Form 10-Q

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

10-Q 1 d436866d10q.htm FORM 10-Q Form 10-Q

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, 2016

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

For the transition period from to

Commission file number: 001-36539

SUNSHINE BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland

30-0831760

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

102 West Baker Street, Plant City, Florida 33563

(Address of principal executive offices; Zip Code)

(813) 752-6193

(Registrant’s telephone number, including area code)

None

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of November 14, 2016, there were issued and outstanding 7,995,059 shares of the Registrant’s Common Stock with a par value of $0.01 per share.

SUNSHINE BANCORP, INC. AND SUBSIDIARY

September 30, 2016 Form 10-Q

Index


		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015		2

	Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2016 and 2015 (Unaudited)		3

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Month Periods Ended September 30, 2016 and 2015 (Unaudited)		4

	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Month Periods Ended September 30, 2016 and 2015 (Unaudited)		5

	Condensed Consolidated Statements of Cash Flows For the Nine Month Periods Ended September 30, 2016 and 2015 (Unaudited)		6-7

	Notes to Condensed Consolidated Financial Statements (Unaudited)		8-24

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25-36

Item 3.	Quantitative and Qualitative Disclosure About Market Risk		37

Item 4.	Controls and Procedures		37

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		38

Item 1A.	Risk Factors		38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38

Item 3.	Defaults Upon Senior Securities		38

Item 4.	Mine Safety Disclosures		38

Item 5.	Other Information		38

Item 6.	Exhibits		38

SIGNATURES			39

SUNSHINE BANCORP, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)


	As of September 30, 2016			As of December 31, 2015
	(Unaudited)
Assets
Cash and due from banks	$	12,476		$	13,220
Interest-earning deposits in financial institutions		14,206			16,523
Federal funds sold		28,589			29,601

Cash and cash equivalents		55,271			59,344
Time deposits with banks		2,695			4,410
Securities available for sale		61,036			65,944
Loans held for sale		—			790
Loans, net of allowance for loan losses of $2,846 and $2,511		395,994			326,266
Premises and equipment, net		16,866			17,612
Federal Home Loan Bank stock, at cost		1,944			1,597
Cash surrender value of bank-owned life insurance		12,366			12,122
Deferred income tax asset		6,108			6,426
Goodwill and other intangibles		10,016			10,101
Accrued interest receivable		1,110			1,048
Other real estate owned		32			32
Other assets		554			1,573

Total assets	$	563,992		$	507,265

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand accounts	$	85,304		$	89,114
Interest-bearing demand and savings accounts		234,697			198,977
Time deposits		118,766			111,020

Total deposits		438,767			399,111
Other borrowings		36,803			28,927
Subordinated Notes		11,000			—
Other liabilities		4,712			7,833

Total liabilities		491,282			435,871

Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 authorized; none outstanding		—			—
Common stock, $0.01 par value, 50,000,000 shares authorized; issued and outstanding of 5,260,252 at September 30, 2016 and 5,259,321 at December 31, 2015		53			53
Additional paid in capital		53,400			52,763
Retained income		22,317			21,846
Unearned employee stock ownership plan (“ESOP”) shares		(3,160	)		(3,160	)
Accumulated other comprehensive income (loss)		100			(108	)

Total stockholders’ equity		72,710			71,394

Total liabilities and stockholders’ equity	$	563,992		$	507,265

See Accompany Notes to Condensed Consolidated Financial Statements

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share amounts)


	Three months Ended September 30,					Nine months Ended September 30,
	2016		2015			2016		2015
Interest income:
Loans	$	4,582	$	3,909		$	12,678	$	6,962
Securities		222		141			684		525
Other		43		33			164		105

Total interest income		4,847		4,083			13,526		7,592

Interest Expense:
Deposits		349		244			962		381
Borrowed funds		192		53			372		54

Total interest expense		541		297			1,334		435

Net interest income		4,306		3,786			12,192		7,157
Provision for loan losses		—		—			350		—

Net interest income after provision for loan losses		4,306		3,786			11,842		7,157

Noninterest income:
Fees and service charges on deposit accounts		314		252			952		532
Mortgage Broker Fees		42		—			112		16
Gain on sale of premise		—		—			563		—
Gain on sale of other real estate owned		18		—			18		20
Gain on sale of securities		77		—			208		195
Income from bank-owned life insurance		97		86			289		203
Other		121		87			343		192

Total noninterest income		669		425			2,485		1,158

Noninterest expenses:
Salaries and employee benefits		2,423		2,381			7,440		5,528
Occupancy and equipment		544		444			1,706		1,000
Data and item processing services		440		227			1,177		491
Professional fees		246		219			665		500
Advertising and promotion		13		55			80		131
Stationery and supplies		64		21			165		90
FDIC Deposit insurance		96		92			298		187
Merger related		207		119			302		1,240
Other		569		583			1,809		1,246

Total noninterest expenses		4,602		4,141			13,642		10,413

Income (Loss) before income taxes		373		70			685		(2,098	)
Income tax (benefit) expense		129		21			214		(1,643	)

Net income (loss)	$	244	$	49		$	471	$	(455	)

Preferred Stock dividend requirement		—		(14	)		—		(14	)

Net income (loss) available to common stockholders	$	244	$	35		$	471	$	(469	)

Basic earnings (loss) per share	$	0.05	$	0.01		$	0.10	$	(0.12	)

Diluted earnings (loss) per share	$	0.05	$	0.01		$	0.09	$	(0.12	)

See Accompany Notes to Condensed Consolidated Financial Statements

SUNSHINE BANCORP, INC. AND SUBSIDIARY

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

(Dollars in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss)	$	244		$	49		$	471		$	(455	)
Other comprehensive income:
Change in unrealized gain on securities:
Unrealized gain arising during the period		96			93			542			302
Reclassification adjustment for realized gains		(77	)		—			(208	)		(195	)

Net change in unrealized gain		19			93			334			107
Deferred income taxes on above change		(7	)		(34	)		(126	)		(39	)

Total other comprehensive income		12			59			208			68

Comprehensive income (loss)	$	256		$	108		$	679		$	(387	)

See Accompany Notes to Condensed Consolidated Financial Statements

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

(Dollars in thousands, except per share amounts)

Nine months Ended September 30, 2016 and 2015


	Preferred Stock						Common Stock				Additional Paid In Capital		Retained Income			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Stockholder’s Equity
	Shares			Amount			Shares		Amount		Additional Paid In Capital		Retained Income			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Stockholder’s Equity
Balance, December 31, 2014		—		$	—			4,232,000	$	42	$	40,766	$	24,091		$	(3,273	)	$	—		$	61,626
Net loss (Unaudited)		—			—			—		—		—		(455	)		—			—			(455	)
Dividends paid on Preferred Stock (Unaudited)		—			—			—		—		—		(14	)		—			—			(14	)
Preferred stock exchanged (Unaudited)		5,700			5,700			—		—		—		—			—			—			5,700
Preferred stock redeemed (Unaudited)		(5,700	)		(5,700	)		—		—		—		—			—			—			(5,700	)
Net change in unrealized loss on Securities available for sale, net of taxes (Unaudited)		—			—			—		—		—		—			—			68			68

Balance, September 30, 2015 (Unaudited)		—			—			4,232,000	$	42	$	40,766	$	23,622		$	(3,273	)	$	68		$	61,225

Balance, December 31, 2015		—		$	—			5,259,321	$	53	$	52,763	$	21,846		$	(3,160	)	$	(108	)	$	71,394
Net Income (Unaudited)		—			—			—		—		—		471			—			—			471
Issuance of common stock under share-based awards plan, net (Unaudited)		—			—			931		—		—		—			—			—			—
Stock based compensation (Unaudited)		—			—			—		—		637		—			—			—			637
Net change in unrealized loss on Securities available for sale, net of taxes (Unaudited)		—			—			—		—		—		—			—			208			208

Balance, September 30, 2016 (Unaudited)		—		$	—			5,260,252	$	53	$	53,400	$	22,317		$	(3,160	)	$	100		$	72,710

