UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

 

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from                      to                     

Commission file number: 001-36539

 

 

SUNSHINE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland		30-0831760
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

102 West Baker Street, Plant City, Florida 33563

(Address of principal executive offices; Zip Code)

(813) 752-6193

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

State the number of shares outstanding of each issuer’s classes of common equity, as of the latest practicable date:

At November 13, 2014, there were 4,232,000 issued and outstanding shares of the issuer’s common stock.

 

 

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

September 30, 2014 Form 10-Q

Index

 

				Page Number
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013			2
		Condensed Consolidated Statements of Operations for the Three- and Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)			3
		Condensed Consolidated Statements of Stockholders’ Equity for the Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)			4
		Condensed Consolidated Statements of Cash Flows For the Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)			5
		Notes to Condensed Consolidated Financial Statements (Unaudited)			7-21
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22-32
Item 3.		Quantitative and Qualitative Disclosure About Market Risk			33
Item 4.		Controls and Procedures			33
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			34
Item 1A.		Risk Factors			34
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3.		Defaults Upon Senior Securities			34
Item 4.		Mine Safety Disclosures			34
Item 5.		Other Information			34
Item 6.		Exhibits			34
SIGNATURES					35

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands, except per share amounts)

 

		At September 30, 2014				At December 31, 2013
		(Unaudited)
Assets
Cash and due from banks		$	8,125				2,391
Interest-bearing deposits with banks			5,952				7,545
Federal funds sold			1,068				1,118
Cash and cash equivalents			15,145				11,054
Time deposits with banks			6,860				9,528
Securities held to maturity (fair value of $75,781 and $48,187)			76,160				48,436
Loans, net of allowance for loan losses of $1,796 and $1,718			110,936				111,263
Premises and equipment, net			5,909				6,128
Federal Home Loan Bank stock, at cost			180				237
Cash surrender value of bank-owned life insurance			4,179				4,089
Accrued interest receivable			627				581
Other real estate owned			1,098				1,422
Other assets			1,758				1,701
Total assets		$	222,852				194,439
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing accounts			26,349				29,123
NOW accounts			29,357				30,129
Money-market deposit accounts			35,701				35,713
Savings accounts			26,318				25,724
Time deposits			37,964				44,230
Total deposits			155,689				164,919
Official checks			683				392
Advances by borrowers for taxes and insurance			291				141
Other liabilities			2,485				2,435
Total liabilities			159,148				167,887
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 authorized, none issued and outstanding			—				—
Common stock, $0.01 par value, 50,000,000 shares authorized, 4,232,000 shares issued and outstanding at September 30, 2014			42				—
Additional paid in capital			40,743				—
Retained income			26,305				26,552
Unearned Employee Stock Ownership Plan shares			(3,386	)			—
Total stockholders’ equity			63,704				26,552
Total liabilities and Stockholders’ Equity		$	222,852				194,439

See accompanying Notes to Condensed Consolidated Financial Statements

 

2

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Interest income:
Loans Securities		$	1,337 231				1,415 114				4,047 455				4,199 307
Other			33				30				97				90
Total interest income			1,601				1,559				4,599				4,596
Interest expense-deposit accounts			71				92				230				288
Net interest income			1,530				1,467				4,369				4,308
Provision for loan losses			20				—				660				—
Net interest income after provision for loan losses			1,510				1,467				3,709				4,308
Noninterest income:
Fees and service charges on deposit accounts			162				169				496				485
Fees and charges on loans			12				24				51				59
Gain on sale of other real estate owned			—				—				27				3
Income from bank-owned life insurance			30				30				90				92
Other			44				3				101				50
Total noninterest income			248				226				765				689
Noninterest expenses:
Salaries and employee benefits			879				850				2,591				2,589
Occupancy and equipment			252				254				739				743
Data and item processing services			111				110				346				345
Professional fees			125				56				271				180
Other real estate owned			13				8				39				44
Advertising and promotion			7				15				39				54
Stationery and supplies			19				16				65				57
Deposit insurance and general insurance			72				63				196				187
Other			242				199				671				597
Total noninterest expenses			1,720				1,571				4,957				4,796
Income (loss) before income (benefit) taxes			38				122				(483	)			201
Income (benefit) taxes			(1	)			51				(236	)			88
Net income (loss)		$	39				71				(247	)			113
Basic income (loss) per common share			N/A				N/A				N/A				N/A
Diluted income (loss) per common share			N/A				N/A				N/A				N/A

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

Nine Months Ended September 30, 2014 and 2013

 

		Common Stock								Additional Paid In Capital				Retained Income				Unearned ESOP Shares				Total Stockholder’s Equity
		Shares				Amount
Balance, December 31, 2012			—			$	—				—				26,411				—				26,411
Net income (unaudited)			—				—				—				113				—				113
Balance, September 30, 2013			—			$	—				—				26,524				—				26,524
Balance, December 31, 2013			—				—				—				26,552				—				26,552
Net loss (unaudited)			—				—				—				(247	)			—				(247	)
Proceeds from issuance of common stock, net of offering costs of $1,536 (unaudited)			3,893,440				39				37,360				—				—				37,399
Issuance of common stock for Employee Stock Ownership Plan (unaudited)			338,560				3				3,383				—				(3,386	)			—
Balance, September 30, 2014 (unaudited)			4,232,000			$	42				40,743				26,305				(3,386	)			63,704

