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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 March 31, 2015

 

¨	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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of May 12, 2015, there were 4,232,000 issued and outstanding shares of the issuer’s common stock.

 

 

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

March 31, 2015 Form 10-Q

Index

 

				Page Number
PART I FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014			2
		Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2015 and 2014 (Unaudited)			3
		Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three-Month Periods Ended March 31, 2015 and 2014 (Unaudited)			4
		Condensed Consolidated Statements of Stockholders’ Equity for the Three-Month Periods Ended March 31, 2015 and 2014 (Unaudited)			5
		Condensed Consolidated Statements of Cash Flows For the Three-Month Periods Ended March 31, 2015 and 2014 (Unaudited)			6
		Notes to Condensed Consolidated Financial Statements (Unaudited)			7-21
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22-30
Item 3.		Quantitative and Qualitative Disclosure About Market Risk			31
Item 4.		Controls and Procedures			31
PART II OTHER INFORMATION
Item 1.		Legal Proceedings			32
Item 1A.		Risk Factors			32
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3.		Defaults Upon Senior Securities			32
Item 4.		Mine Safety Disclosures			32
Item 5.		Other Information			32
Item 6.		Exhibits			32
SIGNATURES					33

 

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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 March 31, 2015				At December 31, 2014
		(Unaudited)
Assets
Cash and due from banks		$	5,110				5,316
Interest-earning deposits with banks			10,822				688
Federal funds sold			28,933				14,475
Cash and cash equivalents			44,865				20,479
Time deposits with banks			5,390				5,880
Securities held to maturity (Fair value of $0 and $75,469)			—				75,473
Securities available for sale			60,039				—
Loans held for sale			347				2,012
Loans, net of allowance for loan losses of $1,743 and $1,726			118,675				108,666
Premises and equipment, net			6,751				6,074
Federal Home Loan Bank stock, at cost			211				180
Cash surrender value of bank-owned life insurance			7,317				7,259
Accrued interest receivable			543				613
Other real estate owned			41				41
Other assets			3,398				3,143
Total assets		$	247,577			$	229,820
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing accounts			43,798				34,774
NOW accounts			33,531				32,589
Money-market deposit accounts			41,236				35,208
Savings accounts			24,965				25,100
Time deposits			35,997				36,253
Total deposits			179,527				163,924
Official checks			3,546				808
Advances by borrowers for taxes and insurance			192				171
Other liabilities			2,882				3,291
Total liabilities			186,147				168,194
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			42				42
Additional paid in capital			40,766				40,766
Retained income			23,738				24,091
Unearned employee stock ownership plan (“ESOP”) shares			(3,273	)			(3,273	)
Accumulated other comprehensive income			157				—
Total stockholders’ equity			61,430				61,626
Total liabilities and stockholders’ equity		$	247,577			$	229,820

See Accompany Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)

 

		Three Months Ended March 31,
		2015				2014
Interest income:
Loans		$	1,529			$	1,355
Securities			223				99
Other			33				27
Total interest income			1,785				1,481
Interest expense-deposits			67				81
Net interest income			1,718				1,400
Provision for loan losses			—				—
Net interest income after provision for loan losses			1,718				1,400
Noninterest income:
Fees and service charges on deposit accounts			139				165
Fees and charges on loans			26				19
Gain on sale of other real estate owned			—				4
Gain on sale of securities			142				—
Gain on sale of loans held for sale			16				—
Income from bank-owned life insurance			58				30
Other			28				23
Total noninterest income			409				241
Noninterest expenses:
Salaries and employee benefits			1,564				875
Occupancy and equipment			299				256
Data and item processing services			120				116
Professional fees			124				51
Advertising and promotion			38				21
Stationery and supplies			25				25
Deposit insurance and general insurance Merger related			56 258				50 —
Other			262				201
Total noninterest expenses			2,746				1,595
(Loss) income before income taxes			(619	)			46
Income tax (benefit) expense			(266	)			2
Net (loss) income		$	(353	)		$	44
Basic and diluted loss per share			(0.09	)			N/A

See Accompany Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(In thousands)

Three Months Ended March 31, 2015 and 2014

 

		Three Months Ended March 31,
		2015				2014
Net loss		$	(353	)		$	44
Other comprehensive income:
Change in unrealized gain on securities:
Unrealized gain arising during the period			394				—
Reclassification adjustment for realized gains			(142	)			—
Net change in unrealized gain			252				—
Deferred income taxes on above change			(95	)			—
Total other comprehensive income			157				—
Comprehensive (loss) income		$	(196	)		$	44

See Accompany Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

($ In thousands)

Three Months Ended March 31, 2015 and 2014

 

		Common Stock								Additional Paid In Capital				Retained Income				Unearned ESOP Shares				Accumulated Other Comprehensive Income				Total Stockholder’s Equity
		Shares				Amount
Balance, December 31, 2013			—			$	—				—				26,552				—				—				26,552
Net income (unaudited)			—				—				—				44				—				—				44
Balance, March 31, 2014 (unaudited)			—			$	—				—				26,596				—				—				26,596
Balance, December 31, 2014			4,232,000				42				40,766				24,091				(3,273	)			—				61,626
Net loss (unaudited)			—				—				—				(353	)			—				—				(353	)
Net change in unrealized gain on Securities available for Sale, net of taxes (unaudited)			—				—				—				—				—				157				157
Balance, March 31, 2015 (unaudited)			4,232,000			$	42				40,766				23,738				(3,273	)			157				61,430

