Attached files
file | filename |
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EX-32 - SECTION 1350 CERTIFICATION - Sunshine Bancorp, Inc. | d936940dex32.htm |
EX-31.2 - RULE 13A-14(A) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - Sunshine Bancorp, Inc. | d936940dex312.htm |
EX-31.1 - RULE 13A-14(A) CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - Sunshine Bancorp, Inc. | d936940dex311.htm |
Table of Contents
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 June 30, 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
(Registrants 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 issuers classes of common equity, as of the latest practicable date:
As of August 12, 2015, there were 4,232,000 issued and outstanding shares of the issuers common stock.
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
June 30, 2015 Form 10-Q
Page Number | ||||||
PART I | ||||||
Item 1. | ||||||
Condensed Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014 |
2 | |||||
3 | ||||||
4 | ||||||
|
5 |
| ||||
6-7 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
8-30 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
31-42 | ||||
Item 3. | 46 | |||||
Item 4. | 46 | |||||
PART II | ||||||
Item 1. | 47 | |||||
Item 1A. | 47 | |||||
Item 2. | 47 | |||||
Item 3. | 47 | |||||
Item 4. | 47 | |||||
Item 5. | 47 | |||||
Item 6. | 47 | |||||
SIGNATURES | 48 |
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
At June 30, | At December 31, |
|||||||
2015 | 2014 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Cash and due from banks |
$ | 7,069 | 5,316 | |||||
Interest-earning deposits with banks |
2,050 | 688 | ||||||
Federal funds sold |
15,155 | 14,475 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
24,274 | 20,479 | ||||||
Time deposits with banks |
5,145 | 5,880 | ||||||
Securities held to maturity (Fair value of $0 and $75,469) |
| 75,473 | ||||||
Securities available for sale |
94,254 | | ||||||
Loans held for sale |
505 | 2,012 | ||||||
Loans, net of allowance for loan losses of $1,883 and $1,726 |
307,002 | 108,666 | ||||||
Premises and equipment, net |
13,585 | 6,074 | ||||||
Federal Home Loan Bank stock, at cost |
2,597 | 180 | ||||||
Cash surrender value of bank-owned life insurance |
11,961 | 7,259 | ||||||
Deferred Tax Asset |
6,572 | 2,782 | ||||||
Goodwill |
8,662 | | ||||||
Core Deposit Intangible |
588 | | ||||||
Accrued interest receivable |
1,221 | 613 | ||||||
Other assets |
623 | 402 | ||||||
|
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|
|
|||||
Total assets |
$ | 476,989 | 229,820 | |||||
|
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|
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Liabilities and Stockholders Equity |
||||||||
Liabilities: |
||||||||
Noninterest-bearing accounts |
71,539 | 34,774 | ||||||
NOW accounts |
54,987 | 32,589 | ||||||
Money-market deposit accounts |
82,225 | 35,208 | ||||||
Savings accounts |
31,647 | 25,100 | ||||||
Time deposits |
108,899 | 36,253 | ||||||
|
|
|
|
|||||
Total deposits |
349,297 | 163,924 | ||||||
Federal Home Loan Bank advances |
51,480 | | ||||||
Customer Repurchase Agreements |
3,285 | | ||||||
Other liabilities |
6,096 | 4,270 | ||||||
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|
|
|
|||||
Total liabilities |
410,158 | 168,194 | ||||||
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|
|||||
Stockholders equity: |
||||||||
Preferred stock: |
||||||||
$0.01 par value, 5,000,000 authorized; none issued and outstanding $0.01 par value, $1,000 liquidation value, 5,700 shares of senior non-cumulative perpetual preferred stock, series A |
5,700 | | ||||||
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 |
23,587 | 24,091 | ||||||
Unallocated employee stock ownership plan (ESOP) shares |
(3,273 | ) | (3,273 | ) | ||||
Accumulated other comprehensive income |
9 | | ||||||
|
|
|
|
|||||
Total stockholders equity |
66,831 | 61,626 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 476,989 | 229,820 | |||||
|
|
|
|
See Accompany Notes to Condensed Consolidated Financial Statements
2
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 1,524 | 1,355 | 3,053 | 2,710 | |||||||||||
Securities |
161 | 125 | 384 | 224 | ||||||||||||
Other |
39 | 37 | 72 | 64 | ||||||||||||
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Total interest income |
1,724 | 1,517 | 3,509 | 2,998 | ||||||||||||
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Interest Expense: |
||||||||||||||||
Deposits |
70 | 78 | 137 | 159 | ||||||||||||
Borrowed funds |
1 | | 1 | | ||||||||||||
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|
|
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|
|
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|
|||||||||
Total interest expense |
71 | 78 | 138 | 159 | ||||||||||||
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Net interest income |
1,653 | 1,439 | 3,371 | 2,839 | ||||||||||||
Provision for loan losses |
| 640 | | 640 | ||||||||||||
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|
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|||||||||
Net interest income after provision for loan losses |
1,653 | 799 | 3,371 | 2,199 | ||||||||||||
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Noninterest income: |
||||||||||||||||
Fees and service charges on deposit accounts |
141 | 169 | 280 | 334 | ||||||||||||
Gain on sale of other real estate owned |
20 | 23 | 20 | 27 | ||||||||||||
Gain on sale of loans held for sale |
| | 16 | | ||||||||||||
Gain on sale of securities |
53 | | 195 | | ||||||||||||
Income from bank-owned life insurance |
58 | 30 | 117 | 60 | ||||||||||||
Other |
52 | 54 | 105 | 96 | ||||||||||||
|
|
|
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|
|
|
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Total noninterest income |
324 | 276 | 733 | 517 | ||||||||||||
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Noninterest expenses: |
||||||||||||||||
Salaries and employee benefits |
1,583 | 866 | 3,147 | 1,712 | ||||||||||||
Occupancy and equipment |
257 | 241 | 556 | 487 | ||||||||||||
Data and item processing services |
144 | 119 | 264 | 235 | ||||||||||||
Professional fees |
157 | 95 | 281 | 146 | ||||||||||||
Advertising and promotion |
38 | 11 | 76 | 32 | ||||||||||||
Stationery and supplies |
44 | 21 | 69 | 46 | ||||||||||||
Deposit insurance and general insurance |
39 | 41 | 95 | 82 | ||||||||||||
Merger related |
863 | | 1,121 | | ||||||||||||
Other |
401 | 248 | 663 | 497 | ||||||||||||
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Total noninterest expenses |
3,526 | 1,642 | 6,272 | 3,237 | ||||||||||||
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|
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Loss before income taxes |
(1,549 | ) | (567 | ) | (2,168 | ) | (521 | ) | ||||||||
Income tax benefit |
(1,398 | ) | (237 | ) | (1,664 | ) | (235 | ) | ||||||||
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Net loss |
$ | (151 | ) | (330 | ) | (504 | ) | (286 | ) | |||||||
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Basic and diluted loss per share |
$ | (0.04 | ) | N/A | (0.13 | ) | N/A | |||||||||
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See Accompany Notes to Condensed Consolidated Financial Statements
3
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(In thousands)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net loss |
$ | (151 | ) | (330 | ) | (504 | ) | (286 | ) | |||||||
Other comprehensive (loss) income: |
||||||||||||||||
Change in unrealized gain on securities: |
||||||||||||||||
Unrealized (loss) gain arising during the period |
(185 | ) | | 209 | | |||||||||||
Reclassification adjustment for realized gains |
(53 | ) | | (195 | ) | | ||||||||||
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Net change in unrealized (loss) gain |
(238 | ) | | 14 | | |||||||||||
Deferred income taxes on above change |
90 | | (5 | ) | | |||||||||||
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Total other comprehensive (loss) income |
(148 | ) | | 9 | | |||||||||||
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Comprehensive loss |
$ | (299 | ) | (330 | ) | (495 | ) | (286 | ) | |||||||
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|
See Accompany Notes to Condensed Consolidated Financial Statements
4
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders Equity (Unaudited)
($ In thousands)
Six Months Ended June 30, 2015 and 2014
Preferred Stock | Common Stock | Additional Paid In Capital |
Retained Income |
Unearned ESOP Shares |
Accumulated Other Comprehensive |
Total Stockholders Equity |
||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance, December 31, 2013 |
| $ | | | $ | | | 26,552 | | | 26,552 | |||||||||||||||||||||||||
Net income (unaudited) |
| | | | | (286 | ) | | | (286 | ) | |||||||||||||||||||||||||
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Balance, June 30, 2014 (unaudited) |
| $ | | | $ | | | 26,266 | | | 26,266 | |||||||||||||||||||||||||
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Balance, December 31, 2014 |
| | 4,232,000 | 42 | 40,766 | 24,091 | (3,273 | ) | | 61,626 | ||||||||||||||||||||||||||
Net loss (unaudited) |
| | | | | (504 | ) | | | (504 | ) | |||||||||||||||||||||||||
Preferred stock Exchanged (unaudited) |
5,700 | 5,700 | | | | | | | 5,700 | |||||||||||||||||||||||||||
Net change in unrealized gain on securities available for Sale, net of taxes (unaudited) |
| | | | | | | 9 | 9 | |||||||||||||||||||||||||||
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Balance, June 30, 2015 (unaudited) |
5,700 | $ | 5,700 | 4,232,000 | $ | 42 | 40,766 | 23,587 | (3,273 | ) | 9 | 66,831 | ||||||||||||||||||||||||
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See Accompany Notes to Condensed Consolidated Financial Statements
5
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended June 30, |
||||||||
2015 | 2014 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (504 | ) | (286 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Depreciation |
275 | 193 | ||||||
Provisions for loan losses |
| 640 | ||||||
Amortization of premiums and discounts on securities, net |
178 | 114 | ||||||
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 |
(341 | ) | | |||||
Amortization of deferred loan fees and costs, net |
(25 | ) | (12 | ) | ||||
Income from bank-owned life insurance, net |
(117 | ) | (60 | ) | ||||
Gain on sale of other real estate owned |
(20 | ) | (27 | ) | ||||
Gain on sale of securities available for sale |
(195 | ) | | |||||
Decrease in accrued interest receivable |
77 | 32 | ||||||
Increase in deferred tax asset |
(1,700 | ) | | |||||
Increase in other assets |
(148 | ) | (852 | ) | ||||
Increase in other liabilities |
1,100 | 22 | ||||||
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|
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Net cash provided by (used in) operating activities |
428 | (236 | ) | |||||
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|
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|
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Cash flows from investing activities: |
||||||||
Maturities of time deposits with banks |
735 | 2,450 | ||||||
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 |
15,997 | | ||||||
Calls and maturities of securities available for sale |
3,825 | | ||||||
Net (increase) decrease in loans |
(26,835 | ) | 2,240 | |||||
Proceeds from sale of other real estate owned |