See Accompany Notes to Condensed Consolidated Financial Statements

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net income (loss)	$	471		$	(455	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, Amortization, Accretion, net		1,136			575
Provisions for loan losses		350			—
Gain on sale of loans originated for sale		(112	)		(16	)
Proceeds from the sale of loans originated for sale		902			1,864
Loans originated as for sale		—			(729	)
Income from bank-owned life insurance, net		(244	)		(203	)
(Gain) on sale of other real estate owned		(18	)		(20	)
Gain on sale of securities available for sale		(208	)		(195	)
Gain on sale of premises		(563	)		—
(Increase) decrease in accrued interest receivable		(62	)		273
Decrease (increase) in deferred tax assets		192			(1,752	)
Decrease (increase) in other assets		1,057			(29	)
Stock options and restricted stock compensation expense		637			—
Decrease in other liabilities		(3,121	)		(297	)

Net cash provided by (used in) operating activities		417			(984	)

Cash flows from investing activities:
Maturities of time deposits with banks		1,715			1,225
Maturities & repayments of securities held to maturity		—			5,800
Proceeds from sale of securities available for sale		22,158			60,369
Purchases of securities available for sale		(35,870	)		—
Calls, repayments, and maturities of securities available for sale		18,527			4,497
Net increase in loans		(70,034	)		(40,121	)
Proceeds from the sale of premise and equipment, net		1,600
Purchases of premises and equipment, net		(771	)		(2,421	)
(Purchase) Redemption of Federal Home Loan Bank stock		(347	)		442
Business acquisitions, net of cash received		—			(20,111	)

Net cash (used in) provided by investing activities		(63,022	)		9,680

Cash flows from financing activities:
Net increase in deposits		39,656			11,143
Net increase (decrease) in Other Borrowings		7,876			(12,583	)
Issuance of Subordinated Notes		11,000			—
Preferred stock dividend		—			(14	)
Redemption of preferred stock		—			(5,700	)

Net cash provided by (used in) financing activities		58,532			(7,154	)

Increase in cash and cash equivalents		(4,073	)		1,542
Cash and cash equivalents at beginning of period		59,344			20,479

Cash and cash equivalents at end of period	$	55,271		$	22,021

Cash paid during the period for interest	$	1,133		$	408

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine months ended September 30,
Noncash transaction-	2016		2015
Accumulated other comprehensive income, net change in unrealized gain on securities available for sale, net of taxes	$	208	$	68

Securities held to maturity transferred to available for sale	$	—	$	69,665

Transfer from loans to other real estate owned	$	20	$	—

Acquisition of Community Southern Bank assets and liabilities:
Noncash assets acquired

Securities available for sale	$	—	$	44,372
Loans	$	—	$	171,476
Premises and equipment	$	—	$	6,097
Federal Home Loan Bank stock	$	—	$	1,540
Cash surrender value of bank-owned life insurance	$	—	$	4,585
Deferred income taxes	$	—	$	2,095
Goodwill	$	—	$	8,662
Core Deposit Intangible	$	—	$	588
Accrued interest	$	—	$	685
Other assets	$	—	$	114

Liabilities assumed and stockholders equity exchanged:
Deposits	$	—	$	178,912
Federal Home Loan Bank advances	$	—	$	31,480
Other borrowings	$	—	$	3,285
Other liabilities	$	—	$	726
Preferred Stock	$	—	$	5,700

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1) Organization and Significant Accounting Policies

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

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

Our accounting and reporting policies conform to Accounting Principles Generally Accepted in the United States of America (“GAAP”) and general practices within the banking industry and are described in note 1 to the audited consolidated financial statements in our 2015 Annual Report on Form 10-K, as updated by information in this Form 10-Q. These condensed consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q, certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted.

In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at September 30, 2016, and the results of operations for the three and nine month periods ended September 30, 2016 and 2015. The results of operations for the three and nine month periods ended September 30, 2016, are not necessarily indicative of the results to be expected for the full year or any other period.

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts in the consolidated financial statements and notes. While management believes the sources utilized to arrive at the estimates are reliable, different sources or methods could have yielded different estimates. Such different value estimates could affect future earnings through different values being utilized for the disposition or amortization of the underlying assets and liabilities acquired. Material estimates that are particularly susceptible to significant changes include the allowance for loan losses, the valuation of goodwill and other intangibles, deferred income taxes, and purchase accounting related adjustments.

Principles of Consolidation. The condensed consolidated financial statements include the accounts of the Holding Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements in this report have not been audited except for information derived from our audited 2015 financial statements.

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

Comprehensive Income (Loss). GAAP generally require that recognized revenue, expenses, gains and losses be included in operations. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items along with net income (loss), are components of comprehensive income (loss).

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

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

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

(2) Business Combinations

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

Acquisition of Community Southern Holdings, Inc. On June 30, 2015, the Company acquired 100% of the outstanding common shares of Community Southern Holdings, Inc. for cash of $30.3 million, through an Agreement and Plan of Merger (the “Merger”). Community Southern Holdings, Inc. was merged into the Company and Community Southern Bank was merged into the Bank. The Company acquired $250.4 million in assets and assumed $214.4 million in liabilities and stockholders’ equity and exchanged $5.7 million in preferred stock to the U.S. Treasury as part of its Small Business Lending Fund. The exchanged shares were subsequently redeemed on September 30, 2015 at their par value of $5.7 million. The Company acquired these assets and liabilities to expand its market presence to Polk and Orange Counties, Florida and to strengthen its position along the demographically attractive I-4 corridor. The Company incurred approximately $1.3 million in merger and acquisition related expenses. Management used market quotations to measure the fair value of investment securities and FHLB advances.

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

Community Southern Bank’s loans were measured at fair value by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, Community Southern Bank’s loan portfolio totaled $170.0 million and was recorded at a fair value of $171.5 million. The following table summarizes the fair value of assets acquired, liabilities assumed and stockholders’ equity exchanged on the date of acquisition during the year ended December 31, 2015 (in thousands):


	Community Southern Holdings, Inc.		First Federal Branch Acquisition		Total
Cash and cash equivalents	$	10,183	$	38,165	$	48,348
Securities available for sale		44,372		—		44,372
Loans		171,476		7,932		179,408
Premises and equipment		6,097		2,630		8,727
Federal Home Loan Bank stock		1,540		—		1,540
Bank owned life insurance		4,585		—		4,585
Deferred tax asset		2,095		—		2,095
Goodwill		8,662		838		9,500
Core deposit intangible		588		67		655
Accrued interest receivable		685		—		685
Other real estate owned		32		—		32
Other assets		82		16		98

Total assets acquired	$	250,397	$	49,648	$	300,045

Deposits		178,912		47,015		225,927
Federal Home Loan Bank advances		31,480		—		31,480
Other borrowings		3,285		—		3,285
Other liabilities		726		3		729
Preferred Stock		5,700		—		5,700

Total liabilities assumed		220,103		47,018		267,121

Net assets acquired	$	30,294	$	2,630	$	32,924

Acquisition of Florida Bank of Commerce. On October 31, 2016, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) entered into May 9, 2016, the Company completed its acquisition of FBC Bancorp, Inc., a Florida corporation (“FBC”), and Florida Bank of Commerce, a Florida state bank and wholly-owned subsidiary of FBC (“FBC Bank”), where FBC merged with and into the Company, and FBC Bank merged with and into Sunshine Bank (collectively, the “Merger”). At the effective time of the Merger, each share of common stock of FBC was converted into 0.88 shares of common stock of the Company. The Company acquired these assets and liabilities to expand its market presence in the Greater Orlando MSA and to further its strategy of capitalizing on opportunities along the demographically attractive I-4 corridor. With the acquisition the Company enters Brevard, Osceola, and Seminole Counties, Florida. Since the acquisition occurred after the reporting date but before the filing of this form 10-Q, the Company has not completed its initial accounting for the business combination which will be accounted for using the acquisition method of accounting. The fair value of the assets and liabilities are still to be determined, which precludes the Company from reporting substantially all the required disclosure including the supplemental pro forma information at this time.

