UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------------------
FORM 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1999
Commission File Number 000-26145
-----------------------------------------------------------
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 November 5, 1999
- --------------- ----------------------------------
Common Stock 952,296
Par Value $3.15 per share
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
INDEX
PAGE
PART I: FINANCIAL INFORMATION NUMBER
Item 1: Financial Statements:
Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1998 1
Consolidated Statements of Operations and Comprehensive
Income for the Three Months and the Nine Months Ended
September 30, 1999 and 1998 (Unaudited) 2
Consolidated Condensed Statements of Cash Flows for the
Three Months and the Nine Months Ended September 30, 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 19
Signatures 20
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999
(Unaudited) December 31, 1998
----------- -----------------
(In Thousands, Except Per Share Data)
<S> <C> <C>
ASSETS
Cash and due from banks .............................................................. $ 2,449 $ 3,940
Federal funds sold ................................................................... 5,200 9,200
--------- ---------
Total cash and cash equivalents ................................................. 7,649 13,140
Interest-bearing deposits in other banks ............................................. 39 9
Securities available-for-sale at fair value .......................................... 5,700 4,675
Securities held-to-maturity (market value of
$1,043 for 1999 and $1,273 for 1998) ............................................. 1,109 1,307
Loans held for investment less allowance for credit losses ........................... 62,455 52,548
Loans held for sale .................................................................. 3,412 8,291
Facilities ........................................................................... 2,872 2,884
Other real estate owned .............................................................. -- 390
Deferred income taxes ................................................................ 140 233
Accrued interest receivable .......................................................... 435 343
Other assets ......................................................................... 974 231
--------- ---------
TOTAL ....................................................................... $ 84,785 $ 84,051
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing ............................................................. $ 10,692 $ 13,393
NOW accounts .................................................................... 3,704 4,121
Money market accounts ........................................................... 4,711 3,026
Savings accounts ................................................................ 9,182 8,423
Time, $100,000 and over ......................................................... 10,517 10,377
Other time deposits ............................................................. 38,794 37,363
--------- ---------
Total deposits .............................................................. 77,600 76,703
--------- ---------
Other borrowings ..................................................................... 249 217
Accrued interest payable on deposits ................................................. 282 297
Accounts payable and accrued liabilities ............................................. 4 387
--------- ---------
Total liabilities ........................................................... 78,135 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 ............................................................... 540 324
Accumulated other comprehensive income:
Net unrealized holding losses on securities ................................. (46) (33)
--------- ---------
Total stockholders' equity .................................................. 6,650 6,447
--------- ---------
TOTAL ....................................................................... $ 84,785 $ 84,051
========= =========
Book value per common share .......................................................... $ 6.98 $ 6.77
========= =========
Common shares outstanding ............................................................ 952,296 952,296
========= =========
</TABLE>
See accompanying notes to consolidated financial
statements.
