ITEM 1. Business
General
Sunshine Bancorp, Inc. (the “Holding Company”), headquartered in Plant City, Florida, is a Maryland corporation formed on March 7, 2014 to serve as the savings and loan holding company for its lone subsidiary Sunshine Bank, a federal savings bank (the “Bank”). The words “Sunshine” “the Company,” “we,” “our” and “us” refer collectively to Sunshine Bancorp and its wholly owned subsidiary, unless otherwise indicated. The Company completed its conversion from the mutual to stock form of ownership on July 14, 2014 and commenced trading the next day on the NASDAQ Capital Market under the symbol “SBCP”. At December 31, 2016, we had total consolidated assets of $931.4 million, total consolidated deposits of $729.9 million and total consolidated stockholders’ equity of $112.1 million.
Sunshine Bank is a federal stock savings bank. It was first organized in 1954 as a federal mutual savings and loan association under the name First Federal Savings and Loan Association of Plant City. In 1975, the Bank changed its name to Sunshine State Federal Savings and Loan Association. In connection with the initial offering of Sunshine Bancorp’s shares, the Bank changed its charter from a federal mutual savings and loan association to a federal stock savings bank and changed its name to Sunshine State Bank. In 2014, the Bank changed its name to Sunshine Bank. The Bank is a financial services institution focused on positively impacting the consumers, businesses, and non-profits throughout central Florida by creating financial success for our customers. Our competitive advantage is our ability to attract and retain employees, who are passionate about providing uncompromising service with a sense of warmth, integrity, friendliness, and company spirit.
We provide a wide range of retail and commercial banking services. Deposit products include checking, savings, money market, time deposit and individual retirement accounts. Loan products include various types of real estate, consumer, commercial, industrial and agricultural loans. We also provide mortgage lending; treasury management services for businesses, individuals and non-profit entities including lock box services; remote deposit capture services; ATMs; telephone banking; online and mobile banking services including electronic bill pay and consumer mobile deposits; debit cards, and safe deposit boxes, among other products and services. Through third party providers, we offer credit cards for consumers and businesses, processing of merchant debit and credit card transactions, and investment brokerage services. While we provide a wide variety of retail and commercial banking services, we operate in only one segment. Our revenue is primarily derived from interest and fees received in connection with, real estate and other loans and interest from investment securities. The principal sources of funds for our lending activities are customer deposits, FHLB
borrowings, and the repayments of loans and investment securities. Our principal expenses are interest paid on deposits and borrowings, and operating and general administrative expenses. We conduct our operations from our main office in Plant City, Florida and our seventeen additional full-service banking offices located in Brandon, Riverview, Zephyrhills, Lakeland, Winter Haven, Bartow, Plant City, Melbourne, Merit Island, Winter Park, Lake Nona, Kissimmee, Lake Mary, Sarasota, Bradenton, Orlando, and Tampa, Florida. We provide financial services to individuals, families and businesses primarily located in Brevard, Hillsborough, Manatee, Orange, Osceola, Pasco, Polk, and Seminole counties, Florida. Our main office is located at 102 West Baker Street, Plant City, Florida 33563, and our telephone number at this address is (813) 752-6193. Our website address is www.mysunshinebank.com. Information on our website is not incorporated into this Annual Report on Form 10-K and should not be considered part of this Annual Report on Form 10-K.
Growth and Expansion
With five banking offices in 2014 located in suburban markets outside of Tampa and a balance sheet comprised mostly of long-term fixed rate residential mortgages, the Board of Directors of Sunshine Bank commenced a strategic plan to transform Sunshine Bank from a traditional thrift lender into a full-service community bank. The Board believed this change was necessary to operate efficiently and profitably in the current banking environment. Effective October 14, 2014, Sunshine Bancorp and Sunshine Bank appointed Andrew S. Samuel, President and Chief Executive Officer. The hiring of Mr. Samuel, who was formerly President and Chief Executive Officer of Susquehanna Bank, was part of the Board’s long-term strategy to bolster the balance sheet and grow the Bank. Following Mr. Samuel’s appointment, the Board expanded its membership and reconstituted the senior management of Sunshine Bank adding bankers with many years of experience in both commercial lending and integrating banks through acquisition.
Since embarking on this strategy, we have achieved substantial progress through a combination of organic growth and acquisitions. We have expanded into two of Florida’s top markets in downtown Tampa and downtown Orlando through de novo branches. Tampa and Orlando are among the top four Florida markets in terms of bank deposits and population growth. We also completed three strategic acquisitions to augment organic growth and deploy the capital raised in the original July 2014 initial stock offering where approximately $42 million was raised and our subsequent private placement in December 2015 where approximately $12 million was raised. The Company also accepted subscriptions for and sold, at 100% of their principal amount, an aggregate of $11.0 million of subordinated notes, on a private placement basis, to two accredited investors as more fully described herein.
On June 30, 2015, the Company acquired 100% of the outstanding common shares of Community Southern Holdings, Inc. (“CSB”) for cash of $30.3 million, through an Agreement and Plan of Merger entered into on February 4, 2015 (the “CSB Merger”). CSB was merged into the Company and Community Southern Bank was merged into the Bank. The Company acquired $250.4 million in assets and assumed $214.4 million in liabilities and stockholders’ equity and exchanged $5.7 million in preferred stock of the Company to the U.S. Treasury as part of its Small Business Lending Fund. The preferred stock was subsequently redeemed on September 30, 2015 at its par value of $5.7 million. The Company acquired these assets and assumed the liabilities to expand its market presence to Polk and Orange Counties, Florida and to strengthen its position along the demographically attractive I-4 corridor.
On November 13, 2015, pursuant to a purchase and assumption agreement signed on July 16, 2015, the Bank assumed the deposits and acquired certain loans along with two branch offices of First Federal Bank of Florida. The branch offices are located in Bradenton and Sarasota, Florida. The purchase and assumption added $47.0 million in deposits and $7.9 million in loans to Sunshine Bank. Sunshine Bank also purchased the real estate property and some selected fixed assets associated with the branches. The Company acquired these assets and assumed the liabilities to expand its market presence to Manatee County, Florida and to capitalize on the demographically attractive I-75 corridor between Tampa and Sarasota, Florida.
On October 31, 2016, pursuant to an Agreement and Plan of Merger (the “FBC Merger”) entered into on May 9, 2016, the Company completed its acquisition of FBC Bancorp, Inc., a Florida corporation (“FBC”), and Florida Bank of Commerce (“FBC Bank”), a Florida state bank and wholly-owned subsidiary of FBC. FBC merged with and into the Company, and FBC Bank merged with and into Sunshine Bank. At the effective time of the FBC Merger, each share of common stock of FBC was converted into 0.88 of a share of common stock of the Company. The Company acquired $335.7 million in assets and assumed $295.0 million in liabilities. The Company acquired these assets and assumed the liabilities to expand its market presence in the Greater Orlando MSA and to further its strategy of capitalizing on opportunities along the demographically attractive I-4 corridor. With the acquisition, the Company entered Brevard, Osceola, and Seminole Counties, Florida.
We intend to continue our organic growth strategy by fully integrating our FBC acquisition and focusing on the franchise that has been constructed over the past two years. Our franchise now stretches across central Florida from the Atlantic coast to the Gulf coast. The costs associated with the infrastructure build-up and the acquisitions have hindered profitability, so we intend to focus on improving earnings in the near term. We may, however, continue to evaluate potential opportunities to open additional branches or loan production offices as our needs and resources permit. With respect to future mergers and acquisitions, we may continue to evaluate opportunities that complement our growth strategy, complement our geographic footprint, in high growth markets, and meet our specific financial criteria.
Market Area
We conduct our operations from our main office and seventeen full-service banking offices located in Brevard, Hillsborough, Manatee, Orange, Osceola, Pasco, Polk, and Seminole counties, Florida. Our primary deposit market includes the areas surrounding our banking offices in these counties. Our primary lending market includes Brevard, Hillsborough, Manatee, Orange, Osceola, Pasco, Polk, and Seminole counties, Florida and the surrounding communities. We occasionally make loans secured by properties located outside of our primary lending market, usually to borrowers with whom we have an existing relationship and who have a presence within our primary market. Our primary markets in Central Florida are a mix of metro, suburban, and rural areas and contain a diverse cross section of economic sectors, with a mix of retail, agriculture, manufacturing, professional services, religious facilities, health care facilities, residential development, and vacation and retirement communities.
Sunshine Bank continues to pursue a three year plan that focuses on organic and strategic growth in the market area from Sarasota north on Interstate 75 to Tampa and then east on Interstate 4 to Orlando and continuing eastward to Florida’s Space Coast. Florida is the 3rd most populated state in the country and our market area represents 12% of the total Florida population. The counties we operate within have enjoyed some of the best growth rates in population and income in the state and nation. While we manage our banking operations as separate regions, we operate in only one segment. Our regions are based on geographic market, which allows each region to retain flexibility and local leadership in the unique communities we serve. We believe that this approach gives our Bank greater flexibility to better serve our markets and increases responsiveness to the needs of local customers.
Competition
We face significant competition within our markets both in making loans and attracting deposits. Our market area has a high concentration of financial institutions, including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Larger competitors offer certain technology-based services that are unavailable to smaller financial institutions. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, consumer finance companies, and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.
As of June 30, 2016 (the latest date for which information is available), our deposit market share was less than 1.0% of total deposits in Brevard, Hillsborough, Manatee, Orange, Osceola, Pasco, Polk, and Seminole counties, Florida.
Lending Activities
General. Our principal lending activity has been the origination of real estate loans concentrated into commercial real estate loans, multi-family real estate, one-to-four family residential real estate loans, land and construction loans; and non-real estate loans concentrated into commercial business loans, and to a lesser extent, consumer loans. Historically, we have retained in our portfolio nearly all of the loans that we have originated. A majority of our loans are made on a secured basis. As of December 31, 2016, approximately 85.2% of our consolidated loan portfolio consisted of loans secured by real estate, 14.6% of the loan portfolio consisted of commercial loans not secured by real estate and 0.2% of our loan portfolio consisted of consumer and other loans. We generally originate all new fixed rate one-to-four family residential real estate loans for sale in the secondary market. Our real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of or for investment in real estate, for the construction of single-family residential and commercial units, and for the development of single-family residential building lots. These real estate loans may be made at fixed or variable interest rates.
Our commercial loan portfolio includes loans to individuals and small-to-medium sized businesses located within our primary market area for working capital, equipment purchases, and various other business purposes. The majority of commercial loans are secured by equipment or similar assets, but these loans may also be made on an unsecured basis. Commercial loans may be made at variable, adjustable, or fixed rates of interest. Our consumer loan portfolio consists primarily of loans to individuals for various consumer purposes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Business Strategy” for more information regarding our strategy for lending activities.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale of $443,000, $790,000, and $2.0 million, at December 31, 2016, 2015, and 2014. There were no loans held for sale as of December 31, 2013 and 2012.
Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2016. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments and scheduled principal amortization.
Fixed and Adjustable-Rate Loan Schedule. The following table sets forth our fixed-rate and adjustable-rate loans at December 31, 2016 that are contractually due after December 31, 2017. Loans that are fixed for a period of time and floating thereafter have been included as adjustable.
Loan Approval Procedures and Authority. Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of the Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable highly liquid collateral” or 30% for certain residential development loans). Our legal lending was $14.4 million at December 31, 2016. In addition, we have established an in-house target that is less than the legal limits on loans to one borrower. Our in-house target was $5.0 million at December 31, 2016. At December 31, 2016, our largest credit relationship totaled $9.0 million, secured by capital stock and all business assets of the company. At December 31, 2016, this relationship was performing in accordance with its loan terms. The second largest relationship totaled $7.0 million and is a loan to an unaffiliated financial institution. At December 31, 2016, the loan was performing in accordance with its loan terms.
Our lending activities follow written, nondiscriminatory underwriting standards and loan origination procedures established by the Board of Directors. In the approval process for residential loans, we assess the borrower’s ability to repay the loan and the value of the collateral securing the loan. To assess the borrower’s ability to repay, we review the borrower’s income and expenses and employment and credit history. In the case of commercial real estate loans, we also review projected income, expenses and the viability of the project being financed. We generally require appraisals of all real property securing loans. Appraisals are performed by independent licensed appraisers who are approved by our Board of Directors. We generally require borrowers to obtain title insurance or an ownership and encumbrance report relating to the title of the property. All real estate secured loans generally require fire and casualty insurance and, if warranted, flood insurance in amounts at least equal to the principal amount of the loan or the maximum amount available. Our loan approval policies and limits are also established by our Board of Directors. All loans originated by the Bank are subject to our underwriting guidelines.
The Bank has established the Officer’s Loan Committee (OLC) to be able to more efficiently service our commercial customers, prudently manage credit risks, and effectively insure that credit policies are adhered to. The OLC requires a quorum of the SVP, Credit Administration, the Chief Risk Officer, Regional Presidents and the Co-Presidents. Each of these individuals have extensive experience in the approval of commercial loans. The OLC has authority to approve loans beginning over $1.0 million up to and including $5.0 million. In addition, the Director’s Loan Committee (DLC) has authority to approve loans over $5.0 million up to the legal lending limit of the Bank (with the exception of Regulation O (insider) loans which need to be approved by the Board of Directors).
The loan approval structure prohibits any single signature loan authority. Dual signatures are in effect up to $1.0 million. The Chief Executive Officer and Chief Risk Officer have been given dual signature authority up to $5.0 million in situations where timing is essential. These approvals must be ratified by OLC at the next meeting.
Commercial Real Estate and Multi-Family Lending. At December 31, 2016, we had $356.8 million in commercial real estate and multi-family loans, representing 51.9% of our total loan portfolio.
