Sunshine Bancorp (SBCP) 10-Q 2015 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, 2015

¨ 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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of November 12, 2015, there were 4,401,248 issued and outstanding shares of the issuer’s common stock.

SUNSHINE BANCORP, INC. AND SUBSIDIARY

September 30, 2015 Form 10-Q

Index

		Page Number
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014		2
	Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2015 and 2014 (Unaudited)		3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Month Periods Ended September 30, 2015 and 2014 (Unaudited)		4
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Month Periods Ended September 30, 2015 and 2014 (Unaudited)		5
	Condensed Consolidated Statements of Cash Flows For the Nine Month Periods Ended September 30, 2015 and 2014 (Unaudited)		6-7
	Notes to Condensed Consolidated Financial Statements (Unaudited)		8-30
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31-42
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		43
Item 4.	Controls and Procedures		43
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		44
Item 1A.	Risk Factors		44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3.	Defaults Upon Senior Securities		44
Item 4.	Mine Safety Disclosures		44
Item 5.	Other Information		44
Item 6.	Exhibits		44
SIGNATURES			45

1

SUNSHINE BANCORP, INC. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(In thousands)

	At September 30, 2015			At December 31, 2014
	(Unaudited)
Assets
Cash and due from banks	$	7,664		$	5,316
Interest-earning deposits with banks		6,002			688
Federal funds sold		8,355			14,475
Cash and cash equivalents		22,021			20,479
Time deposits with banks		4,655			5,880
Securities available for sale		49,226			—
Securities held to maturity (Fair value of $0 and $75,469)		—			75,473
Loans held for sale		893			2,012
Loans, net of allowance for loan losses of $1,947 and $1,726		320,356			108,666
Premises and equipment, net		14,205			6,074
Federal Home Loan Bank stock, at cost		1,278			180
Cash surrender value of bank-owned life insurance		12,047			7,259
Deferred Tax Asset		6,590			2,782
Goodwill		8,662			—
Core Deposit Intangible		562			—
Accrued interest receivable		1,025			613
Other real estate owned		32			41
Other assets		533			361
Total assets	$	442,085		$	229,820
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing accounts	$	68,297		$	34,774
NOW accounts		55,073			32,589
Money-market deposit accounts		97,823			35,208
Savings accounts		32,062			25,100
Time deposits		100,724			36,253
Total deposits		353,979			163,924
Federal Home Loan Bank advances		20,000			—
Other borrowings		2,182			—
Other liabilities		4,699			4,270
Total liabilities		380,860			168,194
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 authorized; none outstanding		—			—
Common stock, $0.01 par value, 50,000,000 shares authorized, 4,232,000 shares issued and outstanding		42			42
Additional paid in capital		40,766			40,766
Retained income		23,622			24,091
Unallocated employee stock ownership plan (“ESOP”) shares		(3,273	)		(3,273	)
Accumulated other comprehensive income		68			—
Total stockholders’ equity		61,225			61,626
Total liabilities and stockholders’ equity	$	442,085		$	229,820

See Accompany Notes to Condensed Consolidated Financial Statements

2

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2015		2014			2015			2014
Interest income:
Loans	$	3,909	$	1,337		$	6,962		$	4,047
Securities		141		231			525			455
Other		33		33			105			97
Total interest income		4,083		1,601			7,592			4,599
Interest Expense:
Deposits		244		71			381			230
Borrowed funds		53		—			54			—
Total interest expense		297		71			435			230
Net interest income		3,786		1,530			7,157			4,369
Provision for loan losses		—		20			—			660
Net interest income after provision for loan losses		3,786		1,510			7,157			3,709
Noninterest income:
Fees and service charges on deposit accounts		252		162			532			496
Gain on sale of other real estate owned		—		—			20			27
Gain on sale of loans held for sale		—		—			16			—
Gain on sale of securities		—		—			195			—
Income from bank-owned life insurance		86		30			203			90
Other		87		56			192			152
Total noninterest income		425		248			1,158			765
Noninterest expenses:
Salaries and employee benefits		2,381		879			5,528			2,591
Occupancy and equipment		444		252			1,000			739
Data and item processing services		227		111			491			346
Professional fees		219		125			500			271
Advertising and promotion		55		7			131			39
Stationery and supplies		21		19			90			65
Deposit insurance and general insurance		92		72			187			196
Merger related		119		—			1,240			—
Other		583		255			1,246			710
Total noninterest expenses		4,141		1,720			10,413			4,957
Income (Loss) before income taxes		70		38			(2,098	)		(483	)
Income tax expense (benefit)		21		(1	)		(1,643	)		(236	)
Net income (loss)	$	49	$	39		$	(455	)	$	(247	)
Preferred Stock dividend requirement		14		—			14			—
Net income (loss) available to common stockholders	$	35	$	39			(469	)	$	(247	)
Basic and diluted earnings (loss) per share	$	0.01		N/A		$	(0.12	)		N/A

See Accompany Notes to Condensed Consolidated Financial Statements

3

SUNSHINE BANCORP, INC. AND SUBSIDIARY

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

(In thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
Net income (loss)	$	49		$	39	$	(455	)	$	(247	)
Other comprehensive income:
Change in unrealized gain on securities:
Unrealized gain arising during the period		93			—		302			—
Reclassification adjustment for realized gains		—			—		(195	)		—
Net change in unrealized gain		93			—		107			—
Deferred income taxes on above change		(34	)		—		(39	)		—
Total other comprehensive income		59			—		68			—
Comprehensive income (loss)	$	108		$	39	$	(387	)	$	(247	)

See Accompany Notes to Condensed Consolidated Financial Statements

4

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

($ In thousands)

Nine Months Ended September 30, 2015 and 2014

																			Accumulated
											Additional					Unallocated			Other		Total
	Preferred Stock						Common Stock				Paid In		Retained			ESOP			Comprehensive		Stockholder’s
	Shares			Amount			Shares		Amount		Capital		Income			Shares			Income		Equity
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
Balance, December 31, 2014		—		$	—			4,232,000	$	42	$	40,766	$	24,091		$	(3,273	)	$	—	$	61,626
Net loss (unaudited)		—			—			—		—		—		(455	)		—			—		(455	)
Dividends Paid on Preferred Stock		—			—			—		—		—		(14	)		—			—		(14	)
Preferred stock Exchanged (unaudited)		5,700			5,700			—		—		—		—			—			—		5,700
Preferred stock Redeemed (unaudited)		(5,700	)		(5,700	)		—		—		—		—			—			—		(5,700	)
Net change in unrealized gain on securities available for sale, net of taxes (unaudited)		—			—			—		—		—		—			—			68		68
Balance, September 30, 2015 (unaudited)		—		$	—			4,232,000	$	42	$	40,766	$	23,622		$	(3,273	)	$	68	$	61,225