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(3) Securities

Securities have been classified according to management intent. On March 19, 2015 the Company transferred all securities classified as held to maturity to available for sale at a fair market value of $69.7 million. The transfer was performed to enhance the interest rate risk position of the Company and provide liquidity for future loan growth. As a result of the transfer, the Company is precluded from classifying securities as held to maturity until March 2017. The amortized cost and fair values of securities are as follows (in thousands):


*Securities Available for Sale:*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
*September 30, 2016:*
Federal Home Loan Bank obligations	$	3,000		7		—		$	3,007
U.S. Government enterprise and agency obligations		10,009		11		—			10,020
Agency Mortgage-backed securities		47,867		209		(67	)		48,009

Total	$	60,876		227		(67	)	$	61,036

*December 31, 2015:*
Federal Home Loan Bank obligations	$	15,074		6		(6	)	$	15,074
U.S. Government enterprise and agency obligations		14,037		7		(37	)		14,007
Agency Mortgage-backed securities		37,007		—		(144	)		36,863

Total	$	66,118		13		(187	)	$	65,944

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


	Securities Available for sale
	Amortized Cost		Fair Value
Due in one year or less	$	11,007	$	11,025
Due from one year to five years		2,002		2,002
Agency Mortgage-backed securities		47,867		48,009

	$	60,876	$	61,036

Securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):


	Less Than Twelve Months					More than Twelve Months
	Gross Unrealized Loss			Fair Value		Gross Unrealized Loss		Fair Value
*Securities Available for sale:*
At September 30, 2016
Agency Mortgage-backed securities	$	(67	)	$	16,374	$	—	$	—

At December 31, 2015:
Federal Home Loan Bank obligations	$	(6	)	$	6,018	$	—	$	—
U.S Government enterprise and agency obligations		(37	)		12,000		—		—
Agency Mortgage-backed securities		(144	)		36,863		—		—

Totals	$	(187	)	$	54,881	$	—	$	—

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

At September 30, 2016 there were seven securities in a loss position. In considering the credit quality of the issuers, the nature and cause of the unrealized loss, the severity and length of time in an unrealized loss position, and other factors, it is expected that the securities would not be settled at a price less than the par value of the investments. Management determined that the decline in fair value is attributable to fluctuations in interest rates and other market conditions and not a deterioration of the credit quality of the issuers. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

The Company pledged securities with a fair market value of approximately $16.7 million at September 30, 2016 and $22.1 million at December 31, 2015 to secure public funds and other borrowings.

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


	For the three months ended				For the nine months ended
	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Proceeds received from sale	$	9,238		—	$	22,158	$	60,369

Gross Gains on sale	$	77		—	$	208		195

(4) Loans

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


	At September 30, 2016			At December 31, 2015
Real estate loans:
One-to-four-family residential	$	73,154		$	68,169
Commercial and multi-family		227,658			192,568
Construction and land		23,265			17,570
Home equity		11,166			6,623

Total real estate loans		335,243			284,930
Commercial loans		62,709			41,417
Consumer loans		1,239			2,726

Total loans		399,191			329,073
Deduct:
Deferred loan fees, net		(351	)		(296	)
Allowance for loan losses		(2,846	)		(2,511	)

Loans, net	$	395,994		$	326,266

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

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

Commercial and multifamily real estate loans are secured by the subject property and are underwritten based on loan to value limits, cash flow coverage and general creditworthiness of the obligors. These loans are generally considered to have more credit risk than traditional one-to-four-family residential loans because these loans tend to involve larger loan balances and their repayment is typically dependent upon the successful operation and management of the underlying real estate.

Construction and Land loans are to finance the construction of owner-occupied and lease properties. These loans are categorized as construction loans during the construction period, later converting to commercial or one-to- four-family residential loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Construction loan funds are disbursed periodically based on the percentage of construction or development completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Construction and land loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sale information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

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

Commercial Loans. Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from income. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, the Company takes as collateral a security interest in any equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.

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

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	Real Estate Loans			Commercial Loans			Consumer Loans			Unallocated			Total
*Three Months Ended September 30, 2016:*
Beginning balance	$	2,240			606			35			14		$	2,895
(Credit) Provision for loan losses		(234	)		190			(9	)		53			—
Charge—offs		(73	)		(1	)		—			—			(74	)
Recoveries		8			17			—			—			25

Ending balance	$	1,941			812			26			67		$	2,846

*Three Months Ended September 30, 2015:*
Beginning balance	$	1,313			496			5			69		$	1,883
(Credit) Provision for loan losses		(116	)		(29	)		15			130			—
Charge-offs		—			—			—			—			—
Recoveries		9			54			1			—			64

Ending balance	$	1,206			521			21			199		$	1,947

*Nine months Ended September 30, 2016:*
Beginning balance	$	1,354			583			23			551		$	2,511
Provision (credit) for loan losses		647			184			3			(484	)		350
Charge—offs		(95	)		(12	)		(3	)		—			(110	)
Recoveries		35			57			3			—			95

Ending balance	$	1,941			812			26			67		$	2,846

*Nine months Ended September 30, 2015:*
Beginning balance	$	1,409			308			9			—		$	1,726
(Credit) Provision for loan losses		(326	)		118			9			199			—
Charge-offs		(1	)		(9	)		—			—			(10	)
Recoveries		124			104			3			—			231

Ending balance	$	1,206			521			21			199		$	1,947

*At September 30, 2016:*
Individually evaluated for impairment:
Recorded investment	$	1,347			510			—			—		$	1,857

Balance in allowance for loan losses	$	32			97			—			—		$	129

Collectively evaluated for impairment:
Recorded investment	$	227,808			48,550			1,239			—		$	277,597

Balance in allowance for loan losses	$	1,839			708			26			67		$	2,640

Recorded investment in loans accounted for under ASC 310-20	$	105,897			13,649			—			—		$	119,546

Balance in allowance for loan losses	$	70			7			—			—		$	77

Recorded investment in loans accounted for under ASC 310-30	$	191			—			—			—		$	191

Balance in allowance for loan losses	$	—			—			—			—		$	—

*At December 31, 2015:*
Individually evaluated for impairment:
Recorded investment	$	1,527			539			—			—		$	2,066

Balance in allowance for loan losses	$	39			9			—			—		$	48

Collectively evaluated for impairment:
Recorded investment	$	159,738			11,830			1,124			—		$	172,692

Balance in allowance for loan losses	$	1,315			574			23			551		$	2,463

Recorded investment in loans accounted for under ASC 310-20	$	123,022			28,990			1,602			—		$	153,614

Balance in allowance for loan losses	$	—			—			—			—		$	—

Recorded investment in loans accounted for under ASC 310-30	$	643			58			—			—		$	701

Balance in allowance for loan losses	$	—			—			—			—		$	—

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

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

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

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

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

Doubtful – A loan classified Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	Real Estate Loans
	One-to Four-Family Residential		Commercial and Multi Family		Construction and Land		Home Equity		Commercial		Consumer		Total
*Credit Risk Profile by Internally Assigned Grade:*
*At September 30, 2016:*
Grade:
Pass	$	72,096		224,192		22,546		10,823		61,507		1,239	$	392,403
Special mention		821		736		664		—		81		—		2,302
Substandard		237		2,730		55		343		1,121		—		4,486

Total	$	73,154		227,658		23,265		11,166		62,709		1,239	$	399,191

*At December 31, 2015:*
Grade:
Pass	$	66,271		189,979		16,705		6,241		38,375		2,726	$	320,297
Special mention		972		1,066		707		382		70		—		3,197
Substandard		926		1,523		158		—		2,972		—		5,579

Total	$	68,169		192,568		17,570		6,623		41,417		2,726	$	329,073

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


	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
*At September 30, 2016:*
Real estate mortgage loans:
One-to-four family residential	$	107		—		—		107		72,840		207	$	73,154
Commercial Real Estate and Multifamily		309		—		—		309		226,790		559		227,658
Construction and Land		—		—		—		—		23,210		55		23,265
Home Equity		23		—		—		23		11,143		—		11,166
Commercial loans		—		—		—		—		62,574		135		62,709
Consumer loans		48		2		—		50		1,189		—		1,239

