The next five years will offer more growth opportunities than the last twelve. The Florida banking industry is brimming with uncertainty, doubt and apprehension. Your Bank is uniquely positioned to capitalize on this disruption.

 

This year’s shareholder letter begins with an assessment of our 2012 operating performance, outlining the Bank’s competitive position and strategic approach for growth in 2013 and beyond.  Next, we will provide a brief economic and industry update, detailing value implications affecting the community, regional and money center bank space.  We will close by showing how First Citrus Bank remains solid and will enhance shareholder value through any market conditions the economy can throw at us.

 

Pre-tax profits of $1.03 million were more than triple that of last year and at their highest levels since 2007. Despite interest rates remaining artificially low, we expect profitability to continue building momentum in 2013. We have much room for improvement, though your Bank continues to outperform all local, regional and state peer groups as evidenced by the Return on Assets graph shown below:

 

 

During 2012, asset growth was flat largely due to stagnant economic conditions.  The balance sheet finished the year at $217 million, while the loan portfolio percentage rose 3% to $165 million, ending three years of atrophy.  Expectations are changing and activity is increasing.  In the month of December alone, your business bankers closed more loans than all of 2010. The most prevalent asset class on Florida bank balance sheets is real estate loans.   At First Citrus, commercial real estate loans of $136 million represent 82% of the loan portfolio and 81% of interest income.  More than half of the commercial real estate portfolio consists of loans to local business owners who occupy their premises, which we helped them acquire. You will be pleased to know that First Citrus continues its exemplary track record of soundness and asset quality success.  “Other Real Estate Owned” is at its lowest levels since 2008 and down to 1.8% of total assets.  From 2008 through 2012 (The Great Recession), First Citrus’ loan portfolio outperformed every bank on the West Coast of Florida, between Naples and Dade City, sustaining the smallest percentage loss, not just for one quarter or one year, but throughout this five year tumult.¹

 

 

What does this say about clients that bank at First Citrus?  In short, they make better decisions, earn higher profits and triumph through change better than businesses that do not bank at First Citrus. Quality business owners working with real bankers is another reason First Citrus was one of few Florida banks that did not need to defensively recapitalize its’ balance sheet throughout the economic downturn, upholding the sanctity of your ownership interest by rejecting dilution.  Earnings per share in 2012 grew 187% to $0.43 from $0.15 the prior year.  As such, the book value appreciated 3.4% to $13.00 over the past 12 months.

 

What are we doing in 2013 to increase the value of your investment? We are going deeper in the market with existing products and services to strengthen our competitive advantage, as opposed to broadening our product offerings, which often results in increased revenues but lower profits.  Until recently, the rank order of organizational priorities was soundness, profitability and growth.  While soundness will always reign supreme, profitability and growth are now equal in stature.  With real estate markets gaining stability, asset quality challenges abating industry-wide, and the cost of offensive capital improving, the case for pursuing scale organically and through acquisition (or peer merger) is increasingly compelling.

 

In 2013, we expect to grow the balance sheet to $250 million and loan portfolio to $200 million.  How will we accomplish over 20% loan growth in a subdued economy with a sluggish 1.9% GDP?  Strategy drives structure and a number of new initiatives and organizational realignments are underway to optimize our credit delivery platform, which will deepen numerous operating practices in our quest for increased market share.  During the last 180 days, we’ve increased staff levels by 25%.  The majority of our new teammates serve in the business banking and credit underwriting arenas.  More business bankers mean more boots on the ground and more credit analysts, expanded underwriting capacity.  To improve client service, the business banking group is moving downstairs to the second floor in our Carrollwood main office. As the year progresses, we anticipate re-deploying business bankers to the branch offices to better support the South Tampa, Brandon, and Westshore markets. 

 

Because of you, our outstanding shareholders, clients and associates, First Citrus Bank boasts an enviable reputation and is consistently recognized for service excellence, solid financial performance and exemplary risk management practices.  Now, we are working to deliver our unique brand of banking on a broader scale, becoming the bank of choice for all of Tampa Bay.  This means #1 in client satisfaction, profit sustainability, reputation and size; making a difference in the lives of small business owners, entrepreneurs, non-profits, professionals and individuals.

