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, 2016

 

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

For the transition period from                      to                     

Commission file number: 001-36539

 

 

SUNSHINE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

102 West Baker Street, Plant City, Florida 33563

(Address of principal executive offices; Zip Code)

(813) 752-6193

(Registrant’s telephone number, including area code)

None

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

 

 

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

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

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

 

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of August 11, 2016, there were issued and outstanding 5,261,150 shares of the Registrant’s Common Stock with a par value of $0.01 per share.

 

 

 

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Table of Contents

SUNSHINE BANCORP, INC. AND SUBSIDIARY

June 30, 2016 Form 10-Q

Index

 

				Page Number
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015			2
		Condensed Consolidated Statements of Operations for the Three and Six month Periods Ended June 30, 2016 and 2015 (Unaudited)			3
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six month Periods Ended June 30, 2016 and 2015 (Unaudited)			4
		Condensed Consolidated Statements of Stockholders’ Equity for the Six month Periods Ended June 30, 2016 and 2015 (Unaudited)			5
		Condensed Consolidated Statements of Cash Flows For the Six month Periods Ended June 30, 2016 and 2015 (Unaudited)			6-7
		Notes to Condensed Consolidated Financial Statements (Unaudited)			8-23
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24-35
Item 3.		Quantitative and Qualitative Disclosure About Market Risk			36
Item 4.		Controls and Procedures			36
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			37
Item 1A.		Risk Factors			37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3.		Defaults Upon Senior Securities			37
Item 4.		Mine Safety Disclosures			37
Item 5.		Other Information			37
Item 6.		Exhibits			37
SIGNATURES					38

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

		As of June 30, 2016				As of December 31, 2015
		(Unaudited)
Assets
Cash and due from banks		$	11,625			$	13,220
Interest-earning deposits in financial institutions			10,150				16,523
Federal funds sold			1,700				29,601
Cash and cash equivalents			23,475				59,344
Time deposits with banks			3,675				4,410
Securities available for sale			66,285				65,944
Loans held for sale			551				790
Loans, net of allowance for loan losses of $2,895 and $2,511			371,538				326,266
Premises and equipment, net			17,065				17,612
Federal Home Loan Bank stock, at cost			1,731				1,597
Cash surrender value of bank-owned life insurance			12,284				12,122
Deferred income tax asset			6,240				6,426
Goodwill and other intangibles			10,042				10,101
Accrued interest receivable			1,109				1,048
Other real estate owned			52				32
Other assets			682				1,573
Total assets		$	514,729			$	507,265
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand accounts		$	92,342			$	89,114
Interest-bearing demand and savings accounts			199,121				198,977
Time deposits			103,852				111,020
Total deposits			395,315				399,111
Other borrowings			31,583				28,927
Subordinated Notes			11,000				—
Other liabilities			4,589				7,833
Total liabilities			442,487				435,871
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 authorized; none outstanding			—				—
Common stock, $0.01 par value, 50,000,000 shares authorized; issued and outstanding of 5,261,150 at June 30, 2016 and 5,259,321 at December 31, 2015			53				53
Additional paid in capital			53,188				52,763
Retained income			22,073				21,846
Unearned employee stock ownership plan (“ESOP”) shares			(3,160	)			(3,160	)
Accumulated other comprehensive income (loss)			88				(108	)
Total stockholders’ equity			72,242				71,394
Total liabilities and stockholders’ equity		$	514,729			$	507,265

See Accompany Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share amounts)

 

		Three months Ended June 30,								Six months Ended June 30,
		2016				2015				2016				2015
Interest income:
Loans		$	4,041			$	1,531			$	8,096			$	3,070
Securities			241				161				462				384
Other			43				41				121				76
Total interest income			4,325				1,733				8,679				3,530
Interest Expense:
Deposits			304				70				619				137
Borrowed funds			148				1				173				1
Total interest expense			452				71				792				138
Net interest income			3,873				1,662				7,887				3,392
Provision for loan losses			350				—				350				—
Net interest income after provision for loan losses			3,523				1,662				7,537				3,392
Noninterest income:
Fees and service charges on deposit accounts			312				136				638				264
Mortgage Broker Fees			22				26				69				51
Gain on sale of securities			105				53				131				195
Gain on sale of premise			563				—				563				—
Income from bank-owned life insurance			97				72				192				141
Other			50				40				223				85
Total noninterest income			1,149				327				1,816				736
Noninterest expenses:
Salaries and employee benefits			2,442				1,609				5,018				3,146
Occupancy and equipment			586				257				1,162				556
Data and item processing services			396				169				737				314
Professional fees			248				157				419				281
Advertising and promotion			22				38				67				76
Stationery and supplies			55				44				101				69
FDIC Deposit insurance			100				49				202				95
Merger related			95				863				95				1,121
Other			619				352				1,240				638
Total noninterest expenses			4,563				3,538				9,041				6,296
Income (Loss) before income taxes			109				(1,549	)			312				(2,168	)
Income tax (benefit) expense			36				(1,398	)			85				(1,664	)
Net income (loss)		$	73			$	(151	)		$	227			$	(504	)
Basic earnings (loss) per share		$	0.01			$	(0.04	)		$	0.05			$	(0.13	)
Diluted earnings (loss) per share		$	0.01			$	(0.04	)		$	0.05			$	(0.13	)

See Accompany Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

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

(Dollars in thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Net income (loss)		$	73			$	(151	)		$	227			$	(504	)
Other comprehensive income (loss):
Change in unrealized gain on securities:
Unrealized gain (losses) arising during the period			138				(185	)			446				209
Reclassification adjustment for realized gains			(105	)			(53	)			(131	)			(195	)
Net change in unrealized gain			33				(238	)			315				14
Deferred income taxes on above change			(13	)			90				(119	)			(5	)
Total other comprehensive income (loss)			20				(148	)			196				9
Comprehensive income(loss)		$	93			$	(299	)		$	423			$	(495	)

See Accompany Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

(Dollars in thousands, except per share amounts)

Six months Ended June 30, 2016 and 2015

 

		Preferred Stock								Common Stock								Additional Paid In Capital				Retained Income				Unearned ESOP Shares				Accumulated Other Comprehensive Income (Loss)				Total Stockholder’s Equity
		Shares				Amount				Shares				Amount
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 loss on Securities available for sale, net of taxes (Unaudited)			—				—				—				—				—				—				—				9				9
Balance, June 30, 2015 (Unaudited)			5,700			$	5,700				4,232,000			$	42			$	40,766			$	23,587			$	(3,273	)		$	9			$	66,831
Balance, December 31, 2015			—			$	—				5,259,321			$	53			$	52,763			$	21,846			$	(3,160	)		$	(108	)		$	71,394
Net Income (Unaudited)																							227												227
Issuance of common stock under share-based awards plan, net (Unaudited)			—				—				1,829				—				—				—				—				—				1,829
Stock based compensation (Unaudited)			—				—				—				—				425				—				—				—				425
Net change in unrealized loss on Securities available for sale, net of taxes (Unaudited)			—				—				—				—				—				—				—				196				196
Balance, June 30, 2016 (Unaudited)			—			$	—				5,261,150			$	53			$	53,188			$	22,073			$	(3,160	)		$	88			$	72,242