Our commercial real estate and multi-family loans generally have amortization terms of 15 to 25 years and have adjustable interest rates. The adjustable rate loans are typically fixed for the first five years and either adjust annually thereafter or have a balloon payment due at the end of the fixed term. Our commercial real estate and multi-family loans are generally tied to a margin above the appropriate three or five year treasury or the Prime Rate. The maximum loan-to-value ratio of our commercial real estate and multifamily loans is generally 80% of the lower of cost or appraised value of the property securing the loan. Our commercial real estate loans are typically secured by multifamily, hotel, agricultural, medical, retail, churches or other commercial properties. At December 31, 2016, we had $171.0 million of non-owner occupied commercial real estate loans, $165.5 million of owner occupied loans, and $20.2 million were secured by multi-family loans.
At December 31, 2016, the average loan balance of our outstanding commercial real estate and multi-family loans was $529,000, and the largest of such loans was a $6.9 million loan secured by an income producing property. At December 31, 2016, this loan was performing in accordance with its loan terms.
We consider a number of factors in originating commercial real estate and multi-family loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service ratio of at least 1.25x.
Personal guarantees are generally obtained from the principals of commercial real estate and multi-family loan borrowers, although this requirement may be waived in limited circumstances depending upon the loan-to-value ratio and the debt service ratio associated with the loan. We require property and casualty insurance and flood insurance if the property is in a flood zone area. In addition, borrowers are required to obtain title insurance unless the balance of the loan is less than $250,000. In such cases, we will require an ownership and encumbrance report relating to the title of the property.
Commercial and multi-family real estate loans can entail greater credit risks compared to other types real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by non-owner occupied income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multi-family real estate than residential properties. We carefully manage the ratio of our non-owner occupied commercial real estate to capital to stay below the 300% as set forth in OCC Bulletin 2006-46, Interagency Guidance on CRE Concentration Risk Management. At December 31, 2016 our ratio was 257.9%.
One-to-four family Residential Real Estate Lending. We originate residential mortgage loans with the intention of selling the majority of these loans into the secondary market through mortgage correspondents. These loans are originated by the Bank and underwritten by the correspondent lender in accordance with secondary market standards and The Federal National Mortgage Association, commonly known as Fannie Mae, underwriting guidelines to comply with ability to repay and qualified mortgage rules. We currently originate and fund fixed rate and adjustable rate conventional loans, jumbo loans, and construction to permanent loans. Certain mortgage loans such as adjustable rate jumbo loans may be retained in the Bank’s loan portfolio. Loans held in portfolio are generally underwritten according to The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans”, which can be sold in the secondary market if we chose to do so. We originate on a broker basis VA, USDA, and FHA loans. We receive a broker commission from the wholesale lender for each loan that is closed.
At December 31, 2016, our loan portfolio had $155.3 million of loans secured by one-to-four family real estate, representing 22.6% of our total loan portfolio. Our one-to-four family residential real estate loans typically have terms of 15 to 30 years. Our adjustable-rate one-to-four family residential real estate loans generally have fixed rates for initial terms of three years, and adjust annually thereafter at a margin. This margin is generally 275 basis points over the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased or decreased is generally 2.00% per adjustment period, and the lifetime interest rate cap is generally 6.00% over the initial interest rate of the loan.
We generally limit the loan-to-value ratios of our one-to-four family residential mortgage loans to 80% of the purchase price or appraised value of the property, whichever is less. Loans originated with loan-to-value ratios above 80% are required to obtain private mortgage insurance. All residential mortgage loans in portfolio include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage, and the loan is not repaid. All borrowers are required to obtain title insurance for the benefit of the Bank. We also require homeowner’s insurance and fire and casualty insurance and, where circumstances warrant, flood insurance on properties securing real estate loans.
Commercial Business Lending. At December 31, 2016, we had $100.2 million of commercial business loans, representing 14.6% of our total loan portfolio. Our business strategy is to increase our originations of commercial business loans. We offer commercial term loans, lines of credit, agricultural production, equipment financing, and revolving lines of credit with a target loan size of $100,000 to $2.0 million to small businesses in our market area to finance short-term working capital needs such as accounts receivable and inventory. Our commercial lines of credit are typically adjustable-rate and are generally priced on a floating rate basis utilizing the prime rate. We generally obtain personal guarantees with respect to all commercial business lines of credit.
We typically originate commercial business loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, the experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial business loans that we originate generally have greater credit risk than one-to-four family residential real estate loans or consumer loans. In addition, commercial business loans often result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts.
As part of the FBC merger the Bank began to originate Small Business Administration (“SBA”) loans under the SBA 504 and 7A programs. SBA 7A loans are originated with the intent to sell the guaranteed portion of the loan and recognize a gain on the sale, while the Bank maintains servicing of the loan. The loans are underwritten by the Bank using the same criteria as other commercial business loans, since the un-guaranteed portion of the loan remains in the Bank’s portfolio.
At December 31, 2016, the average loan balance of our outstanding commercial business loans was $135,000, and the largest outstanding balance was a $9.0 million loan, collateralized by capital stock and business assets. This loan was performing in accordance with its terms at December 31, 2016.
Construction and Land Lending. At December 31, 2016, $51.5 million, or 7.5% of our total loan portfolio, consisted of construction and land loans. Of these, $36.4 million were for commercial development and land loans and $6.7 million were for residential development. At December 31, 2016, our largest land loan was $4.5 million and our largest construction loan was $5.6 million and both properties were located in our primary market area. Both loans were performing in accordance with their original terms at December 31, 2016.
We offer both fixed-rate and adjustable-rate construction and land loans, although most of these loans have fixed interest rates. The maximum loan-to-value of these loans is 85% of the lesser of the appraised value or the purchase price of the property. The Bank offers a onetime closed Residential Construction to Permanent product with our correspondent lending partners. These loans are processed, underwritten, and closed both by our internal bank consumer lending staff and the correspondent lender. This process is done simultaneously to ensure these loans meet both the internal underwriting criteria and the correspondent lenders criteria to ensure these loans conform to secondary marketing standards at loan modification after the construction phase is completed. We fund the construction portion of the loan and monitor the draw process to ensure completion of the construction project according to the originally approved specifications. These loans are reported as loans held for sale on the consolidated statement of condition.
At the end of the construction phase when the loan is modified, it is sold to the correspondent lender for a service release premium. We originate both conventional loans up to 85% loan-to-value ratios (“LTV”) and jumbo loans up to 80% LTV, construction loans. Conventional loans are up to the conforming limit of $417,000 and jumbo loans exceed this limitation. The loan pricing on these loans are fixed for a maximum construction period of 12 months. These loans modify to the current market pricing of the correspondent at the time of modification.
Construction and land lending generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction or land loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction and land loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. Land loans pose additional risk because the property generally does not produce income and may be relatively illiquid.
Home Equity Loans. At December 31, 2016, we had $21.9 million of home equity loans, representing 3.2% of our total loan portfolio. Home equity loans consists of either revolving lines of credit, term, or second mortgage loans secured by one-to-four family residential real estate. These loans are underwritten based on repayment capacity and source, value of the underlying property, and credit history. Home equity loans are generally considered to have more credit risk than traditional one-to-four family residential loans because the Bank tends to have a subordinate lien position. Our home equity loans are secured by a first or second mortgage on the borrower’s principal residence or their second/vacation home (excluding investment/rental property) at a maximum current loan-to-value of 80%. There are minimum credit score standards, maximum debt to income ratios and credit requirements on each Home equity product that is defined in the Bank’s Lending Policy. All credit decisions for home equity loans are made centrally by the Bank’s consumer lending department.
Consumer Lending. To a much lesser extent, we offer a variety of consumer loans to individuals who reside or work in our market area. At December 31, 2016, our consumer loan portfolio totaled $1.5 million, or 0.2% of our total loan portfolio, and $792,000 of our consumer loans were unsecured (excluding overdraft accounts).
Consumer loans can have either a variable rate based on the index of Wall Street Journal Prime rate or a fixed-rate of interest for a term of up to 10 years, depending on the type of collateral, product and the creditworthiness of the borrower. Our lending policy allows for unsecured, non- real estate secured, and real estate secured loan products that are either installment or open end credit. Our consumer loans may be secured with deposits, automobiles, boats, motorcycles, recreational vehicles or real property.
Our consumer loan policy sets forth our underwriting guidelines overall for all loan applications and addresses specific guidelines such as acceptable loan amounts, credit score, debt-to-income ratios, loan-to-value ratios, and collateral allowable by product type. The policy guidelines address applications, structuring, stability, credit standards, collateral, consumer compliance, insurance requirements and appraisal requirements. Our consumer loan policy is approved by the Board of Directors quarterly.
Loan Originations, Participations, Purchases and Sales.
Most of our loan originations are generated by our loan personnel operating at our main office and other banking office locations. All loans we originate are underwritten pursuant to our policies and procedures, which are approved by the Board of Directors. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and pricing levels established by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our loan originations can vary from period to period.
With the exception of residential mortgage and construction loans originated for sale, we generally hold all of the loans we originate in our portfolio. As of December 31, 2016 the Bank had participation loans sold to other financial institutions totaling $29.1 million, which includes loans participated to comply with the Bank’s legal or in-house size limits and SBA loans. As part of the FBC merger the Bank began to originate SBA loans under the SBA 504 and 7A programs. SBA 7A loans are originated with the intent to sell the guaranteed portion of the loan and recognize a gain in the sale, while the Bank maintains servicing of the loan. As of December 31, 2016 we recognized no gains on the sale of SBA loans.
The Bank from time to time may purchase residential mortgage loans where the Bank is not the originator as a balance sheet management strategy and to stay compliant with certain lending criteria applicable to thrift charters. As a federal savings bank, we are subject to lending restrictions such as the Qualified Thrift Lender (“QTL”) ratio. The QTL requires certain assets be in thrift qualified assets of which mortgages qualify. During 2016, the Bank purchased approximately $52.0 million of residential mortgage loans secured by properties located solely in the State of Florida. The purchased residential mortgage loans were deemed conforming loans.
Delinquencies, Classified Assets and Nonperforming Assets
Delinquency Procedures. When a residential mortgage loan or consumer loan becomes more than 15 days delinquent, Sunshine Bank’s computer system sends an automatic notice advising the borrower of the delinquency. If the mortgage loan remains delinquent 30 days after the due date, Sunshine Bank sends a 30-day default letter giving the borrower approximately 10 days to cure the delinquency. This letter also includes credit counseling information. If the loan still remains delinquent following the 30-day letter, an additional letter is sent at approximately 45 days from the due date giving the borrower an additional 10 days to bring the loan current. If the loan is not made current by approximately 60 days from the due date, a demand letter is sent by regular and certified mail giving the borrower 30 days to cure the delinquency or foreclosure proceedings will begin. If the borrower fails to bring the loan current within 90 days from the due date or fails to make arrangements to make the loan current over a longer period of time, the matter is referred to legal counsel and foreclosure or other collection proceedings are instituted. Beginning in 2014 under Florida law, Sunshine Bank could not begin foreclosure proceedings on a borrower’s principal residence until the mortgage obligation was more than 120 days delinquent.
Commercial business and commercial real estate delinquent borrowers are contacted approximately 10 days after the past due date and in writing thereafter. Due to different default provisions, collection efforts are loan specific for commercial loans in compliance with applicable Florida law.
Delinquent Loans. The following table sets forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.
Nonaccrual Loans. We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans generally is applied against principal or interest and is recognized on the cost recovery method or cash basis. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. At December 31, 2016, we had $291,000 in nonaccrual loans.
Troubled Debt Restructurings (“TDR”). Loans are classified as restructured when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The modification of the terms of such loans were one of the following: a reduction of the stated interest rate of the loan for some period of time, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or an extension of time to make payments with the delinquent payments added to the principal of the loan. We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral pledged. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests.
Loans on nonaccrual status at the date of modification are initially classified as nonaccruing TDR. During 2016, we entered into no new TDRs. Our policy provides that TDR loans are returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment performance is generally no less than six consecutive months of timely payments and demonstrated ability to continue to repay. During the year ended December 31, 2016 there were no previously modified loans changed to non-performing in accordance with modified terms. At December 31, 2016, we had $138,000 in nonaccruing TDRs.
Nonperforming Loans. Nonperforming loans decreased to $291,000, or 0.04%, of total loans, at December 31, 2016 from $751,000, or 0.23% of total loans, at December 31, 2015.
Other Real Estate Owned. Other real estate owned includes assets acquired through, or in lieu of, loan foreclosure and are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value less estimated selling costs. Revenue and expenses from operations and changes in the valuation allowance are included in operations. At December 31, 2016, we had $32,000 in other real estate owned.
Nonperforming Assets. The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated. We had no accruing loans past due 90 days or more at December 31, 2016, 2015, 2014, 2013 or 2012.
Interest income that would have been recorded for the year ended December 31, 2016 had nonaccruing loans been current according to their original terms amounted to $41,000. Interest income that would have been recorded for the year ended December 31, 2016 had troubled debt restructurings been current according to their original terms, amounted to $20,000. For the year ended December 31, 2016, there was no interest income recognized on nonaccrual loans and $69,000 in interest income recognized on accruing TDR loans.
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the OCC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific allowance for loan losses is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management. At December 31, 2016, we had $1.8 million of loans designated by management as “special mention,” and $8.7 million of loans designated as “substandard.”
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover losses that are both probable and reasonable to estimate. General allowances represent allowances which have been established to cover accrued losses associated with lending activities that were both probable and reasonable to estimate, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific allowances.
In connection with the filing of our periodic regulatory reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or delinquency status, or if the loan possesses weaknesses although currently performing. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.” Management reviews the status of each loan on our classified list on a monthly basis with the full Board of Directors.
