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SSNF > SEC Filings for SSNF > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for SUNSHINE FINANCIAL INC



Quarterly Report

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations

Forward-Looking Statements

When used in this report and in future filings by Sunshine Financial with the U.S. Securities and Exchange Commission ("SEC"), in Sunshine Financial's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, "anticipate," "believes," "expects," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "projected," or similar expressions are intended to identify forward-looking statements." These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;

changes in general economic conditions, either nationally or in our market area;

changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;

results of examinations of us by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Act, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III;

our ability to attract and retain deposits;

increases in premiums for deposit insurance;


our ability to control operating costs and expenses;

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

difficulties in reducing risks associated with the loans on our balance sheet;

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

computer systems on which we depend could fail or experience a security breach;

our ability to retain key members of our senior management team;

costs and effects of litigation, including settlements and judgments;

our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and out ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

our ability to pay dividends on our common stock;

adverse changes in the securities markets;

inability of key third-party providers to perform their obligations to us;

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods including relating to fair value accounting and loan loss reserve requirements; and

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this report and our reports filed with the SEC.

Any of the forward-looking statements are based upon management's beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.



Sunshine Financial is the holding company for its wholly owned subsidiary, Sunshine Savings Bank. Sunshine Savings Bank was originally chartered as a credit union in 1952 as Sunshine State Credit Union to serve state government employees in the metropolitan Tallahassee area. On July 1, 2007, we converted from a state-chartered credit union known as Sunshine State Credit Union to a federal mutual savings bank known as Sunshine Savings Bank, and in 2009 reorganized into the non-stock mutual holding company structure. On April 5, 2011, Sunshine Financial completed a public offering as part of Sunshine Saving Bank's conversion and reorganization from a non-stock mutual holding company to a stock holding company structure. References to we, us and our throughout this document refer to Sunshine Financial and Sunshine Savings Bank, as the context requires.

We currently operate out of five full-service branch offices serving the Tallahassee, Florida metropolitan area. Our principal business consists of attracting retail deposits from the general public and investing those funds in loans secured by first and second mortgages on one- to four-family residences, commercial real estate, home equity loans and lines of credit, lot loans, and direct automobile, credit card and other consumer loans.

In September 2013, we purchased the buildings, real estate, fixtures and equipment of two former bank branch offices in Tallahassee, Florida, from Centennial Bank as future branch locations of Sunshine Savings Bank. On January 15, 2014, we opened a new branch at one of these locations, with the second branch anticipated to open at the other location during the fourth quarter of 2014. The branch opened in January 2014 is located at 503 Appleyard Drive, Tallahassee, FL and is situated directly across from Tallahassee Community College and the Lively Technical Institute. This branch is also in the same market area as the Leon County School Board, the Leon County Sheriff's Department as well as the Leon County and City of Tallahassee Maintenance Departments. The second location, which is expected to open during the fourth quarter of 2014, is located at 3641 Coolidge Ct., Tallahassee, FL, in the rapidly growing section of Southwood, which is anchored by various agencies of the State of Florida Government. Sunshine Savings Bank does not have any banking facilities convenient to either of these two strategically important areas of Western and Southeast Tallahassee. Management believes that both facilities are located in high traffic growth areas strategically important to our future growth and profitability.

We offer a variety of deposit accounts, which are our primary source of funding for our lending activities. Our operations are significantly affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles. Sources of funds for lending activities include primarily deposits, borrowings, payments on loans and income provided from operations.

Sunshine Financial is regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve") and Sunshine Savings Bank is regulated by the Office of the Comptroller of the Currency ("OCC"). Sunshine Savings Bank is also regulated by the Federal Deposit Insurance Corporation ("FDIC").


Critical Accounting Policies

Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting policies include, determining the allowance for loan losses, accounting for deferred income taxes as well as the valuation of foreclosed assets. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements included in our 10-K.

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. There were no changes in the Bank's accounting policies or methodology during the periods ended March 31, 2014 or 2013.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical industry loss experience adjusted for qualitative factors.

The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding two years. This is supplemented by the risks for each portfolio segment. Risk factors impacting loans in each of the portfolio segments include changes in lending policies and procedures, economic conditions, volume and nature of loans, lending management experience, volume of troubled loans, quality of loan review system, value of collateral-dependent loans, credit concentrations and competition and regulatory change. The historical experience is adjusted for qualitative factors such as economic conditions and other trends or uncertainties that could affect management's estimate of probable losses.