1
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest and fees on loans held for investment .......................... $ 1,348 $ 1,191 $ 3,866 $ 3,617
Interest and fees on loans held for sale ................................ 136 289 460 635
Investment and dividend income on investment securities
and interest-bearing deposits in other banks ......................... 94 107 255 339
Federal funds sold ...................................................... 48 121 199 174
------- ------- ------- -------
Total interest income .......................................... 1,626 1,708 4,780 4,765
------- ------- ------- -------
Interest on deposits .................................................... 710 820 2,071 2,106
Other ................................................................... 28 22 48 52
------- ------- ------- -------
Total interest expense ......................................... 738 842 2,119 2,158
------- ------- ------- -------
Net interest income before provision
for credit losses ......................................... 888 866 2,661 2,607
Provision for credit losses ............................................. 144 28 164 (21)
------- ------- ------- -------
Net interest income after provision
for credit losses ......................................... 744 838 2,497 2,628
------- ------- ------- -------
Fees and service charges ................................................ 104 111 324 304
Other income ............................................................ 8 5 25 21
------- ------- ------- -------
Total other income ............................................. 112 116 349 325
------- ------- ------- -------
Other expenses:
Salaries and employee benefits ..................................... 479 369 1,312 1,080
Expenses of bank premises and fixed assets ......................... 162 136 465 391
Other operating expenses ........................................... 261 257 722 738
------- ------- ------- -------
Total other expenses ........................................... 902 762 2,499 2,209
------- ------- ------- -------
Income (loss) before provision for income taxes ......................... (46) 192 347 744
Provision for income taxes .............................................. (17) 73 131 280
------- ------- ------- -------
Net income (loss) ....................................................... (29) 119 216 464
Other comprehensive income, net of income taxes:
Unrealized holding gains (losses) arising during period ............ 6 41 (11) 59
Less: reclassification adjustments for gains included in
net income for the period ........................................ -- -- (2) (3)
------- ------- ------- -------
Total other comprehensive income,
net of income taxes ....................................... 6 41 (13) 56
------- ------- ------- -------
Comprehensive income (loss) ............................................. $ (23) $ 160 $ 203 $ 520
------- ======= ======= =======
Earnings Per Share Information
Primary ............................................................ $ (0.03) $ 0.13 $ 0.23 $ 0.49
======= ======= ======= =======
Diluted ............................................................ $ (0.02) $ 0.10 $ 0.18 $ 0.40
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial
statements.
2
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Net income (loss) ...................................................... $ (29) $ 119 $ 216 $ 464
Adjustments to reconcile net income (loss) to net cash
provided (used) by
operating activities:
Provision for credit losses ................................... 144 28 164 (21)
Depreciation and amortization ................................. 86 86 254 169
Net premium amortization and
discount accretion ....................................... 4 20 14 20
(Increase) decrease in other assets ........................... 300 16,156 (225) 16,064
Increase (decrease) in other liabilities ...................... 56 179 (318) 425
Origination of loans held for sale ............................ (22,585) (45,485) (84,974) (124,291)
Proceeds on sale of loans held for sale ....................... 22,859 50,281 89,853 116,501
--------- --------- --------- ---------
Net cash provided by
operating activities ................................. 835 21,384 4,984 9,331
--------- --------- --------- ---------
Cash flows from investing activities: Net (increase) decrease in:
Investment securities ......................................... 148 700 (828) 1,878
Interest-bearing deposits in other banks ...................... (38) (2) (30) 54
Loans ......................................................... (4,357) (18,347) (10,224) (17,881)
Purchases of bank premises and equipment, net ..................... (64) (311) (242) (478)
--------- --------- --------- ---------
Net cash used by
investing activities ................................. (4,311) (17,960) (11,324) (16,427)
--------- --------- --------- ---------
Cash flows from financing activities:
Net increase in deposits .......................................... 9,353 2,485 897 10,523
Proceeds from other borrowings,
net of repayments ............................................. (5,793) (3,530) (48) (91)
--------- --------- --------- ---------
Net cash provided (used) by
financing activities ................................. 3,560 (1,045) 849 10,432
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents ....................... 84 2,379 (5,491) 3,336
Cash and cash equivalents at beginning of period ....................... 7,565 7,199 13,140 6,242
--------- --------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 7,649 $ 9,578 $ 7,649 $ 9,578
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial
statements.
3
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Holding
Additional Gains Total
Common Stock Paid-in Retained (Losses) on Stockholders'
Shares Amount Capital Earnings Securities Equity
------ ------ ------- -------- ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 .......................... 952,296 $ 3,007 $ 3,149 $ 324 $ (33) $ 6,447
Comprehensive income:
Net income ....................................... -- -- -- 216 -- --
Net change in unrealized holding
gains (losses) on securities
less reclassification for realized
gains .......................................... -- -- -- -- (13) 203
------- ------- ------- ------- ------- -------
Balance, September 30, 1999 ......................... 952,296 $ 3,007 $ 3,149 $ 540 $ (46) $ 6,650
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial
statements.
4
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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 and nine
months ended September 30, 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 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 credit losses 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 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.