See Accompany Notes to Condensed Consolidated Financial Statements

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

		Six Months Ended June 30,
		2016				2015
Cash flows from operating activities:
Net income (loss)		$	227			$	(504	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation, Amortization, Accretion, net			1,011				428
Provisions for loan losses			350				—
Gain on sale of loans held for sale			(69	)			(16	)
Proceeds from the sale of loans held for sale			1,653				1,864
Gain on sale of premise			(563	)			—
Loans originated as held for sale			(1,345	)			(341	)
Income from bank-owned life insurance, net			(162	)			(117	)
Gain loss on sale of other real estate owned and other assets			—				(20	)
Gain on sale of securities available for sale			(131	)			(195	)
(Increase) decrease in accrued interest receivable			(61	)			77
Decrease (increase) in deferred tax assets			67				(1,700	)
Decrease (increase) in other assets			891				(148	)
Stock based compensation			425				—
(Decrease) increase in other liabilities			(3,244	)			1,100
Net cash (used in) provided by operating activities			(951	)			428
Cash flows from investing activities:
Maturities of time deposits with banks			735				735
Maturities & repayments of securities held to maturity			—				5,800
Proceeds from sale of securities available for sale			12,920				15,997
Calls, repayments, and maturities of securities available for sale			11,940				3,825
Purchases of securities available for sale			(25,173	)			—
Net increase in loans			(45,642	)			(26,835	)
Purchases of premises and equipment, net			(1,024	)			(1,689	)
Proceeds from the sale of premise & equipment			1,600				—
Proceeds from the sale of other real estate owned			—				61
Purchase of Federal Home Loan Bank stock			(134	)			(877	)
Business acquisitions, net of cash received			—				(20,111	)
Net cash used in investing activities			(44,778	)			(23,094	)
Cash flows from financing activities:
Net (decrease) increase in deposits			(3,796	)			6,461
Net increase in other borrowings			2,656				20,000
Issuance of subordinated notes			11,000				—
Net cash provided by financing activities			9,860				26,461
(Decrease) increase in cash and cash equivalents			(35,869	)			3,795
Cash and cash equivalents at beginning of period			59,344				20,479
Cash and cash equivalents at end of period		$	23,475			$	24,274
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	796			$	137

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

		Six months ended June 30,
		2016				2015
Noncash transaction-
Accumulated other comprehensive income, net change in unrealized gain on securities available for sale, net of taxes		$	196			$	9
Securities held to maturity transferred to available for sale		$	—			$	69,665
Transfer from loans to other real estate owned		$	20			$	—
Acquisition of Community Southern Bank assets and liabilities:
Noncash assets acquired
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 income taxes		$	—			$	2,095
Goodwill		$	—			$	8,662
Core Deposit Intangible		$	—			$	588
Accrued interest		$	—			$	685
Other assets		$	—			$	114
Liabilities assumed and stockholders equity exchanged:
Deposits		$	—			$	178,912
Federal Home Loan Bank advances		$	—			$	31,480
Other borrowings		$	—			$	3,285
Other liabilities		$	—			$	726
Preferred Stock		$	—			$	5,700

 

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1)

Organization and Significant Accounting Policies

Organization. Sunshine Bancorp, Inc., a Maryland corporation (the “Holding Company”), was formed on March 7, 2014 to serve as the savings and loan holding company for Sunshine Bank, a federal savings bank (the “Bank”). The Holding Company was formed as part of the Bank’s mutual-to-stock conversion (the “Conversion”). Collectively, the Bank and Holding Company are referred to as the “Company.” On July 14, 2014, the Conversion was completed and the Holding Company became the parent holding company for the Bank.

Sunshine Bank is a federal stock savings bank. It was first organized in 1954 as a federal mutual savings and loan association under the name First Federal Savings and Loan Association of Plant City. In 1975, the Bank changed its name to Sunshine State Federal Savings and Loan Association. In 2014, the Bank changed its name to Sunshine Bank. The Bank through its twelve full service banking offices provides a variety of retail community banking services to individuals and businesses primarily in Hillsborough, Polk, Manatee, Sarasota, Pasco, and Orange Counties, Florida.

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 2015 Annual Report on Form 10-K, as updated by information in this Form 10-Q. These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q, certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted.

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, 2016, and the results of operations for the three and six month periods ended June 30, 2016 and 2015. The results of operations for three and six month periods ended June 30, 2016, are not necessarily indicative of the results to be expected for the full year or any other period.

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts in the consolidated financial statements and notes. 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. Material estimates that are particularly susceptible to significant changes include the allowance for loan losses, the valuation of goodwill and other intangibles, deferred income taxes, and purchase accounting related adjustments.

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 2015 financial statements.

Share-based Compensation. The Company expenses the fair value of any stock options or restricted stock granted. The Company recognizes share-based compensation in operations as the awards vest.

Comprehensive Income (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 income (loss), are components of comprehensive income (loss).

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1)	Organization and Significant Accounting Policies, continued

 

Effects of New Accounting Pronouncements. In June 2016, the FASB issued new guidance related to Credit Losses. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. This guidance is effective for fiscal years beginning after December 15, 2019. The Company will assess this guidance to determine the impact on its consolidated financial statements.

During March 2016, the FASB issued new guidance related to Stock Compensation. The new guidance allows entities to make a one-time policy election to account for forfeitures when they occur, instead of accruing compensation cost based on the number of awards expected to vest. Additionally, the new guidance changes the requirement for an award to qualify for equity classification. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016. This guidance is not expected to have a material impact on the consolidated financial statements.

During February 2016, the FASB issued new guidance related to Leases. The new guidance requires lessees to recognize assets and liabilities related to certain operating leases on the balance sheet. The new guidance also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. This guidance is effective for fiscal years beginning after December 15, 2018. The Company is currently assessing this guidance to determine the impact on its consolidated financial statements.

Reclassifications. Certain amounts reported in the prior periods, consolidated financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on previously reported net income or stockholders’ equity.

 

(2)

Business Combinations

Acquisition of Certain Assets and Liabilities of First Federal Bank of Florida. On November 13, 2015, the Bank, pursuant to a purchase and assumption agreement, assumed the deposits and certain loans from two branch offices of First Federal Bank of Florida. The branch offices are located in Bradenton and Sarasota, Florida. The purchase and assumption added $47.0 million in deposits and $7.9 million in loans. Sunshine Bank also purchased the real estate and selected fixed assets associated with the branches. The Company acquired these assets and liabilities to expand its market presence to Sarasota and Manatee Counties, Florida and to capitalize on the demographically attractive I-75 corridor between Tampa and Sarasota, Fl. The Company incurred approximately $171,000 in acquisition related expenses.

Acquisition of Community Southern Holdings, Inc. 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 Company acquired $250.4 million in assets and assumed $214.4 million in liabilities and stockholders’ equity and exchanged $5.7 million in preferred stock to the U.S. Treasury as part of its Small Business Lending Fund. The exchanged shares were subsequently redeemed on September 30, 2015 at their par value of $5.7 million. The Company acquired these assets and liabilities to expand its market presence to Polk and Orange Counties, Florida and to strengthen its position along the demographically attractive I-4 corridor. The Company incurred approximately $1.3 million in merger and acquisition related expenses. Management used market quotations to measure the fair value of investment securities and FHLB advances.

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(2)	Business Combinations, continued

 

Community Southern Bank’s 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 management’s best estimates of default rates and payment speeds. At acquisition, Community Southern Bank’s loan portfolio totaled $170.0 million and was recorded at a fair value of $171.5 million. The following table summarizes the fair value of assets acquired, liabilities assumed and stockholders’ equity exchanged on the date of acquisition during the year ended December 31, 2015 (in thousands):

 

		Community Southern Holdings, Inc.				First Federal Branch Acquisition				Total
Cash and cash equivalents		$	10,183			$	38,165			$	48,348
Securities available for sale			44,372				—				44,372
Loans			171,476				7,932				179,408
Premises and equipment			6,097				2,630				8,727
Federal Home Loan Bank stock			1,540				—				1,540
Bank owned life insurance			4,585				—				4,585
Deferred tax asset			2,095				—				2,095
Goodwill			8,662				838				9,500
Core deposit intangible			588				67				655
Accrued interest receivable			685				—				685
Other real estate owned			32				—				32
Other assets			82				16				98
Total assets acquired		$	250,397			$	49,648			$	300,045
Deposits			178,912				47,015				225,927
Federal Home Loan Bank advances			31,480				—				31,480
Other borrowings			3,285				—				3,285
Other liabilities			726				3				729
Preferred Stock			5,700				—				5,700
Total liabilities assumed			220,103				47,018				267,121
Net assets acquired		$	30,294			$	2,630			$	32,924

Acquisition of Florida Bank of Commerce. On May 9, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FBC Bancorp, Inc., a Florida corporation (“FBC”), and Florida Bank of Commerce, a Florida state bank and wholly-owned subsidiary of FBC (“FBC Bank”), pursuant to which FBC will merge with and into the Company, with the Company as the surviving entity, and FBC Bank will merge with and into Sunshine Bank, with Sunshine Bank surviving as the Company’s wholly-owned subsidiary (collectively, the “FBC Merger”). The transaction will add approximately $315 million in assets, $232 million in loans and $279 million in deposits to Sunshine Bank. At the effective time of the Merger, each share of common stock of FBC will be converted into the right to receive 0.88 shares of common stock of the Company subject to adjustment if the Company’s stock price (measured four days prior to the closing of the Merger) is more than 20% lower than the Company’s stock price on the trading day before the entry into the Merger Agreement is publicly announced and such decrease in the Company’s stock price is more than 20% relative to the change in the KBW Nasdaq Bank Index on the corresponding dates. As a result of the Merger, FBC’s shareholders would own approximately 34.6% of the Company’s common stock. Upon completion of the Merger, Dana Kilborne, FBC Bank’s current President and Chief Executive Officer, will serve as an Executive Vice President of the Company and Co-President and Chief Banking Officer of Sunshine Bank. In addition, upon completion of the Merger, five FBC current board members will be appointed to the Company and Sunshine Bank board of directors, increasing the total number of directors of the Company to fifteen members. The completion of the Merger is subject to the satisfaction of certain customary closing conditions. It is expected that the Merger will qualify as a tax-free reorganization for U.S. federal income tax purposes.

