
U. S. Government agency securities $ 481 $ 1,474
Mortgage-backed securities 826 1,762
Other - 251
Total $ 1,307 $ 3,487
</TABLE>
<PAGE>
<PAGE>
Investment Securities 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>
December 31, 1998:
U. S. Government
agency
securities $ - 0.0% $2,099 5.0% $ - 0.0% $ - 0.0% $2,099 5.0%
Mortgage-backed
securities - 0.0% 560 6.2% 1,970 5.9% 967 5.2% 3,497 5.7%
Other - 0.0% - 0.0% - 0.0% 386 5.4% 386 5.4%
Total $ - 0.0% $2,659 5.3% $1,970 5.9% $1,353 5.2% $5,982 5.5%
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%
</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 $4.6 million in 1998 as compared to $2.7 million in 1997 and
to $1.1 million in 1996. At December 31, 1998, short-term investments totaled
$9.2 million and $2.6 million at December 31, 1997. 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 1999.
These funds are a primary source of Citrus' liquidity and are generally invested
in an earning capacity on an overnight basis.
Deposits and Other Interest-Bearing Liabilities: Average interest-bearing
liabilities grew $8.0 million, or 15%, to $60.8 million for 1998, which
reflects the general growth in Citrus 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 totaled $59.8 million for 1998,
an increase of 15% over 1997. 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
December 31, 1998, total deposits were $76.7 million compared to $62.6 million
at December 31, 1997, an increase of 23%.
</PAGE>
<PAGE>
Deposits are attracted principally from Citrus' primary market area. Citrus
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. 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.
Other Sources of Funds: In addition to deposits, the sources of funds
available for lending and other business purposes include loan repayments,
loan sales and securities sold under agreements to repurchase. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows
are influenced significantly by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in other sources such as deposits at less than projected levels and
are also used to fund the origination of mortgage loans designated to be sold
in the secondary markets.
Citrus has emphasized commercial banking relationships in an effort to increase
demand deposits as a percentage of total deposits. Citrus' courier service
began operations in the fourth quarter of 1997. The courier service will serve
Citrus' 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 table on the following page shows
the distribution of, and certain other information relating to, Citrus' deposit
accounts by type at the date indicated (dollars in thousands).
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
1998 1997
Percent of Percent of
Amount Total Amount Total
<S> <C> <C> <C> <C>
Demand deposits $ 13,393 17.4% $ 10,723 17.1%
NOW deposits 4,121 5.4% 3,701 5.9%
Money market deposits 3,026 3.9% 4,095 6.5%
Savings deposits 8,423 11.0% 5,993 9.6%
Subtotal 28,963 37.7% 24,512 39.1%
Certificates of deposit:
3.00% - 3.99% 913 1.2% 192 0.3%
4.00% - 4.99% 3,490 4.6% 3,669 5.9%
5.00% - 5.99% 42,123 54.9% 33,934 54.2%
6.00% - 6.99% 1,214 1.6% 294 0.5%
Total certificates of
deposit<F1> 47,740 62.3% 38,089 60.9%
Total deposits<F2> $ 76,703 100.0% $ 62,601 100.0%
</TABLE>
<F1> Includes individual retirement accounts ("IRA") totaling $3,173,000 and
$3,117,000 at December 31, 1998 and 1997, all of which are in the form
of certificates of deposit.
<F2> 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 Citrus' loan portfolio and other
earning assets. Citrus' core deposits were $66.3 million at December 31, 1998,
$54.5 million at December 31, 1997, and $47.9 million at December 31, 1996.
Management anticipates that a stable base of deposits will be Citrus' primary
source of funding to meet both its short-term and long-term liquidity needs in
the future.
<PAGE>
<PAGE>
Jumbo certificates ($100,000 and over) mature as follows (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997
<S> <C> <C>
Due three months or less $ 2,861 $ 2,850
Due over three months to twelve months 7,237 3,681
Due over twelve months to three years 100 1,548
Due over three years 179 -
Total $ 10,377 $ 8,079
Other time deposits under $100,000 mature as follows (dollars in thousands):
At December 31,
1998 1997
Due three months or less $ 12,374 $ 8,803
Due over three months to twelve months 21,547 11,604
Due over twelve months to three years 2,778 9,603
Due over three years 664 -
Total $ 37,363 $ 30,010
The following table sets forth the net deposit flows of Citrus during the
periods indicated (dollars in thousands):
At December 31,
1998 1997
Net increase before interest credited $ 11,319 $ 1,498
Net interest credited 2,783 2,457
Net deposit increase $ 14,102 $ 3,955
</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, Citrus does not accept
brokered deposits.
</PAGE>
<PAGE>
Borrowings: Citrus Bank has a line of credit master agreement with the FHLB of
Atlanta that enables Citrus 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
December 31, 1998, there were no advances outstanding under this line. In
addition to the line of credit arrangement, Citrus Bank had fixed FHLB advances
outstanding as follows (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
<S> <C> <C> <C>
Maturity Date Interest Rate 1998 1997
2000 5.26% $ - $ 167
2003 5.76% 217 266
$ 217 $ 433
</TABLE>
Interest expense on the line of credit and other FHLB advances amounted to
approximately $54,000 for 1998 and $56,000 for 1997.
Citrus' Regulatory Capital Position: Total stockholders' equity as of December
31, 1998, was $6.4 million, an increase of $625,000 or approximately 11%
compared with stockholders' equity of $5.8 million as of December 31, 1997.
This increase was attributable to net income for the year ended December 31,
1998, of $564,000 and a $61,000 net increase in the market value of investment
securities available-for-sale.