A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for residential mortgage loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Deferred Tax Assets. Income taxes are reflected in our financial statements to show the tax effects of the operations and transactions reported in the financial statements and consist of taxes currently payable plus deferred taxes. Generally accepted accounting principles require the asset and liability approach for financial accounting and reporting for deferred income taxes. Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of assets and liabilities. They are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled and are determined using the assets and liability method of accounting. The deferred income provision represents the difference between net deferred tax asset/liability at the beginning and end of the reported period. In formulating our deferred tax asset, we are required to estimate our income and taxes in the jurisdiction in which we operate. This process involves estimating our actual current tax exposure for the reported period together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The realization of deferred tax assets is dependent on results of future operations. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Foreclosed Real Estate. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value less costs to sell. Revenue and expenses from operations are included in the condensed consolidated statements of operations.


Comparison of Financial Condition at March 31, 2014 and December 31, 2013

General. Total assets increased $3.8 million, or 2.6%, to $150.3 million at March 31, 2014 from $146.5 million at December 31, 2013. The increase in total assets was due primarily to increases in securities held to maturity and loans. Our securities held to maturity increased $2.9 million and loans increased $1.4 million since December 31, 2013. The net increase in assets was funded by a $3.9 million increase in deposits.

Loans. Our net loan portfolio increased $1.4 million, to $96.9 million at March 31, 2014 from $95.5 million at December 31, 2013. The increase in loans was due to a $3.2 million, or 17.5%, increase in commercial real estate loans, as well as a $301,000 increase in commercial business loans and a $168,000 increase in construction loans, which is consistent with our strategy to originate higher yielding loans and to diversify our portfolio. The increases in the aforementioned loans were partially offset by a $729,000 decrease in one- to four-family loans and a $927,000 decrease in consumer loans. We originate and sell one- to four-family real estate mortgage loans to Freddie Mac to generate additional income. For the three-months ended March 31, 2014, we originated $1.1 million of one- to four-family mortgage loans for sale, and $1.2 million were sold to Freddie Mac at a gain on sale of $27,000.

Allowance for Loan Losses. Our allowance for loan losses at March 31, 2014 was $1.2 million, or 1.22% of loans, compared to $1.3 million, or 1.35% of loans, at December 31, 2013. Nonperforming loans increased slightly to $1.7 million at March 31, 2014 from $1.3 million at December 31, 2013. Nonperforming loans to total loans increased to 1.69% at March 31, 2014 from 1.35% at December 31, 2013. Loans on nonaccrual which were less than ninety days past due totaled $302,000 at March 31, 2014 compared to $457,000 million at December 31, 2013.

Deposits. Total deposits increased $3.9 million, or 3.2%, to $126.0 million at March 31, 2014 from $122.1 million at December 31, 2013. This increase was due to increases in noninterest bearing deposits, money market accounts and savings accounts, partially offset by decreases in time deposits.

Equity. Total stockholders' equity decreased $353,000 to $23.4 million at March 31, 2014. This decrease was due to stock-based compensation of $48,000, ESOP compensation expense of $3,000, offset by a net loss of $21,000 and $383,000 in stock buy-backs for the three-months ended March 31, 2014.


Results of Operations

The following tables set forth, for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) interest-rate spread; and (v) net interest margin. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances.

                                                         Three Months Ended March 31,
                                               2014                                        2013
                                             Interest        Average                     Interest       Average
                               Average          and          Yield/        Average         and          Yield/
                               Balance       Dividends        Rate         Balance       Dividend        Rate
                                                               ($ in thousands)
Interest-earning assets:
  Loans receivable (1)        $  96,343     $     1,284          5.33 %   $  93,140     $    1,369          5.88 %
  Investments held to
maturity                         28,382             152          2.14        15,007             80          2.13
  Other interest-earning
assets (2)                        9,420               6          0.25        26,461             16          0.25

    Total interest-earning
assets                          134,145           1,442          4.30       134,608          1,465          4.35

Noninterest-earning assets       11,437                                      10,929

    Total assets              $ 145,582                                   $ 145,537

  MMDA and statement
savings                          71,582              60          0.34        67,300             63          0.37
  Time deposits                  28,251              33          0.47        31,101             44          0.57

    Total interest-bearing
liabilities                      99,833              93          0.37        98,401            107          0.44

liabilities                      22,398                                      22,173
Equity                           23,351                                      24,963

    Total liabilities and
equity                        $ 145,582                                   $ 145,537

Net interest income                         $     1,349                                 $    1,358

Net interest rate spread
(3)                                                              3.93 %                                     3.91 %

Net interest margin (4)                                          4.02 %                                     4.04 %

Ratio of average
interest-earning assets
  to average
liabilities                        1.34 x                                      1.37 x

(1) Includes nonaccrual loans.
(2) Other interest-earnings assets consist of Federal Home Loan Bank stock and interest-bearing deposits.
(3) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average rate of interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average interest-earning assets (annualized).