61 | 148 | ||||||
Purchases of premises and equipment, net |
(1,689 | ) | (49 | ) | ||||
(Purchase) redemption of Federal Home Loan Bank stock |
(877 | ) | 57 | |||||
Business acquisitions, net of cash received |
(20,111 | ) | | |||||
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|
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Net cash (used in) provided by investing activities |
(23,094 | ) | 16 | |||||
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Cash flows from financing activities: |
||||||||
Net increase in deposits |
6,461 | 389 | ||||||
Net increase in Federal Home Loan Bank Advances |
20,000 | | ||||||
Proceeds from stock subscriptions |
| 117,215 | ||||||
Increase in restricted cash |
| (117,215 | ) | |||||
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|
|
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Net cash provided by financing activities |
26,461 | 389 | ||||||
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|
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Increase in cash and cash equivalents |
3,795 | 169 | ||||||
Cash and cash equivalents at beginning of period |
20,479 | 11,054 | ||||||
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|
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Cash and cash equivalents at end of period |
$ | 24,274 | 11,223 | |||||
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Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for- Interest |
$ | 137 | 159 | |||||
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|
(continued)
6
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended June 30, |
||||||||
2015 | 2014 | |||||||
Noncash transaction- |
||||||||
Accumulated other comprehensive income, net change in unrealized gain on securities available for sale, net of taxes |
$ | 9 | | |||||
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|
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Securities held to maturity transferred to available for sale |
$ | 69,665 | | |||||
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Acquisition of Community Southern Bank assets and liabilities: |
||||||||
Noncash assets acquired |
||||||||
Securities available for sale |
$ | 44,372 | | |||||
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Loans |
$ | 171,476 | | |||||
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Premises and equipment |
$ | 6,097 | | |||||
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Federal Home Loan Bank stock |
$ | 1,540 | | |||||
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|
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Cash surrender value of bank-owned life insurance |
$ | 4,585 | | |||||
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Deferred income taxes |
$ | 2,095 | | |||||
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Goodwill |
$ | 8,662 | | |||||
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Core Deposit Intangible |
$ | 588 | | |||||
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Accrued interest |
$ | 685 | | |||||
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|
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Other assets |
$ | 114 | | |||||
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Liabilities assumed and stockholders equity exchanged: |
||||||||
Deposits |
$ | 178,912 | | |||||
Federal Home Loan Bank advances |
$ | 31,480 | | |||||
|
|
|
|
|||||
Customer Repurchase agreements |
$ | 3,285 | | |||||
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|
|||||
Other liabilities |
$ | 726 | | |||||
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|
|||||
Preferred Stock |
$ | 5,700 | | |||||
|
|
|
|
See Accompany Notes to Condensed Consolidated Financial Statements
7
Table of Contents
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, a federal savings bank (the Bank). The Holding Company was formed as part of the Banks 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 Banks 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 Companys Common 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 eight full service banking offices and two loan production offices provides a variety of retail community banking services to individuals and businesses primarily in Hillsborough, Polk, Pasco, and Orange Counties, Florida. The Banks deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation (FDIC).
Our accounting and reporting policies conform to Accounting Principles Generally Accepted in the United States of America (GAAP) and general practices within the banking industry and are described in note 1 to the audited consolidated financial statements in our 2014 Annual Report on Form 10-K, as updated by information in this Form 10-Q.
While management believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. Such different value estimates could affect future earnings through different values being utilized for the disposition or amortization of the underlying assets and liabilities acquired.
Purchased Credit-Impaired Loans. As a part of the business acquisition, the Company acquired loans, some of which have shown evidence of credit deterioration since origination. These purchased credit-impaired (PCI) loans were determined to be credit impaired based on borrower payment history, past due status, loan credit grading, value of underlying collateral and other factors that affect the collectability of contractual cash flows. Under GAAP, purchasers are permitted to individually evaluate or collectively aggregate PCI loans into pools. PCI loans acquired in the same fiscal quarter may be assembled into one or more pools with common risk characteristics. Once pooled, a single composite interest rate is used to determine aggregate expected cash flows for the pool.
8
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Organization and Significant Accounting Policies, Continued
At June 30, 2015, as a result of the Companys recent acquisition, the Company individually evaluated three PCI loans. These acquired loans were recorded on the acquisition date at fair value. The Company estimates the amount and timing of expected cash flows for each individually analyzed loan. Estimated cash flows in excess of the amount paid is recorded as interest income over the remaining life of the loan.
On a quarterly basis, the Company will update the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pools effective interest rate. Impairments that occur after the acquisition date are recognized through the allowance for loan losses. Probable and significant increases in expected cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the PCI portfolio.
Goodwill and Core Deposit Intangible. Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired in the acquisition. GAAP requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. There can be no assurance that future goodwill impairment tests will not result in a charge to income. Core deposit intangibles (CDI) are initially measured at fair value and then amortized over ten years on an accelerated basis using projected decay rates of the underlying core deposits. The principal factors considered when valuing the CDI consist of the following: (1) the rate and maturity structure of the interest bearing liabilities, (2) estimated retention rates for each deposit liability category, (3) the current interest rate environment and (4) estimated noninterest income potential of the acquired relationship. The CDI is evaluated periodically for impairment.
(continued)
9
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Organization and Significant Accounting Policies, Continued
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.
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 June 30, 2015, and the results of operations for the three and six month periods ended June 30, 2015 and 2014. The results of operations for the six months ended June 30, 2015, are not necessarily indicative of the results to be expected for the full year or any other period.
Comprehensive Loss. 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, are components of comprehensive loss.
Reclassifications. Certain amounts in the 2014 financial statements have been reclassified to conform with the 2015 presentation.
(continued)
10
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(2) Business Combinations
Agreement to Acquire First Federal Bank of Florida Branches. On July 16, 2015, the Bank signed a purchase agreement pursuant to which the Bank will purchase three branch offices from First Federal Bank of Florida in Sarasota and Manatee counties. The branch offices are located in Bradenton and Sarasota, Florida. One branch is expected to be consolidated into the other Sarasota branch prior to the closing of this transaction. The purchase is expected to add approximately $56.4 million in deposits for a deposit premium of 1.80% and $8.3 million in loans at par value. Sunshine Bank has also agreed to purchase the real estate property and some selected fixed assets associated with the branches. The transaction is expected to close in the fourth quarter of 2015, subject to regulatory approvals and satisfaction of customary closing conditions.
Acquisition of Community Southern Holdings, Inc. The Company accounts for acquisitions using the acquisition method of accounting. The acquisition method of accounting requires the Company to estimate the fair value of the tangible assets and identifiable assets acquired, and liabilities and equity assumed. The estimated fair values are based on available information and current economic conditions at the date of acquisition. Fair value may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair value estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities.
On June 30, 2015, the Company acquired 100% of the outstanding common shares of Community Southern Holdings, Inc. for cash of $30.3 million, through an Agreement and Plan of Merger (the Merger). Community Southern Holdings, Inc. was merged into the Company and Community Southern Bank was merged into the Bank. The Bank acquired $250.4 million in assets and assumed $214.4 million in liabilities and stockholders equity and exchanged $5.7 million in preferred stock to the U.S. Treasury as part of its Small Business Lending Fund. The Company acquired these assets and liabilities to expand its market presence to Polk and Orange Counties, Florida. The Company incurred approximately $1.1 million in acquisition expense which are included in other noninterest expense in the accompanying consolidated statements of earnings. The Company also recorded an identifiable intangible asset representing the core deposit base of Community Southern Bank based on managements evaluation of the cost of such deposits relative to alternative funding sources. Management used market quotations to measure the fair value of investment securities and FHLB advances.
Accounting for business combination under the GAAP acquisition method prohibits carrying over valuation allowances, such as the allowance for loan losses. Uncertainties relating to the expected future cash flows is be reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Bank will establish loan loss allowances for the acquired loans in periods after the acquisition, but only for losses incurred on these loans due to credit deterioration after acquisition. As a result, the allowance for loan loss reflected in these statements is only that of historical Sunshine Bank.
