PINX:SSNF Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)

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

For the quarterly period ended March 31, 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 May 15, 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 March 31, 2012 (Unaudited) and December 31, 2011
 
2
   
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
 
3
   
Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
 
 
4
   
Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2012 and 2011 (Unaudited)
 
5
   
Notes to Condensed Consolidated Financial Statements
6-19
   
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
20-28
   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk  
   
Item 4.    Controls and Procedures
29
   
PART II    OTHER INFORMATION
 
   
Item 1.     Legal Proceedings
30
   
Item 1A.  Risk Factors
30
   
Item 2.    Unregistered Sales of Equity Securities and Use
                          of Proceeds
 
30
   
Item 3.     Defaults Upon Senior Securities
30
   
Item 4.    Mine Safety Disclosures
30
   
Item 5.    Other Information
30
   
Item 6.    Exhibits
30
   
SIGNATURES
31
   
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 March 31,
2012
   
At December 31,
2011
 
   
(Unaudited)
       
Assets
           
             
Cash and due from banks
  $ 1,118       2,053  
Interest-bearing deposits with banks
    3,507       6,546  
Federal funds sold
    25,947       16,456  
                 
Cash and cash equivalents
    30,572       25,055  
                 
Securities held to maturity (fair value of $9,237 and $10,088)
    8,963       9,835  
Loans, net of allowance for loan losses of $1,304 and $1,329
    98,772       102,002  
Premises and equipment, net
    3,513       3,623  
Federal Home Loan Bank stock, at cost
    247       247  
Deferred income taxes
    2,397       2,364  
Accrued interest receivable
    437       454  
Foreclosed real estate
    1,252       743  
Other assets
    1,372       1,437  
                 
Total assets
  $ 147,525       145,760  
                 
Liabilities and Stockholders’ Equity
               
                 
Liabilities:
               
Noninterest-bearing deposit accounts
    22,474       21,827  
Money-market deposit accounts
    28,683       27,028  
Savings accounts
    36,146       34,271  
Time deposits
    33,903       36,290  
                 
Total deposits
    121,206       119,416  
                 
Official checks
    460       572  
Advances by borrowers for taxes and insurance
    143       21  
Other liabilities
    353       366  
                 
Total liabilities
    122,162       120,375  
                 
Stockholders' equity:
               
Common stock, $.01 par value, 6,000,000 shares authorized, 1,234,454 shares issued and outstanding at March 31, 2012 and December 31, 2011
      12         12  
Additional paid in capital
    11,487       11,487  
Retained earnings
    14,771       14,813  
Unearned Employee Stock Ownership Plan shares
    (907 )     (927 )
                 
Total stockholders' equity
    25,363       25,385  
                 
Total liabilities and stockholders’ equity
  $ 147,525       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
 
   
 March 31,
 
   
2012
   
2011
 
Interest income:
           
Loans
  $ 1,461       1,707  
Securities, held to maturity
    61       38  
Other
    13       10  
                 
Total interest income
    1,535       1,755  
                 
Interest expense
    165       303  
                 
Net interest income
    1,370       1,452  
                 
Provision for loan losses
    225       225  
                 
Net interest income after provision for loan losses
    1,145       1,227  
                 
Noninterest income:
               
Fees and service charges on deposit accounts
    506       544  
Fees and charges on loans
    71       21  
Other
    19       16  
                 
Total noninterest income
    596       581  
                 
Noninterest expenses:
               
Salaries and employee benefits
    901       892  
Occupancy and equipment
    269       269  
Data processing services
    182       179  
Professional fees
    162       139  
Federal Deposit Insurance Corporation  insurance
    29       46  
Advertising and promotion
    17       14  
Debit card losses
    6       30  
Telephone and postage
    60       64  
Foreclosed real estate
    49       11  
Other
    141       151  
                 
Total noninterest expenses
    1,816       1,795  
                 
(Loss) earnings before income taxes (benefit)
    (75 )     13  
                 
Income taxes (benefit)
    (33 )     5  
                 
Net (loss) earnings
  $ (42 )     8  
                 
Loss per common share
  $ (0.03 )     -  
                 
                 
                 
                 

See accompanying Notes to Condensed Consolidated Financial Statements.

