Sunshine Bancorp (SBCP) 10-Q 2014 Q3 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 ended September 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 November 13, 2014, there were 4,232,000 issued and outstanding shares of the issuer’s common stock.

SUNSHINE BANCORP, INC. AND SUBSIDIARY

September 30, 2014 Form 10-Q

Index

		Page Number
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013		2
	Condensed Consolidated Statements of Operations for the Three- and Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)		3
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows For the Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)		5
	Notes to Condensed Consolidated Financial Statements (Unaudited)		7-21
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22-32
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		33
Item 4.	Controls and Procedures		33
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		34
Item 1A.	Risk Factors		34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3.	Defaults Upon Senior Securities		34
Item 4.	Mine Safety Disclosures		34
Item 5.	Other Information		34
Item 6.	Exhibits		34
SIGNATURES			35

SUNSHINE BANCORP, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands, except per share amounts)

	At September 30, 2014			At December 31, 2013
	(Unaudited)
Assets
Cash and due from banks	$	8,125			2,391
Interest-bearing deposits with banks		5,952			7,545
Federal funds sold		1,068			1,118
Cash and cash equivalents		15,145			11,054
Time deposits with banks		6,860			9,528
Securities held to maturity (fair value of $75,781 and $48,187)		76,160			48,436
Loans, net of allowance for loan losses of $1,796 and $1,718		110,936			111,263
Premises and equipment, net		5,909			6,128
Federal Home Loan Bank stock, at cost		180			237
Cash surrender value of bank-owned life insurance		4,179			4,089
Accrued interest receivable		627			581
Other real estate owned		1,098			1,422
Other assets		1,758			1,701
Total assets	$	222,852			194,439
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing accounts		26,349			29,123
NOW accounts		29,357			30,129
Money-market deposit accounts		35,701			35,713
Savings accounts		26,318			25,724
Time deposits		37,964			44,230
Total deposits		155,689			164,919
Official checks		683			392
Advances by borrowers for taxes and insurance		291			141
Other liabilities		2,485			2,435
Total liabilities		159,148			167,887
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 authorized, none issued and outstanding		—			—
Common stock, $0.01 par value, 50,000,000 shares authorized, 4,232,000 shares issued and outstanding at September 30, 2014		42			—
Additional paid in capital		40,743			—
Retained income		26,305			26,552
Unearned Employee Stock Ownership Plan shares		(3,386	)		—
Total stockholders’ equity		63,704			26,552
Total liabilities and Stockholders’ Equity	$	222,852			194,439

See accompanying Notes to Condensed Consolidated Financial Statements

2

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
Interest income:
Loans Securities	$	1,337 231			1,415 114		4,047 455			4,199 307
Other		33			30		97			90
Total interest income		1,601			1,559		4,599			4,596
Interest expense-deposit accounts		71			92		230			288
Net interest income		1,530			1,467		4,369			4,308
Provision for loan losses		20			—		660			—
Net interest income after provision for loan losses		1,510			1,467		3,709			4,308
Noninterest income:
Fees and service charges on deposit accounts		162			169		496			485
Fees and charges on loans		12			24		51			59
Gain on sale of other real estate owned		—			—		27			3
Income from bank-owned life insurance		30			30		90			92
Other		44			3		101			50
Total noninterest income		248			226		765			689
Noninterest expenses:
Salaries and employee benefits		879			850		2,591			2,589
Occupancy and equipment		252			254		739			743
Data and item processing services		111			110		346			345
Professional fees		125			56		271			180
Other real estate owned		13			8		39			44
Advertising and promotion		7			15		39			54
Stationery and supplies		19			16		65			57
Deposit insurance and general insurance		72			63		196			187
Other		242			199		671			597
Total noninterest expenses		1,720			1,571		4,957			4,796
Income (loss) before income (benefit) taxes		38			122		(483	)		201
Income (benefit) taxes		(1	)		51		(236	)		88
Net income (loss)	$	39			71		(247	)		113
Basic income (loss) per common share		N/A			N/A		N/A			N/A
Diluted income (loss) per common share		N/A			N/A		N/A			N/A

See accompanying Notes to Condensed Consolidated Financial Statements.