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, Citrus' capital is currently measured
only at Citrus 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 except for certain limitations. An institution's
qualifying capital base for purposes of its risk-based capital ratio consists
of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum
requirements are 4% for Tier 1 and 8% for total risk-based capital.
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. Citrus Bank
exceeded their minimum regulatory capital ratios as of December 31, 1998, as
reflected in the following table. The table on the following page sets forth
Citrus Bank's regulatory capital position at December 31, 1998, and the effects
of the minimum proposed offering of Citrus' Common Stock (see "What's New With
Services and Markets") on its capital position on a pro forma basis (dollars in
thousands):
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
Actual Minimum<F1> Well-Capitalized<F2>
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to
Risk-Weighted Assets) $ 6,476 10.71% $ 4,839 8.00% $ 6,049 10.00%
Tier 1 Capital (to
Risk-Weighted Assets) $ 6,015 9.94% $ 2,420 4.00% $ 3,630 6.00%
Tier 1 Capital (to
Average Assets) $ 6,015 7.33% $ 3,283 4.00% $ 4,104 5.00%
Pro Forma Adjustments <F3><F4>:
Total capital (to
Risk-Weighted Assets) $ 3,000 $ 48 $ 60
Tier 1 Capital (to
Risk-Weighted Assets) $ 3,000 $ 24 $ 36
Tier 1 Capital (to
Average Assets) $ 3,000 $ 120 $ 150
Pro Forma Ratios:
Total capital (to
Risk-Weighted Assets) $ 9,476 15.51% $ 4,887 8.00% $ 6,109 10.00%
Tier 1 Capital (to
Risk-Weighted Assets) $ 9,015 14.76% $ 2,446 4.00% $ 3,666 6.00%
Tier 1 Capital (to
Average Assets) $ 9,015 10.60% $ 3,403 4.00% $ 4,254 5.00%
</TABLE>
<F1> The minimum required for adequately capitalized purposes.
<F2> To be "well-capitalized" under the FDIC's Prompt Corrective Action
regulations.
<F3> Adjusted for net proceeds from minimum offering of $3,000,000 to be used
by Citrus Bank for new branches.
<F4> Assumes $3,000,000 initially invested by Citrus Bank in 20% risk-weighted
assets.
</PAGE>
<PAGE>
Management of Citrus' Sources and Uses of Funds
Liquidity management involves monitoring Citrus' 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 under varying degrees of management
control. For example, the timing of maturities of the investment portfolio is
very predictable and may be controlled very precisely at the time investment
decisions are made. However, net deposit inflows and outflows are far less
predictable and cannot be controlled as precisely.
Asset liquidity is provided by cash and assets which are readily marketable,
can be pledged or will mature in the near future. Liability liquidity is
provided by access to core funding sources, principally the ability to generate
customer deposits in Citrus' 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.
Citrus' federal funds sold position, which is typically its primary source of
liquidity, averaged $4.6 million during the year ended December 31, 1998, and
was $9.2 million at December 31, 1998. Citrus 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 1998.
Management regularly reviews the liquidity position of Citrus 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. Citrus intends
to use the net proceeds of the offering to finance the formation of new banks
or the acquisition of existing banks, as well as to support the continued growth
of Citrus. Citrus anticipates that the net proceeds of the proposed offering
of Citrus' Common Stock (see"What's New With Services and Markets") will be
adequate for the establishment of these branches and Citrus' capital needs for
the foreseeable future. However, should Citrus need additional capital to
support the branches or Citrus' growth, Citrus would likely obtain loans from
third parties.
Changes in Financial Reporting Requirements: 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. Citrus adopted SFAS 128 in 1998.
</PAGE>
<PAGE>
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. Citrus adopted SFAS 130 in 1998.
Citrus' Efforts to Prepare for the Year 2000: Citrus is aware of the issues
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 this information could generate
erroneous data or cause a system to fail. Citrus is utilizing both internal
and external resources to identify, correct and test their systems for Year
2000 compliance. Management believes that all necessary modifications and
testing have been completed. 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 in early 1999. To date there
have been no significant limitations on recourse under the representations
obtained from primary vendors that have indicated Year 2000 compliance.
In addition to representations made by the primary vendors, Citrus has tested
all mission critical hardware and software, except for its credit card
processor. In the event the credit card processor places significant
limitations on its representations or the mission critical testing is not
successfully completed in a timely manner, Citrus intends to sell its credit
card portfolio, which represents less than 1% of outstanding loans. At
December 31, 1998, Citrus had estimated total Year 2000 costs of $55,000 in
excess of normal recurring capital expenditures for routine software and
hardware upgrades. Of this amount, approximately $20,400 remains to be spent.
It is recognized that any Year 2000 compliance failures could result in
additional expenses to Citrus.
Citrus has established timelines for testing all ancillary systems, including
telephone systems and security devices. We cannot give assurances, however,
that all hardware and software that Citrus uses will be Year 2000 compliant,
and Citrus cannot predict with any certainty the costs it will incur to respond
to any unidentified Year 2000 issues. Factors which may affect the amount of
these costs include Citrus' inability to control third party modification plans,
Citrus' ability to identify and correct all relevant computer codes, the
availability and cost of engaging personnel trained in solving Year 2000 issues
and other similar uncertainties.
