Annual Shareholder Letter


March 17, 2014

Dear Shareholder:

Since the Great Recession of 2008, the prevailing industry logic in community bank board rooms across Florida has been to neither sell, buy, nor grow; that is changing.  The absence of scale in the community bank space is becoming a serial problem.  This year’s shareholder letter highlights First Citrus Bank’s (FCB) repositioning initiative as a result of these accelerating shifts.  We’ll also discuss our 2013 operating performance, deliver candid industry analysis and reiterate our strategic goals including a path for shareholder liquidity.

During 2013, management consummated a significant market repositioning, investing heavily in additional personnel, transitioning from defense to offense.  We finished 2013 with 44% more staff than in 2012.  While a few new associates were recruited to stem heightened compliance risks, most serve in a lending or credit underwriting capacity.

As such, we’ve introduced more robust 2014 balance sheet growth objectives.  You’ll note from the chart below, this loan growth campaign is quickly gaining momentum and will deliver better scale benefits, while expanding strategic alternatives.


In 2013, Hillsborough County community bank balance sheets grew a scant 1% while FCB’s grew 6.5% to $231 million.1 FCB’s loan portfolio grew 7% from $165 million to $177 million, while Hillsborough County peer was 3%.2 It's worth noting that FCB's growth rate was more than double that of peer and attained while simultaneously executing a wholesale restructuring of our credit delivery platform; delivering growth capital to small businesses.

We are sensitive to the essential need in balancing short-term operating performance with the primacy of long-term market positioning.  The benefit of this approach is already making an impact.   The first two months of 2014 resulted in our business bankers deploying more growth capital to small businesses than we did in the first five months of 2013.  This organic growth disparity, relative to peer and the economy, will become more pronounced as the year progresses. 

While loan growth was up, pre-tax profits were sharply reduced to $380 thousand from just over $1 million the previous year.  This delta is a byproduct of a $700 thousand repositioning investment in human capital, and $500 thousand in additional loan reserve contributions.  Earnings per share on the year grew 13 cents to $13.14.

Legacy asset quality issues are becoming a rear-view mirror metric industry-wide, however, remain a temporary drag on earnings though loss exposure continues to dissipate as illustrated below.

Our expanded roster of associates includes new skill sets in marketing and board level expertise in mergers & acquisitions as well as NASDAQ public bank board experience.  In addition, we have a dynamic and expanded Advisory Board, which makes us better bankers. 
We’ve begun several new marketing initiatives, including client receptions in each of our five branches throughout Hillsborough County.  These outreach exchanges will become staples of the FCB client experience and exemplify the essence of community banking.  The opportunity for our bankers to connect face-to-face with hundreds of clients and friends is special and mutually rewarding!
In the Fourth Quarter of 2014, we are launching a more sophisticated and user-friendly web site, making it easier to conduct online banking than ever before.  Plans are underway to upgrade our data processing program and evaluate options for mobile banking apps in 2014 too. 
It is broadly understood that small businesses are the engines of commerce and America’s largest job creators.  While community bank assets have atrophied nationally to 14% of the $17 trillion in industry assets, we provide nearly 50% of all loans to small businesses.3
A quarter century ago, four out of the five largest banks in Florida were headquartered in Florida; Barnett Bank, First Florida Bank, Florida National Bank, Southeast Bank and NCNB.  Today, none of the five largest banks are based in Florida. Yet, they occupy over 53% of our state’s $441 billion deposit market.  In Hillsborough County, all five of the largest banks are headquartered outside Florida and the market share imbalances worsen at 69.5% of the $25.6 billion deposit market.4
Imagine how vibrant Tampa Bay’s economy would be if the community bank space held 69.5% deposit market share given our track record supporting non-profits and small business enterprise.  Only 21% of the 5,602 bank branches in Florida are community banks; the lowest quantity of any state east of the Mississippi. Four other states in the country have a lower ratio.
Competing with community banks is healthy competition.  Competing against government subsidized “Too Big to Fail” out-of-state rivals is not.  Paradoxically, big banks commonly charge more in fees and pay less interest to depositors.  It’s no revelation their client experience is lacking.
Recently, a business reporter inquired if I felt the community bank model was dead.  I replied that while there are embedded advantages to scale in any business, and banking is no different, the large banks are facing a more intensified regulatory burden, higher capital requirements, and fewer sources of revenue. 
Combine the aforementioned with the opacity of money center bank financials compared to the transparency of community bank balance sheets; the tangibility of community bank capital versus the synthetic equity of money center banks; the systemic risk large banks pose on the national economy versus the highly diversified financial networks of thousands of community banks. 

I see more legitimate opportunity in the community bank model than ever before!  First Citrus Bank ranks 11th in deposit market share out of 34 banks competing in the zip code radius of our five branch locations and 17th out of 52 banks competing overall in Hillsborough County, though it amounts to only .68% of the $25.6 billion market. 

The scale returns associated with modest consolidation in the community bank space will revive the flow of capital back into this sector, restoring valuations to more desirable levels.  The momentum already underway with FCB’s organic balance sheet growth, coupled with leveraging fixed operating costs over a larger asset base, engenders shareholder victory. 
We respect our community bank brethren throughout Florida and welcome opportunities to grow our brand together, building a world class bank for Florida.  To ameliorate our state’s economic dependence on out-of-state rivals, I believe our state needs multiple $5 billion banks headquartered in Florida.  Not only are shareholder returns meaningful through scale attainment, the virtue and character of lending money at the local level is socially responsible! 
To be sure however, stiff headwinds remain.  The industry is too receptive to locking interest rates on the asset side of the balance sheet, via the bond market, and longer term fixed-rate loans.  Many institutions will suffer margin compression when rates adjust.  Industry disintermediation from an irrationally complex and expensive compliance burden continues; thanks to regulations promulgated by a congress that is more concerned with their next election than the next generation. 
Quantitatively, the biggest driver of high-performing banks in the future will hinge on optimizing scale while minimizing interest rate risk.  Qualitatively, it comes down to a talent management issue.
We distinguish ourselves in the market through a consultative “care-frontational” strategic dialogue we bring to client exchanges.  To further differentiate ourselves from competitors; it’s essential to have a superior credit delivery platform as measured by speed to market in delivering structurally sound financing to small businesses. 
Your board is evaluating several capital options including a built-in shareholder liquidity mechanism.  Longer term, we anticipate secondary market liquidity as we near one billion in assets.  
Candidly, First Citrus Bank has one of the best stories in Florida banking and the risk management track record to back it up.  Your senior management team is highly seasoned and youthful, averaging 43 years of age.  Our culture is very special and it’s evident in our approach to the market.  We are extremely proud of your bankers and my highest privilege is serving with them. 
Through a litany of market corrections, your investment in First Citrus Bank has consistently performed with little downside risk, while the industry was eviscerated.  Now, it’s time to capitalize and fulfill our potential.  You play a vital role.  It’s essential that all of your deposits are held in your bank; First Citrus Bank.   Your board and management have the vision, plan and ability to significantly grow franchise value. On behalf of your Board, Advisory Board, and management team, thank you for your trust and confidence.



John M Barrett 
President and 
Chief Executive Officer
1 FDIC Uniform Bank Performance Report - FYE 2014
2 Ibid
3 FDIC Quarterly 2013 Volume 7 Number 4
4 FDIC Summary of Deposits, June 30, 2013