3

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

Nine Months Ended September 30, 2014 and 2013

	Common Stock				Additional Paid In Capital		Retained Income			Unearned ESOP Shares			Total Stockholder’s Equity
	Shares		Amount
Balance, December 31, 2012		—	$	—		—		26,411			—			26,411
Net income (unaudited)		—		—		—		113			—			113
Balance, September 30, 2013		—	$	—		—		26,524			—			26,524
Balance, December 31, 2013		—		—		—		26,552			—			26,552
Net loss (unaudited)		—		—		—		(247	)		—			(247	)
Proceeds from issuance of common stock, net of offering costs of $1,536 (unaudited)		3,893,440		39		37,360		—			—			37,399
Issuance of common stock for Employee Stock Ownership Plan (unaudited)		338,560		3		3,383		—			(3,386	)		—
Balance, September 30, 2014 (unaudited)		4,232,000	$	42		40,743		26,305			(3,386	)		63,704

See accompanying Notes to Condensed Consolidated Financial Statements.

4

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net (loss) income	$	(247	)		113
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		292			288
Provisions for loan losses		660			—
Amortization of premiums and discounts on securities		191			216
Amortization of deferred loan fees and costs, net		(18	)		(18	)
Income from bank-owned life insurance, net		(90	)		(92	)
Gain on sale of other real estate owned		(27	)		(3	)
Write-down of other real estate owned		—			14
(Increase) decrease in accrued interest receivable		(46	)		66
(Increase) decrease in other assets		(57	)		269
Increase (decrease) in official checks		291			(810	)
Increase in other liabilities		50			385
Net cash provided by operating activities		999			428
Cash flows from investing activities:
Purchase of time deposits with banks		—			(3,675	)
Maturities of time deposit with banks		2,668			1,715
Principal pay-downs of securities held to maturity		358			—
Purchases of securities held to maturity		(30,273	)		(16,012	)
Maturities of securities held to maturity		2,000			10,000
Net (increase) decrease in loans		(315	)		4,429
Proceeds from sale of other real estate owned		351			23
Purchases of premises and equipment, net		(73	)		(313	)
Redemption of Federal Home Loan Bank stock		57			65
Net cash used in investing activities		(25,227	)		(3,768	)
Cash flows from financing activities:
Net decrease in deposits		(9,230	)		(1,835	)
Net increase in advances by borrowers for taxes and insurance		150			136
Net proceeds from stock issuance		37,399			—
Net cash provided by (used in) by financing activities		28,319			(1,699	)
Increase (decrease) in cash and cash equivalents		4,091			(5,039	)
Cash and cash equivalents at beginning of period		11,054			12,301
Cash and cash equivalents at end of period	$	15,145			7,262
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	20			—
Interest	$	230			288
Noncash transaction-Transfer from other real estate owned to loans	$	—			168

See accompanying Notes to Condensed Consolidated Financial Statements

5

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 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.” The accounting and reporting policies conform to U.S. generally accepted accounting principles (GAAP) and general practices within the banking industry and are described in note 1 to the financial statements in 2013, as updated by the information in this Form 10-Q

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 and the employee stock ownership plan (“ESOP”) at $10.00 per share through which the Holding Company received gross offering proceeds of approximately $42.3 million. The net proceeds received were $37.4 million after offering costs and the allocation of unearned ESOP shares. The Holding Company owns all the outstanding shares of common stock of the bank.

In connection with the Conversion, the Holding Company implemented an ESOP, to provide eligible employees the opportunity to own the Company’s 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.

The Bank 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 Bank’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.

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 benefit of eligible account holders who maintain deposit accounts in the Bank after the conversion.

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 2013 financial statements. Financial information prior to July 14, 2014 is of the Bank only.

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, 2014, and the results of operations for the three and nine month periods ended September 30, 2014 and 2013. The results of operations for the three and nine months ended September 30, 2014, are not necessarily indicative of the results to be expected for the full year or any other period.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

Income Per Share.The conversion was complete on July 14, 2014. Income per share will be computed starting on October 1, 2014, as if conversion from a mutual holding company to a capital stock holding company occurred on that date.

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 Bank’s financial statements.

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.

(continued)

8

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 Bank. 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 Holding Company and the Bank on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. The Bank is currently evaluating the provisions of the final rules and their expected impact on the Bank.

(continued)

9

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(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
September 30, 2014:
U.S. Treasury securities	$	5,042		11		—			5,053
Federal Home Loan Bank obligations		23,302		18		(131	)		23,189
U.S. Government enterprise and agency obligations		29,794		24		(134	)		29,684
Mortgage-backed securities		18,022		—		(167	)		17,855
Total	$	76,160		53		(432	)		75,781
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 September 30, 2014 were as follows (in thousands):

	Amortized Cost		Fair Value
Due in one year or less	$	5,021		5,032
Due from one year to five years		43,196		43,049
Due from five years to ten years		9,921		9,845
Mortgage-backed securities		18,022		17,855
	$	76,160		75,781

