10-Q 1 ssnf-10q093012.htm ssnf-10q093012.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)

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

For the quarterly period ended September 30, 2012

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

For the transition period from _______ to ________

Commission file number:    000-54280


SUNSHINE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Maryland
36-4678532
(State or other jurisdiction of incorporation of organization)
(IRS Employer Identification No.)

1400 East Park Avenue, Tallahassee, Florida  32301
(Address of principal executive offices; Zip Code)

(850) 219-7200
(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 and 15(d) of the Exchange Act 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 xNo ¨

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:
 
At November 12, 2012, there were issued and outstanding 1,234,454 shares of the issuer’s common stock.

 
 
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Index

   
Page Number
PART I  FINANCIAL INFORMATION
 
     
Item 1.  Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011
2
     
 
Condensed Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2012 and 2011 (Unaudited)
3
     
 
Condensed Consolidated Statements of Stockholders' Equity for the Nine-Month Periods Ended September 30, 2012 and 2011 (Unaudited)
4
     
 
Condensed Consolidated Statements of Cash Flows For the Nine-Month Periods Ended September 30, 2012 and 2011 (Unaudited)
5
     
 
Notes to Condensed Consolidated Financial Statements
6-22
     
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
23-34
     
Item 3.  Quantitative and Qualitative Disclosure About Market Risk
35
     
Item 4.  Controls and Procedures
35
     
PART II  OTHER INFORMATION
 
     
Item 1.  Legal Proceedings
36
     
Item 1A.  Risk Factors
36
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
36
     
Item 3.  Defaults Upon Senior Securities
36
     
Item 4.  Mine Safety Disclosures
36
     
Item 5.  Other Information
36
     
Item 6.  Exhibits
36
     
SIGNATURES
37
     
EXHIBIT INDEX
 
 

 
 
1
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Condensed Consolidated Balance Sheets
(In thousands, except share information)

   
At September 30,
2012
   
At December 31,
2011
 
   
(Unaudited)
       
Assets
           
             
Cash and due from banks
  $ 1,334       2,053  
Interest-bearing deposits with banks
    3,166       6,546  
Federal funds sold
    24,804       16,456  
                 
Cash and cash equivalents
    29,304       25,055  
                 
Securities held to maturity (fair value of $15,623 and $10,088)
    15,397       9,835  
Loans, net of allowance for loan losses of $1,526 and $1,329
    91,813       102,002  
Premises and equipment, net
    3,394       3,623  
Federal Home Loan Bank stock, at cost
    218       247  
Deferred income taxes
    2,770       2,364  
Accrued interest receivable
    385       454  
Foreclosed real estate
    2,199       743  
Other assets
    1,359       1,437  
                 
Total assets
  $ 146,839       145,760  
                 
Liabilities and Stockholders’ Equity
               
                 
Liabilities:
               
Noninterest-bearing deposit accounts
    23,017       21,827  
Money-market deposit accounts
    30,087       27,028  
Savings accounts
    35,558       34,271  
Time deposits
    32,153       36,290  
                 
Total deposits
    120,815       119,416  
                 
Official checks
    553       572  
Advances by borrowers for taxes and insurance
    275       21  
Other liabilities
    423       366  
                 
Total liabilities
    122,066       120,375  
                 
Stockholders' equity:
               
Common stock, $.01 par value, 6,000,000 shares authorized,
  1,234,454 shares issued and outstanding at September 30, 2012
  and December 31, 2011
      12         12  
Additional paid in capital
    11,483       11,487  
Retained earnings
    14,143       14,813  
Unearned Employee Stock Ownership Plan shares
    (865 )     (927 )
                 
Total stockholders' equity
    24,773       25,385  
                 
Total liabilities and stockholders’ equity
  $ 146,839       145,760  
                 

See accompanying Notes to Condensed Consolidated Financial Statements.