See Accompany Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Three Months Ended March 31,
		2015				2014
Cash flows from operating activities:
Net (loss) income		$	(353	)			44
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation			160				93
Amortization of premiums and discounts on securities, net			85				60
Gain on sale of loans held for sale			(16	)			—
Proceeds from the sale of loans held for sale			1,864				—
Loans originated as held for sale			(183	)			—
Amortization of deferred loan fees and costs, net			(9	)			(3	)
Income from bank-owned life insurance, net			(58	)			(30	)
Gain on sale of other real estate owned			—				(4	)
Gain on sale of securities available for sale			(142	)			—
Decrease in accrued interest receivable			70				4
Increase in other assets			(350	)			(412	)
Increase (decrease) in official checks			2,738				(20	)
Decrease in other liabilities			(409	)			(44	)
Net cash provided by (used in) operating activities			3,397				(312	)
Cash flows from investing activities:
Maturities of time deposits with banks			490				—
Purchases of securities held to maturity			—				(4,830	)
Maturities of securities held to maturity			5,000				—
Principle repayment of securities held to maturity			800				—
Proceeds from sale of securities available for sale			9,943				—
Net (increase) decrease in loans			(10,000	)			1,329
Proceeds from sale of other real estate owned			—				76
Purchases of premises and equipment, net			(837	)			(15	)
(Purchase) redemption of Federal Home Loan Bank stock			(31	)			57
Net cash provided by (used in) investing activities			5,365				(3,383	)
Cash flows from financing activities:
Net increase in deposits			15,603				6,937
Net increase in advances by borrowers for taxes and insurance			21				55
Net cash provided by financing activities			15,624				6,992
Increase in cash and cash equivalents			24,386				3,297
Cash and cash equivalents at beginning of period			20,479				11,054
Cash and cash equivalents at end of period		$	44,865			$	14,351
Supplemental disclosure of cash flow information:
Cash paid during the period for-
Interest		$	67			$	81
Noncash transaction-
Accumulated other comprehensive income, net change in unrealized gain on securities available for sale, net of taxes		$	157			$	—
Securities held to maturity transferred to available for sale		$	69,665			$	—

See Accompany 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 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.”

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.

The Conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

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 common 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 (“FDIC”).

Our 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 condensed consolidated financial statements in our 2014 Annual Report on Form 10-K, as updated by information in this Form 10-Q.

Agreement to Acquire Community Southern Holdings, Inc. On February 4, 2015, the Company signed an Agreement and Plan of Merger to acquire Community Southern Holdings, Inc. and its subsidiary Community Southern Bank in Lakeland, Florida. The Company will acquire approximately $246 million in assets and four banking locations in the Lakeland, Florida market. The transaction is subject to regulatory approval and the approval of Community Southern Holdings, Inc.’s shareholders. On April 24, 2015, the Federal Reserve Bank of Atlanta approved the transaction. The transaction is expected to close late in the second quarter or early in the third quarter of 2015.

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 2014 financial statements.

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 March 31, 2015, and the results of operations for the three month periods ended March 31, 2015 and 2014. The results of operations for the three months ended March 31, 2015, are not necessarily indicative of the results to be expected for the full year or any other period.

Comprehensive (Loss) Income Accounting principles generally accepted in the United States of America (“GAAP”) generally require that recognized revenue, expenses, gains and losses be included in operations. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items along with net (loss) income, are components of comprehensive (loss) income.

Reclassifications. Certain amounts in the 2014 financial statements have been reclassified to conform with the 2015 presentation.

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2)	Securities

Securities have been classified according to management intent. On March 19, 2015 management transferred all securities classified as held to maturity to available for sale at an estimated fair market value of $69.7 million. The transfer was performed to enhance the interest rate risk position of the Bank and provide liquidity for future loan growth. As a result of the transfer, the Bank is precluded from classifying securities as held to maturity until March 2017. The amortized cost and fair values of securities are as follows (in thousands):

 

Securities Available for sale:		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
March 31 2015:
U.S. Treasury securities		$	3,014				3				—				3,017
Federal Home Loan Bank obligations			19,232				78				(7	)			19,303
U.S. Government enterprise and agency obligations			21,004				68				(17	)			21,055
Mortgage-backed securities			16,537				127				—				16,664
Total		$	59,787				276				(24	)			60,039
Securities held for maturity:
December 31, 2014:
U.S. Treasury securities			5,025				5				—				5,030
Federal Home Loan Bank obligations			23,269				24				(50	)			23,243
U.S. Government enterprise and agency obligations			29,799				84				(85	)			29,798
Mortgage-backed securities			17,380				19				(1	)			17,398
Total		$	75,473				132				(136	)			75,469

