UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File Number 33-29696-A
___________________________________________________________
CITRUS FINANCIAL SERVICES, INC.
(Exact Name of registrant as specified in its charter)
Florida 65-0136504
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 Indian River Boulevard
Suite 100
Vero Beach, Florida 32960
(Address of Principal Executive Offices) (Zip Code)
__________________________________________________________
(561) 778-4100
(Registrant's telephone number including area code)
____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____.
Indicate the number of shares outstanding of each of the issuer's classes of
Common stock as of the latest practicable date:
Class Outstanding as of May 6, 1999
Common Stock 952,296
Par Value $3.15 per share
<PAGE>
CITRUS FINANCIAL SERVICES, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION NUMBER
Item 1: Financial Statements:
Consolidated Balance Sheets March 31, 1999 (Unaudited)
and December 31, 1998 1
Consolidated Statements of Operations and Comprehensive Income
for the Three Months Ended March 31, 1999 and 1998 (Unaudited) 2
Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 (Unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II: OTHER INFORMATION 17
Signatures 18
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, 1999
(Unaudited) December 31, 1998
(In Thousands, Except Per Share Data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,744 $ 3,940
Federal funds sold 5,750 9,200
Total cash and cash equivalents 8,494 13,140
Interest-bearing deposits in other banks 23 9
Securities available-for-sale at fair value 4,549 4,675
Securities held-to-maturity (market value of
$1,193 for 1999 and $1,273 for 1998) 1,235 1,307
Loans held for investment less allowance for credit losses 55,282 52,548
Loans held for sale 5,434 8,291
Facilities 2,916 2,884
Other real estate owned 390 390
Deferred income taxes 206 233
Accrued interest receivable 386 343
Other assets 518 231
TOTAL $ 79,433 $ 84,051
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 11,924 $ 13,393
NOW accounts 3,660 4,121
Money market accounts 2,685 3,026
Savings accounts 10,064 8,423
Time, $100,000 and over 9,170 10,377
Other time deposits 34,500 37,363
Total deposits 72,003 76,703
Other borrowings 204 217
Accrued interest payable on deposits 248 297
Accounts payable and accrued liabilities 407 387
Total liabilities 72,862 77,604
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - -
Common stock 3,007 3,007
Additional paid-in capital 3,149 3,149
Retained earnings 446 324
Accumulated other comprehensive income
Net unrealized holding losses on securities (31) (33)
Total stockholders' equity 6,571 6,447
TOTAL $ 79,433 $ 84,051
Book value per common share $ 6.90 $ 6.77
Common shares outstanding 952,296 952,296
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
For the Three Months Ended
March 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Interest and fees on loans held for investment $ 1,211 $ 1,212
Interest and fees on loans held for sale 177 107
Investment income on investment securities
and interest-bearing deposits in other banks 78 125
Federal funds sold 102 39
Total interest income 1,568 1,483
Interest on deposits 716 625
Other 3 6
Total interest expense 719 631
Net interest income before provision for credit losses 849 852
Provision for credit losses 22 (96)
Net interest income 827 948
Fees and service charges 107 93
Other income 7 7
Total other income 114 100
Other expenses:
Salaries and employee benefits 388 330
Expenses of bank premises and fixed assets 141 119
Other operating expenses 216 256
Total other expenses 745 705
Income before provision for income taxes 196 343
Provision for income taxes 74 129
Net income 122 214
Other comprehensive income, net of income taxes:
Unrealized holding gains arising during period 2 22
Comprehensive income $ 124 $ 236
Earnings Per Share
Basic earnings per share $ 0.13 $ 0.22
Diluted earnings per share $ 0.10 $ 0.19
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
For the Three Months Ended March 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Net income $ 122 $ 214
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for credit losses 22 (71)
Depreciation and amortization 79 62
Net premium amortization and discount accretion 5 -
Increase in other assets (371) (119)
Increase in other liabilities 29 139
Origination of loans held for sale (30,558) (25,694)
Proceeds on sale of loans held for sale 33,415 20,594
Net cash provided (used) by operating activities 2,743 (4,875)
Cash flows from investing activities:
Net (increase) decrease in:
Investment securities 205 564
Interest-bearing deposits in other banks (14) 56
Loans (2,756) 105
Purchases of bank premises and equipment, net (111) (83)
Net cash provided (used) in investing activities (2,676) 642