 

What are our challenges in the coming year? Nationally, shrinking economic growth – now forecast below 2%, lingering high unemployment at 7.7% and an incredible $16.7 trillion deficit.  Fiscal policy is clobbering the economy.  Since 2007, unimaginable government spending levels have ballooned the deficit from $9 trillion in 2007 to $16.4 trillion in 2012.  Consumer spending, a pronounced driver of economic growth, will lessen as non-discriminate payroll taxes increase this year from 4.2% to over 6%. Though Florida is still healing too, the fundamentals are more favorable than much of the country.  Florida is one of only four states in the nation with a AAA bond rating and the only state that didn’t raise a single tax in the last two years, yet still balanced the budget.  The sunshine is not going away and population inflows have rebounded.

 

Since the Great Recession began, Congress and the regulatory community coined a category of banks called Systemically Important Financial Institutions (SIFI). Each SIFI exceeds $50 billion in assets and includes all the money centers but only the largest regional banks. Today, the risk to America’s economy is heightened because the behemoth out-of-state SIFI’s have further morphed in size since 2008. Out of the 7,083 financial institutions in the United States at the end of the year, there were nineteen SIFI’s. While these nineteen banks collectively represent .003% of the 7,000+ financial institutions, they occupy over 60% of the $16 trillion in industry assets.²

 

Community banks provide 46% of all dollars loaned to small businesses despite comprising only 14% of industry assets.³ It’s broadly understood that small business job growth is central to returning America to prosperity. Community banks do more to bolster job growth and our local economies because we are exemplars at delivering growth capital. First Citrus Bankers live to finance the unfettered initiatives, hopes and dreams of the American entrepreneur.

 

Presently occurring, is an epochal shift in SIFI capital requirements. These shifts will reduce SIFI balance sheet leverage and permanently water down their shareholder returns. Though Basel III regulations are not yet complete, most agree the provision regarding increased SIFI capital requirements will be made permanent. The increased capital requirements for SIFI’s are warranted given the systemic risk they impose on the economy. As a result, the once “bar-bell” industry composition will likely become a “race to the middle” as diminishing returns to large scale are realized by the capital markets and institutional investment community. SIFI bank profitability in 2013 will occur more from cost-cutting workforce reductions. The regionals in the middle, depending on their geography, will continue lumbering through remnant asset quality legacy issues and branch divestitures while they wait for valuations in the capital markets to rebound. Premium valuations in the community bank space will return concurrently with the rise in regional bank valuations.

 

The obvious market solution to ameliorate systemic financial risk in America’s economy is to break up the big banks. Strong economies have many strong banks. The scale benefits portioned to the 7,000+ non-SIFI banks would immediately fortify the industry and, henceforth economy. The concentration of credit distribution channels in the hands of a few out-of-state money center institutions is fundamentally unhealthy. There is tremendous character to lending money at the local level. These are the reasons why we are so passionate about our mission.

 

At First Citrus Bank, we believe every client is unique and deserves a tailored financial solution for their specific need. We initiate a dialogue that begins with a clear understanding of the businesses we serve.   We sit down and have a conversation about their industry, discuss opportunities and what keeps them up at night.  First Citrus bankers provide solutions for our clients’ most important problems. These professional standards set First Citrus apart from others.  Our unique approach reinforces our strategy, which competitors find difficult to replicate.

 

There is a scarcity value for quality community banks in metropolitan growth markets with solid management teams. As such, the shareholder benefits of scale are increasingly compelling and rewarding. An unanticipated 2014 interest rate hike by the Fed may trigger growth opportunities. Community banks with balance sheet gaps in asset-liability management or pronounced exposure in the bond market may relent to peer mergers as their shareholders’ best market solution. 

 

The future of Florida banking is bright. You should feel confident about your investment in First Citrus Bank. Your bankers are highly professional and I respect their talents immensely. Our realigned organizational structure, expanded personnel roster and redefined scope of operating practices will be the catalyst for First Citrus to become Tampa Bay’s premier bank! Your Board brings a high level of awareness in strategic positioning, in addition to growth solutions for optimizing long-term shareholder value.  Your Management team consistently demonstrates the ability to reinvent itself, dynamically adjusting to market conditions. Banking is very special and the First Citrus brand makes Tampa Bay a better place to live. On behalf of your Board and Management team, thank you for your continued trust and confidence.

Sincerely,

 

John M Barrett 

President and 

Chief Executive Officer