The scheduled maturities of securities at March 31, 2015 were as follows (in thousands):

 

		Securities Available for sale
		Amortized Cost				Fair Value
Due in one year or less		$	10,070				10,083
Due from one year to five years			29,145				29,192
Due in more than five years			4,035				4,100
Mortgage-backed securities			16,537				16,664
Total		$	59,787			$	60,039

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2)	Securities, Continued

 

Securities with gross unrealized losses, 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
Securities Available for sale:
At March 31, 2015:
Federal Home Loan Bank obligations		$	—				—				(7	)			1,993
U.S. Government enterprise and agency obligations			—				—				(17	)			4,016
Totals		$	—				—				(24	)			6,009
Securities held for maturity:
At December 31, 2014:
Federal Home Loan Bank obligations			(13	)			7,055				(37	)			3,995
U.S. Government enterprise and agency obligations			(50	)			14,957				(35	)			4,001
Mortgage-backed securities			(1	)			1,964				—				—
Totals		$	(64	)			23,976				(72	)			7,996

The unrealized losses on three investment securities available for sale at March 31, 2015 were caused by changes in interest rates. 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 March 31, 2015 and December 31, 2014 were pledged to the Housing Authority of the City of Plant City, Florida for deposit accounts held at the Bank.

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2)	Securities, Continued

 

Securities available for sale sold during the three months ended March 31, 2015, are summarized as follows (in thousands):

 

Proceeds received from sale		$	9,943
Gross Gains on sale		$	142

 

(3)

Loans

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

 

		March 31, 2015				December 31, 2014
Real estate mortgage loans:
One-to four-family residential		$	51,739				52,708
Commercial			32,719				22,043
Multi-family			11,653				10,622
Land and construction			7,415				7,075
Total real estate mortgage loans			103,526				92,448
Commercial loans			15,828				16,773
Consumer loans			1,432				1,398
Total loans			120,786				110,619
Deduct:
Deferred loan fees, net			(184	)			(124	)
Allowance for loan losses			(1,743	)			(1,726	)
Undisbursed loan proceeds			(184	)			(103	)
Loans, net		$	118,675				108,666

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 real estate, commercial real estate, multi-family real estate and land and construction.

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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.

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.

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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.

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 March 31, 2015:
Beginning balance		$	1,409				308				9				—				1,726
Provision (credit) for loan losses			(83	)			84				(1	)			—				—
Charge-offs			(1	)			(9	)							—				(10	)
Recoveries			2				24				1				—				27
Ending balance		$	1,327				407				9				—				1,743
Three Months Ended March 31, 2014:
Beginning balance			1,417				208				10				83				1,718
Provision (credit) for loan losses			27				(10	)			2				(19	)			—
Charge-offs			(6	)			—				(4	)			—				(10	)
Recoveries			3				9				1				—				13
Ending balance		$	1,441				207				9				64				1,721
At March 31, 2015:
Individually evaluated for impairment:
Recorded investment		$	610				726				—				—				1,336
Balance in allowance for loan losses		$	12				9				—				—				21
Collectively evaluated for impairment:
Recorded investment		$	102,916				15,102				1,432				—				119,450
Balance in allowance for loan losses		$	1,315				398				9				—				1,722
At December 31, 2014:
Individually evaluated for impairment:
Recorded investment		$	4,028				768				—				—				4,796
Balance in allowance for loan losses		$	301				9				—				—				310
Collectively evaluated for impairment:
Recorded investment		$	88,420				16,005				1,398				—				105,823
Balance in allowance for loan losses		$	1,108				299				9				—				1,416

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3)	Loans, Continued

 

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

 

		Real Estate Mortgage Loans												Land and Construction				Commercial Loans				Consumer Loans				Total
		One-to Four-Family Residential				Commercial				Multi- Family
Credit Risk Profile by Internally Assigned Grade:
At March 31, 2015:
Grade:
Pass		$	51,330				32,173				11,539				7,206				15,331				1,432				119,011
Special mention			409				—				—				—				—				—				409
Substandard			—				546				114				209				497				—				1,366
Total		$	51,739				32,719				11,653				7,415				15,828				1,432				120,786
At December 31, 2014:
Grade:
Pass			52,392				21,385				10,498				6,864				15,788				1,398				108,325
Special mention			316				413				—				211				94				—				1,034
Substandard			—				245				124				—				891				—				1,260
Total		$	52,708				22,043				10,622				7,075				16,773				1,398				110,619

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.

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, multi-family and commercial real estate loans over $250,000 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 as a loss. 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.

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3)	Loans, Continued

 

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.

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 basically worthless asset even though partial recovery may be affected in the future.