(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 September 30, 2014 and December 31, 2013, 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
September 30, 2014:
Federal Home Loan Bank obligations	$	(63	)		5,015		(68	)		6,966
U.S. Government enterprise and agency obligations		(39	)		6,766		(95	)		15,000
Mortgage-backed securities		(167	)		17,855		—			—
Totals	$	(269	)		29,636		(163	)		21,966

	Less Than Twelve Months					More than Twelve Months
	Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value
December 31, 2013:
Federal Home Loan Bank obligations	$	(111	)		9,948		—			—
U.S. Government enterprise and agency obligations		(136	)		16,977		(43	)		1,965
Totals	$	(247	)		26,925		(43	)		1,965

The unrealized losses on twenty-six investment securities held to maturity at September 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 $2.0 million at September 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):

	September 30,			December 31,
	2014			2013
Real estate mortgage loans:
One-to four-family residential	$	55,858			59,976
Commercial		22,740			23,900
Multi-family		9,329			3,363
Land and construction		7,518			6,514
Total real estate mortgage loans		95,445			93,753
Commercial loans		16,340			17,358
Consumer loans		1,312			2,277
Total loans		113,097			113,388
Deduct:
Deferred loan fees, net		(136	)		(147	)
Allowance for loan losses		(1,796	)		(1,718	)
Undisbursed loan proceeds		(229	)		(260	)
Loans, net	$	110,936			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, commercial, multi-family 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 Loans			Consumer Loans			Unallocated			Total
Three Months Ended September 30, 2014:
Beginning balance	$	1,517			245			9			—			1,771
(Credit) provision for loan losses		(6	)		24			2			—			20
Charge-offs		(14	)		—			(4	)		—			(18	)
Recoveries		3			19			1			—			23
Ending balance	$	1,500			288			8			—			1,796
Three Months Ended September 30, 2013:
Beginning balance	$	1,484			160			12			252			1,908
Provision (credit) for loan losses		141			28			(1	)		(168	)		—
Charge-offs		(212	)		—			—			—			(212	)
Recoveries		23			6			—			—			29
Ending balance	$	1,436			194			11			84			1,725
Nine Months Ended September 30, 2014:
Beginning balance		1,417			208			10			83			1,718
Provision (credit) for loan losses		84			661			(2	)		(83	)		660
Charge-offs		(20	)		(626	)		(9	)		—			(655	)
Recoveries		19			45			9			—			73
Ending balance	$	1,500			288			8			—			1,796
Nine Months Ended September 30, 2013:
Beginning balance		1,520			189			13			554			2,276
Provision (credit) for loan losses		493			(21	)		(2	)		(470	)		—
Charge-offs		(664	)		—			(2	)		—			(666	)
Recoveries		87			26			2			—			115
Ending balance	$	1,436			194			11			84			1,725

(continued)

14

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans, Continued

	Real Estate Mortgage Loans		Commercial Loans		Consumer Loans		Unallocated		Total
At September 30, 2014:
Individually evaluated for impairment:
Recorded investment	$	6,803		785		—		—		7,588
Balance in allowance for loan losses	$	354		9		—		—		363
Collectively evaluated for impairment:
Recorded investment	$	88,642		15,555		1,312		—		105,509
Balance in allowance for loan losses	$	1,146		279		8		—		1,433
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 Loans		Consumer Loans		Total
Credit Risk Profile by Internally Assigned Grade:
At September 30, 2014:
Grade:
Pass	$	53,146		19,508		9,199		7,101		15,337		1,312		105,603
Special mention		317		417		—		214		95		—		1,043
Substandard		2,395		2,815		130		203		908		—		6,451
Total	$	55,858		22,740		9,329		7,518		16,340		1,312		113,097
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)

15

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 Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

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

Doubtful – A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. At September 30, 2014 and December 31, 2013, the Company had no loans listed as doubtful in its loan credit quality.

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 asset even though partial recovery may be affected in the future. At September 30, 2014 and December 31, 2013, the Company had no loans listed as loss in its loan credit quality.

(continued)

16

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 September 30, 2014:
Real estate mortgage loans:
One-to four-family residential	$	24		—		—		24		53,719		2,115		55,858
Commercial		—		—		—		—		21,338		1,402		22,740
Multi-family		—		—		—		—		9,199		130		9,329
Land and construction		—		—		—		—		7,331		187		7,518
Commercial loans		368		—		—		368		15,091		881		16,340
Consumer loans		2		—		—		2		1,310		—		1,312
Total	$	394		—		—		394		107,988		4,715		113,097
At December 31, 2013:
Real estate mortgage loans:
One-to four-family residential		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 loans		181		272		—		453		16,202		703		17,358
Consumer loans		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 September 30, 2014:
Real estate mortgage loans:
One-to four-family residential	$	1,514		1,778		307		323		19		1,821		2,101		19
Commercial		394		966		4,347		4,347		335		4,741		5,313		335
Multi-family		130		269		—		—		—		130		269		—
Land and construction		111		177		—		—		—		111		177		—
Commercial loans		676		775		109		110		9		785		885		9
	$	2,825		3,965		4,763		4,780		363		7,588		8,745		363
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 loans		703		781		—		—		—		703		781		—
	$	3,003		4,058		4,735		4,745		354		7,738		8,803		354