5
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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 and nine months ended
September 30, 1999 and 1998 (in thousands except per share data):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS computation:
Numerator - Net income ............................................ $ (29) $ 119 $ 216 $ 464
Denominator - Weighted average shares outstanding ................. 952 952 952 952
------- ------- ------- -------
Basic EPS ......................................................... $ (0.03) $ 0.13 $ 0.23 $ 0.49
======= ======= ======= =======
Diluted EPS computation:
Numerator - Net income ............................................ $ (29) $ 119 $ 216 $ 464
------- ------- ------- -------
Denominator - Weighted average shares outstanding ................. 952 952 952 952
Stock options and warrants ........................................ 221 220 221 220
------- ------- ------- -------
1,173 1,172 1,173 1,172
------- ------- ------- -------
Diluted EPS ....................................................... $ (0.02) $ 0.10 $ 0.18 $ 0.40
======= ======= ======= =======
</TABLE>
NOTE 3 - LOANS HELD FOR INVESTMENT
Loans held for investment consisted of (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Real estate .................................................................... $ 44,456 $ 35,914
Commercial and agriculture ..................................................... 14,086 12,868
Installment and other loans .................................................... 4,388 4,347
-------- --------
Total loans held for investment, gross ................................... 62,930 53,129
Unearned income and deferred fees .............................................. (3) (120)
Allowance for credit losses .................................................... (472) (461)
-------- --------
Net loans held for investment ............................................ $ 62,455 $ 52,548
======== ========
</TABLE>
6
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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 September 30, 1999, and December 31, 1998, such loans totaled
$3,412,000 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>
<CAPTION>
Nine Months Twelve Months
Ended September 30, 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 ............................................ 33 1
---- ----
33 52
---- ----
Charge-offs
Real estate loans ......................................................... -- --
Installment loans ......................................................... 12 35
Credit card and related plans ............................................. 7 10
Commercial and all other loans ............................................ 167 --
---- ----
186 45
---- ----
Provision charged to operations .................................................... 164 23
---- ----
Balance, end of period ............................................................. $472 $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. During the
remainder of 1998, Citrus recorded a provision for credit losses of $119,000 to
recognize the potential credit losses associated with one borrower. Three loans
totaling $85,000 to this borrower were charged off in 1999. At September 30,
1999, Citrus had one loan relationship classified as a loss totaling $79,000.
7
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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 commitments
involve, to varying degrees, elements of credit, and interest rate risk in
excess of the amounts recognized in the balance sheet.
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.
Financial instruments at September 30, 1999, consisted of commitments to extend
credit approximating $8.8 million and letters of credit of $126,000.
NOTE 7 - SUBSEQUENT EVENTS
Public Stock Offering
- ---------------------
Citrus' Registration Statement on Form SB-2 ("Registration Statement") was
declared effective by the Securities and Exchange Commission ("SEC") on May 3,
1999. Citrus commenced 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 proposed banks if the maximum shares are sold or one proposed
bank and additional branches if less than the maximum shares are sold (see a
more complete discussion in the Registration Statement). As of September 30,
1999, approximately $3.0 million had been deposited in an escrow account held
with Independent Bankers' Bank of Florida subject to an Escrow Agreement as
described in the Registration Statement. None of the escrow deposits have been
recorded by Citrus and the costs of raising these funds incurred by Citrus
through September 30, 1999, have been recorded as other assets.
On October 28, 1999, the SEC declared effective an amendment to the Registration
Statement that provides for a reduction in the minimum public offering from
1,000,000 to 560,000 shares of Citrus' common stock. Also, the offering period
has been extended to April 30, 2000. Because of these changes, Citrus refunded
all subscription proceeds and began a reoffering of shares on November 6, 1999.
Restatement of Financial Statements
- -----------------------------------
Subsequent to September 30, 1999, Bank management amended its quarterly filing
with its primary regulator for the quarter ended September 30, 1999, and reduced
interest income by $30,000, increased the provision for credit losses by
$105,000, and reduced income tax expense by $51,000.