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

 

		Accruing Loans
		30-59 Days Past Due				60-89 Days Past Due				90 Days Or Greater Past Due				Total Past Due				Current				Nonaccrual Loans				Total Loans
At March 31, 2015:
Real estate mortgage loans:
One-to four-family		$	87				—				—				87				51,652				—				51,739
Commercial			—				—				—				—				32,719				—				32,719
Multi-family			—				—				—				—				11,539				114				11,653
Land and construction			—				—				—				—				7,415				—				7,415
Commercial loans			—				—				—				—				15,570				258				15,828
Consumer loans			—				—				—				—				1,432				—				1,432
Total		$	87				—				—				87				120,327				372				120,786
At December 31, 2014:
Real estate mortgage loans:
One-to four-family			59				—				—				59				52,649				—				52,708
Commercial			—				—				—				—				22,043				—				22,043
Multi-family			—				—				—				—				10,498				124				10,622
Land and construction			—				—				—				—				7 075				—				7,075
Commercial loans			167				—				—				167				15,838				768				16,773
Consumer loans			2				—				—				2				1,396				—				1,398
Total		$	228				—				—				228				109,499				892				110,619

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3)	Loans, Continued

 

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
March 31, 2015:
Real estate mortgage loans:
One-to four-family residential		$	—				—				121				139				12				121				139				12
Commercial			375				955				—				—				—				375				955				—
Multi-family			114				258				—				—				—				114				258				—
Land and construction			—				—				—				—				—				—				—				—
Commercial loans			626				751				100				103				9				726				854				9
		$	1,115				1,964				221				242				21				1,336				2,206				21
December 31, 2014:
Real estate mortgage loans:
One-to four-family residential			—				—				123				140				12				123				140				12
Commercial			380				966				3,401				3,401				289				3,781				4,367				289
Multi-family			124				265				—				—				—				124				265				—
Commercial loans			664				750				104				107				9				768				857				9
		$	1,168				1,981				3,628				3,648				310				4,796				5,629				310

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

 

		Average Recorded Investment				Interest Income Recognized				Interest Income Received
Three Months Ended March 31, 2015:
Real estate mortgage loans:
One-to four-family residential		$	121				3				2
Commercial			2,637				84				80
Multi-family			118				—				3
Commercial loans			745				—				13
		$	3,621				87				98

 

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3)	Loans, Continued

 

		Average Recorded Investment				Interest Income Recognized				Interest Income Received
Three Months Ended March 31, 2014:
Real estate mortgage loans:
One-to four-family residential		$	1,847				5				10
Commercial			4,836				91				80
Multi-family			161				—				5
Land and construction			113				—				1
Commercial			703				—				—
		$	7,660				96				96

Loans are classified as troubled debt restructurings when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. During the three months ended March 31, 2015 and 2014, the Company had no loans restructured as troubled debt restructurings and the Company had no loans restructured as troubled debt restructurings that subsequently defaulted that had been modified in the previous twelve month period.

 

(4)	Fair Value of Financial Instruments

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

 

		At March 31, 2015												At December 31, 2014
		Carrying Amount				Fair Value				Level				Carrying Amount				Fair Value				Level
Financial assets:
Cash and cash equivalents		$	44,865				44,865				1			$	20,479				20,479				1
Time deposits with banks			5,390				5,390				1				5,880				5,880				1
Securities			60,039				60,039				2				75,473				75,469				2
Loans held for sale			347				347				3				2,012				2,028				3
Loans			118,675				124,332				3				108,666				113,807				3
Federal Home Loan Bank stock			211				211				3				180				180				3
Accrued interest receivable			543				543				3				613				613				3
Financial liabilities:
Deposits			179,527				171,203				3				163,924				153,568				3
Off-balance-sheet financial instruments			—				—				3				—				—				3

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(5)	Fair Value Measurements

There were no securities available for sale at December 31, 2014. Securities available for sale measured at fair value on a recurring basis at March 31, 2015 are summarized below (in thousands):

 

		Fair Value				Level 1				Level 2				Level 3
U.S. Treasury securities		$	3,017				—				3,017				—
Federal Home Loan Bank obligations			19,303				—				19,303				—
U.S. Government enterprise and agency obligations			21,055								21,055
Mortgage-backed securities			16,664				—				16,664				—
Total		$	60,039				—				60,039				—

During the three months ended March 31, 2015, no securities were transferred in or out of Level 1, Level 2, or Level 3.

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(5)	Fair Value Measurements, Continued

 

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 March 31, 2015:
Real estate mortgage loans:
Commercial		$	375				—				—				375				517				—
Multi-family			114				—				—				114				128				—
Commercial			86				—				—				86				74				—
Total		$	575				—				—				575				719				—
At December 31, 2014:
Real estate mortgage loans:
Commercial			380				—				—				380				517				—
Multi-family			124				—				—				124				128				—
Commercial			94				—				—				94				74				2
Total		$	598				—				—				598				719				2

Foreclosed real estate which is measured at fair value on a nonrecurring basis is summarized below (in thousands):

 

		At Period End																Total Losses				Losses Recorded During the Period
		Total				Level 1				Level 2				Level 3
At March 31, 2015-
Foreclosed real estate		$	41				—				—				41				—				—
At December 31, 2014-
Foreclosed real estate		$	41				—				—				41				—				—

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(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.