(continued)

17

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 September 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	$	1,636		22		32		2,568		60		69
Commercial		4,755		67		80		4,918		70		81
Multi-family		134		—		5		177		—		7
Land and construction		111		—		1		178		—		—
Commercial loans		720		—		16		708		—		3
Total	$	7,356		89		134		8,549		130		160
	Nine Months Ended September 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	$	1,653		31		53		2,367		67		93
Commercial		4,796		222		236		4,939		232		245
Multi-family		147		—		15		250		—		7
Land and construction		112		—		2		164		2		4
Commercial loans		708		—		22		708		—		17
Total	$	7,416		253		328		8,428		301		366

(continued)

18

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Loans, Continued

Troubled Debt Restructurings (TDRs) entered into during the three and nine months ended September 30, 2014 and 2013 are as follows (dollars in thousands):

	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
For the Three Months Ended September 30, 2014:
Commercial loans-
Modified interest rate and amortization		6	$	740		116
For the Three Months Ended September 30, 2013:
Real estate mortgage loans-
One-to four-family residential loans-
Modified interest rate and amortization		1	$	144		144
Commercial loans-
Modified interest rate and amortization		1		105		105
Total		2	$	249		249
For the Nine Months Ended September 30, 2014:
Commercial loans-
Modified interest rate and amortization		6	$	740		116
For the Nine Months Ended September 30, 2013:
Real estate mortgage loans-
One-to four-family residential loans-
Modified interest rate and amortization		1	$	144		144
Commercial loans-
Modified interest rate and amortization		1		105		105
Total		2	$	249		249

The allowance for loan losses on all loans that have been restructured and are considered TDRs is included in the Bank’s specific allowance for loan losses. The specific allowance for loan losses is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDRs that have subsequently defaulted are considered collateral-dependent.

During the three and nine months ended September 30, 2014 and 2013, the Company had no loans restructured as troubled debt restructurings that subsequently defaulted that had been modified in the previous twelve month period.

(continued)

19

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 September 30, 2014						At December 31, 2013
	Carrying		Fair				Carrying		Fair
	Amount		Value		Level		Amount		Value		Level
Financial assets:
Cash and cash equivalents	$	15,145		15,145		1		11,504		11,504		1
Time deposits with banks		6,860		6,860		1		9,528		9,528		1
Securities held to maturity		76,160		75,781		2		48,436		48,187		2
Loans, net		110,936		115,335		3		111,263		115,864		3
Federal Home Loan Bank stock		180		180		3		237		237		3
Accrued interest receivable		627		627		3		581		581		3
Financial liabilities:
Deposits		155,689		145,178		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 September 30, 2014:
Real estate mortgage loans:
One-to four-family residential	$	532		—		—		532		242		15
Commercial		394		—		—		394		517		—
Multi-family		130		—		—		130		128		—
Land and construction		86		—		—		86		63		2
Commercial		97		—		—		97		74		2
Total	$	1,239		—		—		1,239		1,024		19
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)

20

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 September 30, 2014-
Other real estate owned	$	1,098		—		1,098		428		—		—
At December 31, 2013-
Other real estate owned	$	1,422		—		1,422		428		—		—

(6) Employee Stock Ownership Plan

Effective July 14, 2014, the Holding Company established an ESOP which acquired 8% of the total number of shares of common stock sold during the Company’s initial public offering. A total of 338,560 shares were acquired 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, 2014, no shares held by the Employee Stock Ownership Plan Trust have been released.

(7) Regulatory Matters

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

	Capital Ratio			Requirement
Tier I capital to total assets		19.00	%		5.00	%
Tier I capital to risk-weighted assets		37.26	%		6.00	%
Total capital to risk-weighted assets		38.52	%		10.00	%

21

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.

Recent Events

The Holding Company was formed on March 7, 2014 to serve as the savings and loan holding company for the Bank. The Holding Company was formed as part of the Bank’s mutual-to-stock conversion. 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 and the ESOP for $10.00 per share through which the Holding Company received gross offering proceeds of approximately $42.3 million. The net proceeds received were $37.4 million after offering costs and the allocation of unearned ESOP shares. The Holding Company owns all the outstanding shares of common stock of the Bank.