Further, the business of many of Citrus' customers may be negatively affected
by the Year 2000 issue, and any financial difficulties incurred by Citrus'
customers in solving Year 2000 issues could negatively affect those customers'
ability to repay any loans which Citrus may have extended. Therefore, even if
Citrus does not incur significant direct costs in connection with responding
to the Year 2000 issue, we cannot give assurances that the failure or delay of
Citrus' customers or other third parties in addressing the Year 2000 issue or
the costs involved in the process will not have a material adverse effect on
Citrus' business, financial condition, or results of operations.
</PAGE>
<PAGE>
To date our efforts have been centered primarily upon notification of our
customers for the purpose of making them aware of the Year 2000 issues and we
have not conducted specific analysis of the Year 2000 risk exposure for our
borrowers and customers. Our significant commercial customers have been
surveyed to assess their status in preparing for the Year 2000. In 1999,
Citrus plans to use checklists to assist in identifying other current and
potential borrowers with a high Year 2000 risk exposure. To the extent Citrus
identifies a Year 2000 exposure associated with one of its borrowers, the
lending officer will work with the borrower on a one-on-one basis to minimize
the exposure. Frequent reminders will be made to all customers of Year 2000
matters in monthly deposit statements and other correspondence.
Our Year 2000 plans provide for use of outside consultants in its testing
phases to ensure that adequate testing and contingency planning has been
conducted. Citrus has completed its initial contingency plan and Management
currently believes the most likely worst case scenario centers around the loss
of power at its main office, branches and ATM machines. Citrus is currently
investigating the most reliable alternate power supply to operate its main
office. If necessary, the ATM machines and branch operations would be
suspended and the main office would conduct all business operations until the
power is restored. Plans also exist to handle the contingency of a disruption
in data communications which include use of couriers to provide tapes of data
normally transmitted by data lines and printing of reports at the main office
for delivery to the tellers and branches.
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 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 Citrus.
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 Citrus.
Impact of Inflation on Our Operations: The consolidated financial statements
and related data presented herein have been prepared in accordance with
Generally Accepted Accounting Principles 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 Citrus are monetary in nature. As a result,
interest rates have a more significant impact on Citrus' 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 these 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.
<PAGE>
<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 ("Citrus") as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive income, cash
flows, and changes in stockholders' equity for the years then ended. These
consolidated financial statements are the responsibility of Citrus'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 Citrus as of
December 31, 1998 and 1997, and the consolidated results of its operations and
and cash flows for the years then ended, in conformity with generally accepted
accounting principles.
STEVENS, SPARKS & COMPANY, P.A.
January 22, 1999
Jacksonville, Florida
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Citrus Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
December 31,
1998 1997
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 3,940 $ 3,742
Federal funds sold 9,200 2,500
Total cash and cash equivalents 13,140 6,242
Interest-bearing deposits in other banks 9 61
Securities available-for-sale 4,675 5,796
Securities held-to-maturity (market value of
$1,273 for 1998 and $3,426 for 1997) 1,307 3,487
Loans held for investment less allowance for
credit losses 52,548 49,260
Loans held for sale 8,291 847
Facilities 2,884 2,471
Other real estate owned 390 390
Deferred income taxes 233 36
Accrued interest receivable 343 292
Other assets 231 216
Total assets $ 84,051 $ 69,098
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 13,393 $ 10,723
Demand deposits 4,121 3,701
Money market accounts 3,026 4,095
Savings accounts 8,423 5,993
Time, $100,000 and over 10,377 8,079
Other time deposits 37,363 30,010
Total deposits 76,703 62,601
Other borrowings 217 433
Accrued interest payable on deposits 297 195
Accounts payable and accrued liabilities 387 47
Total liabilities 77,604 63,276
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock, $5.00 par value, authorized and
unissued 1,000,000 shares in 1997 and 1998 - -
Common stock, $3.15 par value, authorized
10,000,000 shares, issued 952,296 shares in
1998 and 865,829 shares in 1997 3,007 3,007
Additional paid-in capital 3,149 3,149
Retained earnings (deficit) 324 (239)
Accumulated other comprehensive income:
Net unrealized holding losses on securities (33) (95)
Total stockholders' equity 6,447 5,822
Total liabilities and stockholders' equity $ 84,051 $ 69,098
Book value per common share $ 6.77 $ 6.11
Common shares outstanding, adjusted for
stock split 952,296 952,296
See notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
Citrus Financial Services, Inc. and Subsidiary
Consolidated Statements of Operations
And Comprehensive Income
For the Years Ended December 31,
1998 1997
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans held for
investment $ 4,896 $ 4,668
Interest and fees on loans held for sale 879 159
Interest and dividend income from investment
securities and interest-bearing deposits
in other banks 432 547
Federal funds sold 245 140
Total interest income 6,452 5,514
INTEREST EXPENSE
Interest on deposits 2,885 2,424
Other 56 58
Total interest expense 2,941 2,482
NET INTEREST INCOME BEFORE PROVISION FOR
CREDIT LOSSES 3,511 3,032
PROVISION FOR CREDIT LOSSES 23 269
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 3,488 2,763
OTHER INCOME
Service charges on deposit accounts 350 327
Other fees for customer service and other income 71 72
Total other income 421 399
OTHER EXPENSES
Salaries and employee benefits 1,466 1,280
Expenses of bank premises and fixed assets 544 452
Other operating expenses 997 1,043
Total other expenses 3,007 2,775
INCOME BEFORE PROVISION FOR INCOME TAXES 902 387
PROVISION FOR INCOME TAXES 338 137
NET INCOME 564 250
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
Unrealized holding gains on securities
arising during period 65 63
Less: reclassification adjustment for gains
included in net income for the period (3) -
Total other comprehensive income, net of
income taxes 62 63
COMPREHENSIVE INCOME $ 626 $ 313
EARNINGS PER SHARE
Basic earnings per share $ 0.59 $ 0.26
Diluted earnings per share $ 0.48 $ 0.21
See notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Citrus Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31,
1998 1997
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 564 $ 250
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 23 269
Depreciation and amortization of facilities 279 226
Net premium amortization and discount accretion 20 18
Gain on sale of securities (3) -
Deferred income taxes (200) 49
Cash paid for purchases of loans held for sale (171,223) (25,320)
Cash received for sales of loans held for sale 163,779 29,034
(Increase) decrease in assets:
Accrued interest and other assets (66) 64
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 442 (46)
Net cash provided by (used in) operating
activities (6,385) 4,544
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (1,605) (661)
Proceeds from maturities 2,176 239
Proceeds from sales 604 -
Securities held-to-maturity:
Proceeds from maturities 2,173 713
Decrease in interest-bearing deposits in other banks 52 45
Increase in loans held for investment (3,311) (3,420)
Purchases of facilities (692) (147)
Net cash used in investing activities (603) (3,231)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits:
Noninterest-bearing 2,670 2,587
Interest-bearing 11,432 1,368
Repayments of FHLB advances (216) (1,122)
Net decrease in federal funds purchased - (500)
Proceeds from stock options exercised - 82
Net cash provided by financing activities 13,886 2,415
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,898 3,728
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,242 2,514
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,140 $ 6,242
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash received during the year for interest and
dividends $ 6,401 $ 5,594
Cash paid during the year for interest $ 2,839 $ 2,515
Cash paid during the year for income taxes $ 131 $ 75
See notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
Citrus Financial Services, Inc. and Subsidiary
Consolidated Statement of Changes
In Stockholders' Equity
Net
Unrealized
Common Stock Retained Holding Total
Par Additional Earnings Gains Stock-
Value Paid-in (Accumulated (Losses)on holders'
Shares (Rounded) Amount Capital Deficit) Securities Equity
(Dollars in Thousands, Except Par Value Per Share)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 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) - - (1) - (1)
Comprehensive income:
Net income - - - - 564 - -
Net change in unrealized
holding gains on securities - - - - - 62 -
Total comp. income - - - - - - 626
Balance,
December 31 1998 952,296 $ 3.15 $3,007 $3,149 $ 324 $ (33) $6,447
See notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 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. ("Citrus") and its wholly-owned
subsidiary, Citrus Bank, National Association ("Citrus 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.
Citrus Bank provides a wide range of banking services to individual and
corporate customers primarily in Indian River County, Florida.
Citrus and Citrus Bank are subject to regulations issued by certain regulatory
agencies and undergo periodic examinations by those agencies.
Basis of Financial Statement Presentation: The accounting and reporting
policies of Citrus 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 credit 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.
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
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.
Citrus 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 Held for Investment: Loans held for investment are stated at unpaid
principal balances less the allowance for credit losses and net deferred loan
fees and unearned discounts. Unearned discounts on installment loans are
recognized as income over the term of the loans using a method that
approximates the interest method.
Interest on loans held for investment is accounted for on the accrual basis.
Generally, Citrus' 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, Citrus 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
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
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, 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.
Loans Held for Sale: Citrus Bank originates and purchases residential mortgage
loans for sale to the Federal National Mortgage Association (FNMA) and other
investors in the secondary market. Substantially all such loans are purchased
through a program that provides table funding for mortgage loans originated by
third party mortgage brokers that are held for securitization or sale to an
end investor in exchange for Citrus' purchase of an undivided 100% interim
interest on a loan-by-loan basis.
Under this program, the originating broker closes a mortgage loan that has been
pre-approved by Citrus Bank as conforming with Citrus Bank's pre-determined
lending guidelines and secondary market conditions, assigns the mortgage loan
and the purchase and rate-lock commitments to Citrus Bank and receives up to
98% of the mortgage note amount. Citrus Bank is not shown on the closing
statements as lender but is assigned a 100% interest in the mortgage loan.
The discount from the mortgage note amount (holdback) and the purchase and
rate-lock commitments limit market risks. The advance approval of these
conforming mortgage loans as well as the holdback limit credit risks and since
these mortgage loans are conforming, Citrus Bank can sell these mortgage loans
in the secondary market to FNMA or other investors. Citrus Bank is not
obligated to table fund all mortgage loans provided by a broker and
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
the agreement with the broker can be canceled with a 30 day notice. Typically
Citrus works with three or four brokers and the end investors used by the
brokers to purchase these mortgage loans approximates ten. The holdback is
returned to the broker at the time of settlement with the end investor, net of
interest and fees earned by Citrus Bank. No servicing rights are purchased or
servicing performed by Citrus Bank. Substantially, all mortgage loans are
conforming and have been pre-sold to the end investor at the time of table
funding. Loans held for sale are carried at cost which is lower than market
in all material respects. Loans originated for sale to FNMA were not material
in 1998 or 1997.
Interest and Fee Income from Table Funding Loan Program: Citrus Bank accounts
for interest on the loans held for sale on an accrual basis. A processing fee
is charged for each loan purchased under the table funding loan program and
this fee is recorded into fee income when the loan is sold. This fee income is
included in the Statements of Operations caption, "Interest and fees on loans
held-for-sale".
Allowance for Credit Losses: The provision for credit losses charged to
operating expenses is based on 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.
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.
<PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
Off-Balance Sheet Instruments: In the ordinary course of business Citrus 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 (EPS) 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 years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997
(In thousands except per share data)
<S> <C> <C>
Basic EPS computation:
Numerator - Net income $ 564 $ 250
Denominator - Weighted average shares outstanding 952 948
Basic EPS $ 0.59 $ 0.26
Diluted EPS computation:
Numerator - Net income $ 564 $ 250
Denominator - Weighted average shares outstanding 952 948
Stock options and warrants 227 220
1,179 1,168
Diluted EPS $ 0.48 $ 0.21
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
Statement of Cash Flows: For the 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 consolidated financial
statements for 1997 have been reclassified to conform to the classifications
used for the current year.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of instruments in debt and equity
securities at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government agencies $ 1,600 $ 18 $ - $ 1,618
Mortgage-backed securities 2,734 - 63 2,671
Other 386 - - 386
$ 4,720 $ 18 $ 63 $ 4,675
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
Securities held-to-maturity:
U.S. Government agencies $ 481 $ - $ 35 $ 446
Mortgage-backed securities 826 2 1 827
Other - - - -
$ 1,307 $ 2 $ 36 $ 1,273
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 2 - INVESTMENT SECURITIES (continued):
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
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
</TABLE>
The fair value of securities fluctuates during the investment period. No
provision for loss has been made in connection with the decline of fair value
below book value because the securities are purchased for investment purposes
and the decline is not deemed to be other than temporary. Temporary declines
in fair value of securities available-for-sale at December 31, 1998, of
$33,000 (net of deferred income taxes of $30,000) are regarded as an adjustment
to stockholders' equity. The estimated fair value of securities is determined
on the basis of market quotations. At December 31, 1998, no securities were
pledged to secure deposits and for other operating purposes.
At December 31, 1998 and 1997, the carrying value of collateralized mortgage
obligations included in securities available-for-sale and securities
held-to-maturity was approximately $2,446,000 and $3,998,000, respectively.
No investment securities were sold during 1997 and gains on sales of investment
securities in 1998 totaled $3,000. The cost and estimated fair value of debt
and equity securities at December 31, 1998, by contractual maturities are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 2 - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
Securities Securities
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 $ - $ - $ - $ -
Due from one to five years 1,600 1,618 1,041 1,006
Due from five to ten years 1,737 1,705 266 267
Due after ten years 997 966 - -
Other 386 386 - -
$ 4,720 $ 4,675 $ 1,307 $ 1,273
</TABLE>
NOTE 3 - LOANS HELD FOR INVESTMENT
Loans held for investment are classified as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Commercial and agricultural $ 12,868 $ 10,316
Real estate 35,914 35,075
Installment and other loans 4,347 4,326
Total loans 53,129 49,717
Less, unearned income (120) (26)
Less, allowance for credit losses (461) (431)
$ 52,548 $ 49,260
</TABLE>
The following is a summary of the transactions in the allowance for credit
losses:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Balance, beginning of year $ 431 $ 354
Provisions charged to operating expenses 23 269
Loans charged-off (45) (212)
Recoveries 52 20
Balance, end of year $ 461 $ 431
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 3 - LOANS HELD FOR INVESTMENT (Continued):
Loans on which interest was not being accrued totaled $141,000 at December 31,
1998, and $783,000 at December 31, 1997. Had interest been accrued on these
nonaccrual loans at originally contracted rates, interest income, before income
taxes, would have been increased by approximately $13,000 and $100,000 at
December 31, 1998 and 1997, respectively.
A loan is considered impaired when, according to the contractual terms of the
contract, it is probable that Citrus Bank will be unable to collect all amounts
due. Of the $141,000 in nonaccrual loans held for investment at December 31,
1998, loans totaling $85,000 were classified by management as impaired. The
remaining nonaccrual loans held for investment totaling $56,000 were not
classified as impaired because management expects to recover substantially all
of the balances owed. However, these loans remain on nonaccrual status in
accordance with Citrus' policy.
The following table sets forth the recorded investment in impaired loans and
the related valuation allowance for each loan category as of December 31, 1998.
At December 31, 1997, no loans held for investment were classified as impaired
and for December 31, 1998 and 1997, no loans held for sale were classified as
impaired.
<TABLE>
<CAPTION>
Total Amount of
Impaired Valuation
Loans Allowance
<S> <C> <C>
December 31, 1998
Commercial real estate $ - $ -
Residential real estate - -
Commercial loans 85 43
Consumer loans - -
Total impaired loans held
for investment $ 85 $ 43
</TABLE>
All of the impaired loans at December 31, 1998, were measured using Management's
current estimate of fair value of the collateral. The average loans held for
investment classified as impaired totaled $4,000 in 1998 and $-0- in 1997. No
material amounts of interest were recorded in 1998 or 1997 for impaired loans.
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 4 - LOANS HELD FOR SALE
Loans held for sale include residential real estate loans held for sale to FNMA
and outstanding loans originated by third-party brokers assigned to Citrus Bank
and held by Citrus Bank pending transfer to investors with take-out commitments.
At December 31, 1998 and 1997, such loans totaled $8,291,000 and $847,000,
respectively. These loans are carried at cost which is lower than market.
Citrus Bank does not originate any significant amounts of loans specifically
for resale. Loans originated by Citrus Bank and sold principally to FNMA
totaled less than 1% and 3% of all loans originated during 1998 and 1997,
respectively. The only servicing income received by Citrus Bank comes from
the servicing of loans sold principally to FNMA. Servicing income recorded
totaled $22,000 and $21,000 for the years ended December 31, 1998 and 1997,
respectively.