The following table sets forth our amounts of classified loans and loans designated as special mention as of December 31, 2016, 2015, 2014, 2013 and 2012.
During the fourth quarter of 2014, management initiated the sale of selected criticized credits totaling $5.0 million. Of the $5.0 million, the Bank sold $2.1 million in classified commercial real estate loans in 2014 and the remaining principal balance of $2.9 million (less previous charge offs) was transferred to held for sale at year end 2014 at a net amount of $1.8 million. These loans were subsequently sold in January 2015.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to operations.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value could result in our charging off the loan or the portion of the loan that was impaired.
Among other factors, we consider current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of housing depreciation.
The majority of our loans are secured by collateral. Residential real estate loans 180 days past due, consumer loans 120 days past due and all other loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using an independent appraisal, adjusted for current economic conditions and other factors, and related general or specific allowances for loan losses are adjusted on a quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent appraisal if it has not already been obtained. Any shortfall would result in immediately charging off the portion of the loan that was impaired.
Specific Allowances for Impaired Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific impaired loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; (7) the borrower’s effort to cure the delinquency; and (8) for loans secured by real estate, the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by losses recognized by portfolio segment and assigning specific loss rates for specific categories of loans based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio over the preceding sixteen quarters. The allowance may be adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These qualitative factors include the existence and effect of any concentrations of credit and changes in the level of such concentrations, changes in national, regional and local economic conditions that affect the collectability of the loan portfolio, changes in levels or trends in charge-offs and recoveries, changes in the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss, changes in the size and composition of the loan portfolio and terms of loans, changes in lending policies and procedures, risk selection and underwriting standards, changes in the experience, ability and depth of lending management and other relevant staff, quality of loan review and the effect of other external factors, trends or uncertainties that could affect management’s estimate of probable losses, such as competition and industry conditions. The qualitative factors are re-evaluated quarterly to ensure their relevance to the entire loan portfolio.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years indicated.
Accounting for business combinations under GAAP acquisition method prohibits “carrying over” valuation allowances, such as the allowance for loan losses. Uncertainties relating to the expected future cash flows is reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Bank will establish loan loss allowances for the acquired loans in periods after the acquisition, but only for losses incurred on these loans due to credit deterioration after acquisition.
As a part of the business acquisitions, the Company acquired loans, some of which have shown evidence of credit deterioration since origination. These purchased credit-impaired (“PCI”) loans were determined to be credit impaired based on borrower payment history, past due status, loan credit grading, value of underlying collateral and other factors that affect the collectability of contractual cash flows. Under GAAP, purchasers are permitted to individually evaluate or collectively aggregate PCI loans into pools. PCI loans acquired in the same fiscal quarter may be assembled into one or more pools with common risk characteristics. Once pooled, a single composite interest rate is used to determine aggregate expected cash flows for the pool.
As a result of the Company’s recent acquisition, the Company individually evaluated seven PCI loans. These acquired loans were recorded on the acquisition date at fair value. The Company estimates the amount and timing of expected cash flows for each individually analyzed loan. Estimated cash flows in excess of the amount paid is recorded as interest income over the remaining life of the loan.
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At December 31, 2016, our allowance for loan losses represented 0.48% of total loans and 1125.1% of nonperforming loans. The allowance to total loans ratio decreased as a result of our Mergers. In accordance with current purchase accounting rules under GAAP, the Bank did not carry over the allowance of the acquired banks, but measured uncertainties relating to the expected future cash flows as part of the fair value measurement of the acquired loans and reflected it in the purchase price. The increase in allowance for loan losses to nonperforming assets reflects the Bank’s overall improvement in credit quality. At December 31, 2015, our allowance for loan losses represented 0.76% of total loans and 334.5% of nonperforming loans. At December 31, 2014, our allowance for loan losses represented 1.56% of total loans and 193.5% of nonperforming loans. At December 31, 2013, our allowance for loan losses represented 1.52% of total loans and 44.95% of nonperforming loans. At December 31, 2012, our allowance for loan losses represented 1.95% of total loans and 44.92% of nonperforming loans. There were $413,000 of net recoveries during the year ended December 31, 2016, and $785,000 during the year ended December 31, 2015 and net charge-offs of $2.5 million, 558,000, and $1.1 million during the years ended December 31, 2014, 2013 and 2012, respectively. During 2014, management implemented a strategy to strengthen the balance sheet and enhance asset quality. This strategy led to an increase in charge off activity for classified and delinquent loans.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of any portion of our loan portfolio deteriorates as a result. Furthermore, as an integral part of its examination process, the OCC will periodically review our allowance for loan losses. The OCC may require that we increase our allowance based on its judgments of information available to it at the time of its examination. Any material increase in the allowance for loan losses will adversely affect our financial condition and results of operations.
Investment Activities
General. Our investment policy is established by the Board of Directors. The objectives of the policy are to: (i) ensure adequate liquidity for loan demand and deposit fluctuations, and to allow us to alter our liquidity position to meet both day-to-day and long-term changes in assets and liabilities; (ii) maintain a balance of high quality investments to minimize risk; (iii) provide collateral for pledging requirements; and (iv) maximize return on our investments within the context of our interest rate risk management policy.
The Asset-Liability management committee (“ALCO”) is responsible for the investment management policy and approval of investment strategies. The ALCO will determine the approved dollar amount required for investment, typically for the forthcoming quarter, and authorize execution of the strategy. The ALCO has delegated the responsibility for administering the policy and implementing investment strategies to the Chief Financial Officer, and any designated investment officers. The investment officers will, under most circumstances, execute the purchase/sell orders, perform settlement operations, manage custody functions, and administer collateral assignments. Investment officers have the additional responsibility of continually monitoring the portfolios of the Company to determine that the assets serve the objectives of the Company as to liquidity, safety and soundness, and profitability.
We account for investment securities in accordance with Accounting Standards Codification Topic 320, “Investments - Debt and Equity Securities.” Accounting Standards Codification 320 requires that investments be categorized as held-to maturity, trading, or available for sale. At December 31, 2016 all our securities were designated as available for sale. During 2015, management transferred all securities classified as held to maturity to available for sale. The transfer was executed for liquidity and interest rate risk purposes. Certain securities were subsequently sold and a gain of $195,000 was recognized. The Company is precluded from classifying securities as held to maturity until March 2017.
Federally-chartered savings institutions have authority to invest in various types of assets, including U.S. government-sponsored enterprise obligations, securities of various federal agencies, residential mortgage-backed securities, certain time deposit of insured financial institutions, overnight and short-term loans to other banks, corporate debt instruments, debt instruments of municipalities and Fannie Mae and Freddie Mac equity securities. At December 31, 2016, our investment portfolio consisted of U.S government sponsored enterprise mortgage-backed securities, securities and obligations issued by U.S. government agencies, U.S. government-sponsored enterprises or the Federal Home Loan Bank. At December 31, 2016, we owned $3.5 million of Federal Home Loan Bank of Atlanta stock. As a member of Federal Home Loan Bank of Atlanta, we are required to purchase stock in the Federal Home Loan Bank of Atlanta. The Federal Home Loan Bank common stock is carried at cost.
The following table sets forth the composition of our investment securities portfolio, at the dates indicated, excluding stock of the Federal Home Loan Bank of Atlanta.
The following table sets forth the amortized cost and fair value of investments in Agency Mortgage-Backed Securities that exceeded 10% of shareholders’ equity at December 31, 2016.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2016, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. All of our securities at December 31, 2016, were taxable securities.
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We may also use borrowings, primarily Federal Home Loan Bank of Atlanta advances, to supplement cash flow needs, as necessary. In addition, we receive funds from scheduled loan payments, loan prepayments, retained income and income on interest-earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are generated primarily from residents and businesses within our primary market area. We offer a selection of deposit accounts, including noninterest-bearing demand accounts, interest-bearing demand accounts, money market accounts, savings accounts and time deposits. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. At December 31, 2016, our core deposits, which are deposits other than time deposits, were $571.7 million, representing 78.3% of total deposits. Brokered deposits, including reciprocal deposits, totaled $89.8 million, or 12.3% of total deposits.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis by the ALCO committee. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. Our ability to generate deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates.
The following table sets forth the distribution of total deposits by account type for the years indicated.
As of December 31, 2016, the aggregate amount of all our time deposits in amounts greater than or equal to $100,000 was approximately $116.6 million. The following table sets forth the maturity of these deposits as of December 31, 2016.
Borrowings. We obtain advances from the Federal Home Loan Bank of Atlanta upon the security of our capital stock in the Federal Home Loan Bank of Atlanta and certain of our loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. As of December 31, 2016 we had $65.0 million outstanding in FHLB advances all maturing in 2017. At December 31, 2016, based on available collateral and our ownership of FHLB stock, we had total borrowing capacity of $117.8 million less $65.0 million of outstanding borrowings for available borrowing capacity of $52.8 million at the Federal Home Loan Bank. We also have lines of credit at three financial institutions that would allow us to borrow up to $25.5 million at December 31, 2016. Other than as required by federal regulations to test our borrowing capabilities, we did not utilize any lines of credit during the years ended December 31, 2016 and 2015.
The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at and for the periods shown:
At December 31, 2016, we had $11.0 million of subordinated notes outstanding. The subordinated notes bear interest at a fixed interest rate of 5.0% per year and have a term of five years maturing on April 1, 2021. The subordinated notes are redeemable at the option of the Company, in whole or in part, at any time, without penalty or premium, subject to any required regulatory approvals.
Subsidiary Activities
Sunshine Bank is the wholly-owned subsidiary of Sunshine Bancorp. Sunshine Bancorp has no other subsidiaries.
Employees
As of December 31, 2016 we had 155 full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.
Availability of Annual Report on Form 10-K
This Annual Report on Form 10-K is available on our website at http://www.mysunshinebank.com/. Information on the website is not incorporated into, and is not otherwise considered a part of, this Annual Report on Form 10-K.
Regulation and Supervision
As a federal savings bank, Sunshine Bank is subject to examination and regulation by the OCC, and is also subject to examination by the FDIC. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Sunshine Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund, and not for the protection of stockholders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Sunshine Bank also is regulated to a lesser extent by the Federal Reserve Board, which governs the reserves to be maintained against deposits and other matters. Sunshine Bank must comply with consumer protection regulations issued by the Consumer Financial Protection Bureau. Sunshine Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. The OCC examines Sunshine Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Sunshine Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts, the form and content of Sunshine Bank’s loan documents and certain consumer protection matters.
As a savings and loan holding company, Sunshine Bancorp is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. Sunshine Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Set forth below are certain material regulatory requirements that are applicable to Sunshine Bank and Sunshine Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Sunshine Bank and Sunshine Bancorp. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on Sunshine Bancorp, Sunshine Bank and their operations.
Dodd-Frank Act
The Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies, as well as changes that affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Sunshine Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than on total deposits. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over Boards of Directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage originations.
Many provisions of the Dodd-Frank Act involve delayed effective dates and/or require implementing regulations or have not been issued in final form. The full impact on our operations cannot yet fully be assessed. It is likely that the Dodd-Frank Act will result in an increased regulatory burden and compliance, operating and interest expense for Sunshine Bank and Sunshine Bancorp.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Sunshine Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts. Sunshine Bank may also establish subsidiaries that may engage in certain activities not otherwise permissible for Sunshine Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements. Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions such as Sunshine Bank, that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to-four family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
Federal savings banks must also meet a statutory “tangible capital” standard of 1.5% of total adjusted assets. Tangible capital is generally defined as Tier 1 capital less intangible assets other than certain mortgage servicing rights.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. For 2017, the capital conservation buffer is 1.25% of risk weighted assets.
In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
At December 31, 2016, Sunshine Bank’s capital exceeded all applicable requirements.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.
Qualified Thrift Lender Test. As a federal savings bank, Sunshine Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Sunshine Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities; home equity loans, and loans to small businesses) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business. A federal savings bank that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to enforcement action for a violation of law. At December 31, 2016, Sunshine Bank satisfied the QTL requirements.
Capital Distributions. In June 2015, Sunshine Bank applied for and received approval for an $18.8 million capital distribution to Sunshine Bancorp which was used to facilitate the acquisition of Community Southern Holdings, Inc. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application for approval of a capital distribution if:
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the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net earnings for the preceding two years;
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the savings bank would not be at least adequately capitalized following the distribution;
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the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
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the savings bank is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every savings bank that is a subsidiary of a savings and loan holding company, such as Sunshine Bank, must still file a notice with the Federal Reserve Board at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution may be disapproved if:
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the federal savings bank would be undercapitalized following the distribution;
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the proposed capital distribution raises safety and soundness concerns; or
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the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings bank also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form. In addition, beginning in 2016, Sunshine Bank’s ability to pay dividends will be limited if Sunshine Bank does not have the capital conservation buffer required by the new capital rules, which may limit the ability of Sunshine Bancorp to pay dividends to its stockholders. See “-Capital Requirements.”
Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings bank, the OCC is required to assess the federal savings bank’s record of compliance with the Community Reinvestment Act. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. Sunshine Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository institution, such as Sunshine Bank. Sunshine Bancorp is an affiliate of Sunshine Bank because of its control of Sunshine Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings banks to maintain detailed records of all transactions with affiliates.
Sunshine Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
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be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
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not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Sunshine Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Sunshine Bank’s loan committee or Board of Directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The OCC has primary enforcement responsibility over federal savings banks and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings bank. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest-rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and authorized to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank is placed in one of the following five categories based on the savings bank’s capital:
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well-capitalized (at least 5% leverage capital, 8% Tier 1 risk-based capital, 10% total risk-based capital, and 6.5% common equity Tier 1 ratios and is not subject to any written agreement, order, capital directive or prompt corrective action directive issued under certain statutes and regulations, to maintain a specific capital level for any capital measure);
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adequately capitalized (at least 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital and 4.5% common equity Tier 1 ratios);
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undercapitalized (less than 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital or 4.5% common equity Tier 1 ratios);
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significantly undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital, 6% total risk-based capital or 3% common equity Tier 1 ratios); and
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critically undercapitalized (less than 2% tangible capital to total assets).