On October 14, 2014, the Company has hired Andrew S. Samuel as the President and Chief Executive Officer and a Director of the Company and Bank. Mr. Samuel will succeed J. Floyd Hall, who has led the Company since 1986 as President and Chief Executive Officer. Mr. Hall will remain on the Board of Directors.

On October 23, 2014, the Company appointed Bruce. R. Carr as Executive Vice President and Chief Lending Officer of the Bank. Mr. Carr will be responsible for leading, managing, and directing the day-to-day operations and expansion of the credit team.

22

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

Total Assets.Total assets increased $28.5 million, or 14.6%, to $222.9 million at September 30, 2014 from $194.4 million at December 31, 2013. The increase in total assets was primarily the result of the net cash received from the recent stock offering in which a portion of the proceeds were used to purchase mortgage back securities and other investment securities held to maturity.

Cash and Cash Equivalents.Total cash and cash equivalents increased by $4.0 million, to $15.1 million at September 30, 2014 from $11.1 million at December 31, 2013. This increase in cash was a result of the Federal Reserve regulation to maintain higher cash reserves due to the increase in deposit funds held for stock subscriptions at June 30, 2014.

Investment Securities.Investment securities classified as held to maturity increased $27.8 million, or 57.2%, to $76.2 million at September 30, 2014 from $48.4 million at December 31, 2013. During the nine months ended September 30, 2014, the Company invested cash received from the stock offering and excess liquidity in $18.0 million of Mortgage-backed securities and $11.8 million in other investment securities to increase the average yield of our interest-earning assets.

Net Loans.Net loans decreased $400,000 to $110.9 million at September 30, 2014 from $111.3 million at December 31, 2013. One- to four-family residential real estate loans decreased $4.1 million, to $55.9 million at September 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 $1.2 million, to $22.7 million at September 30, 2014 from $23.9 million at December 31, 2013 and commercial business loans decreased $1.1 million, to $16.3 million at September 30, 2014 from $17.4 million at December 31, 2013 due to loan repayments and pay-offs exceeding new loan originations. Multi-family mortgage loans increased $5.9 million, to $9.3 million at September 30, 2014 from $3.4 million at December 31, 2013 due to new loan originations of $6.2 million.

Deposits.Deposits decreased $9.2 million, or 5.6%, to $155.7 million at September 30, 2014 from $164.9 million at December 31, 2013. Noninterest-bearing accounts decreased $2.8 million to $26.3 million at September 30, 2014 from $29.1 million at December 31, 2013 due to customers having used their deposits to purchase stock in the conversion and the seasonal outflow of deposits for agricultural customers to being planting crops. Time deposits decreased $6.2 million, to $38.0 million at September 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.

Stockholder’s Equity.Total stockholders’ equity increased $37.1 million, to $63.7 million at September 30, 2014 as a result of the recent conversion to a stock company. This was partially offset by the establishment of an employee stock ownership plan of $3.4 million. No shares of the ESOP have been allocated as of September 30, 2014. Retained Income decreased by $247,000 due to a net loss for the nine months ended September 30, 2014.

23

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, 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 September 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	$	112,054	$	1,337		4.77	%	$	110,994	$	1,415		5.10	%
Securities		77,699		231		1.19			52,519		114		.87
Other (2)		15,490		33		.85			17,614		30		.68
Total interest-earning assets		205,243		1,601		3.12			181,127		1,559		3.44
Noninterest-earning assets		20,328							14,227
Total assets	$	225,571						$	195,354
Interest-bearing liabilities:
NOW accounts		29,887		3		.04			28,825		4		.06
Money market accounts		35,663		17		.19			40,588		19		.19
Savings accounts		26,208		7		.11			25,750		7		.11
Time deposit		39,281		44		.45			45,000		62		.55
Total interest-bearing deposits		131,039		71		.22			140,163		92		.26
Noninterest-bearing liabilities		43,295							28,691
Total liabilities		174,334							168,854
Total stockholder’s equity		51,237							26,500
Total liabilities and equity	$	225,571						$	195,354
Net interest income			$	1,530						$	1,467
Net interest-rate spread (3)						2.90	%						3.18	%
Net interest-earning assets (4)	$	74,204						$	40,964
Net interest margin (5)						2.98	%						3.24	%
Average interest-earning assets to average interest-bearing liabilities		1.57							1.29

(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.

