Another Shining Quarter At First Citrus, With PPP Loan Tailwinds

First Citrus (OTCQB:FCIT) reported second-quarter earnings on July 20, with another record quarter. These results were primarily fueled by PPP loans and COVID-19 re-positioning. The company’s valuation has taken a hit since February and is now at a level not seen since 2018.

Second-Quarter Earnings
The company reported quarterly earnings per share of $0.63, a 53% increase over the previous quarter. Year over year, the company has earnings growth of 36%, coupled with asset growth of 39%. Loan and deposit growth at 40% and 46%, respectively. This growth comes on the back of a recent new branch, along with the benefit of $106 million in PPP loans, 20% of which came from new clients. First Citrus’ CEO Jack Barrett sees a tremendous benefit for community banks out of COVID-19, as many businesses are turning away from larger national and regional banks on the back of terrible service in the face of crisis. Specifically, when trying to secure loans, PPP in particular, many businesses were unable to get through to larger banks. As a result, they turned to First Citrus, whose better service was able to process their requests and as a result, the bank has been able to gain new customers. This was outlined by First Citrus’ CEO: “ There’s no question who the winner of the pandemic economy is: community banks. He’s seeing an “exodus” away from big national banks and even super-regional banks. “So many small businesses, they couldn’t even get a return phone call” from big banks, he says. “And so they were just banging down our doors — calling, texting and emailing, and of course we welcomed them with open arms.”

COVID-19 Benefit to Community Banks and First Citrus
This new development positions the company stronger for the long term. Its expanded customer base provides greater loan income as well as a bigger deposit base with which to pursue more loans. This is particularly valuable when looking in combination with its Saint Petersburg expansion. This area has “30 percent fewer banks” according to First Citrus’ CEO, and the company’s decision to expand there was predicated on filling the need for community banks. With COVID not causing businesses to shift their banking towards local institutions, the new branch in a community-bank-poor area has a chance to outperform. The earnings from processing PPP loans are primarily a one-off benefit to the bank, but this income is beneficial in helping the bank have cash on hand for the crisis and giving it a stronger potential to expand further as it sees fit.

Valuation and Dividend
First Citrus has lost approximately 30% of its share price since its February high following the COVID-19 selloff. At its current share price of $19.30, the company’s shares are priced below book value of $19.35 per share – though not a huge discount – as assets climbed to $549 million. The company’s trailing dividend rate has climbed to 2.07%, and we can likely expect a raise
next year, for a fifth consecutive dividend increase. The company’s price to earnings ratio of 9.65 remains well below the average for Atlantic Coast banks at 13.03, and Florida banks at 13.42. This leaves the company selling at a significant discount to its peers, which considering its track record for earnings growth, seems unjustified.

Risks
COVID-19 continues to pose a risk to First Citrus. Firstly, the PPP loans benefit is a one-off gain to earnings from processing fees – though the company may have gained long-term customers alongside. Comparative YOY earnings for next year are likely to decline as a result. The main structural risk is commercial real estate and small businesses going under. These risks have been fairly well managed for the time being, but default rates may climb as the crisis persists. Thankfully, First Citrus has reduced its commercial real estate exposure in recent years.

Conclusion
First Citrus remains a well-managed bank that is largely discounted by the market. The company’s growth has been vastly accelerated by the PPP program, and with organic growth efforts continuing, the company is well positioned for the future. The shift away from larger banks that First Citrus has seen within its community helped it gain customers and put it on a trajectory
for growth despite macroeconomic headwinds. The local economy remains a risk for First Citrus but has so far handled well. Its stock has yet to recoverfrom its February decline, which makes for an attractive entry point.

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