The new rule that strengthened regulatory capital requirements adjusted the prompt corrective actions categories to incorporate the new standards, as reflected above.
Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date that a federal savings bank is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings bank that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5% of the savings bank’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures such as a restrictions on capital distributions and asset growth. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings bank, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At December 31, 2016, Sunshine Bank met the criteria for being considered “well capitalized.”
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as Sunshine Bank. Deposit accounts in Sunshine Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates.
The FDIC issued a final rule that redefined the assessment base used for calculating deposit insurance assessments effective April 1, 2011. Under the rule, assessments were based on an institution’s average consolidated total assets minus average tangible equity instead of total deposits. The final rule revised the assessment rate schedule to establish assessments ranging from 2.5 to 45 basis points. Effective July 1, 2016, the FDIC adopted changes that eliminated the risk categories. Assessments for most institutions are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.5%, the assessment range (inclusive of possible adjustments) was reduced for most banks and savings banks to 1.5 basis points to 30 basis points.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2016, the annualized FICO assessment was equal to 0.54 of a basis point of total assets less tangible capital.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Sunshine Bank. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System. Sunshine Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Atlanta, Sunshine Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2016, Sunshine Bank was in compliance with this requirement. Sunshine Bank’s ability to borrow from the Federal Home Loan Bank of Atlanta provides an additional source of liquidity.
Other Regulations
Interest and other charges collected or contracted for by Sunshine Bank are subject to state usury laws and federal laws concerning interest rates. Sunshine Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to-four family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Truth in Savings Act; and
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rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
In addition, the Consumer Financial Protection Bureau issues regulations and standards under these federal consumer protection laws that affect our consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage loan servicing and originator compensation standards. In addition, on October 3, 2015, the new TILA-RESPA Integrated Disclosure (TRID) rules for mortgage closings took effect for new loan applications.
Sunshine Bank evaluates regulations and proposals, and devotes significant compliance, legal and operational resources to compliance with consumer protection regulations and standards.
The operations of Sunshine Bank also are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
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Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
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The USA PATRIOT Act, which requires savings banks to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. Sunshine Bancorp is a savings and loan holding company within the meaning of Home Owners’ Loan Act. As such, Sunshine Bancorp is registered with the Federal Reserve Board and is subject to regulations, examinations, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over Sunshine Bancorp and any future non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Permissible Activities. Under present law, the business activities of Sunshine Bancorp are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met (including electing such status), or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations. As of December 31, 2016, Sunshine Bancorp, Inc. has not elected financial holding company status.
Federal law prohibits a savings and loan holding company, including Sunshine Bancorp, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
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the approval of interstate supervisory acquisitions by savings and loan holding companies; and
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the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital. Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act, however, required the Federal Reserve Board to establish for all depository institution holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries.
However, legislation was enacted in December 2014 which required the Federal Reserve Board to amend its “Small Bank Holding Company” exemption from consolidated holding company capital requirements to (i) extend its applicability to savings and loan holding companies and (ii) raise the threshold for the exemption from $500 million to $1 billion in consolidated assets. Regulations doing so were effective May 15, 2015. Consequently, both bank and savings and loan holding companies with under $1 billion in consolidated assets are exempt from the consolidated regulatory capital requirements unless the Federal Reserve Board determines otherwise on a case by case basis.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all savings and loan holding companies serve as a source of managerial and financial strength to their subsidiary savings and loan associations by providing capital, liquidity and other support in times of financial stress.
Dividends. The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a savings and loan holding company to pay dividends may be restricted if a subsidiary savings bank becomes undercapitalized. The policy statement also states that a savings and loan holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the savings and loan holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Sunshine Bancorp to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Federal Securities Laws
Sunshine Bancorp’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Sunshine Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of common stock issued in the conversion does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Emerging Growth Company Status
The JOBS Act which was enacted in April 2012 has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” Sunshine Bancorp qualifies as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, Sunshine Bancorp will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. Sunshine Bancorp has elected to comply with new or amended accounting pronouncements in the same manner as a private company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: (i) they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; (ii) they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and (iii) they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
Federal Taxation
General. Sunshine Bancorp and Sunshine Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Sunshine Bancorp and Sunshine Bank.
Method of Accounting. For federal income tax purposes, Sunshine Bancorp currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing its federal income tax returns.
Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, less an exemption amount, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent tax computed this way exceeds tax computed by applying the regular tax rates to regular taxable income. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2016, Sunshine Bancorp had approximately $269,000 in alternative minimum tax credit carryforwards.
Net Operating Loss Carryovers. Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2016, Sunshine Bancorp has net operating loss carryforwards of approximately $9.2 million available to offset future taxable income.
Capital Loss Carryovers. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any unused loss remaining after the five year carryover period is not deductible. At December 31, 2016, Sunshine Bancorp had no capital loss carryover.
Corporate Dividends. We may generally exclude from our income 100% of dividends received from Sunshine Bank as a member of the same affiliated group of corporations.
State Taxation
Sunshine Bank and Sunshine Bancorp are subject to Florida corporate tax which is assessed at the rate of 5.50%. For the Florida corporate tax, taxable income generally means federal taxable income subject to certain modifications under state law. As a Maryland business corporation, Sunshine Bancorp is required to file annual franchise tax return with the State of Maryland. Sunshine Bank’s state income tax returns have not been audited in the past five years.
ITEM 1A.
ITEM 1A. Risk Factors
Investing in our securities involves certain risks. The following risk factors, as well as other information contained in this report, including our Consolidated Financial Statements and related notes should be carefully considered. The following factors affect our business, the industry in which we operate and our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known or which we consider immaterial as of the date hereof may also have an adverse effect on our business. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected, the market price of our common stock could decline and you could lose all or part of your investment in our securities.
Risks Related to Our Business
Our commercial real estate, multi-family and commercial business loans generally carry greater credit risk than loans secured by owner occupied one-to-four family real estate, and these risks will increase if we succeed in our plan to increase these types of loans.
At December 31, 2016, $457.0 million, or 66.5%, of our loan portfolio consisted of commercial real estate, multi-family and commercial business loans. Given their larger balances and the complexity of the underlying collateral, commercial real estate, multi-family and commercial business loans generally expose a lender to greater credit risk than loans secured by owner occupied one-to-four family real estate. Also, many of our borrowers have more than one of these types of loans outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential real estate loan. These loans also have greater credit risk than one-to-four family residential real estate loans for the following reasons:
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commercial real estate and multi-family loans - repayment is generally dependent on income being generated in amounts sufficient to cover operating expenses and debt service.
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commercial business loans - repayment is generally dependent upon the successful operation of the borrower’s business.
If loans that are collateralized by real estate or other business assets become troubled and the value of the collateral becomes significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses, which would in turn adversely affect our operating results and financial condition.
We have a high concentration of loans in a small geographic market area, which makes our business highly susceptible to downturns in the local economies and depressed banking markets, which could be detrimental to our financial condition.
Unlike larger financial institutions that are more geographically diversified, we are a community banking franchise concentrated in Central Florida. As of December 31, 2016, almost all of the loans in our loan portfolio were made to borrowers who live and/or conduct business in Central Florida and almost all of our loans were secured by real estate or other assets located in that market area. Deterioration in local economic conditions in the real estate market could have a material adverse effect on the quality of our portfolio by eroding the loan-to-value ratio of our portfolio, the demand for our products and services, the ability of borrowers to timely repay loans, the value of the collateral securing loans and our financial condition, results of operations and future prospects. In addition, if the population or income growth in the region is slower than projected, income levels, deposits and real estate development could be adversely affected and could result in the curtailment of our expansion, growth and profitability. If any of these developments were to result in losses that materially and adversely affected the Bank’s capital, we might be subject to regulatory restrictions on operations and growth and required to raise additional capital.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2016, $155.3 million, or 22.6%, of our total loan portfolio was secured by one-to-four family real estate. One-to-four family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the Florida housing market between 2008 and 2011 reduced the value of the real estate collateral securing these types of loans. Future declines could cause certain of our residential mortgage loans to be secured by liens on mortgage properties in which the borrowers may have little or no equity. As a result, we have increased risk that we could incur losses if borrowers default on their loans because we may be unable to recover all or part of the defaulted loans by selling the real estate collateral. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the sale proceeds.
A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduced demand for our products and services, which could have an adverse effect on our results of operations.
Nationally, economic growth has been slow and uneven. A return to deteriorating economic conditions or negative developments in the domestic and international credit markets could significantly affect our customers’ operations, the value of our loans and investments, and the demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.
Future changes in interest rates could reduce our profits and asset values.
Net income is the amount by which net interest income and noninterest income exceeds noninterest expense and the provision for loan losses and income taxes. Net interest income makes up a majority of our income and is the difference between:
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interest income we earn on interest-earning assets, such as loans and securities; and
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interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.
We are vulnerable to changes in interest rates, including the shape of the yield curve, because of a mismatch between the terms to maturity and repricing of our assets and liabilities. For the years ended December 31, 2015 and 2016, our net interest margin was 3.53% and 3.66%, respectively. Changes in interest rates also can affect: (i) our ability to originate loans; (ii) the value of our interest-earning assets; (iii) our ability to obtain and retain deposits; and (iv) the ability of our borrowers to repay their loans, particularly adjustable rate loans.
Historically low interest rates may adversely affect our net interest income and profitability.
In recent years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower levels compared to those that existed prior to 2008. As of December 30, 2016, 78.3% of our deposit balances do not have stated maturities. Our non-maturity deposits and time deposits may reprice or mature more quickly than our interest-earning assets. Our ability to lower our interest expense on deposits may be limited at these current low interest rate levels while the average yield on our interest-earning assets may continue to decrease. The Federal Reserve Board may continue to maintain low interest rates. Accordingly, our net interest income (the difference between interest income we earn on our assets and the interest expense we pay on our liabilities) may continue to decrease, which will have an adverse effect on our profitability.
Our financial performance will be negatively impacted if we are unable to execute our growth strategy and manage our growth.
Our current growth strategy is to grow organically and through select acquisitions. Our ability to grow organically depends primarily on generating loans and deposits of acceptable risk and expense, and we may not be successful in continuing this organic growth. Our ability to identify and consummate appropriate acquisitions, depends upon prevailing economic conditions, availability of sufficient capital, our ability to recruit and retain qualified personnel, competitive factors and changes in banking laws, among other factors. Sustaining our growth will require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. If we grow too quickly and are unable to control costs and maintain asset quality, such growth, whether organic or through select acquisitions, could materially and adversely affect our financial condition and results of operations.
We may make future acquisitions, which may be restricted by applicable regulation, difficult to integrate, divert management resources, result in unanticipated costs, or dilute our stockholders.
Part of our business strategy is to make acquisitions of, or investments in, companies that complement our current position or offer growth opportunities. Federal and Florida state banking laws restrict the activities that the Company and the Bank may lawfully conduct, whether directly or indirectly through acquisitions, subsidiaries and certain interests in other companies. These laws also affect the ability to effect a change of control of the Company or another savings and loan holding company. Our acquisitions may be subject to regulatory approval. We may not receive regulatory approval for future acquisitions or, if received, such regulatory approval may not be timely. Changes in the number or scope of permissible activities under applicable law could have an adverse effect on our ability to implement our business strategy.
Furthermore, future acquisitions could pose numerous risks to our operations, including:
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we may have difficulty integrating the purchased operations;
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we may incur substantial unanticipated integration costs;
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assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business;
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acquisitions could result in the loss of key employees, particularly those of the acquired operations;
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we may have difficulty retaining or developing the acquired businesses’ customers;
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acquisitions could adversely affect our existing business relationships with customers;
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we may be unable to effectively compete in the markets serviced by the acquired bank;
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we may fail to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisitions; and
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we may incur liabilities from the acquired businesses and we may not be successful in seeking indemnification for such liabilities or claims.
In connection with these acquisitions or investments, we could incur debt, amortization expenses related to intangible assets or large and immediate write-offs, assume liabilities, or issue stock that would dilute our current stockholders’ percentage of ownership. We may not be able to complete acquisitions or integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital could decrease.
Lending is inherently risky and we are exposed to the risk that our borrowers may default on their obligations. A borrower’s default on its obligations may result in lost principal and interest income and increased operating expenses as a result of the allocation of management’s time and resources to the collection and work-out of the loan. In certain situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be reached, we may have to charge-off the loan in whole or in part. In such situations, we may acquire real estate or other assets, if any, that secure the loan through foreclosure or other similar available remedies, and the amount owed under the defaulted loan may exceed the value of the assets acquired.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate other factors including, among other things, current economic conditions. If our assumptions are incorrect, or if delinquencies or non-performing loans increase, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance, which could materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and, based on their judgments and information available to them at the time of their review, may require us to increase our allowance for loan losses or recognize further loan charge-offs. An increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may reduce our net income and our capital, which may have a material adverse effect on our financial condition and results of operations.
If our nonperforming assets increase, our earnings will be adversely affected.
At December 31, 2016, our nonperforming assets, which consist of non-performing loans and other real estate owned, were approximately $291,000, or 0.03% of total assets. Our nonperforming assets adversely affect our net income in various ways:
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we record interest income only on the cash basis or cost-recovery method for non-accrual loans and we do not record interest income for other real estate owned;
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we must provide for probable loan losses through a current period charge to the provision for loan losses;
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noninterest expense increases when we write down the value of properties in our other real estate owned portfolio to reflect changing market values;
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there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees; and
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the resolution of nonperforming assets requires the active involvement of management, which can distract them from more profitable activity.