Cash flows from financing activities:
Net increase (decrease) in deposits (4,700) 3,401
Advances (repayments) of FHLB advances, net (13) (30)
Net cash provided (used) by financing activities (4,713) 3,371
Decrease in cash and cash equivalents (4,646) (862)
Cash and cash equivalents at beginning of period 13,140 6,242
Cash and cash equivalents at end of period $ 8,494 $ 5,380
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
Net
Unrealized
Holding
Common Stock Gains Total
Par Additional (Losses) Stock-
Value Paid-in Retained on holders'
Shares (Rounded) Amount Capital Earnings Securities Equity
(Dollars in Thousands, Except Par Value Per Share)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 952,296 $ 3.15 $ 3,007 $ 3,149 $ 324 $ (33) $ 6,447
Comprehensive income:
Net income - - - - 122 -
Net change in unrealized
holding gains on securities - - - - - 2
Total comprehensive income - - - - - - 124
Balance,
March 31, 1999 952,296 $ 3.15 $ 3,007 $ 3,149 $ 446 $ (31) $ 6,571
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Citrus Financial
Services, Inc. ("Citrus") and its wholly owned subsidiary Citrus Bank, N.A.
("Citrus Bank"). The consolidated financial statements for the three months
ended March 31, 1999 and 1998, have not been audited and do not include
information or footnotes necessary for a complete presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, the
accompanying consolidated financial statements contain all adjustments, which
are of a normal recurring nature, necessary for a fair presentation. The
results of operations for the interim periods are not necessarily indicative
of the results which may be expected for an entire year. The accounting
policies followed by Citrus are set forth in Note 1 to Citrus' consolidated
financial statements contained in the 1998 Annual Report to Stockholders and
are incorporated herein by reference.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans ("Other Real Estate Owned"). In connection with the
determination of the allowances for credit losses on loans and foreclosed real
estate, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review Citrus Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require Citrus Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Management does not anticipate that the allowances for credit
losses on loans and foreclosed real estate will change materially in the near
term.
Fair Value of Financial Instruments
Financial instruments of Citrus consist of cash, due from banks, federal funds
sold, investment securities, loans receivable, accrued interest receivable,
deposits, federal funds purchased, other borrowings, accrued interest payable,
and off-balance sheet commitments such as commitments to extend credit and
standby letters of credit. On an interim basis, management considers the cost
of providing estimated fair values by each class of financial instrument to
exceed the benefits derived. In management's opinion, the carrying amount of
financial instruments approximates fair value.
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
NOTE 2 - COMPUTATION OF PER SHARE EARNINGS
Basic earnings per share amounts are computed by dividing net earnings by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed by dividing net earnings by the weighted
average number of shares and all dilutive potential shares outstanding during
the period. The following information was used in the computation of earnings
per share on both a basic and diluted basis for the three months ended March 31,
1999 and 1998 (in thousands except per share data):
<TABLE>
For the Three Months
Ended March 31,
1999 1998
<S> <C> <C>
Basic EPS computation:
Numerator - Net income $ 122 $ 214
Denominator - Weighted average shares outstanding 952 952
Basic EPS $ 0.13 $ 0.22
Diluted EPS computation:
Numerator - Net income $ 122 $ 214
Denominator - Weighted average shares outstanding 952 952
Stock options and warrants 227 196
1,179 1,148
Diluted EPS $ 0.10 $ 0.19
</TABLE>
NOTE 3 - LOANS HELD FOR INVESTMENT
Loans consisted of (dollars in thousands):
<TABLE>
March 31, December 31,
1999 1998
<S> <C> <C>
Real estate $ 38,615 $ 35,914
Commercial and agriculture 12,970 12,868
Installment and other loans 4,175 4,347
Total loans, gross 55,760 53,129
Unearned income and deferred fees ( 7) (120)
Allowance for credit losses (471) (461)
Net loans $ 55,282 $ 52,548
</TABLE>
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
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 March 31, 1999, and December 31, 1998, such loans
totaled $5,434,000 and $8,291,000, 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
generally represent less than 3% of all loans originated. The only servicing
income received by Citrus Bank comes from the servicing of loans sold
principally to FNMA, which is not considered to be material.