Community Southern Banks loans were measured at fair value by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to managements best estimates of default rates and payment speeds. At acquisition, Community Southern Banks loan portfolio totaled $170.0 million and was recorded at a fair value of $171.5 million.
11
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(2) Business Combinations, continued
The following table summarizes the fair value of assets acquired, liabilities assumed and stockholders equity exchanged on the date of acquisition:
On June 30, 2015 |
||||
Cash and cash equivalents |
10,183 | |||
Securities available for sale |
44,372 | |||
Loans |
171,476 | |||
Premises and equipment |
6,097 | |||
Federal Home Loan Bank stock |
1,540 | |||
Cash surrender value of bank owned life insurance |
4,585 | |||
Deferred tax asset |
2,095 | |||
Goodwill |
8,662 | |||
Core deposit intangible |
588 | |||
Accrued interest receivable |
685 | |||
Other assets |
114 | |||
|
|
|||
Total assets acquired |
250,397 | |||
|
|
|||
Deposits |
178,912 | |||
Federal Home Loan Bank Advances |
31,480 | |||
Customer repurchase agreements |
3,285 | |||
Other liabilities |
726 | |||
Preferred Stock exchanged |
5,700 | |||
|
|
|||
Total liabilities assumed and stockholders equity exchanged |
220,103 | |||
|
|
|||
Net assets acquired |
$ | 30,294 | ||
|
|
Results of operations for Community Southern Holdings Inc. prior to the acquisition date are not included in the Consolidated Statement of Income for the three and six-month periods ended June 30, 2015. The following table presents financial information regarding the former Community Southern Holdings Inc. operations excluded from the Consolidated Statement of Income prior to the date of acquisition. In addition, the second table presents unaudited pro forma information as if the acquisition of Community Southern Holdings Inc. had occurred on January 1, 2015. The tables below have been prepared for comparative purposes only and have not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect managements estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. The acquisition was accounted for as a business combination under the acquisition method of accounting.
12
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(2) Business Combinations, Continued
Actual From January 1, 2015 Through June 30, 2015 (in thousands) |
||||
Net interest income |
$ | 3,642 | ||
|
|
|||
Noninterest income |
$ | 331 | ||
|
|
|||
Net loss |
$ | (1,470 | ) | |
|
|
Pro Formas | ||||||||||||||||
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(in thousands, except per share data) |
||||||||||||||||
Net interest income N |
$ | 3,487 | 3,269 | 7,013 | 6,357 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Noninterest income |
$ | 483 | 425 | 1,064 | 792 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (Loss) income |
$ | (1,907 | ) | (11 | ) | (1,974 | ) | 219 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma Loss per share- Basic and Diluted |
$ | (0.49 | ) | N/A | (0.51 | ) | N/A | |||||||||
|
|
|
|
|
|
|
|
13
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(3) Goodwill and Other Intangible Assets
Goodwill and Core Deposit Intangible (CDI) at June 30, 2015 was $8,662,000 and $588,000 respectively.
The future expected amortization of CDI with determinable useful lives as of June 30, 2015 are as follows (in thousands):
Year Ending December 31, |
Amount | |||
2015 |
$ | 53 | ||
2016 |
102 | |||
2017 |
91 | |||
2018 |
80 | |||
2019 |
70 | |||
Thereafter |
192 | |||
|
|
|||
$ | 588 | |||
|
|
14
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(4) 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 |
||||||||||||
June 30, 2015: |
||||||||||||||||
U.S. Treasury securities |
$ | 2,006 | 2 | | 2,008 | |||||||||||
Federal Home Loan Bank obligations |
16,134 | 30 | (10 | ) | 16,154 | |||||||||||
U.S. Government enterprise and agency obligations |
22,776 | 24 | (10 | ) | 22,790 | |||||||||||
Municipal securities |
11,940 | | | 11,940 | ||||||||||||
Corporate securities |
2,379 | | | 2,379 | ||||||||||||
Mortgage-backed securities |
39,005 | | (22 | ) | 38,983 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 94,240 | 56 | (42 | ) | 94,254 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
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 June 30, 2015 were as follows (in thousands):
Securities Available for sale |
||||||||
Amortized Cost |
Fair Value |
|||||||
Due in one year or less |
$11,074 | 11,093 | ||||||
Due from after one year to five years |
23,952 | 23,969 | ||||||
Due from after five years to ten years |
1,979 | 1,979 | ||||||
Due after ten years |
18,230 | 18,230 | ||||||
Mortgage-backed securities |
39,005 | 38,983 | ||||||
|
|
|
|
|||||
Total |
$ | 94,240 | 94,254 | |||||
|
|
|
|
(continued)
15
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(4) 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 June 30, 2015: |
||||||||||||||||
Federal Home Loan Bank obligations |
$ | (1) | 2,027 | (9 | ) | 1,990 | ||||||||||
U.S Government enterprise and agency obligations |
| | (10 | ) | 4,020 | |||||||||||
Mortgage-backed securities |
(22 | ) | 15,648 | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Totals |
$ | (23 | ) | 17,675 | (19 | ) | 6,010 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
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 eleven investment securities available for sale at June 30, 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 was 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.
The Bank pledged securities with a fair market value of approximately $24.2 million at June 30, 2015 and $25.6 million at December 31, 2014 to secure public funds and other borrowings.
(continued)
16
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(4) Securities, Continued
Securities available for sale sold during the six months ended June 30, 2015, are summarized as follows (in thousands):
Proceeds received from sale |
$ | 15,997 | ||
|
|
|||
Gross Gains on sale |
$ | 195 | ||
|
|
(5) Loans
The loan portfolio segments and classes are as follows (in thousands):
June 30, 2015 |
December 31, 2014 |
|||||||
Real estate mortgage loans: |
||||||||
One-to four-family residential |
$ | 85,077 | 52,708 | |||||
Commercial |
118,402 | 22,043 | ||||||
Multi-family |
16,116 | 10,622 | ||||||
Land and construction |
23,478 | 7,075 | ||||||
|
|
|
|
|||||
Total real estate mortgage loans |
243,073 | 92,448 | ||||||
Commercial loans |
61,307 | 16,773 | ||||||
Consumer loans |
4,992 | 1,398 | ||||||
|
|
|
|
|||||
Total loans |
309,372 | 110,619 | ||||||
Deduct: |
||||||||
Deferred loan fees, net |
(320 | ) | (124 | ) | ||||
Allowance for loan losses |
(1,883 | ) | (1,726 | ) | ||||
Undisbursed loan proceeds |
(167 | ) | (103 | ) | ||||
|
|
|
|
|||||
Loans, net |
$ | 307,002 | 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 Companys 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.
(continued)
17
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(5) Loans, Continued
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 borrowers 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.
(continued)
18
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(5) Loans, Continued
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 June 30, 2015: |
||||||||||||||||||||
Beginning balance |
$ | 1,327 | 407 | 9 | | 1,743 | ||||||||||||||
Provision (credit) for loan losses |
(127 | ) | 63 | (5 | ) | 69 | | |||||||||||||
Charge-offs |
| | | | | |||||||||||||||
Recoveries |
113 | 26 | 1 | | 140 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 1,313 | 496 | 5 | 69 | 1,883 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Three Months Ended June 30, 2014: |
||||||||||||||||||||
Beginning balance |
1,441 | 207 | 9 | 64 | 1,721 | |||||||||||||||
Provision (credit) for loan losses |
63 | 647 | (6 | ) | (64 | ) | 640 | |||||||||||||
Charge-offs |
| (626 | ) | (1 | ) | | (627 | ) | ||||||||||||
Recoveries |
13 | 17 | 7 | | 37 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 1,517 | 245 | 9 | | 1,771 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Six Months Ended June 30, 2015: |
||||||||||||||||||||
Beginning balance |
1,409 | 308 | 9 | | 1,726 | |||||||||||||||
Provision (credit) for loan losses |
(210 | ) | 147 | (6 | ) | 69 | | |||||||||||||
Charge-offs |
(1 | ) | (9 | ) | | | (10 | ) | ||||||||||||
Recoveries |
115 | 50 | 2 | | 167 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 1,313 | 496 | 5 | 69 | 1,883 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Six Months Ended June 30, 2014: |
||||||||||||||||||||
Beginning balance |
1,417 | 208 | 10 | 83 | 1,718 | |||||||||||||||
Provision (credit) for loan losses |
90 | 637 | (4 | ) | (83 | ) | 640 | |||||||||||||
Charge-offs |
(6 | ) | (626 | ) | (5 | ) | | (637 | ) | |||||||||||
Recoveries |
16 | 26 | 8 | | 50 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 1,517 | 245 | 9 | | 1,771 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
(continued)
19
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(5) Loans, Continued
Real Estate Mortgage Loans |
Commercial Loans |
Consumer Loans |
Unallocated | Total | ||||||||||||||||
At June 30, 2015: |
||||||||||||||||||||
Individually evaluated for impairment: |
||||||||||||||||||||
Recorded investment |
$ | 598 | 644 | | | 1,242 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance in allowance for loan losses |
$ | 12 | 9 | | | 21 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Collectively evaluated for impairment: |
||||||||||||||||||||
Recorded investment |
$ | 241,791 | 60,607 | 4,992 | | 307,390 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance in allowance for loan losses |
$ | 1,301 | 487 | 5 | 69 | 1,862 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Acquired with deteriorated credit quality: |
||||||||||||||||||||
Recorded investment |
$ | 684 | 56 | | | 740 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance in allowance for loan losses |
$ | | | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
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 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
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 June 30, 2015: |
||||||||||||||||||||||||||||
Grade: |
||||||||||||||||||||||||||||
Pass |
$ | 81,632 | 115,748 | 16,007 | 22,573 | 57,636 | 4,992 | 298,588 | ||||||||||||||||||||
Special mention |
2,181 | 2,034 | | 440 | 3,011 | | 7,666 | |||||||||||||||||||||
Substandard |
1,264 | 620 | 109 | 465 | 660 | | 3,118 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 85,077 | 118,402 | 16,116 | 23,478 | 61,307 | 4,992 | 309,372 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
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.