If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.
Our small size makes it more difficult for us to compete.
Our small asset size makes it more difficult to compete with other financial institutions which are generally larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. In addition, our smaller customer base makes it difficult to generate meaningful noninterest income. Finally, as a smaller institution, we are disproportionately affected by the ongoing increased costs of compliance with banking and other regulations.
Strong competition within our market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that may benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.
The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued industry consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services than we can as well as better pricing for those products and services.
We have more limited resources than many of our competitors to invest in technology.
Our industry is experiencing rapid technological change. These new technologies are often designed to provide better customer service as well as cost reduction. Our future success depends, in part, on our ability to address the needs of our customers by using technology to enhance customer convenience while operating more efficiently. Many of our competitors have substantially greater resources to invest in technological improvements. If we are unable to effectively implement new technological developments on pace with our competitors, our competitive position may be harmed.
The occurrence of fraudulent activity, breaches of our information security or cybersecurity-related incidents could have a material adverse effect on our business, financial condition and results of operations.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our clients’ information, misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation.
Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and malware or other cyberattacks. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity-related incidents in recent periods. Moreover, recently, several large corporations, including retail companies, have suffered major data breaches, where in some cases, exposing sensitive financial and other personal information of their clients and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with the Bank.
Information pertaining to us and our clients is maintained, and transactions are executed, on our networks and systems, those of our clients and certain of our third party partners, such as our online banking or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain our clients’ confidence. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, the inability to anticipate, or failure to adequately mitigate, breaches of security could result in: losses to us or our clients; our loss of business and/or clients; damage to our reputation; the incurrence of additional expenses; disruption to our business, and/or our ability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or exposure to civil litigation or possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial condition and results of operations could be adversely affected.
We may be adversely affected by disruptions to our network and computer systems or to those of our service providers as a result of denial-of-service or other cyber-attacks.
We may experience disruptions or failures in our computer systems and network infrastructure or in those of our service providers as a result of coordinated denial-of-service or other cyber-attacks in the future. Due to the increasing sophistication of such attacks, we may not be able to prevent denial-of-service or other cyber-attacks that could compromise our normal business operations, compromise the normal business operations of our clients, or result in the unauthorized use of clients’ confidential and proprietary information. The occurrence of any failure, interruption or security breach of network and computer systems resulting from denial-of-service or other cyber-attacks could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could adversely affect our business, results of operations and financial condition.
We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.
We depend upon the services of the members of our senior management team to implement our business strategy and execute our operations. Accordingly, our success and future growth depend upon the continued success of our management team, in particular our Chief Executive Officer, Andrew Samuel, and other key employees. Members of our senior management team and lending personnel who have expertise and key business relationships in our markets could be difficult to replace. The loss of these persons or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
We are a community bank and our reputation is one of the most valuable assets of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and operating results may be materially adversely affected.
We face reputation and business risks due to our interactions with business partners, service providers and other third parties.
We rely on third parties in a variety of ways, including to provide key components of our business infrastructure or to further our business objectives. These third parties may provide services to us and our clients or serve as partners in business activities. We rely on these third parties to fulfill our obligations, to accurately inform us of relevant information and to conduct our activities professionally and in a manner that reflects positively on us. Any failure of these business partners, service providers or other third parties to meet their commitments to us or to perform in accordance with our expectations could result in operational issues, increased expenditures, and damage to our reputation or loss of clients, which could harm our business and operations, financial performance, strategic growth and reputation.
In recent years regulators have increased scrutiny of financial institutions’ relationships with third parties. If our activities, policies, procedures and systems are deemed deficient or inappropriate, or those of third parties with whom we have a relationship are deemed deficient or inappropriate, we could be subject to liability, including fines and regulatory actions, which may include restrictions on our permitted activities.
In particular, we receive core systems processing, essential web hosting and other Internet systems, deposit processing, wire processing and other processing services from third-party service providers. If these third-party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, results of operations and financial condition could be adversely affected, perhaps materially. Even if we were able to replace them, it may be at higher cost to us, which could adversely affect our business, results of operations and financial condition.
Our business and results of operations could be adversely affected by hurricanes or other adverse weather events, terrorist activities or by international hostilities.
Neither the occurrence nor the potential impact of natural disasters, terrorist activities and international hostilities can be predicted. Our market area is susceptible to natural disasters, such as hurricanes, tropical storms, other severe weather events and related flooding and wind damage. These natural disasters could negatively impact regional economic conditions, disrupt operations, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us, damage our banking facilities and offices, result in a decline in local loan demand and our loan originations and negatively impact our growth strategy. We could also suffer adverse consequences to the extent that natural disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in a particular region. We cannot predict whether or to what extent future natural disasters, terrorist activities or international hostilities will affect our operations or the economies in our current or future market areas. Our business or results of operations may be adversely affected by these and other negative effects of natural disasters.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to us. We require sufficient liquidity to meet our expected financial obligations, as well as unexpected requirements stemming from client activity and market changes.
The Company manages liquidity using several liquidity key risk indicators measured at the Bank. The key risk indicators include, but are not limited to, the loan to deposit ratio, the ratio of non-reciprocal brokered deposits to total deposits, and the ratio of Federal Home Loan Bank borrowings to total assets. As of December 31, 2016, these ratios were 94.8%, 7.0%, and 9.9%, respectively. As of December 31, 2016, Sunshine Bank had outstanding advances with the Federal Home Loan Bank of Atlanta (“FHLB”) of $65.0 million. The FHLB advance is secured by a blanket lien on loans with a remaining credit availability of approximately $52.8 million, collateralized by real estate loans.
An inability to maintain or raise funds through these sources could have a substantial negative effect on us. Access to funding sources in amounts adequate to finance our activities, or on attractive terms, could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include an increase in costs of capital in financial capital markets, a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, or a decrease in depositor or investor confidence. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe volatility or disruption of financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Any failure to manage our liquidity effectively could have a material adverse effect on its financial condition.
We are subject to environmental liability risk associated with our lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations of enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our future business, results of operations, financial condition and the value of our common stock.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, payment processors, and other institutional clients, which may result in payment or delivery obligations to us or to our clients due to products arranged by us. Many of these transactions expose us to credit, market and execution risk as a result of possible counterparty or client default. In addition, the Bank is exposed to market risk when the collateral it holds cannot be realized or is liquidated at prices not sufficient to recover the full amount of the secured obligation. There is no assurance that any such losses would not materially and adversely affect our business, results of operations and financial condition.
Our internal control systems could fail to detect certain events.
We are subject to operational risks, including, but not limited to, data processing system failures and errors and client or employee fraud. We maintain a system of internal controls designed to mitigate against such occurrences and maintain insurance coverage for such risks. However, should such an event occur that is not prevented or detected by our internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse effect on our business, results of operations and financial condition.
The Financial Accounting Standards Board has issued and may continue to issue accounting standards that adversely impact the earnings and capital of the Company.
The bodies responsible for establishing or interpreting accounting standards, including the Financial Accounting Standards Board and the Securities and Exchange Commission, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. These changes may be hard to predict and may materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.
On June 16, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Current Expected Credit Loss Standard (“CECL”) that will impact the methodology used to estimate the allowance for loan and lease losses. Although the new standard does not become effective for several years, the impact of CECL may not be estimable for some time. Furthermore, the FASB may issue additional accounting standards that may adversely impact the Company.
Risks Related to Our Regulatory Environment
Financial reform legislation will result in new laws and regulations that are expected to increase our cost of operations.
The Dodd-Frank Act has changed the bank regulatory framework. For example, it has created an independent Consumer Financial Protection Bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, established more stringent capital standards for banks and bank holding companies and gives the Federal Reserve Board exclusive authority to regulate savings and loan holding companies. The legislation has also resulted in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Sunshine Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. Banks and savings institutions with $10.0 billion or less in assets will continue to be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings and loan associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
The full impact of the Dodd-Frank Act on our business will not be known until all of the regulations implementing the statute are adopted and implemented. As a result, we cannot at this time predict the extent to which the Dodd-Frank Act will impact our business, operations or financial condition. For example, the Consumer Financial Protection Bureau has the power to adopt new regulations to protect consumers and exercise control over existing consumer protection regulations adopted by federal banking regulators. The Volcker Rule, a component of the Dodd-Frank Act, generally prohibits the Company from engaging in proprietary trading and having ownership interests in, or acting as sponsors to, certain hedge funds and private equity funds, activities that, in prior regulatory regimes, might have generated higher returns on capital. However, compliance with these new laws and regulations may require us to make changes to our business and operations and will likely result in additional costs and divert management’s time from other business activities, any of which may adversely impact our results of operations, liquidity or financial condition.
We are subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.
In 2013, the OCC adopted final rules to update the regulatory risk-based capital rules applicable to the Bank. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule applies to all depository institutions, and top-tier bank holding companies and savings and loan holding companies with total consolidated assets of $1 billion or more.
The final rule includes minimum risk-based capital and leverage ratios, which became effective for the Bank on January 1, 2015, and refined the definition of what constitutes “capital” for purposes of calculating these ratios. The minimum capital requirements under the “Basel III” regulatory capital reforms are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. For 2017, the capital conservation buffer is 1.25% of risk-weighted assets. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such actions.
The application of more stringent capital requirements for the Bank could, among other things, result in lower returns on equity, require raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III has impacted the competitive investment and deposit gathering strategies of larger financial institutions that may have a collateral impact on our Bank.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision, and examination by the Federal Reserve Board, the OCC and, to a lesser extent, the Federal Deposit Insurance Corporation. Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets by a financial institution, and the adequacy of a financial institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation could have a material impact on us and our operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. Laws, rules and regulations may be adopted in the future that could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.
Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we become subject as a result of such examinations could materially and adversely affect us.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations. Accommodating such examinations may require management to reallocate resources, which would otherwise be used in the day-to-day operation of other aspects of our business. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, allowance for loan losses, asset quality, earnings prospects, management, liquidity or other aspects of our operations had become unsatisfactory, or that the Company or its management was in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, we could be materially and adversely affected.
Florida financial institutions face a higher risk of noncompliance and enforcement actions with respect to the Bank Secrecy Act and other anti-money laundering statutes and regulations.
Like all U.S. financial institutions, we are subject to monitoring requirements under federal law, including anti-money laundering, or AML, and Bank Secrecy Act, or BSA, matters. Since September 11, 2001, banking regulators have intensified their focus on AML and BSA compliance requirements, particularly the AML provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. There is also increased scrutiny of compliance with the rules enforced by the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC. Moreover, we operate in areas designated as High Intensity Financial Crime Areas and High Intensity Drug Trafficking Areas. Since 2004, federal banking regulators and examiners have been extremely aggressive in their supervision and examination of financial institutions located in the State of Florida with respect to institutions’ BSA and AML compliance. Consequently, a number of formal enforcement actions have been issued against Florida financial institutions. Although we have adopted policies, procedures and controls to comply with the BSA and other AML statutes and regulations, this aggressive supervision and examination and increased likelihood of enforcement actions may increase our operating costs, which could negatively affect our results of operation and reputation.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, Consumer Financial Protection Bureau and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the Community Reinvestment Act, or CRA, and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief and imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
Risks Related to our Common Stock
Certain provisions of our articles of incorporation and bylaws, and state and federal law could prevent or impede the ability of stockholders to obtain representation on our board of directors, and may discourage hostile acquisitions of control of the Company, which could negatively affect our stock value.
Certain provisions in our articles of incorporation and bylaws may discourage attempts to acquire the Company, pursue a proxy contest for control of the Company, assume control of the Company by a holder of a large block of common stock, or remove the Company’s management, all of which stockholders might think are in their best interests. These provisions include:
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restrictive requirements regarding eligibility for service on the board of directors, age requirements, a prohibition on service by persons who are or have been the subject of certain legal or regulatory proceedings, a prohibition on service by persons who are party to agreements that may affect their voting discretion, and a prohibition on service by nominees or representatives (as defined in applicable Federal Reserve Board regulations) of another person who would not be eligible for service or of an entity the partners or controlling persons of which would not be eligible for service;
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the election of directors to staggered terms of three years;
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provisions requiring advance notice of stockholder proposals and director nominations;
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a limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common stock;
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a prohibition on cumulative voting;
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a requirement that the calling of a special meeting by stockholders requires the request of a majority of all votes entitled to be cast at the special meeting;
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a requirement that directors may only be removed for cause and by a majority of the votes entitled to be cast;
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the ability of the board of directors to fill vacancies on the board;
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the board of directors’ ability to cause the Company to issue preferred stock;
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the ability of the board of directors to amend and repeal the bylaws and the required stockholder vote to amend or repeal the bylaws;
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the ability of the board of directors to consider a variety of factors in evaluating offers to purchase or acquire the Company; and
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the requirement of the vote of 80% of the votes entitled to be cast in order to amend certain provisions of the articles of incorporation, including those set forth above.
Federal regulations prohibit for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of the Bank or the Holding Company without prior regulatory approval. In addition, the business corporation law of Maryland, the state where the Company is incorporated, provides for certain restrictions on acquisition of the Company.
A significant percentage of our common stock is held or controlled by our directors and executive officers and benefit plans.
Our board of directors and executive officers collectively own approximately 9.3% and our employee stock ownership plan (“ESOP”) owns approximately 4.2% of the outstanding shares of our common stock. The ownership by executive officers, directors and our ESOP could result in actions being taken that are not in accordance with other stockholders’ wishes, and could prevent any action requiring a supermajority vote under our articles of incorporation and bylaws (including the amendment of certain protective provisions of our articles and bylaws discussed immediately above).
We have the ability to incur debt and pledge our assets, including our stock in the Bank, to secure that debt.