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Nine Months Ended September 30,
		2014				2013
Cash flows from operating activities:
Net (loss) income		$	(247	)			113
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation			292				288
Provisions for loan losses			660				—
Amortization of premiums and discounts on securities			191				216
Amortization of deferred loan fees and costs, net			(18	)			(18	)
Income from bank-owned life insurance, net			(90	)			(92	)
Gain on sale of other real estate owned			(27	)			(3	)
Write-down of other real estate owned			—				14
(Increase) decrease in accrued interest receivable			(46	)			66
(Increase) decrease in other assets			(57	)			269
Increase (decrease) in official checks			291				(810	)
Increase in other liabilities			50				385
Net cash provided by operating activities			999				428
Cash flows from investing activities:
Purchase of time deposits with banks			—				(3,675	)
Maturities of time deposit with banks			2,668				1,715
Principal pay-downs of securities held to maturity			358				—
Purchases of securities held to maturity			(30,273	)			(16,012	)
Maturities of securities held to maturity			2,000				10,000
Net (increase) decrease in loans			(315	)			4,429
Proceeds from sale of other real estate owned			351				23
Purchases of premises and equipment, net			(73	)			(313	)
Redemption of Federal Home Loan Bank stock			57				65
Net cash used in investing activities			(25,227	)			(3,768	)
Cash flows from financing activities:
Net decrease in deposits			(9,230	)			(1,835	)
Net increase in advances by borrowers for taxes and insurance			150				136
Net proceeds from stock issuance			37,399				—
Net cash provided by (used in) by financing activities			28,319				(1,699	)
Increase (decrease) in cash and cash equivalents			4,091				(5,039	)
Cash and cash equivalents at beginning of period			11,054				12,301
Cash and cash equivalents at end of period		$	15,145				7,262
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes		$	20				—
Interest		$	230				288
Noncash transaction-Transfer from other real estate owned to loans		$	—				168

See accompanying Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1) Organization and Significant Accounting Policies

Organization. Sunshine Bancorp, Inc., a Maryland corporation (the “Holding Company”), was formed on March 7, 2014 to serve as the savings and loan holding company for Sunshine State Bank (the “Bank”). The Holding Company was formed as part of the Bank’s mutual-to-stock conversion (the “Conversion”). Collectively, the Bank and Holding Company are referred to as the “Company.” The accounting and reporting policies conform to U.S. generally accepted accounting principles (GAAP) and general practices within the banking industry and are described in note 1 to the financial statements in 2013, as updated by the information in this Form 10-Q

On July 14, 2014, the Conversion was completed and the Holding Company became the parent holding company for the Bank. A total of 4,232,000 shares of common stock were sold to depositors and the employee stock ownership plan (“ESOP”) at $10.00 per share through which the Holding Company received gross offering proceeds of approximately $42.3 million. The net proceeds received were $37.4 million after offering costs and the allocation of unearned ESOP shares. The Holding Company owns all the outstanding shares of common stock of the bank.

In connection with the Conversion, the Holding Company implemented an ESOP, to provide eligible employees the opportunity to own the Company’s stock. This plan is a tax-qualified retirement plan for the benefit of all Bank employees. A total of 338,560 shares of the stock issued in the conversion were acquired by the ESOP.

The Bank through its five banking offices provides a variety of retail community banking services to individuals and businesses primarily in Hillsborough and Pasco Counties, Florida. The Bank’s deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation. The financial statements of the Company have been prepared to conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry.

As part of the Conversion, the Holding Company established a liquidation account in an amount equal to retained income of $26.6 million contained in the final prospectus. The liquidation account will be maintained for the benefit of eligible account holders who maintain deposit accounts in the Bank after the conversion.

Principles of Consolidation. The condensed consolidated financial statements include the accounts of the Holding Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements in this report have not been audited except for information derived from our audited 2013 financial statements. Financial information prior to July 14, 2014 is of the Bank only.

In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at September 30, 2014, and the results of operations for the three and nine month periods ended September 30, 2014 and 2013. The results of operations for the three and nine months ended September 30, 2014, are not necessarily indicative of the results to be expected for the full year or any other period.

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Income Per Share. The conversion was complete on July 14, 2014. Income per share will be computed starting on October 1, 2014, as if conversion from a mutual holding company to a capital stock holding company occurred on that date.

Recent Accounting Standards Update. In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective beginning January 1, 2015. Upon adoption, this guidance is not expected to impact the Bank’s financial statements.

In June 2014, FASB issued ASU 2014-11, Transfers and Servicing - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ASU 2014-11 requires, among other things, two accounting changes. First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. The adoption of this guidance is not expected to have any impact on the Company’s consolidated financial statements.

In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires, among other things, that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have any impact on the Company’s consolidated financial statements.

 

(continued)

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Recent Regulatory Developments

Basel III Rules. On July 2, 2013, the Federal Reserve Board (“FRB”) approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. In July 2013, the Office of the Comptroller of the Currency (“OCC”), our primary bank regulator, also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The OCC’s rule is identical in substance to the final rules issued by the FRB.

The phase-in period for the final rules will begin for the Holding Company and the Bank on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. The Bank is currently evaluating the provisions of the final rules and their expected impact on the Bank.

 

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(2) Securities Held to Maturity

Securities have been classified as held to maturity according to management intent. The carrying amount of securities and their fair values are as follows (in thousands):

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
September 30, 2014:
U.S. Treasury securities		$	5,042				11				—				5,053
Federal Home Loan Bank obligations			23,302				18				(131	)			23,189
U.S. Government enterprise and agency obligations			29,794				24				(134	)			29,684
Mortgage-backed securities			18,022				—				(167	)			17,855
Total		$	76,160				53				(432	)			75,781
December 31, 2013:
U.S. Treasury securities			7,125				13				—				7,138
Federal Home Loan Bank obligations			18,313				15				(111	)			18,217
U.S. Government enterprise and agency obligations			22,998				13				(179	)			22,832
Total		$	48,436				41				(290	)			48,187

The scheduled maturities of securities at September 30, 2014 were as follows (in thousands):

 

		Amortized Cost				Fair Value
Due in one year or less		$	5,021				5,032
Due from one year to five years			43,196				43,049
Due from five years to ten years			9,921				9,845
Mortgage-backed securities			18,022				17,855
		$	76,160				75,781

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(2) Securities Held to Maturity, Continued

Securities with unrealized losses at September 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

 

		Less Than Twelve Months								More than Twelve Months
		Gross Unrealized Loss				Fair Value				Gross Unrealized Loss				Fair Value
September 30, 2014:
Federal Home Loan Bank obligations		$	(63	)			5,015				(68	)			6,966
U.S. Government enterprise and agency obligations			(39	)			6,766				(95	)			15,000
Mortgage-backed securities			(167	)			17,855				—				—
Totals		$	(269	)			29,636				(163	)			21,966

 

		Less Than Twelve Months								More than Twelve Months
		Gross Unrealized Loss				Fair Value				Gross Unrealized Loss				Fair Value
December 31, 2013:
Federal Home Loan Bank obligations		$	(111	)			9,948				—				—
U.S. Government enterprise and agency obligations			(136	)			16,977				(43	)			1,965
Totals		$	(247	)			26,925				(43	)			1,965

The unrealized losses on twenty-six investment securities held to maturity at September 30, 2014 were caused by market conditions. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

Securities with a carrying amount of approximately $2.0 million at September 30, 2014 and December 31, 2013 were pledged to the Housing Authority of the City of Plant City, Florida for deposit accounts held at the Company.