 
2
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share information)



   
Three Months Ended
  September 30,
   
Nine Months Ended
  September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest income:
                       
Loans
  $ 1,392       1,634       4,256       5,027  
Securities, held to maturity
    66       82       180       192  
Other
    16       9       46       31  
                                 
Total interest income
    1,474       1,725       4,482       5,250  
                                 
Interest expense-
                               
Deposit accounts
    128       206       439       761  
                                 
Net interest income
    1,346       1,519       4,043       4,489  
                                 
Provision for loan losses
    270       306       1,450       756  
                                 
Net interest income after provision for loan losses
    1,076       1,213       2,593       3,733  
                                 
Noninterest income:
                               
Fees and service charges on deposit accounts
    532       573       1,572       1,681  
Gain on loan sales
    135       21       257       35  
Fees and charges on loans
    35       36       82       71  
Other
    28       4       34       26  
                                 
Total noninterest income
    730       634       1,945       1,813  
                                 
Noninterest expenses:
                               
Salaries and employee benefits
    862       828       2,645       2,586  
Occupancy and equipment
    270       272       826       813  
Data processing services
    202       191       579       551  
Professional fees
    164       178       519       455  
FDIC insurance
    32       29       90       112  
Advertising and promotion
    13       16       50       48  
Stationery and supplies
    17       12       63       40  
Other
    324       294       842       792  
                                 
Total noninterest expenses
    1,884       1,820       5,614       5,397  
                                 
Earnings (loss) before income taxes
    (78 )     27       (1,076 )     149  
                                 
Income taxes (benefit)
    (34 )     13       (406 )     56  
                                 
Net (loss) earnings
  $ (44 )     14       (670 )     93  
                                 
Basic (loss) earnings per common share
  $ (0.04 )     0.01       (0.54 )      -  
                                 
Cash dividends per common share
  $ -       -       -        -  
                                 
                                 
                                 
See accompanying Notes to Condensed Consolidated Financial Statements.

 
3
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Nine Months Ended September 30, 2012 and 2011
($ in thousands)



                               
                     
Unearned
       
                     
Employee
       
                     
Stock
       
         
Additional
         
Ownership
   
Total
 
   
Common Stock
   
Paid In
   
Retained
   
Plan
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Shares
   
Equity
 
                                     
Balance, December 31, 2010
    -     $ -       -       15,039       -       15,039  
                                                 
Net earnings (unaudited)
    -       -       -       93       -       93  
                                                 
Proceeds from issuance of
                                               
  common stock, net of offering
                                               
  costs of $847 (unaudited)
    1,135,698       11       10,498       -       -       10,509  
                                                 
Issuance of common stock for
                                               
  ESOP (unaudited)
    98,756       1       987       -       (988 )     -  
                                                 
Common stock allocated to
                                               
  ESOP participants (unaudited)
    -       -       3       -       49       52  
                                                 
Balance, September 30, 2011
                                               
  (unaudited)
    1,234,454     $ 12       11,488       15,132       (939 )     25,693  
                                                 
                                                 
Balance, December 31, 2011
    1,234,454       12       11,487       14,813       (927 )     25,385  
                                                 
Net loss (unaudited)
    -       -       -       (670 )     -       (670 )
                                                 
Common stock allocated to
                                               
  ESOP participants (unaudited)
    -       -       (4 )     -       62       58  
                                                 
Balance, September 30, 2012
                                               
  (unaudited)
    1,234,454     $ 12       11,483       14,143       (865 )     24,773  







See accompanying Notes to Condensed Consolidated Financial Statements.



 
4
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)


     Nine Months Ended September 30,  
   
2012
   
2011
 
Cash flows from operating activities:
           
Net (loss) earnings
  $ (670 )     93  
Adjustments to reconcile net (loss) earnings to net cash from operating activities:
               
Depreciation
    371       368  
Provision for loan losses
    1,450       756  
Deferred income taxes (benefit)
    (406 )     56  
Net accretion of premiums/discounts on securities
    55       16  
Net amortization of deferred loan fees and costs
    9       6  
Loans originated for sale
    (10,227 )     (2,218 )
Proceeds from loans sold
    10,484       2,253  
Gain on sale of loans
    (257 )     (35 )
ESOP compensation expense
    58       52  
Decrease  in accrued interest receivable
    69       66  
Decrease in other assets
    78       350  
Loss on sale of foreclosed real estate
    3       -  
Write-down of foreclosed real estate
    101       25  
(Decrease) increase in official checks
    (19 )     86  
Net increase in advances by borrowers for taxes and insurance
    254       220  
Increase (decrease) in other liabilities
    57       (104 )
                 