NOTE 5 - FACILITIES
Facilities are summarized as follows:
<TABLE>
<CAPTION>
Accumulated Estimated
Depreciation and Net Book Useful
Cost Amortization Value Lives
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1998
Land and land improvements $ 278 $ - $ 278
Bank building and improvements 2,219 504 1,715 31.5 years
Furniture, fixtures, and equipment 1,647 756 891 2-15 years
$ 4,144 $ 1,260 $ 2,884
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
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 5 - FACILITIES (Continued)
Other expenses for the years ended December 31, 1998 and 1997, included
depreciation and amortization of facilities of $279,000 and $226,000,
respectively.
NOTE 6 - FHLB ADVANCES
Citrus Bank has a line of credit master agreement with the FHLB of Atlanta that
enables Citrus Bank to borrow up to $10,000,000 with no expiration date. These
advances are collateralized by Citrus Bank's FHLB stock and a blanket floating
lien consisting of wholly-owned residential (1-4 units) first mortgage loans.
No amounts were outstanding at December 31, 1998 and 1997, under this line of
credit. In addition to the line of credit arrangement, Citrus Bank had fixed
FHLB advances outstanding as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate 1998 1997
<S> <C> <C> <C>
2000 5.26% $ - $ 166,667
2003 5.76% $ 217 $ 266,666
</TABLE>
Interest expense on the line of credit and other FHLB advances amounted to
approximately $54,000 and $56,000 for the years ended December 31, 1998 and
1997, respectively.
NOTE 7 - TIME DEPOSITS
Time deposits at December 31, 198, totaled $47,740,000. 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 $ 2,861 $ 12,374
Over three through twelve months 7,237 21,547
Over twelve months through three years 100 2,778
Over three years 179 664
$ 10,377 $ 37,363
</TABLE>
Interest expense on certificates of deposit of $100,000 or more for 1998 and
1997 were approximately $569,000 and $504,000, respectively.
<PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 8 - INCOME TAXES
The provision for income taxes on income is summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Current:
Federal $ 457 $ 87
State 78 1
535 88
Deferred:
Federal (168) 41
State (29) 8
197 49
Total income tax provision $ 338 $ 137
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Tax computed at statutory rate $ 307 $ 132
Increase (decrease) resulting from:
Utilization of net operating loss carryforwards - (2)
Other 31 7
Income tax provision $ 338 $ 137
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 8 - INCOME TAXES (Continued):
The components of the deferred income tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Deferred tax asset:
Federal $ 212 $ 111
State 36 19
248 130
Deferred tax liability:
Federal (13) (80)
State ( 2) (14)
(15) (94)
Net deferred tax asset $ 233 $ 36
</TABLE>
The tax effects of each type of significant item that gave rise to deferred
taxes are:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Net unrealized holding losses on securities $ 30 $ 33
Depreciation (15) (94)
Allowance for credit losses 173 97
Other 45 -
Net deferred tax asset $ 233 $ 36
</TABLE>
NOTE 9 - DEFINED CONTRIBUTION PLAN
Citrus sponsors a 401(k) Profit Sharing Plan (the Plan) that substantially
covers all employees. Citrus, 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.
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 9 - DEFINED CONTRIBUTION PLAN (Continued):
For 1998 and 1997, Citrus' expenses were approximately $11,000 and $12,000,
respectively.
NOTE 10 - 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>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Commitments to extend credit $ 11,156 $ 7,098
Standby letters of credit $ 126 $ 75
Commercial letters of credit $ 100 $ 100
</TABLE>
Citrus 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.
Citrus 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 December 31, 1998, Citrus Bank had $1,750,000 unfunded lines-of-credit
available from other banks for the purchase of federal funds.
NOTE 11 - CONCENTRATIONS OF CREDIT
Substantially, all of Citrus 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.
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 12 - RELATED PARTIES
Citrus Bank holds loans and engages in transactions in the ordinary course of
business with certain directors and senior officers of Citrus Bank. Total
loans to such persons and their affiliates amounted to $3,468,000 and $3,543,000
at December 31, 1998 and 1997, respectively.
Following is a summary of activity for 1997 and 1998 for such loans:
<TABLE>
<CAPTION>
Beginning End of
of Year Year
Balance Additions Reductions Balance
(In Thousands)
<S> <C> <C> <C> <C>
1997 $ 2,230 $ 1,973 $ 660 $ 3,543
1998 $ 3,543 $ 1,882 $ 1,957 $ 3,463
</TABLE>
NOTE 13 - STOCKHOLDERS' EQUITY
Citrus 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 December 31, 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 from the original issue of $5.00 par value and $10.00
option price follows:
<TABLE>
<CAPTION>
Option
Record Date Action Par Value (Rounded) Price (Rounded)
<S> <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)
December 31, 1998 $ 3.15 $ 6.31
</TABLE>
In connection with Citrus' 1990 offering, organizers were granted warrants to
purchase 469,772 shares of common stock at $6.31 per share (as adjusted for
stock splits). The warrants are exercisable for a ten-year period commencing
April 13, 1990.
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
As part of an employment agreement, in 1990 Citrus 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, Citrus 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.
Citrus has also entered into stock option agreements with its officers providing
for the grant of 39,840 non-statutory stock options. Such options are
exercisable at $6.31 (as adjusted for stock splits) per share.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), became effective in 1996. 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 1998 and
1997. However, Citrus 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
Average
Number of Exercise
Shares<F1> Price
<S> <C> <C>
Outstanding at December 31, 1996 68,783<F2> $ 7.47<F2>
Exercised (11,862)<F2> $ 6.94<F2>
Outstanding at December 31, 1997 56,921<F2> $ 6.94<F2>
Outstanding at December 31, 1998 62,613<F3> $ 6.31<F3>
<FN>
<F1> No options were granted during 1997 or 1998.