See Accompany Notes to Condensed Consolidated Financial Statements

5

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine months Ended September 30,
	2015			2014
Cash flows from operating activities:
Net loss	$	(455	)	$	(247	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		387			292
Provisions for loan losses		—			660
Amortization of premiums and discounts on securities, net		255			191
Gain on sale of loans held for sale		(16	)		—
Proceeds from the sale of loans held for sale		1,864			—
Loans originated as held for sale		(729	)		—
Amortization of deferred loan fees and costs, net		(93	)		(18	)
Income from bank-owned life insurance, net		(203	)		(90	)
Gain on sale of other real estate owned		(20	)		(27	)
Gain on sale of securities available for sale		(195	)		—
Decrease (increase) in accrued interest receivable		273			(46	)
Increase in deferred tax asset		(1,752	)		—
Amortization of core deposit intangible		26			—
Increase in other assets		(90	)		(57	)
(Decrease) increase in other liabilities		(297	)		491
Net cash (used in) provided by operating activities		(1,045	)		1,149
Cash flows from investing activities:
Maturities of time deposits with banks		1,225			2,668
Purchases of securities held to maturity		—			(30,273	)
Maturities of securities held to maturity		5,000			2,000
Principle repayment of securities held to maturity		800			358
Proceeds from sale of securities available for sale		60,369			—
Calls, repayments and maturities of securities available for sale		4,497			—
Net increase in loans		(40,121	)		(315	)
Proceeds from sale of other real estate owned		61			351
Purchases of premises and equipment, net		(2,421	)		(73	)
Redemption of Federal Home Loan Bank stock		442			57
Business acquisitions, net of cash received		(20,111	)		—
Net cash provided by (used in) investing activities		9,741			(25,227	)
Cash flows from financing activities:
Net increase (decrease) in deposits		11,143			(9,230	)
Net decrease in Federal Home Loan Bank Advances		(11,480	)		—
Net decrease in other borrowings		(1,103	)		—
Preferred Stock dividend		(14	)
Redemption of Preferred Stock		(5,700	)		—
Net proceeds from stock issuance		—			37,399
Net cash (used in) provided by financing activities		(7,154	)		28,169
Increase in cash and cash equivalents		1,542			4,091
Cash and cash equivalents at beginning of period		20,479			11,054
Cash and cash equivalents at end of period	$	22,021		$	15,145
Supplemental disclosure of cash flow information:
Cash paid during the period for Interest	$	408		$	230

6

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine months Ended September 30,
	2015		2014
Noncash transaction-
Accumulated other comprehensive income, net change in unrealized gain on securities available for sale, net of taxes	$	68		—
Securities held to maturity transferred to available for sale	$	69,665		—
Acquisition of Community Southern Bank assets and liabilities:
Noncash assets acquired
Securities available for sale	$	44,372		—
Loans	$	171,476		—
Premises and equipment	$	6,097		—
Federal Home Loan Bank stock	$	1,540		—
Cash surrender value of bank-owned life insurance	$	4,585		—
Deferred income taxes	$	2,095		—
Goodwill	$	8,662		—
Core Deposit Intangible	$	588		—
Accrued interest	$	685		—
Other assets	$	114		—
Liabilities assumed and stockholders equity exchanged:
Deposits	$	178,912		—
Federal Home Loan Bank advances	$	31,480		—
Other borrowings	$	3,285		—
Other liabilities	$	726		—
Preferred Stock	$	5,700		—

See Accompany Notes to Condensed Consolidated Financial Statements

7

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1) Organization and Significant Accounting Policies

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

On July 14, 2014, the Conversion was completed and the Holding Company became the parent holding company for the Bank. 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.

The Conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

In connection with the Conversion, the Holding Company implemented an ESOP, to provide eligible employees the opportunity to own the Company’s Common stock. This plan is a tax-qualified retirement plan for the benefit of all Bank employees. A total of 338,560 shares of common stock issued in the Conversion were acquired by the ESOP.

The Bank through its eight full-service banking offices and two loan production offices provides a variety of retail community banking services to individuals and businesses primarily in Hillsborough, Polk, Pasco, and Orange Counties, Florida. The Bank’s deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”).

Our accounting and reporting policies conform to Accounting Principles Generally Accepted in the United States of America (“GAAP”) and general practices within the banking industry and are described in note 1 to the audited consolidated financial statements in our 2014 Annual Report on Form 10-K, as updated by information in this Form 10-Q.

While management believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. Such different value estimates could affect future earnings through different values being utilized for the disposition or amortization of the underlying assets and liabilities acquired.

Acquisition Method of Accounting.The Company accounts for acquisitions using the acquisition method of accounting. The acquisition method of accounting requires the Company to estimate the fair value of the tangible assets and identifiable assets acquired, and liabilities and equity assumed. The estimated fair values are based on available information and current economic conditions at the date of acquisition. Fair value may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair value estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities.

Accounting for business combination under GAAP acquisition method prohibits “carrying over” valuation allowances, such as the allowance for loan losses. Uncertainties relating to the expected future cash flows is be reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Bank will establish loan loss allowances for the acquired loans in periods after the acquisition, but only for losses incurred on these loans due to credit deterioration after acquisition. As a result, the allowance for loan loss reflected in these statements is only that of historical Sunshine Bank.

(continued)

8

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1) Organization and Significant Accounting Policies, Continued

Purchased Credit-Impaired Loans.As a part of the business acquisition, the Company acquired loans, some of which have shown evidence of credit deterioration since origination. These purchased credit-impaired (“PCI”) loans were determined to be credit impaired based on borrower payment history, past due status, loan credit grading, value of underlying collateral and other factors that affect the collectability of contractual cash flows. Under GAAP, purchasers are permitted to individually evaluate or collectively aggregate PCI loans into pools. PCI loans acquired in the same fiscal quarter may be assembled into one or more pools with common risk characteristics. Once pooled, a single composite interest rate is used to determine aggregate expected cash flows for the pool.

As a result of the Company’s recent acquisition, the Company individually evaluated three PCI loans. These acquired loans were recorded on the acquisition date at fair value. The Company estimates the amount and timing of expected cash flows for each individually analyzed loan. Estimated cash flows in excess of the amount paid is recorded as interest income over the remaining life of the loan.

On a quarterly basis, the Company will update the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments that occur after the acquisition date are recognized through the allowance for loan losses. Probable and significant increases in expected cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the PCI portfolio.

Goodwill and Core Deposit Intangible. Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired in the acquisition. GAAP requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. There can be no assurance that future goodwill impairment tests will not result in a charge to income. Core deposit intangibles (“CDI”) are initially measured at fair value and then amortized over ten years on an accelerated basis using projected decay rates of the underlying core deposits. The principal factors considered when valuing the CDI consist of the following: (1) the rate and maturity structure of the interest bearing liabilities, (2) estimated retention rates for each deposit liability category, (3) the current interest rate environment and (4) estimated noninterest income potential of the acquired relationship. The CDI is evaluated periodically for impairment.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1) Organization and Significant Accounting Policies, Continued

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 2014 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 September 30, 2015, and the results of operations for the three and nine month periods ended September 30, 2015 and 2014. The results of operations for the nine months ended September 30, 2015, are not necessarily indicative of the results to be expected for the full year or any other period.

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

Reclassifications.Certain amounts in the 2014 financial statements have been reclassified to conform to the 2015 presentation.