At March 31, 2015 the ESOP shares were as follows ($ in thousands, except per share amounts):

 

Allocated shares			11,285
Unallocated shares			327,275
Total ESOP shares			338,560
Fair value of unallocated shares		$	4,058

 

(7)	Regulatory Matters

Effective January 1, 2015, the Bank became subject to new capital requirements set forth by federal banking regulations. These changes were designed to ensure capital positions remain strong during the events of economic downturns or unforeseen losses. The Company is exempt from consolidated capital requirements as the Federal Reserve Board amended its “small bank holding company” policy statement to generally exempt bank holding companies with less than $1.0 billion in assets from capital requirements.

These new requirements create a new capital ratio for common equity Tier 1 capital and increase the Tier 1 capital ratio requirements. Under the new capital regulation for the Bank, the minimum capital ratios consist of a common equity tier 1 ratio of 4.5% of risk-weighted assets, a tier 1 capital ratio of 6.0% of risk-weighted assets, a total capital ratio of 8.0% of risk weighted assets, and a leverage ratio of 4.0%. Common equity tier 1 generally comprises of common stock, addition paid in capital, and retained income.

There were changes in the risk weighting of certain assets to better reflect the risk associated with those assets, such as the risk weighting for non-performing loans and certain high volatility commercial real estate acquisitions, development and construction loans. The changes also include additional limitations on the inclusion of deferred tax asset in capital. The Bank made a one-time election to exclude accumulated other comprehensive income from regulatory capital in order to reduce the impact of market volatility on regulatory capital.

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(7)	Regulatory Matters, Continued

 

The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at March 31, 2015:

 

		Actual								Minimum For Capital Adequacy Purposes								Minimum To Be Well Capitalized
		Amount				%				Amount				%				Amount				%
Common Equity Tier 1 Capital to Risk-Weighted Assets		$	38,540				30.05	%		$	5,771				4.50	%		$	8,336				6.50	%
Tier I Capital to Risk-Weighted Assets			38,540				30.05				7,695				6.00				10,260				8.00
Total Capital to Risk-Weighted Assets			40,144				31.30				10,260				8.00				12,824				10.00
Tier I Capital to Total Assets			38,540				16.62				9,276				4.00				11,594				5.00

As of March 31, 2015, the Bank was well capitalized under all capital ratios. There are no conditions or events since that notification that management believes have changed the institution’s capitalization category.

 

(8)	Loss Per Share

Basic loss per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three months ended March 31, 2015, basic and diluted loss per share is the same due to the Company having no stock-based compensation plans. The conversion was complete on July 14, 2014. Loss per share was not computed until January 1, 2015, as if conversion from a mutual holding company to a capital stock holding company occurred on that date. The shares purchased by the Employee Stock Ownership Plan are included in the weighted-average shares when they are committed to be released ($ in thousands, except per share amounts):

 

		Loss				Weighted Average Shares				Per Share Amount
Three Months Ended March 31, 2015:
Basic and Diluted loss per share:
Net loss		$	(353	)			3,904,725			$	(.09	)

 

 

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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 audited condensed consolidated financial statements and footnotes for the year ended December 31, 2014 in the Annual Report on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company and the Bank 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 Bank, 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.

Overview

The Bank provides financial services to individuals and businesses from our main office in Plant City, Florida and our four additional full-service banking offices located in Brandon, Riverview, Zephyrhills and Plant City, Florida. Our primary market area includes Hillsborough County and Pasco County, Florida. Our principal business has consisted of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, in commercial real estate loans, commercial business loans and, to a lesser extent, multi-family real estate, land and construction and consumer loans. We also invest in securities, which consist primarily of U.S. Treasury securities, U.S government sponsored enterprise mortgage-backed securities, U.S. government agency securities and securities and obligations of U.S. government-sponsored enterprises and the Federal Home Loan Bank. We offer a variety of deposit accounts to consumers and small businesses, including savings accounts, NOW accounts, money market accounts and certificate of deposit accounts.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of fees and service charges on deposit accounts, fees and charges on loans, gain (loss) on sales of other real estate owned, income from bank-owned life insurance and other income. Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data and item processing, professional fees, other real estate owned, advertising and promotion, stationery and supplies, deposit and general insurance and other expenses.

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

 

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Recent Developments

On February 4, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Sunshine Interim Corp., a wholly-owned subsidiary of the Company (“Merger Sub”) and Community Southern Holdings, Inc. (“CS Holdings”), pursuant to which (i) Merger Sub will be merged with and into CS Holdings, with CS Holdings as the surviving entity (the “Merger”), (ii) immediately thereafter, it is anticipated that CS Holdings will merge with and into the Company, with the Company as the surviving entity, and (iii) immediately thereafter, Community Southern Bank, the bank subsidiary of CS Holdings, will be merged with and into the Bank, the savings bank subsidiary of the Company, with the Bank as the surviving bank.

Under the terms of the Merger Agreement, stockholders of CS Holdings will receive a cash payment equal to eleven dollars and sixty-six cents ($11.66) for each share of CS Holdings common stock, subject to possible adjustment. The aggregate merger consideration, excluding any upward price adjustment, is approximately $30.8 million, which includes the cash out of in the money stock options and warrants.