8
<PAGE>
CITRUS FINANCIAL SERVICES, INC. AND SUBSIDIARY
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Citrus Financial Services, Inc. ("Citrus") is a bank holding company registered
under the Bank Holding Company Act of 1956. Citrus owns 100% of the issued and
outstanding common stock of Citrus Bank, N.A., Vero Beach, Florida ("Citrus
Bank"). Citrus was incorporated 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' Registration Statement on Form SB-2 ("Registration Statement") was
declared effective by the Securities and Exchange Commission ("SEC") on May 3,
1999. Citrus commenced 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 proposed banks if the maximum shares are sold or one proposed
bank and additional branches if less than the maximum shares are sold (see a
more complete discussion in the Registration Statement). On October 28, 1999,
the SEC declared effective an amendment to the Registration Statement that
provides for a reduction in the minimum public offering from 1,000,000 to
560,000 shares of Citrus' common stock. Also, the offering period has been
extended to April 30, 2000. Because of these changes, Citrus refunded all
subscription proceeds and began a reoffering of shares on November 6, 1999.
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. Citrus Bank opened a loan
production office in Dade County, Florida, during the first quarter of 1999, and
opened a loan production office in Sebring, Florida, during the second quarter
of 1999. It is Citrus' intent that these loan production offices will be closed
when and if Citrus opens its proposed new banks. Loans originated in these loan
production offices would then be transferred to the new banks. Citrus Bank has
incurred loan production office operating costs through September 30, 1999,
totaling approximately $270,000.
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, as well as others, 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.
9
<PAGE>
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 September 30, 1999, Citrus had estimated total Year
2000 costs of $10,000 in excess of normal recurring capital expenditures for
routine software and hardware upgrades. All of this amount remains to be spent.
It is recognized that any Year 2000 compliance failures could result in
additional expense to Citrus.
Citrus has tested 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. However, we do
not believe that such situations will be the case.
During 1998, we notified our customers for the purpose of making them aware of
the Year 2000 issues. In 1999, our significant commercial customers were
surveyed to assess their status in preparing for the Year 2000 using checklists
to assist in identifying other current and potential borrowers with a high Year
2000 risk exposure. No current nor potential borrowers have been determined to
have a high Year 2000 risk exposure. Should Citrus identify 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 to ensure that
adequate contingency plans have been adopted. 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 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.
10
<PAGE>
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.
Results of Operations
Overview
Citrus' net income decreased $148,000 and $248,000 for the three and nine months
ended September 30, 1999, respectively, over the comparable periods in 1998.
This decline for the nine months of 1999 versus 1998 reflects the effects of
increases in the provision for credit losses ($185,000), increased operating
costs associated with the start-up of loan production offices in Dade County,
Florida, and Sebring, Florida, as well as a declining net interest margin. The
increase in average earning assets of 6.4% for the first nine months of 1999
versus the same period in 1998 was partially offset by a decline of
approximately 60 basis points in the average yield on earning assets. These
factors produced a net increase in total interest income of less than 1% in the
first nine months of 1999 as compared to the first nine months of 1998. For the
nine months ended September 30, 1999, as compared with the comparable period in
1998, increases in total interest income of $15,000 and decreases in interest
expense of $39,000 resulted in an increase in net interest income before
provision for credit losses of $54,000, or 2.1%, over 1998. Noninterest income
increased 7.4%, to $349,000 in the first nine months of 1999 as compared to
$325,000 in the first nine months of 1998. This improvement resulted primarily
from deposit account charges corresponding with the growth in average deposits.
Noninterest expense in the first nine months of 1999 as compared to the first
nine months of 1998 rose at a pace of 13.1% to $2,499,000 from $2,209,000. The
return on average assets for the nine months ended September 30, 1999, declined
to 0.35% annualized as compared with the return of average assets of 0.72% for
1998.
Net income for the three months ended September 30, 1999, declined $148,000
from the same period in 1998 primarily due to increases in the provision for
credit losses ($116,000) and a 18.4% increase in other expenses. During the
three months ended September 30, 1999, expenses for the Dade County and Sebring
loan production offices totaled $189,000 and $96,000, respectively, for the nine
months ended September 30, 1999. The $140,000 increase in other expenses for the
third quarter of 1999 as compared with the same period of 1998 was partially
offset by lower costs on deposits.