<F2> Unadjusted for 1998 10% Stock Split.
<F3> Adjusted for 1998 10% Stock Split.
</FN>
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
The following is a summary of the status of the plans at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Remaining Exercise
Price Number Contractual Life Price
<S> <C> <C> <C>
$ 6.31 18,789 16 months $ 6.31
$ 6.31 43,824 31 months $ 6.31
</TABLE>
All outstanding options were fully vested and exercisable at December 31, 1998.
The ability of Citrus to pay dividends to stockholders depends primarily on
dividends received by Citrus from Citrus Bank. Citrus Bank's ability to pay
dividends is limited by federal banking regulations based upon Citrus Bank's
profitability and other factors. At December 31, 1998, approximately $674,000
of retained earnings of Citrus Bank was available for payment of dividends to
Citrus without prior regulatory approval.
On April 27, 1998, Citrus' 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 Citrus' shareholders are
either directors, officers or employees, and there is a presumption that these
parties have intimate knowledge of the affairs of Citrus. Since Citrus 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%.
NOTE 14 - NONINTEREST OPERATING EXPENSES
Other operating expenses were as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Advertising and public relations $ 72 $ 69
Professional fees 133 288
Data processing 158 153
Stationary, printing, and supplies 73 58
Insurance 30 24
Telephone 50 40
Other miscellaneous expenses 481 411
$ 997 $ 1,043
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 15 - 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: 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 similar remaining maturities.
<PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):
Short-term Debt: For short-term debt including accounts and demand notes
payable, the carrying amount is a reasonable estimate of fair value.
The estimated fair values of Citrus Bank's financial instruments at
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
(In Thousands)
<S> <C> <C>
Financial Assets
Cash and deposits in other banks $ 3,949 $ 3,949
Federal funds sold 9,200 9,200
Investment securities 5,982 5,948
Loans held for investment 52,548 52,841
Loans held for sale 8,291 8,457
Total assets valued $ 79,970 $ 80,395
Financial Liabilities
Deposits $ 76,703 $ 76,462
FHLB advances 217 217
Total liabilities valued $ 76,920 $ 76,679
</TABLE>
While these estimates of fair value are based on Management's judgment of the
most appropriate factors, there is no assurance that, were Citrus to have
disposed of such items at December 31, 1998, the estimated fair values would
necessarily have been achieved at that date since market values may differ
depending on various circumstances. The estimated fair values at
December 31, 1998, should not necessarily be considered to apply at subsequent
dates.
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 16 - 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 1
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, 1998, the most recent notification from the FDIC, Citrus
Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. To remain categorized as well as capitalized, it
will have to maintain minimum total risk-based, Tier 1 risk-based and Tier 1
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
Amount Ratio > Amount > Ratio > Amount > Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Risk-Based Capital
(To Risk-Weighted Assets) $ 6,476 10.71% $ 4,839 8.00% $ 6,049 10.00%
Tier 1 Capital
(To Risk-Weighted Assets) $ 6,015 9.94% $ 2,420 4.00% $ 3,630 6.00%
Tier 1 Capital
(To Adjusted Total Assets) $ 6,015 7.33% $ 3,283 4.00% $ 4,104 5.00%
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 17 - 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: 1998 1997
(In Thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 135 $ 264
Investment in subsidiary bank, net 5,982 5,333
Other assets 330 225
Total $ 6,447 $ 5,822
Liabilities and Stockholders' Equity
Liabilities $ - $ -
Stockholders' equity 6,447 5,822
Total $ 6,447 $ 5,822
</TABLE>
Presented below are condensed financial statements for Citrus Financial
Services, Inc. (parent only):
<TABLE>
<CAPTION>
Condensed Statements of Operations and Stockholders' Equity
Years Ended December 31: 1998 1997
(In Thousands)
<S> <C> <C>
Equity in net income of subsidiary bank $ 587 $ 273
Other income 101 43
Other expenses (124) (66)
Net income 564 250
Stockholders' Equity:
Beginning of year 5,822 5,427
Stock options exercised and rounding (1) 82
Net change in unrealized holding gains on
securities in subsidiary bank 62 63
End of year $ 6,447 $ 5,822
</TABLE>
</PAGE>
<PAGE>
Citrus Financial Services, Inc. And Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 17 - PARENT COMPANY FINANCIAL INFORMATION (Continued):
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Years Ended December 31: 1998 1997
(In Thousands)
<S> <C> <C>
Operating Activities
Net income $ 564 $ 250
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (587) (273)
Deferred income taxes (184) 68
Other 78 (126)
Net Cash Used In Operating Activities (129) (81)
Net Cash Provided by Financing Activities:
Proceeds from stock options exercised - 82
Cash and cash equivalents:
Beginning of year 264 263
End of year $ 135 $ 264
</TABLE>
<PAGE>
Board of Directors
Citrus Financial Services, Inc.
Citrus Bank, National Association
Robert L. Brackett
Chairman of the Board, Citrus Financial Services, Inc. and Citrus Bank, N.A.
Treasurer and Director, Credit Data Services, Inc.
Real Estate Investments
Josh C. Cox, Jr.
President and Chief Executive Officer, Director, Citrus Financial Services, Inc.
Chief Executive Officer, Vice-Chairman of the Board, Citrus Bank, N.A.
S. Hallock duPont, Jr.
Director, Citrus Bank, N.A.