Total	$	487		2		—		489		397,746		956	$	399,191

*At December 31, 2015:*
Real estate mortgage loans:
One-to-four family residential	$	255		13		—		268		67,861		40	$	68,169
Commercial Real Estate and Multifamily		355		—		—		355		191,660		553		192,568
Construction and Land		192		—		—		192		17,220		158		17,570
Home Equity		11		—		—		11		6,612		—		6,623
Commercial loans		193		—		—		193		41,224		—		41,417
Consumer loans		—		—		—		—		2,726		—	$	2,726

Total	$	1,006		13		—		1,019		327,303		751	$	329,073

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	With No Related Allowance Recorded				With an Allowance Recorded						Total
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
*September 30, 2016*
Real estate mortgage loans:
One-to- four-family residential	$	—	$	—	$	451	$	451	$	32	$	451	$	451	$	32
Commercial and Multifamily		896		1,798		—		147		—		896		1,945		—
Commercial loans		434		464		76		81		97		510		545		97

	$	1,330	$	2,262	$	527	$	679	$	129	$	1,857	$	2,941	$	129

*December 31, 2015:*
Real estate mortgage loans:
One-to- four-family residential	$	—	$	—	$	460	$	460	$	39	$	460	$	460	$	39
Commercial and Multifamily		909		1,849		—		—		—		909		1,849		—
Construction and Land		158		164		—		—		—		158		164		—
Commercial loans		452		482		87		92		9		539		574		9

	$	1,519	$	2,495	$	547	$	552	$	48	$	2,066	$	3,047	$	48

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	Three Months Ended September 30,
	2016						2015
	Average Recorded Investment		Interest Income Recognized		Interest Income Received		Average Recorded Investment		Interest Income Recognized		Interest Income Received
Real estate mortgage loans:
One-to-four-family residential	$	453		6		6		452		7		4
Commercial real estate and Multifamily		902		8		19		940		7		16
Land and construction		73		—		6		255		—		10
Commercial loans		518		9		10		552		—		10

Total	$	1,946		23		41		2,199		14		40


	Nine months Ended September 30,
	2016						2015
	Average Recorded Investment		Interest Income Recognized		Interest Income Received		Average Recorded Investment		Interest Income Recognized		Interest Income Received
Real estate mortgage loans:
One-to-four-family residential	$	455		20		18		231		11		8
Commercial real estate and Multifamily		918		36		66		1,451		103		114
Land and construction		167		—		8		85		—		10
Commercial loans		525		27		28		590		—		33

Total	$	2,065		83		120		2,357		114		165

During the three and the nine months ended September 30, 2016 and 2015, the Company did not enter into any debt restructurings and the Company had no loans restructured as troubled debt restructurings that subsequently defaulted that had been modified in the previous twelve month period. As of September 30, 2016, the Company had remaining approximately $864,000 accruing TDR’s and $148,000 of non-accruing TDR’s.

At September 30, 2016, the contractually required principal of Purchased Credit Impaired (“PCI”) loans acquired was $312,000. The recorded investment of PCI loans was $191,000. There were no additional losses generated during the three month or nine months ended September 30, 2016 from these loans.

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) Other Borrowings

The Company is a member of the Federal Home Loan Bank of Atlanta (“FHLB”). The FHLB requires members to purchase stock in the FHLB, the required amount changes based upon their level of borrowings. FHLB stock is non-marketable and is carried at cost. At September 30, 2016 the Company held $1.9 million in FHLB stock.

At September 30, 2016, the Company had a maximum borrowing capacity of approximately $128.5 million with the FHLB. Advances are secured by a blanket lien on loans and the Company’s FHLB stock. Pursuant to the collateral agreement, borrowing availability is determined by the amount of qualifying collateral pledged. As of September 30, 2016, the Company had $107.8 million in loans pledged and total availability of approximately $72.6 million.

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


Maturing in the Year Ending December 31,	Advance Type		Interest Rate			Amount
2016		Fixed Rate		0.62	%	$	10,000
2016		Fixed Rate		0.60	%	$	10,000
2016		Fixed Rate		0.57	%	$	10,000
2016		Fixed Rate		0.50	%	$	5,000

Total						$	35,000

The Company enters into sweep agreements with customers that sweep funds from deposit accounts into investment accounts. These investment accounts are not federally insured and are treated as borrowings. At September 30, 2016, the outstanding balance of such borrowings totaled $1.8 million. The Company pledged securities with a market value of $5.0 million as collateral for these agreements. There were $1.5 million in sweep agreements at December 31, 2015.

(6) Subordinated notes

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

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(7) Fair Value of Financial Instruments

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


	At September 30, 2016				At December 31, 2015
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents (Level 1)	$	55,271	$	55,271	$	59,344		59,344
Time deposits with banks (Level 1)		2,695		2,695		4,410		4,410
Securities available for sale (Level 2)		61,036		61,036		65,944		65,944
Loans held for sale (Level 3)		—		—		790		806
Loans (Level 3)		395,994		401,812		326,266		330,801
Federal Home Loan Bank stock (Level 3)		1,944		1,944		1,597		1,597
Accrued interest receivable (Level 3)		1,110		1,110		1,048		1,048
Financial liabilities:
Deposits (Level 3)		438,767		438,667		399,111		399,000
FHLB Advances (Level 3)		35,000		34,997		27,500		27,487
Other borrowings (Level 3)		1,803		1,803		1,427		1,427
Subordinated notes (Level 3)		11,000		10,859		—		—
Off-balance-sheet financial instruments (Level 3)		—		—		—		—

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

(8) Fair Value Measurements

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


	Fair Value		Level 1		Level 2		Level 3
At September 30, 2016:
Federal Home Loan Bank obligations	$	3,007		—		3,007		—
U.S. Government enterprise and agency obligations		10,020		—		10,020		—
Mortgage-backed securities		48,009		—		48,009		—

Total	$	61,036		—		61,036		—


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

Total	$	65,944		—		65,944		—

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

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Those impaired collateral-dependent loans which are measured at fair value on a nonrecurring basis, excluding purchased credit impaired loans are as follows (in thousands):


	At Period End								Total Losses		Losses Recorded During the Period
	Fair Value		Level 1		Level 2		Level 3		Total Losses		Losses Recorded During the Period
*At September 30, 2016:*
Commercial and Multifamily	$	405		—		—		405		645		—
Commercial		433		—		—		433		72		—

Total	$	839		—		—		839		717		—

*At December 31, 2015:*
Commercial and Multifamily	$	450		—		—		450		645		—
Commercial		452		—		—		452		72		—

Total	$	902		—		—		902		717		—

Other real estate owned which is measured at fair value on a nonrecurring basis is summarized below (in thousands):


	At Period End								Total Losses		Losses Recorded During the Period
	Fair Value		Level 1		Level 2		Level 3		Total Losses		Losses Recorded During the Period
*At September 30, 2016*
Other real estate owned	$	32		—		—		32		—		—

*At December 31, 2015*
Other real estate owned	$	32		—		—		32		—		—

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(9) Employee Stock Ownership Plan (“ESOP”)

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

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


	At September 30, 2016		At December 31, 2015
Allocated shares		22,571		22,571
Unallocated shares		315,989		315,989

Total ESOP shares		338,560		338,560

Fair value of unallocated shares	$	4,670	$	4,803

(10) Stock-Based Compensation

On August 26, 2015, stockholders approved the Company’s 2015 Equity Incentive Plan (the “Plan”), which provides for the grant of stock-based awards to officers, employees and directors of the Company. On September 28, 2016, stockholders approved an amendment to the Plan. The amendment increased the total number of shares available for issuance from 592,480 shares to 742,480 shares and the corresponding increase in the maximum number of shares issuable pursuant to the exercise of stock options. In connection with the overall increase, stockholders approved to simplify and consolidate the various limitations on issuances of types of award. Additional details regarding changes to the Plan can be found on the Company’s registration statement filed on Form S-4 with the SEC.

The fair value of options is measured on the grant date using the Black-Scholes option-pricing model. The Company used the following assumptions to determine the fair value of stock options granted which included the one year Treasury-bill rate to establish a risk free interest rate of 0.32%, expected volatility of 16.7%, and an expected life of seven years. There were no outstanding stock options or restricted stock grants as of September 30, 2015.

