Sunshine Bancorp (SBCP) 10-Q 2014 Q2 Quarterly report

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 endedJune 30, 2014

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

For the transition period from                    to                    

Commission file number:001-36539

SUNSHINE BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

102 West Baker Street, Plant City, Florida 33563

(Address of principal executive offices; Zip Code)

(813) 752-6193

(Registrant’s telephone number, including area code)

None

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

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

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

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

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

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

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

At August 13, 2014, there were 4,232,000 issued and outstanding shares of the issuer’s common stock.

SUNSHINE BANCORP, INC. AND SUBSIDIARY

June 30, 2014 Form 10-Q

Index

		Page Number
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013		2
	Condensed Consolidated Statements of Operations for the Three- and Six-Month Periods Ended June  30, 2014 and 2013 (Unaudited)		3
	Condensed Consolidated Statements of Retained Income for the Three- and Six-Month Periods Ended June  30, 2014 and 2013 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows For the Six-Month Periods Ended June  30, 2014 and 2013 (Unaudited)		5
	Notes to Condensed Consolidated Financial Statements (Unaudited)		6-19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20-30
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		31
Item 4.	Controls and Procedures		31
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		32
Item 1A.	Risk Factors		32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3.	Defaults Upon Senior Securities		32
Item 4.	Mine Safety Disclosures		33
Item 5.	Other Information		33
Item 6.	Exhibits		33
SIGNATURES			34

1

SUNSHINE BANCORP, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(In thousands)

	At June 30, 2014		At December 31, 2013
	(Unaudited)
Assets
Cash and due from banks	$	4,229		2,391
Interest-bearing deposits with banks		3,672		7,545
Federal funds sold		3,322		1,118
Cash and cash equivalents		11,223		11,054
Restricted cash		117,215		—
Time deposits with banks		7,078		9,528
Securities held to maturity (fair value of $53,032 and $48,187)		53,152		48,436
Loans, net of allowance for loan losses of $1,771 and $1,718		108,395		111,263
Premises and equipment, net		5,984		6,128
Federal Home Loan Bank stock, at cost		180		237
Cash surrender value of bank-owned life insurance		4,149		4,089
Accrued interest receivable		549		581
Other real estate owned		1,301		1,422
Other assets		2,553		1,701
Total assets	$	311,779		194,439
Liabilities and Retained Income
Liabilities:
Noninterest-bearing accounts		29,589		29,123
NOW accounts		30,202		30,129
Money-market deposit accounts		36,721		35,713
Savings accounts		26,763		25,724
Time deposits		42,033		44,230
Total deposits		165,308		164,919
Official checks		347		392
Advances by borrowers for taxes and insurance		242		141
Stock subscriptions		117,215		—
Other liabilities		2,401		2,435
Total liabilities		285,513		167,887
Retained income		26,266		26,552
Total liabilities and retained income	$	311,779		194,439

See accompanying Notes to Condensed Consolidated Financial Statements.

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
Interest income:
Loans	$	1,355			1,411		2,710			2,784
Securities		125			100		224			193
Other		37			31		64			60
Total interest income		1,517			1,542		2,998			3,037
Interest expense-deposit accounts		78			96		159			196
Net interest income		1,439			1,446		2,839			2,841
Provision for loan losses		640			—		640			—
Net interest income after provision for loan losses		799			1,446		2,199			2,841
Noninterest income:
Fees and service charges on deposit accounts		169			159		334			316
Fees and charges on loans		20			14		39			35
Gain on sale of other real estate owned		23			—		27			3
Income from bank-owned life insurance		30			32		60			62
Other		34			44		57			47
Total noninterest income		276			249		517			463
Noninterest expenses:
Salaries and employee benefits		866			879		1,712			1,739
Occupancy and equipment		241			244		487			489
Data and item processing services		119			112		235			235
Professional fees		95			76		146			124
Other real estate owned		13			8		26			36
Advertising and promotion		11			9		32			39
Stationery and supplies		21			17		46			41
Deposit insurance and general insurance		62			62		124			124
Other		214			196		429			398
Total noninterest expenses		1,642			1,603		3,237			3,225
(Loss) income before income (benefit) taxes		(567	)		92		(521	)		79
Income (benefit) taxes		(237	)		39		(235	)		37
Net (loss) income	$	(330	)		53		(286	)		42

See accompanying Notes to Condensed Consolidated Financial Statements.

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Retained Income (Unaudited)

(In thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
Retained income at beginning of period	$	26,596			26,400		26,552			26,411
Net (loss) income		(330	)		53		(286	)		42
Retained income at end of period	$	26,266			26,453		26,266			26,453

See accompanying Notes to Condensed Consolidated Financial Statements.