(continued)
20
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(5) 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, 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 loans 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 managements close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Companys 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.
(continued)
21
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(5) 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 |
90 Days Or Greater Past Due |
Total Past Due |
Current | (1) Nonaccrual Loans |
Total Loans |
||||||||||||||||||||||
At June 30, 2015: |
||||||||||||||||||||||||||||
Real estate mortgage loans: |
||||||||||||||||||||||||||||
One-to four-family |
$ | 322 | 36 | | 358 | 84,091 | 628 | 85,077 | ||||||||||||||||||||
Commercial |
| | | | 118,006 | 396 | 118,402 | |||||||||||||||||||||
Multi-family |
| | | | 16,007 | 109 | 16,116 | |||||||||||||||||||||
Land and construction |
22 | | | 22 | 23,199 | 257 | 23,478 | |||||||||||||||||||||
Commercial loans |
132 | | | 132 | 60,931 | 244 | 61,307 | |||||||||||||||||||||
Consumer loans |
1 | | | 1 | 4,991 | | 4,992 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 477 | 36 | | 513 | 307,225 | 1,634 | 309,372 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
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 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes $740,000 in purchased credit impaired loans at June 30, 2015. |
(continued)
22
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(5) Loans, Continued
The following summarizes the amount of impaired loans (in thousands):
With No Related Allowance Recorded |
With an Allowance Recorded | Total (1) | ||||||||||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
|||||||||||||||||||||||||
June 30, 2015: |
||||||||||||||||||||||||||||||||
Real estate mortgage loans: |
||||||||||||||||||||||||||||||||
One-to four-family residential |
$ | | | 120 | 138 | 12 | 120 | 138 | 12 | |||||||||||||||||||||||
Commercial |
369 | 949 | | | | 369 | 949 | | ||||||||||||||||||||||||
Multi-family |
109 | 255 | | | | 109 | 255 | | ||||||||||||||||||||||||
Land and construction |
| | | | | | | | ||||||||||||||||||||||||
Commercial loans |
549 | 673 | 95 | 99 | 9 | 644 | 772 | 9 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 1,027 | 1,877 | 215 | 237 | 21 | 1,242 | 2,114 | 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 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Excludes $740,000 in purchased credit impaired loans at June 30, 2015 |
The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
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 |
$ | 121 | 1 | 2 | 1,645 | 4 | 11 | |||||||||||||||||
Commercial |
370 | 12 | 12 | 4,796 | 12 | 76 | ||||||||||||||||||
Multi-family |
111 | | 3 | 148 | | 3 | ||||||||||||||||||
Land and construction |
| | | 111 | | | ||||||||||||||||||
Commercial loans |
648 | | 10 | 700 | | 6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,250 | 13 | 27 | 7,400 | 16 | 96 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
23
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(5) Loans, Continued
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
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 |
$ | 121 | 4 | 4 | 1,746 | 9 | 21 | |||||||||||||||||
Commercial |
1,504 | 96 | 92 | 4,816 | 155 | 156 | ||||||||||||||||||
Multi-family |
114 | | 6 | 154 | | 10 | ||||||||||||||||||
Land and construction |
| | | 112 | | 1 | ||||||||||||||||||
Commercial loans |
696 | | 23 | 702 | | 6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,435 | 100 | 125 | 7,530 | 164 | 194 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 six months ended June 30, 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.
(6) Purchased Credit Impaired Loans
The carrying amounts as of the acquisition date of PCI loans acquired are detailed in the following table (in thousands):
During the Six-months Ended June 30, 2015 |
||||
Contractually required principal and interest at acquisition |
$ | 1,272 | ||
Nonaccretable difference |
(404 | ) | ||
|
|
|||
Cash flows expected to be collected at acquisition |
868 | |||
Accretable yield adjustment |
(128 | ) | ||
|
|
|||
Total carrying amount of PCI loans |
$ | 740 | ||
|
|
24
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(7) Federal Home Loan Bank Advances
A summary of Federal Home Loan Bank (FHLB) advances at June 30, 2015 ($ in thousands). There were no advances as of December 31, 2014.
Maturing in the Year Ending December 31, |
Advance Type | Interest Rate |
June 30, 2015 |
|||||||
2015 |
Daily Rate Credit | 0.37 | % | $ | 20,000 | |||||
2015 |
Fixed Rate | 1.56 | % | 1,271 | ||||||
2015 |
Fixed Rate | 0.29 | % | 3,000 | ||||||
2015 |
Fixed Rate | 0.30 | % | 2,000 | ||||||
2015 |
Fixed Rate | 1.58 | % | 1,004 | ||||||
2015 |
Principal Reducing | 1.62 | % | 100 | ||||||
2016 |
Adjustable Rate | 0.31 | % | 2,501 | ||||||
2016 |
Fixed Rate | 1.99 | % | 5,064 | ||||||
2016 |
Principal Reducing | 0.70 | % | 1,253 | ||||||
2017 |
Adjustable Rate | 0.38 | % | 2,503 | ||||||
2017 |
Fixed Rate | 2.37 | % | 3,091 | ||||||
2017 |
Fixed Rate | 2.37 | % | 2,060 | ||||||
2018 |
Convertible | 3.99 | % | 2,278 | ||||||
2018 |
Convertible | 3.67 | % | 5,355 | ||||||
|
|
|||||||||
Total |
$ | 51,480 | ||||||||
|
|
At June 30, 2015, we had the capacity to borrow approximately $72.4 million and pursuant to the collateral agreement with the FHLB, advances are secured by a blanket lien of residential and commercial real estate loans totaling approximately $79.2 million and the Companys FHLB stock.
25
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(8) Fair Value of Financial Instruments
The estimated fair values of the Companys financial instruments are as follows (in thousands):
At June 30, 2015 | At December 31, 2014 | |||||||||||||||||||||||
Carrying Amount |
Fair Value |
Level | Carrying Amount |
Fair Value |
Level | |||||||||||||||||||
Financial assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 24,274 | 24,274 | 1 | $ | 20,479 | 20,479 | 1 | ||||||||||||||||
Time deposits with banks |
5,145 | 5,145 | 1 | 5,880 | 5,880 | 1 | ||||||||||||||||||
Securities |
94,254 | 94,254 | 2 | 75,473 | 75,469 | 2 | ||||||||||||||||||
Loans held for sale |
505 | 505 | 3 | 2,012 | 2,028 | 3 | ||||||||||||||||||
Loans |
307,002 | 311,187 | 3 | 108,666 | 113,807 | 3 | ||||||||||||||||||
Federal Home Loan Bank stock |
2,597 | 2,597 | 3 | 180 | 180 | 3 | ||||||||||||||||||
Accrued interest receivable |
1,221 | 1,221 | 3 | 613 | 613 | 3 | ||||||||||||||||||
Financial liabilities: |
||||||||||||||||||||||||
Deposits |
349,297 | 340,841 | 3 | 163,924 | 153,568 | 3 | ||||||||||||||||||
FHLB Advances |
51,480 | 51,480 | 3 | | | 3 | ||||||||||||||||||
Customer Repurchase Agreements |
3,285 | 3,285 | 3 | | | 3 | ||||||||||||||||||
Off-balance-sheet financial instruments |
| | 3 | | | 3 |
(9) 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 June 30, 2015 are summarized below (in thousands):
Fair Value |
Level 1 | Level 2 | Level 3 | |||||||||||||
U.S. Treasury securities |
$ | 2,008 | | 2,008 | | |||||||||||
Federal Home Loan Bank obligations |
16,154 | | 16,154 | | ||||||||||||
U.S. Government enterprise and agency obligations |
22,790 | | 22,790 | | ||||||||||||
Municiple securities |
11,940 | 11,940 | | |||||||||||||
Corporate securities |
2,379 | | 2,379 | | ||||||||||||
Mortgage-backed securities |
38,983 | | 38,983 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 94,254 | | 94,254 | | |||||||||||
|
|
|
|
|
|
|
|
During the six months ended June 30, 2015, no securities were transferred in or out of Level 1, Level 2, or Level 3.