10

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(2) Business Combinations

Agreement to Acquire First Federal Bank of Florida Branches.On July 16, 2015, the Bank signed a purchase and assumption agreement pursuant to which the Bank will purchase three branch offices from First Federal Bank of Florida in Sarasota and Manatee counties. The branch offices are located in Bradenton and Sarasota, Florida. One branch is expected to be consolidated into the other Sarasota branch office prior to the closing of this transaction. The purchase is expected to add approximately $56.4 million in deposits for a deposit premium of 1.80% and $8.3 million in loans at par value. Sunshine Bank has also agreed to purchase the real estate property and some selected fixed assets associated with the branches. The transaction is expected to close on November 13, 2015, following regulatory approval and subject to the satisfaction of customary closing conditions.

Acquisition of Community Southern Holdings, Inc.On June 30, 2015, the Company acquired 100% of the outstanding common shares of Community Southern Holdings, Inc. for cash of $30.3 million, through an Agreement and Plan of Merger (the “Merger”). Community Southern Holdings, Inc. was merged into the Company and Community Southern Bank was merged into the Bank. The Company acquired $250.4 million in assets and assumed $214.4 million in liabilities and stockholders’ equity and exchanged $5.7 million in preferred stock to the U.S. Treasury as part of its Small Business Lending Fund. The Company acquired these assets and liabilities to expand its market presence to Polk and Orange Counties, Florida. The Company incurred approximately $1.2 million in acquisition expense which are included in other noninterest expense in the accompanying consolidated statements of operations. The Company also recorded an identifiable intangible asset representing the core deposit base of Community Southern Bank based on management’s evaluation of the cost of such deposits relative to alternative funding sources. Management used market quotations to measure the fair value of investment securities and FHLB advances.

Community Southern Bank’s loans were measured at fair value by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, Community Southern Bank’s loan portfolio totaled $170.0 million and was recorded at a fair value of $171.5 million.

(continued)

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(2) Business Combinations, Continued

The following table summarizes the fair value of assets acquired, liabilities assumed and stockholders’ equity exchanged on the date of acquisition (in thousands):

	On June 30, 2015
Cash and cash equivalents	$	10,183
Securities available for sale		44,372
Loans		171,476
Premises and equipment		6,097
Federal Home Loan Bank stock		1,540
Cash surrender value of bank owned life insurance		4,585
Deferred tax asset		2,095
Goodwill		8,662
Core deposit intangible		588
Accrued interest receivable		685
Other assets		114
Total assets acquired	$	250,397
Deposits	$	178,912
Federal Home Loan Bank Advances		31,480
Other borrowings		3,285
Other liabilities		726
Preferred Stock exchanged		5,700
Total liabilities assumed and stockholders’ equity exchanged		220,103
Net assets acquired	$	30,294

Results of operations for Community Southern Holdings, Inc. prior to the acquisition date are not included in the Consolidated Statement of Operations for the three month period ended September 30, 2014 and for and nine-month periods ended September 30, 2015 and September 30, 2014. The following table presents financial information regarding the former Community Southern Holdings, Inc. operations excluded from the Consolidated Statement of Operations prior to the date of acquisition. In addition, the second table presents unaudited pro forma information as if the acquisition of Community Southern Holdings, Inc. had occurred on January 1, 2015. The tables below have been prepared for comparative purposes only and are not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect the Company’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. (in thousands, except per share amounts)

(continued)

12

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(2) Business Combinations, Continued

	Actual From January 1, 2015 Through June 30, 2015
Net interest income	$	3,642
Noninterest income	$	331
Net loss	$	(1,470	)

	Unaudited pro forma information
	Three months ended September 30,			Nine months ended September 30,
	2014			2015			2014
Net interest income	$	3,306		$	10,627		$	9,963
Noninterest income	$	410		$	1,489		$	1,202
Net (Loss) income	$	(390	)	$	(2,085	)	$	609
Pro forma Loss per share-
Basic and Diluted		N/A		$	(0.52	)		N/A

13

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(3) Goodwill and Other Intangible Assets

Goodwill and Core Deposit Intangible (“CDI”) at September 30, 2015 was $8,662,000 and $562,000 respectively.

The future expected amortization of CDI with determinable useful lives as of September 30, 2015 are as follows (in thousands):

Year Ending December 31,	Amount
2015	$	26
2016		102
2017		91
2018		80
2019		70
Thereafter		193
	$	562

14

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(4) Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for sale-
September 30, 2015:
U.S. Treasury securities	$	2,002		1		—		$	2,003
Federal Home Loan Bank obligations		16,104		31		(5	)		16,130
U.S. Government enterprise and agency obligations		16,047		32		(4	)		16,075
Mortgage-backed securities		14,966		52		—			15,018
Total	$	49,119		116		(9	)	$	49,226
Securities held for maturity-
December 31, 2014:
U.S. Treasury securities	$	5,025		5		—		$	5,030
Federal Home Loan Bank obligations		23,269		24		(50	)		23,243
U.S. Government enterprise and agency obligations		29,799		84		(85	)		29,798
Mortgage-backed securities		17,380		19		(1	)		17,398
Total	$	75,473		132		(136	)	$	75,469

The scheduled maturities of securities at September 30, 2015 were as follows (in thousands):

	Securities Available for sale
	Amortized Cost		Fair Value
Due in one year or less	$	15,106	$	15,125
Due from after one year to five years		19,047		19,083
Mortgage-backed securities		14,966		15,018
Total	$	49,119	$	49,226

(continued)

15

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(4) Securities, Continued

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

	Less Than Twelve Months					More than Twelve Months
	Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value
Securities Available for sale:
At September 30, 2015:
Federal Home Loan Bank obligations	$	—			—	$	(5	)		1,995
U.S Government enterprise and agency obligations		(4	)		4,021		—			—
Totals	$	(4	)		4,021	$	(5	)		1,995
Securities held for maturity:
At December 31, 2014:
Federal Home Loan Bank obligations	$	(13	)		7,055	$	(37	)		3,995
U.S. Government enterprise and agency obligations		(50	)		14,957		(35	)		4,001
Mortgage-backed securities		(1	)		1,964		—			—
Totals	$	(64	)		23,976	$	(72	)		7,996

The unrealized losses on three investment securities available for sale at September 30, 2015 were caused by changes in interest rates. 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 was 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 consideredother-than-temporarily impaired.

The Bank pledged securities with a fair market value of approximately $24.2 million at September 30, 2015 and $25.6 million at December 31, 2014 to secure public funds and other borrowings.

16

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) Loans

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

	September 30, 2015			December 31, 2014
Real estate mortgage loans:
One-to four-family residential	$	79,042		$	52,708
Commercial		152,688			22,043
Multi-family		16,173			10,622
Land and construction		26,680			7,075
Total real estate mortgage loans		274,583			92,448
Commercial loans		43,974			16,773
Consumer loans		4,358			1,398
Total loans		322,915			110,619
Deduct:
Deferred loan fees, net		(341	)		(124	)
Allowance for loan losses		(1,947	)		(1,726	)
Undisbursed loan proceeds		(271	)		(103	)
Loans, net	$	320,356		$	108,666

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.

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.