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


	Stock Options			Weighted Average Exercise Price
Outstanding at December 31, 2015		373,760		$	13.96
Granted		10,000		$	15.15
Vested		2,000		$	15.15
Forfeitures		(32,366	)	$	13.96
Outstanding at September 30, 2016		351,394		$	13.99
Exercisable at September 30, 2016		69,798		$	13.99

	Restricted Stock Awards			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2015		158,724		$	13.96
Granted		7,000		$	15.15
Vested		1,050		$	15.15
Shares withheld for income tax purposes		(350	)	$	15.15
Forfeitures		(6,400	)	$	13.96
Outstanding at September 30, 2016		158,974		$	13.99

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(11) Regulatory Matters

Effective January 1, 2015, the Bank became subject to new capital requirements set forth by federal banking regulations. These changes were designed to ensure capital positions remain strong during the events of economic downturns or unforeseen losses. The Company is exempt from consolidated capital requirements as the Federal Reserve Board amended its “small bank holding company” policy statement to generally exempt savings and loan holding companies with less than $1.0 billion in assets from capital requirements.

These new requirements create a new capital ratio for common equity Tier 1 capital and increase the Tier 1 capital ratio requirements. Under the new capital regulation for the Bank, the minimum capital ratios consist of a common equity tier 1 ratio of 4.5% of risk-weighted assets, a tier 1 capital ratio of 6.0% of risk-weighted assets, a total capital ratio of 8.0% of risk weighted assets, and a leverage ratio of 4.0%. Common equity tier 1 generally comprises of common stock, additional paid in capital, and retained income.

There were changes in the risk weighting of certain assets to better reflect the risk associated with those assets, such as the risk weighting for nonperforming loans and certain high volatility commercial real estate acquisitions, development and construction loans. The changes also include additional limitations on the inclusion of deferred tax asset in capital. The Bank made a one-time election to exclude accumulated other comprehensive income from regulatory capital in order to reduce the impact of market volatility on regulatory capital. In order to avoid limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements. As of September 30, 2016, the Bank’s capital conservation buffer was 7.84% exceeding the minimum of 0.625% for 2016.

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


	Actual					Minimum for Capital Adequacy Purposes					Minimum to be Well Capitalized
	Amount		%			Amount		%			Amount		%
September 30, 2016
Common Equity Tier 1 to Risk-Weighted Assets	$	64,583		15.17	%	$	19,161		4.50	%	$	27,677		6.50	%
Tier I Capital to Risk-Weighted Assets		64,583		15.17	%		25,548		6.00	%		34,064		8.00	%
Total Capital to Risk-Weighted Assets		67,429		15.84	%		34,064		8.00	%		42,580		10.00	%
Tier I Capital to Total Assets		64,583		12.62	%		20,469		4.00	%		25,587		5.00	%

December 31, 2015
Common Equity Tier 1 to Risk-Weighted Assets	$	45,056		12.44	%	$	16,297		4.50	%	$	23,540		6.50	%
Tier I Capital to Risk-Weighted Assets		45,056		12.44	%		21,729		6.00	%		28,972		8.00	%
Total Capital to Risk-Weighted Assets		47,567		13.13	%		28,972		8.00	%		36,215		10.00	%
Tier I Capital to Total Assets		45,056		9.76	%		18,466		4.00	%		23,082		5.00	%

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(12) Earnings (Loss) Per Share

Basic earnings (loss) per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three months and the nine months ended September 30, 2016 outstanding stock options are considered dilutive securities for the purposes of calculating diluted earnings per share which was computed using the treasury method. There were no stock options outstanding as of September 30, 2015. The shares purchased by the Employee Stock Ownership Plan are included in the weighted-average shares when they are committed to be released. ($ in thousands, except per share amounts):


	Three months Ended Sept 30, 2016		Three months Ended September 30, 2015
Net Income Available to Common Stockholders	$	244	$	35
Weighted Average Shares		4,944,262		3,904,725
Basic income per share:	$	0.05	$	0.01
Weighted Average Diluted Shares		4,955,143		3,904,725
Diluted income per share	$	0.05	$	0.01

	Nine months Ended September 30, 2016		Nine months Ended September 30, 2015
Net Income (Loss) Available to Common Stockholders	$	471	$	(469	)
Weighted Average Shares		4,947,549		3,904,725
Basic income per share:	$	0.10	$	(0.12	)
Weighted Average Diluted Shares		4,960,023		3,904,725
Diluted income per share	$	0.09	$	(0.12	)

Item 2. Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto presented elsewhere in this report. For additional information, refer to the audited consolidated financial statements and footnotes for the year ended December 31, 2015 in the Annual Report on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. Certain factors that could cause actual results to differ materially from expected results include, general economic conditions, including our local, state and national real estate markets and employment trends; changes in legislation or regulation; competition from other financial institutions; the accuracy of our estimates of future loan losses; inflation, interest rate, market and monetary fluctuations; acquisitions and integration of acquired businesses; the possible impairment of goodwill associated with our acquisitions; expansion of our operations, including branch openings and branch acquisitions, new product offerings and expansion into new markets; the impact of new capital requirements; restrictions or conditions imposed by our regulators on our operations; cybersecurity breaches, including potential business disruptions or financial losses. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Overview

The Bank is a financial services institution focused on positively impacting the consumers, businesses, and non-profits throughout central Florida by creating financial success for our customers. Our competitive advantage is our ability to attract and retain employees, who are passionate about providing uncompromising service with a sense of warmth, integrity, friendliness, and company spirit. Operations are conducted from the main banking office in Plant City, Florida and seventeen additional full service Florida banking offices located in Bartow, Brandon, Bradenton, Kissimmee, Lakeland, Lake Mary, Melbourne, Merritt Island, Orlando, Plant City, Riverview, Sarasota, Tampa, Winter Haven, Winter Park, and Zephyrhills,. Our common stock is traded on the NASDAQ Capital Market under the symbol “SBCP.”

Our principal business has consisted of attracting retail and commercial deposits from the general public in our primary market area of Brevard, Hillsborough, Manatee, Orange, Osceola, Pasco, Polk, and Seminole counties, Florida, and investing those deposits, together with funds generated from operations, in commercial real estate loans, commercial business loans and, to a lesser extent, multi-family real estate, land and construction, one-to- four-family and consumer loans. We also invest in securities, which consist primarily of U.S. Treasury securities, U.S government sponsored enterprise (“GSE”) mortgage-backed securities, GSE securities and obligations, U.S. government agency securities, and securities issued by the Federal Home Loan Bank. We offer a variety of deposit accounts to consumers and small businesses, including savings accounts, NOW accounts, money market accounts, certificate of deposit accounts, other borrowings, and cash management programs.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income currently consists of fees and service charges on deposit accounts, mortgage broker fees, gain on sales of securities, income from bank-owned life insurance and other income. Non-interest expense currently consists of expenses related to salaries and employee benefits, occupancy and equipment, data and item processing, professional fees, advertising and promotion, stationery and supplies, FDIC insurance, merger related expenses, and other expenses.

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Recent Developments

On October 31, 2016, the Company completed its acquisition of the common stock of FBC Bancorp, Inc., a Florida corporation (“FBC”), and Florida Bank of Commerce, a Florida state bank and wholly-owned subsidiary of FBC (“FBC Bank”), pursuant into an Agreement and Plan of Merger (the “Merger Agreement”) entered into May 9, 2016, where FBC merged with and into the Company, with the Company as the surviving entity, and FBC Bank merged with and into Sunshine Bank, with Sunshine Bank surviving as the Company’s wholly-owned subsidiary (collectively, the “Merger”).

The strategic partnership created a franchise with 18 banking facilities across central Florida, stretching from the East to West Coasts. The Company acquired these assets and liabilities to expand its market presence in the Greater Orlando MSA and to further its strategy of growth along the demographically attractive I-4 corridor. The transaction expands Sunshine Bank into contiguous markets. With the Merger the company enters Brevard, Osceola, and Seminole Counties, Florida. The Company believes it is well position to take advantage of high growth markets in Florida by having presence in two of Florida’s largest metropolitan MSA’s in Tampa and Orlando.

At the effective time of the Merger, each share of common stock of FBC was converted into 0.88 shares of common stock of the Company. As a result of the Merger, FBC’s stockholders own approximately 34.6% of the Company’s common stock.