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3)

Securities

Securities have been classified according to management intent. On March 19, 2015 the Bank transferred all securities classified as held to maturity to available for sale at a 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 Loss				Fair Value
June 30, 2016:
Federal Home Loan Bank obligations		$	5,015				9				—			$	5,024
U.S. Government enterprise and agency obligations			12,016				14				—				12,030
Agency Mortgage-backed securities			49,113				189				(71	)			49,231
Total		$	66,144				212				(71	)		$	66,285
December 31, 2015:
Federal Home Loan Bank obligations		$	15,074				6				(6	)		$	15,074
U.S. Government enterprise and agency obligations			14,037				7				(37	)			14,007
Agency Mortgage-backed securities			37,007				—				(144	)			36,863
Total		$	66,118				13				(187	)		$	65,944

The amortized cost and fair value of securities at June 30, 2016, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to call or prepayment rights. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately. (in thousands)

 

		Securities Available for sale
		Amortized Cost				Fair Value
Due in one year or less		$	11,029			$	11,040
Due from one year to five years			6,002				6,014
Agency Mortgage-backed securities			49,113				49,231
		$	66,144			$	66,285

Securities with 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, 2016
Agency Mortgage-backed securities Totals		$	(71	)		$	20,161			$	—			$	—
At December 31, 2015:
Federal Home Loan Bank obligations		$	(6	)		$	6,018			$	—			$	—
U.S Government enterprise and agency obligations			(37	)			12,000				—				—
Agency Mortgage-backed securities			(144	)			36,863				—				—
Totals		$	(187	)		$	54,881			$	—			$	—

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

At June 30, 2016 there were seven securities in a loss position. In considering the credit quality of the issuers, the nature and cause of the unrealized loss, the severity and length of time in an unrealized loss position, and other factors, it is expected that the securities would not be settled at a price less than the par value of the investments. Management determined that the decline in fair value is attributable to fluctuations in interest rates and other market conditions and not a deterioration of the credit quality of the issuers. 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 Company pledged securities with a fair market value of approximately $16.1 million at June 30, 2016 and $22.1 million at December 31, 2015 to secure public funds and other borrowings.

Securities available for sale sold, are summarized as follows (in thousands):

 

		For the three months ended								For the six months ended
		2016				2015				2016				2015
Proceeds received from sale		$	8,872				6,054			$	12,920				15,997
Gross Gains on sale		$	105				53			$	131				195

 

(4)

Loans

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

 

		At June 30, 2016				At December 31, 2015
Real estate loans:
One-to-four-family residential		$	63,191			$	68,169
Commercial and multi-family			224,202				192,568
Construction and land			19,489				17,570
Home equity			10,309				6,623
Total real estate loans			317,191				284,930
Commercial loans			55,491				41,417
Consumer loans			2,189				2,726
Total loans			374,871				329,073
Deduct:
Deferred loan fees, net			(438	)			(296	)
Allowance for loan losses			(2,895	)			(2,511	)
Loans, net		$	371,538			$	326,266

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

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

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

Commercial and multifamily real estate loans are secured by the subject property and are underwritten based on loan to value limits, cash flow coverage and general creditworthiness of the obligors. 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.

Construction and Land 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 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. Construction loan funds are disbursed periodically based on the percentage of construction or development completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Construction and land loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sale information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

Home equity loans consists of either revolving line of credit, term, or second mortgage loans secured by one-to-four residential real estate. These loans have similar risk characteristics to one-to-four family loans and are secured by a first or second mortgage on the borrower’s principal residence or their second/vacation home (excluding investment/rental property). There are minimum credit score standards, maximum debt to income ratios and credit requirements on each Home equity product. Home equity lines of credit are variable rate based on an index of Wall Street Journal prime rate with a margin.

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 equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.

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

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(4)	Loans, Continued

 

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

 

		Real Estate Loans				Commercial Loans				Consumer Loans				Unallocated				Total
Three Months Ended June 30, 2016:
Beginning balance		$	1,368				591				22				551			$	2,532
Provision (credit) for loan losses			881				(6	)			12				(537	)			350
Charge—offs			(22	)			—				—				—				(22	)
Recoveries			13				21				1				—				35
Ending balance		$	2,240				606				35				14			$	2,895
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
Six Months Ended June 30, 2016:
Beginning balance		$	1,354				583				23				551			$	2,511
Provision (credit) for loan losses			881				(6	)			12				(537	)			350
Charge—offs			(22	)			(11	)			(2	)			—				(35	)
Recoveries			27				40				2				—				69
Ending balance		$	2,240				606				35				14			$	2,895
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
At June 30, 2016:
Individually evaluated for impairment:
Recorded investment		$	1,611				521				—				—			$	2,132
Balance in allowance for loan losses		$	99				9				—				—			$	108
Collectively evaluated for impairment:
Recorded investment		$	203,221				34,374				2,189				—			$	239,784
Balance in allowance for loan losses		$	2,108				595				35				14			$	2,752
Recorded investment in loans accounted for under ASC 310-20		$	111,701				20,596				—				—			$	132,297
Balance in allowance for loan losses		$	33				2				—				—			$	35
Recorded investment in loans accounted for under ASC 310-30		$	658				—				—				—			$	658
Balance in allowance for loan losses		$	—				—				—				—			$	—
At December 31, 2015:
Individually evaluated for impairment:
Recorded investment		$	1,527				539				—				—			$	2,066
Balance in allowance for loan losses		$	39				9				—				—			$	48
Collectively evaluated for impairment:
Recorded investment		$	159,738				11,830				1,124				—			$	172,692
Balance in allowance for loan losses		$	1,315				574				23				551			$	2,463
Recorded investment in loans accounted for under ASC 310-20		$	123,022				28,990				1,602				—			$	153,614
Balance in allowance for loan losses		$	—				—				—				—			$	—
Recorded investment in loans accounted for under ASC 310-30		$	643				58				—				—			$	701
Balance in allowance for loan losses		$	—				—				—				—			$	—

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(4)	Loans, Continued

 

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

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

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

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

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

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

Doubtful – A loan classified Doubtful has all the weaknesses inherent in a loan 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.