Net cash provided by operating activities
    1,410       1,990  
 
Cash flows from investing activities:
               
Net purchases of securities held-to-maturity
    (5,617 )     (7,795 )
Net decrease in loans
    6,628       9,710  
Net purchases of premises and equipment
    (142 )     (59 )
Proceeds from sale of Federal Home Loan Bank stock
    29       38  
Proceeds from sale of foreclosed real estate
    542       -  
Capital expenditures for foreclosed real estate
    -       (35 )
                 
Net cash provided by investing activities
    1,440       1,859  
                 
Cash flows from financing activities:
               
Net increase (decrease) in deposits
    1,399       (14,852 )
Net proceeds from stock issuance
    -       11,497  
Issuance of common stock to ESOP
    -       (988 )
                 
Net cash provided by (used in) financing activities
    1,399       (4,343 )
                 
Increase (decrease) in cash and cash equivalents
    4,249       (494 )
                 
Cash and cash equivalents at beginning of period
    25,055       19,324  
                 
Cash and cash equivalents at end of period
  $ 29,304       18,830  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Income taxes
  $ -       -  
                 
Interest
  $ 439       761  
                 
Noncash transaction-
               
Transfer from loans to foreclosed real estate
  $ 2,102       210  
                 
                 


See accompanying Notes to Condensed Consolidated Financial Statements.

 
5
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


1.  Organization and Basis of Presentation
 
Sunshine Financial, Inc. ("Sunshine Financial" or the "Holding Company"), a Maryland corporation, is the holding company for Sunshine Savings Bank (the "Bank") and owns all the outstanding common stock of the Bank.  The Bank completed its reorganization from the mutual to stock holding company form of organization on April 5, 2011. A total of 1,234,454 shares of common stock were sold in the subscription and community offerings at a price of $10.00 per share.  In accordance with the Plan of Conversion and Reorganization (the "Plan"), the Holding Company has succeeded to all rights and obligations of Sunshine Savings MHC and the old Sunshine Financial, Inc. ("Old Sunshine").  See Note 14 for details of the conversion.  The transaction was accounted for as a reorganization of entities under common control at historical cost and, the financial data for periods presented include the results of the Bank.  The unaudited, condensed consolidated financial statements include the consolidated results of operations of Old Sunshine and its subsidiary, the Bank.

 
 
The Holding Company's only business is the operation of the Bank.  The Bank, through its four banking offices, provides a variety of retail community banking services to individuals and businesses primarily in Leon County, Florida. The Bank's deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation. The Bank's subsidiary is Sunshine Member Insurance Services, Inc. ("SMSI"), which was established to sell automobile warranty and credit life and disability insurance products associated with loan products. Collectively the entities are referred to as the "Company."

 
 
These condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 8-03 of Regulation S-X and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company's financial condition and results of operations.

 
 
In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods.  The results for the three and nine-month periods ended September 30, 2012 should not be considered as indicative of results for a full year.

2.  Recent Accounting Standards Update
 
In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") No. 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2011-20. The amendments in this ASU delay the effective date of the disclosures about troubled debt restructurings in ASU 2011-20 for public entities. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring is effective as outlined in ASU No. 2011-02. The adoption of the ASU did not have a material impact on the Company's consolidated financial statements.

 
(continued)

 
6
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


2.  Recent Accounting Standards Update, Continued
 
In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This amends the guidance for troubled debt restructurings.  The guidance clarifies the guidance on a creditor's evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. For public entities, the amendments are effective for first interim or annual period beginning on or after September 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the ASU did not have a material impact on the Company's consolidated financial statements.