The transaction has been approved by the Board of Directors of each company and is expected to close either late in the second quarter or early in the third quarter of 2015. Completion of the Merger is subject to customary closing conditions, including the receipt of required regulatory approvals and the approval of CS Holdings’ stockholders. On April 24, 2015, the Federal Reserve Bank of Atlanta approved the transaction.

Critical Accounting Policies

There have been no material changes in our critical accounting policies since the Company filed its 2014 Annual Report on Form 10-K.

 

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Comparison of Financial Condition at March 31, 2015 and December 31, 2014

Total Assets. Total assets increased $17.8 million, or 7.7%, to $247.6 million at March 31, 2015 from $229.8 million at December 31, 2014. The increase was primarily the result of increases of $24.4 million in cash and cash equivalents and $10.0 million in net loans, partially offset by a $15.4 million decrease in securities and a $1.7 million decrease in loans held for sale.

Cash and Cash Equivalents. Total cash and cash equivalents increased by $24.4 million, or 119.1%, to $44.9 million at March 31, 2015 from $20.5 million at December 31, 2014. The increase in total cash and cash equivalents reflected management’s decision to remain liquid for future loan growth and Merger related expenses. The Bank also experienced an increase in cash and cash equivalents due to the seasonality of customers’ deposit inflows, primarily from our agricultural-based customers.

Investment Securities. Investment securities decreased $15.4 million, or 20.4%, to $60.0 million at March 31, 2015 from $75.5 million at December 31, 2014. During the first quarter of 2015, the Bank transferred the investment portfolio from held-to-maturity to available-for-sale. Corresponding with the change, the Bank sold approximately $10.0 million in securities resulting in a gain on sale of $142,000. This change in classification and corresponding asset sale was initiated to create liquidity for anticipated loan growth and position the balance sheet for the pending Merger. The Bank also had $5.0 million in securities mature or called during the quarter, which were not immediately reinvested due to the anticipated loan growth.

Net Loans. Net loans increased $10.0 million, or 9.2%, to $118.7 million at March 31, 2015 from $108.7 million at December 31, 2014. Commercial real estate loans increased $10.7 million, or 48.4%, to $32.8 million at March 31, 2015 from $22.0 million at December 31, 2014, due to management’s focus to shift from residential mortgage to commercial based lending. The Bank originated $14.7 million in commercial mortgage loans, partially offset by $4.0 million in payoffs and normal amortization of loans during the first quarter of 2015. One- to four-family residential real estate loans decreased $1.0 million, or 1.8%, to $51.7 million at March 31, 2015 from $52.7 million at December 31, 2014 as a result of management’s strategic decision to cease holding in portfolio new one- to four-family residential real estate loans.

Deposits. Deposits increased $15.6 million, or 9.5%, to $179.5 million at March 31, 2015 from $163.9 million at December 31, 2014. Our core deposits (consisting of non-interest-bearing, NOW, money market and savings accounts) increased $15.8 million, or 12.4%, to $143.5 million at March 31, 2015 from $127.7 million at December 31, 2014 as a result of our continuous efforts to attract new customers and retain relationships by enhancing and expanding deposit products and services. In addition, the economic conditions for businesses are improving in our market area, creating increased deposit balances. The Bank has also experienced a seasonality of deposit inflows, primarily from our agricultural-based customers during the first quarter of 2015. Time deposits decreased $256,000, or 0.7%, to $36.0 million at March 31, 2015 from $36.3 million at December 31, 2014 primarily due to management’s focus of growing low-cost in-market deposits and allowing higher cost short term time deposits to mature.

Stockholders’ Equity. Stockholders’ equity decreased $196,000, or 0.3%, to $61.4 million at March 31, 2015 as a result of net loss of $353,000 for the quarter ended March 31, 2015, partially offset by an unrealized gain on securities of $157,000.

 

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Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the three months ended March 31, 2015 and 2014. 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 March 31,
		2015 (1)												2014 (1)
		Average Balance				Interest and Dividends				Average Yield/ Rate				Average Balance				Interest and Dividends				Average Yield/ Rate
		(In thousands)
Interest-earning assets:
Loans		$	111,268			$	1,529				5.50	%		$	111,691			$	1,355				4.85	%
Securities			71,274				223				1.25				50,006				99				.80
Other (2)			29,752				33				.44				17,935				27				.60
Total interest-earning assets			212,294				1,785				3.36				179,632				1,481				3.30
Noninterest-earning assets			22,325												17,158
Total assets		$	234,619											$	196,790
Interest-bearing liabilities:
NOW accounts			33,611				4				.05				30,626				4				.05
Money market accounts			38,198				18				.19				37,940				17				.18
Savings accounts			25,036				6				.10				25,682				6				.09
Time deposit			36,009				39				.43				43,558				54				.50
Total interest-bearing deposits			132,854				67				.20				137,806				81				.24
Noninterest-bearing liabilities			40,227												32,418
Total liabilities			173,081												170,224
Total stockholders’ equity			61,538												26,566
Total liabilities and stockholders’ equity		$	234,619											$	196,790
Net interest income						$	1,718											$	1,400
Net interest rate spread (3)											3.16	%											3.06	%
Net interest-earning assets (4)		$	79,440											$	41,826
Net interest margin (5)											3.24	%											3.12	%
Average interest-earning assets to average interest-bearing liabilities			159.80												130.35

 

(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 March 31, 2015 and March 31, 2014

General. Net loss for the three months ended March 31, 2015 was $353,000, compared to net income of $44,000 for the three months ended March 31, 2014. The decrease in net income was primarily due to an increase in non-interest expense of $1.2 million, partially offset by increases of $318,000 in net interest income and $168,000 in noninterest income.