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(4) Loans, Continued

 

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

 

		Real Estate Loans
		One-to Four-Family Residential				Commercial and Multi Family				Construction and Land				Home Equity				Commercial				Consumer				Total
Credit Risk Profile by Internally Assigned Grade:
At June 30, 2016:
Grade:
Pass		$	61,437				220,700				18,376				9,957				54,521				2,189				367,180
Special mention			856				742				673				—				83				—				2,354
Substandard			898				2,760				440				352				887				—				5,337
Total		$	63,191				224,202				19,489				10,309				55,491				2,189				374,871
At December 31, 2015:
Grade:
Pass		$	66,271				189,979				16,705				6,241				38,375				2,726				320,297
Special mention			972				1,066				707				382				70				—				3,197
Substandard			926				1,523				158				—				2,972				—				5,579
Total		$	68,169				192,568				17,570				6,623				41,417				2,726				329,073

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

 

		Accruing Loans
		30-59 Days Past Due				60-89 Days Past Due				90 Days Or Greater Past Due				Total Past Due				Current				Nonaccrual Loans				Total Loans
At June 30, 2016:
Real estate mortgage loans:
One-to-four family residential		$	276				—				—				276				62,607				308			$	63,191
Commercial Real Estate and Multifamily			1,031				224				—				1,255				222,290				657				224,202
Construction and Land			306				—				—				306				18,972				211				19,489
Home Equity			—				—				—				—				10,309				—				10,309
Commercial loans			139				25				—				164				55,232				95				55,491
Consumer loans			—				108				—				108				2,081				—			$	2,189
Total		$	1,752			$	357			$	—			$	2,109			$	371,491			$	1,271			$	374,871
At December 31, 2015:
Real estate mortgage loans:
One-to-four family residential		$	255				13				—				268				67,861				40			$	68,169
Commercial Real Estate and Multifamily			355				—				—				355				191,660				553				192,568
Construction and Land			192				—				—				192				17,220				158				17,570
Home Equity			11				—				—				11				6,612				—				6,623
Commercial loans			193				—				—				193				41,224				—				41,417
Consumer loans			—				—				—				—				2,726				—			$	2,726
Total		$	1,006			$	13			$	—			$	1,019			$	327,303			$	751			$	329,073

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(4) Loans, Continued

 

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

 

		With No Related Allowance Recorded								With an Allowance Recorded												Total
		Recorded Investment				Unpaid Principal Balance				Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
June 30, 2016
Real estate mortgage loans:
One-to- four-family residential		$	—			$	—			$	454			$	454			$	26			$	454			$	454			$	26
Commercial and Multifamily			852				1,815				149				149				73				1,001				1,964				73
Construction and Land			156				163				—				—				—				156				163				—
Commercial loans			440				470				81				86				9				521				556				9
		$	1,448			$	2,448			$	683			$	688			$	108			$	2,132			$	3,137			$	108
December 31, 2015:
Real estate mortgage loans:
One-to- four-family residential		$	—			$	—			$	460			$	460			$	39			$	460			$	460			$	39
Commercial and Multifamily			909				1,849				—				—				—				909				1,849				—
Construction and Land			158				164				—				—				—				158				164				—
Commercial loans			452				482				87				92				9				539				574				9
		$	1,519			$	2,495			$	547			$	552			$	48			$	2,066			$	3,047			$	48

 

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(4) Loans, Continued

 

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

 

		Three month Ended June 30,
		2016												2015
		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		$	454				5				5				121				1				2
Commercial real estate and Multifamily			1,021				5				21				481				12				15
Land and construction			156				—				—				—				—				—
Commercial loans			525				6				6				648				—				10
Total		$	2,156				16				32				1,250				13				27
		Six Months Ended June 30,
		2016												2015
		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		$	457				14				12				121				4				4
Commercial real estate and Multifamily			1,030				24				47				1,618				96				98
Land and construction			157				—				2				—				—				—
Commercial loans			530				18				18				696				—				23
Total		$	2,174				56				79				2,435				100				125

During the three and the six months ended June 30, 2016 and 2015, the Company did not enter into any 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.

At June 30, 2016, the contractually required principle of Purchased Credit Impaired (“PCI”) loans acquired was $891,000. The recorded investment of PCI loans was $658,000. There were no additional losses generated during the three month or six month ended June 30, 2016 from these loans.

 

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(5)

Other Borrowings

The Company is a member of the Federal Home Loan Bank of Atlanta (“FHLB”). The FHLB requires members to purchase stock in the FHLB based upon their level of borrowings. FHLB stock is non-marketable and is carried at cost. At June 30, 2016 the Company held $1.7 million in FHLB stock.

At June 30, 2016, the Company had a maximum borrowing capacity of approximately $128.5 million with the FHLB. Advances are secured by a blanket lien on loans and the Company’s FHLB stock. Pursuant to the collateral agreement, borrowing availability is determined by the amount of qualifying collateral pledged. As of June 30, 2016 the Company had $83.2 million in loans pledged and total availability of approximately $53.2 million.

As of at June 30, 2016, the Company had the following FHLB advances ($ in thousands).

 

Maturing in the Year Ending December 31,		Advance Type				Interest Rate				Amount
2016			Fixed Rate				0.62	%		$	10,000
2016			Fixed Rate				0.60	%		$	10,000
2016			Fixed Rate				0.57	%		$	10,000
Total										$	30,000

The Company enters into sweep agreements with customers that sweep funds from deposit accounts into investment accounts. These investment accounts are not federally insured and are treated as borrowings. At June 30, 2016, the outstanding balance of such borrowings totaled $1.6 million. The Company pledged securities with a market value of $4.0 million as collateral for these agreements. There were $1.5 million in sweep agreements at December 31, 2015.

 

(6)

Subordinated notes

On March 30, 2016, the Company accepted subscriptions for and sold, at 100% of their principal amount, an aggregate of $11.0 million of subordinated notes (the “Notes”), on a private placement basis, to two accredited investors. The investors included a corporation owned and controlled by George Parmer, who is a director of the Company, which purchased $7.0 million in principal amount of the Notes. The Notes bear interest at a fixed interest rate of 5.0% per year. The Notes have a term of five years, and have a maturity date of April 1, 2021. The Notes are redeemable at the option of the Company, in whole or in part, at any time, without penalty or premium, subject to any required regulatory approvals. The Company contributed the proceeds from the Notes to the Bank as equity capital to support the Bank’s continued growth, including ongoing lending activities.

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(7)

Fair Value of Financial Instruments

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

 

		At June 30, 2016								At December 31, 2015
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents (Level 1)		$	23,475			$	23,475			$	59,344				59,344
Time deposits with banks (Level 1)			3,675				3,675				4,410				4,410
Securities available for sale (Level 2)			66,285				66,285				65,944				65,944
Loans held for sale (Level 3)			551				562				790				806
Loans (Level 3)			371,538				376,699				326,266				330,801
Federal Home Loan Bank stock (Level 3)			1,731				1,731				1,597				1,597
Accrued interest receivable (Level 3)			1,109				1,109				1,048				1,048
Financial liabilities:
Deposits (Level 3)			395,315				394,524				399,111				399,000
FHLB Advances (Level 3)			30,000				29,995				27,500				27,487
Other borrowings (Level 3)			1,583				1,583				1,427				1,427
Subordinated notes (Level 3)			11,000				10,860				—				—
Off-balance-sheet financial instruments (Level 3)			—				—				—				—

Discussion regarding the assumptions used to compute the estimated fair values of instruments can be found in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 18, 2016 (“2015 Form 10-K”).

 

(8)

Fair Value Measurements

Securities available for sale measured at fair value on a recurring basis are summarized below (in thousands):

 

		Fair Value				Level 1				Level 2				Level 3
At June 30, 2016:
Federal Home Loan Bank obligations		$	5,024				—				5,024				—
U.S. Government enterprise and agency obligations			12,030				—				12,030				—
Mortgage-backed securities			49,231				—				49,231				—
Total		$	66,285				—				66,285				—

 

		Fair Value				Level 1				Level 2				Level 3
At December 31, 2015:
Federal Home Loan Bank obligations		$	15,074				—				15,074				—
U.S. Government enterprise and agency obligations			14,007				—				14,007				—
Mortgage-backed securities			36,863				—				36,863				—
Total		$	65,944				—				65,944				—

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(8) Fair Value Measurements, Continued

 

During the six months ended June 30, 2016, no securities were transferred in or out of Levels 1, 2, or 3.

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):

 

		At Period End																Total Losses				Losses Recorded
		Fair Value				Level 1				Level 2				Level 3								During the Period
At June 30, 2016:
Commercial and Multifamily		$	433				—				—				433				645				—
Commercial			446				—				—				446				72				—
Total		$	879				—				—				879				717				—
At December 31, 2015:
Commercial and Multifamily		$	450				—				—				450				645				—
Commercial			452				—				—				452				72				—
Total		$	902				—				—				902				717				—

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
		Fair Value				Level 1				Level 2				Level 3								During the Period
At June 30, 2016:
Other real estate owned		$	52				—				—				52				—				—
At December 31, 2015:
Other real estate owned		$	32				—				—				32				—				—

 

 

(continued)

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(9)

Employee Stock Ownership Plan (“ESOP”)

The Holding Company has established an ESOP which acquired 338,560 shares in exchange for a $3,385,600 indirect note payable from the Employee Stock Ownership Plan Trust to the Holding Company. The note bears interest at a variable rate based on Prime and is payable in thirty annual installments. As of June 30, 2016, 22,571 shares held by the Employee Stock Ownership Plan Trust have been released and allocated to employees.