 
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreement, which applies to all public entities. It affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. ASU 2011-03 removes from the assessment of effective control the requirement that the transferor have the ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. Consequently, it also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. Eliminating consideration of the transferor's ability to fulfill its contractual rights and obligations from the criteria in determining effective control should improve the accounting for repos and other similar transactions. ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011 and is to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 did not have a material impact on the Company's consolidated financial statements.

 
In May 2011, the FASB issued ASU No. 2011-04 ("ASU 2011-04"), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The objective of ASU 2011-04 is to provide clarification of Topic 820 and, also, to ensure that fair value has the same meaning in U.S. generally accepted accounting principles ("GAAP") and in international financial reporting standards ("IFRSs") and that their respective fair value measurement and disclosure requirements are generally the same.  Thus, this ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRSs. The amendment is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively.  Early application is not permitted. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

 
(continued)

 
7
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


2.  Recent Accounting Standards Update, Continued
 
In June 2011, the FASB issued ASU No. 2011-05 ("ASU 2011-05"), Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The objective of ASU 2011-05 is to improve the comparability, consistency and transparency of financial reporting, and to increase the prominence of items reported in other comprehensive income.  To achieve this goal and to facilitate convergence of U.S. GAAP and IFRS, the FASB decided to eliminate the option to present components of other comprehensive income as part of the consolidated statement of changes in stockholders' equity. The amendments in ASU 2011-05 require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in ASU 2011-05 should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted, because compliance with the amendments is already permitted.  The amendments do not require any transition disclosures.  The adoption of this guidance had no effect on the Company's consolidated financial statements.

 
In December 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-12 ("ASU 2011-12"), Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-05"). Stakeholders raised concerns that the new presentation requirements about reclassifications of items out of accumulated other comprehensive income would be difficult for preparers and may add unnecessary complexity to financial statements.  In addition, it is difficult for some stakeholders to change systems in time to gather the information for the new presentation requirements by the effective date of ASU 2011-05.  All other requirements in ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The amendments in ASU 2011-12 are effective on a retrospective basis for public entities for annual periods beginning after December 15, 2011, and interim periods within those years.  An entity should provide the disclosures required by ASU 2011-12 retrospectively for all comparative periods presented.  The adoption of this guidance had no effect on the Company's consolidated financial statements.

 
(continued)

 
8
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


2.  Recent Accounting Standards Update, Continued
 
In December 2011, the FASB issued ASU No. 2011-11 ("ASU 2011-11"), Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. The objective of ASU 2011-11 is to enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with Section 210-20-45 or Section 815-10-45.  This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position.  The amendments in ASU 2011-11 are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by ASU 2011-11 retrospectively for all comparative periods presented. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

3.  (Loss) Earnings Per Share
 
(Loss) per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period, which was 1,234,454 shares during the three and nine-month periods ended September 30, 2012.  The Company has no dilutive securities.

 
For 2011, earnings per share have been computed for periods beginning after April 1, 2011, as if conversion from a mutual holding company to a capital stock holding company occurred on that date.  Basic earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period, which was 1,141,587 shares during the three-month period ended September 30, 2011.

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

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
At September 30, 2012-
                       
Mortgage-backed securities
  $ 15,397       268       (42 )     15,623  
                                 
At December 31, 2011-
                               
Mortgage-backed securities
  $ 9,835       255       (2 )     10,088  
                                 
 
There were no sales of securities during the nine months ended September 30, 2012 or 2011. There were no securities pledged at September 30, 2012 or December 31, 2011.

 
(continued)

 
9
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


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

   
September 30,
   
December 31,
 
   
2012
   
2011
 
Real estate mortgage loans:
           
One-to-four-family
  $ 62,335       70,144  
Lot loans
    6,651       7,363  
Commercial real estate
    1,975       -  
Construction
    813       74  
                 
Total real estate loans
    71,774       77,581  
                 
Consumer loans:
               
Home equity
    10,723       12,731  
Automobile
    2,553       2,483  
Credit cards and unsecured
    7,481       8,184  
Deposit account
    598       791  
Other
    1,501       1,818  
                 
Total consumer loans
    22,856       26,007  
                 
Total loans
    94,630       103,588  
                 
Less:
               
Loans in process
    1,232       207  
Deferred fees and discounts
    59       50  
Allowance for losses
    1,526       1,329  
                 
Total loans, net
  $ 91,813       102,002  
                 
 
The Company grants real estate and consumer loans to customers primarily in the State of Florida with the majority of such loans in the Tallahassee, Florida metropolitan area.  Therefore, the Company's exposure to credit risk could be significantly affected by changes in the economy and real estate market in the Tallahassee, Florida metropolitan area.  The Company grants commercial real estate loans to customers primarily in the Leon county market area.