 

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(3) Loans

The loan portfolio segments and classes are as follows (in thousands):

 

		September 30,				December 31,
		2014				2013
Real estate mortgage loans:
One-to four-family residential		$	55,858				59,976
Commercial			22,740				23,900
Multi-family			9,329				3,363
Land and construction			7,518				6,514
Total real estate mortgage loans			95,445				93,753
Commercial loans			16,340				17,358
Consumer loans			1,312				2,277
Total loans			113,097				113,388
Deduct:
Deferred loan fees, net			(136	)			(147	)
Allowance for loan losses			(1,796	)			(1,718	)
Undisbursed loan proceeds			(229	)			(260	)
Loans, net		$	110,936				111,263

The Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten in accordance with policies set forth and approved by the Company’s board of directors. The portfolio segments identified by the Company are as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are typically segmented into four classes: one-to four-family residential, commercial, multi-family and land and construction.

One-to four-family residential real estate loans are underwritten based on repayment capacity and source, value of the underlying property, credit history and stability.

Commercial real estate loans are secured by the subject property. Underwriting standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors.

 

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(3) Loans, Continued

Multi-family real estate loans follow the same underwriting criteria as commercial real estate loans. These loans are generally considered to have more credit risk than traditional one-to four-family residential loans because these loans tend to involve larger loan balances and their repayment is typically dependent upon the successful operation and management of the underlying real estate.

Land and construction loans are to finance the construction of owner-occupied and lease properties. These loans are categorized as construction loans during the construction period, later converting to commercial or one-to four-family residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sale information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

Commercial Loans. Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from income. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, the Company takes as collateral a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.

Consumer Loans. Consumer loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. The Company also offers lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed interest rates and may be made on terms of up to five years. Risk is mitigated by the fact that the loans are of smaller individual amounts.

 

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(3) Loans, Continued

An analysis of the change in the allowance for loan losses follows (in thousands):

 

		Real Estate Mortgage Loans				Commercial Loans				Consumer Loans				Unallocated				Total
Three Months Ended September 30, 2014:
Beginning balance		$	1,517				245				9				—				1,771
(Credit) provision for loan losses			(6	)			24				2				—				20
Charge-offs			(14	)			—				(4	)			—				(18	)
Recoveries			3				19				1				—				23
Ending balance		$	1,500				288				8				—				1,796
Three Months Ended September 30, 2013:
Beginning balance		$	1,484				160				12				252				1,908
Provision (credit) for loan losses			141				28				(1	)			(168	)			—
Charge-offs			(212	)			—				—				—				(212	)
Recoveries			23				6				—				—				29
Ending balance		$	1,436				194				11				84				1,725
Nine Months Ended September 30, 2014:
Beginning balance			1,417				208				10				83				1,718
Provision (credit) for loan losses			84				661				(2	)			(83	)			660
Charge-offs			(20	)			(626	)			(9	)			—				(655	)
Recoveries			19				45				9				—				73
Ending balance		$	1,500				288				8				—				1,796
Nine Months Ended September 30, 2013:
Beginning balance			1,520				189				13				554				2,276
Provision (credit) for loan losses			493				(21	)			(2	)			(470	)			—
Charge-offs			(664	)			—				(2	)			—				(666	)
Recoveries			87				26				2				—				115
Ending balance		$	1,436				194				11				84				1,725

 

(continued)

14

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(3) Loans, Continued

 

		Real Estate Mortgage Loans				Commercial Loans				Consumer Loans				Unallocated				Total
At September 30, 2014:
Individually evaluated for impairment:
Recorded investment		$	6,803				785				—				—				7,588
Balance in allowance for loan losses		$	354				9				—				—				363
Collectively evaluated for impairment:
Recorded investment		$	88,642				15,555				1,312				—				105,509
Balance in allowance for loan losses		$	1,146				279				8				—				1,433
At December 31, 2013:
Individually evaluated for impairment:
Recorded investment		$	7,035				703				—				—				7,738
Balance in allowance for loan losses		$	354				—				—				—				354
Collectively evaluated for impairment:
Recorded investment		$	86,718				16,655				2,277				—				105,650
Balance in allowance for loan losses		$	1,063				208				10				83				1,364

The following summarizes the loan credit quality (in thousands):

 

		Real Estate Mortgage Loans
		One-to Four-Family Residential				Commercial				Multi- Family				Land and Construction				Commercial Loans				Consumer Loans				Total
Credit Risk Profile by Internally Assigned Grade:
At September 30, 2014:
Grade:
Pass		$	53,146				19,508				9,199				7,101				15,337				1,312				105,603
Special mention			317				417				—				214				95				—				1,043
Substandard			2,395				2,815				130				203				908				—				6,451
Total		$	55,858				22,740				9,329				7,518				16,340				1,312				113,097
At December 31, 2013:
Grade:
Pass			56,691				20,512				3,193				6,080				15,881				2,277				104,634
Special mention			43				429				—				—				514				—				986
Substandard			3,242				2,959				170				434				963				—				7,768
Total		$	59,976				23,900				3,363				6,514				17,358				2,277				113,388

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

 

(continued)

15

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(3) Loans, Continued

 

The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Further, commercial, multi-family and commercial real estate loans over $25,000 are typically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will determine the appropriate loan grade.

Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of a deterioration in the credit worthiness of the borrower; or (c) the borrower contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged-off. The Company uses the following definitions for risk ratings:

Pass – A Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.

Special Mention – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard – A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. At September 30, 2014 and December 31, 2013, the Company had no loans listed as doubtful in its loan credit quality.

Loss – A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future. At September 30, 2014 and December 31, 2013, the Company had no loans listed as loss in its loan credit quality.