(continued)
26
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(9) 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, excluding purchased credit impaired loans are as follows (in thousands):
Fair Value |
Level 1 | Level 2 | Level 3 | Total Losses |
Losses Recorded During the Period |
|||||||||||||||||||
At June 30, 2015: |
||||||||||||||||||||||||
Real estate mortgage loans: |
||||||||||||||||||||||||
Commercial |
$ | 369 | | | 369 | 517 | | |||||||||||||||||
Multi-family |
109 | | | 109 | 128 | | ||||||||||||||||||
Commercial |
86 | | | 86 | 74 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 564 | | | 564 | 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 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned 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 June 30, 2015- |
||||||||||||||||||||||||
Other real estate owned |
$ | 32 | | | 32 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
At December 31, 2014- |
||||||||||||||||||||||||
Other real estate owned |
$ | 41 | | | 41 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
27
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(9) Fair Value Measurements, Continued
Acquired assets, assumed liabilities and stockholders equity exchanged measured at fair value on a nonrecurring bases are as follows (in thousands):
Fair Value |
Level 1 | Level 2 | Level 3 | Total Losses |
Losses Recorded During the Year |
|||||||||||||||||||
As of June 30, 2015: |
||||||||||||||||||||||||
Securities available for sale |
$ | 44,372 | | 44,372 | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans, net of discount |
$ | 171,476 | | | 171,476 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Premises and equipment |
$ | 6,097 | | | 6,097 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Federal Home Loan Bank Stock |
$ | 1,540 | | | 1,540 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash surrender value of bank owned life insurance |
$ | 4,585 | | | 4,585 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Deferred taxes |
$ | 2,095 | | | 2,095 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Goodwill |
$ | 8,662 | | | 8,662 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Core deposit intangible |
$ | 588 | | | 588 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Accrued interest |
$ | 685 | | | 685 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Other assets |
$ | 114 | | | 114 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Deposits |
$ | 178,912 | | | 178,912 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
FHLB Advances |
$ | 31,480 | | | 31,480 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Customer Repurchase Agreement |
$ | 3,285 | | | 3,285 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Other liabilities |
$ | 726 | | | 726 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Preferred Stock |
$ | 5,700 | | | 5,700 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
28
Table of Contents
SUNSHINE BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(10) 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 Companys initial public offering. A total of 338,560 shares were acquired in exchange for a $3,385,600 indirect note payable from the Employee Stock Ownership Plan Trust to the Holding Company. The note bears interest at a variable rate based on Prime and is payable in thirty annual installments.
At June 30, 2015 the ESOP shares were as follows ($ in thousands, except per share amounts):
Allocated shares |
11,285 | |||
Unallocated shares |
327,275 | |||
|
|
|||
Total ESOP shares |
338,560 | |||
|
|
|||
Fair value of unallocated shares |
$ | 4,844 | ||
|
|
(11) Stockholders Equity
As a result of the Merger with Community Southern Holdings, Inc. the Company exchanged Community Southern Holdings, Inc.s Preferred Stock for similar shares issued by the Company to the U.S. Treasury.
The 5,700 shares exchanged with the U.S. Treasury are Senior Non-Cumulative Perpetual Preferred Stock, Class A, having a liquidation preference of $1,000 per share (the Class A Preferred Stock), for aggregate liquidation value of $5,700,000. The Class A Preferred Stock is entitled to receive noncumulative dividends payable quarterly on each January 1, April 1, July 1 and October 1. At June 30, 2015, the dividend rate was 1% per annum. If the Class A Preferred Stock remains outstanding after April 1, 2016 dividend rate will be fixed at 9%. Such dividends are not cumulative, but the Company may only declare and pay dividends on its common stock (or any other equity securities junior to the Class A Preferred Stock) if it has declared and paid dividends for the current dividend period on the Class A Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem other securities. In addition, if (i) The Company has not timely declared and paid dividends on the Class A Preferred Stock for six dividend periods or more, whether or not consecutive, and (ii) shares of Class A Preferred Stock with an aggregate liquidation preference of a certain amount are still outstanding, the Treasury (or any successor holder of Class A Preferred Stock) may designate two additional directors to be elected to the Companys Board of Directors. The Company may redeem the shares of Class A Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the Liquidation Amount per share and the per-share amount of any unpaid dividends for the then current period, subject to any required prior approval by the Companys primary federal banking regulator.
(12) 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 savings and loan 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, additional 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)
(12) Regulatory Matters, Continued
The following table shows the Banks capital amounts and ratios and regulatory thresholds at June 30, 2015:
Actual | Minimum For Capital Adequacy Purposes |
Minimum To Be Well Capitalized |
||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Common Equity Tier 1 | ||||||||||||||||||||||||
Capital to Risk Weighted Assets |
$ | 47,417 | 14.51 | % | $ | 14,705 | 4.50 | % | $ | 21,241 | 6.50 | % | ||||||||||||
Tier I Capital to Risk-Weighted Assets |
47,417 | 14.51 | 19,607 | 6.00 | 26,143 | 8.00 | ||||||||||||||||||
Total Capital to Risk-Weighted Assets |
49,300 | 15.09 | 26,137 | 8.00 | 32,671 | 10.00 | ||||||||||||||||||
Tier I Capital to Total Assets |
47,417 | 20.10 | 9,436 | 4.00 | 11,795 | 5.00 |
As of June 30, 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 institutions capitalization category.
(13) 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 and six months ended June 30, 2015, basic and diluted loss per share is the same due to the Company having no stock-based compensation plans. The conversion was completed on July 14, 2014. Loss per share was not computed until January 1, 2015, as if the conversion from a mutual savings bank 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 June 30, 2015: |
||||||||||||
Basic and Diluted loss per share: |
||||||||||||
Net loss |
$ | (151 | ) | 3,904,725 | $ | (0.04 | ) | |||||
|
|
|
|
|
|
|||||||
Six Months Ended June 30, 2015: |
||||||||||||
Basic and Diluted loss per share: |
||||||||||||
Net loss |
$ | (504 | ) | 3,904,725 | $ | (0.13 | ) | |||||
|
|
|
|
|
|
30
Table of Contents
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto presented elsewhere in this report. For additional information, refer to the audited 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, general economic conditions, including our local, state and national real estate markets and employment trends; changes in legislation or regulation; competition from other financial institutions; the accuracy of our estimates of future loan losses; inflation, interest rate, market and monetary fluctuations; acquisitions and integration of acquired businesses; the possible impairment of goodwill associated with our acquisition; expansion of operations, including branch openings and branch acquisitions, new product offerings and expansion into new markets; the impact of new capital requirements; restrictions or conditions imposed by our regulators on our operations; cybersecurity breaches, including potential business disruptions or financial losses. 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 is a financial services institution focused on creating financial success for consumers, businesses, and non-profits throughout central Florida. Our competitive advantage is our employees, who are passionate about providing uncompromising service with a sense of warmth, integrity, friendliness, and company spirit. Operations are conducted from the main banking office in Plant City, Florida and seven additional full service banking offices located in Brandon, Riverview, Lakeland, Zephyrhills, Bartow, Plant City and Winter Haven, Florida, and two loan production offices located in downtown Tampa and downtown Orlando, Florida. Our common stock is traded on the NASDAQ Capital Market under the symbol SBCP.
Our principal business has consisted of attracting retail deposits from the general public in our primary market area of Hillsborough and Pasco counties and following the Merger in Polk and Orange counties, Florida, 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, one-to four-family 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, the Federal Home Loan Bank, Municipal, and Corporate. We offer a variety of deposit accounts to consumers and small businesses, including savings accounts, NOW accounts, money market accounts, certificate of deposit accounts, customer repurchase agreements, and cash management programs.
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Table of Contents
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 provision for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of fees and service charges on deposit accounts, gain on sales of other real estate owned, gain on sales of loans held for sale, gain on sales of securities, 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, 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.
Recent Developments
Agreement to Acquire First Federal Bank of Florida Branches. On July 16, 2015, the Bank signed a purchase agreement pursuant to which the Bank will purchase three of the three branch offices from First Federal Bank of Florida in Sarasota and Manatee counties. The branches offices are located in Bradenton and Sarasota, Florida. One branch is expected to be consolidated into the other Sarasota branch prior to the closing of this transaction. The purchase is expected to add approximately $56.4 million in deposits for a deposit premium of 1.80% and $8.3 million in loans at par value. Sunshine Bank has also agreed to purchase the real estate property and some selected fixed assets associated with the branches. The transaction is expected to close in the fourth quarter of 2015, subject to regulatory approvals and satisfaction of customary closing conditions.
Agreement to Acquire Community Southern Holdings, Inc. On June 30, 2015, the Company acquired 100.00% of the outstanding common shares of Community Southern Holdings, Inc. for $30.3 million, through an Agreement and Plan of Merger (the Merger). Community Southern Holdings, Inc. was merged into the Company and Community Southern Bank was merged into the Bank. The Merger added three branch locations in the Lakeland/Orlando, Florida market, establishing Sunshine Banks presence in that market. The Bank acquired $250.4 million in assets and assumed $214.4 million in liabilities and exchanged $5.7 million in preferred stock to the U.S. Treasury as part of its Small Business lending fund. The Company acquired these assets and liabilities to expand its market presence to Polk and Orange Counties. The Company incurred approximately $1.1 million in acquisition expenses which are included in noninterest expense in the accompanying consolidated statements of operations. On June 30, 2015, in connection with the completion of the Merger, Kenneth H. Compton, former director of Community Southern Holdings, Inc. and Community Southern Bank, began his service as a director of the Company and the Bank.