 
3
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, 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)
    -       -       -       8       -       8  
                                                 
Balance, March 31, 2011 (unaudited)
     -     $ -        -       15,047        -       15,047  
                                                 
                                                 
Balance, December 31, 2011
    1,234,454       12       11,487       14,813       (927 )     25,385  
                                                 
Net loss (unaudited)
    -       -       -       (42 )     -       (42 )
                                                 
Common stock allocated to Employer Stock Ownership Plan participants (unaudited)
       -          -          -          -          20          20  
                                                 
Balance, March 31, 2012 (unaudited)
    1,234,454     $ 12       11,487       14,771       (907 )     25,363  
                                                 
                                                 

















See accompanying Notes to Condensed Consolidated Financial Statements.



 
4
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

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

   
Three Months Ended
 March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net (loss) earnings
  $ (42 )     8  
Adjustments to reconcile net (loss) earnings to net cash from operating activities:
               
Depreciation
    122       122  
Provision for loan losses
    225       225  
Deferred income taxes (benefit)
    (33 )     5  
Net amortization of premiums and discounts on securities
    19       (3 )
Net amortization of deferred loan fees and costs
    3       2  
Loans originated for sale
    (1,827 )     (503 )
Proceeds from loans sold
    1,865       511  
Gain on sale of loans
    (38 )     (8 )
Employee Stock Ownership Plan compensation expense
    20       -  
Decrease in accrued interest receivable
    17       47  
Decrease (increase) in other assets
    65       (112 )
Write-down of foreclosed real estate
    16       -  
(Decrease) increase in official checks
    (112 )     287  
Net increase in advances by borrowers for taxes and insurance
    122       85  
Decrease in other liabilities
    (13 )     (73 )
                 
Net cash provided by operating activities
    409       593  
 
Cash flows from investing activities:
               
Net repayments of securities held-to-maturity
    853       348  
Net decrease in loans
    2,477       3,368  
Net purchases of premises and equipment
    (12 )     (14 )
        Capital expenditures for foreclosed real estate     -       (3
                 
Net cash provided by investing activities
    3,318       3,699  
                 
Cash flows from financing activity:
               
Net increase in deposits
    1,790       9,394  
                 
Increase in cash and cash equivalents
    5,517       13,686  
                 
Cash and cash equivalents at beginning of period
    25,055       19,324  
                 
Cash and cash equivalents at end of period
  $ 30,572       33,010  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Income taxes
  $ -       -  
                 
Interest
  $ 165       303  
                 
Noncash transaction-
               
Transfer from loans to foreclosed real estate
  $ 525       -  
                 
                 
                 
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 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-month period ended March 31, 2012, should not be considered as indicative of results for a full year.

 
(continued)

 
6
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


2.   Recent Accounting Standards Update
 
In January 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2011-20. The amendments in this Update delay the effective date of the disclosures about troubled debt restructurings in Update 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 is not expected to have a material impact on the Company's financial statements.

 
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 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 the assessment of effective control the criterion relating to the transferor's 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 the transferor's ability criterion and related implementation guidance from an entity's assessment of 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.

 
(continued)

 
7
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 
2.   Recent Accounting Standards Update, Continued
 
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 update 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.

 
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. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (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 did not have a material effect on the Company's consolidated financial statements.













 
 
 
 
 
 

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


2.   Recent Accounting Standards Update, Continued
 
In December 2011, the Financial Accounting Standards Board ("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 Update 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 did not have a material effect on the Company's consolidated financial statements.

 
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 did not have a material effect on the Company's consolidated financial statements.