ESOP shares were as follows ($ in thousands, except per share amounts):

 

		At June 30, 2016				At December 31, 2015
Allocated shares			22,571				22,571
Unallocated shares			315,989				315,989
Total ESOP shares			338,560				338,560
Fair value of unallocated shares		$	4,474			$	4,803

 

(10)

Stock-Based Compensation

On August 26, 2015, stockholders approved the Company’s 2015 Equity Incentive Plan (the “Plan”), which provides for the grant of stock-based awards to officers, employees and directors of the Company. The Plan authorizes the issuance or delivery to participants of up to 592,480 shares of the Company’s common stock pursuant to grants of incentive and non-statutory stock options, restricted stock awards and restricted stock units. Of this number, the maximum number of shares that may be issued pursuant to the exercise of stock options is 423,200 shares, and the maximum number of shares that may be issued as restricted stock awards or restricted stock units is 169,280 shares. The fair value of options is measured on the grant date using the Black-Scholes option-pricing model. The Company used the following assumptions to determine the fair value of stock options granted which included the one year Treasury-bill rate to establish a risk free interest rate of 0.32%, expected volatility of 16.7%, and an expected life of seven years.

There were no outstanding stock options or restricted stock grants as of June 30, 2015.

Summary of the outstanding stock options and restricted stock under the 2015 Equity Plan at June 30, 2016:

 

		Stock Options				Weighted Average Exercise Price
Outstanding at December 31, 2015			373,760			$	13.96
Granted			10,000			$	15.15
Vested			2,000			$	15.15
Forfeitures			(32,366	)		$	13.96
Outstanding at June 30, 2016			351,394			$	13.99
Exercisable at June 30, 2016			69,798			$	13.99
		Restricted Stock Awards				Weighted Average Grant Date Fair Value
Outstanding at December 31, 2015			158,724			$	13.96
Granted			7,000			$	15.15
Vested			1,050			$	15.15
Shares withheld for income tax purposes			(350	)		$	15.15
Forfeitures			(4,800	)		$	13.96
Outstanding at June 30, 2016			160,574			$	13.99

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(11)

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 nonperforming 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. In order to avoid limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements. As of June 30, 2016, the Bank’s capital conservation buffer was 7.44% exceeding the minimum of 0.625% for 2016.

The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at June 30, 2016 and December 31, 2015. As of June 30, 2016, the Bank was “Well Capitalized” under all capital ratios.

 

		Actual								Minimum for Capital Adequacy Purposes								Minimum to be Well Capitalized
		Amount				%				Amount				%				Amount				%
June 30, 2016
Common Equity Tier 1 to Risk-Weighted Assets		$	58,816				14.72	%		$	17,981				4.50	%		$	25,973				6.50	%
Tier I Capital to Risk-Weighted Assets			58,816				14.72	%			23,975				6.00	%			31,967				8.00	%
Total Capital to Risk-Weighted Assets			61,711				15.44	%			31,967				8.00	%			39,959				10.00	%
Tier I Capital to Total Assets			58,816				12.11	%			19,421				4.00	%			24,276				5.00	%
December 31, 2015
Common Equity Tier 1 to Risk-Weighted Assets		$	45,056				12.44	%		$	16,297				4.50	%		$	23,540				6.50	%
Tier I Capital to Risk-Weighted Assets			45,056				12.44	%			21,729				6.00	%			28,972				8.00	%
Total Capital to Risk-Weighted Assets			47,567				13.13	%			28,972				8.00	%			36,215				10.00	%
Tier I Capital to Total Assets			45,056				9.76	%			18,466				4.00	%			23,082				5.00	%

 

(12)

Earnings (Loss) Per Share

Basic earnings (loss) per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three months and the six months ended June 30, 2016 outstanding stock options are considered dilutive securities for the purposes of calculating diluted earnings per share which was computed using the treasury method. There were no stock options outstanding as of June 30, 2015. 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):

 

		Three months Ended June 30, 2016				Three months Ended June 30, 2015
Income (Loss)		$	73			$	(151	)
Weighted Average Shares			4,948,606				3,964,725
Basic income per share:		$	0.01			$	(0.04	)
Weighted Average Diluted Shares			4,961,508				3,964,725
Diluted income per share		$	0.01			$	(0.04	)
		Six months Ended June 30, 2016				Six months Ended June 30, 2015
Income (Loss)		$	227			$	(504	)
Weighted Average Shares			4,949,210				3,964,725
Basic income per share:		$	0.05			$	(0.13	)
Weighted Average Diluted Shares			4,963,285				3,964,725
Diluted income per share		$	0.05			$	(0.13	)

 

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Item 2. Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion should be read in conjunction with the 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, 2015 in the Annual Report on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. 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 our 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 positively impacting the consumers, businesses, and non-profits throughout central Florida by creating financial success for our customers. Our competitive advantage is our ability to attract and retain employees, who are passionate about providing uncompromising service with a sense of warmth, integrity, friendliness, and company spirit. Operations are conducted from the main banking office in Plant City, Florida and eleven additional full service Florida banking offices located in Brandon, Riverview, Lakeland, Zephyrhills, Bartow, Plant City, Bradenton, Sarasota, Winter Haven, and two new offices opened in the first quarter 2016, located in downtown Tampa and downtown Orlando. Our common stock is traded on the NASDAQ Capital Market under the symbol “SBCP.”

Our principal business has consisted of attracting retail and commercial deposits from the general public in our primary market area of Hillsborough, Polk, Manatee, Orange, and Pasco 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 (“GSE”) mortgage-backed securities, GSE securities and obligations, U.S. government agency securities, securities issued by the Federal Home Loan Bank, municipal securities, and corporate obligations. We offer a variety of deposit accounts to consumers and small businesses, including savings accounts, NOW accounts, money market accounts, certificate of deposit accounts, other borrowings, and cash management programs.

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 of fees and service charges on deposit accounts, mortgage broker fees, gain on sales of securities, income from bank-owned life insurance and other income. Non-interest expense currently consists of expenses related to salaries and employee benefits, occupancy and equipment, data and item processing, professional fees, advertising and promotion, stationery and supplies, FDIC insurance, merger related expenses, and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

 

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Recent Developments

On May 9, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FBC Bancorp, Inc., a Florida corporation (“FBC”), and Florida Bank of Commerce, a Florida state bank and wholly-owned subsidiary of FBC (“FBC Bank”), pursuant to which FBC will merge with and into the Company, with the Company as the surviving entity, and FBC Bank will merge with and into Sunshine Bank, with Sunshine Bank surviving as the Company’s wholly-owned subsidiary (collectively, the “Merger”).

The strategic partnership will create a franchise with over $800 million in assets and 18 banking facilities across central Florida, stretching from the East to West Coast. The transaction expands Sunshine Bank into contiguous markets and along the growing I-4 corridor. The Merger will create one of the largest community banks headquartered in central Florida. Additionally, the transaction will add approximately $315 million in assets, $231 million in loans and $278 million in deposits to Sunshine Bank.

At the effective time of the Merger, each share of common stock of FBC will be converted into the right to receive 0.88 shares of common stock of the Company subject to adjustment if the Company’s stock price (measured four days prior to the closing of the Merger) is more than 20% lower than the Company’s stock price on the trading day before the entry into the Merger Agreement was publicly announced and such decrease in the Company’s stock price is more than 20% relative to the change in the KBW Nasdaq Bank Index on the corresponding dates. As a result of the Merger, FBC’s shareholders would own approximately 34.6% of the Company’s common stock.

Upon completion of the Merger, Dana Kilborne, FBC Bank’s current President and Chief Executive Officer, will serve as an Executive Vice President of the Company and Co-President and Chief Banking Officer of Sunshine Bank. In addition, upon completion of the Merger, five FBC current board members will be appointed to the Company and Sunshine Bank board of directors, increasing the total number of directors of the Company and the Bank to fifteen members. The completion of the Merger is subject to regulatory approval and the satisfaction of certain customary closing conditions. It is expected that the Merger will qualify as a tax-free reorganization for U.S. federal income tax purposes. More information in connection with the proposed transaction can be found in the Company’s registration statement on Form S-4, which the Company filed with the SEC on June 23, 2016.