NOTE 5 - ALLOWANCE FOR CREDIT LOSSES
Citrus' Board of Directors monitors the loan portfolio quarterly in order to
enable it to evaluate the adequacy of the allowance for credit losses.
Management has implemented a risk system that identifies potential problem
credits as early as possible, categorizes the credits as to risk, and puts a
reporting process in place to monitor the progress of the credits.
Citrus maintains the allowance for credit losses at a level sufficient to
absorb all estimated losses inherent in the loan portfolio. Activity in the
allowance for credit losses follows (dollars in thousands):
<TABLE>
Three Months Twelve Months
Ended March 31, Ended December 31,
1999 1998
<S> <C> <C>
Balance, beginning of period $ 461 $ 431
Recoveries
Real estate loans - 43
Installment loans - 8
Credit card and related plans - -
Commercial and all other loans - 1
- 52
Charge-offs
Real estate loans - -
Installment loans 6 35
Credit card and related plans - 10
Commercial and all other loans 6 -
12 45
Provision charged to operations 22 23
Balance, end of period $ 471 $ 461
</TABLE>
During the first quarter of 1998, Citrus settled litigation involving a
significant problem credit. As a result of this settlement, Citrus recorded
a credit provision of $96,000 for the quarter ended March 31, 1998. The OCC
had previously mandated that this credit be written down prior to resolution
of Citrus' lawsuit against the borrower. While management disagreed with the
amount of the OCC adjustment made in 1997, the effect on financial condition
and results of operations was not considered material.
</PAGE>
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
NOTE 6 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Citrus is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Those instruments
involve, to varying degrees, elements of credit, and interest rate risk in
excess of the amounts recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement Citrus
has in particular classes of financial instruments.
Financial instruments at March 31, 1999, consisted of commitments to extend
credit approximating $10.0 million and letters of credit of $226,000.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
NOTE 7 - SUBSEQUENT EVENT
Citrus' Registration Statement on Form SB-2 ("Registration Statement") was
declared effective by the Securities and Exchange Commission as of May 3, 1999.
This action permits Citrus to shortly commence its public offering of between
1,000,000 and 1,200,000 shares of its common stock. The proceeds are expected
to be used to complete the opening of two new banks as further discussed in
the Registration Statement.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Citrus Financial Services, Inc. ("Citrus") is a registered bank holding company
under the federal Bank Holding Company Act of 1956, as amended, and owns 100%
of the issued and outstanding common stock of Citrus Bank, N.A., Vero Beach,
Florida ("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. The holding company
provides flexibility for expansion of Citrus' banking business through
acquisition of other financial institutions and provision of additional
banking-related services which the traditional commercial bank may not provide
under present laws.
Citrus Bank commenced business operations on April 13, 1990, in a permanent
facility located at the corner of Indian River Boulevard and 17th Street, Vero
Beach, Florida. The facility is a three-story office condominium, the first
floor of which is owned by Citrus Bank. Citrus Bank operates a branch office
at 1020 U.S. 1, Sebastian, Florida, which commenced operations in February
1993 and another branch office located at 1020 Buttonwood Street, Barefoot Bay,
Florida, which commenced operations in September 1996.
Forward-looking Statements
When used in this Form 10-QSB, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project,"
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties including
changes in economic conditions in Citrus' market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in
Citrus' market area and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. Citrus wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as to the date made.