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.
(This section left blank intentionally.)
11
<PAGE>
Average Balances, Income and Expenses, and Rates (dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
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 ....................... $ 24 $ 1 4.9% $ 48 $ 2 5.6%
Taxable securities .............................. 6,294 255 5.4% 8,380 337 5.4%
Federal funds sold .............................. 5,518 198 4.8% 4,250 174 5.5%
Loans held for sale ............................. 5,555 460 11.0% 8,491 635 10.0%
Loans held for investment, net .................. 57,299 3,866 9.0% 49,043 3,617 9.8%
------ ----- ------ -----
Total earning assets ........................ 74,690 4,780 8.5% 70,212 4,765 9.1%
----- -----
Non-earning assets ................................... 6,815 6,269
----- -----
Total assets ................................ $81,505 $76,481
======= =======
Interest-bearing liabilities:
NOW and money market deposits ................... $ 7,311 112 2.0% $ 7,316 116 2.1%
Savings ......................................... 9,522 232 3.3% 7,176 173 3.2%
Time deposits ................................... 44,524 1,727 5.2% 43,897 1,817 5.5%
Other borrowings ................................ 1,189 48 5.4% 1,280 52 5.4%
----- -- ----- --
Total interest-bearing liabilities .......... 62,546 2,119 4.5% 59,669 2,158 4.8%
----- -----
Noninterest-bearing liabilities ...................... 12,355 11,423
Stockholders' equity ................................. 6,604 5,389
----- -----
Total liabilities and
stockholders' equity ................... $81,505 $76,481
======= =======
Net interest income before provision
for credit losses .................................. $ 2,661 $ 2,607
======= =======
Interest-rate spread ................................. 4.0% 4.2%
=== ===
Net interest margin .................................. 4.8% 5.0%
=== ===
Ratio of average earning assets to
average interest-bearing liabilities ............... 119.4% 117.7%
===== =====
</TABLE>
12
<PAGE>
Comparison of Results of Operations for the Nine Months
Ended September 30, 1999 and 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 $2,497,000 for the nine months ended September 30, 1999,
as compared to $2,628,000 for the nine months ended September 30, 1998. The
increases in earning assets of $4.5 million reflected the growth of Citrus'
average loan portfolio of $5.3 million, or 9.2%, between these periods, which
contributed to improvements in Citrus' total interest income. However, net
interest income decreased $131,000 for the nine months ended September 30, 1999,
versus the comparable period in 1998, due to declining yields on earning assets
and the increase in the provision for credit losses. Net interest spread, the
difference between the yield on earning assets and the rate paid on
interest-bearing liabilities, was 4.0% for the nine months ended September 30,
1999, as compared to 4.2% for the nine months ended September 30, 1998. Net
interest margin, net interest income divided by average interest-earning assets,
declined to 4.8% for the nine months ended September 30, 1999, as compared to
5.0% for the nine months ended September 30, 1998. These unfavorable trends
result from lower yields on loans held for investment, which have declined
approximately 80 basis points, while interest rates on deposits and borrowings
have only dropped approximately 30 basis points in 1999 versus 1998. Also, a
swing in the provision for credit losses of $185,000 left net interest income
down $94,000 for the nine months ended September 30, 1999, as compared with the
same period of 1998.
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 September 30, 1999, Citrus had 12 loans totaling $934,000 that were
classified by regulatory standards as substandard, doubtful, or loss. At
December 31, 1998, Citrus had 12 loans totaling $448,000 in the same categories.
At September 30, 1999, Citrus had $79,000 in loss assets to be charged off and
none on December 31, 1998. Loans classified by management as impaired under
generally accepted accounting principles (and are included in the regulatory
classifications of doubtful or loss) totaled $185,000 and $85,000 at September
30, 1999, and December 31, 1998, respectively. Management increased the
provision for credit losses to reflect increases in classified loans from
December 31, 1998, to September 30, 1999.