We have the ability to incur debt and pledge our assets to secure that debt. Absent special and unusual circumstances, a holder of indebtedness for borrowed money has rights that are superior to those of holders of common stock. For example, interest must be paid to the lender before dividends can be paid to the stockholders, and loans must be paid off before any assets can be distributed to stockholders if we were to liquidate. Furthermore, we would have to make principal and interest payments on our indebtedness, which could reduce our profitability or result in net losses on a consolidated basis even if the Bank were profitable.
We are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as modified by the JOBS Act. We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes Oxley Act, including the additional level of review of our internal control over financial reporting that may occur when outside auditors attest to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important.
We could remain an emerging growth company for up to five years from the completion of the conversion, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. Taking advantage of any of these exemptions may adversely affect the value and trading price of our common stock.
We have elected to delay the adoption of new and revised accounting pronouncements, which means that our financial statements may not be comparable to those of other public companies.
As an “emerging growth company,” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2.
ITEM 2. Properties
The following table sets forth information regarding our offices. We believe that our current facilities are adequate to meet our present and foreseeable needs. We routinely evaluate all of our properties for ongoing use and for opportunities to upgrade facilities and locations and may do so in the future.
ITEM 3.
ITEM 3. Legal Proceedings
We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. At December 31, 2016, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.
ITEM 4.
ITEM 4. Mine Safety Disclosure.
None.
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Sunshine Bancorp’s common stock is traded on the NASDAQ Capital Market under the symbol “SBCP.” The approximate number of holders of record of Sunshine Bancorp’s common stock as of March 14, 2017 was 587. Certain shares of Sunshine Bancorp are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. The following table shows the reported high and low sale price of the common stock during the periods indicated.
Sunshine Bancorp has not declared dividends on its common stock. Dividend payments by Sunshine Bancorp are dependent in part on dividends it receives from Sunshine Bank because Sunshine Bancorp has no source of income other than dividends from Sunshine Bank, earnings from the investment of proceeds from the sales of shares of common stock or subordinated notes retained by Sunshine Bancorp and interest payments with respect to Sunshine Bancorp’s loan to the Employee Stock Ownership Plan. For more information on restrictions on dividend payments, please see “Item 1 Business-Federal Banking Regulation-Capital Distributions and Holding Company Regulation-Dividends.”
Sunshine Bancorp has not repurchased any shares in 2014, 2015, or 2016.
The following table provides information about options outstanding, pursuant to the Sunshine Bancorp, Inc. 2015 Equity Incentive Plan approved by stockholders on both August 26, 2015, and as amended on September 28, 2016.
ITEM 6.
ITEM 6. Selected Financial Data
The following tables set forth selected historical financial and other data of Sunshine Bancorp (and prior to July 14, 2014, Sunshine Bank) at or for the years ended December 31, 2016, 2015, 2014, 2013 and 2012. The information at and for the years ended December 31, 2016 and 2015 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto beginning at page of Exhibit 13 to this Annual Report on Form 10-K. The information at and for the years ended December 31, 2014, 2013, and 2012 is derived in part from audited financial statements that are not included in this Annual Report on Form 10-K.
(*) Represents the year Sunshine Bancorp, Inc. was incorporated.
(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.
(2) Represents net interest income as a percentage of average interest-earning assets.
(3) Represents noninterest expense divided by the sum of net interest income and noninterest income.
(4) Represents Sunshine Bank capital ratios.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited consolidated financial statements, which appear beginning on page of Exhibit 13 to this Annual Report on Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding Sunshine Bancorp provided in this Annual Report on Form 10-K.
Overview
Sunshine Bank provides financial services to individuals and businesses from our main office in Plant City, Florida and seventeen additional full-service banking offices located throughout Central Florida. Our primary market area includes Brevard, Hillsborough, Manatee, Orange, Osceola, Pasco, Polk, and Seminole counties, Florida. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, in commercial real estate loans, commercial and industrial business loans, one-to-four family residential real estate loans, multifamily real estate, land and construction and to a lesser extent consumer loans. We also invest in securities, which consist primarily of U.S government sponsored enterprise mortgage-backed securities, U.S. government agency securities and securities and obligations of U.S. government-sponsored enterprises and the Federal Home Loan Bank. We offer a variety of deposit accounts to consumers and small businesses, including savings accounts, interest bearing and noninterest bearing checking accounts, money market accounts and certificate of deposit accounts.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of fees and service charges on deposit accounts, gains on sales of assets (securities and other real estate owned), mortgage broker fees, income from bank-owned life insurance, and other income. Noninterest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data and item processing, professional fees, advertising and promotion, stationery and supplies, deposit and general insurance, merger and acquisition related expenses, and other expenses.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
The Bank is a financial services institution focused on positively impacting the consumers, businesses, and non-profits throughout central Florida by creating financial success for our customers. Our competitive advantage is our ability to attract and retain employees, who are passionate about providing uncompromising service with a sense of warmth, integrity, friendliness, and company spirit. The Company has grown from approximately $230 million in total assets as of December 31, 2014 to approximately $931 million in total assets as of December 31, 2016. The branch network includes 18 branches spanning the east and west coasts of Florida. The Company’s strategic plan calls for continued growth from organic loan and deposit generation, de novo branches, and acquisitions that meet our strategic criteria. Our experienced management teams has a proven track record of maximizing franchise creation, growth, and value. Our bankers have a long standing knowledge of the local marketplace and deep relationships in the communities that we serve. We believe that these combined elements are critical to creating a dominate Florida banking franchise. Our core business strategies are discussed below.
Increase our focus on commercial lending. We have adjusted our business strategy to focus on increasing our originations of commercial loans. On October 14, 2014, the Board of Directors appointed Andrew S. Samuel, President and Chief Executive Officer. The hiring of Mr. Samuel, who was formerly President and Chief Executive Officer of Susquehanna Bank, was part of the Board’s long-term strategy to continue to transform Sunshine Bank from a traditional thrift lender into a full service community bank with an increased focus on commercial lending. Following Mr. Samuel’s appointment, the Board of Directors reconstituted the senior management of Sunshine Bank by adding bankers who have many years of experience in commercial lending. In addition, our acquisitions of Community Southern Bank and Florida Bank of Commerce, two Florida commercial banks, significantly increased the amount of commercial real estate and commercial business loans on our balance sheet. We focus our commercial lending on small businesses located in our market area, and we target owner-occupied businesses such as professional service providers and local farmers.
Continue to attract low-cost deposits. We offer noninterest bearing, interest bearing, savings and money market accounts, which generally are lower cost sources of funds than time deposits. These deposits are generally less sensitive to withdrawals when interest rates fluctuate, and provide us the opportunity to generate deposit-related fee income. At December 31, 2016, approximately
78.3% of our deposits were core deposits. We intend to increase these low cost deposits by implementing marketing and promotional programs, adding competitive commercial banking products and fee generating services, and broadening banking relationships with lending customers.
Increase our noninterest income by selling originated one-to-four family residential real estate loans through its correspondent mortgage banking department. While the Bank may portfolio select new residential real estate loans and may acquire residential mortgages to manage loan concentration risk and achieve other strategic objectives, our core strategy is to originate and sell one-to-four residential real estate loans, on a correspondent basis, to generate noninterest income. We originate and fund these loans for sale on a best efforts basis. Our lending staff takes the loan applications and prepares the material for submission to a mortgage banking company. These loans are underwritten in accordance with secondary market standards and pursuant to guidelines established by the purchasing mortgage banking company.
Expand our banking franchise as opportunities arise through acquisitions of other financial institutions. On June 30, 2015, the Company acquired 100% of the outstanding common shares of Community Southern Holdings, Inc. for $30.3 million in cash. Community Southern Holdings, Inc. was merged into the Company and Community Southern Bank was merged into the Bank. The Company acquired $250.4 million in assets and assumed $214.4 million in liabilities and stockholders’ equity. The Company acquired these assets and liabilities to expand its market presence to Polk and Orange Counties, Florida and continue the Bank’s transformation into a full service community bank.
On November 13, 2015, the Bank purchased two branch offices from First Federal Bank of Florida. The branch offices are located in Bradenton and Sarasota, Florida. The purchase added $47.0 million in deposits and $7.9 million in loans to the Bank. The Bank also purchased the real estate property and some selected fixed assets associated with the branches. The Company acquired these assets and liabilities to expand its market presence to Manatee and Sarasota Counties, Florida. These acquisitions increased our branch network to ten full service offices.
In February 2016, the Bank opened two new full service offices in downtown Tampa and downtown Orlando, bringing the total number of branches to twelve. We anticipate these two offices will allow the Bank to capitalize upon the additional opportunities associated with being located in the center of two of Florida’s largest metropolitan markets.
On October 31, 2016, the Company completed its acquisition of FBC Bancorp, Inc., a Florida corporation and Florida Bank of Commerce, a Florida state bank and wholly-owned subsidiary of FBC, where FBC Bancorp, Inc. merged with and into the Company, and Florida Bank of Commerce merged with and into Sunshine Bank. At the effective time of the Merger, each share of common stock of FBC Bancorp, Inc. was converted into 0.88x share of common stock of the Company. The Company acquired $335.7 million in assets and assumed $295.0 million in liabilities. The Company acquired these assets and liabilities to expand its market presence in the Greater Orlando MSA and to further its strategy of capitalizing on opportunities along the demographically attractive I-4 corridor. With the acquisition the Company enters Brevard, Osceola, and Seminole Counties, Florida.
We intend to continue to evaluate expansion opportunities though the acquisition of community banks generally between $200 million and $500 million in assets and /or branch acquisitions, located in Central Florida along interstates I-4 and I-75 contiguous to our current market areas.
Recent Developments
Issuance of Subordinated Debt. On March 30, 2016, the Company accepted subscriptions for and sold, at 100% of their principal amount, an aggregate of $11.0 million of subordinated notes (the “Notes”), on a private placement basis, to two accredited investors. The investors included a corporation owned and controlled by George Parmer, who is a director of the Company, which purchased $7.0 million in principal amount of the Notes. The Notes bear interest at a fixed interest rate of 5.0% per year. The Notes have a term of five years, and have a maturity date of April 1, 2021. The Notes are redeemable at the option of the Company, in whole or in part, at any time, without penalty or premium, subject to any required regulatory approvals. The Company contributed the proceeds from the Notes to the Bank as equity capital to support the Bank’s continued growth, including ongoing lending activities.
Appointment of Bank Co-Presidents. Coincident with the acquisition of FBC Bancorp, Inc., the Company appointed Janak Amin and Dana Kilborne as co-presidents of Sunshine Bank. The co-presidents will provide leadership to separate geographic regions of Sunshine Bank.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represents our critical accounting policies:
Business combinations. The Company accounts for acquisitions using the acquisition method of accounting. The acquisition method of accounting requires the Company to estimate the fair value of the tangible assets and identifiable assets acquired, liabilities and equity assumed. The estimated fair values are based on available information and current economic conditions at the date of acquisition. Fair value may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair value estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities.
Allowance for loan losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged to operations. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.
Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.
The analysis has two components - specific and general allowances. The specific allowance is for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge is recorded for the difference. The general allowance, which is for loans reviewed collectively, is determined by losses recognized by portfolio segment. We also analyze historical loss experience for the past sixteen quarters, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes historical loss percentages and qualitative factors that are applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that are reviewed collectively. These qualitative factors include the existence and effect of any concentrations of credit and changes in the level of such concentrations, changes in national, regional and local economic conditions that affect the collectability of the loan portfolio, changes in levels or trends in charge-offs and recoveries, changes in the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss, changes in the size and composition of the loan portfolio and terms of loans, changes in lending policies and procedures, risk selection and underwriting standards, changes in the experience, ability and depth of lending management and other relevant staff, quality of loan review and Board of Directors oversight and the effect of other external factors, trends or uncertainties that could affect management’s estimate of probable losses, such as competition and industry conditions. The qualitative component is critical in determining the allowance for loan losses as certain trends may indicate the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Actual loan losses may be significantly more than the allowances we have established, which could result in a material negative effect on our financial results.
Income Taxes. There are two components of income taxes: current and deferred. Current income taxes reflect taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. Sunshine Bancorp determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income taxes result from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not that the tax position will be realized or sustained upon examination including resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. As of December 31, 2016 management is not aware of any uncertain tax positions that would have a material effect on our financial statements.
Sunshine Bancorp recognizes interest and penalties on income taxes as a component of income taxes.
Comparison of Financial Condition at December 31, 2016 and December 31, 2015
Total Assets. Total assets increased $424.2 million, or 83.6%, to $931.4 million at December 31, 2016 from $507.3 million at December 31, 2015. The increase was primarily the result of the merger with FBC Bancorp, Inc. The Company completed the FBC Merger on October 31, 2016 adding approximately $335.7 million in total assets consisting of $76.9 million in cash and securities available for sale, $236.4 million in total loans, and $22.1 million in all other assets. Excluding balances acquired in the FBC Merger, loans outstanding increased $121.1 million or 37.1%.
Cash and Cash Equivalents. Total cash and cash equivalents decreased by $9.1 million, or 15.3%, to $50.3 million at December 31, 2016 from $59.3 million at December 31, 2015. The decrease was primarily the net result of cash outflows of loan originations and securities purchases, partially offset by cash inflows from increased borrowings, and increased deposits.
Investment Securities. Investment securities increased $43.7 million, or 66.3%, to $109.7 million at December 31, 2016 from $65.9 million at December 31, 2015. The increase was primarily due to approximately $93 million in purchases and approximately $16 million in acquired securities, partially offset by approximately $64.0 million in sales, maturities, and repayments of securities. Securities sales during 2016 resulted in gains of $208,000. The sales were initiated as part of a balance sheet management and cash flow strategy. The expected average life of the investment portfolio as of December 31, 2016 was 4.6 years, assuming no changes in the current interest rate environment. The expected life increased from 2.7 at December 31, 2015 principally as a result of increased variable rate mortgage back securities purchased during 2016.