Citrus wishes to advise readers that the factors listed above could affect
Citrus' financial performance and could cause Citrus' actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements. Citrus does not
undertake, and specifically disclaims any obligation, to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Year 2000
Citrus is aware of the issue associated with the programming code in existing
computer systems as the millennium (Year 2000) approaches. The issue is
whether computer systems will properly recognize date sensitive information
when the year changes to 2000. Primary systems that do not properly recognize
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 the 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. 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 completed testing
for all mission critical hardware and software. At March 31, 1999, 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 $22,000 remains to be spent. It is recognized that any
Year 2000 compliance failures could result in additional expense to Citrus.
Citrus has established time lines 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.
</PAGE>
<PAGE>
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.
During 1998, our efforts were centered primarily upon notification of our
customers for the purpose of making them aware of the Year 2000 issues and we
had not conducted specific analysis of the Year 2000 risk exposure of 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 and to ensure that adequate testing and contingency planning have been
conducted. Citrus has completed its initial contingency plan and management
currently believes the most reasonably 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 also provided as well as additional disclosures. SFAS 133
becomes effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. Earlier application is permitted with certain exceptions.
Management does not anticipate that adoption of SFAS 133 will have a material
impact on the financial condition or results of operations of Citrus.
Impact of Inflation
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurements of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of 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 such prices are affected
by inflation to a larger extent than interest rates. As discussed herein,
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>
Results of Operations
Net Income
Citrus' net income decreased $92,000 for the three months ended March 31, 1999,
over the comparable period in 1998. This decline for the three months of 1999
versus 1998 reflects the effects of the credit provision for credit losses of
$96,000, increased operating costs associated with the start-up of a loan
production office in Miami, Florida, and declining margins. The increase in
average earning assets of 15.6% for the first quarter of 1999 versus the same
period in 1998 was partially offset by a decline of approximately 70 basis
points in the average yield on earning assets. These factors produced a net
increase in total interest income of 5.7% in the first three months of 1999 as
compared to the first three months of 1998. For the three months ended
March 31, 1999, as compared with the comparable period in 1998, increases in
total interest income of $85,000 were offset by increases in interest expense
of $88,000. Noninterest income increased 14.0%, to $114,000 in the first three
months of 1999 as compared to $100,000 in the first three months of 1998. This
improvement resulted primarily from deposit account charges resulting from the
growth in deposits. Noninterest expense in the first three months of 1999 as
compared to the first three months of 1998 rose at a pace of 5.7% to $745,000
rom $705,000. The return on average assets for the three months ended
March 31, 1999, declined 0.60% annualized as compared with the return of
average assets of 0.72% for 1998.
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 such 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, and the degree of
mismatch and the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities.
Net interest income was $849,000 for the three months ended March 31, 1999, as
compared to $852,000 for the three months ended March 31, 1998. The increases
in earning assets of 14.0% reflected the substantial growth of Citrus' loan
portfolio between these periods, which resulted in improvements in Citrus' total
interest income but the declining net interest spread and net interest margin
contributed to the flat net interest income in 1999 versus 1998. Net interest
spread, the difference between the yield on earning assets and the rate paid
on interest-bearing liabilities, was 3.7% for the three months ended
March 31, 1999, as compared to 4.4% for the three months ended March 31, 1998.
Net interest margin (which is net interest income divided by average
interest-earning assets) declined 4.5% for the three months ended
March 31, 1999, as compared to 5.2% for the three months ended March 31, 1998.
These decreases reflect the fact that during the first three months of 1999
yields for loans held for investment have declined approximately 70 basis
points, while interest expense yields have only dropped 10 basis points in
1999 versus 1998.
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.
Such yields are derived by dividing income or expense by the average balance
of the corresponding assets or liabilities. Average balances have been derived
from daily averages.