13
<PAGE>
Nonperforming loans include loans that have been placed on nonaccrual status by
Citrus and loans past due for ninety days or more. Some of these nonperforming
loans are well-collateralized, posing no significant risk of loss, and have not
been classified as substandard, doubtful, or loss.
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended Ended
September 30, December 31,
1999 1998
<S> <C> <C>
Nonaccrual loans held for investment:
Real estate loans ....................................................................... $ 88 $ --
Installment loans ....................................................................... 67 2
Credit cards and related plans .......................................................... -- --
Commercial and all other loan ........................................................... 580 139
------ ------
Total nonaccrual loans held for investment ................................................... 735 141
------ ------
Accruing loans held for investment over 90 days delinquent:
Real estate loans ....................................................................... -- 228
Installment loans ....................................................................... 14 23
Credit cards and related plans .......................................................... 8 --
Commercial and all other loans .......................................................... 19 108
------ ------
Total accrual loans held for investment over 90 days delinquent .............................. 41 359
------ ------
Troubled debt restructurings not included above .............................................. -- --
------ ------
Total nonperforming loans held for investment ................................................ 776 500
------ ------
Other real estate owned:
Real estate acquired by foreclosure or deed in lieu
of foreclosure ...................................................................... -- 390
------ ------
Total nonperforming loans held for investment and
other real estate owned ............................................................ $ 776 $ 890
====== ======
Total nonperforming loans held for investment
as a percentage of total loans ...................................................... 1.2% 0.9%
====== ======
Total nonperforming loans held for investment
as a percentage of total assets ..................................................... 0.9% 0.6%
====== ======
Total nonperforming loans held for investment
and other real estate owned as a percentage of total assets ......................... 0.9% 1.1%
====== ======
Troubled debt restructurings and modified loans held for investment:
Current ................................................................................. $1,434 $ 685
Past due over 30 days and less than 90 days ............................................. -- --
Past due over 90 days and included above ................................................ -- --
------ ------
$1,434 $ 685
====== ======
</TABLE>
Nonperforming loans at September 30, 1999 declined from the quarter ended March
31, 1999 total of $859,000, but continue to exceed December 31, 1998, levels.
However, total nonperforming loans and other real estate owned declined from
$890,000 at December 31, 1998, to $776,000 at September 30, 1999.
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.
14
<PAGE>
Activity in the allowance for credit losses follows (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended Ended
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Allowance at beginning of period ....................................................... $461 $431
---- ----
Charge-offs:
Real estate loans .................................................................. -- --
Installment loans .................................................................. 12 35
Credit cards and related plans ..................................................... 7 10
Commercial and all other loans ..................................................... 167 --
---- ----
Total charge-offs ...................................................................... 186 45
---- ----
Recoveries:
Real estate loans .................................................................. -- 43
Installment loans .................................................................. -- 8
Credit cards and related plans ..................................................... -- --
Commercial and all other loans ..................................................... 33 1
---- ----
Total recoveries ....................................................................... 33 52
---- ----
Provision for credit losses charged to operations ...................................... 164 23
---- ----
Allowance at end of period ............................................................. $472 $461
==== ====
Ratio of net charge-offs during the period to average
loans outstanding during the period ................................................. 0.4% 0.0%
=== ===
</TABLE>
At September 30, 1999, the allowance for credit losses amounted to $472,000, or
0.75% 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 $164,000 for the
nine months ended September 30, 1999. For the same nine months period in 1998,
the provision for credit losses was $(21,000). The provision in 1999 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
measured by the decline in nonperforming loans since March 31, 1999), the
recognition of losses on impaired credit relationships during the first nine
months of 1999, and favorable historical trends in overall charge-offs.
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 $21,000 for the nine months ended September 30, 1998.
Citrus' allowance for credit losses remains at levels lower than its peer group
due in part to the mix of the loan portfolio with approximately 71% of Citrus'
loans secured by real estate as of September 30, 1999. 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 credit card fees, commissions on
check sales, safe deposit box rent, wire transfer, and official check fees.