(continued)

17

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) Loans, Continued

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. Land 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. Land 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. Land 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 commercial loans on occasion for the purchase of land for future development by the borrower. The Company carefully analyzes the borrower and 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. 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 to individuals for personal, family, or household purposes. Consumer Loans are determined primarily by loan purpose, including but not limited to 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 are 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 when applicable. Consumer loans can be made either unsecured or secured with collateral. Consumer loans are made at both variable and fixed interest rates and may be made on terms of up to ten years. 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)

18

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) 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, 2015:
Beginning balance	$	1,313			496			5			69		$	1,883
Provision (credit) for loan losses		(116	)		(29	)		15			130			—
Charge-offs		—			—			—			—			—
Recoveries		9			54			1			—			64
Ending balance	$	1,206			521			21			199		$	1,947
Three Months Ended September 30, 2014:
Beginning balance		1,517			245			9			—		$	1,771
Provision (credit) 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
Nine Months Ended September 30, 2015:
Beginning balance		1,409			308			9			—		$	1,726
Provision (credit) for loan losses		(326	)		118			9			199			—
Charge-offs		(1	)		(9	)		—			—			(10	)
Recoveries		124			104			3			—			231
Ending balance	$	1,206			521			21			199		$	1,947
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
At September 30, 2015:
Individually evaluated for impairment:
Recorded investment	$	1,649			549			—			—			2,198
Balance in allowance for loan losses	$	12			9			—			—			21
Collectively evaluated for impairment:
Recorded investment	$	272,250			43,364			4,358			—			319,972
Balance in allowance for loan losses	$	1,194			512			21			199			1,926
Acquired with deteriorated credit quality:
Recorded investment	$	684			61			—			—			745
Balance in allowance for loan losses	$	—			—			—			—			—
At December 31, 2014:
Individually evaluated for impairment:
Recorded investment	$	4,028			768			—			—			4,796
Balance in allowance for loan losses	$	301			9			—			—			310
Collectively evaluated for impairment:
Recorded investment	$	88,420			16,005			1,398			—			105,823
Balance in allowance for loan losses	$	1,108			299			9			—			1,416

(continued)

19

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) 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 loans over $500,000 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 as a loss. 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.

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.

20

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) Loans, Continued

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, 2015:
Grade:
Pass	$	77,013		150,511		16,075		25,471		40,310		4,325	$	313,705
Special mention		1,369		1,349		—		955		3,312		33		7,018
Substandard		660		828		98		254		352		—		2,192
Total	$	79,042		152,688		16,173		26,680		43,974		4,358	$	322,915
At December 31, 2014:
Grade:
Pass	$	52,392		21,385		10,498		6,864		15,788		1,398	$	108,325
Special mention		316		413		—		211		94		—		1,034
Substandard		—		245		124		—		891		—		1,260
Total	$	52,708		22,043		10,622		7,075		16,773		1,398	$	110,619

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)

21

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) 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		90 Days Or Greater Past Due (1)		Total Past Due		Current		Nonaccrual Loans		Total Loans
At September 30, 2015:
Real estate mortgage loans:
One-to four-family	$	—		—		46		46		78,956		40		79,042
Commercial		93		—		—		93		152,124		471		152,688
Multi-family		—		—		—		—		16,074		99		16,173
Land and construction		513		—		114		627		25,799		254		26,680
Commercial loans		758		—		—		758		43,216		—		43,974
Consumer loans		—		5		—		5		4,353		—		4,358
Total	$	1,364		5		160		1,529		320,522		864		322,915
At December 31, 2014:
Real estate mortgage loans:
One-to four-family		59		—		—		59		52,649		—		52,708
Commercial		—		—		—		—		22,043		—		22,043
Multi-family		—		—		—		—		10,498		124		10,622
Land and construction		—		—		—		—		7,075		—		7,075
Commercial loans		167		—		—		167		15,838		768		16,773
Consumer loans		2		—		—		2		1,396		—		1,398
Total	$	228		—		—		228		109,499		892		110,619

(1) Loans 90 days or greater past due consisted of two performing loans which were only past due while awaiting completion of a renewal process

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

	With No Related Allowance Recorded					With an Allowance Recorded						Total (2)
	Recorded Investment		Unpaid Principal Balance			Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
September 30, 2015:
Real estate mortgage loans:
One-to four-family residential	$	326		326			137		137		12		463		463		12
Commercial		833		1,369			—		—		—		833		1,369		—
Multi-family		99		248			—		—		—		99		248		—
Land and construction		254		257			—		—		—		254		257		—
Commercial loans		458		488			91		96		9		549		584		9
	$	1,970		2,688			228		233		21		2,198		2,921		21
December 31, 2014:
Real estate mortgage loans:
One-to four-family residential		—		—			123		140		12		123		140		12
Commercial		380		966			3,401		3,401		289		3,781		4,367		289
Multi-family		124		265			—		—		—		124		265		—
Commercial loans		664		750			104		107		9		768		857		9
	$	1,168		1,981			3,628		3,648		310		4,796		5,629		310
					��

(2) Excludes $745,000 in purchased credit impaired loans at September 30, 2015

(continued)

22

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) 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,
	2015						2014
	Average		Interest		Interest		Average		Interest		Interest
	Recorded Investment		Income Recognized		Income Received		Recorded Investment		Income Recognized		Income Received
Real estate mortgage loans:
One-to-four-family residential	$	452		7		4		1,636		22		32
Commercial		839		7		14		4,755		67		80
Multi-family		101		—		2		134		—		5
Land and construction		255		—		10		111		—		1
Commercial loans		552		—		10		720		—		16
Total	$	2,199		14		40		7,356		89		134

	Nine Months Ended September 30,
	2015						2014
	Average		Interest		Interest		Average		Interest		Interest
	Recorded Investment		Income Recognized		Income Received		Recorded Investment		Income Recognized		Income Received
Real estate mortgage loans:
One-to-four-family residential	$	231		11		8		1,653		31		53
Commercial		1,341		103		106		4,796		222		236
Multi-family		110		—		8		147		—		15
Land and construction		85		—		10		112		—		2
Commercial loans		590		—		33		708		—		22
Total	$	2,357		114		165		7,416		253		328

(continued)

23

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(5) Loans, Continued

Loans are classified as troubled debt restructurings (TDRs) when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. TDRs entered into during the three- and nine-months ended September 30, 2015 and 2014 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, 2015:
One-to four-family residential loans -
Modified interest rate and amortization	1	$	328	$	328
For the Nine Months Ended September 30, 2015:
One-to four-family residential loans -
Modified interest rate and amortization	1	$	328	$	328
Troubled Debt Restructurings:
For the Three Months Ended September 30, 2014:
Commercial loans-
Modified interest rate and amortization	6	$	740	$	116
For the Nine Months Ended September 30, 2014:
Commercial loans-
Modified interest rate and amortization	6	$	740	$	116

The allowance for loan losses on all loans that have been restructured and are considered TDRs is included in the Companies 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.

There were no TDRs during the three and nine months ended September 30, 2014 that subsequently defaulted. TDRs that were restructured during 2015 that subsequently defaulted during the three and nine months ended September 30, 2015 are as follows (dollars in thousands):

	Number of Contracts	Recorded Investment
Commercial mortgage loan	1	$	86

24

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(6) Purchased Credit Impaired (“PCI”) Loans

The recorded investment as of the acquisition date of PCI loans acquired are detailed in the following table (in thousands):

	Loans acquired during the Nine months ended September 30, 2015
Contractually required principal and interest at acquisition	$	1,272
Nonaccretable difference		(404	)
Cash flows expected to be collected at acquisition		868
Accretable yield adjustment		(128	)
Total carrying amount of PCI loans at acquisition	$	740

The recorded investment of PCI loans at September 30, 2015 was $745,000.