24

	Nine Months Ended September 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	$	111,903		4,047		4.82	%	$	111,508	$	4,199		5.02	%
Securities		60,292		455		1.01			50,210		307		.82
Other (2)		29,384		97		.44			22,124		90		.54
Total interest-earning assets		201,579		4,599		3.04			183,842		4,596		3.33
Noninterest-earning assets		17,950							15,044
Total assets	$	219,529						$	198,886
Interest-bearing liabilities:
NOW accounts		30,669		11		.05			30,280		12		.05
Money market accounts		37,239		52		.19			39,439		55		.19
Savings accounts		26,145		20		.10			25,569		19		.10
Time deposit		41,763		147		.47			46,210		202		.58
Total interest-bearing deposits		135,816		230		.23			141,498		288		.27
Noninterest-bearing liabilities		48,945							30,952
Total liabilities		184,761							172,450
Total stockholder’s equity		34,768							26,436
Total liabilities and equity	$	219,529						$	198,886
Net interest income			$	4,369						$	4,308
Net interest-rate spread (3)						2.81	%						3.06	%
Net interest-earning assets (4)	$	65,763						$	42,344
Net interest margin (5)						2.89	%						3.12	%
Average interest-earning assets to average interest-bearing liabilities		1.48							1.30

(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.

25

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

General. Net income for the three months ended September 30, 2014 was $39,000, compared to net income of $71,000 for the three months ended September 30, 2013. The decrease in net income was primarily due to an increase in noninterest expense of $149,000, partially offset by an increase in net interest income of $63,000 and an increase in noninterest income of $22,000.

Interest Income. Interest income increased $42,000, or 2.7%, to $1.6 million for the three months ended September 30, 2014 primarily as a result of a $117,000 increase in interest income on securities, partially offset by a $78,000 decrease in interest income on loans.

Interest income on securities increased $117,000, or 102.6%, to $231,000 for the three months ended September 30, 2014 as a result of the increase in the average balance of securities. The increase in interest income on securities was primarily due to the purchase of securities from the cash received in the stock offering. The average balance of securities held to maturity increased $25.2 million to $77.7 million for the three months ended September 30, 2014 from $52.5 million for the three months ended September 30, 2013 due to purchases of U.S. government-sponsored enterprise and agency obligations, Federal Home Loan Bank obligations and Mortgage-backed Securities during 2014. The average yield on investment securities held to maturity increased by 32 basis point to 1.19% for the three months ended September 30, 2014 from 0.87% for the three months ended September 30, 2013 due to the purchase of higher yielding securities.

Interest income on loans decreased $78,000, or 5.5%, to $1.3 million for the three months ended September 30, 2014 as a result of a decrease in the average yield on loans. The average yield on loans decreased by 33 basis points to 4.77% for the three months ended September 30, 2014 from 5.10% for the three months ended September 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 Expense. Interest expense decreased $21,000, or 22.8%, to $71,000 for the three months ended September 30, 2014 from $92,000 for the three months ended September 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 $9.1 million during the three months ended September 30, 2014 to $131.0 million from $140.1 million for the three months ended September 30, 2013. The decrease was due to customers having used their deposits to purchase stock in the conversion and the seasonal outflow of deposits for agricultural customers. The average cost of deposits decreased by 4 basis points to 0.22% for the three months ended September 30, 2014 from 0.26% for the three months ended September 30, 2013 reflecting the lower interest rate environment.

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Net Interest Income. Net interest income increased $63,000, to $1.5 million for the three months ended September 30, 2014. The increase in net interest income was primarily the result of a $33.2 million increase in our net interest earning assets as a result of the growth in our investment securities portfolio. Our net interest-rate spread decreased 28 basis points to 2.90% for the three months ended September 30, 2014 from 3.18% for the three months ended September 30, 2013. Our net interest margin decreased 26 basis points to 2.98% for the three months ended September 30, 2014 from 3.24% for the three months ended September 30, 2013.

Provision for Loan Losses. We recorded a provision for loan losses of $20,000 for the three months ended September 30, 2014 compared to no provision for the three months ended September 30, 2013. The increase in provision was primarily due to the increase in the loan portfolio during the quarter. Nonperforming loans to total loans at September 30, 2014 were 4.17% compared to 3.37% at December 31, 2013. The change was primarily due to a commercial real estate loan of $1.0 million moving to nonaccrual. Net recoveries for the three months ended September 30, 2014 were $5,000 compared to net charge-offs of $183,000 for the three months ended September 30, 2013. The increase in provision for loan losses reflects historical and expected loan losses, as well as the change in the mix of loans.

Management considers the allowance for loan losses at September 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 $22,000 to $248,000 for the three months ended September 30, 2014 from $226,000 for the three months ended September 30, 2013. The increase was primarily related to a $41,000 increase in other noninterest income from third party mortgage origination fees partially offset by a $12,000 decrease in fees and charges on loans for the three months ended September 30, 2014.