Loans Held for Sale. Loans held for sale decreased $347,000 or 43.9% to $443,000 as of December 31, 2016, from $790,000 at December 31, 2015. The balance in loans held for sale as of December 31, 2016 represented construction loans that will be sold through correspondent relationships upon modification to permanent loans.
Net Loans. Our primary interest earning asset and source of income is our loan portfolio. Net loans increased $357.5 million, or 109.6%, to $683.8 million at December 31, 2016 from $326.3 million at December 31, 2015. The majority of the increase was primarily due to the FBC Merger which resulted in a net loan increase of $236.4 million. The acquired loan portfolio consisted of $177.0 million in commercial real estate loans, $32.5 million in commercial loans, $15.7 million in one-to-four family residential loans and $11.2 million in other loans. The Bank also purchased $52.0 million of one-to-four family residential mortgages as part of a strategy to further diversify loan concentrations and satisfy the requirements of the Qualified Thrift Lender test. The Bank also experienced strong organic growth in originated loans of $69.1 million. The growth occurred mainly in commercial loans and commercial real estate loans.
Premises and equipment, net. Premises and equipment increased $8.3 million, or 47.2%, to $25.9 million at December 31, 2016 from $17.6 million at December 31, 2015. The increase was mostly the result of $9.3 million in buildings and equipment acquired from the FBC merger. During 2016 the Bank executed a sale-leaseback of one of its branch offices and recognized a gain of $563,000.
Deposits. Deposits increased $330.8 million, or 82.9%, to $729.9 million at December 31, 2016 from $399.1 million at December 31, 2015. The increase was primarily due to the FBC Merger, which resulted in an increase in deposits of $286.6 million. The assumed deposits were comprised of core deposits (consisting of noninterest-bearing, NOW, money market and savings accounts) of $276.0 million and noncore deposits (consisting of time deposits) of $10.6 million. During 2016 the Bank expanded its use of non-reciprocal brokered deposits by $58.9 million. The Bank continued its efforts to attract new customers and retain relationships by enhancing its infrastructure, its online and mobile banking products, and its deposit products and services.
Borrowings. Borrowings increased to $71.9 million at December 31, 2016 as a result of a $37.5 million increase in Federal Home Loan Bank of Atlanta (“FHLB”) advances and an increase of $5.4 million in customer repurchase agreement accounts, $5.0 million of which were assumed in the FBC Merger. The FHLB advances are secured by a blanket asset lien on residential and commercial real estate loans. As of December 31, 2016, the Bank had total unused borrowing capacity of $52.8 million at the FHLB. The other borrowings are secured by securities with a market value of $9.9 million at December 31, 2016.
Subordinated notes. Subordinated notes increased $11.0 million. There were no notes outstanding as of December 31, 2015. During 2016 the Company sold, at 100% of their principal amount, an aggregate of $11.0 million, on a private placement basis, to two accredited investors. The investors included a corporation owned and controlled by George Parmer, who is a director of the Company, which purchased $7.0 million in principal amount of the Notes. The Notes bear interest at a fixed interest rate of 5.0% per year. The Notes have a term of five years, and have a maturity date of April 1, 2021. The Notes are redeemable at the option of the Company, in whole or in part, at any time, without penalty or premium, subject to any required regulatory approvals. The Company contributed the proceeds from the Notes to the Bank as equity capital to support the Bank’s continued growth, including ongoing lending activities.
Stockholder’s Equity. Stockholders’ equity increased $40.7 million, or 57.0%, to $112.1 million at December 31, 2016. The increase included a $758,000 increase from stock based compensation awards, a $193,000 increase from the release of ESOP shares, and $40.7 million assumed in the FBC merger. These increases were partially offset by the $43,000 net loss for the year ended December 31, 2016 and $929,000 decrease in accumulated other comprehensive income, from increases in unrealized losses on securities.
Comparison of Operating Results for the Years Ended December 31, 2016 and December 31, 2015
General. Net loss to common stockholders for the year ended December 31, 2016 was $43,000 compared to a net loss of $2.2 million for the year ended December 31, 2015. The $2.2 million decrease in net loss was primarily due to increases in revenue resulting from the Bank’s increased size and growth in higher yielding assets. This improvement was the result of an increase in net interest income of $7.8 million, an increase in noninterest income of $1.6 million; partially offset by an increase in noninterest expense of $4.3 million. The increase in noninterest expense was mostly comprised of increases in FBC Merger related expenses, salaries and benefits expense, occupancy expense, and other increases related to the larger size of the Company and its increased footprint.
Interest Income. Interest income increased $9.1 million, or 76.7%, to $20.9 million for the year ended December 31, 2016 primarily as a result of an $8.7 million increase in interest income on loans. The increase in interest income resulted primarily from a $202.9 million increase in the average balance of our interest-earnings assets to $517.1 million and a 28 basis points increase in the average yield on our interest-earning assets to 4.05% for the year ended December 31, 2016 compared to the prior year. The increase in the average yield was attributable to the higher yielding investment portfolio and the improved mix of the larger loan portfolio. The increase in average interest earnings assets was attributable to our loan organic growth and acquired loans.
Interest income on loans increased $8.7 million, or 79.2%, to $19.6 million for the year ended December 31, 2016 due mainly to the increase in the average balance of loans. Average loans for the year ended December 31, 2016 increased by $189.3 million to $408.6 million from $219.3 million for the year ended December 31, 2015, primarily as a result of the Company’s acquisitions and organic lending efforts. The average yield on loans decreased by 19 basis points to 4.81% for the year ended December 31, 2016 from 5.00% for the year ended December 31, 2015 due to the prolonged low interest rate environment.
Interest income on investment securities increased $340,000, to $1.0 million for the year ended December 31, 2016 as a result of the $13.0 million increase in the average balance of securities. In addition, the average yield on investment securities increased to 1.42% for the year ended December 31, 2016 from 1.16% for the year ended December 31, 2015, as a result of the higher yielding securities purchased during 2016.
Interest Expense. Interest expense increased $1.3 million, or 168.2%, to $2.0 million for the year ended December 31, 2016 from $751,000 for the year ended December 31, 2015. The increase was due to the increase in average deposits and the increase in borrowings in 2016. The average balance of interest-bearing deposits increased by $131.5 million during the year ended December 31, 2016 to $345.1 million, due mainly to the increased deposits assumed in the Mergers and expanded use of non-reciprocal brokered deposits. The average cost of interest-bearing deposits increased by 10 basis points to 0.41% for the year December 31, 2016 from 0.31% for the year ended December 31, 2015. The increased cost of deposits was mostly due to slightly higher rates on time deposits resulting from the increase in short term interest rates at the end of 2016. The average cost of total deposits increased by 6 basis points to 0.31% for the year December 31, 2016 from 0.25% for the year ended December 31, 2015. While the cost of total deposits increased during 2016 as compared to 2015, the percentage of noninterest bearing deposits to total deposits increased to 29.7% from 22.3% between December 31, 2015 and December 31, 2016. Borrowed funds expense increased $507,000 to $588,000 for the year ended December 31, 2016. The average balance of borrowings increased $14.9 million for the year ended December 31, 2016. The average rate on borrowings was 0.56% for the year ended December 31, 2016, an increase of 2 basis points from the prior period.
Net Interest Income. The effect of higher average balances on loans and an increased yield on interest earning assets has increased the Bank’s net interest income for the year ended December 31, 2016 compared to the prior year. Net interest income increased $7.8 million, or 70.5%, to $18.9 million for the year ended December 31, 2016 compared to the prior year. The increase was
primarily due to the increase in our net interest rate spread to 3.52% for the year ended December 31, 2016 from 3.44% for the year ended December 31, 2015. Our net interest margin increased to 3.66% for the year ended December 31, 2016 from 3.53% for the year ended December 31, 2015.
Provision for Loan Losses. We recorded $350,000 in provision for loan losses for the year ended December 31, 2016 compared to no provision for the year ended December 31, 2015. Net recoveries for the year ended December 31, 2016 were $413,000 compared to net recoveries of $113,000 for the year ended December 31, 2015. The increase in provision expense was necessitated by the organic loan growth in the loan portfolio.
Management considers the allowance for loan losses at December 31, 2016 to be adequate to cover losses inherent in the loan portfolio based on an assessment of the qualitative and quantitative factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.
Accounting for business combinations under the GAAP acquisition method prohibits “carrying over” valuation allowances, such as the allowance for loan losses. Uncertainties relating to the expected future cash flows was reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Bank will establish loan loss allowances for the acquired loans in periods after the FBC Merger, but only for losses incurred on these loans due to credit deterioration after the FBC Merger.
Noninterest Income. Noninterest income increased $1.6 million, or 95.6%, to $3.2 million for the year ended December 31, 2016 from $1.6 million for the year ended December 31, 2015. The increase was primarily related to the increases in deposit related fee income of $606,000, a $563,000 gain recognized on the sale-leaseback of a branch office, and a $71,000 increase in income from bank-owned life insurance. The Bank invested an additional $10.0 million in bank-owned life insurance in December of 2016.
Noninterest Expenses. Noninterest expenses increased $4.3 million, or 25.1%, to $21.6 million for the year ended December 31, 2016 compared to 2015. The increase in noninterest expenses was comprised of increases in merger related expenses of $1.4 million, salaries and benefits expense of $1.1 million, occupancy expense of $901,000, data processing of $633,000 and other expenses which increased proportionally related to the increased size the Company. The salaries and employee benefits expense increase year over year was attributable to the increased number of employees resulting from our acquisitions. The increased occupancy expense reflected the growth in the number of branch offices. Data processing increased as the number of customer accounts increased as a result of our acquisitions. The Company had $3.0 million in merger related expenses associated with the FBC Merger during 2016 compared with $1.3 million in merger related expenses relating to Community Southern Holdings, Inc. and $171,000 in acquisition related expense associated with the First Federal branch acquisitions during 2015.
Income Taxes (benefit). Income tax expense was $177,000 for the year ended December 31, 2016 on pretax income of $134,000. The income tax expense was negatively impacted by the non-deductibility of certain FBC Merger related expenses. Income tax expense increased $2.5 million due to the $4.7 million increase in pretax income.
Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. No tax-equivalent yield adjustments have been made, as we had no tax-free interest-earning assets during the years. All average balances are monthly average balances based upon amortized costs. Nonaccrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and net proceeds from borrowings and capital offerings. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At December 31, 2016, we had the capacity to borrow approximately $117.8 million from the Federal Home Loan Bank of Atlanta. At December 31, 2016, we had outstanding advances of $65.0 million at December 31, 2016 compared to $27.5 million at December 31, 2015, the increase was due mostly to the expanded use of borrowings to fund loan growth, generally at more advantageous rates than time deposits. We also have lines of credit at three financial institutions that would allow us to borrow up to $25.5 million at December 31, 2016. No credit lines were drawn upon at December 31, 2016.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-earning demand deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used by operating activities for the year ended December 31, 2016 was $2.6 million. Net cash used by investing activities was $99.6 million for the year ended December 31, 2016, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing and repayment of securities. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, FHLB advances, proceeds of the subordinated notes issued was $93.2 million for the year ended December 31, 2016. Net cash provided by operating activities for year ended December 31, 2015 was $639,000. Net cash used in investing activities for the year ended December 31, 2015, was $29.2 million primarily disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, borrowings, and net proceeds from the stock offerings, was $9.1 million for the year ended December 31, 2015.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
At December 31, 2016, the Bank exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 12.10% of adjusted total assets, which is above the required level of 5.00%, common equity tier 1 capital to risk-weighted assets of 12.93%, which is above the required level of 6.50%, tier 1 capital to risk-weighted assets of 12.93%, which is above the required level of 8.00%, and total risk-based capital of 13.39% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Bank was categorized as well-capitalized at December 31, 2016. Management is not aware of any conditions or events since the most recent notification that would change our category.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2016, we had unfunded loan commitments of $97.1 million including stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from December 31, 2016 totaled $144.2 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits are not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.
Impact of Inflation and Changing Price
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement 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. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risks
The types of market risk exposures generally faced by us include:
•
equity market price risk;
•
liquidity risk; and
•
interest rate risk.
Due to the nature of our operations, foreign currency and commodity price risk are not significant to us.
Equity Market Price Risk
Equity market price risk is the risk related to market fluctuations of equity prices in the securities markets. Other than investments in the stock of correspondent banks, we do not hold equity securities in our investment portfolio.
Liquidity Risk
Company Liquidity. Our primary sources of liquidity at the parent holding company level are dividends from Sunshine Bank, investment income, proceeds from the sale of investments, and net proceeds from borrowings and capital offerings. During 2016 and 2015, our primary uses of liquidity at the parent holding company level were the payment of dividends on preferred shares, the redemption of $5.7 million of preferred stock issued to the U.S. Treasury as part of its Small Business Lending Fund, the purchase of Community Southern Holdings, Inc., infusing equity capital into Sunshine Bank, and operating expenses of the parent holding company.
During 2015, Sunshine Bank paid a special dividend to the parent holding company of $18.8 million in connection with the acquisition of Community Southern Holdings, Inc.
During 2015, the Company sold 875,000 common shares to certain investors in a private placement at a price of $13.92 per share. The shares were issued to support the general corporate purposes of the Company.
During 2016, the Company accepted subscriptions for and sold, at 100% of their principal amount, an aggregate of $11.0 million of subordinated notes on a private placement basis, to two accredited investors. The subordinated notes bear interest at a fixed interest rate of 5.0% per year and have a maturity date of April 1, 2021. The subordinated notes are redeemable at the option of the Company, in whole or in part, at any time, without penalty or premium, subject to any required regulatory approvals.