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net (loss) income	$	(286	)		42
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation		193			193
Provisions for loan losses		640			—
Amortization of premiums and discounts on securities		114			149
Amortization of deferred loan fees and costs, net		(12	)		(14	)
Income from bank-owned life insurance, net		(60	)		(62	)
Gain on sale of other real estate owned		(27	)		(3	)
Write-down of other real estate owned		—			14
Decrease in accrued interest receivable		32			31
(Increase) decrease in other assets		(852	)		334
Decrease in official checks		(45	)		(644	)
(Decrease) increase in other liabilities		(34	)		288
Net cash (used in) provided by operating activities		(337	)		328
Cash flows from investing activities:
Purchase of time deposits with banks		—			(2,940	)
Maturities of time deposit with banks		2,450			1,715
Purchases of securities held to maturity		(4,830	)		(16,012	)
Maturities of securities held to maturity		—			6,000
Net decrease in loans		2,240			6,319
Proceeds from sale of other real estate owned		148			23
Purchases of premises and equipment, net		(49	)		(279	)
Redemption of Federal Home Loan Bank stock		57			65
Net cash provided by (used in) investing activities		16			(5,109	)
Cash flows from financing activities:
Net increase in deposits		389			9,256
Net increase in advances by borrowers for taxes and insurance		101			77
Proceeds from stock subscriptions		117,215			—
Increase in restricted cash		(117,215	)		—
Net cash provided by financing activities		490			9,333
Increase in cash and cash equivalents		169			4,552
Cash and cash equivalents at beginning of period		11,054			12,301
Cash and cash equivalents at end of period	$	11,223			16,853
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	20			—
Interest	$	159			196
Noncash transaction-
Transfer from other real estate owned to loans	$	—			168

See accompanying Notes to Condensed Consolidated Financial Statements.

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1) Organization and Significant Accounting Policies

Organization. Sunshine Bancorp, Inc., a Maryland corporation (the “Holding Company”), was formed on March 7, 2014 to serve as the savings and loan holding company for Sunshine State Federal Savings and Loan Association (the “Association”). The Company was formed as part of the Association’s mutual-to-stock conversion. The conversion was completed as of July 14, 2014. Therefore, the financial and other information of the Association is included in this Quarterly Report. Collectively, the Association and Holding Company are referred to as the “Company.” The Association through its five banking offices provides a variety of retail community banking services to individuals and businesses primarily in Hillsborough and Pasco Counties, Florida. The Association’s deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation.

The financial statements of the Company have been prepared to conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry.

Principles of Consolidation. The condensed consolidated financial statements include the accounts of the Holding Company and the Association. 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 2013 financial statements

In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at June 30, 2014, and the results of operations for the three and six month periods ended June 30, 2014 and 2013. The results of operations for the three and six months ended June 30, 2014, are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Standards Update. In January 2014, the FASB issued ASU 2014-04,Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,which is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective beginning January 1, 2015. Upon adoption, this guidance is not expected to impact the Association’s financial statements.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(1) Organization and Significant Accounting Policies, Continued

Recent Accounting Standards Update, Continued. In June 2014, FASB issued ASU 2014-11, “Transfers and Servicing - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.”ASU 2014-11 requires, among other things, two accounting changes. First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. The adoption of this guidance is not expected to have any impact on the Company’s consolidated financial statements.

In June 2014, FASB issued ASU 2014-12,“Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires, among other things, that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have any impact on the Company’s consolidated financial statements.

Recent Regulatory Developments

Basel III Rules. On July 2, 2013, the Federal Reserve Board (“FRB”) approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Association. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. In July 2013, the Office of the Comptroller of the Currency (“OCC”), our primary bank regulator, also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The OCC’s rule is identical in substance to the final rules issued by the FRB.

The phase-in period for the final rules will begin for the Association on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. The Association is currently evaluating the provisions of the final rules and their expected impact on the Association.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(2) Securities Held to Maturity

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2014:
U.S. Treasury securities	$	7,070		13		—			7,083
Federal Home Loan Bank obligations		18,254		30		(81	)		18,203
U.S. Government enterprise and agency obligations		27,828		44		(126	)		27,746
Total	$	53,152		87		(207	)		53,032
December 31, 2013:
U.S. Treasury securities		7,125		13		—			7,138
Federal Home Loan Bank obligations		18,313		15		(111	)		18,217
U.S. Government enterprise and agency obligations		22,998		13		(179	)		22,832
Total	$	48,436		41		(290	)		48,187

The scheduled maturities of securities at June 30, 2014 were as follows (in thousands):

	Amortized Cost		Fair Value
Due in one year or less	$	7,043		7,060
Due from one year to five years		41,272		41,149
Due in more than five years		4,837		4,823
	$	53,152		53,032

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(2) Securities Held to Maturity, Continued

Securities with unrealized losses at June 30, 2014, 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
Federal Home Loan Bank obligations	$	—			—		(81	)		8,955
U.S. Government enterprise and agency obligations		(23	)		1,914		(103	)		16,995
Totals	$	(23	)		1,914		(184	)		25,950

The unrealized losses on fifteen investment securities held to maturity at June 30, 2014 were caused by market conditions. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and 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.

Securities with a carrying amount of approximately $2 million at June 30, 2014 and December 31, 2013 were pledged to the Housing Authority of the City of Plant City, Florida for deposit accounts held at the Company.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans

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

	June 30, 2014			December 31, 2013
Real estate mortgage loans:
One-to four-family residential	$	57,447			59,976
Commercial		23,237			23,900
Multi-family		5,756			3,363
Land and construction		7,423			6,514
Total real estate mortgage loans		93,863			93,753
Commercial loans		15,164			17,358
Consumer loans		1,379			2,277
Total loans		110,406			113,388
Deduct:
Deferred loan fees, net		(124	)		(147	)
Allowance for loan losses		(1,771	)		(1,718	)
Undisbursed loan proceeds		(116	)		(260	)
Loans, net	$	108,395			111,263

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 Mortgage Loans. Real estate mortgage loans are typically segmented into four classes: one-to four-family residential real estate, commercial real estate, multi-family real estate and land and construction.