On March 30, 2016, the Company accepted subscriptions for and sold, at 100% of their principal amount, an aggregate of $11 million of subordinated notes (the “Notes”), on a private placement basis, to two accredited investors. The investors included a corporation owned and controlled by George Parmer, who is a director of the Company, which purchased $7.0 million in principal amount of the Notes. The Notes bear interest at a fixed interest rate of 5.0% per year. The Notes have a term of five years, and have a maturity date of April 1, 2021. The Notes are redeemable at the option of the Company, in whole or in part, at any time, without penalty or premium, subject to any required regulatory approvals. The Company contributed the proceeds from the Notes to the Bank as equity capital to support the Bank’s continued growth, including ongoing lending activities.

Critical Accounting Policies

There have been no material changes in our critical accounting policies since the Company filed its Annual Report on Form 10-K for 2015.

 

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Comparison of Financial Condition at June 30, 2016 and December 31, 2015

Total Assets. Total assets increased $7.5 million, or 1.5%, to $514.7 million at June 30, 2016 from $507.3 million at December 31, 2015. The increase was primarily the result of an increase of $45.3 million in loans outstanding offset by a decrease of $35.9 million in cash and cash equivalents.

Cash and Cash Equivalents. Total cash and cash equivalents decreased by $35.9 million, or 60.4%, to $23.5 million at June 30, 2016 from $59.3 million at December 31, 2015. Cash provided by financing activities totaled $9.9 million, primarily from increases in borrowings and subordinated notes. This was offset by cash used in investing and operations of $44.8 million and $1.0 million, respectively, primarily from increases in loans.

Investment Securities. Investment securities increased $341,000, or 0.5%, to $66.3 million at June 30, 2016 from $65.9 million at December 31, 2015. The increase was primarily due to $25.2 million in purchases of agency mortgage backed securities, offset by $11.9 million in maturities, repayments, and calls, and the sale of approximately $12.9 million in agency securities, resulting in a $131,000 gain. All of our investment securities were classified as available for sale at both June 30, 2016 and December 31, 2015.

Net Loans. Our primary interest-earning asset and source of income is our loan portfolio. Net loans increased $45.3 million, or 13.9%, to $371.5 million at June 30, 2016 from $326.3 million at December 31, 2015. The growth consisted of increases of $31.6 million in commercial real estate loans, $14.1 million in commercial loans, and $3.6 million in Home Equity loans, partially offset by a $4.9 million decrease in one-to-four family residential loans. During the first half of the year, the Bank continued its strategic emphasis to focus more of its lending activities on the origination of commercial loans. This emphasis stresses the Bank’s effort on relationship banking and targeted asset class diversification within the loan portfolio.

Deposits. Deposits decreased $3.8 million, or 1.0%, to $395.3 million at June 30, 2016 from $399.1 million at December 31, 2015. The decrease was primarily due to the run off of $7.2 million in time deposits, offset by an increase of $3.4 million in core deposits. The decrease in time deposits resulted mainly from the Bank allowing large municipal deposits requiring collateralization to run off. The increase in core deposits was a result of the Bank’s continued effort to attract low cost demand accounts. The Bank continued its efforts to attract new customers and offer more banking options to existing relationships by opening two new full service offices in Tampa and Orlando during the first quarter of 2016.

Borrowings. Other borrowings, consisting of Federal Home Loan Bank (“FHLB”) advances and customer repurchase sweep agreements, increased $2.7 million to $31.6 million at June 30, 2016, compared to $28.9 million at December 31, 2015. The slight increase offset the loss of time deposits. The $30.0 million in FHLB advances are secured by a blanket asset lien on loans with maximum borrowing capacity of approximately $128.5 million at June 30, 2016, collateralized by residential and commercial real estate loans. The customer repurchase sweep agreements are secured by securities with a market value of $4.0 million at June 30, 2016.

Subordinated notes (the “Notes”) were $11.0 million at June 30, 2016. There were no notes outstanding at December 31, 2015. The Notes were issued on March 30, 2016, to two accredited investors. The investors included a corporation owned and controlled by George Parmer, who is a director of the Company, which purchased $7.0 million in principal amount of the Notes. The Notes bear interest at a fixed interest rate of 5.0% per year. The Notes have a maturity date of April 1, 2021. The Notes are redeemable at the option of the Company, in whole or in part, at any time, without penalty or premium, subject to any required regulatory approvals. The Company contributed the proceeds from the Notes to the Bank as equity capital to support the Bank’s continued growth, including ongoing lending activities.

Stockholders’ Equity. Stockholders’ equity increased $848,000, or 1.2%, to $72.2 million at June 30, 2016, as a result of net income of $227,000 for the six months ended June 30, 2016, $425,000 in additional paid in capital from stock-based compensation and $196,000 in other comprehensive income mainly from increases in unrealized gains on securities.

 

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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the three and six months ended June 30, 2016 and 2015. 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.

 

		For the Three Months Ended June 30,
		2016												2015
		Average Outstanding Balance				Interest				Average Yield/Rate(1)				Average Outstanding Balance				Interest				Average Yield/Rate
Interest-earning assets:
Loans		$	343,336			$	4,041				4.71	%		$	128,379			$	1,531				4.75	%
Securities			68,596				241				1.41				64,561				161				1.00
Other(2)			27,383				43				0.63				38,815				41				0.40
Total interest-earning assets			439,315				4,325				3.94				231,755				1,733				2.98
Non-interest-earning assets			58,658												13,934
Total assets		$	497,973											$	245,689
Interest-bearing liabilities:
Interest-bearing demand and savings accounts		$	206,723			$	144				0.28			$	103,523			$	31				0.12
Time deposits			99,748				160				0.64				36,507				39				0.43
Total interest-bearing deposits			306,471				304				0.40				140,030				70				0.20
FHLB Advances and other borrowings			11,104				10				0.36				1,445				1				—
Subordinated Notes			11,000				138				5.00				—				—				—
Total interest-bearing liabilities			328,575				452				0.55				141,475				71				0.20
Non-interest-bearing liabilities			97,556												42,861
Total liabilities			426,131												184,336
Stockholders’ equity			71,842												61,353
Total liabilities and stockholders’ equity		$	497,973											$	245,689
Net interest income						$	3,873											$	1,662
Net interest rate spread (3)											3.39												2.77
Net interest-earning assets (4)		$	110,740											$	90,280
Net interest margin (5)											3.53												2.85
Average interest-earning assets to average interest-bearing liabilities			133.7	%											163.8	%

 

(1)	Annualized.

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

(3)	Net interest rate spread represents the difference between the weighted-average yield on interest earning assets and the weighted-average cost of interest-bearing liabilities.

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

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

 

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		For the Six Months Ended June 30,
		2016												2015
		Average Outstanding Balance				Interest				Average Yield/Rate(1)				Average Outstanding Balance				Interest				Average Yield/Rate
Interest-earning assets:
Loans		$	338,502			$	8,096				4.78	%		$	119,871			$	3,070				5.09	%
Securities			66,265				462				1.39				64,305				384				1.19
Other(2)			36,670				121				0.66				34,308				76				0.42
Total interest-earning assets			441,437				8,679				3.93				218,484				3,530				3.21
Non-interest-earning assets			59,125												21,678
Total assets		$	500,562											$	240,162
Interest-bearing liabilities:
Interest-bearing demand and savings accounts		$	205,339			$	303				0.30			$	100,203			$	59				0.12
Time deposits			103,034				316				0.61				36,259				78				0.43
Total interest-bearing deposits			308,373				619				0.40				136,462				137				0.20
FHLB Advances and other borrowings			17,197				33				0.38				727				1				0.28
Subordinated notes			5,621				140				5.00				—				—				—
Total interest-bearing liabilities			331,191				792				0.48				137,189				138				0.20
Non-interest-bearing liabilities			97,639												41,561
Total liabilities			428,830												178,750
Stockholders’ equity			71,732												61,412
Total liabilities and stockholders’ equity		$	500,562											$	240,162
Net interest income						$	7,887											$	3,392
Net interest rate spread (3)											3.45												3.01
Net interest-earning assets (4)		$	110,246											$	81,295
Net interest margin (5)											3.57												3.09
Average interest-earning assets to average interest-bearing liabilities			133.3	%											159.3	%

 

(1)	Annualized.