</PAGE>
<PAGE>
Average Balances, Income and Expenses, and Rates (dollars in thousands)
<TABLE>
For the Three Months Ended March 31,
1999 1998
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 $ 23 $ - 4.8% $ 44 $ 1 4.6%
Taxable securities 5,927 78 5.3% 8,842 124 5.6%
Federal funds sold 8,715 102 4.7% 2,995 39 5.2%
Loans held for sale 7,304 177 9.7% 3,397 107 12.6%
Loans held for investment,
net 53,664 1,211 9.0% 50,159 1,212 9.7%
Total earning assets 75,633 1,568 8.3% 65,437 1,483 9.1%
Non-earning assets 6,114 6,342
Total assets $ 81,747 $ 71,779
Interest-bearing liabilities:
NOW and money market
deposits $ 6,470 28 1.7% $ 7,367 36 2.0%
Savings deposits 9,172 73 3.2% 6,784 55 3.2%
Time deposits 46,394 615 5.3% 39,646 534 5.4%
Other borrowings 211 3 5.7% 434 6 5.5%
Total interest-bearing
liabilities 62,247 719 4.6% 54,231 631 4.7%
Noninterest-bearing
liabilities 12,996 11,391
Stockholders' equity 6,504 6,157
Total liabilities and
stockholders' equity $ 81,747 $ 71,779
Net interest income $ 849 $ 852
Interest-rate spread 3.7% 4.4%
Net interest margin 4.5% 5.2%
Ratio of average earning
assets to average
interest-bearing
liabilities 121.5% 120.7%
</TABLE>
<PAGE>
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, there can be no assurance that
charge-offs in future periods will not exceed the allowance for credit losses or
that additional increases in the credit loss allowance will not be required.
Asset Classification. Commercial banks are required to review and, when
appropriate, classify their assets on a regular basis. The OCC has the
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, condition, and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible
and of such little value that continuance as an asset of the institution is
not warranted. If an asset or portion thereof is classified as loss, the
insured institution establishes a specific reserve for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Assets that do not warrant
classification in the aforementioned categories, but possess weaknesses, are
classified as special mention and are monitored by Citrus.
At March 31, 1999, Citrus had 11 loans classified as substandard, doubtful, or
loss totaling $427,000. At December 31, 1998, Citrus had 12 loans totaling
$448,000 in the same categories. At both March 31, 1999, and December 31, 1998,
Citrus had no loss assets to be charged-off. Loans classified by management as
impaired totaled $87,000 and $85,000 at March 31, 1999, and December 31, 1998,
respectively.
<TABLE>
A summary of nonperforming loans by type follows:
March 31, December 31,
1999 1998
<S> <C> <C>
Real estate $ - $ 228
Installment loans 20 25
Credit cards and related plans 4 -
Commercial and all other loans 835 247
$ 859 $ 500
</TABLE>
The primary reason for the increase in nonperforming loans was one loan totaling
$586,000 that was 90 days past due pending renewal. This loan was subsequently
renewed upon receipt of current financial statements.
Allowance for Credit Losses. The allowance for credit losses is established
through a provision for loan losses charged against income. Loans are charged
against the provision when management believes that the collectibility of the
principal is unlikely. The provision is an estimated amount that management
believes will be adequate to absorb losses inherent in the loan portfolio based
on evaluations of its collectibility. The evaluations take into consideration
such factors as changes in the nature and volume of the portfolio, overall
portfolio quality, specific problem loans and commitments, and current
anticipated economic conditions that may affect the borrower's ability to pay.
While management uses the best information available to recognize losses on
loans, future additions to the provision may be necessary based on changes in
economic conditions.
At March 31, 1999, the allowance for credit losses amounted to $471,000, or
0.84% of outstanding loans held for investment. At December 31, 1998, the
allowance for credit losses amounted to $461,000, or 0.87% of outstanding loans
held for investment. Citrus' provision for credit losses was $22,000 for the
three months ended March 31, 1999. For the same three months period in 1998,
the provision for credit losses was $(96,000). The provision was made based on
management's assessment of general credit loss risk and asset quality. The
decline in the allowance for credit losses as a percentage of outstanding loans
reflects the overall improvement in the quality of the loan portfolio as further
discussed in the next paragraph.
During the first quarter of 1998, Citrus settled litigation involving a
significant problem credit. As a result of this settlement, Citrus recorded
</PAGE>
<PAGE>
a credit provision of $96,000 for the quarter ended March 31, 1998. The OCC had
previously mandated that this credit be written down prior to resolution of
Citrus' lawsuit against the borrower. While management disagreed with the
amount of the OCC 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' underwriting guidelines.