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

Commercial real estate loans are secured by the subject property. Underwriting standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans, Continued

Multi-family real estate loans follow the same underwriting criteria as commercial real estate loans. 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.

Land and construction 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 real estate 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. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction 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.

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 available real estate, 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 interest rates and may be made on terms of up to five years. Risk is mitigated by the fact that the loans are of smaller individual amounts.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans, Continued

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

	Real Estate Mortgage Loans			Commercial			Consumer			Unallocated			Total
Three Months Ended June 30, 2014:
Beginning balance	$	1,441			207			9			64			1,721
Provision (credit) for loan losses		63			647			(6	)		(64	)		640
Charge-offs		—			(626	)		(1	)		—			(627	)
Recoveries		13			17			7			—			37
Ending balance	$	1,517			245			9			—			1,771
Six Months Ended June 30, 2014:
Beginning balance		1,417			208			10			83			1,718
Provision (credit) for loan losses		90			637			(4	)		(83	)		640
Charge-offs		(6	)		(626	)		(5	)		—			(637	)
Recoveries		16			26			8			—			50
Ending balance	$	1,517			245			9			—			1,771
Three Months Ended June 30, 2013:
Beginning balance		1,524			174			11			157			1,866
Provision (credit) for loan losses		(69	)		(26	)		—			95			—
Charge-offs		(2	)		—			—			—			(2	)
Recoveries		31			12			1			—			44
Ending balance	$	1,484			160			12			252			1,908
Six Months Ended June 30, 2013:
Beginning balance		1,520			189			13			554			2,276
Provision (credit) for loan losses		352			(49	)		(1	)		(302	)		—
Charge-offs		(452	)		—			(2	)		—			(454	)
Recoveries		64			20			2			—			86
Ending balance	$	1,484			160			12			252			1,908

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans, Continued

	Real Estate Mortgage Loans		Commercial		Consumer		Unallocated		Total
At June 30, 2014:
Individually evaluated for impairment:
Recorded investment	$	6,612		698		—		—		7,310
Balance in allowance for loan losses	$	354		—		—		—		354
Collectively evaluated for impairment:
Recorded investment	$	87,251		14,466		1,379		—		103,096
Balance in allowance for loan losses	$	1,163		245		9		—		1,417
At December 31, 2013:
Individually evaluated for impairment:
Recorded investment	$	7,035		703		—		—		7,738
Balance in allowance for loan losses	$	354		—		—		—		354
Collectively evaluated for impairment:
Recorded investment	$	86,718		16,655		2,277		—		105,650
Balance in allowance for loan losses	$	1,063		208		10		83		1,364

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

	Real Estate Mortgage Loans
	One-to Four-Family Residential		Commercial		Multi- Family		Land and Construction		Commercial		Consumer		Total
Credit Risk Profile by Internally Assigned Grade:
At June 30, 2014:
Grade:
Pass	$	54,813		19,948		5,612		7,001		14,131		1,379		102,884
Special mention		319		421		—		216		96		—		1,052
Substandard		2,315		2,868		144		206		937		—		6,470
Total	$	57,447		23,237		5,756		7,423		15,164		1,379		110,406
At December 31, 2013:
Grade:
Pass		56,691		20,512		3,193		6,080		15,881		2,277		104,634
Special mention		43		429		—		—		514		—		986
Substandard		3,242		2,959		170		434		963		—		7,768
Total	$	59,976		23,900		3,363		6,514		17,358		2,277		113,388

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.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans, Continued

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 over $25,000 are typically reviewed at least annually 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 Association’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

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

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

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

(continued)

14

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans, Continued

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

	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
At June 30, 2014:
Real estate mortgage loans:
One-to four-family	$	232		13		—		245		55,438		1,764		57,447
Commercial		1,252		—		—		1,252		21,574		411		23,237
Multi-family		—		—		—		—		5,612		144		5,756
Land and construction		216		—		—		216		7,017		190		7,423
Commercial		185		166		—		351		13,499		1,314		15,164
Consumer		1		3		—		4		1,375		—		1,379
Total	$	1,886		182		—		2,068		104,515		3,823		110,406
At December 31, 2013:
Real estate mortgage loans:
One-to four-family		333		15		—		348		57,342		2,286		59,976
Commercial		233		—		—		233		23,220		447		23,900
Multi-family		—		—		—		—		3,193		170		3,363
Land and construction		221		—		—		221		6,079		214		6,514
Commercial		181		272		—		453		16,202		703		17,358
Consumer		51		2		—		53		2,222		2		2,277
Total	$	1,019		289		—		1,308		108,258		3,822		113,388

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
At June 30, 2014:
Real estate mortgage loans:
One-to four-family residential	$	1,265			1,519		310		325		19		1,575		1,844		19
Commercial		411			972		4,371		4,371		335		4,782		5,343		335
Multi-family		144			277		—		—		—		144		277		—
Land and construction		111	��		179		—		—		—		111		179		—
Commercial		698			781		—		—		—		698		781		—
	$	2,629			3,728		4,681		4,696		354		7,310		8,424		354
At December 31, 2013:
Real estate mortgage loans:
One-to four-family residential		1,506			1,712		317		327		19		1,823		2,039		19
Commercial		446			983		4,418		4,418		335		4,864		5,401		335
Multi-family		170			294		—		—		—		170		294		—
Land and construction		178			288		—		—		—		178		288		—
Commercial		703			781		—		—		—		703		781		—
	$	3,003			4,058		4,735		4,745		354		7,738		8,803		354