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

(3)	Net interest rate spread represents the difference between the weighted-average yield on interest earning assets and the weighted-average cost of interest-bearing liabilities.

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

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

 

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Comparison of Operating Results for the Three Months Ended June 30, 2016 and June 30, 2015

General. Net income for the three months ended June 30, 2016 was $73,000 compared to a net loss of $151,000 for the three months ended June 30, 2015. The increase in net income was primarily due to increases in net interest income of $2.2 million and due to the growth in the Company’s assets an increase in noninterest income of $822,000. These increases in revenue were offset by increases in noninterest expense of $1.0 million and provision for loan losses of $350,000. The increase in noninterest expense was mostly comprised of increases in compensation, occupancy, and data processing expenses due to the expanded size and footprint of the Company. These increases in expenses were offset partially by a decrease of $768,000 in Merger related expenses.

Interest Income. Interest income increased $2.6 million, or 149.6%, to $4.3 million for the three months ended June 30, 2016 primarily as a result of a $2.5 million increase in interest income on loans. The increase in interest income resulted primarily from a $207.6 million increase in the average balance of our interest-earnings assets to $439.3 million and a 96 basis points increase in the average yield on our interest-earning assets to 3.94% for the three months ended June 30, 2016 compared to the prior year period.

Interest income on loans increased $2.5 million, or 163.9%, to $4.0 million for the three months ended June 30, 2016 as compared to the same period in 2015. The average balance of loans increased to $215.0 million for the three months ended June 30, 2016 from $128.4 million for the three months ended June 30, 2015, as a result of the completion of the Community Southern merger and the branch acquisition. Despite the generally low rate yield environment, the Bank experienced only a small decrease in its average yield on loans decreasing 4 basis points to 4.71% in the three months ended June 30, 2016 as compared to the same period in 2015.

Interest income on investment securities increased $80,000, or 49.7%, to $241,000 for the three months ended June 30, 2016 as compared to the same period in 2015, mostly as a result of a 41 basis points increase in the average yield on investment securities to 1.41% as a result of the higher yielding securities in the portfolio compared to the same period in 2015. The average balance of investment securities increased $4.0 million to $68.6 million for the three months ended June 30, 2016 from $64.6 million for the three months ended June 30, 2015. The increase in the average balance of investment securities was the result of purchases designed to achieve improved portfolio diversification.

Interest Expense. Interest expense increased $381,000, or 536.6%, to $452,000 for the three months ended June 30, 2016 from $71,000 for the three months ended June 30, 2015 as the result of the increase in deposits as a result of the completion of the Community Southern merger and the branch acquisition and the $147,000 increase in borrowing costs from the subordinated debt and increased use of short-term FHLB advances. The average cost of interest-bearing deposits increased by 20 basis points to 0.40% for the three months ended June 30, 2016 from 0.20% for the three months ended June 30, 2015 reflecting the slightly higher deposit rates assumed in the Community Southern Merger. The average balance of interest-bearing deposits increased by $166.4 million during the three months ended June 30, 2016 to $306.5 million compared to the prior year period due to the Community Southern Merger. The average balance of borrowings increased $20.7 million for the three months ended June 30, 2016 due to the $11.0 million in subordinated debt and increased use of short-term FHLB advances which currently serve as a lower rate means of funding than time deposits.

Net Interest Income. The effect of a higher average balance on loans and higher yielding asset mix compared to the prior year period has increased the Company’s net interest income for the three months ended June 30, 2016. Net interest income increased $2.2 million, or 133.0%, to $3.9 million for the three months ended June 30, 2016 compared to the prior year period. The net interest rate spread increased to 3.39% for the three months ended June 30, 2016 from 2.77% for the three months ended June 30, 2015. Our net interest margin increased to 3.53% for the three months ended June 30, 2016 from 2.85% for the three months ended June 30, 2015.

Provision for Loan Losses. We recorded a $350,000 provision for loan losses for the three months ended June 30, 2016 compared to no provision for the three months ended June 30, 2015. Although the Company has continued to experience strong credit quality, the need for additional provision was necessitated by the growth in loans, which grew 40.0% on an annualized basis during the second quarter. Net recoveries for the three months ended June 30, 2016 were $13,000 compared to net recoveries of $140,000 for the three months ended June 30, 2015.

 

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Management considers the allowance for loan losses at June 30, 2016 to be adequate to cover losses inherent in the loan portfolio based on an assessment of the qualitative and quantitative factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income increased $822,000, or 251.4%, to $1.1 million for the three months ended June 30, 2016 from $327,000 for the three months ended June 30, 2015. The increase was primarily related to a $563,000 gain recognized on the sale-leaseback of the Bank’s Brandon office. The sale will enable the Bank to build a more efficient office on part of the land sold. The Bank also experienced a $176,000 increase in fees and service charges on deposit accounts, a $52,000 increase in gains on securities sales, and a $25,000 increase in income from bank-owned life insurance.

Noninterest Expenses. Non-interest expense increased $1.0 million to $4.6 million for the three months ended June 30, 2016 compared to the same period in 2015. The increase primarily reflected an increase of $833,000 in salaries and employee benefits expense. The salaries and employee benefits expense increase quarter over quarter was mostly attributable to the Company’s 2015 equity plan and the increased number of employees resulting from the expanded footprint of the Bank. Occupancy, data processing, and other expenses have all increased proportionally with the increased size of the Company. The Company also had a decrease of $768,000 in merger related expenses during the three months ended June 30, 2016 as compared to the prior year period.

Income Tax Expense (Benefit). Income taxes were $36,000 for the three months ended June 30, 2016 due to pretax income of $109,000 at a 33% effective tax rate compared to an income tax benefit of $1.4 million for the three months ended June 30, 2015 due to the pretax loss of $1.5 million and the change in accounting in estimate for bank owned life insurance which resulted in a $733,000 benefit.

 

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Comparison of Operating Results for the Six months Ended June 30, 2016 and June 30, 2015

General. Net income for the six months ended June 30, 2016 was $227,000 compared to a net loss of $504,000 for the six months ended June 30, 2015. The increase in net income was primarily due to an increase in net interest income of $4.5 million and an increase in non-interest income of $1.1 million due to the growth in the Company’s assets. These increases in revenue were offset by increases in noninterest expense of $2.7 million and provision for loan losses of $350,000. The increase in noninterest expense was mostly comprised of increases in compensation, occupancy, and data processing expenses due to the expanded size and footprint of the Company. These increases in expenses were offset partially by a decrease of $1.0 million in Merger related expenses.

Interest Income. Interest income increased $5.1 million, or 145.9%, to $8.7 million for the six months ended June 30, 2016 as compared to the same period in 2015, primarily as a result of a $5.0 million increase in interest income on loans. The increase in interest income resulted primarily from a $222.9 million increase in the average balance of our interest-earnings assets to $441.4 million and a 72 basis points increase in the average yield on our interest-earning assets to 3.93% for the six months ended June 30, 2016 compared to the prior year period. The increase in the average yield was attributable to the mix of interest earning assets, as the higher yielding loan portfolio represented the majority of the asset growth.

Interest income on loans increased $5.0 million, or 163.7%, to $8.1 million for the six months ended June 30, 2016 due mainly to the increase in the average balance of loans. Average loans for the six months ended June 30, 2016 increased by $218.6 million to $338.5 million from $119.9 million for the six months ended June 30, 2015 as a result of the completion of the Community Southern merger and the branch acquisition. The average yield on loans decreased 31 basis points to 4.78% for the six months ended June 30, 2016 from 5.09% for the six months ended June 30, 2015. 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 in the first quarter of 2015.

Interest income on investment securities increased $78,000, or 20.3%, to $462,000 for the six months ended June 30, 2016 as a result of the increase of 20 basis points in the average yield. The average yield on investment securities increased to 1.39% for the six months ended June 30, 2016 from 1.19% for the six months ended June 30, 2015 as a result of the higher yielding securities in the portfolio compared to the same period in 2015. The average balance of investment securities increased $2.0 million to $66.3 million for the six months ended June 30, 2016 from $64.3 million for the six months ended June 30, 2015. The increase the in average balance of investment securities was the result of purchases designed to achieve improved portfolio diversification.