Critical Accounting Policies
There have been no material changes in our critical accounting policies since the Company filed its Annual Report Form 10-K in 2014, except for our accounting policy related to business combinations.
Business combinations. The Company accounts for acquisitions using the acquisition method of accounting. The acquisition method of accounting requires the Company to estimate the fair value of the tangible assets and identifiable assets acquired, liabilities and equity assumed. The estimated fair values are based on available information and current economic conditions at the date of acquisition. Fair value may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair value estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities.
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Table of Contents
Comparison of Financial Condition at June 30, 2015 and December 31, 2014
Total Assets. Total assets increased $247.2 million, or 107.5%, to $477.0 million at June 30, 2015 from $229.8 million at December 31, 2014. The increase was primarily the result of the Merger with Community Southern Holdings, Inc. The Company completed the Merger on June 30, 2015 adding approximately $250.4 million in total assets, $44.4 million in securities available for sale, $171.5 million in total loans, and $34.5 million in all other assets. Managements strategic plan to change the Banks business model from a traditional thrift to a full service commercial bank led to a restructuring of the Companys balance sheet, reducing lower interest yielding securities and cash and increasing higher yielding commercial and commercial real estate loans. The Companys increase in total assets due to organic growth during the first six months of 2015, included an increase of $26.8 million in net loans, partially offset by a $25.6 million decrease in securities.
Cash and Cash Equivalents. Total cash and cash equivalents increased by $3.8 million, or 18.5%, to $24.3 million at June 30, 2015 from $20.5 million at December 31, 2014. The increase was the net result of increases in cash received in the Merger, from securities sales and maturities, and borrowings; reduced by cash used in the Merger, increases in loan originations and strategic investments in infrastructure, sales platforms, and new products.
Investment Securities. Investment securities increased $18.8 million, or 24.9%, to $94.3 million at June 30, 2015 from $75.5 million at December 31, 2014. The increase was primarily due to the securities acquired in the Merger of $44.4 million, all of which were classified as available for sale. This increase was partially offset by $8.0 million in maturities and calls and the sale of approximately $16.0 million in securities, resulting in a $195,000 gain during the first half of 2015. During the period, 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. The sales were initiated as part of the strategic plan to redeploy excess proceeds from the July 2014 offering, which were initially invested in low yielding securities, into the higher yielding loan portfolio.
Net Loans. Our primary interest earning asset and source of income is our loan portfolio. Net loans increased $198.3 million, or 182.5%, to $307.0 million at June 30, 2015 from $108.7 million at December 31, 2014. The increase was primarily a result of the Merger, resulting in a net loan increase of $171.5 million. The acquire loan portfolio consisted of $83.6 million in commercial real estate, $34.2 million in commercial, $34.0 million in one-to four-family residential and $19.7 million in other loans. The Bank also experienced strong organic loan growth in commercial real estate and commercial loans during the first half of 2015. Excluding acquired loans, commercial real estate loans increased $12.8 million. The commercial real estate loans increase was comprised of $18.2 million in commercial mortgage loans, net of $5.4 million in normal payoffs and amortization of loans. In addition, commercial loans increased $10.3 million and one-to four-family residential real estate loans decreased $1.6 million as management no longer originates fixed one-to four-family residential loans to be held in portfolio.
Deposits. Deposits increased $185.4 million, or 113.1%, to $349.3 million at June 30, 2015 from $163.9 million at December 31, 2014. The increase was primarily due to the Merger, resulting in an increase in deposits of $178.9 million, which was comprised of core deposits (consisting of non-interest-bearing, NOW, money market and savings accounts) of $105.7 million and noncore deposits (consisting of time deposits) of $73.2 million. The Bank continued its efforts to attract new customers and retain relationships by enhancing its online and mobile banking products, expanding deposit products and services, and introducing a full suite of business banking products. Economic conditions and demographic data are trending positively in our market area creating expanded opportunities to capitalize upon.
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Table of Contents
Borrowings. Borrowings increased to $54.8 million at June 30, 2015 primarily as a result of assumed borrowings of $34.8 million from the merger and the Banks daily rate credit overnight borrowing of $20.0 million. At June 30, 2015, borrowings consisted of $51.5 million of Federal Home Loan Bank (FHLB) advances and $3.3 million of customer repurchase agreements. The FHLB advances are secured by a blanket lien of residential and commercial real estate loans totaling approximately $79.2 million. The customer repurchase agreements are secured by securities with a market value of $4.1 million.
Stockholders Equity. Stockholders equity increased $5.2 million, or 8.4%, to $66.8 million at June 30, 2015, a result of the exchange of $5.7 million of preferred stock issued to the U.S. Treasury as part of its Small Business Lending Fund (SBLF); partially offset by the net loss of $504,000 for the six months ended June 30, 2015.
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Table of Contents
Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the three and six months ended June 30, 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 daily 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 June 30, | ||||||||||||||||||||||||
2015 (1) | 2014 (1) | |||||||||||||||||||||||
Average Balance (2) |
Interest and Dividends |
Average Yield/ Rate |
Average Balance |
Interest and Dividends |
Average Yield/ Rate |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 128,379 | $ | 1,524 | 4.75 | % | $ | 111,595 | $ | 1,355 | 4.86 | % | ||||||||||||
Securities |
64,561 | 161 | 1.00 | 53,170 | 125 | .94 | ||||||||||||||||||
Other (3) |
38,815 | 39 | .40 | 55,308 | 37 | .27 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-earning assets |
231,755 | 1,724 | 2.98 | 220,073 | 1,517 | 2.76 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Noninterest-earning assets |
13,934 | 16,350 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 245,689 | $ | 236,423 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
NOW accounts |
33,428 | 4 | .05 | 31,493 | 4 | .05 | ||||||||||||||||||
Money market accounts |
44,771 | 21 | .19 | 38,114 | 18 | .19 | ||||||||||||||||||
Savings accounts |
25,324 | 6 | .09 | 26,546 | 7 | .11 | ||||||||||||||||||
Time deposit |
36,507 | 39 | .43 | 42,451 | 49 | .46 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
140,030 | 70 | .20 | 138,604 | 78 | .23 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
FHLB Advances |
1,445 | 1 | .28 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total interest-bearing liabilities |
141,475 | 71 | .20 | 138,604 | 78 | .23 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Noninterest-bearing liabilities |
42,861 | 71,318 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities |
184,336 | 209,922 | ||||||||||||||||||||||
Total stockholders equity |
61,353 | 26,501 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 245,689 | $ | 236,423 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 1,653 | $ | 1,439 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest rate spread (4) |
2.78 | % | 2.53 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest-earning assets (5) |
$ | 90,280 | $ | 81,469 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin (6) |
2.85 | % | 2.62 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Average interest-earning assets to average interest-liabilities |
163.8 | % | 158.8 | % | ||||||||||||||||||||
|
|
|
|
(1) | Annualized. |
(2) | Acquired assets and assumed liabilities and equity for the three months ended June 30, 2015 are not included in the average balances. |
(3) | Includes interest-earning deposits, federal funds, FHLB stock and time deposits with other banks. |
(4) | 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. |
(5) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(6) | Net interest margin represents net interest income divided by average total interest-earning assets. |
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Table of Contents
Six months Ended June 30, | ||||||||||||||||||||||||
2015 (1) | 2014 (1) | |||||||||||||||||||||||
Average Balance (2) |
Interest and Dividends |
Average Yield/ Rate |
Average Balance |
Interest and Dividends |
Average Yield/ Rate |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 119,871 | $ | 3,053 | 5.09 | % | $ | 111,827 | $ | 2,710 | 4.85 | % | ||||||||||||
Securities |
64,305 | 384 | 1.19 | 51,588 | 224 | .87 | ||||||||||||||||||
Other (3) |
34,308 | 72 | .42 | 36,621 | 64 | .35 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total interest-earning assets |
218,484 | 3,509 | 3.21 | 200,036 | 2,998 | 3.00 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Noninterest-earning assets |
21,678 | 16,559 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 240,162 | $ | 216,595 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
NOW accounts |
33,519 | 8 | .05 | 31,060 | 8 | .05 | ||||||||||||||||||
Money market accounts |
41,503 | 39 | .19 | 38,027 | 35 | .18 | ||||||||||||||||||
Savings accounts |
25,181 | 12 | .10 | 26,114 | 13 | .10 | ||||||||||||||||||
Time deposit |
36,259 | 78 | .43 | 43,004 | 103 | .48 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
136,462 | 137 | .20 | 138,205 | 159 | .23 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
FHLB Advances |
727 | 1 | .28 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
137,189 | 138 | .20 | 138,205 | 159 | .23 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Noninterest-bearing liabilities |
41,561 | 51,856 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities |
178,750 | 190,061 | ||||||||||||||||||||||
Total stockholders equity |
61,412 | 26,534 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 240,162 | $ | 216,595 | ||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net interest income |
$ | 3,371 | $ | 2,839 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest rate spread (4) |
3.01 | % | 2.77 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest-earning assets (5) |
$ | 81,295 | $ | 61,831 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin (6) |
3.09 | % | 2.84 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities |
159.3 | % | 144.7 | % | ||||||||||||||||||||
|
|
|
|
(1) | Annualized. |
(2) | Acquired assets and assumed liabilities and equity for the six months ended June 30, 2015 are not included in the average balances. |
(3) | Includes interest-earning deposits, federal funds, FHLB stock and time deposits with other banks. |
(4) | 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. |
(5) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(6) | Net interest margin represents net interest income divided by average total interest-earning assets. |
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Table of Contents
Comparison of Operating Results for the Three Months Ended June 30, 2015 and June 30, 2014
General. Net loss for the three months ended June 30, 2015 was $151,000 compared to a net loss of $330,000 for the three months ended June 30, 2014. The decrease in net loss was primarily due to increases in net interest income of $214,000, and a decrease in the provision for loan losses of $640,000, and income tax benefit of $1.2 million; partially offset by an increase in noninterest expense of $1.9 million. The increase in noninterest expense was mostly comprised of merger related expenses, increases in salary and benefit expense, and expenses related to the investment in expanding the lending, credit, risk, and compliance functions of the Bank, and other increases related to infrastructure costs.