3.   Earnings Per Share
 
Earnings per share have 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-month period ended March 31, 2012 and and during the three-month period ended March 31, 2011.  The Company has no dilutive securities.

 
(continued)

 
8
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


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 March 31, 2012-
                       
Mortgage-backed securities
  $ 8,963       274       -       9,237  
                                 
At December 31, 2011-
                               
Mortgage-backed securities
  $ 9,835       255       (2 )     10,088  
                                 
 
There were no sales of securities during the three months ended March 31, 2012 or the three months ended March 31, 2011. There were no securities pledged at March 31, 2012 or December 31, 2011.

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

   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Real estate mortgage loans:
           
One-to-four-family
  $ 67,872       70,144  
Lot loans
    7,031       7,363  
Construction
    517       74  
                 
Total real estate loans
    75,420       77,581  
                 
Consumer loans:
               
Home equity
    12,047       12,731  
Automobile
    2,532       2,483  
Credit cards and unsecured
    7,690       8,184  
Deposit account
    685       791  
Other
    1,732       1,818  
                 
Total consumer loans
    24,686       26,007  
                 
Total loans
    100,106       103,588  
                 
Less (plus):
               
Loans in process
    (24 )     207  
Deferred fees and discounts
    54       50  
Allowance for losses
    1,304       1,329  
                 
Total loans, net
  $ 98,772       102,002  
                 
 
(continued)

 
9
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


5.   Loans, Continued
 
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 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 area.

 
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 three classes: One-to-four family, Lot loans and Construction loans. The Company generally originates 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 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. 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 residential real estate loans after the construction is complete and amortization of the loan begins. Real estate 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)

 
10
 
 

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 March 31, 2012
 
   
One-to
Four
Family
   
Lot
Loans
   
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
    156       37       -       67       1       (65 )     -       29       225  
Charge-offs
    (67 )     (85 )     -       (44 )     (16 )     (38 )     -       (19 )     (269 )
Recoveries
    -       5       -       -       4       10       -       -       19  
                                                                         
Ending balance
  $ 564       101       -       258       28       244       -       109       1,304  
                                                                         
Individually evaluated for impairment:
                                                                       
Recorded investment
  $ 4,443        68        -        454        -        -        -        -        4,965  
Balance in allowance for loan losses
  $  -          -          -          -          -          -          -          -          -  
                                                                         
Collectively evaluated for impairment:
                                                                       
Recorded investment
  $ 63,429       6,963       517       11,593       2,532       7,690       685       1,732       95,141  
Balance in allowance for loan losses
  $  564          101          -          258          28          244          -          109          1,304  
                                                                         

   
For the Three Months Ended March 31, 2011
 
   
One-to
Four
Family
   
Lot
Loans
   
Construction
   
Home
Equity
   
Automobile
   
Credit
Cards and
Unsecured
   
Deposit
Account
   
Other
   
Total
 
                                                       
Beginning balance
  $ 623       59       2       252       39       503       -       143       1,621  
Provision (credit) for loan loss
    118       -       -       104       -       (14 )     -       17       225  
Charge-offs
    -       -       -       (38 )     (2 )     (109 )     -       (16 )     (165 )
Recoveries
    -       -       -       -       4       18       -       2       24  
                                                                         
Ending balance
  $ 741       59       2       318       41       398       -       146       1,705  
                                                                         
Individually evaluated for impairment:
                                                                       
Recorded investment
  $ 3,258        142        -        333        -        -        -        -        3,733  
Balance in allowance for loan losses
  $  607          46          -          193          -          -          -          -          846  
                                                                         
Collectively evaluated for impairment:
                                                                       
Recorded investment
  $ 74,085       9,438       207       14,693       2,545       8,409       812       2,070       112,259  
Balance in allowance for loan losses
  $  134          13          2          125          41          398          -          146          859  
                                                                         
 
(continued)

 
11
 
 

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
 
One- to
                           
Credit
                   
Profile by Internally
 
Four-
   
Lot
         
Home
         
Cards and
   
Deposit
             
Assigned Grade:
 