At the completion of the Merger, Dana Kilborne, FBC’s President and Chief Executive Officer, joined the Company as a director, and Executive Vice President of the Company, and Co-President of Sunshine Bank. Four additional FBC board members, Malcolm Kirschenbaum, Sal A. (Joe) Nunziata, James T. Swann, and John C. Reich were appointed to the Company and Sunshine Bank board of directors, increasing the total number of directors of the Company and the Bank to fifteen members.

Critical Accounting Policies

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

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

Total Assets. Total assets increased $56.7 million, or 11.2%, to $564.0 million at September 30, 2016 from $507.3 million at December 31, 2015. The increase was primarily the result of an increase of $69.7 million in net loans partially offset by decreases of $4.1 million in cash and cash equivalents and $4.9 million in securities available for sale.

Cash and Cash Equivalents. Total cash and cash equivalents decreased by $4.1 million, or 6.9%, to $55.3 million at September 30, 2016 from $59.3 million at December 31, 2015. Cash provided by financing activities totaled $58.5 million, primarily from increases in deposits, borrowings and subordinated notes. This was offset by cash used in investing of $63.9 million primarily from increases in loans.

Investment Securities. Investment securities decreased $4.9 million, or 7.4%, to $61.0 million at September 30, 2016 from $65.9 million at December 31, 2015. The decrease was primarily due to $18.5 million in maturities, repayments, and calls, and the sale of approximately $22.2 million in securities during the first nine months of 2016, resulting in a $208,000 gain. These decreases in securities were offset by $35.9 million in purchases of agency mortgage backed securities during the same time period. All of our investment securities were classified as available for sale at both September 30, 2016 and December 31, 2015.

Net Loans. Our primary interest-earning asset and source of income is our loan portfolio. Net loans increased $69.7 million, or 21.4%, to $396.0 million at September 30, 2016 from $326.3 million at December 31, 2015. The growth consisted of increases of $35.1 million in commercial real estate loans, $21.3 million in commercial loans,

$4.5 million in home equity loans, and $5.0 million in one-to-four family residential loans. During the first nine months of the year, the Bank continued its strategic emphasis to focus more of its lending activities on the origination of commercial loans. This emphasis stresses the Bank’s effort on relationship banking and targeted asset class diversification within the loan portfolio. During the third quarter of 2016, the Bank purchased a small pool of 27 residential mortgages totaling $11.2 million to offset greater than anticipated declining balances of one-to-four family residential loans being refinanced. The Bank wanted to supplement this class of loans to continue to meet certain regulatory requirements related to the Bank operating under a thrift charter, such as its Qualified Thrift Lender ratio. While the Bank still plans to sell one-to-four family residential loans originated for sale and recognize gains on the sale, we may further increase our mortgage loans outstanding with additional purchases to stay compliant with our certain thrift related requirements.

Deposits. Deposits increased $39.7 million, or 9.9%, to $438.8 million at September 30, 2016 from $399.1 million at December 31, 2015. The increase was primarily due to a $30.0 million money market deposit made by the Florida Bank of Commerce and an increase of $ $25.0 million in non-reciprocal brokered time deposits, offset by a decrease of $3.8 million in core deposits. The increase in non-reciprocal brokered time deposits was to allow for runoff of higher rate and municipal time deposits requiring pledges. The decrease in core deposits resulted mainly from seasonal variations in the agricultural deposit base. The Bank continued its efforts to attract new customers and offer more banking options to existing relationships by opening two new full service offices in Tampa and Orlando during the first quarter of 2016.

Borrowings. Other borrowings, consisting of Federal Home Loan Bank (“FHLB”) advances and customer repurchase sweep agreements, increased $7.9 million to $36.8 million at September 30, 2016, compared to $28.9 million at December 31, 2015. The $35.0 million in FHLB advances are secured by a blanket asset lien on loans with maximum borrowing capacity of approximately $128.5 million at September 30, 2016, collateralized by residential and commercial real estate loans. The customer repurchase sweep agreements are secured by securities with a market value of $5.0 million at September 30, 2016.

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

Stockholders’ Equity. Stockholders’ equity increased $1.3 million, or 1.8%, to $72.7 million at September 30, 2016, as a result of net income of $471,000 for the nine months ended September 30, 2016, $637,000 in additional paid in capital from stock-based compensation and $208,000 in other comprehensive income mainly from increases in unrealized gains on securities.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the three and nine months ended September 30, 2016 and 2015. No tax-equivalent yield adjustments have been made, as we had no tax-free interest-earning assets during the periods. All average balances are daily average balances based upon amortized costs. Nonaccrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.


	For the Three Months Ended September 30,
	2016							2015
	Average Outstanding Balance			Interest		Average Yield/ Rate(1)		Average Outstanding Balance			Interest		Average Yield/ Rate(1)
Interest-earning assets:
Loans	$	382,165		$	4,582		4.80	$	314,924		$	3,909		4.97
Securities		65,738			222		1.35		54,874			141		1.03
Other(2)		18,403			43		0.93		37,791			33		0.35

Total interest-earning assets		466,306			4,847		4.16		407,589			4,083		4.01
Non-interest-earning assets		57,480							52,636

Total assets	$	523,786						$	460,225

Interest-bearing liabilities:
Interest-bearing demand and savings accounts	$	202,625		$	134		0.26	$	175,169		$	121		0.28
Time deposits		108,196			215		0.79		105,749			123		0.47

Total interest-bearing deposits		310,821			349		0.45		280,918			244		0.35
FHLB Advances and other borrowings		36,038			51		0.57		30,433			53		0.70
Subordinated Notes		11,000			141		5.00		—			—		—

Total interest-bearing liabilities		357,859			541		0.60		311,351			297		0.38
Non-interest-bearing liabilities		93,670							82,052

Total liabilities		451,529							393,403
Stockholders’ equity		72,257							66,822

Total liabilities and stockholders’ equity	$	523,786						$	460,225

Net interest income				$	4,306						$	3,786

Net interest rate spread (3)							3.55							3.63
Net interest-earning assets (4)	$	108,447						$	96,238

Net interest margin (5)							3.69							3.72
Average interest-earning assets to average interest-bearing liabilities		130.3	%						130.9	%

(1)	Annualized.

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

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

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

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


	For the Nine Months Ended September 30,
	2016							2015
	Average Outstanding Balance			Interest		Average Yield/ Rate(1)		Average Outstanding Balance			Interest		Average Yield/ Rate(1)
Interest-earning assets:
Loans	$	353,163		$	12,678		4.79	$	185,603		$	6,962		5.00
Securities		66,088			684		1.38		61,830			525		1.13
Other(2)		30,536			164		0.72		35,482			105		0.39

Total interest-earning assets		449,787			13,526		4.01		282,915			7,592		3.58
Non-interest-earning assets		58,573							31,585

Total assets	$	508,360						$	314,500

Interest-bearing liabilities:
Interest-bearing demand and savings accounts	$	204,887		$	431		0.28	$	125,463		$	180		0.19
Time deposits		104,768			531		0.68		59,677			201		0.45

Total interest-bearing deposits		309,655			962		0.41		185,140			381		0.27
FHLB Advances and other borrowings		23,523			91		0.52		10,751			54		0.67
Subordinated notes		7,427			281		5.00		—			—		—

Total interest-bearing liabilities		340,605			1,334		0.52		195,891			435		0.30

Non-interest-bearing liabilities		95,796							55,382

Total liabilities		436,401							251,273
Stockholders’ equity		71,959							63,227

Total liabilities and stockholders’ equity	$	508,360						$	314,500

Net interest income				$	12,192						$	7,157

Net interest rate spread (3)							3.49							3.28
Net interest-earning assets (4)	$	109,182						$	87,024

Net interest margin (5)							3.61							3.37
Average interest-earning assets to average interest-bearing liabilities		132.1	%						144.4	%

(1)	Annualized.

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

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

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

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

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

General. Net income available to common stockholders for the three months ended September 30, 2016 was $244,000 compared to net income of $35,000 for the three months ended September 30, 2015. The increase in net income available to common stockholders was primarily due to increases in net interest income of $520,000 or 13.7% due to the growth in the Company’s interest earning assets and an increase in noninterest income of $244,000 or 57.4%. This increase in revenue was offset by an increase in noninterest expense of $461,000. The increase in noninterest expense was mostly comprised of increases in compensation, occupancy, and data processing expenses due to the expanded size and footprint of the Company as a result of the Company’s growth strategy.