(continued)

15

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans, Continued

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

	Three Months Ended June 30,
	2014						2013
	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	$	1,645		4		11		2,514		3		15
Commercial		4,796		64		76		4,940		69		79
Multi-family		148		—		5		265		—		—
Land and construction		111		—		—		181		1		2
Commercial		700		—		6		709		—		7
Total	$	7,400		68		98		8,609		73		103

	Six Months Ended June 30,
	2014						2013
	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	$	1,746		9		21		2,294		7		24
Commercial		4,816		155		156		4,950		162		164
Multi-family		154		—		10		287		—		—
Land and construction		112		—		1		156		2		4
Commercial		702		—		6		736		—		14
Total	$	7,530		164		194		8,423		171		206

During the three and six months ended June 30, 2014 and 2013, the Company had no loans restructured as troubled debt restructurings.

(continued)

16

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(4) Fair Value of Financial Instruments

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

	At June 30, 2014						At December 31, 2013
	Carrying Amount		Fair Value		Level		Carrying Amount		Fair Value		Level
Financial assets:
Cash and cash equivalents	$	11,223		11,223		1		11,504		11,504		1
Restricted cash		117,215		117,215		1		—		—		1
Time deposits with banks		7,078		7,078		1		9,528		9,528		1
Securities held to maturity		53,152		53,032		2		48,436		48,187		2
Loans		108,395		113,609		3		111,263		115,864		3
Federal Home Loan Bank stock		180		180		3		237		237		3
Accrued interest receivable		549		549		3		581		581		3
Financial liabilities:
Deposits		165,308		156,119		3		164,919		155,724		3
Off-balance-sheet financial instruments		—		—				—		—

(5) Fair Value Measurements

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 are as follows (in thousands):

	Fair Value		Level 1		Level 2		Level 3		Total Losses		Losses Recorded During the Period
At June 30, 2014:
Real estate mortgage loans:
One-to four-family residential	$	535		—		—		535		201		3
Commercial		411		—		—		411		517		—
Multi-family		144		—		—		144		128		—
Land and construction		86		—		—		86		106		—
Commercial		99		—		—		99		74		2
Total	$	1,275		—		—		1,275		1,026		5
At December 31, 2013:
Real estate mortgage loans:
One-to four-family residential		592		—		—		592		198		163
Commercial		446		—		—		446		517		—
Multi-family		170		—		—		170		128		128
Land and construction		151		—		—		151		106		76
Commercial		102		—		—		102		72		—
Total	$	1,461		—		—		1,461		1,021		367

(continued)

17

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(5) Fair Value Measurements, Continued

Other real estate owned is recorded at fair value less estimated costs to sell. Other real estate owned which is measured at fair value on a nonrecurring basis is summarized below (in thousands):

	At Period End										Losses
	Total		Level 1		Level 2		Level 3		Total Losses		Recorded During the Period
At June 30, 2014-
Other real estate owned	$	1,301		—		—		1,301		428		—
At December 31, 2013-
Other real estate owned	$	1,422		—		—		1,422		428		—

(6) Regulatory Matters

The Association is required to maintain certain minimum regulatory capital requirements. The Association is considered to be well-capitalized. The following is a summary at June 30, 2014 of the regulatory capital requirements and the Association’s capital on a percentage basis:

	Capital Ratio			Requirement
Tier I capital to total assets		8.04	%		5.00	%
Tier I capital to risk-weighted assets		23.53	%		6.00	%
Total capital to risk-weighted assets		24.78	%		10.00	%

(7) Adoption of Plan of Reorganization and Subsequent Stock Issuance

On December 18, 2013, the Board of Directors of the Association adopted the Plan of Conversion to convert the Association from a mutual form of organization to a fully stock form of organization with the establishment of a stock holding company (Sunshine Bancorp, Inc.), as parent of the Association. When the conversion and related stock offering are complete, the Association will change its name to Sunshine State Bank (the “Bank”), all of the capital stock of the Bank will be owned by the Holding Company and all of the common stock of Holding Company will be owned by stockholders.

The conversion will be accounted for as a change in corporate form with the historic basis of the Association’s assets, liabilities and retained income unchanged as a result.

At June 30, 2014, stock subscriptions received aggregated $117.2 million. Conversion costs are capitalized and will reduce the proceeds from the stock sold in the Conversion. At June 30, 2014, conversion costs amounted to $759,000.

(continued)

18

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(7) Adoption of Plan of Reorganization and Subsequent Stock Issuance, Continued

On July 14, 2014, the Conversion was completed and the Holding Company became the parent holding company for the Bank. A total of 4,232,000 shares of common stock were sold to depositors at $10.00 per share through which the Holding Company received gross offering proceeds of approximately $42.3 million, the remaining stock subscriptions were returned to the subscribers.

In connection with the Conversion, the Holding Company implemented an employee stock ownership plan (“ESOP”), to provide eligible employees the opportunity to own corporation stock. This plan is a tax-qualified retirement plan for the benefit of all bank employees. A total of 338,560 shares of the stock issued in the conversion were acquired by the ESOP.

As part of the Conversion, the Holding Company established a liquidation account in an amount equal to retained income of $26.6 million contained in the final prospectus. The liquidation account will be maintained for the benefits of eligible savings account holders who maintain deposit accounts in the Bank after conversion.