(7) Federal Home Loan Bank Advances

A summary of Federal Home Loan Bank (“FHLB”) advances at September 30, 2015 ($ in thousands).

Maturing in the Year Ending December 31,	Advance Type	Interest Rate			September 30, 2015
2015	Fixed Rate		0.27	%	$	20,000

The Company had one advance outstanding as of September 30, 2015. There were no advances outstanding as of December 31, 2014.

At September 30, 2015, the Company had total credit availability of approximately $95.3 million with the FHLB. Advances are secured by a blanket lien on loans and the Company’s FHLB stock. Pursuant to the collateral agreement, borrowing capacity is determined by the amount of qualifying collateral pledged. As of September 30, 2015 the Company had $38.3 million in loans pledged.

25

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(8) Fair Value of Financial Instruments

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

	At September 30, 2015						At December 31, 2014
	Carrying Amount		Fair Value		Level		Carrying Amount		Fair Value		Level
Financial assets:
Cash and cash equivalents	$	22,021		22,021		1	$	20,479		20,479		1
Time deposits with banks		4,655		4,655		1		5,880		5,880		1
Securities		49,226		49,226		2		75,473		75,469		2
Loans held for sale		893		893		3		2,012		2,028		3
Loans		320,356		325,843		3		108,666		113,807		3
Federal Home Loan Bank stock		1,278		1,278		3		180		180		3
Accrued interest receivable		1,025		1,025		3		613		613		3
Financial liabilities:
Deposits		353,979		345,017		3		163,924		153,568		3
FHLB Advances		20,000		20,000		3		—		—		3
Other borrowings		2,182		2,182		3		—		—		3
Off-balance-sheet financial instruments		—		—		3		—		—		3

Discussion regarding the assumptions used to compute the estimated fair values of instruments can be found in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2014 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 27, 2015 (“2014 Form 10-K”).

(9) Fair Value Measurements

There were no securities available for sale at December 31, 2014. Securities available for sale measured at fair value on a recurring basis at September 30, 2015 are summarized below (in thousands):

	Fair Value		Level 1		Level 2		Level 3
U.S. Treasury securities	$	2,003		—		2,003		—
Federal Home Loan Bank obligations		16,130		—		16,130		—
U.S. Government enterprise and agency obligations		16,075		—		16,075		—
Mortgage-backed securities		15,018		—		15,018		—
Total	$	49,226		—		49,226		—

During the nine months ended September 30, 2015, no securities were transferred in or out of Level 1, Level 2, or Level 3.

(continued)

26

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(9) Fair Value Measurements, Continued

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

	At Period End
											Losses
											Recorded
	Fair Value		Level 1		Level 2		Level 3		Total Losses		During the Period
At September 30, 2015:
Real estate mortgage loans:
One-to-four family	$	326		—		—		326		—		—
Commercial		833		—		—		833		517		—
Multi-family		99		—		—		99		128		—
Land and construction		254		—		—		254		—		—
Commercial		458		—		—		458		74		—
Total	$	1,970		—		—		1,970		719		—
At December 31, 2014:
Real estate mortgage loans:
Commercial		380		—		—		380		517		—
Multi-family		124		—		—		124		128		—
Commercial		94		—		—		94		74		2
Total	$	598		—		—		598		719		2
Other real estate owned which is measured at fair value on a nonrecurring basis is summarized below (in thousands):
	At Period End										Losses
											Recorded
									Total		During the
	Fair Value		Level 1		Level 2		Level 3		Losses		Period
At September 30, 2015-
Other real estate owned	$	32		—		—		32		—		—
At December 31, 2014-
Other real estate owned	$	41		—		—		41		—		—

(continued)

27

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

(9) Fair Value Measurements, Continued

Acquired assets, assumed liabilities and stockholders’ equity exchanged measured at fair value on a nonrecurring bases are as follows (in thousands):

	For the Period Ended September 30, 2015										Losses
											Recorded
	Fair								Total		During the
	Value		Level 1		Level 2		Level 3		Losses		Period
Securities available for sale	$	44,372		—		44,372		—		—		—
Loans, net of discount	$	171,476		—		—		171,476		—		—
Premises and equipment	$	6,097		—		—		6,097		—		—
Federal Home Loan Bank Stock	$	1,540		—		—		1,540		—		—
Cash surrender value of bank owned life insurance	$	4,585		—		—		4,585		—		—
Deferred income taxes	$	2,095		—		—		2,095		—		—
Goodwill	$	8,662		—		—		8,662		—		—
Core deposit intangible	$	588		—		—		588		—		—
Accrued interest	$	685		—		—		685		—
Other assets	$	114		—		—		114		—		—
Deposits	$	178,912		—		—		178,912		—		—
FHLB Advances	$	31,480		—		—		31,480		—		—
Other borrowings	$	3,285		—		—		3,285		—		—
Other liabilities	$	726		—		—		726		—		—
Preferred Stock	$	5,700		—		—		5,700		—		—

28

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

At September 30, 2015 the ESOP shares were as follows ($ in thousands, except share amounts):

Allocated shares		11,285
Unallocated shares		327,275
Total ESOP shares		338,560
Fair value of unallocated shares	$	4,516

(11) Stockholders’ Equity

On June 30, 2015, the Company exchanged 5,700 shares of Senior Non-Cumulative Perpetual Preferred Stock, Class A, having a liquidation preference of $1,000 per share for aggregate proceeds of $5.7 million with the U.S. Treasury. The 5,700 shares exchanged had been issued to the Secretary of the Treasury as part of the Company’s the acquisition of Community Southern Holdings, Inc., a participant in the U.S. Treasury Small Business Lending Fund.

On September 30, 2015, the Company redeemed all of the outstanding 5,700 shares of its Series A Preferred Stock for $5.7 million, which included payment of accrued dividends.

(12) Regulatory Matters

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

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

There were changes in the risk weighting of certain assets to better reflect the risk associated with those assets, such as the risk weighting for non-performing loans and certain high volatility commercial real estate acquisitions, development and construction loans. The changes also include additional limitations on the inclusion of deferred tax asset in capital. The Bank made a one-time election to exclude accumulated other comprehensive income from regulatory capital in order to reduce the impact of market volatility on regulatory capital.

(continued)

29

SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (Unaudited)

12) Regulatory Matters (continued)

The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at September 30, 2015 (dollars in thousands):

	Actual					Minimum For Capital Adequacy Purposes					Minimum To Be Well Capitalized
	Amount		%			Amount		%			Amount		%
Common Equity Tier 1 Capital to Risk – Weighted Assets	$	47,679		13.75	%	$	15,604		4.50	%	$	22,539		6.50	%
Tier I Capital to Risk-Weighted Assets		47,679		13.75			20,805		6.00			27,741		8.00
Total Capital to Risk-Weighted Assets		49,626		14.31			27,743		8.00			34,679		10.00
Tier I Capital to Total Assets		47,679		10.59			18,009		4.00			22,511		5.00

As of September 30, 2015, the Bank was well capitalized under all capital ratios. There are no conditions or events since that notification that management believes have changed the institution’s capitalization category.