 

(continued)

16

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(3) Loans, Continued

 

Age analysis of past-due loans is as follows (in thousands):

 

		Accruing Loans
		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days Past Due				Total Past Due				Current				Nonaccrual Loans				Total Loans
At September 30, 2014:
Real estate mortgage loans:
One-to four-family residential		$	24				—				—				24				53,719				2,115				55,858
Commercial			—				—				—				—				21,338				1,402				22,740
Multi-family			—				—				—				—				9,199				130				9,329
Land and construction			—				—				—				—				7,331				187				7,518
Commercial loans			368				—				—				368				15,091				881				16,340
Consumer loans			2				—				—				2				1,310				—				1,312
Total		$	394				—				—				394				107,988				4,715				113,097
At December 31, 2013:
Real estate mortgage loans:
One-to four-family residential			333				15				—				348				57,342				2,286				59,976
Commercial			233				—				—				233				23,220				447				23,900
Multi-family			—				—				—				—				3,193				170				3,363
Land and construction			221				—				—				221				6,079				214				6,514
Commercial loans			181				272				—				453				16,202				703				17,358
Consumer loans			51				2				—				53				2,222				2				2,277
Total		$	1,019				289				—				1,308				108,258				3,822				113,388

The following summarizes the amount of impaired loans (in thousands):

 

		With No Related Allowance Recorded								With an Allowance Recorded												Total
		Recorded Investment				Unpaid Principal Balance				Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
At September 30, 2014:
Real estate mortgage loans:
One-to four-family residential		$	1,514				1,778				307				323				19				1,821				2,101				19
Commercial			394				966				4,347				4,347				335				4,741				5,313				335
Multi-family			130				269				—				—				—				130				269				—
Land and construction			111				177				—				—				—				111				177				—
Commercial loans			676				775				109				110				9				785				885				9
		$	2,825				3,965				4,763				4,780				363				7,588				8,745				363
At December 31, 2013:
Real estate mortgage loans:
One-to four-family residential			1,506				1,712				317				327				19				1,823				2,039				19
Commercial			446				983				4,418				4,418				335				4,864				5,401				335
Multi-family			170				294				—				—				—				170				294				—
Land and construction			178				288				—				—				—				178				288				—
Commercial loans			703				781				—				—				—				703				781				—
		$	3,003				4,058				4,735				4,745				354				7,738				8,803				354

 

(continued)

17

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(3) Loans, Continued

 

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):

 

		Three Months Ended September 30,
		2014												2013
		Average Recorded Investment				Interest Income Recognized				Interest Income Received				Average Recorded Investment				Interest Income Recognized				Interest Income Received
Real estate mortgage loans:
One-to-four-family residential		$	1,636				22				32				2,568				60				69
Commercial			4,755				67				80				4,918				70				81
Multi-family			134				—				5				177				—				7
Land and construction			111				—				1				178				—				—
Commercial loans			720				—				16				708				—				3
Total		$	7,356				89				134				8,549				130				160
		Nine Months Ended September 30,
		2014												2013
		Average Recorded Investment				Interest Income Recognized				Interest Income Received				Average Recorded Investment				Interest Income Recognized				Interest Income Received
Real estate mortgage loans:
One-to-four-family residential		$	1,653				31				53				2,367				67				93
Commercial			4,796				222				236				4,939				232				245
Multi-family			147				—				15				250				—				7
Land and construction			112				—				2				164				2				4
Commercial loans			708				—				22				708				—				17
Total		$	7,416				253				328				8,428				301				366

 

(continued)

18

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(3) Loans, Continued

 

Troubled Debt Restructurings (TDRs) entered into during the three and nine months ended September 30, 2014 and 2013 are as follows (dollars in thousands):

 

		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
For the Three Months Ended September 30, 2014:
Commercial loans-
Modified interest rate and amortization			6			$	740				116
For the Three Months Ended September 30, 2013:
Real estate mortgage loans-
One-to four-family residential loans-
Modified interest rate and amortization			1			$	144				144
Commercial loans-
Modified interest rate and amortization			1				105				105
Total			2			$	249				249
For the Nine Months Ended September 30, 2014:
Commercial loans-
Modified interest rate and amortization			6			$	740				116
For the Nine Months Ended September 30, 2013:
Real estate mortgage loans-
One-to four-family residential loans-
Modified interest rate and amortization			1			$	144				144
Commercial loans-
Modified interest rate and amortization			1				105				105
Total			2			$	249				249

The allowance for loan losses on all loans that have been restructured and are considered TDRs is included in the Bank’s specific allowance for loan losses. The specific allowance for loan losses is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDRs that have subsequently defaulted are considered collateral-dependent.

During the three and nine months ended September 30, 2014 and 2013, the Company had no loans restructured as troubled debt restructurings that subsequently defaulted that had been modified in the previous twelve month period.

 

(continued)

19

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(4) Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

 

		At September 30, 2014												At December 31, 2013
		Carrying				Fair								Carrying				Fair
		Amount				Value				Level				Amount				Value				Level
Financial assets:
Cash and cash equivalents		$	15,145				15,145				1				11,504				11,504				1
Time deposits with banks			6,860				6,860				1				9,528				9,528				1
Securities held to maturity			76,160				75,781				2				48,436				48,187				2
Loans, net			110,936				115,335				3				111,263				115,864				3
Federal Home Loan Bank stock			180				180				3				237				237				3
Accrued interest receivable			627				627				3				581				581				3
Financial liabilities:
Deposits			155,689				145,178				3				164,919				155,724				3
Off-balance-sheet financial instruments			—				—								—				—

(5) Fair Value Measurements

Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Those impaired collateral-dependent loans which are measured at fair value on a nonrecurring basis are as follows (in thousands):

 

		Fair Value				Level 1				Level 2				Level 3				Total Losses				Losses Recorded During the Period
At September 30, 2014:
Real estate mortgage loans:
One-to four-family residential		$	532				—				—				532				242				15
Commercial			394				—				—				394				517				—
Multi-family			130				—				—				130				128				—
Land and construction			86				—				—				86				63				2
Commercial			97				—				—				97				74				2
Total		$	1,239				—				—				1,239				1,024				19
At December 31, 2013:
Real estate mortgage loans:
One-to four-family residential			592				—				—				592				198				163
Commercial			446				—				—				446				517				—
Multi-family			170				—				—				170				128				128
Land and construction			151				—				—				151				106				76
Commercial			102				—				—				102				72				—
Total		$	1,461				—				—				1,461				1,021				367