Noninterest Income and Expense
Noninterest Income. Citrus' primary source of noninterest income is service
charges on deposit accounts. In addition, Citrus originates mortgage loans,
which are closed in the name of a third party, for which Citrus receives a fee.
Other sources of noninterest income include bankcard fees, commissions on
check sales, safe deposit box rent, wire transfer, and official check fees.
Total noninterest income increased by $14,000 during the three months ended
March 31, 1999, as compared to the same period in 1998, reflecting increased
activity fees related to increases in deposit and loan balances. Fees and
service charges were $107,000 for the three months ended March 31, 1999, as
compared to $93,000 for the comparable periods in 1998, an increase of 15.1%.
Noninterest Expense. Total noninterest expense increased by $40,000 during
the three months ended March 31, 1999, as compared to the same period in 1998,
as a result of Citrus' continued growth. For the first three months in 1999,
this increase includes an increase in salary and benefits expense of $58,000,
as Citrus employed additional employees and provided normal salary and benefit
increases. Occupancy-related expenses increased $22,000 in the first three
months of 1999 as compared with the same period in 1998, principally due to
the start-up of Citrus' in-house data processing center. Continued reductions
in professional fees of $17,000 were realized in the first three months of 1999
along with reductions in outside data processing costs.
Income Tax Expense
The income tax provision was $74,000 for the three months March 31, 1999, or
an effective rate of 37.8%. This compares with an effective rate of 37.6% for
the same period in 1998.
Financial Condition
Citrus' total assets at March 31, 1999, were $79.4 million, decreasing from
$84.1 million at December 31, 1998. The decrease of approximately $4.7
million was due principally to the decline in federal funds sold of $3.5
million and loans held for sale of $2.9 million, partially offset by an
increase in loans held for investment of $2.7 million. Deposits declined
approximately $4.7 million, with $4.1 million of the decline attributable to
higher costing certificates of deposit.
Total stockholders' equity as of March 31, 1999, was $6.6 million, an increase
of $124,000 or approximately 2% compared with stockholders' equity of $6.4
million as of December 31, 1998. This increase was attributable to net income
for the three months of 1999 of $122,000 and a $2,000 increase in the market
value (net of deferred income taxes) of investment securities
available-for-sale.
</PAGE>
<PAGE>
The following table shows selected ratios for the periods ended or at the dates
indicated (annualized for the three months ended March 31, 1999):
<TABLE>
Three Months Ended Year Ended
March 31, December 31,
1999 1998
<S> <C> <C>
Return on average assets 0.60% 0.72%
Return on average equity 7.50% 9.13%
Interest-rate spread during the period 3.67% 4.20%
Net interest margin 4.49% 4.92%
Allowance for credit losses to period end
loans held for investment 0.84% 0.87%
Net charge-offs to average loans held for
investment 0.09% (0.01)%
Nonperforming assets to period end loans
held for investment and foreclosed property 2.22% 1.67%
Nonperforming assets to period end total assets 1.57% 1.06%
</TABLE>
Liquidity and Capital Resources
Liquidity Management. 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 subject to varying
degrees of management control. For example, the timing of maturities of the
investment portfolio is very predictable and subject to a high degree of
control at the time investment decisions are made. However, net deposit
inflows and outflows are far less predictable and are not subject to the same
degree of control. Asset liquidity is provided by cash and assets which are
readily marketable, which can be pledged, or which will mature in the near
future. Liability liquidity is provided by access to core funding sources,
principally the ability to generate customer deposits in 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.
Short-Term Investments. Short-term investments, which consist of federal funds
sold and securities purchased under agreements to resell and interest-bearing
deposits, averaged $8.7 million in the first three months of 1999 as compared to
$3.0 million in the same period of 1998. At March 31, 1999, and December 31,
1998, short-term investments totaled $5.8 million and $9.2 million,
respectively. These funds are a primary source of Citrus' liquidity and are
generally invested in an earning capacity on an overnight basis.
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.