Total noninterest income increased by $24,000 during the nine months ended
September 30, 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 $324,000 for the nine months ended September 30, 1999, as
compared to $304,000 for the comparable period in 1998, an increase of 6.6%.
15
<PAGE>
Noninterest Expense. Total noninterest expense increased by $290,000 during the
nine months ended September 30, 1999, as compared to the same period in 1998, as
a result of Citrus' continued growth. For the first nine months in 1999, this
increase includes an increase in salary and benefits expense of $232,000, as
Citrus employed additional employees for its new loan production offices and
provided normal salary and benefit increases. Occupancy-related expenses
increased $74,000 in the first nine months of 1999 as compared with the same
period in 1998, principally due to the start-up of Citrus' in-house data
processing center and the new loan production offices. Continued reductions in
professional fees were realized in the first nine months of 1999 along with
reductions in outside data processing costs, contributed to a $16,000 decline in
other operating expenses for the period.
Income Tax Expense
The income tax provision was $131,000 for the nine months ended September 30,
1999, or an effective rate of 37.8%. This compares with an effective rate of
37.6% for the same period in 1998.
Comparison of Results of Operations for the Three Months
Ended September 30, 1999 and 1998
Net Interest Income
Net interest income was $744,000 for the three months ended September 30, 1999,
as compared with $838,000 for the three months ended September 30, 1998, a
decrease of $94,000, or 11.2%. This decrease is reflective of the $116,000
increase in the provision for credit losses. While average earning assets
increased only $1.3 million, or 1.7%, during this same period, the mix in
earning assets improved with average total loans representing 85% of average
earning assets for the three months ended September 30, 1999, as compared with
80% for the same period in 1998. These factors helped mitigate the overall
decline in yields, which resulted in a yield on average earning assets of 8.6%
for the three months ended September 30, 1999, versus 9.2% for the same period
in 1998. Also, a reduction in the cost of interest-bearing liabilities of 70
basis points in this period was due in part to a shift from higher costing
certificates of deposit to savings and other lower cost deposits. As a result,
Citrus' interest rate spread improved approximately 10 basis points and net
interest margin was flat at 4.7%.
Noninterest Income and Expense
Noninterest Income. Total noninterest income decreased $4,000 during the three
months ended September 30, 1999, as compared to the same period in 1998. While
fees and service charges declined $7,000 for the three months ended September
30, 1999, as compared with the comparable period in 1998, management believes
this decline to be temporary and no anticipated negative trend is expected.
Noninterest Expense. Total noninterest expense increased by $140,000 during the
three months ended September 30, 1999, as compared to the same period in 1998,
as a result of Citrus' continued growth. For the third quarter of 1999, this
increase includes an increase in salary and benefits expense of $110,000, as
Citrus employed additional employees for its new loan production offices and
provided normal salary and benefit increases. Occupancy-related expenses
increased $26,000 in the third quarter of 1999 as compared with the same period
in 1998, principally due to the start-up of Citrus' in-house data processing
center and the new loan production offices. Continued reductions in professional
fees were realized during 1999 which, when combined with reductions in outside
data processing costs, kept other operating expense growth to a rate of less
than 1.6% for the third quarter of 1999 over the same period in 1998.
Income Tax Expense
The income tax provision was a $17,000 credit for the three months ended
September 30, 1999, or an effective rate of 37.0%. This compares with an
effective rate of 38.0% for the same period in 1998.
Financial Condition
Citrus' total assets at September 30, 1999, were $84.8 million, increasing from
$84.1 million at December 31, 1998. The increase of approximately $0.7 million
reflects increases in loans held for investment of $9.9 million and securities
of $0.8 million, offset by declines in loans held for sale of $4.9 million and
cash and cash equivalents of $5.5 million.