19

Item 2. Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto presented elsewhere in this report. For additional information, refer to the financial statements and footnotes for the year ended December 31, 2013 in the Company’s Registration Statement on Form S-1 (Registration Statement 333-194501) as declared effective by the SEC on May 14, 2014. 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Certain factors that could cause actual results to differ materially from expected results include, changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the business of the Company, and changes in the securities markets. 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

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 State Federal Savings and Loan Association (the “Association”). The Company was formed as part of the Association’s mutual-to-stock conversion. The conversion was completed as of July 14, 2014. Therefore, the financial and other information of the Association is included in this Quarterly Report. Collectively, the Association and Holding Company are referred to as the “Company.” The Association through its five banking offices provides a variety of retail community banking services to individuals and businesses primarily in Hillsborough and Pasco Counties, Florida. The Association’s deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation.

On July 14, 2014, the Conversion was completed and the Holding Company became the parent holding company for the Bank. A total of 4,232,000 shares of common stock were sold to depositors at $10.00 per share through which the Holding Company received gross offering proceeds of approximately $42.3 million, the remaining stock subscriptions were returned to the subscribers.

20

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

Total Assets. Total assets increased $117.3 million, or 60.4%, to $311.8 million at June 30, 2014 from $194.4 million at December 31, 2013. The increase was primarily the result of cash received from stock subscriptions in the amount of $117.2 million.

Cash and Cash Equivalents. Total cash and cash equivalents increased by $100,000, to $11.2 million at June 30, 2014 from $11.1 million at December 31, 2013.

Investment Securities. Investment securities classified as held to maturity increased $4.8 million, or 9.7%, to $53.2 million at June 30, 2014 from $48.4 million at December 31, 2013. During the six months ended June 30, 2014, the Company invested our excess liquidity in $4.8 million of U.S. government-sponsored enterprise and agency obligations and Federal Home Loan Bank obligations to increase yield.

Net Loans. Net loans decreased $2.9 million, or 2.6%, to $108.4 million at June 30, 2014 from $111.3 million at December 31, 2013. One- to four-family residential real estate loans decreased $2.6 million, to $57.4 million at June 30, 2014 from $60.0 million at December 31, 2013 as a result of management’s strategic decision to cease holding in portfolio new one- to four-family residential real estate loans. Commercial real estate loans decreased $700,000, to $23.2 million at June 30, 2014 from $23.9 million at December 31, 2013, due to normal amortization from loan repayments. Commercial business loans also decreased $2.2 million, or 12.6%, to $15.2 million at June 30, 2014 from $17.4 million at December 31, 2013 due to agricultural line of credit loans being paid down for the end of the seasonal production.

Deposits. Deposits increased $389,000, or 0.2%, to $165.3 million at June 30, 2014 from $164.9 million at December 31, 2013. Our core deposits (consisting of noninterest-bearing, NOW, money market and savings accounts) increased $2.6 million, to $123.3 million at June 30, 2014 from $120.7 million at December 31, 2013 as a result of improving economic conditions for businesses in our market area. Time deposit decreased $2.2 million, to $42.0 million at June 30, 2014 from $44.2 million at December 31, 2013 as a result of management’s decision to not match competitors’ higher rates in order to reduce interest expense.

Retained Income. Retained income decreased $286,000, to $26.3 million at June 30, 2014 as a result of net loss of $286,000 for the six months ended June 30, 2014.

21

Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the three and six months ended June 30, 2014 and 2013. No tax-equivalent yield adjustments have been made, as we had no tax-free interest-earning assets during the periods. All average balances are monthly 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.

	Three Months Ended June 30,
	2014							2013
	Average Balance		Interest and Dividends		Average Yield/ Rate (1)			Average Balance		Interest and Dividends		Average Yield/ Rate (1)
	(In thousands)
Interest-earning assets:
Loans	$	111,595	$	1,355		4.86	%	$	110,588	$	1,411		5.10	%
Securities		53,170		125		.94			52,018		100		.77
Other (5)		55,308		37		.27			24,634		31		.50
Total interest-earning assets		220,073		1,517		2.76			187,240		1,542		3.29
Noninterest-earning assets		16,350							15,129
Total assets	$	236,423						$	202,369
Interest-bearing liabilities:
NOW accounts		31,493		4		.05			30,101		4		.05
Money market accounts		38,114		18		.19			42,517		20		.19
Savings accounts		26,546		7		.11			25,727		6		.09
Time deposit		42,451		49		.46			46,269		66		.57
Total interest-bearing deposits		138,604		78		.23			144,614		96		.27
Noninterest-bearing liabilities		71,318							31,341
Total liabilities		209,922							175,955
Total retained income		26,501							26,414
Total liabilities and retained income	$	236,423						$	202,369
Net interest income			$	1,439						$	1,446
Net interest-rate spread (2)						2.53	%						3.02	%
Net interest-earning assets (3)	$	81,469						$	42,626
Net interest margin (4)						2.62	%						3.09	%
Average interest-earning assets to average interest-bearing liabilities		1.59							1.29

(1) Annualized.