Interest Income. Interest income increased $764,000 or 18.7%, to $4.8 million for the three months ended September 30, 2016 primarily as a result of a $673,000 increase in interest income on loans. The increase in interest income resulted primarily from a $58.7 million increase in the average balance of our interest-earning assets to $466.3 million and a 15 basis points increase in the average yield on our interest-earning assets to 4.16% for the three months ended September 30, 2016 compared to the prior year period.

Interest income on loans increased $673,000, or 17.2%, to $4.6 million for the three months ended September 30, 2016 as compared to the same period in 2015. The average balance of loans increased to $382.2 million for the three months ended September 30, 2016 from $314.9 million for the three months ended September 30, 2015, as the Company continued to see strong organic loan growth following its acquisition of Community Southern Bank in June 2015. The generally low rate yield environment resulted in the Company experiencing a decrease in its average yield on loans decreasing 17 basis points to 4.80% in the three months ended September 30, 2016 as compared to the same period in 2015.

Interest income on investment securities increased $81,000, or 57.5%, to $222,000 for the three months ended September 30, 2016 as compared to the same period in 2015, mostly as a result of a 32 basis points increase in the average yield on investment securities to 1.35% as a result of the higher yielding securities in the portfolio compared to the same period in 2015. The average balance of investment securities increased $10.9 million to $65.7 million for the three months ended September 30, 2016 from $54.9 million for the three months ended September 30, 2015. The increase in the average balance of investment securities was the result of purchases designed to achieve improved diversification of the portfolio’s cash flow behavior under various rate scenarios.

Interest Expense. Interest expense increased $244,000, or 82.2%, to $541,000 for the three months ended September 30, 2016 from $297,000 for the three months ended September 30, 2015 as the result of the $29.9 million increase in the average balance of interest-bearing deposits and the $141,000 increase in borrowing costs from the subordinated debt. The average cost of interest-bearing deposits increased by 10 basis points to 0.45% for the three months ended September 30, 2016 from 0.35% for the three months ended September 30, 2015 reflecting the higher deposit rates on time deposits. Competitive market pricing and the expectation of a future fed funds increase have pressured rates on time deposits. The average balance of interest-bearing deposits increased by $29.9 million during the three months ended September 30, 2016 to $310.8 million compared to the prior year period due to an increase in the average balance of core deposits. The average balance of borrowings increased $16.6 million for the three months ended September 30, 2016 due to the $11.0 million in subordinated debt and increased use of short-term FHLB advances which currently serve as a lower rate means of funding than time deposits.

Net Interest Income. The effect of a higher average balance on loans and higher yielding asset mix compared to the prior year period has increased the Company’s net interest income for the three months ended September 30, 2016. Net interest income increased $520,000, or 13.7%, to $4.3 million for the three months ended September 30, 2016 compared to the prior year period as net interest-earning assets increased to $108.4 million for the three months ended September 30, 2016 as compared to $96.2 million for the prior year period. The net interest rate spread decreased to 3.55% for the three months ended September 30, 2016 from 3.63% for the three months ended September 30, 2015. Our net interest margin decreased to 3.69% for the three months ended September 30, 2016 from 3.72% for the three months ended September 30, 2015.

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended September 30, 2016 or for the three months ended September 30, 2015. The Company has continued to experience strong credit quality, requiring no additional provision during the quarter. Net charge-offs for the three months ended September 30, 2016 were $49,000 compared to net recoveries of $64,000 for the three months ended September 30, 2015.

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

Noninterest Income. Noninterest income increased $244,000, or 57.4%, to $669,000 for the three months ended September 30, 2016 from $425,000 for the three months ended September 30, 2015. The Bank experienced a $62,000 increase in fees and service charges on deposit accounts as a result of its expanded products offered since its shift to a full service commercial bank. The Bank experienced a $42,000 increase in Mortgage broker fees as no mortgage originations of loans originated for sale occurred during the same period in the prior year as the Bank retooled its compliance department to handle new mortgage originations disclosures. The Bank also had a $77,000 increase in gains on securities sales.

Noninterest Expenses. Non-interest expenses increased $461,000 to $4.6 million for the three months ended September 30, 2016 compared to the same period in 2015. The increase reflected an increase of $42,000 in salaries and employee benefits expense, a result of the increased in FTEs from the fourth quarter 2015 branch purchase. Occupancy, data processing, and other expenses have all increased proportionally with the increased size of the Company. The Company also had an increase of $88,000 in merger related expenses during the three months ended September 30, 2016 as compared to the prior year period.

Income Tax Expense. Income taxes were $129,000 for the three months ended September 30, 2016 due to pretax income of $373,000 at a 34.6% effective tax rate compared to an income tax expense of $21,000 for the three months ended September 30, 2015 due to the pretax income of $70,000 at a 30.0% effective tax rate.

Comparison of Operating Results for the Nine months Ended September 30, 2016 and September 30, 2015

General. Net income available to common stockholders for the nine months ended September 30, 2016 was $471,000 compared to a net loss available to common stockholders of $469,000 for the nine months ended September 30, 2015. The increase in net income available to common stockholders was primarily due to an increase in net interest income of $5.0 million and an increase in non-interest income of $1.3 million due to the growth in the Company’s size. This increase in revenue was offset by increases in noninterest expense of $3.2 million and provision for loan losses of $350,000. The increase in noninterest expense was mostly comprised of increases in compensation, occupancy, and data processing expenses due to the expanded size and footprint of the Company as a result of the Company’s growth strategy. These increases in expenses were offset partially by a decrease of $938,000 in Merger related expenses.

Interest Income. Interest income increased $6.0 million, or 78.2%, to $13.5 million for the nine months ended September 30, 2016 as compared to the same period in 2015, primarily as a result of a $5.7 million increase in interest income on loans. The increase in interest income resulted primarily from a $166.9 million increase in the average balance of our interest-earnings assets to $449.8 million and a 43 basis points increase in the average yield on our interest-earning assets to 4.01% for the nine months ended September 30, 2016 compared to the prior year period. The increase in the average yield was attributable to the mix of interest earning assets, as the higher yielding loan portfolio represented the majority of the asset growth.

Interest income on loans increased $5.7 million, or 82.1%, to $12.7 million for the nine months ended September 30, 2016 due mainly to the increase in the average balance of loans. Average loans for the nine months ended September 30, 2016 increased by $167.6 million to $353.2 million from $185.6 million for the nine months ended September 30, 2015 as a result of the completion of the Community Southern merger and the branch acquisition. The average yield on loans decreased 21 basis points to 4.79% for the nine months ended September 30, 2016 from 5.00% for the nine months ended September 30, 2015 due to the continuing low interest rate environment.

Interest income on investment securities increased $159,000, or 30.2%, to $684,000 for the nine months ended September 30, 2016 as a result of the increase of 25 basis points in the average yield on investment securities The average yield on investment securities increased to 1.38% for the nine months ended September 30, 2016 from 1.13% for the nine months ended September 30, 2015 as a result of the higher yielding securities in the portfolio compared to the same period in 2015. The average balance of investment securities increased $4.3 million to $66.1 million for the nine months ended September 30, 2016 from $61.8 million for the nine months ended September 30, 2015. The increase in the average balance of investment securities was the result of purchases designed to achieve improved diversification of the portfolio’s cash flow behavior under various rate scenarios.

Interest Expense. Interest expense increased $899,000, or 206.7%, to $1.3 million for the nine months ended September 30, 2016 from $435,000 for the nine months ended September 30, 2015. The increase can be attributed to the increase in average deposits and the increased borrowing costs of $312,000, mostly from the $11.0 million subordinated notes issued in March 2016 and increased usage of short-term FHLB advances. The average balance of interest-bearing deposits increased by $124.5 million during the nine months ended September 30, 2016 to $309.7 million, due to mainly to the increased deposits assumed in the Community Southern merger. The average cost of deposits increased by 14 basis points to 0.41% for the nine months ended September 30, 2016 from 0.27% for the nine months ended September 30, 2015 due mainly to the higher rates assumed in the Community Southern merger and higher rates experienced on time deposits. The average balance of borrowings increased $20.2 million for the nine months ended September 30, 2016 a result of the $11.0 million in subordinated debt issued on March 30, 2016 and increased use of short-term FHLB advances which currently serve as a lower rate means of funding than time deposits.