Noninterest Expense. Noninterest expense increased $149,000, or 9.5%, to $1.7 million for the three months ended September 30, 2014. The increase primarily reflected a $69,000 increase in professional services, a $43,000 increase in other expenses and a $29,000 increase in salaries and employee benefit expenses. The increase in professional fees related to the increase costs of legal and audit reporting for a public traded company. The increase in other expenses was primarily relate to special board meetings held during the period.

Income Taxes (Benefit). For the three months ended September 30, 2014, income tax benefit was $1,000 on a before tax net income of $38,000 compared to the three months ended September 30, 2013, where income taxes were $51,000 on before tax net income of $122,000. Income taxes decreased due to a decrease in income before income taxes.

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Comparison of Operating Results for the Nine Months Ended September 30, 2014 and September 30, 2013

General. Net loss for the nine months ended September 30, 2014 was $247,000, compared to net income of $113,000 for the nine months ended September 30, 2013. The decrease in net income was primarily due to an increase in provision for loan losses.

Interest Income. Interest income increased $3,000 to $4.6 million for the nine months ended September 30, 2014 primarily as a result of a $148,000 increase in interest on investment securities, partially offset by a $152,000 decrease in interest income on loans.

Interest income on securities increased $148,000, or 48.2%, to $455,000 for the nine months ended September 30, 2014 as a result of the increase in the average balance and average yield of securities. The average balance of securities held to maturity increased $10.1 million to $60.3 million for the nine months ended September 30, 2014 from $50.2 million for the nine months ended September 30, 2013 due to increased purchases of Mortgage-backed securities, U.S. government-sponsored enterprise and agency obligations and Federal Home Loan Bank obligations during 2014. The average yield on investment securities held to maturity increased by 19 basis points to 1.01% for the nine months ended September 30, 2014 from .82% for the nine months ended September 30, 2013 due to the purchase of higher yielding securities.

Interest income on loans decreased $152,000, or 3.6%, to $4.0 million for the nine months ended September 30, 2014 as a result of a decrease in the average yield on loans. The average yield on loans decreased by 20 basis points to 4.82% for the nine months ended September 30, 2014 from 5.02% for the nine months ended September 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 Expense. Interest expense decreased $58,000, or 20.1%, to $230,000 for the nine months ended September 30, 2014 from $288,000 for the nine months ended September 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 $5.7 million during the nine months ended September 30, 2014 to $135.8 million from $141.5 million during the nine months ended September 30, 2013. The average cost of deposits decreased by 4 basis points to .23% for the nine months ended September 30, 2014 from .27% for the nine months ended September 30, 2013 reflecting the lower interest rate environment.

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Net Interest Income. Net interest income increased $61,000, to $4.4 million for the nine months ended September 30, 2014. The increase in net interest income was primarily the result of a decrease in interest expense due primarily to the downward re-pricing of our time deposits, which was more than the decrease in our interest income. In addition, our net interest earnings assets increased $23.4 million for the nine months ended September 30, 2014 as compared to the prior year. Our net interest-rate spread decreased 25 basis points to 2.81% for the three months ended September 30, 2014 from 3.06% for the three months ended September 30, 2013. Our net interest margin decreased 23 basis points to 2.89% for the three months ended September 30, 2014 from 3.12% for the three months ended September 30, 2013.

Provision for Loan Losses. We recorded a provision for loan losses of $660,000 for the nine months ended September 30, 2014 compared to no provision for the nine months ended September 30, 2013. The increase in the provision was primarily due to the charge-off of a large commercial loan relationship in the amount of $624,000 during the second quarter of 2014. Net charge-offs for the nine months ended September 30, 2014 were $582,000 compared to a net charge-offs of $551,000 for the nine months ended September 30, 2013. Nonperforming loans to total loans at September 30, 2014 were 4.17% compared to 3.37% at December 31, 2013. The change was primarily due to a commercial real estate loan of $1.0 million moving to nonaccrual. The increase in provision for loan losses reflects historical and expected loan losses, as well as the change in the mix of loans.

Management considers the allowance for loan losses at September 30, 2014 to be adequate to cover losses 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 $76,000, or 11.0%, to $765,000 for the nine months ended September 30, 2014 from $689,000 for the nine months ended September 30, 2013. The increase was related to a $51,000 increase in other noninterest income primarily due to $87,000 in third party mortgage origination fees for the nine months ended September 30, 2014 compared to none in 2013 and a $27,000 gain on sale of other real estate owned.