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

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

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

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

22

	Six Months Ended June 30,
	2014							2013
	Average Balance		Interest and Dividends		Average Yield/ Rate (1)			Average Balance			Interest and Dividends		Average Yield/ Rate (1)
	(In thousands)
Interest-earning assets:
Loans	$	111,827	$	2,710		4.85	%	$	111,765		$	2,784		4.98	%
Securities		51,588		224		.87			49,055			193		.79
Other (5)		36,621		64		.35			24,756			60		.48
Total interest-earning assets		200,036		2,998		3.00			185,576			3,037		3.27
Noninterest-earning assets		16,559							15,076
Total assets	$	216,595						$	200,652
Interest-bearing liabilities:
NOW accounts		31,060		8		.05			31,007			8		.05
Money market accounts		38,027		35		.18			38,864			36		.19
Savings accounts		26,114		13		.10			25,479			12		.09
Time deposit		43,004		103		.48			46,814			140		.60
Total interest-bearing deposits		138,205		159		.23			142,164			196		.28
Noninterest-bearing liabilities		51,856							32,084
Total liabilities		190,061							174,248
Total retained income		26,534							26,404
Total liabilities and retained income	$	216,595						$	200,652
Net interest income			$	2,839							$	2,841
Net interest-rate spread (2)						2.77	%							2.99	%
Net interest-earning assets (3)	$	61,831						$	43,412
										��
Net interest margin (4)						2.84	%							3.06	%
Average interest-earning assets to average interest-bearing liabilities		1.48							1.31

(1) Annualized.

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

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

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

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

23

Comparison of Operating Results for the Three Months Ended June 30, 2014 and June 30, 2013

General. Net loss for the three months ended June 30, 2014 was $330,000, compared to net income of $53,000 for the three months ended June 30, 2013. The decrease in net income was primarily due to an increase in provision for loan losses.

Interest Income. Interest income decreased $25,000, or 1.6%, to $1.5 million for the three months ended June 30, 2014 primarily as a result of a $56,000 decrease in interest income on loans, partially offset by a $25,000 increase in interest on investment securities. The decrease in interest income resulted primarily from a lower average yield rate on interest-earning assets.

Interest income on loans decreased $56,000, or 4.0%, to $1.4 million for the three months ended June 30, 2014 as a result of a decrease in the average yield on loans. The average yield on loans decreased by twenty-four basis points to 4.86% for the three months ended June 30, 2014 from 5.10% for the three months ended June 30, 2013 due to pay-offs of higher-yielding existing loans and new loan originations being added in the current low interest rate environment.

Interest income on investment securities increased $25,000, or 25%, to $125,000 for the three months ended June 30, 2014 as a result of the increase in the average balance of investment securities. The average balance of investment securities held to maturity increased $1.2 million to $53.2 million for the three months ended June 30, 2014 from $52.0 million for the three months ended June 30, 2013 due to increased purchases of U.S. government-sponsored enterprise and agency obligations and Federal Home Loan Bank obligations during the first quarter of 2014. The average yield on investment securities held to maturity increased by seventeen basis point to .94% for the three months ended June 30, 2014 from .77% for the three months ended June 30, 2013 due to the purchase of higher yielding securities.

Interest Expense. Interest expense decreased $18,000, or 18.8%, to $78,000 for the three months ended June 30, 2014 from $96,000 for the three months ended June 30, 2013 due to decreases in the average balance of interest-bearing deposits and the average cost of interest-bearing deposits. The average balance of interest-bearing deposits decreased by $6.0 million during the three months ended June 30, 2014 to $138.6 million from $144.6 million for the three months ended June 30 2013. The average cost of deposits decreased by four basis points to 0.23% for the three months ended June 30, 2014 from .27% for the three months ended June 30, 2013 reflecting the lower interest rate environment.

24

Net Interest Income. Net interest income decreased $7,000, to $1.4 million for the three months ended June 30, 2014. The decrease in net interest income was primarily the result of a twenty-four basis point decline in the average yield on our loan portfolio, partially offset by a seventeen basis point increase in securities and a four basis point decrease in interest-bearing deposits. Our net interest-rate spread decreased forty-nine basis points to 2.53% for the three months ended June 30, 2014 from 3.02% for the three months ended June 30, 2013. Our net interest margin decreased forty-seven basis points to 2.62% for the three months ended June 30, 2014 from 3.09% for the three months ended June 30, 2013.

Provision for Loan Losses. We recorded a provision for loan losses of $640,000 for the three months ended June 30, 2014 compared to no provision for the three months ended June 30, 2013. Net charge-offs for the three months ended June 30, 2014 were $590,000 compared to a net recoveries of $42,000 for the three months ended June 30, 2013. Nonperforming loans to total loans at June 30, 2014 were 3.46% compared to 3.37% at December 31, 2013. The change was primarily due to the charge-off of a large commercial loan relationship in the amount of $624,000. The increase in provision for loan losses reflects historical and expected future loan losses, as well as the change in the mix of loans.

Management considers the allowance for loan losses at June 30, 2014 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income increased $27,000, or 10.8%, to $276,000 for the three months ended June 30, 2014 from $249,000 for the three months ended June 30, 2013. The increase was primarily related to a $23,000 gain on sale of other real estate owned and a $10,000 increase in fees and service charges partially offset by a $10,000 decrease in other noninterest income for the three months ended June 30, 2014.

Noninterest Expense. Noninterest expense increased $39,000, or 2.4%, to $1.6 million for the three months ended June 30, 2014. The increase primarily reflected a $19,000 increase in professional services and a $18,000 increase in other expense.

Income Taxes (Benefit). Income tax benefit were $237,000 or 42.39% of loss before income taxes benefit for the three months ended June 30, 2014 compared to an income tax expense of $39,000 or 41.80% of income before taxes for the three months ended June 30, 2013.