Net Interest Income. The effect of higher average balances on loans and securities and an increased average yield on securities has increased the Bank’s net interest income for the nine months ended September 30, 2016 compared to the prior year period. Net interest income increased $5.0 million, or 70.4%, to $12.2 million for the nine months ended September 30, 2016 compared to the prior year period. The increase was primarily due to the increase in our net interest rate spread to 3.49% for the nine months ended September 30, 2016 from 3.28% for the nine months ended September 30, 2015. Our net interest margin increased to 3.61% for the nine months ended September 30, 2016 from 3.37% for the nine months ended September 30, 2015.

Provision for Loan Losses. We recorded $350,000 in provision for loan losses for the nine months ended September 30, 2016 compared to no provision for the nine months ended September 30, 2015. The need for additional provision was necessitated by the growth in loans, which grew 28.5% on an annualized basis during 2016. Net charge-offs for the nine months ended September 30, 2016 were $15,000 compared to net recoveries of $157,000 for the nine months ended September 30, 2015.

Noninterest Income. Noninterest income increased $1.3 million or 114.6%, to $2.5 million for the nine months ended September 30, 2016 from $1.2 million for the nine months ended September 30, 2015. The increase was attributable to a $563,000 gain on the sale and subsequent partial leaseback of the Bank’s Brandon office, a $420,000 increase in the fees and service charges related to deposits as a result of increased fee producing products and services introduced since the shift to a full service commercial bank along with the increased deposit base from the Community Southern merger. The Bank experienced a $96,000 increase in Mortgage broker fees as originations for loans intended for sale occurred during the last two quarters in the prior year as the Bank retooled its compliance department to handle new mortgage originations disclosures.

Noninterest Expenses. Noninterest expense increased $3.2 million, or 31.0%, to $13.6 million for the nine months ended September 30, 2016 compared to the same period in 2015. The increase primarily reflected an increase of $1.9 million in salaries and employee benefits expense. The salaries and employee benefits expense increase period over period was attributable to the increased number of employees resulting from the Community Southern merger and branch acquisition and increased expense from the 2015 equity plan. The other expense categories grew proportionally with the increased size of the Company. The Company had a decrease of $938,000 in merger related expenses.

Income Tax Expense. Income tax expense was $214,000 for the nine months ended September 30, 2016 due to pretax income of $685,000, a 31.2% effective tax rate, compared to a benefit of $1.6 million for the nine months ended September 30, 2015. The Company performed a change in accounting estimate for bank owned life insurance, which resulted in a benefit of approximately $733,000 for the nine months ended September 30, 2015.

Asset Quality

Non-Performing Assets. We define non-performing loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due. Non-performing assets, including non-performing loans and other real estate owned, totaled $988,000, or 0.18% of total assets, at September 30, 2016 and $783,000, or 0.15% of total assets, at December 31, 2015. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. We had no accruing loans past due 90 days or more at September 30, 2016 or December 31, 2015.


	At September 30,			At December 31,
	2016			2015
	(dollars in thousands)
Non-accrual loans:
Real estate mortgage loans:
One- to four-family residential	$	207		$	40
Commercial real estate and multi-family		411			373
Construction and land		55			158
Non-Real estate loans:
Commercial business loans		135			—
Consumer loans		—			—

Total non-accrual loans		808			571

Non-accruing troubled debt restructured loans:

Commercial real estate and multi-family		148			180

Total non-performing loans		956			751

Other real estate owned
Land and construction		32			32

Total non-performing assets	$	988		$	783

Total accruing troubled debt restructured loans	$	1,298		$	1,355

Total non-performing loans to total loans		0.24	%		0.23	%

Total non-performing assets to total assets		0.18	%		0.15	%

The following table sets forth activity in our allowance for loan losses for the periods indicated.


	For the nine months ended September 30,
	2016			2015
	(dollars in thousands)
Allowance at beginning of period	$	2,511		$	1,726
Provision for loan losses		350			—
Charge offs:
Real estate mortgage loans:
One- to four-family residential		(22	)		(1	)
Commercial real estate and multi-family		(73	)		—
Construction and land		—			—
Commercial business loans		(12	)		(9	)
Consumer loans		(3	)		—

Total charge-offs		(110	)		(10	)

Recoveries:
Real estate mortgage loans:
One- to four-family residential		—			1
Commercial real estate and multi-family		3			114
Construction and land		—			—
Home Equity		32
Commercial business loans		57			50
Consumer loans		3			2

Total recoveries		95			167

Net (charge-offs)recoveries		(15	)		157

Allowance at end of period	$	2,846		$	1,883

Allowance to nonperforming loans		297.7	%		115.2	%
Allowance to total loans outstanding at the end of the period		0.71	%		0.61	%
Net (charge-offs)recoveries to average loans outstanding during the period (annualized)		0.00	%		0.26	%

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At September 30, 2016, we had the capacity to borrow approximately $128.5 million from the Federal Home Loan Bank of Atlanta. At September 30, 2016, we had outstanding advances of approximately $35.0 million and at December 31, 2015 we had $27.5 million in outstanding advances from the Federal Home Loan Bank of Atlanta. We also have lines of credit at three financial institutions that would allow us to borrow up to $25.5 million at September 30, 2016. No credit lines were drawn upon at September 30, 2016.

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

The principal sources of the Holding Company’s liquidity are its existing cash resources. The Holding Company serves as a source of capital strength for the Bank. The Holding company has contributed $19 million in additional capital to the Bank year to date . The Holding Company has undertaken recent actions that demonstrate its ability to access capital and provide for the funding needs of the Bank. Cash on hand at the Holding Company represent mainly the proceeds of our December 2015 private placement of common stock, which raised net proceeds of approximately $11.4 million. On March 30, 2016, the Holding Company also issued $11.0 million in subordinated notes, the proceeds of which were contributed to the Bank to support the growing loan demand.

The Company has established an Asset/Liability Management (ALCO) policy and committee in order to maximize earnings performance while maintaining acceptable levels of risks, adequate liquidity, and a “well capitalized”

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

At September 30, 2016, Sunshine Bank exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 12.6% of adjusted total assets, which is above the required level of 5.00% to be considered “well capitalized”, common equity tier 1 capital to risk-weighted assets of 15.2%, which is above the required level of 6.50% to be considered “well capitalized”, tier 1 capital to risk-weighted assets of 15.2%, which is above the required level of 8.00% to be considered “well capitalized”, and total risk-based capital of 15.4% of risk-weighted assets, which is above the required level of 10.00% to be considered “well capitalized”. The capital conservation buffer was 7.84% exceeding the minimum of 0.625% for 2016. Management is not aware of any conditions or events since the most recent notification that would change our category.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2016, we had unfunded loan commitments of $69.6 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from September 30, 2016 totaled $103.2 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits are not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not required for smaller reporting companies

Item 4. Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) as of September 30, 2016, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures in effect as of September 30, 2016, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not required for smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Nothing to report.

Item 3. Defaults Upon Senior Securities

Nothing to report.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Nothing to report.

Item 6. Exhibits


Exhibits:

31.1		Rule 13a-14(a) Certification of the Chief Executive Officer

31.2		Rule 13a-14(a) Certification of the Chief Financial Officer

32.0		Section 1350 Certification

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Calculation Linkbase Document

101 DEF		XBRL Taxonomy Extension Definition Linkbase Document

101 LAB		XBRL Taxonomy Label Linkbase Document

101.PRE		XBRL Taxonomy Presentation Linkbase Document

SUNSHINE BANCORP, INC. AND SUBSIDIARY

SIGNATURES

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


	SUNSHINE BANCORP, INC.

Date: November 14, 2016	By:	/s/ Andrew S. Samuel
		Andrew S. Samuel
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: November 14, 2016	By:	/s/ John Finley
		John Finley
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company