Noninterest Expense. Noninterest expense increased $161,000, to $5.0 million for the nine months ended September 30, 2014. The increase primarily reflected a $91,000 increase in professional services and a $74,000 increase in other expenses during the nine months ended September 30, 2014. The increase in professional fees relate to the increase costs of legal and audit reporting for a public traded company. The increase in other expenses was primarily relate to special board meetings held during the period.

Income Taxes (Benefit). For the nine months ended September 30, 2014, the tax benefit was $236,000 on a before tax loss of $483,000 compared to the nine months ended September 30, 2013, where income taxes were $88,000 on income before taxes of $201,000.

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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 $5.8 million, or 2.61% of total assets, at September 30, 2014 and $5.2 million, or 2.70% of total assets, at December 31, 2013. We had no accruing loans past due 90 days or more at September 30, 2014 and at December 31, 2013. The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated.

	At September 30,			At December 31,
	2014			2013
	($ in thousands)
Nonaccrual loans(excluding TDR’s):
Real estate mortgage loans:
One-to-four family residential	$	1,991		$	2,154
Commercial		1,009			—
Land and construction		113			140
Commercial business loans		675			602
Consumer loans		—			2
Total nonaccrual loans (excluding TDR’s)		3,788			2,898
Nonaccruing TDR’s loans:
Real estate mortgage loans:
One-to-four family residential		124			132
Commercial		394			447
Multi-family		130			170
Land and construction		74			74
Commercial business loans		205			101
Total nonaccruing troubled debt restructured loans		927			924
Total nonperforming loans		4,715			3,822
Other real estate owned:
One-to-four family		310			634
Land and construction		788			788
Total other real estate owned		1,098			1,422
Total nonperforming assets	$	5,813		$	5,244
Total accruing troubled debt restructured loans	$	4,530		$	4,602
Total nonperforming loans to total loans		4.17	%		3.37	%
Total nonperforming assets to total assets		2.61	%		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 September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Allowance at beginning of period	$	1,771			1,908			1,718			2,276
Provision for loan losses		20			—			660			—
Charge-offs:
Real estate mortgage loans:
One- to four-family residential		(11	)		(163	)		(17	)		(348	)
Commercial		—			(42	)		—			(42	)
Multi-family		—			(7	)		—			(135	)
Land and construction		(2	)		—			(2	)		(139	)
Commercial business loans		—			—			(626	)		—
Consumer loans		(5	)		—			(10	)		(2	)
Total charge-offs		(18	)		(212	)		(655	)		(666	)
Recoveries:
Real estate mortgage loans:
One- to four-family residential		—			—			9			13
Commercial		3			7			9			46
Multi-family		—			14			1			14
Land and construction		—			2			—			14
Commercial business loans		19			6			45			26
Consumer loans		1			—			9			2
Total recoveries		23			29			73			115
Net charge-offs		5			(183	)		(582	)		(551	)
Allowance at end of period	$	1,796			1,725			1,796			1,725
Allowance to nonperforming loans		38.09	%		45.13	%		38.09	%		45.13	%
Allowance to total loans outstanding at the end of the period		1.59	%		1.54	%		1.59	%		1.54	%
Net charge-offs to average loans outstanding during the period (annualized)		.01	%		(.66	)%		(.69	)%		(.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 September 30, 2014, we had the capacity to borrow approximately $38.3 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 September 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 September 30, 2014. Neither credit line was drawn upon at September 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 nine months ended September 30, 2014 by operating activities was $999,000. 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 $25.2 million. During the nine months ended September 30, 2014, we purchased $30.3 million in securities held to maturity. Net cash provided by financing activities, consisting primarily of the proceeds from the stock offering and the activity in deposit accounts, was $28.3 million for the nine months ended September 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 September 30, 2014, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 19.00% of adjusted total assets, which is above the required level of 5.00%; and total risk-based capital of 38.52% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Bank was categorized as well-capitalized at September 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 September 30, 2014, we had outstanding commitments to originate loans of $4.1 million, unused lines of credit totaling $8.7 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 September 30, 2014 totaled $28.1 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. Controlsand 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, 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 September 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 September 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

None.

Item 3. Defaults Upon Senior Securities

Nothing to report.

Item 4. Mine Safety Disclosures

Nothing to report.

Item 5. Other Information

Nothing to report.

Item 6. Exhibits

Exhibits:

3.2	Amended and Restated Bylaws
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: November 13, 2014	By:	/s/ Andrew S. Samuel
		Andrew S. Samuel
		President and Chief Executive Officer
		(Duly Authorized Officer)
Date: November 13, 2014	By:	/s/ Vickie J. Houllis
		Vickie J. Houllis
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

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