 
(continued)

 
10
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


5.  Loans, Continued
 
The Company has divided the loan portfolio into two 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 Board, including repayment capacity and source, value of the underlying property, credit history and stability.  The portfolio segments identified by the Company are as follows:

Real Estate Mortgage Loans.  Real estate mortgage loans are loans comprised of four classes: One-to-four family, Lot loans, Commercial real estate, and Construction loans. The Company generally originates one-to-four family mortgage loans in amounts up to 80% of the lesser of the appraised value or purchase price of a mortgaged property, but will also permit loan-to-value ratios of up to 95%. For one-to-four family mortgage loans exceeding an 80% loan-to-value ratio, the Company generally requires the borrower to obtain private mortgage insurance covering any loss on the amount of the loan in excess of 80% in the event of foreclosure. Commercial real estate loans are generally 80% or less loan-to-value ratio and contain balloon features for up to ten years.  Construction loans to borrowers are to finance the construction of owner occupied properties. These loans are categorized as construction loans during the construction period, later converting to one-to-four family mortgage loans after the construction is complete and amortization of the loan begins. Construction loan funds are disbursed periodically based on the percentage of construction completed.  If the estimate of construction cost proves to be inaccurate, the Company may be compelled to advance additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower to repay the loan.  The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Construction loans are typically secured by the properties under construction. The Company also makes loans for the purchase of developed lots for future construction of the borrower's primary residence. Construction and lot loan lending is generally considered to involve a higher degree of credit risk than long-term permanent financing of residential properties.

Consumer Loans.  Consumer loans are comprised of five classes: Home Equity, Automobile, Credit cards and unsecured, Deposit account and Other.  The Company offers a variety of secured consumer loans, including home equity, new and used automobile, boat and other recreational vehicle loans, and loans secured by savings deposits.  The Company also offers unsecured consumer loans including a credit card product.  The Company originates its consumer loans primarily in its market area.  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 twenty years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

(continued)

 
11
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


5.  Loans, Continued
An analysis of the change in the allowance for loan losses follows (in thousands):

   
For the Three Months Ended September 30, 2012
 
   
One-to
Four-
Family
   
 
Lot
Loans
   
Commercial
Real
Estate
   
Construction
   
Home
Equity
   
Automobile
   
Credit
Cards and
Unsecured
   
Deposit
Account
   
Other
   
Total
 
                                                             
Beginning balance
  $ 670       112       -       -       326       8       227       -       124       1,467  
Provision (credit) for loan loss
    143       -       20       -       70       (1 )     22       -       16       270  
Charge-offs
    (92 )     -       -       -       (63 )     -       (48 )     -       (23 )     (226 )
Recoveries
    -       -       -       -       -       2       12       -       1       15  
                                                                                 
Ending balance
  $ 721       112       20       -       333       9       213       -       118       1,526  

   
For the Nine Months Ended September 30, 2012
 
   
One-to
Four-
Family
   
Lot
Loans
   
Commercial
Real
Estate
   
Construction
   
Home
Equity
   
Automobile
   
Credit
Cards and
Unsecured
   
Deposit
Account
   
Other
   
Total
 
                                                             
Beginning balance
  $ 475       144       -       -       235       39       337       -       99       1,329  
Provision (credit) for loan loss
    819       91       20       -       387       (23 )     23       -       133       1,450  
Charge-offs
    (573 )     (128 )     -       -       (289 )     (17 )     (181 )     -       (116 )     (1,304 )
Recoveries
    -       5       -       -       -       10       34       -       2       51  
                                                                                 