(13) Earnings (Loss) Per Share

Basic earnings (loss) per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three and nine months ended September 30, 2015, basic and diluted loss per share is the same due to the Company having no equity awards outstanding. The shares purchased by the Employee Stock Ownership Plan are included in the weighted-average shares when they are committed to be released ($ in thousands, except per share amounts):

	Income (Loss)			Weighted Average Shares		Per Share Amount
Three Months Ended September 30, 2015:
Basic and Diluted income per share:
Net income applicable to common stockholders	$	35			3,904,725	$	0.01
Nine Months Ended September 30, 2015:
Basic and Diluted loss per share:
Net loss	$	(469	)		3,904,725	$	(0.12	)

The Conversion was completed on July 14, 2014. Loss per share was not computed until January 1, 2015, as if the Conversion from a mutual savings bank to a capital stock holding company occurred on that date. For the three and nine month periods ending September 30, 2014 there were no dilutive shares.

(14) Stock-Based Compensation

On August 26, 2015, stockholders approved the Company’s 2015 Equity Incentive Plan (the “Plan”), which provides for the grant of stock-based awards to officers, employees and directors of the Company and Sunshine Bank. A description of the material terms of the Plan is contained in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on July 15, 2015. The Plan authorizes the issuance or delivery to participants of up to 592,480 shares of the Company’s common stock pursuant to grants of incentive and non-statutory stock options, restricted stock awards and restricted stock units. Of this number, the maximum number of shares that may be issued pursuant to the exercise of stock options is 423,200 shares, and the maximum number of shares that may be issued as restricted stock awards or restricted stock units is 169,280 shares. As of September 30, 2015, there were no shares granted. On October 28, 2015, pursuant to the Plan, the Compensation committee of the Board of Directors, approved restricted stock and stock option grants to employees, officers and directors of the Company. An aggregate of 383,758 stock options and 169,248 shares of restricted stock were granted. Generally the grants vest over a five year period with the first 20% of each grant vesting immediately.

30

Item 2. Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto presented elsewhere in this report. For additional information, refer to the audited consolidated financial statements and footnotes for the year ended December 31, 2014 in the Annual Report on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company and the Bank 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, general economic conditions, including our local, state and national real estate markets and employment trends; changes in legislation or regulation; competition from other financial institutions; the accuracy of our estimates of future loan losses; inflation, interest rate, market and monetary fluctuations; acquisitions and integration of acquired businesses; the possible impairment of goodwill associated with our acquisition; expansion of operations, including branch openings and branch acquisitions, new product offerings and expansion into new markets; the impact of new capital requirements; restrictions or conditions imposed by our regulators on our operations; cybersecurity breaches, including potential business disruptions or financial losses. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Overview

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

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

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

31

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

Recent Developments

Agreement to Acquire First Federal Bank of Florida Branches.On July 16, 2015, the Bank signed a purchase and assumption agreement pursuant to which the Bank will purchase three branch offices from First Federal Bank of Florida in Sarasota and Manatee counties. The branch offices are located in Bradenton and Sarasota, Florida. One branch is expected to be consolidated into the other Sarasota branch office prior to the closing of this transaction. The purchase is expected to add approximately $56.4 million in deposits for a deposit premium of 1.80% and $8.3 million in loans at par value. Sunshine Bank has also agreed to purchase the real estate property and some selected fixed assets associated with the branches. The transaction is expected to close on November 13, 2015, following regulatory approval and subject to the satisfaction of customary closing conditions.

Acquisition of Community Southern Holdings, Inc. On June 30, 2015, the Company acquired 100.00% of the outstanding common shares of Community Southern Holdings, Inc. for $30.3 million in cash, through an Agreement and Plan of Merger (the “Merger”). Community Southern Holdings, Inc. was merged into the Company and Community Southern Bank was merged into the Bank. The Merger added three branch locations in the Lakeland/Orlando, Florida market, establishing Sunshine Bank’s presence in that market. The Company acquired $250.4 million in assets and assumed $214.4 million in liabilities and exchanged $5.7 million in preferred stock to the U.S. Treasury as part of its Small Business lending fund. The Company acquired these assets and liabilities to expand its market presence to Polk and Orange Counties in Florida. The Company incurred approximately $1.2 million in acquisition expenses which are included in noninterest expense in the accompanying consolidated statements of operations.

On September 30, 2015, the Company redeemed all of the outstanding 5,700 shares of its Series A Preferred Stock for $5.7 million.

Appointment of Director and OfficerOn June 30, 2015, in connection with the completion of the Merger, Kenneth H. Compton, former director of Community Southern Holdings, Inc. and Community Southern Bank, began his service as a director of the Company and the Bank.

On October 2, 2015, the Company announced the appointment of John D. Finley as Executive Vice President and Chief Financial Officer of the Company effective October 5, 2015. Finley is responsible for overseeing the Company’s strategic financial planning, investment management, asset liability and interest-rate risk management, and Human Resources department.

Critical Accounting Policies

There have been no material changes in our critical accounting policies since the Company filed its Annual Report Form 10-K in 2014, except for our accounting policy related to business combinations.

Business combinations. The Company accounts for acquisitions using the acquisition method of accounting. The acquisition method of accounting requires the Company to estimate the fair value of the tangible assets and identifiable assets acquired, liabilities and equity assumed. The estimated fair values are based on available information and current economic conditions at the date of acquisition. Fair value may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair value estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities.

32

Comparison of Financial Condition at September 30, 2015 and December 31, 2014

Total Assets.Total assets increased $212.3 million, or 92.4%, to $442.1 million at September 30, 2015 from $229.8 million at December 31, 2014. The increase was primarily the result of the merger with Community Southern Holdings, Inc. The Company completed the Merger on June 30, 2015 adding approximately $250.4 million in total assets consisting of, $44.4 million in securities available for sale, $171.5 million in total loans, and $34.5 million in all other assets. Following completion of the Merger, the Company liquidated the securities portfolio acquired from Community Southern Bank and used the proceeds to pay off higher rate borrowings assumed in the Merger. Management’s strategic transformation of the balance sheet from a traditional thrift to a full service commercial bank included an increase of $40.8 million or 36.6% in organic loan growth. The strategic transformation consisted mainly of a redeployment of short term investments and securities into higher yielding commercial and commercial real estate loans.

Cash and Cash Equivalents.Total cash and cash equivalents increased by $1.5 million, or 7.5%, to $22.0 million at September 30, 2015 from $20.5 million at December 31, 2014. The increase was the net result of increases in cash received in the Merger, from securities sales and maturities, and borrowings; partially offset by cash used in the Merger, increases in loan originations and strategic investments in infrastructure, sales platforms, and new products.

Investment Securities.Investment securities decreased $26.3 million, or 34.8%, to $49.2 million at September 30, 2015 from $75.5 million at December 31, 2014. The decrease was primarily due to $9.4 million in maturities and calls and the sale of approximately $16.0 million in securities, resulting in a $195,000 gain during the first half of 2015. During the same period, management transferred all securities classified as held to maturity to available for sale at an estimated fair market value of $69.7 million. The transfer was performed to enhance the interest rate risk position of the Bank and to provide liquidity for future loan growth. The sales were initiated as part of the strategic plan to redeploy excess proceeds from the July 2014 offering, which were initially invested in lower yielding securities, into the higher yielding loan portfolio.