President, Europa Corp.
Hubert Graves, Jr.
Director, Citrus Financial Services, Inc. and Citrus Bank, N.A.
President, Hubert Graves Citrus, Inc.
President, HGX, Inc.
Roy H. Lambert
Director, Citrus Financial Services, Inc.
Chairman, Regency Windsor Companies
Earl H. Masteller
Director, Citrus Financial Services, Inc. and Citrus Bank, N.A.
President, Masteller, Moler & Associates, Inc.
Vice President, Masteller, Moler & Reed, Inc.
Secretary, Walsh Environmental Services, Inc.
John A. Purdie
Director, Citrus Bank, N.A.
President, Regency Windsor Capital, Inc.
Louis L. Schlitt
Director, Citrus Financial Services, Inc. and Citrus Bank, N.A.
President, Schlitt Insurance Services, Inc.
President, Louis Schlitt, Inc.
Walter E. Smith, Jr.
Director, Citrus Financial Services, Inc.
Owner/Operator, Unocal 76 Truck Stops
Director, Travel Centers of America, Inc.
James R. Thompson
Director, Citrus Financial Services, Inc. and Citrus Bank, N.A.
Consulting Engineer, Regency Windsor Capital, Inc.
Jeffrey L. Velde
Director, Citrus Bank, N.A.
President, Velde Ford
William B. Schuh
Advisory Director, Community Development Manager, Citrus Bank, N.A.
<PAGE>
<PAGE>
Officers
Citrus Financial Services, Inc.
Citrus Bank, National Association
Josh C. Cox, Jr.
President and Chief Executive Officer, Citrus Financial Services, Inc.
Vice Chairman andChief Executive Officer, Citrus Bank, N.A.
Randy J. Riley
Senior Vice President and Credit, Administrator, Citrus Financial Services, Inc.
President and Chief Operating Officer, Citrus Bank, N.A.
Walter A. Alvarez
President, Miami Region, Citrus Bank, N.A.
Barbara S. Camarigg
Vice President, Banking Center Administrator, Citrus Bank, N.A.
E. Angel Brown
Assistant Vice President, Vero Beach Banking Center Manager, Citrus Bank, N.A.
Megan Drancsak
Assistant Vice President, Mortgage Manager, Citrus Bank, N.A.
Michele L. Schenarts
Assistant Vice President, Mortgage Funding Manager, Citrus Bank, N.A.
Henry O. Speight
Executive Vice President, Chief Financial Officer, Citrus Financial
Services, Inc.
Senior Vice President and Chief Financial Officer, Citrus Bank, N.A.
Joanna Brown
Vice President, Operations Manager, Citrus Bank, N.A.
Marion H. DeTota
Assistant Vice President, Finance Officer, Citrus Bank, N.A.
Diana R. Best
Assistant Vice President, Banking Support Manager, Citrus Bank, N.A.
<PAGE>
<PAGE>
Shareholder Information
Shareholder Assistance: Shareholders requiring a change of address, records or
information about lost /missing certificates should contact:
Continental Stock Transfer and Trust Company
2 Broadway
New York, New York 10004
(212) 509-4000
Information: Analysts, investors and others seeking financial data or general
information are asked to contact:
Josh C. Cox, Jr., President and CEO.
Telephone: (561) 778-4100
Publications: Requests for printed materials including annual and quarterly
reports, proxy statements, 10-K and 10-Q reports should be directed to CFSI's
Finance Officer:
Citrus Financial Services, Inc.
P.O. Box 2560
Vero Beach, FL 32961-2560
Telephone: (561) 778-4100
Annual Meeting: Citrus' 1999 annual meeting of shareholders will be held at
5:00 p.m. on Monday, April 26, 1999, at the Courthouse Executive Center,
2145 14th Avenue, Vero Beach Florida.
Independent Auditors:
Stevens, Sparks & Company, P.A.
(formerly Stevens, Thomas, Schemer & Sparks, P.A.)
6273 DuPont Station Court
Jacksonville, Florida 32217-2513
Telephone: (904) 731-1366
Legal Counsel:
Igler & Dougherty, P.A.
1501 Park Avenue East
Tallahassee, Florida 32301
(850) 878-2411
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,940
<INT-BEARING-DEPOSITS> 9
<FED-FUNDS-SOLD> 9,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,675
<INVESTMENTS-CARRYING> 1,307
<INVESTMENTS-MARKET> 1,273
<LOANS> 61,300
<ALLOWANCE> 461
<TOTAL-ASSETS> 84,051
<DEPOSITS> 76,703
<SHORT-TERM> 0
<LIABILITIES-OTHER> 604
<LONG-TERM> 297
0
0
<COMMON> 3,007
<OTHER-SE> 3,440
<TOTAL-LIABILITIES-AND-EQUITY> 84,051
<INTEREST-LOAN> 5,775
<INTEREST-INVEST> 432
<INTEREST-OTHER> 245
<INTEREST-TOTAL> 6,452
<INTEREST-DEPOSIT> 2,885
<INTEREST-EXPENSE> 2,941
<INTEREST-INCOME-NET> 3,511
<LOAN-LOSSES> 23
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 3,007
<INCOME-PRETAX> 902
<INCOME-PRE-EXTRAORDINARY> 902
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 564
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 4.92
<LOANS-NON> 141
<LOANS-PAST> 359
<LOANS-TROUBLED> 685
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 461
<CHARGE-OFFS> 45
<RECOVERIES> 52
<ALLOWANCE-CLOSE> 461
<ALLOWANCE-DOMESTIC> 461
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