Ending balance
  $ 721       112       20       -       333       9       213       -       118       1,526  
                                                                                 
Individually evaluated for impairment:
                                                                               
Recorded investment
  $ 3,289        73         -        -        323        -        40        -        -        3,725  
Balance in allowance for loan losses
  $  38          -          -          -          1          -          -          -          -          39  
                                                                                 
Collectively evaluated for impairment:
                                                                               
Recorded investment
  $ 59,046       6,578       1,975       813       10,400       2,553       7,441       598       1,501       90,905  
Balance in allowance for loan losses
  $  683          112          20          -          332          9          213          -          118          1,487  
 
 
(continued)

 
12
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


5.  Loans, Continued

   
For the Three Months Ended September 30, 2011
 
   
One-to
Four-
Family
   
Lot
Loans
   
Commercial
Real
Estate
   
Construction
   
Home
Equity
   
Automobile
   
Credit
Cards and
Unsecured
   
Deposit
Accounts
   
Other
   
Total
 
                                                             
Beginning balance
  $ 835       137       -       6       109       43       315       -       139       1,604  
Provision for loan loss
    86       17       -       (6 )     220       5       (30 )     -       14       306  
Charge-offs
    (160 )     -       -       -       (104 )     (22 )     (46 )     -       (38 )     (370 )
Recoveries
    2       -       -       -       -       5       12       -       -       19  
                                                                                 
Ending balance
  $ 783       154       -       -       225       31       251       -       115       1,559  
                                                                                 


   
For the Nine Months Ended September 30, 2011
 
   
One-to
Four-
Family
   
Lot
Loans
   
Commercial
Real
Estate
   
Construction
   
Home
Equity
   
Automobile
   
Credit
Cards and
Unsecured
   
Deposit
Accounts
   
Other
   
Total
 
                                                             
Beginning balance
  $ 623       59       -       2       252       39       503       -       143       1,621  
Provision for loan loss
    379       95       -       (2 )     308       7       (71 )     -       40       756  
Charge-offs
    (221 )     -       -       -       (335 )     (28 )     (227 )     -       (70 )     (881 )
Recoveries
    2       -       -       -       -       13       46       -       2       63  
                                                                                 
Ending balance
  $ 783       154       -       -       225       31       251       -       115       1,559  
 
Individually evaluated for
  impairment:
                                                                               
  Recorded investment
  $ 3,649       142       -       -       380       18       -       -       -       4,187  
  Balance in allowance
        for loan losses
  $ 535        118        -        -        75        18        -        -        -        746  
                                                                                 
Collectively evaluated for
  impairment:
                                                                               
  Recorded investment
  $ 70,229       8,143       -       -       12,953       2,221       8,331       834       1,916       104,627  
  Balance in allowance
        for loan losses
  $ 248        36        -        -        150        13        251        -        115        813  
                                                                                 
(continued)

 
13
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


5.  Loans, Continued
The following summarizes the loan credit quality (in thousands):
                                                             
Credit Risk
Profile by Internally
 
One-to
Four-
   
 
Lot
   
Commercial
Real
         
 
Home
         
Credit
Cards and
   
 
Deposit
             
Assigned Grade:
 
Family
   
Loans
   
Estate
   
Construction
   
Equity
   
Automobile
   
Unsecured
   
Account
   
Other
   
Total
 
At September 30, 2012:
                                                           
  Grade:
                                                           
    Pass
  $ 57,834       6,544       1,975       813       10,209       2,534       7,372       598       1,468       89,347  
    Special mention
    701       -       -       -       131       -       89       -       -       921  
    Substandard
    3,800       107       -       -       383       19       13       -       -       4,322  
    Doubtful
    -       -       -       -       -       -       7       -       33       40  
    Loss
    -       -       -       -       -       -       -       -       -       -  
                                                                                 
  Total
  $ 62,335       6,651       1,975       813       10,723       2,553       7,481       598       1,501       94,630  
                                                                                 
At December 31, 2011:
                                                                               
  Grade:
                                                                               
    Pass
    64,888       7,151       -       74       12,218       2,449       8,166       791