Net Loans.Our primary interest earning asset and source of income is our loan portfolio. Net loans increased $211.7 million, or 194.8%, to $320.4 million at September 30, 2015 from $108.7 million at December 31, 2014. The increase was primarily due to the Merger which resulted in a net loan increase of $171.5 million. The acquired loan portfolio consisted of $83.6 million in commercial real estate, $34.2 million in commercial, $34.0 million in one-to four-family residential and $19.7 million in other loans. The Bank also experienced strong organic loan growth of $40.8 million. The growth was comprised of increases of $40.0 million in commercial and commercial real estate and $8.5 million in other loans, partially offset by a $7.7 million decrease in one-to four-family residential loans.

Deposits.Deposits increased $190.1 million, or 115.9%, to $354.0 million at September 30, 2015 from $163.9 million at December 31, 2014. The increase was primarily due to the Merger, which resulted in an increase in deposits of $178.9 million. The assumed deposits were comprised of core deposits (consisting of non-interest-bearing, NOW, money market and savings accounts) of $105.7 million and noncore deposits (consisting of time deposits) of $73.2 million. The Bank continued its efforts to attract new customers and retain relationships by investing in a modern infrastructure, enhancing its online and mobile banking products, expanding deposit products and services, and introducing a full suite of business banking products. Organic deposit growth during the first nine months of 2015 totaled $11.1 million or 6.8%.

Borrowings.Borrowings increased to $22.2 million at September 30, 2015 as a result of a short term three month Federal Home Loan Bank (“FHLB”) advance of $20.0 million and $2.2 million in customer repurchase agreement accounts assumed in the Merger. The FHLB advance is secured by a blanket asset lien on loans with total credit availability of approximately $95.3 million at September 30, 2015, collateralized by residential and commercial real estate loans. The other borrowings are secured by securities with a market value of $4.1 million at September 30, 2015.

33

Stockholders’ Equity.Stockholders’ equity decreased $401,000, or 0.7%, to $61.2 million at September 30, 2015, as a result of the net loss of $469,000 for the nine months ended September 30, 2015, partially offset by the $68,000 increase in accumulated other comprehensive income, mostly from increases in unrealized gains on securities.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the three and nine months ended September 30, 2015 and 2014. No tax-equivalent yield adjustments have been made, as we had no tax-free interest-earning assets during the periods. All average balances are daily average balances based upon amortized costs. Nonaccrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

	Three months Ended September 30,
	2015								2014
				Interest		Average						Interest		Average
	Average			and		Yield/			Average			and		Yield/
	Balance			Dividends		Rate(1)			Balance			Dividends		Rate(1)
	(In thousands)
Interest-earning assets:
Loans	$	314,924		$	3,909		4.97	%	$	112,054		$	1,337		4.77	%
Securities		54,874			141		1.03			77,699			231		1.19
Other (2)		37,791			33		.35			15,490			33		.85
Total interest-earning assets		407,589			4,083		4.01			205,243			1,601		3.12
Noninterest-earning assets		52,636								20,328
Total assets	$	460,225							$	225,571
Interest-bearing liabilities:
NOW accounts		54,590			15		.11			29,887			3		.04
Money market accounts		88,797			95		.43			35,663			17		.19
Savings accounts		31,782			11		.14			26,208			7		.11
Time deposit		105,749			123		.47			39,281			44		.45
Total interest-bearing deposits		280,918			244		.35			131,039			71		.22
FHLB Advances and other borrowings		30,433			53		.70			—			—		—
Total interest-bearing liabilities		311,351			297		.38			131,039			71		.22
Noninterest-bearing liabilities		82,052								43,295
Total liabilities		393,403								174,334
Total stockholders’ equity		66,822								51,237
Total liabilities and stockholders’ equity	$	460,225							$	225,571
Net interest income				$	3,786							$	1,530
Net interest rate spread (3)							3.63	%							2.90	%
Net interest-earning assets (4)	$	96,238							$	74,204
Net interest margin (5)							3.72	%							2.98	%
Average interest-earning assets to average interest-bearing liabilities		130.9	%							156.6	%

(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.

34

(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.

	Nine months Ended September 30,
	2015								2014
				Interest		Average						Interest		Average
	Average			and		Yield/			Average			and		Yield/
	Balance (2)			Dividends		Rate(1)			Balance			Dividends		Rate (1)
	(In thousands)
Interest-earning assets:
Loans	$	185,603		$	6,962		5.00	%	$	111,903		$	4,047		4.82	%
Securities		61,830			525		1.13			60,292			455		1.01
Other (3)		35,482			105		.39			29,384			97		.44
Total interest-earning assets		282,915			7,592		3.58			201,579			4,599		3.04
Noninterest-earning assets		31,585								17,950
Total assets	$	314,500							$	219,529
Interest-bearing liabilities:
NOW accounts		40,617			23		.08			30,669			11		.05
Money market accounts		57,441			134		.31			37,239			52		.19
Savings accounts		27,405			23		.11			26,145			20		.10
Time deposit		59,677			201		.45			41,763			147		.47
Total interest-bearing deposits		185,140			381		.27			135,816			230		.23
FHLB Advances and other borrowings		10,751			54		.67			—			—		—
Total interest-bearing liabilities		195,891			435		.30			135,816			230		.23
Noninterest-bearing liabilities		55,382								48,945
Total liabilities		251,273								184,761
Total stockholders’ equity		63,227								34,768
Total liabilities and stockholders’ equity	$	314,500							$	219,529
Net interest income				$	7,157							$	4,369
Net interest rate spread (4)							3.28	%							2.81	%
Net interest-earning assets (5)	$	87,024							$	65,763
Net interest margin (6)							3.37	%							2.89	%
Average interest-earning assets to average interest-bearing liabilities		144.4	%							148.4	%

(1) Annualized.

(2) Acquired assets and assumed liabilities and equity for the first six months ended June 30, 2015 are not included in the average balances.

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

(4) 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.

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

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

35

Comparison of Operating Results for the Three Months Ended September 30, 2015 and September 30, 2014

General. Net income available to common stockholders for the three months ended September 30, 2015 was $35,000 compared to net income of $39,000 for the three months ended September 30, 2014. The slight decrease in net income was primarily due to an increase in noninterest expense of $2.4 million, offset by an increase in net interest income of $2.3 million, an increase in noninterest income of $177,000, and a decrease in the provision for loan losses of $20,000. The increase in noninterest expense was mostly comprised of merger related expenses, increases in compensation expense, and expenses related to the investment in expanding the lending, credit, risk, and compliance functions of the Bank, and other increases related to infrastructure costs.

Interest Income. Interest income increased $2.5 million, or 155.0%, to $4.1 million for the three months ended September 30, 2015 primarily as a result of a $2.6 million increase in interest income on loans, partially offset by a decrease of $90,000 in interest income from securities. The increase in interest income resulted primarily from a $202.3 million increase in the average balance of our interest-earnings assets to $407.6 million and an 89 basis points increase in the average yield on our interest-earning assets to 4.01% for the three months ended September 30, 2015 compared to the prior year period.