Deposits and Other Sources of Funds. In addition to deposits, the sources of
funds available for lending and other business purposes include loan repayments,
loan sales, and securities sold under agreements to repurchase. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows are
influenced significantly by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in
other sources, such as deposits at less than projected levels and are also used
to fund the origination of mortgage loans designated to be sold in the
secondary markets.
Core Deposits. Core deposits, which exclude certificates of deposit of $100,000
or more, provide a relatively stable funding source for Citrus' loan portfolio
and other earning assets. Citrus' core deposits were $62.8 million at March 31,
1999, and $66.3 million at December 31, 1998. 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.
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 Citrus Bank's FHLB stock and a blanket floating lien
consisting of wholly-owned residential (1-4 units) first mortgage loans. At
March 31, 1999, 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>
At March 31, At December 31,
Maturity Date Interest Rate 1999 1998
<S> <C> <C> <C>
2003 5.76% $ 204 $ 217
</TABLE>
Capital. The Federal Reserve Board and bank regulatory agencies require bank
holding companies and financial institutions to maintain capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100% (the Federal Reserve grants an
exemption from these requirements for bank holding companies with less than
$150 million in consolidated assets, and therefore 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 stockholders'
equity, excluding the unrealized gain (loss) on available-for-sale securities,
minus certain intangible assets. Tier 2 capital consists of the general
allowance for credit losses subject to certain limitations. An institution's
qualifying capital base for purposes of its risk-based capital ratio consists
of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum
requirements are 4% for Tier 1 and 8% for total risk-based capital.
Bank holding companies and banks are also required to maintain capital at a
minimum level based on total assets, which is known as the leverage ratio.
The minimum requirement for the leverage ratio is 3%, but all but the highest
rated institutions are required to maintain ratios 100 to 200 basis points
above the minimum. Citrus and Citrus Bank exceeded their minimum regulatory
capital ratios as of March 31, 1999, as reflected in the following table.
The following table sets forth Citrus Bank's regulatory capital position
(dollars in thousands):
<TABLE>
Actual Minimum(1) Well-Capitalized(2)
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted
Assets) $ 6,610 10.71% $ 4,938 8.00% $ 6,172 10.00%
Tier I Capital (to Risk-Weighted
Assets) $ 6,139 9.95% $ 2,469 4.00% $ 3,703 6.00%
Tier I Capital (to Average
Assets) $ 6,139 7.54% $ 3,256 4.00% $ 4,071 5.00%
</TABLE>
(1) The minimum required for adequately capitalized purposes.
(2) To be "well-capitalized" under the FDIC's Prompt Corrective Action
regulations.
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes In Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registered has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Citrus Financial Services, Inc.
Date: May 13, 1999 /s/ Josh C. Cox, Jr.
Josh C. Cox, Jr.
President and Chief Executive Officer
Date: May 13, 1999 /s/ Henry O. Speight
Henry O. Speight
Executive Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,744
<INT-BEARING-DEPOSITS> 23
<FED-FUNDS-SOLD> 5,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,549
<INVESTMENTS-CARRYING> 1,235
<INVESTMENTS-MARKET> 1,273
<LOANS> 61,187
<ALLOWANCE> 471
<TOTAL-ASSETS> 79,433
<DEPOSITS> 72,003
<SHORT-TERM> 0
<LIABILITIES-OTHER> 655
<LONG-TERM> 204
0
0
<COMMON> 3,007
<OTHER-SE> 3,564
<TOTAL-LIABILITIES-AND-EQUITY> 79,433
<INTEREST-LOAN> 1,388
<INTEREST-INVEST> 78
<INTEREST-OTHER> 102
<INTEREST-TOTAL> 1,568
<INTEREST-DEPOSIT> 716
<INTEREST-EXPENSE> 719
<INTEREST-INCOME-NET> 849
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 745
<INCOME-PRETAX> 196
<INCOME-PRE-EXTRAORDINARY> 196
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.10
<YIELD-ACTUAL> 4.49
<LOANS-NON> 859
<LOANS-PAST> 700
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 87
<ALLOWANCE-OPEN> 461
<CHARGE-OFFS> 12
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 471
<ALLOWANCE-DOMESTIC> 471
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