Family
   
Loans
   
Construction
   
Equity
   
Automobile
   
Unsecured
   
Accounts
   
Other
   
Total
 
At March 31, 2012:
                                                     
  Grade:
                                                     
    Pass
  $ 63,018       6,929       517       11,469       2,513       7,641       685       1,598       94,370  
    Special mention
    1,414       -       -       254       8       21       -       92       1,789  
    Substandard
    3,440       102       -       324       11       24       -       42       3,943  
    Doubtful
    -       -       -       -       -       4       -       -       4  
    Loss
    -       -       -       -       -       -       -       -       -  
                                                                         
  Total
  $ 67,872       7,031       517       12,047       2,532       7,690       685       1,732       100,106  
                                                                         
At December 31, 2011:
                                                                       
  Grade:
                                                                       
    Pass
    64,888       7,151       74       12,218       2,449       8,166       791       1,743       97,480  
    Special mention
    1,528       -       -       91       1       10       -       -       1,630  
    Substandard
    3,728       212       -       422       3       7       -       13       4,385  
    Doubtful
    -       -       -       -       12       1       -       62       75  
    Loss
    -       -       -       -       18       -       -       -       18  
                                                                         
  Total
  $ 70,144       7,363       74       12,731       2,483       8,184       791       1,818       103,588  
                                                                         
 
Internally assigned loan grades are defined as follows:

 
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 one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 
Loss – A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

(continued)

 
12
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


5.   Loans, Continued
 
Age analysis of past-due loans is as follows (in thousands):

   
Accruing Loans
             
               
Greater
                         
     30-59     60-89    
Than 90
   
Total
                   
   
Days
   
Days
   
Days
   
Past
         
Nonaccrual
   
Total
 
   
Past Due
   
Past Due
   
Past Due
   
Due
   
Current
   
Loans
   
Loans
 
At March 31, 2012:
                                             
    Real estate loans:
                                             
        One-to-four family
  $ 1,737       333       -       2,070       62,185       3,617       67,872  
        Lot loans
    25       -       -       25       6,904       102       7,031  
        Construction
    -       -       -       -       517       -       517  
    Consumer loans:
                                                       
        Home equity
    555       -       -       555       11,125       367       12,047  
        Automobile
    29       -       -       29       2,483       20       2,532  
        Credit cards and unsecured
    21       11       -       32       7,620       38       7,690  
        Deposit account
    -       -       -       -       685       -       685  
        Other
    -       -       -       -       1,690       42       1,732  
                                                         
    Total
  $ 2,367       344       -       2,711       93,209       4,186       100,106  
                                                         
At December 31, 2011:
                                                       
    Real estate loans:
                                                       
        One-to-four family
    1,894       146       -       2,040       64,148       3,956       70,144  
        Lot loans
    -       -       -       -       7,152       211       7,363  
        Construction
    -       -       -       -       74       -       74  
    Consumer loans:
                                                       
        Home equity
    465       91       -       556       11,815       360       12,731  
        Automobile
    -       1       -       1       2,458       24       2,483  
        Credit cards and unsecured
    107       25       -       132       8,040       12       8,184  
        Deposit account
    -       -       -       -       791       -       791  
        Other
    -       -       -       -       1,743       75       1,818  
                                                         
    Total
  $ 2,466       263       -       2,729       96,221       4,638       103,588  
                                                         
 
At March 31, 2012 and December 31, 2011, there were no loans past due ninety days or more but still accruing.

 
(continued)

 
13
 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


5.  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
   
Related
Allowance
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
At March 31, 2012:
                                                     
  Real estate loans:
                                                     
    One-to-four family
  $ 4,443       5,089       -       -       -       -       4,443       5,089       -  
    Lot loans
    68       289       -       -       -       -       68       289       -  
  Consumer loans-
                                                                       
    Home equity
    454       503       -        -        -       -       454       503        -