25

Comparison of Operating Results for the Six Months Ended June 30, 2014 and June 30, 2013

General. Net loss for the six months ended June 30, 2014 was $286,000, compared to net income of $42,000 for the six months ended June 30, 2013. The decrease in net income was primarily due to an increase in provision for loan losses.

Interest Income. Interest income decreased $39,000, or 1.3%, to $3.0 million for the six months ended June 30, 2014 primarily as a result of a $74,000 decrease in interest income on loans, partially offset by a $31,000 increase in interest on investment securities. The decrease in interest income resulted primarily from a lower average yield rate on interest-earning assets.

Interest income on loans decreased $74,000, or 2.7%, to $2.7 million for the six months ended June 30, 2014 as a result of decreases in the average yield on loans. The average yield on loans decreased by thirteen basis points to 4.85% for the six months ended June 30, 2014 from 4.98% for the six months ended June 30, 2013 due to pay-offs of higher-yielding existing loans and new loan originations being added in the current low interest rate environment.

Interest income on investment securities increased $31,000, or 16.1%, to $224,000 for the six months ended June 30, 2014 as a result of the increase in the average balance of investment securities. The average balance of investment securities held to maturity increased $2.5 million to $51.6 million for the six months ended June 30, 2014 from $49.1 million for the six months ended June 30, 2013 due to increased purchases of U.S. government-sponsored enterprise and agency obligations and Federal Home Loan Bank obligations during the first quarter of 2014. The average yield on investment securities held to maturity increased by eight basis point to .87% for the six months ended June 30, 2014 from .79% for the six months ended June 30, 2013 due to the purchase of higher yield securities.

Interest Expense. Interest expense decreased $37,000, or 18.9%, to $159,000 for the six months ended June 30, 2014 from $196,000 for the six months ended June 30, 2013 due to decreases in the average balance of interest-bearing deposits and the average cost of interest-bearing deposits. The average balance of interest-bearing deposits decreased by $4.0 million during the six months ended June 30, 2014 to $138.2 million from $142.2 million during the six months ended June 30, 2013. The average cost of deposits decreased by five basis points to 0.23% for the six months ended June 30, 2014 from .28% for the six months ended June 30, 2013 reflecting the lower interest rate environment.

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Net Interest Income. Net interest income decreased $2,000, to $2.8 million for the six months ended June 30, 2014. The decrease in net interest income was primarily the result of a decrease in interest expense due primarily to the downward repricing of our time deposit, which was less than the decrease in our interest income. Our net interest rate spread decreased twenty-two basis points to 2.77% for the six months ended June 30, 2014 from 2.99% for the six months ended June 30, 2013. Our net interest margin decreased twenty-two basis points to 2.84% for the six months ended June 30, 2014 from 3.06% for the six months ended June 30, 2013.

Provision for Loan Losses. We recorded a provision for loan losses of $640,000 for the six months ended June 30, 2014 compared to no provision for the six months ended June 30, 2013. Net charge-offs for the six months ended June 30, 2014 were $587,000 compared to a net charge-offs of $368,000 for the six months ended June 30, 2013. Nonperforming loans to total loans at June 30, 2014 were 3.46% compared to 3.37% at December 31, 2013. The change was primarily due to the charge-off of a large commercial loan relationship in the amount of $624,000. The increase in provision for loan losses reflects historical and expected future loan losses, as well as the change in the mix of loans.

Management considers the allowance for loan losses at June 30, 2014 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income increased $54,000, or 11.7%, to $517,000 for the six months ended June 30, 2014 from $463,000 for the six months ended June 30, 2013. The increase was primarily related to a $10,000 increase in other noninterest income, a $18,000 increase in fees and service charges and a $27,000 gain on sale of other real estate owned.

Noninterest Expense. Noninterest expense increased $12,000, to $3.2 million for the six months ended June 30, 2014. The increase primarily reflected a $22,000 increase in professional services and a $31,000 increase in other expense during the six months ended June 30, 2014. These increases were partially offset by a $27,000 decrease in salaries and employee benefits during the six months ended June 30, 2014. Salaries and employee benefits expense decreased primarily due to a reduction in deferred compensation benefits and salary for our Chief Executive Officer and a reduction in the number of full time equivalent employees, partially offset by a general increase in wages.

Income Taxes (Benefit). Income tax benefit were $235,000 or 45.10% of loss before income tax benefit for the six months ended June 30, 2014 compared to an income tax expense of $37,000 or 46.84% of income before income taxes for the six months ended June 30, 2013.

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Asset Quality

Nonperforming Assets. We define nonperforming loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due and nonaccruing troubled debt restructurings. Nonperforming assets, including nonperforming loans and other real estate owned, totaled $5.1 million, or 1.64% of total assets, at June 30, 2014 and $5.2 million, or 2.70% of total assets, at December 31, 2013. The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated. We had no accruing loans past due 90 days or more at June 30, 2014 and at December 31, 2013.