 

(continued)

20

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

(5) Fair Value Measurements, Continued

 

Other real estate owned is recorded at fair value less estimated costs to sell. Other real estate owned which is measured at fair value on a nonrecurring basis is summarized below (in thousands):

 

		At Period End																				Losses
		Total				Level 1				Level 2				Level 3				Total Losses				Recorded During the Period
At September 30, 2014-
Other real estate owned		$	1,098				—				1,098				428				—				—
At December 31, 2013-
Other real estate owned		$	1,422				—				1,422				428				—				—

(6) Employee Stock Ownership Plan

Effective July 14, 2014, the Holding Company established an ESOP which acquired 8% of the total number of shares of common stock sold during the Company’s initial public offering. A total of 338,560 shares were acquired in exchange for a $3,385,600 indirect note payable from the Employee Stock Ownership Plan Trust to the Holding Company. The note bears interest at a variable rate based on Prime and is payable in thirty annual installments. As of September 30, 2014, no shares held by the Employee Stock Ownership Plan Trust have been released.

(7) Regulatory Matters

The Bank is required to maintain certain minimum regulatory capital requirements. The Bank is considered to be well-capitalized. The following is a summary at September 30, 2014 of the regulatory capital requirements and the Bank’s capital on a percentage basis:

 

		Capital Ratio				Requirement
Tier I capital to total assets			19.00	%			5.00	%
Tier I capital to risk-weighted assets			37.26	%			6.00	%
Total capital to risk-weighted assets			38.52	%			10.00	%

 

21

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Item 2. Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto presented elsewhere in this report. For additional information, refer to the financial statements and footnotes for the year ended December 31, 2013 in the Company’s Registration Statement on Form S-1 (Registration Statement 333-194501) as declared effective by the SEC on May 14, 2014. 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Certain factors that could cause actual results to differ materially from expected results include, changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the business of the Company, and changes in the securities markets. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Recent Events

The Holding Company was formed on March 7, 2014 to serve as the savings and loan holding company for the Bank. The Holding Company was formed as part of the Bank’s mutual-to-stock conversion. On July 14, 2014, the Conversion was completed and the Holding Company became the parent holding company for the Bank. A total of 4,232,000 shares of common stock were sold to depositors and the ESOP for $10.00 per share through which the Holding Company received gross offering proceeds of approximately $42.3 million. The net proceeds received were $37.4 million after offering costs and the allocation of unearned ESOP shares. The Holding Company owns all the outstanding shares of common stock of the Bank.

On October 14, 2014, the Company has hired Andrew S. Samuel as the President and Chief Executive Officer and a Director of the Company and Bank. Mr. Samuel will succeed J. Floyd Hall, who has led the Company since 1986 as President and Chief Executive Officer. Mr. Hall will remain on the Board of Directors.

On October 23, 2014, the Company appointed Bruce. R. Carr as Executive Vice President and Chief Lending Officer of the Bank. Mr. Carr will be responsible for leading, managing, and directing the day-to-day operations and expansion of the credit team.

 

22

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Comparison of Financial Condition at September 30, 2014 and December 31, 2013

Total Assets. Total assets increased $28.5 million, or 14.6%, to $222.9 million at September 30, 2014 from $194.4 million at December 31, 2013. The increase in total assets was primarily the result of the net cash received from the recent stock offering in which a portion of the proceeds were used to purchase mortgage back securities and other investment securities held to maturity.

Cash and Cash Equivalents. Total cash and cash equivalents increased by $4.0 million, to $15.1 million at September 30, 2014 from $11.1 million at December 31, 2013. This increase in cash was a result of the Federal Reserve regulation to maintain higher cash reserves due to the increase in deposit funds held for stock subscriptions at June 30, 2014.

Investment Securities. Investment securities classified as held to maturity increased $27.8 million, or 57.2%, to $76.2 million at September 30, 2014 from $48.4 million at December 31, 2013. During the nine months ended September 30, 2014, the Company invested cash received from the stock offering and excess liquidity in $18.0 million of Mortgage-backed securities and $11.8 million in other investment securities to increase the average yield of our interest-earning assets.

Net Loans. Net loans decreased $400,000 to $110.9 million at September 30, 2014 from $111.3 million at December 31, 2013. One- to four-family residential real estate loans decreased $4.1 million, to $55.9 million at September 30, 2014 from $60.0 million at December 31, 2013 as a result of management’s strategic decision to cease holding in portfolio new one- to four-family residential real estate loans. Commercial real estate loans decreased $1.2 million, to $22.7 million at September 30, 2014 from $23.9 million at December 31, 2013 and commercial business loans decreased $1.1 million, to $16.3 million at September 30, 2014 from $17.4 million at December 31, 2013 due to loan repayments and pay-offs exceeding new loan originations. Multi-family mortgage loans increased $5.9 million, to $9.3 million at September 30, 2014 from $3.4 million at December 31, 2013 due to new loan originations of $6.2 million.

Deposits. Deposits decreased $9.2 million, or 5.6%, to $155.7 million at September 30, 2014 from $164.9 million at December 31, 2013. Noninterest-bearing accounts decreased $2.8 million to $26.3 million at September 30, 2014 from $29.1 million at December 31, 2013 due to customers having used their deposits to purchase stock in the conversion and the seasonal outflow of deposits for agricultural customers to being planting crops. Time deposits decreased $6.2 million, to $38.0 million at September 30, 2014 from $44.2 million at December 31, 2013 as a result of management’s decision to not match competitors’ higher rates in order to reduce interest expense.

Stockholder’s Equity. Total stockholders’ equity increased $37.1 million, to $63.7 million at September 30, 2014 as a result of the recent conversion to a stock company. This was partially offset by the establishment of an employee stock ownership plan of $3.4 million. No shares of the ESOP have been allocated as of September 30, 2014. Retained Income decreased by $247,000 due to a net loss for the nine months ended September 30, 2014.