Comparison of the Three Months Ended March 31, 2014 and 2013

General. Net loss for the three months ended March 31, 2014 was $21,000 compared to net earnings of $121,000 for the three months ended March 31, 2013, resulting in an annualized return on average assets of (0.06)% for the three months ended March 31, 2014 and 0.33% for the three months ended March 31, 2013. The decrease in net earnings was due primarily to a decrease in noninterest income, an increase in the provision for loan losses, partially offset by an decrease in our noninterest expense.

Net Interest Income. Net interest income decreased $9,000, or 0.7%, to $1,349,000 for the three months ended March 31, 2014 from $1,358,000 for the same period in 2013, primarily due to the 55 basis point decline in the average rate of our loan portfolio, partially offset by our lower cost of deposits. Our net interest rate spread increased to 3.93% for the three months ended March 31, 2014 from 3.91% for the same period in 2013, while our net interest margin decreased to 4.02% at March 31, 2014 from 4.04% at March 31, 2013. The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended March 31, 2014 decreased to 1.34, from 1.37 for the three months ended March 31, 2013.

Interest Income. Interest income for the three months ended March 31, 2014 decreased $23,000, or 1.6%, to $1,442,000 from $1,465,000 for the same period ended March 31, 2013. The decrease in interest income for the three months ended March 31, 2014 was primarily due to lower rates on loans, partially offset by higher balances of investments held to maturity. The average rate on loans receivable decreased to 5.33% for the three months ended March 31, 2014 compared to 5.88% for the three months ended March 31, 2013. Average investments held to maturity increased to $28.4 million for the three months ended March 31, 2014 compared to $15.0 million for the three months ended March 31, 2013.

Interest Expense. Interest expense for the three months ended March 31, 2014 was $93,000 compared to $107,000 for the same period in 2013, a decrease of $14,000 or 13.1%. The decrease was primarily the result of decrease in the average rate paid on deposits. The average balance of time deposits decreased to $28.3 million for the three month period ended March 31, 2014 from $31.1 million for the same period in 2013 and the average rate paid on certificates of deposit decreased to 0.47% from 0.57%. The total cost of funds for the three months ended March 31, 2014 decreased to 0.37% from 0.44% for the three months ended March 31, 2013.

Provision for Loan Losses. We recorded a provision for loan losses of $50,000 for the three months ended March 31, 2014 compared to a credit of $48,000 for the three months ended March 31, 2013. The provision for loan losses reflected historical and expected future loan losses, the slight increase in the size of our loan portfolio as well as the change in the mix of loans. Net charge-offs for the three months ended March 31, 2014 were $131,000 compared to a net recoveries of $142,000 for the three months ended March 31, 2013. Nonperforming loans to total loans at March 31, 2014 were 1.69% compared to 1.35% at March 31, 2013. The allowance for loan losses to net loans was 1.25% at March 31, 2014 compared to 1.36% at December 31, 2013.


Comparison of the Three Months Ended March 31, 2014 and 2013, Continued

Management considers the allowance for loan losses at March 31, 2014 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income for the three months ended March 31, 2014 decreased $295,000, or 39.1%, to $460,000 compared to $755,000 for the same period in 2013. The gain on loan sales decreased $54,000, the gain on sale of foreclosed assets decreased $129,000 and service charges on deposit accounts decreased $94,000 for the three months ended March 31, 2014, compared to the three months ended March 31, 2013. The primary cause for the decrease in the gain on loan sales was a decrease in the volume of loans sold to FHLMC. There was no gain on sale of foreclosed assets during the three months ended March 31, 2014. The primary cause for a decrease in fees from deposit accounts was a decrease in income from debit card activity.

Noninterest Expense. Noninterest expense for the three months ended March 31, 2014 decreased $170,000, or 8.7%, to $1,796,000 compared to $1,966,000 for the same period in 2013. The largest decreases were in other expenses and professional fees. The decrease in other expenses was primarily due to lower other loan expense and debit card losses. The decrease in professional fees expense primarily was due to a decrease in legal fees associated with settlement of a former lawsuit in which the Bank was the plaintiff.

Income Taxes. For the three months ended March 31, 2014, we recorded an income . . .

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