	At June 30,			At December 31,
	2014			2013
	(Dollars in thousands)
Nonaccrual loans:
Real estate mortgage loans:
One- to four-family residential	$	1,637		$	2,154
Land and construction		116			140
Commercial business loans		1,215			602
Consumer loans		—			2
Total non-accrual loans		2,968			2,898
Nonaccruing troubled debt restructured loans:
Real estate mortgage loans:
One- to four-family residential		127			132
Commercial		411			447
Multi-family		144			170
Land and construction		74			74
Commercial business loans		99			101
Total nonaccruing troubled debt restructured loans		855			924
Total nonperforming loans		3,823			3,822
Other real estate owned:
One- to four-family		513			634
Land and construction		788			788
Total other real estate owned		1,301			1,422
Total nonperforming assets	$	5,124		$	5,244
Total accruing troubled debt restructured loans	$	4,554		$	4,602
Total nonperforming loans to total loans		3.46	%		3.37	%
Total nonperforming assets to total assets		1.64	%		2.70	%

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Allowance at beginning of period	$	1,721			1,866			1,718			2,276
Provision for loan losses		640			—			640			—
Charge-offs:
Real estate mortgage loans:
One- to four-family residential		—			(2	)		(6	)		(185	)
Commercial		—			—			—			—
Multi-family		—			—			—			(128	)
Land and construction		—			—			—			(139	)
Commercial business loans		(626	)		—			(626	)		—
Consumer loans		(1	)		—			(5	)		(2	)
Total charge-offs		(627	)		(2	)		(637	)		(454	)
Recoveries:
Real estate mortgage loans:
One- to four-family residential		9			8			9			13
Commercial		3			20			6			39
Multi-family		1			—			1			—
Land and construction		—			3			—			12
Commercial business loans		17			12			26			20
Consumer loans		7			1			8			2
Total recoveries		37			44			50			86
Net charge-offs		(590	)		42			(587	)		(368	)
Allowance at end of period	$	1,771			1,908			1,771			1,908
Allowance to nonperforming loans		46.32	%		41.37	%		46.32	%		41.37	%
Allowance to total loans outstanding at the end of the period		1.60	%		1.73	%		1.60	%		1.73	%
Net charge-offs to average loans outstanding during the period (annualized)		(2.11	)%		.15	%		(1.05	)%		(.66	)%

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At June 30, 2014, we had the capacity to borrow approximately $38.9 million from the Federal Home Loan Bank of Atlanta. We historically have not used Federal Home Loan Bank advances to fund our operations, and at June 30, 2014 and December 31, 2013, we had no outstanding advances from the Federal Home Loan Bank of Atlanta. We also have lines of credit at two financial institutions that would allow us to borrow up to $8.7 million and $6.0 million, respectively at June 30, 2014. Neither credit line was drawn upon at June 30, 2014.

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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.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in the six months ended June 30, 2014 by operating activities was $337,000. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $16,000. During the six months ended June 30, 2014, we purchased $4.8 million in securities held to maturity. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, was $490,000 for the six months ended June 30, 2014.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

At June 30, 2014, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 8.04% of adjusted total assets, which is above the required level of 5.00%; and total risk-based capital of 24.78% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Association was categorized as well-capitalized at June 30, 2014. Management is not aware of any conditions or events since the most recent notification that would change our category.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At June 30, 2014, we had outstanding commitments to originate loans of $3.5 million, unused lines of credit totaling $9.0 million, and stand-by letters of credit of $714,000. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposit that are scheduled to mature in less than one year from June 30, 2014 totaled $31.1 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

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

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not required for smaller reporting companies.

Item 4. Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) as of June 30, 2014, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures in effect as of June 30, 2014, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not required for smaller reporting companies.

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

On March 12, 2014, Sunshine Bancorp, Inc. filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in connection with the mutual to stock conversion of Sunshine State Federal Savings and Loan Association and the related offering of common stock by Sunshine Bancorp, Inc. The Registration Statement (File No. 333-194501) was declared effective by the Securities and Exchange Commission on May 14, 2014. Sunshine Bancorp, Inc. registered 4,232,000 shares of common stock, par value $0.01 per share, pursuant to the Registration Statement for an aggregate offering price of $42.3 million. The stock offering commenced on May 24, 2014, and ended on July 14, 2014.

Keefe, Bruyette & Woods, Inc. (“KBW”) was engaged to assist in the marketing of the common stock and records management services. For its services, KBW received a fee of $395,000. KBW was also reimbursed $111,000 for its reasonable out-of-pocket expenses, inclusive of its legal fees and expenses.

The stock offering resulted in gross proceeds of $42.3 million, through the sale of 4.2 million shares of common stock at a price of $10.00 per share. Expenses related to the offering were approximately $1.5 million, including $506,000 paid to KBW. Net proceeds of the offering were approximately $40.8 million.

Sunshine Bancorp, Inc. contributed approximately $20.4 million of the net proceeds of the offering to the Bank. In addition, $3.4 million of the net proceeds were used to fund the loan to the employee stock ownership plan and approximately $17.0 million of the net proceeds were retained by Sunshine Bancorp, Inc. The net proceeds contributed to the Bank have been invested in cash and short term instruments. Over the long term, the bank will attempt to use the proceeds to increase loan production. The net proceeds retained by Sunshine Bancorp, Inc. have been deposited with the Bank.

Item 3. Defaults Upon Senior Securities

Nothing to report.

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Item 4. Mine Safety Disclosures

Nothing to report.

Item 5. Other Information

Nothing to report.

Item 6. Exhibits

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

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SUNSHINE BANCORP, INC.

SIGNATURES

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

	SUNSHINE BANCORP, INC.
Date: August 13, 2014	By:	/s/ J. Floyd Hall
		J. Floyd Hall
		President and Chief Executive Officer
		(Duly Authorized Officer)
Date: August 13, 2014	By:	/s/ Vickie J. Houllis
		Vickie J. Houllis
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

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