Interest Income. Interest income increased $207,000, or 13.6%, to $1.7 million for the three months ended June 30, 2015 primarily as a result of a $169,000 increase in interest income on loans and a $36,000 increase in interest income from securities. The increase in interest income resulted primarily from a $11.7 million increase in the average balance of our interest-earnings assets to $231.8 million and a 22 basis points increase in the average yield on our interest-earning assets to 2.98% for the three months ended June 30, 2015 as compared to the prior year period. The increase in the average balance was attributable to managements focus on reducing lower interest yielding securities and cash and increasing higher yielding commercial and commercial real estate loans.
Interest income on loans increased $169,000, or 12.5%, to $1.5 million for the three months ended June 30, 2015. Despite generally lower average yields, the Bank was able to increase average balances of loans. The average balance of loans increased to $128.4 million for the three months ended June 30, 2015 from $111.6 million for the three months ended June 30, 2014 as a result of managements emphasis on growing commercial loans.
Interest income on investment securities increased $36,000, or 28.8%, to $161,000 for the three months ended June 30, 2015 as a result of the increase in the average balance of investment securities. The average balance of investment securities increased $11.4 million to $64.6 million for the three months ended June 30, 2015 from $53.2 million for the three months ended June 30, 2014. The average balance on investment securities increased as a result of the funds from the excess liquidity created in the 2014 stock offering to purchase U.S government sponsored enterprise mortgage-backed securities, U.S. government enterprise and agency obligations and Federal Home Loan Bank obligations during the second half of 2014. The average yield on investment securities increased by six basis point to 1.00% for the three months ended June 30, 2015 from 0.94% for the three months ended June 30, 2014.
Interest Expense. Interest expense decreased $7,000, or 8.9%, to $71,000 for the three months ended June 30, 2015 from $78,000 for the three months ended June 30, 2014 due to managements strategy to obtain lower costing deposits and improving the deposit mix by allowing short term higher rate time deposits to mature. The average cost of deposits decreased by three basis points to 0.20% for the three months ended June 30, 2015 from 0.23% for the three months ended June 30, 2014 reflecting managements success in lowering the cost of deposits. The average balance of interest-bearing deposits increased by $1.4 million during the three months ended June 30, 2015 to $140.0 million as compared to the prior year period.
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Table of Contents
Net Interest Income. The combined effect of a higher average balance on loans, increased average yield on securities and a lower average cost of deposits has increased the Banks net interest income for the three months ended June 30, 2015. Net interest income increased $214,000, or 14.9%, to $1.7 million for the three months ended June 30, 2015 as compared to the prior year period. The increase was primarily due to the increase in our net interest rate spread to 2.78% for the three months ended June 30, 2015 from 2.53% for the three months ended June 30, 2014. Our net interest margin increased to 2.85% for the three months ended June 30, 2015 from 2.62% for the three months ended June 30, 2014.
Provision for Loan Losses. We recorded no provision for loan losses for the three months ended June 30, 2015 compared to a provision of $640,000 for the three months ended June 30, 2014. Net recoveries for the three months ended June 30, 2015 were $140,000 compared to net charge-offs of $590,000 for the three months ended June 30, 2014. The change was primarily due to the charge-off of a large commercial loan relationship in the amount of $624,000 for the period ended June 30, 2014.
Management considers the allowance for loan losses at June 30, 2015 to be adequate to cover losses inherent in the loan portfolio based on an assessment of the qualitative and quantitative factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.
Accounting for business combination under the GAAP acquisition method prohibits carrying over valuation allowances, such as the allowance for loan losses. Uncertainties relating to the expected future cash flows is be reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Bank will establish loan loss allowances for the acquired loans in periods after the Merger, but only for losses incurred on these loans due to credit deterioration after Merger. As a result, the allowance for loan loss reflected in these statements is only that of historical Sunshine Bank.
Noninterest Income. Noninterest income increased $48,000, or 17.4%, to $324,000 for the three months ended June 30, 2015 from $276,000 for the three months ended June 30, 2014. The increase was primarily related to a $53,000 gain on sales of securities and a $28,000 increase in income from bank-owned life insurance, partially offset by a $28,000 decrease in fees and service charges on deposit accounts.
Noninterest Expense. Non-interest expense increased $1.9 million to $3.5 million for the three months ended June 30, 2015 as compared to the same period in 2014. The increase primarily reflected an increase of $717,000 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 half of 2015 as well as preparing and positioning the Company for future organic and strategic growth. There were also increased expenses associated with the Banks new employee stock ownership plan, which was not in effect for the second quarter 2014. The Company also had an increase of $863,000 in merger related expenses due to the Merger with Community Southern Holding, Inc. The Bank also experienced an increase of $62,000 in professional fees which related to the increased costs of legal and audit reporting as a public company.
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Income Tax Benefit. Income tax benefit was $1.4 million for the three months ended June 30, 2015 due to pretax losses of $1.5 million and a change in accounting estimates. The Company performed a change in accounting estimate for bank owned life insurance, which resulted in a benefit of approximately $733,000 for the three months ended June 30. 2015.
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Comparison of Operating Results for the Six Months Ended June 30, 2015 and June 30, 2014
General. Net loss for the six months ended June 30, 2015 was $504,000 compared to a net loss of $286,000 for the six months ended June 30, 2014. The increase in net loss was primarily due to an increase in noninterest expense of $3.0 million; partially offset by increases in net interest income of $532,000, a decrease in provision for loan losses of $640,000, and an increase in income tax benefit of $1.4 million. The increase in noninterest expense was mostly comprised of merger related expenses, increases in salary and benefit expense, and expenses related to the investment in expanding the lending, credit, risk, and compliance functions of the bank, and other increases related to infrastructure costs.
Interest Income. Interest income increased $511,000, or 17.0%, to $3.5 million for the six months ended June 30, 2015 primarily as a result of a $343,000 increase in interest income on loans and a $160,000 increase in interest income from securities. The increase in interest income resulted primarily from an $18.4 million increase in the average balance of our interest-earnings assets to $218.5 million and a 21 basis points increase in the average yield on our interest-earning assets to 3.21% for the six months ended June 30, 2015 as compared to the prior year period. The increase in the average yield was attributable to managements focus on growing the higher yielding loan portfolio resulting in a shift from low interest yielding investment securities and cash into commercial loans.
Interest income on loans increased $343,000, or 12.7%, to $3.1 million for the six months ended June 30, 2015 due largely to an increase in the average yield on loans. The average yield on loans increased by 24 basis points to 5.09% for the six months ended June 30, 2015 from 4.85% for the six months ended June 30, 2014. During the six months ended June 30, 2015, the Bank recognized $151,000 of past due interest due to the payoff of a restructured loan. The average balance of loans during the six months ended June 30, 2015 increased by $8.0 million to $119.9 million from $111.8 million for the six months ended June 30, 2014 due to the increase of our commercial real estate and commercial loan portfolios.
Interest income on investment securities increased $160,000, or 71.4%, to $384,000 for the six months ended June 30, 2015 as a result of the increase in the average balance of investment securities. The average balance of investment securities increased $12.7 million to $64.3 million for the six months ended June 30, 2015 from $51.6 million for the six months ended June 30, 2014. The average balance on investment securities increased as a result of the funds from the excess liquidity created in the 2014 stock offering to purchase U.S government sponsored enterprise mortgage-backed securities, U.S. government enterprise and agency obligations and Federal Home Loan Bank obligations during the second half of 2014. The average yield on investment securities increased by 32 basis points to 1.19% for the six months ended June 30, 2015 from 0.87% for the six months ended June 30, 2014 due to the purchase of U.S. government sponsored enterprise mortgage-backed securities and other securities from the excess liquidity created in the 2014 stock offering.
Interest Expense. Interest expense decreased $21,000, or 13.2%, to $138,000 for the six months ended June 30, 2015 from $159,000 for the six months ended June 30, 2014 due to managements aforementioned strategy to improve the deposit mix and lower the cost of deposits. The average balance of interest-bearing deposits decreased by $1.7 million during the six months ended June 30, 2015 to $136.5 million, due to decreases in the average balances in savings and time deposits, partially offset by increases in the average balances of NOW and money market accounts. The average cost of deposits decreased by three basis points to 0.20% for the six months ended June 30, 2015 from 0.23% for the six months ended June 30, 2014.
