The Future Of The Small Bank Industry With Sunshine Bancorp CEO Andrew Samuel

Deep value investor Tim Melvin had the opportunity to speak with Andrew Samuel, CEO Of Sunshine Bancorp Inc SBCP. Below is a full transcript and audio of their conversation.

Tim Melvin: Okay, we're off today with Andrew Samuel of Sunshine Bancorp Inc SBCP, Plant City, Florida. Thank you for spending some time with us today, I really appreciate it.

Andrew Samuel: Sure.

T: Okay. Now, you're back, your thrift conversion in 2014, you completed that process, and you're in the Hillsboro, Pasco County area of Florida. Can you tell us about the economic conditions in that area right now?

AS: Sure, sure. I am very excited about the marketplace that we're in. Our bank is headquartered in Plant City, Florida, which is right on the I-4 quarter between Tampa and Orlando. And when you look at this quarter between Tampa and Orlando, as well as the corridor between Tampa and Sarasota on Route 75, there's an awful lot of growth projected here over the next few years. In fact, there are some statistics that say there are close to 800 to 900 people moving to Florida every day. Half of them are coming to these quarters that I just mentioned. This quarter is very attractive for a number of reasons. Obviously, you have the beach and the sun on one side, but then, you've got the bay in Tampa, a lot of things to do in Tampa Bay, and then you've got Orlando on the other side. The economy here is very diverse in terms of when you look at the warehousing, logistical opportunities, the healthcare facilities, the healthcare opportunities, the colleges and universities, venture capital opportunities, and not to mention the tourism activity, too; it's a very diverse economy here, and it's poised for some major growth over the next few years. Our focus at Sunshine Bancorp is really on those two corridors between Sarasota and Tampa and Tampa and Orlando. We're looking to build a major, dominant Florida franchise here, and we think we've found the right location and geographic area to really build that franchise.

T: Yes, and reading over your most recent 10K, you guys have some very... I don't wanna call them aggressive, that's the wrong word, but some very strong growth plans, and you're really making a move into commercial real estate. How is that progressing so far?

AS: It's progressing very well. Our plan is- our heritage, for 60 years we've been here as a thrift, which was primarily driven around consumer and residential lending- as we look to the future, we believe that the next 60 years of our franchise is really focused on being more commercial bank like. So we're putting on more commercial and industrial loan assets on the books, we're putting on commercial real estate assets as well as focusing on business banking and business banking opportunities in the small business banking arena. So, the transformation is well ahead of schedule. We started this transformation actually in October of last year, so we're about 10 months into it, and we're very pleased that in February 2015, we announced the acquisition of CSB holdings, which not only doubled the size of the company, but actually accelerated our transformation into a more commercial bank-like balance sheet.

T: Are you guys targeting any specific industries or types of loans as you go in the commercial space? Or are you just going after what you can get?

AS: Well, our focus is really, when you look at our loan portfolio, we would like it to basically, as we grow this portfolio, we're looking for about 30% of our loan assets to be in commercial and industrial loan opportunities, 30% in the commercial real estate arena, 20% in residential, and 20% in consumer. So, that's the breakdown we're looking for, and we're well on our way to achieving that.

Listen below to the full audio of this interview!

T: Are you doing much with agricultural lending or multi-family or any of the other hot sectors here in Florida?

AS: Yeah, the multi-family is included in that commercial real estate portfolio, and the farm loans are included in C & I, commercial and industrial.

T: Okay, I know these are very big areas in the Orlando to Tampa corridor.

AS: Yes, that's right.

T: You also bought a couple branches in the suburbs, in Bradenton and Sarasota, recently.

AS: That's right. Our focus is threefold. Number one, we're very focused on organic growth. So, we're always looking to add one customer at a time, feet on the street, one customer at a time, we're aggressively doing that and organically growing. We also are interested in complementing that organic growth with strategic branch acquisitions, like the one, Sarasota Bradenton, as well as whole bank acquisitions like the CSB acquisition. We were drawn to these two branches for a number of reasons. Sarasota Bradenton is on our core three year plan in terms of a growth market. Secondly, it's very, very low cost deposits, very sticky deposits that we were able to acquire. So, we're pleased that we're able to go into a market immediately with two branches, a pool of core deposits, and a market that is a very attractive market. And, we believe that that's the kind of deals we're looking for.

T: I also noticed in the 10K that you guys have done something pretty interesting with your single-family mortgage loans. You're actually basically sending those out to mortgage banks for funding and just taking a commission, aren't you?

AS: Yes we are. We initiated that policy late last year, and right now, we are very active in the residential lending area, but we originate to sell in the secondary market, and that's our primary focus. The only things that we keep on our books are five year adjustable rate mortgages. But other than that, all fixed rate products are sold in a secondary market, and we're very pleased with the returns on them, because, obviously, the fee income is pretty attractive in that business.