 

23

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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the three and nine months ended September 30, 2014 and 2013. No tax-equivalent yield adjustments have been made, as we had no tax-free interest-earning assets during the periods. 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.

 

		Three Months Ended September 30,
		2014												2013
		Average Balance				Interest and Dividends				Average Yield/ Rate (1)				Average Balance				Interest and Dividends				Average Yield/ Rate (1)
		($ In thousands)
Interest-earning assets:
Loans		$	112,054			$	1,337				4.77	%		$	110,994			$	1,415				5.10	%
Securities			77,699				231				1.19				52,519				114				.87
Other (2)			15,490				33				.85				17,614				30				.68
Total interest-earning assets			205,243				1,601				3.12				181,127				1,559				3.44
Noninterest-earning assets			20,328												14,227
Total assets		$	225,571											$	195,354
Interest-bearing liabilities:
NOW accounts			29,887				3				.04				28,825				4				.06
Money market accounts			35,663				17				.19				40,588				19				.19
Savings accounts			26,208				7				.11				25,750				7				.11
Time deposit			39,281				44				.45				45,000				62				.55
Total interest-bearing deposits			131,039				71				.22				140,163				92				.26
Noninterest-bearing liabilities			43,295												28,691
Total liabilities			174,334												168,854
Total stockholder’s equity			51,237												26,500
Total liabilities and equity		$	225,571											$	195,354
Net interest income						$	1,530											$	1,467
Net interest-rate spread (3)											2.90	%											3.18	%
Net interest-earning assets (4)		$	74,204											$	40,964
Net interest margin (5)											2.98	%											3.24	%
Average interest-earning assets to average interest-bearing liabilities			1.57												1.29

 

(1)	Annualized.

(2)	Includes interest-earning deposits, federal funds, FHLB stock and time deposits with other banks

(3)	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.

(4)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(5)	Net interest margin represents net interest income divided by average total interest-earning assets.

 

24

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		Nine Months Ended September 30,
		2014												2013
		Average Balance				Interest and Dividends				Average Yield/ Rate (1)				Average Balance				Interest and Dividends				Average Yield/ Rate (1)
		($ In thousands)
Interest-earning assets:
Loans		$	111,903				4,047				4.82	%		$	111,508			$	4,199				5.02	%
Securities			60,292				455				1.01				50,210				307				.82
Other (2)			29,384				97				.44				22,124				90				.54
Total interest-earning assets			201,579				4,599				3.04				183,842				4,596				3.33
Noninterest-earning assets			17,950												15,044
Total assets		$	219,529											$	198,886
Interest-bearing liabilities:
NOW accounts			30,669				11				.05				30,280				12				.05
Money market accounts			37,239				52				.19				39,439				55				.19
Savings accounts			26,145				20				.10				25,569				19				.10
Time deposit			41,763				147				.47				46,210				202				.58
Total interest-bearing deposits			135,816				230				.23				141,498				288				.27
Noninterest-bearing liabilities			48,945												30,952
Total liabilities			184,761												172,450
Total stockholder’s equity			34,768												26,436
Total liabilities and equity		$	219,529											$	198,886
Net interest income						$	4,369											$	4,308
Net interest-rate spread (3)											2.81	%											3.06	%
Net interest-earning assets (4)		$	65,763											$	42,344
Net interest margin (5)											2.89	%											3.12	%
Average interest-earning assets to average interest-bearing liabilities			1.48												1.30

 

(1)	Annualized.

(2)	Includes interest-earning deposits, federal funds, FHLB stock and time deposits with other banks.

(3)	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.

(4)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(5)	Net interest margin represents net interest income divided by average total interest-earning assets.

 

 

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Comparison of Operating Results for the Three Months Ended September 30, 2014 and September 30, 2013

General. Net income for the three months ended September 30, 2014 was $39,000, compared to net income of $71,000 for the three months ended September 30, 2013. The decrease in net income was primarily due to an increase in noninterest expense of $149,000, partially offset by an increase in net interest income of $63,000 and an increase in noninterest income of $22,000.

Interest Income. Interest income increased $42,000, or 2.7%, to $1.6 million for the three months ended September 30, 2014 primarily as a result of a $117,000 increase in interest income on securities, partially offset by a $78,000 decrease in interest income on loans.

Interest income on securities increased $117,000, or 102.6%, to $231,000 for the three months ended September 30, 2014 as a result of the increase in the average balance of securities. The increase in interest income on securities was primarily due to the purchase of securities from the cash received in the stock offering. The average balance of securities held to maturity increased $25.2 million to $77.7 million for the three months ended September 30, 2014 from $52.5 million for the three months ended September 30, 2013 due to purchases of U.S. government-sponsored enterprise and agency obligations, Federal Home Loan Bank obligations and Mortgage-backed Securities during 2014. The average yield on investment securities held to maturity increased by 32 basis point to 1.19% for the three months ended September 30, 2014 from 0.87% for the three months ended September 30, 2013 due to the purchase of higher yielding securities.

Interest income on loans decreased $78,000, or 5.5%, to $1.3 million for the three months ended September 30, 2014 as a result of a decrease in the average yield on loans. The average yield on loans decreased by 33 basis points to 4.77% for the three months ended September 30, 2014 from 5.10% for the three months ended September 30, 2013 due to pay-offs of higher-yielding existing loans and new loan originations being added in the current low interest rate environment.

Interest Expense. Interest expense decreased $21,000, or 22.8%, to $71,000 for the three months ended September 30, 2014 from $92,000 for the three months ended September 30, 2013 due to decreases in the average balance of interest-bearing deposits and the average cost of interest-bearing deposits. The average balance of interest-bearing deposits decreased by $9.1 million during the three months ended September 30, 2014 to $131.0 million from $140.1 million for the three months ended September 30, 2013. The decrease was due to customers having used their deposits to purchase stock in the conversion and the seasonal outflow of deposits for agricultural customers. The average cost of deposits decreased by 4 basis points to 0.22% for the three months ended September 30, 2014 from 0.26% for the three months ended September 30, 2013 reflecting the lower interest rate environment.