Interest Expense. Interest expense increased $654,000, or 473.9%, to $792,000 for the six months ended June 30, 2016 from $138,000 for the six months ended June 30, 2015. The increase can be attributed to the increase in average deposits and the increased borrowing costs of $172,000, mostly from the $11.0 million subordinated notes issued in March 2016 and increased usage of short-term FHLB advances. The average balance of interest-bearing deposits increased by $171.9 million during the six months ended June 30, 2016 to $308.4 million, due to mainly to the increased deposits assumed in the Community Southern merger. The average cost of deposits increased by 20 basis points to 0.40% for the six months ended June 30, 2016 from 0.20% for the six months ended June 30, 2015 due mainly to the higher rates assumed in the Community Southern merger. The average balance of borrowings increased $22.1 million for the six months ended June 30, 2016 from the $11.0 million in subordinated debt issued on March 30, 2016 and increased use of short-term FHLB advances which currently serve as a lower rate means of funding than time deposits.

Net Interest Income. The effect of higher average balances on loans and securities and an increased average yield on loans and securities has increased the Bank’s net interest income for the six months ended June 30, 2016 compared to the prior year period. Net interest income increased $4.5 million, or 132.5%, to $7.9 million for the six months ended June 30, 2016 compared to the prior year period. The increase was primarily due to the increase in our net interest rate spread to 3.45% for the six months ended June 30, 2016 from 3.01% for the six months ended June 30, 2015. Our net interest margin increased to 3.57% for the six months ended June 30, 2016 from 3.09% for the six months ended June 30, 2015.

 

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Provision for Loan Losses. We recorded $350,000 provision for loan losses for the six months ended June 30, 2016 compared to no provision for the six months ended June 30, 2015. The need for additional provision was necessitated by the growth in loans, which grew 28.0% on an annualized basis during the first half of the year. Net recoveries for the six months ended June 30, 2016 were $34,000 compared to net recoveries of $157,000 for the six months ended June 30, 2015.

Management considers the allowance for loan losses at June 30, 2016 to be adequate to cover losses inherent in the loan portfolio based on an assessment of the qualitative and quantitative factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income increased $1.1 million or 146.7%, to $1.8 million for the six months ended June 30, 2016 from $736,000 for the six months ended June 30, 2015. The increase was primarily related to a $563,000 gain on the sale and subsequent partial leaseback of the Bank’s Brandon office, a $374,000 increase in the fees and service charges related to deposits, and a $51,000 increase in income from bank-owned life insurance.

Noninterest Expense. Non-interest expense increased $2.7 million, or 43.6%, to $9.0 million for the six months ended June 30, 2016 compared to the same period in 2015. The increase primarily reflected an increase of $1.9 million in salaries and employee benefits expense. The salaries and employee benefits expense increase period over period was attributable to the increased number of employees resulting from the Community Southern Merger and branch acquisition and increased expense from the 2015 equity plan. The other expense categories grew proportionally with the increased size of the Company. The Company had a decrease of $1.0 million in merger related expenses.

Income Tax Expense. Income tax expense was $85,000 for the six months ended June 30, 2016 due to pretax income of $312,000 as compared to a benefit of $1.7 million for the six months ended June 30, 2015. 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. Non-performing assets, including non-performing loans and other real estate owned, totaled $1.3 million, or 0.26% of total assets, at June 30, 2016 and $783,000, or 0.15% of total assets, at December 31, 2015. 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, 2016 or December 31, 2015.

 

		At June 30,				At December 31,
		2016				2015
		(dollars in thousands)
Non-accrual loans:
Real estate mortgage loans:
One- to four-family residential		$	308			$	40
Commercial real estate and multi-family			497				373
Construction and land			211				156
Non-Real estate loans:
Commercial business loans			95				—
Consumer loans			—				—
Total non-accrual loans			1,111				571
Non-accruing troubled debt restructured loans:
Commercial real estate and multi-family			160				180
Total non-performing loans			1,271				751
Other real estate owned:
One- to four-family			20				—
Land and construction			32				32
Total other real estate owned			52				32
Total non-performing assets		$	1,323			$	783
Total accruing troubled debt restructured loans		$	1,243			$	1,355
Total non-performing loans to total loans			0.34	%			0.23	%
Total non-performing assets to total assets			0.26	%			0.15	%

 

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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,
		2016				2015
		(dollars in thousands)
Allowance at beginning of period		$	2,511			$	1,726
Provision for loan losses			350				—
Charge offs:
Real estate mortgage loans:
One- to four-family residential			(22	)			(1	)
Commercial real estate and multi-family			—				—
Construction and land			—				—
Commercial business loans			(11	)			(9	)
Consumer loans			(2	)			—
Total charge-offs			(35	)			(10	)
Recoveries:
Real estate mortgage loans:
One- to four-family residential			—				1
Commercial real estate and multi-family			3				114
Construction and land			—				—
Home Equity			24
Commercial business loans			40				50
Consumer loans			2				2
Total recoveries			69				167
Net recoveries (charge-offs)			34				157
Allowance at end of period		$	2,895			$	1,883
Allowance to nonperforming loans			227.8	%			115.2	%
Allowance to total loans outstanding at the end of the period			0.77	%			0.61	%
Net recoveries (charge-offs) to average loans outstanding during the period (annualized)			0.01	%			0.26	%

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, 2016, we had the capacity to borrow approximately $128.5 million from the Federal Home Loan Bank of Atlanta. At June 30, 2016, we had outstanding advances of approximately $30.0 million and at December 31, 2015 we had $27.5 million in outstanding advances from the Federal Home Loan Bank of Atlanta. We also have lines of credit at three financial institutions that would allow us to borrow up to $25.5 million at June 30, 2016. No credit lines were drawn upon at June 30, 2016.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-earning demand deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.

The principle sources of the Holding Company’s liquidity are its existing cash resources. The Holding Company serves as a source of capital strength for the Bank. The Holding Company has undertaken recent actions that demonstrate its ability to access capital and provide for the funding needs of the Bank. Cash on hand at the Holding Company represent mainly the proceeds of our December 2015 private placement of common stock, which raised net proceeds of approximately $11.4 million. On March 30, 2016, the Holding Company also issued $11.0 million in subordinated notes, the proceeds of which were contributed to the Bank to support the growing loan demand.

The Company has established an Asset/Liability Management (ALCO) policy and committee in order to maximize earnings performance while maintaining acceptable levels of risks, adequate liquidity, and a “well capitalized” balance sheet. ALCO reviews and approves products, pricing, and strategies that affect balance sheet, cash flows,

 

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and liquidity positions. ALCO has also established a contingency funding plan to address risks associated with periods of liquidity stress. The Company is committed to maintaining a strong liquidity position. The Company monitors its liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments.

At June 30, 2016, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 12.1% of adjusted total assets, which is above the required level of 5.00% to be considered “well capitalized”, common equity tier 1 capital to risk-weighted assets of 14.7%, which is above the required level of 6.50% to be considered “well capitalized”, tier 1 capital to risk-weighted assets of 14.7%, which is above the required level of 8.00% to be considered “well capitalized”, and total risk-based capital of 15.4% of risk-weighted assets, which is above the required level of 10.00% to be considered “well capitalized”. The capital conservation buffer was 7.44% exceeding the minimum of 0.625% for 2016. Management is not aware of any conditions or events since the most recent notification that would change our category.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At June 30, 2016, we had unfunded loan commitments of $58.8 million and stand-by letters of credit of $739,000. 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, 2016 totaled $87.3 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits are not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.

 

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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, 2016, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures in effect as of June 30, 2016, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended June 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company as of June 30, 2016.

 

Item 1A.

Risk Factors

Not required for smaller reporting company.

 

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.

 

Item 5.

Other Information

Nothing to report.

 

Item 6.

Exhibits

 

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

 

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

SIGNATURES

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

 

				SUNSHINE BANCORP, INC.
Date: August 12, 2016				By:		/s/ Andrew S. Samuel
						Andrew S. Samuel
						President and Chief Executive Officer
						(Duly Authorized Officer)
Date: August 12, 2016				By:		/s/ John Finley
						John Finley
						Executive Vice President and
						Chief Financial Officer
						(Principal Financial Officer)

 

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