Total stockholders' equity as of September 30, 1999, was $6.7 million, an
increase of $203,000, or approximately 3.1%, compared with stockholders' equity
of $6.4 million as of December 31, 1998. This increase was attributable to net
16
<PAGE>
income for the nine months of 1999 of $216,000 offset by a $13,000 decrease in
the market value (net of deferred income taxes) of investment securities
available-for-sale.
The following table shows selected ratios for the periods ended or at the dates
indicated (annualized for the nine months ended September 30, 1999):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
----------------- ------------
<S> <C> <C>
Return on average assets ...................................................................... 0.35% 0.72%
Return on average equity ...................................................................... 4.36% 9.13%
Interest-rate spread during the period ........................................................ 4.00% 4.20%
Net interest margin ........................................................................... 4.80% 4.92%
Allowance for credit losses to period end loans held for investment ........................... 0.75% 0.87%
Net charge-offs to average loans held for investment .......................................... 0.36% (0.01)%
Nonperforming assets to period end loans held for investment
and foreclosed property ................................................................... 1.23% 1.67%
Nonperforming assets to period end total assets ............................................... 0.91% 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 obtain
funds from the Federal Home Loan Bank 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 $5.5 million in the first nine months of 1999 as compared to
$4.3 million in the same period of 1998. At September 30, 1999, and December 31,
1998, short-term investments totaled $5.2 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 $67.1 million at September
30, 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.
17
<PAGE>
Citrus uses its resources principally to fund existing and continuing loan
commitments and to purchase investment securities. At September 30, 1999, Citrus
had commitments to originate loans totaling $8.8 million, and had issued, but
unused, letters of credit of $126,000 for the same period. In addition,
scheduled maturities of certificates of deposit during the 12 months following
September 30, 1999, total $41.6 million. Management believes that Citrus has
adequate resources to fund all its commitments, that substantially all of its
existing commitments will be funded within 12 months and, if so desired, that
Citrus can adjust the rates and terms on certificates of deposit and other
deposit accounts to retain deposits in a changing interest rate environment.
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
September 30, 1999, all advances during 1999 had been repaid. At September 30,
1999, Citrus had borrowed $70,000 from Central Illinois Bank under a revolving
line of credit agreement in the amount of $500,000. This line of credit matures
May 20, 2000, with interest floating at New York prime. In addition to the line
of credit arrangements, Citrus Bank had fixed FHLB advances outstanding as
follows (dollars in thousands):
At September 30, At December 31,
Maturity Date Interest Rate 1999 1998
- ------------- ------------- ---- ----
2003 5.76% $ 179 $ 217
===== =====
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 September 30, 1999, as reflected in the following table.
The following table sets forth Citrus Bank's regulatory capital position
(dollars in thousands):
<TABLE>
<CAPTION>
Actual Minimum(1) Well-Capitalized(2)
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets) ............... $6,716 10.10% $5,320 8.00% $6,651 10.00%
Tier I Capital (to Risk-Weighted Assets) .............. $6,244 9.39% $2,660 4.00% $3,990 6.00%
Tier I Capital (to Average Assets) .................... $6,244 7.65% $3,263 4.00% $4,079 5.00%
</TABLE>
(1) The minimum required for adequately capitalized purposes. (2) To be
"well-capitalized" under the FDIC's Prompt Corrective Action regulations.
Citrus Bank's total capital to risk weighted assets ratio has declined from
10.71% at December 31, 1998, to 10.10% at September 30, 1999. Management has
developed plans to increase Citrus Bank's capital during 2000. These plans
include the anticipated capital infusion from the exercise of warrants and
options expiring in April 2000, which may result in up to 488,561 shares of
Citrus' common stock issued for a total of up to $3.1 million in additional
capital. Some or all of the proceeds to Citrus could be contributed to Citrus
Bank.
18
<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.
19
<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: December 30, 1999 /s/ Josh C. Cox, Jr.
----------------- --------------------
Josh C. Cox, Jr.
President and Chief Executive Officer
Date: December 30, 1999 /s/ Henry O. Speight
----------------- --------------------
Henry O. Speight
Executive Vice President and
Chief Financial Officer
20
<PAGE>
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