Interest Income. Interest income increased $304,000, or 20.5%, to $1.8 million for the three months ended March 31, 2015 primarily as a result of a $174,000 increase in interest income on loans and a $124,000 increase in interest income from securities. The increase in interest income resulted primarily from a $32.7 million increase in the average balance of our interest-earnings assets to $212.3 million and a six basis points increase in the average yield on our interest-earning assets to 3.36% for the three months ended March 31, 2015. The increase in the average yield was attributable to management’s focus on increasing commercial based lending, resulting in a shift from low interest rate investments and cash into commercial based loans.

Interest income on loans increased $174,000, or 12.8%, to $1.5 million for the three months ended March 31, 2015 as a result of an increase in the average yield on loans. The average yield on loans increased by 65 basis points to 5.50% for the three months ended March 31, 2015 from 4.85% for the three months ended March 31, 2014. During the current quarter, the Bank recognized $151,000 of past due interest due to the payoff of a restructured loan. The average balance of loans during the three months ended March 31, 2015 decreased by $423,000 to $111.3 million from $111.7 million for the three months ended March 31, 2014.

Interest income on investment securities increased $124,000, or 125.3%, to $223,000 for the three months ended March 31, 2015 as a result of the increase in the average balance of investment securities. The average balance of investment securities increased $21.3 million to $71.3 million for the three months ended March 31, 2015 from $50.0 million for the three months ended March 31, 2014 due to purchases of U.S government sponsored enterprise mortgage-backed securities, U.S. government enterprise and agency obligations and Federal Home Loan Bank obligations. The average yield on investment securities increased by 45 basis point to 1.25% for the three months ended March 31, 2015 from 0.80% for the three months ended March 31, 2014 due to the purchase of U.S government sponsored enterprise mortgage-backed securities and other higher yielding securities from the excess liquidity created in the stock offering.

Interest Expense. Interest expense decreased $14,000, or 17.3%, to $67,000 for the three months ended March 31, 2015 from $81,000 for the three months ended March 31, 2014 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 $4.9 million during the three months ended March 31, 2015 to $132.9 million as a result of a $7.5 million decrease in the average balance of time deposits, which was partially offset by a $2.6 million increase in the average balance of core deposits. The change in the mix of deposits was due to management’s focus on obtaining new core deposit customers, not competing with other banks offering higher rates on certificates of deposit, and improving market conditions for businesses in our market area. The average cost of deposits decreased by four basis points to 0.20% for the three months ended March 31, 2015 from 0.24% for the three months ended March 31, 2014, reflecting the increase in low cost core deposits and lower balances in higher rate time deposit accounts. The average cost of time deposits decreased by seven basis points during the three months ended March 31, 2015 to 0.43%, reflecting the growth of low-cost in-market deposits and allowing higher cost short term time deposits to mature.

 

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Net Interest Income. Net interest income increased $318,000, or 22.7%, to $1.7 million for the three months ended March 31, 2015. The increase was primarily due to the increase in the percentage of average interest-earning assets to average interest-bearing liabilities to 159.8% for the three months ended March 31, 2015 as compared to 130.4% for the three months ended March 31, 2014. Our net interest rate spread increased to 3.16% for the three months ended March 31, 2015 from 3.06% for the three months ended March 31, 2014. Our net interest margin increased to 3.24% for the three months ended March 31, 2015 from 3.12% for the three months ended March 31, 2014.

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended March 31, 2015 and 2014, respectively. Net recoveries for the three months ended March 31, 2015 were $17,000 compared to net recoveries of $3,000 for the three months ended March 31, 2014. The allowance for loan losses was $1.7 million, or 1.45%, of total loans at March 31, 2015 compared to $1.7 million, or 1.54%, of total loans at March 31, 2014.

Management considers the allowance for loan losses at March 31, 2015 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.

Non-Interest Income. Non-interest income increased $168,000, or 69.7%, to $409,000 for the three months ended March 31, 2015 from $241,000 for the three months ended March 31, 2014. The increase was primarily related to a $142,000 gain recorded on the sale of securities and a $28,000 increase in income from bank-owned life insurance.

Non-Interest Expense. Non-interest expense increased $1.2 million, or 72.2%, to $2.7 million for the three months ended March 31, 2015 as compared to the same period in 2014. The increase primarily reflected an increase of $689,000 in salaries and employee benefits expense. The salaries and employee benefits expense increase quarter over quarter was attributable to the addition of key bank employees. These employees have been critical to the organic growth in the first quarter of 2015 as well as preparing and positioning the Company for the pending Merger with CS Holdings. In addition, there were increased expenses associated with the Bank’s new Employee Stock Ownership Plan, which was not in effect for the first quarter 2014. The Company also had an increase of $258,000 in Merger related expenses due to the pending Merger and an increase of $73,000 in professional fees. The increase in professional fees related to the increased costs of legal and audit reporting as a public company.