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Net Interest Income. The combined effect of higher average balances on loans and securities, increased average yield on loans and securities and a lower average cost of deposits has increased the Banks net interest income for the six months ended June 30, 2015. Net interest income increased $532,000, or 18.7%, to $3.4 million for the six months ended June 30, 2015 as compared to the prior year period. The increase was primarily due to the increase in our net interest rate spread to 3.01% for the six months ended June 30, 2015 from 2.77% for the six months ended June 30, 2014. Our net interest margin increased to 3.09% for the six months ended June 30, 2015 from 2.84% for the six months ended June 30, 2014.
Provision for Loan Losses. We recorded no provision for loan losses for the six months ended June 30, 2015 compared to a provision of $640,000 for the six months ended June 30, 2014. Net recoveries for the six months ended June 30, 2015 were $157,000 compared to a net charge-offs of $587,000 for the six months ended June 30, 2014. The change was primarily due to the charge-off of a large commercial loan relationship in the amount of $624,000 for the period ended June 30, 2014.
Management considers the allowance for loan losses at June 30, 2015 to be adequate to cover losses inherent in the loan portfolio based on an assessment of the qualitative and quantitative factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.
Accounting for business combination under the GAAP acquisition method prohibits carrying over valuation allowances, such as the allowance for loan losses. Uncertainties relating to the expected future cash flows is be reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Bank will establish loan loss allowances for the acquired loans in periods after the Merger, but only for losses incurred on these loans due to credit deterioration after Merger. As a result, the allowance for loan loss reflected in these statements is only that of historical Sunshine Bank.
Noninterest Income. Noninterest income increased $216,000, or 41.8%, to $733,000 for the six months ended June 30, 2015 from $517,000 for the six months ended June 30, 2014. The increase was primarily related to a $195,000 gain on sales of securities, a $16,000 gain on sales of loans held for sale and a $56,000 increase in income from bank-owned life insurance, partially offset by a $54,000 decrease in fees and service charges on deposit accounts.
Noninterest Expense. Non-interest expense increased $3.0 million, or 93.8%, to $6.3 million for the six months ended June 30, 2015 as compared to the same period in 2014. The increase primarily reflected an increase of $1.4 million in salaries and employee benefits expense. The salaries and employee benefits expense increase six months over six months was attributable to the addition of key bank employees. These employees have been critical to the organic growth in the first half of 2015 as well as preparing and positioning the Company for strategic growth. There were increased expenses associated with the Banks new employee stock ownership plan, which was not in effect for the six months ended June 30, 2014. The Company also had an increase of $1.1 million in merger related expenses due to the Merger with Community Southern Holding, Inc. The Bank also had an increase of $135,000 in professional fees which related to the increased costs of legal and audit reporting as a public company.
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Income Tax Benefit. Income tax benefit was $1.7 million for the six months ended June 30, 2015 due to pretax losses of $2.2 million and a change in accounting estimates. The Company performed a change in accounting estimate for bank owned life insurance, which resulted in a benefit of approximately $733,000 for the six months ended June 30, 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 $1.7 million, or 0.35% of total assets, at June 30, 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 June 30, 2015 and at December 31, 2014.
At June 30, |
At December 31, |
|||||||
2015 | 2014 | |||||||
(Dollars in thousands) | ||||||||
Non-accrual loans: |
||||||||
Real estate mortgage loans: |
||||||||
One- to four-family residential |
$ | 628 | | |||||
Commercial |
396 | | ||||||
Multi-family |
| | ||||||
Land and construction |
257 | | ||||||
Commercial business loans |
158 | 570 | ||||||
Consumer loans |
| | ||||||
|
|
|
|
|||||
Total non-accrual loans |
1,439 | 570 | ||||||
|
|
|
|
|||||
Non-accruing troubled debt restructured loans: |
||||||||
Real estate mortgage loans: |
||||||||
One- to four-family residential |
| | ||||||
Commercial |
| | ||||||
Multi-family |
109 | 124 | ||||||
Land and construction |
| | ||||||
Commercial business loans |
86 | 198 | ||||||
Consumer loans |
| | ||||||
|
|
|
|
|||||
Total non-accruing troubled debt restructured loans |
195 | 322 | ||||||
|
|
|
|
|||||
Total non-performing loans |
1,634 | 892 | ||||||
|
|
|
|
|||||
Loans Held for Sale |
| 1,829 | ||||||
|
|
|
|
|||||
Other real estate owned: |
||||||||
One- to four-family |
| 41 | ||||||
Commercial |
| | ||||||
Multi-family |
| | ||||||
Land and construction |
32 | | ||||||
Commercial business loans |
| | ||||||
Consumer loans |
| | ||||||
|
|
|
|
|||||
Total other real estate owned |
32 | 41 | ||||||
|
|
|
|
|||||
Total non-performing assets |
$ | 1,666 | 2,762 | |||||
|
|
|
|
|||||
Total accruing troubled debt restructured loans |
$ | 1,046 | 3,903 | |||||
|
|
|
|
|||||
Total non-performing loans to total loans |
0.53 | % | 0.81 | |||||
|
|
|
|
|||||
Total non-performing assets to total assets |
0.35 | % | 1.20 | |||||
|
|
|
|
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The following table sets forth activity in our allowance for loan losses for the periods indicated.
For the Six Months Ended June 30, |
||||||||
2015 | 2014 | |||||||
(Dollars in thousands) |
||||||||
Allowance at beginning of period |
$ | 1,726 | 1,718 | |||||
Provision for loan losses |
| 640 | ||||||
Charge offs: |
||||||||
Real estate mortgage loans: |
||||||||
One- to four-family residential |
(1 | ) | (6 | ) | ||||
Commercial |
| | ||||||
Multi-family |
| | ||||||
Land and construction |
| | ||||||
Commercial business loans |
(9 | ) | (626 | ) | ||||
Consumer loans |
| (5 | ) | |||||
|
|
|
|
|||||
Total charge-offs |
(10 | ) | (637 | ) | ||||
|
|
|
|
|||||
Recoveries: |
||||||||
Real estate mortgage loans: |
||||||||
One- to four-family residential |
1 | 9 | ||||||
Commercial |
114 | 6 | ||||||
Multi-family |
| 1 | ||||||
Land and construction |
| | ||||||
Commercial business loans |
50 | 26 | ||||||
Consumer loans |
2 | 8 | ||||||
|
|
|
|
|||||
Total recoveries |
167 | 50 | ||||||
|
|
|
|
|||||
Net recoveries (charge-offs) |
157 | (587 | ) | |||||
|
|
|
|
|||||
Allowance at end of period |
$ | 1,883 | 1,771 | |||||
|
|
|
|
|||||
Allowance to nonperforming loans |
115.24 | % | 46.32 | |||||
Allowance to total loans outstanding at the end of the period |
0.61 | % | 1.60 | |||||
Net recoveries (charge-offs) to average loans outstanding during the period (annualized) |
0.26 | % | (1.05 | ) |
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 June 30, 2015, we had the capacity to borrow approximately $72.4 million from the Federal Home Loan Bank of Atlanta. At June 30, 2015, we had outstanding advances of approximately $51.5 million and at December 31, 2014 we had no outstanding advances from the Federal Home Loan Bank of Atlanta. Advances increased due to the assumed borrowings of $34.8 million from the merger and the Banks daily rate credit overnight borrowing of $20.0 million. 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 June 30, 2015. Neither credit line was drawn upon at June 30, 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 the six months ended June 30, 2015 by operating activities was $428,000. During the six months ended June 30, 2015, we received $1.9 million from the proceeds of sales on loans held for sale and an increase in deferred tax asset of $1.7 million. Net cash used in investing activities, which consisted primarily of the net assets acquired in the Merger with Community Southern Holdings, Inc., disbursements for loan originations and the purchase of premises and equipment, offset by principal collections on loans and proceeds from maturing securities, was $23.1 million for the six months ended June 30, 2015. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $26.5 million for the six months ended June 30, 2015.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in the six months ended June 30, 2014 by operating activities was $337,000. 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 $16,000. During the six months ended June 30, 2014, we purchased $4.8 million in securities held to maturity. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, was $490,000 for the six months ended June 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 June 30, 2015, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 20.10% of adjusted total assets, which is above the required level of 5.00%, common equity tier 1 capital to risk-weighted assets of 14.51%, which is above the required level of 6.50%, tier 1 capital to risk-weighted assets of 14.51%, which is above the required level of 8.00%, and total risk-based capital of 15.09% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Bank was categorized as well-capitalized at June 30, 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 June 30, 2015, we had outstanding commitments to originate loans of $23.1 million, unused lines of credit totaling $35.8 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 June 30, 2015 totaled $88.1 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits are not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities. The Company has also entered into a branch purchase agreement with First Federal Bank of Florida.
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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 June 30, 2015, was carried out under the supervision and with the participation of the Companys Chief Executive Officer, Chief Financial Officer and several other members of the Companys senior management. The Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures in effect as of June 30, 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 Companys 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 SECs 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 June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 as of June 30, 2015.
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
Not applicable.
Nothing to report.
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
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: August 13, 2015 | By: | /s/ Andrew S. Samuel | ||||
Andrew S. Samuel | ||||||
President and Chief Executive Officer | ||||||
(Duly Authorized Officer) | ||||||
Date: August 13, 2015 | By: | /s/ Vickie J. Houllis | ||||
Vickie J. Houllis | ||||||
Senior Vice President and | ||||||
Chief Financial Officer | ||||||
(Principal Financial Officer) |
48