T: That's just a great move, because everybody I've talked to in the single family space right now is just saying, "Look, it's crowded, it's competitive, and it's nowhere near as profitable as it used to be." So, I absolutely love this idea. Now, in the first quarter earnings report, you refer to the fourth quarter of 2013 as what you call a "cleanup and transition quarter." And really, there was a dramatic reduction in that quarter in non-performing assets. Can you tell us what happened there?

AS: Yes. A couple of things. We worked very aggressively with some customers and were able to come to resolution of some credit. We did sell a small portfolio of problem loans that we sold in the fourth quarter. So, it was a combination of that, plus the growth in our portfolio in the fourth quarter, all contributed to those percentages improving.

T: Okay, very good. So now, your non-performing assets ratios are extremely low, according to your last report. And it looks like your past-due and non-performing loans are remarkably low. So, it doesn't look like the non-performing assets will change much any time soon.

AS: No, no. We brought on board a new Chief Risk Officer/Chief Credit Officer, and she's done a remarkable job. We also brought on board a new Credit Administration Officer. And the two of them have really brought the discipline that we needed and are doing a terrific job with their teams, in not only the overseeing credit policy, but the overall risk profile of the company. We're watching concentrations very closely, we're looking the kind of businesses we're in. And, so, they really have done a terrific job administering the whole long portfolio.

T: Very good. Shifting gears a little bit, every banker that I talk to these days is worried about, of course, regulatory costs, since the credit crisis and the passing of Dodd-Frank and a host of other regulations, the cost is becoming quite onerous for some of these banks. How are you guys dealing with this very difficult regulatory environment?

AS: There's no doubt about it that the costs are there and the burden is there in terms of what we need to do in terms of BSA risk management, compliance, etc. One of the things we've done is, and this is our philosophy, we've made some significant investments in technology and people related to those functions. And it is imperative that we know the company. We've made some investments that give us a long runway in terms of growth. We could easily build this company to twice this size because of the investments we've made in those areas. We've always believed that we wanna make those investments beforehand and then grow the company, versus growing the company and then trying to fill the holes. So, I'm very comfortable that we've got the right people in a lot of those areas. Again, they all come under the reporting lines of our Chief Risk Officer, and she's done a great job putting that team together.

T: Okay, fantastic. Now, another cost that I'm starting to hear a lot about, particularly among the non-giant-type banks, let's say, the too-big-to-fail type guys, is technology costs, to keep up with a more mobile, more technology-oriented consumer. How are you guys dealing with that? 'Cause those costs can be quite extensive.

AS: Right. The nice thing for a small bank like us is, those costs have been coming down in the sense of, it's acceptable to a small company like us. So, what we've done is actually invested in mobile technology. If you look at our products here, we can pretty much offer 95% of what any other bank is offering. Those investments have been made in the last 10 months. We do believe that bricks and mortar is important, but not at the same scale that it was in the past. We believe that there are markets where you just need to have a presence in terms of physical building, but that most customers will just try to do what everybody else is, which is encourage technological products.

T: Okay. I also noticed that everyone on your board of directors owns some shares of stock, as a total officers and directors own about 5%, and your AESOP has about 8% as of the end of last year, so I guess it's probably a little higher than that right now. Do you feel like this gives everybody at the bank a bit of a skin in the game attitude, a little more focus to detail?

AS: Absolutely. We, as a board, we talk about it every month. And as officers of the company, we talk about it at our officers meeting all the time, about the importance of being engaged because of the significant insider ownership. And they understand that if you're looking, out of every dollar of that profit, 14 cents goes back to the employees and directors, because they own 14% of it, they understand that. We talk about that a lot. And I do believe that gives us an edge, because our interests are very much aligned with that of our shareholders.

T: Okay. I know you guys have been looking- you've made some acquisitions, you're not averse to making some more acquisitions down the road, and indeed this merger and acquisitions, everybody seems to take this as really going to continue in the bank spaces as everybody continues to deal with regulatory problems and growth issues. Do you think the M & A wave continues, going forward?

AS: Absolutely. Absolutely. Particularly in Florida, there are roughly 170 banks left in Florida. A bulk of them are small community banks. And with the regulatory costs, the compliance costs, people are going to have to partner up and be able to move ahead. And the only way I see that happening is really for people to partner up. So, I do believe there'll be continued consolidation going on in the marketplace. It has to, because scale is the only way to really deal with these costs that are out that.

T: You've been in banking since 1984, been CEO of several different banks. Looking ahead, how do you see the future of the industry and Sunshine Bancorp developing over the next decade or so?

AS: Very good question, because I have seen a lot of changes in the last 31 years, and I imagine there'll be a lot more. But, I'll tell you, I believe that- you know, when I look over the next five, 10, 15 years, I believe that there will always be a need for community banks. And I believe that, as we look forward, the model is gonna change a little bit in terms of how that landscape looks. I think we will always have the five or six megabanks, and I think there'll be fewer players in between. But then, when you come to five billion and under, I still believe there'll be a number of banks under five billion that will be serving the markets of local communities and operating as a local community bank in their individual markets. So, when I look at the next few years, I see us being one of those players that fits into that community banking model.