During 2016, the Company contributed $19 million to Sunshine Bank as equity capital to support the Bank’s continued growth, including ongoing lending activities.
Management is not aware of any events that are reasonably likely to have a material adverse effect on the parent holding company’s liquidity.
Bank Liquidity. Management believes the sources of liquidity at the Bank are sufficient to support our banking operations.
Sunshine Bank’s primary sources of liquidity are deposit accounts, repurchase agreements, borrowings, and the sale, maturity, or call of investment securities. Sunshine Bank’s primary use of liquidity is the origination of loans; extension of credit; purchase of investment securities; and management of working capital. Deposits represented 89.8% and 93.2% of total Bank funding at December 31, 2016 and 2015, respectively. Brokered deposits at December 31, 2016 were $89.8 million, or 12.3% of total deposits. Brokered deposits at December 31, 2015 were $19.4 million, or 4.9% of total deposits. As of December 31, 2016 and December 31, 2015, reciprocal brokered deposits were $19.8 million and $8.3 million, respectively. As of December 31, 2016 and December 31, 2015, nonreciprocal brokered deposits represented 9.6% and 2.8%, respectively, of total deposits.
As of December 31, 2016 and 2015, Sunshine Bank had approximately $117.8 million and $88.3 million, respectively, of lendable collateral value available under a collateralized line of credit with the Federal Home Loan Bank of Atlanta (“FHLB”). As of December 31, 2016 and December 31, 2015, we had outstanding advances of $65.0 million and $27.5 million, respectively. Accordingly, as of December 31, 2016 and December 31, 2015, Sunshine Bank had available borrowing capacity from the FHLB of $52.8 million and $60.8 million, respectively. The Bank may access additional funding at the FHLB through the pledge of additional collateral. As of December 31, 2016 and 2015, we had federal funds purchased lines of credit at three financial institutions that would allow us to borrow up to $25.5 million. No credit lines were drawn upon at December 31, 2016 and 2015.
Sunshine Bank had unrestricted investment securities with a market value of $77.6 million and $43.8 million for the years ended December 31, 2016 and 2015, respectively.
The Board has designated a management Asset and Liability Committee (“ALCO”) to develop strategies, policies, and procedures to identify, measure, monitor, and control liquidity risk pursuant to its liquidity management policy. The liquidity management policy is commensurate with the complexity, risk profile, and scope of operations of Sunshine Bank and reflects its risk appetite, tolerances, key risk indicators, and reporting requirements that are deemed appropriate in order to operate in a safe and sound manner. The liquidity management policy includes Sunshine Bank’s contingency funding plan that assesses liquidity needs that may arise from certain stress events that are bank-specific, as well as the result of external factors.
Interest Rate Risk
We define interest rate risk as the risk to earnings and equity arising from the behavior of interest rates. These behaviors include increases and decreases in interest rates as well as continuation of the current interest rate environment. The Asset Liability & Interest Rate Risk Management Policy (the “ALM Policy”) provides a comprehensive management process for identifying, measuring, monitoring, and managing interest rate risk. The ALM Policy is commensurate with the complexity, risk profile, and scope of operations and reflects the risk appetite, interest rate risk tolerances, and key risk indicators of the Company. The Board has designated the ALCO, through the treasury group, to implement the ALM Policy and to develop strategies to manage interest rate risk. The analysis of interest rate risk is performed at the Bank level. Accordingly, the model results provided herein reflect Bank-level data.
Our interest rate risk principally consists of reprice, option, basis, and yield curve risk. Reprice risk results from differences in the maturity or repricing characteristics of asset and liability portfolios. Option risk arises from embedded options in the investment and loan portfolios such as investment securities calls and loan prepay options. Option risk also exists since deposit customers may withdraw funds at their discretion in response to general market conditions, competitive alternatives to existing accounts or other factors. The exercise of such options may result in higher costs or lower revenue for the Company. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in narrowing spreads on interest-earning assets and interest-bearing liabilities. Basis risk also exists in administered rate liabilities, such as interest-bearing checking accounts, savings accounts and money market accounts where the price sensitivity of such products may vary relative to general markets rates. Yield curve risk refers to the adverse consequences of nonparallel shifts in the yield curves of various market indices that impact our assets and liabilities.
We use simulation analysis as a primary method to assess earnings at risk and equity at risk due to assumed changes in interest rates. Management uses the results of its various simulation analyses in combination with other data and observations to formulate strategies designed to maintain interest rate risk within risk tolerances.
Earnings at risk is defined as the percentage change in net interest income (excluding provision for loan losses and income tax expense or benefit) due to assumed changes in interest rates. Earnings at risk is generally used to assess interest rate risk over relatively short time horizons. We compute earnings at risk on a quarterly basis over one and two-year time horizons.
Equity at risk is defined as the percentage change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. The discounted present value of all cash flows represents our economic value of equity. Equity at risk is generally considered a measure of the long-term interest rate exposures of the balance sheet at a point in time. We compute equity at risk on a quarterly basis.
We conduct scenario analyses across a range of instantaneous, parallel, and sustained interest rate shocks and measure the percent of change in earnings and equity relative to a base case scenario assuming industry-generated forward rate curves. The range of interest rate shocks includes upward and downward movements of rates through 300 basis points in 100 basis point increments, subject to market conditions that may render certain rate shocks impracticable. For example, during the current period of ultra-low interest rates, downward interest rate shocks have been suspended. The ALM Policy defines this series of scenario analysis as Core Scenarios. The size and composition of the balance sheet is held constant for the Core Scenarios. Measures of earnings at risk computed over a one-year time horizon and equity at risk produced from the Core Scenarios are defined as key risk indicators and are compared to risk tolerances established by the ALCO and the Board.
We will conduct scenario analysis across a range of other changes in interest rates including ramped rate changes, non-parallel rate changes, and changes in key interest rates that do not move in tandem for upward and downward interest rate shocks. The specific interest rate scenarios that are analyzed are developed by the treasury group in consultation with the ALCO. We also conduct scenario analyses assuming changes in the size and composition of the balance sheet to support business planning, budgeting, and forecasting.
Simulation analysis involves the use of several assumptions including, but not limited to, the timing of cash flows such as investment security calls, loan prepayment speeds, deposit attrition rates, the interest rate sensitivity of loans and deposits relative to general market rates, and the behavior of interest rates and spreads. Furthermore, equity at risk simulation uses assumptions regarding discount rates that value cash flows. Simulation analysis is highly dependent on model assumptions that may vary from actual outcomes. For example, higher levels of interest rate sensitivity of deposits to upward movements in interest rates may adversely impact net interest income. Additionally, slower prepayment speeds of loans may adversely impact the economic value of equity in a rising interest rate environment. Key simulation assumptions are subject to stress testing to assess the impact of assumption changes on earnings at risk and equity at risk. We will also use back-testing to assess the effectiveness of simulation analysis in identifying, measuring, monitoring, and managing interest rate risk. From time to time, key model assumptions may be modified to improve the effectiveness of simulation analysis. Management modified certain key assumptions at December 31, 2015. The key assumptions were held constant during 2016.
The table below summarizes the results of the Core Scenarios for earnings at risk and equity at risk assuming instantaneous, parallel, and sustained upward interest rate shocks of 100, 200, and 300 basis points, which we deem most relevant in the current economic environment, at December 31, 2016 and December 31, 2015. The results for earnings at risk are measured over a one-year time horizon as compared to the base case scenario. Earnings at risk and equity at risk may not produce highly correlated results due to the fundamental nature of the two simulation techniques. The calculation of earnings at risk is focused on the interest rate characteristics of assets and liabilities that may alter earnings within a one-year time horizon. In contrast, equity at risk measures cash flows over time horizons that capture the interest rate characteristics of assets and liabilities that may change within one year and beyond one year.
The Company uses a variety of strategies to manage interest rate risk including, but not limited to, modifications to the size and composition of various assets and liabilities and modifications to the pricing and structure of the loan and deposit products.
The change in the interest rate risk profile of the bank between December 31, 2015 and December 31, 2016 reflect the impact of the acquisition of loans and deposits from Florida Bank of Commerce, an increase in the holdings of floating rate securities in the investment portfolio, and an increase in the holdings of adjustable rate residential mortgages in the loan portfolio.
As of December 31, 2016 and December 31, 2015, the Company had no derivative financial instruments.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements are presented in Exhibit 13 of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A. Controls and Procedures
(a) Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice-President Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2016. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
(b) Management’s Report on Internal Control over Financial Reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflects the transactions and disposition of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2016. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to provisions of the Dodd-Frank Act that permit the Company to provide only management’s report in this annual report.
(c) Internal Control Over Financial Reporting. There has been no change in the Company’s internal control over financial reporting during the Company’s fourth quarter of the fiscal year ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information
None.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance
The “Proposal I-Election of Directors” section of the Company’s definitive proxy statement for the Company’s 2017 Annual Meeting of Stockholders (the “2017 Proxy Statement”) is incorporated herein by reference.
ITEM 11.
ITEM 11. Executive Compensation
The “Proposal I-Election of Directors” section of the Company’s 2017 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The “Proposal I-Election of Directors” section of the Company’s 2017 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
The “Transactions with Certain Related Persons” section of the Company’s 2017 Proxy Statement is incorporated herein by reference.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
The “Proposal II - Ratification of Appointment of Independent Registered Public Accounting Firm” Section of the Company’s 2017 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. Exhibits and Consolidated Financial Statement Schedules
(a)(1)
Consolidated Financial Statements
The documents filed as a part of this Form 10-K are:
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(a)(3) Exhibits
(1) Filed as Exhibit 3.1 to the Registration Statement on Form S-3 of Sunshine Bancorp, Inc. (file no. 333-208610) originally filed with the Securities and Exchange Commission on December 18, 2015, as amended, and incorporated herein by reference.
(2) Filed as Exhibit 3.1 to the Current Report on Form 8-K of Sunshine Bancorp, Inc. (file no. 001-36539) originally filed with the Securities and Exchange Commission on February 25, 2016 and incorporated herein by reference.
(3) Filed as Exhibit 4.1 to the Registration Statement on Form S-3 of Sunshine Bancorp, Inc. (file no. 333-208610) originally filed with the Securities and Exchange Commission on December 18, 2015, as amended, and incorporated herein by reference.
(4) Filed as Exhibit 10.1 to the Current Report on Form 8-K of Sunshine Bancorp, Inc. (file no. 001-36539) originally filed with the Securities and Exchange Commission on October 10, 2014 and incorporated herein by reference.
(5) Filed as Exhibit 10.1 to the Current Report on Form 8-K of Sunshine Bancorp, Inc. (file no. 001-36539) originally filed with the Securities and Exchange Commission on February 3, 2015 and incorporated herein by reference.
(6) Filed as Exhibit 10.2 to the Current Report on Form 8-K of Sunshine Bancorp, Inc. (file no. 001-36539) originally filed with the Securities and Exchange Commission on February 3, 2015 and incorporated herein by reference.
(7) Filed as Exhibit 10.1 to the Current Report on Form 8-K of Sunshine Bancorp, Inc. (file no. 001-36539) originally filed with the Securities and Exchange Commission on January 28, 2016 and incorporated herein by reference.
(8) Filed as Exhibit 10.1 to the Current Report on Form 8-K of Sunshine Bancorp, Inc. (file no. 001- 36539) originally filed with the Securities and Exchange Commission on December 2, 2015 and incorporated herein by reference.
(9) Filed as Appendix A to the 2015 Proxy Statement DEF 14A of Sunshine Bancorp, Inc. (file no. 001- 36539) originally filed with the Securities and Exchange Commission on July 15, 2015.
(10) Filed on Form S-4 of Sunshine Bancorp, Inc. (file no. 333-212209) originally filed with the Securities and Exchange Commission on June 23, 2016 and incorporated herein by reference.
(11) Filed as Exhibit 10.2 to the Registration Statement on Form S-8 of Sunshine Bancorp, Inc. (file no. 333-207372) originally filed with the Securities and Exchange Commission on October 9, 2015 and incorporated herein by reference.
(12) Filed as Exhibit 10.3 to the Registration Statement on Form S-8 of Sunshine Bancorp, Inc. (file no. 333-207372) originally filed with the Securities and Exchange Commission on October 9, 2015 and incorporated herein by reference.
(13) Filed as Exhibit 10.4 to the Registration Statement on Form S-8 of Sunshine Bancorp, Inc. (file no. 333-207372) originally filed with the Securities and Exchange Commission on October 9, 2015 and incorporated herein by reference.
(14) Filed as Exhibit 10.1 to the Current Report on Form 8-K of Sunshine Bancorp, Inc. (file no. 001-36539) originally filed with the Securities and Exchange Commission on October 2, 2015 and incorporated herein by reference.
(15) Filed as Exhibit 10.15 to the Registration Statement on Form S-4 of Sunshine Bancorp, Inc. (file no. 333-212209) originally filed with the Securities and Exchange Commission on June 23, 2016 and incorporated herein by reference.
(16) Filed as Exhibit B to Exhibit 2.1 to the Current Report on Form 8-K of Sunshine Bancorp, Inc. (file no. 001-36539) originally filed with the Securities and Exchange Commission on May 10, 2016 and incorporated herein by reference.
(17) Filed as Exhibit 21 to the Registration Statement on Form S-1 of Sunshine Bancorp, Inc. (file no. 333-191125) originally filed with the Securities and Exchange Commission on September 12, 2013, amended, and incorporated herein by reference.
(18) Filed as Exhibit 23.3 and Exhibit 23.4 on Form S-4 of Sunshine Bancorp, Inc. (file no. 333-212209) originally filed with the Securities and Exchange Commission on June 23, 2016 and incorporated herein by reference.
ITEM 16. Form 10-K Summary.
None.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.