 

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Net Interest Income. Net interest income increased $63,000, to $1.5 million for the three months ended September 30, 2014. The increase in net interest income was primarily the result of a $33.2 million increase in our net interest earning assets as a result of the growth in our investment securities portfolio. Our net interest-rate spread decreased 28 basis points to 2.90% for the three months ended September 30, 2014 from 3.18% for the three months ended September 30, 2013. Our net interest margin decreased 26 basis points to 2.98% for the three months ended September 30, 2014 from 3.24% for the three months ended September 30, 2013.

Provision for Loan Losses. We recorded a provision for loan losses of $20,000 for the three months ended September 30, 2014 compared to no provision for the three months ended September 30, 2013. The increase in provision was primarily due to the increase in the loan portfolio during the quarter. Nonperforming loans to total loans at September 30, 2014 were 4.17% compared to 3.37% at December 31, 2013. The change was primarily due to a commercial real estate loan of $1.0 million moving to nonaccrual. Net recoveries for the three months ended September 30, 2014 were $5,000 compared to net charge-offs of $183,000 for the three months ended September 30, 2013. The increase in provision for loan losses reflects historical and expected loan losses, as well as the change in the mix of loans.

Management considers the allowance for loan losses at September 30, 2014 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned 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.

Noninterest Income. Noninterest income increased $22,000 to $248,000 for the three months ended September 30, 2014 from $226,000 for the three months ended September 30, 2013. The increase was primarily related to a $41,000 increase in other noninterest income from third party mortgage origination fees partially offset by a $12,000 decrease in fees and charges on loans for the three months ended September 30, 2014.

Noninterest Expense. Noninterest expense increased $149,000, or 9.5%, to $1.7 million for the three months ended September 30, 2014. The increase primarily reflected a $69,000 increase in professional services, a $43,000 increase in other expenses and a $29,000 increase in salaries and employee benefit expenses. The increase in professional fees related to the increase costs of legal and audit reporting for a public traded company. The increase in other expenses was primarily relate to special board meetings held during the period.

Income Taxes (Benefit). For the three months ended September 30, 2014, income tax benefit was $1,000 on a before tax net income of $38,000 compared to the three months ended September 30, 2013, where income taxes were $51,000 on before tax net income of $122,000. Income taxes decreased due to a decrease in income before income taxes.

 

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Comparison of Operating Results for the Nine Months Ended September 30, 2014 and September 30, 2013

General. Net loss for the nine months ended September 30, 2014 was $247,000, compared to net income of $113,000 for the nine months ended September 30, 2013. The decrease in net income was primarily due to an increase in provision for loan losses.

Interest Income. Interest income increased $3,000 to $4.6 million for the nine months ended September 30, 2014 primarily as a result of a $148,000 increase in interest on investment securities, partially offset by a $152,000 decrease in interest income on loans.

Interest income on securities increased $148,000, or 48.2%, to $455,000 for the nine months ended September 30, 2014 as a result of the increase in the average balance and average yield of securities. The average balance of securities held to maturity increased $10.1 million to $60.3 million for the nine months ended September 30, 2014 from $50.2 million for the nine months ended September 30, 2013 due to increased purchases of Mortgage-backed securities, U.S. government-sponsored enterprise and agency obligations and Federal Home Loan Bank obligations during 2014. The average yield on investment securities held to maturity increased by 19 basis points to 1.01% for the nine months ended September 30, 2014 from .82% for the nine months ended September 30, 2013 due to the purchase of higher yielding securities.

Interest income on loans decreased $152,000, or 3.6%, to $4.0 million for the nine months ended September 30, 2014 as a result of a decrease in the average yield on loans. The average yield on loans decreased by 20 basis points to 4.82% for the nine months ended September 30, 2014 from 5.02% for the nine months ended September 30, 2013 due to pay-offs of higher-yielding existing loans and new loan originations being added in the current low interest rate environment.

Interest Expense. Interest expense decreased $58,000, or 20.1%, to $230,000 for the nine months ended September 30, 2014 from $288,000 for the nine months ended September 30, 2013 due to decreases in the average balance of interest-bearing deposits and the average cost of interest-bearing deposits. The average balance of interest-bearing deposits decreased by $5.7 million during the nine months ended September 30, 2014 to $135.8 million from $141.5 million during the nine months ended September 30, 2013. The average cost of deposits decreased by 4 basis points to .23% for the nine months ended September 30, 2014 from .27% for the nine months ended September 30, 2013 reflecting the lower interest rate environment.

 

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Net Interest Income. Net interest income increased $61,000, to $4.4 million for the nine months ended September 30, 2014. The increase in net interest income was primarily the result of a decrease in interest expense due primarily to the downward re-pricing of our time deposits, which was more than the decrease in our interest income. In addition, our net interest earnings assets increased $23.4 million for the nine months ended September 30, 2014 as compared to the prior year. Our net interest-rate spread decreased 25 basis points to 2.81% for the three months ended September 30, 2014 from 3.06% for the three months ended September 30, 2013. Our net interest margin decreased 23 basis points to 2.89% for the three months ended September 30, 2014 from 3.12% for the three months ended September 30, 2013.

Provision for Loan Losses. We recorded a provision for loan losses of $660,000 for the nine months ended September 30, 2014 compared to no provision for the nine months ended September 30, 2013. The increase in the provision was primarily due to the charge-off of a large commercial loan relationship in the amount of $624,000 during the second quarter of 2014. Net charge-offs for the nine months ended September 30, 2014 were $582,000 compared to a net charge-offs of $551,000 for the nine months ended September 30, 2013. Nonperforming loans to total loans at September 30, 2014 were 4.17% compared to 3.37% at December 31, 2013. The change was primarily due to a commercial real estate loan of $1.0 million moving to nonaccrual. The increase in provision for loan losses reflects historical and expected loan losses, as well as the change in the mix of loans.

Management considers the allowance for loan losses at September 30, 2014 to be adequate to cover losses in the loan portfolio based on the assessment of the above-mentioned 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.

Noninterest Income. Noninterest income increased $76,000, or 11.0%, to $765,000 for the nine months ended September 30, 2014 from $689,000 for the nine months ended September 30, 2013. The increase was related to a $51,000 increase in other noninterest income primarily due to $87,000 in third party mortgage origination fees for the nine months ended September 30, 2014 compared to none in 2013 and a $27,000 gain on sale of other real estate owned.