Income Tax (benefit) expense. Income tax benefit was $266,000 for the three months ended March 31, 2015 as compared to an income tax expense of $2,000 for the three months ended March 31, 2014. The decrease in income tax expense was due to the increase in pre-tax loss of $665,000 for the three months ended March 31, 2015.

 

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Asset Quality

Non-Performing Assets. We define non-performing loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due and non-accruing troubled debt restructurings. Non-performing assets, including non-performing loans and other real estate owned, totaled $413,000, or 0.17% of total assets, at March 31, 2015 and $2.8 million, or 1.20% of total assets, at December 31, 2014. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. We had no accruing loans past due 90 days or more at March 31, 2015 and at December 31, 2014.

 

		At March 31,				At December 31,
		2015				2014
		(Dollars in thousands)
Non-accrual loans:
Real estate mortgage loans:
One- to four-family residential		$	—			$	—
Commercial			—				—
Multi-family			—				—
Land and construction			—				—
Commercial business loans			72				570
Consumer loans			—				—
Total non-accrual loans			72				570
Non-accruing troubled debt restructured loans:
Real estate mortgage loans:
One- to four-family residential			—				—
Commercial			—				—
Multi-family			114				124
Land and construction			—				—
Commercial business loans			186				198
Consumer loans			—				—
Total non-accruing troubled debt restructured loans			300				322
Total non-performing loans			372				892
Loans Held for Sale			—				1,829
Other real estate owned:
One- to four-family			41				41
Commercial			—				—
Multi-family			—				—
Land and construction			—				—
Commercial business loans			—				—
Consumer loans			—				—
Total other real estate owned			41				41
Total non-performing assets		$	413			$	2,762
Total accruing troubled debt restructured loans		$	495			$	3,903
Total non-performing loans to total loans			0.31	%			0.81	%
Total non-performing assets to total assets			0.17	%			1.20	%

 

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

 

		For the Three Months Ended March 31,
		2015				2014
		(Dollars in thousands)
Allowance at beginning of period		$	1,726			$	1,718
Provision for loan losses			—				—
Charge offs:
Real estate mortgage loans:
One- to four-family residential			(1	)			(6	)
Commercial			—				—
Multi-family			—				—
Land and construction			—				—
Commercial business loans			(9	)			—
Consumer loans			—				(4	)
Total charge-offs			(10	)			(10	)
Recoveries:
Real estate mortgage loans:
One- to four-family residential			1				—
Commercial			1				3
Multi-family			—				—
Land and construction			—				—
Commercial business loans			24				9
Consumer loans			1				1
Total recoveries			27				13
Net charge-offs			17				3
Allowance at end of period		$	1,743			$	1,721
Allowance to nonperforming loans			468.55	%			48.68	%
Allowance to total loans outstanding at the end of the period (annualized)			1.45	%			1.54	%
Net charge-offs to average loans outstanding during the period (annualized)			0.06	%			0.01	%

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 March 31, 2015, we had the capacity to borrow approximately $37.8 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 March 31, 2015 and at December 31, 2014, 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 March 31, 2015. Neither credit line was drawn upon at March 31, 2015.

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.

 

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Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by in the three months ended March 31, 2015 by operating activities was $3.4 million. During the three months ended March 31, 2015, we received $1.9 million from the proceeds of sale on loans held for sale and an increase in official checks of $2.7 million. Net cash provided by 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 $5.4 million for the three months ended March 31, 2015. During the three months ended March 31, 2015 the Bank originated $10.0 million in net loans, offset by $14.9 million in cash received through maturing and selling of securities. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, was $15.6 million for the three months ended March 31, 2015.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

At March 31, 2015, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 16.62% of adjusted total assets, which is above the required level of 5.00%, common equity tier 1 capital to risk-weighted assets of 30.05%, which is above the required level of 6.50%, tier 1 capital to risk-weighted assets of 30.05%, which is above the required level of 8.00%, and total risk-based capital of 31.30% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Bank was categorized as well-capitalized at March 31, 2015. 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 March 31, 2015, we had outstanding commitments to originate loans of $7.9 million, unused lines of credit totaling $7.8 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 deposits that are scheduled to mature in less than one year from March 31, 2015 totaled $27.3 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. The Company has also entered into a merger agreement with Community Southern Holdings, Inc.

 

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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 March 31, 2015, 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 March 31, 2015, 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 March 31, 2015, 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

Nothing to report.

 

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:
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. AND SUBSIDIARY

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: May 12, 2015				By:		/s/ Andrew S. Samuel
						Andrew S. Samuel
						President and Chief Executive Officer
						(Duly Authorized Officer)
Date: May 12, 2015				By:		/s/ Vickie J. Houllis
						Vickie J. Houllis
						Senior Vice President and
						Chief Financial Officer
						(Principal Financial Officer)

 

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