Noninterest Expense. Noninterest expense increased $161,000, to $5.0 million for the nine months ended September 30, 2014. The increase primarily reflected a $91,000 increase in professional services and a $74,000 increase in other expenses during the nine months ended September 30, 2014. The increase in professional fees relate to the increase costs of legal and audit reporting for a public traded company. The increase in other expenses was primarily relate to special board meetings held during the period.

Income Taxes (Benefit). For the nine months ended September 30, 2014, the tax benefit was $236,000 on a before tax loss of $483,000 compared to the nine months ended September 30, 2013, where income taxes were $88,000 on income before taxes of $201,000.

 

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Asset Quality

Nonperforming Assets. We define nonperforming loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due and nonaccruing troubled debt restructurings. Nonperforming assets, including nonperforming loans and other real estate owned, totaled $5.8 million, or 2.61% of total assets, at September 30, 2014 and $5.2 million, or 2.70% of total assets, at December 31, 2013. We had no accruing loans past due 90 days or more at September 30, 2014 and at December 31, 2013. The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated.

 

		At September 30,				At December 31,
		2014				2013
		($ in thousands)
Nonaccrual loans(excluding TDR’s):
Real estate mortgage loans:
One-to-four family residential		$	1,991			$	2,154
Commercial			1,009				—
Land and construction			113				140
Commercial business loans			675				602
Consumer loans			—				2
Total nonaccrual loans (excluding TDR’s)			3,788				2,898
Nonaccruing TDR’s loans:
Real estate mortgage loans:
One-to-four family residential			124				132
Commercial			394				447
Multi-family			130				170
Land and construction			74				74
Commercial business loans			205				101
Total nonaccruing troubled debt restructured loans			927				924
Total nonperforming loans			4,715				3,822
Other real estate owned:
One-to-four family			310				634
Land and construction			788				788
Total other real estate owned			1,098				1,422
Total nonperforming assets		$	5,813			$	5,244
Total accruing troubled debt restructured loans		$	4,530			$	4,602
Total nonperforming loans to total loans			4.17	%			3.37	%
Total nonperforming assets to total assets			2.61	%			2.70	%

 

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The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Allowance at beginning of period		$	1,771				1,908				1,718				2,276
Provision for loan losses			20				—				660				—
Charge-offs:
Real estate mortgage loans:
One- to four-family residential			(11	)			(163	)			(17	)			(348	)
Commercial			—				(42	)			—				(42	)
Multi-family			—				(7	)			—				(135	)
Land and construction			(2	)			—				(2	)			(139	)
Commercial business loans			—				—				(626	)			—
Consumer loans			(5	)			—				(10	)			(2	)
Total charge-offs			(18	)			(212	)			(655	)			(666	)
Recoveries:
Real estate mortgage loans:
One- to four-family residential			—				—				9				13
Commercial			3				7				9				46
Multi-family			—				14				1				14
Land and construction			—				2				—				14
Commercial business loans			19				6				45				26
Consumer loans			1				—				9				2
Total recoveries			23				29				73				115
Net charge-offs			5				(183	)			(582	)			(551	)
Allowance at end of period		$	1,796				1,725				1,796				1,725
Allowance to nonperforming loans			38.09	%			45.13	%			38.09	%			45.13	%
Allowance to total loans outstanding at the end of the period			1.59	%			1.54	%			1.59	%			1.54	%
Net charge-offs to average loans outstanding during the period (annualized)			.01	%			(.66	)%			(.69	)%			(.66	)%

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 proceeds from maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At September 30, 2014, we had the capacity to borrow approximately $38.3 million from the Federal Home Loan Bank of Atlanta. We historically have not used Federal Home Loan Bank advances to fund our operations, and at September 30, 2014 and December 31, 2013, we had no outstanding advances from the Federal Home Loan Bank of Atlanta. We also have lines of credit at two financial institutions that would allow us to borrow up to $8.7 million and $6.0 million, respectively at September 30, 2014. Neither credit line was drawn upon at September 30, 2014.

 

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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 in the nine months ended September 30, 2014 by operating activities was $999,000. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $25.2 million. During the nine months ended September 30, 2014, we purchased $30.3 million in securities held to maturity. Net cash provided by financing activities, consisting primarily of the proceeds from the stock offering and the activity in deposit accounts, was $28.3 million for the nine months ended September 30, 2014.

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 September 30, 2014, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 19.00% of adjusted total assets, which is above the required level of 5.00%; and total risk-based capital of 38.52% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Bank was categorized as well-capitalized at September 30, 2014. 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 September 30, 2014, we had outstanding commitments to originate loans of $4.1 million, unused lines of credit totaling $8.7 million, and stand-by letters of credit of $714,000. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposit that are scheduled to mature in less than one year from September 30, 2014 totaled $28.1 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is 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.

 

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Item 3.

Quantitative and Qualitative Disclosure About Market Risk

Not required for smaller reporting companies.

 

Item 4.

Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) as of September 30, 2014, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures in effect as of September 30, 2014, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

 

Item 1A.

Risk Factors

Not required for smaller reporting companies.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults Upon Senior Securities

Nothing to report.

 

Item 4.

Mine Safety Disclosures

Nothing to report.

 

Item 5.

Other Information

Nothing to report.

 

Item 6.

Exhibits

Exhibits:

 

3.2		Amended and Restated Bylaws
31.1		Rule 13a-14(a) Certification of the Chief Executive Officer
31.2		Rule 13a-14(a) Certification of the Chief Financial Officer
32.0		Section 1350 Certification
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101 DEF		XBRL Taxonomy Extension Definition Linkbase Document
101 LAB		XBRL Taxonomy Label Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document

 

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SUNSHINE BANCORP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				SUNSHINE BANCORP, INC.
Date: November 13, 2014				By:		/s/ Andrew S. Samuel
						Andrew S. Samuel
						President and Chief Executive Officer
						(Duly Authorized Officer)
Date: November 13, 2014				By:		/s/ Vickie J. Houllis
						Vickie J. Houllis
						Senior Vice President and Chief Financial Officer
						(Principal Financial Officer)

 

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