Interest income on loans increased $2.6 million, or 192.4%, to $3.9 million for the three months ended September 30, 2015. Despite the generally low rate environment, the Bank was able to increase its yield on loans. The average balance of loans also increased to $314.9 million for the three months ended September 30, 2015 from $112.1 million for the three months ended September 30, 2014. The average yield on loans increased 20 basis points to the 4.97% for the three months ended September 30, 2015 compared to the prior year period.

Interest income on investment securities decreased $90,000, or 39.0%, to $141,000 for the three months ended September 30, 2015 as a result of the decrease in the average balance of investment securities. The average balance of investment securities decreased $22.8 million to $54.9 million for the three months ended September 30, 2015 from $77.7 million for the three months ended September 30, 2014. The prior year average balance on investment securities was as a result of the excess liquidity created in the 2014 stock offering initially used to purchase U.S government sponsored enterprise mortgage-backed securities, U.S. government enterprise and agency obligations and Federal Home Loan Bank obligations during the second half of 2014. The average yield on investment securities decreased by 16 basis points to 1.03% for the three months ended September 30, 2015 from 1.19% for the three months ended September 30, 2014.

Interest Expense. Interest expense increased $226,000, or 318.3%, to $297,000 for the three months ended September 30, 2015 from $71,000 for the three months ended September 30, 2014 the result of the increase in deposits from the Merger and the $53,000 increase in borrowing costs. The average cost of interest-bearing deposits increased by 13 basis points to 0.35% for the three months ended September 30, 2015 from 0.22% for the three months ended September 30, 2014 reflecting the slightly higher deposit rates assumed in the Merger. The average balance of interest-bearing deposits increased by $149.9 million during the three months ended September 30, 2015 to $280.9 million compared to the prior year period due to the Merger.

Net Interest Income. The effect of a higher average balance on loans and higher yielding asset mix compared to the prior year period has increased the Company’s net interest income for the three months ended September 30, 2015. Net interest income increased $2.3 million, or 147.5%, to $3.8 million for the three months ended September 30, 2015 compared to the prior year period. The net interest-rate spread increased to 3.63% for the three months ended September 30, 2015 from 2.90% for the three months ended September 30, 2014. Our net interest margin increased to 3.72% for the three months ended September 30, 2015 from 2.98% for the three months ended September 30, 2014.

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended September 30, 2015 compared to a provision of $20,000 for the three months ended September 30, 2014. Net recoveries for the three months ended September 30, 2015 were $64,000 compared to net recoveries of $5,000 for the three months ended September 30, 2014.

Management considers the allowance for loan losses at September 30, 2015 to be adequate to cover losses inherent in the loan portfolio based on an assessment of the qualitative and quantitative factors affecting the loan

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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.

Accounting for business combination under the GAAP acquisition method prohibits “carrying over” valuation allowances, such as the allowance for loan losses. Uncertainties relating to the expected future cash flows was reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Bank will establish loan loss allowances for the acquired loans in periods after the Merger, but only for losses incurred on these loans due to credit deterioration after Merger. As a result, the allowance for loan losses reflected in these financial statements are only that of historical Sunshine Bank.

Noninterest Income. Noninterest income increased $177,000, or 71.4%, to $425,000 for the three months ended September 30, 2015 from $248,000 for the three months ended September 30, 2014. The increase was primarily related to a $90,000 increase in fees and service charges on deposit accounts and a $56,000 increase in income from bank-owned life insurance.

Noninterest Expenses. Non-interest expense increased $2.4 million to $4.1 million for the three months ended September 30, 2015 compared to the same period in 2014. The increase primarily reflected an increase of $1.5 million in salaries and employee benefits expense. The salaries and employee benefits expense increase quarter over quarter was attributable to the addition of key Bank employees since October 2014 and the increased number of employees resulting from the Merger. The key employees have been critical to the organic growth in the first nine months of 2015 as well as preparing and positioning the Company for future organic and strategic growth. Occupancy, data processing, and other expenses have all increased proportionally with the increased size of the Company. Professional fees increased due to expenses associated with the Bank’s new equity compensation plan, which was approved during the third quarter of 2015, however no awards were granted as of September 30, 2015 and from increased costs of legal and audit reporting as a public company. The Company also had an increase of $119,000 in merger related expenses mostly residual costs of the Merger with Community Southern Holding, Inc. and to a lesser extent costs associated with the Company’s announced branch purchase expected to close in November.

Income Tax Expense. Income taxes were $21,000 for the three months ended September 30, 2015 due to pretax income of $70,000 at a 37% tax rate.

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Comparison of Operating Results for the Nine Months Ended September 30, 2015 and September 30, 2014

General. Net loss to common stockholders for the nine months ended September 30, 2015 was $469,000 compared to a net loss of $247,000 for the nine months ended September 30, 2014. The increase in net loss was primarily due to an increase in noninterest expense of $5.5 million; partially offset by an increase in net interest income of $2.8 million, a decrease in provision for loan losses of $660,000, an increase in non-interest income of $393,000 and an increase in income tax benefit of $1.3 million. The increase in noninterest expense was mostly comprised of Merger related expenses, increases in salary and benefit expense, and expenses related to the investment in expanding the lending, credit, risk, and compliance functions of the Bank, and other increases related to infrastructure costs.

Interest Income. Interest income increased $3.0 million, or 65.1%, to $7.6 million for the nine months ended September 30, 2015 primarily as a result of a $2.9 million increase in interest income on loans. The increase in interest income resulted primarily from an $81.3 million increase in the average balance of our interest-earnings assets to $282.9 million and a 54 basis points increase in the average yield on our interest-earning assets to 3.58% for the nine months ended September 30, 2015 compared to the prior year period. The increase in the average yield was attributable to management’s focus on growing the higher yielding loan portfolio resulting in a shift from low interest yielding investment securities and cash into commercial loans.

Interest income on loans increased $2.9 million, or 72.0%, to $7.0 million for the nine months ended September 30, 2015 due mainly to the increase in the average balance of loans. Average loans for the nine months ended September 30, 2015 increased by $73.7 million to $185.6 million from $111.9 million for the nine months ended September 30, 2014. The average yield on loans increased 8 basis points to 5.00% for the nine months ended September 30, 2015 from 4.82% for the nine months ended September 30, 2014. During the nine months ended September 30, 2015, the Bank recognized $151,000 of past due interest due to the payoff of a restructured loan in the first quarter.

Interest income on investment securities increased $90,000, or 15.4%, to $525,000 for the nine months ended September 30, 2015 as a result of the increase of 12 basis points in the average yield. The average yield on investment securities increased to 1.13% for the nine months ended September 30, 2015 from 1.01% for the nine months ended September 30, 2014. The average balance of investment securities increased $1.5 million to $61.8 million for the nine months ended September 30, 2015 from $60.3 million for the nine months ended September 30, 2014.

Interest Expense. Interest expense increased $205,000, or 89.1%, to $435,000 for the nine months ended September 30, 2015 from $230,000 for the nine months ended September 30, 2014. The increase can be attributed to the increase in average deposits and the increased borrowing costs of $54,000. The average balance of interest-bearing deposits increased by $49.3 million during the nine months ended September 30, 2015 to $185.1 million, due mainly to the increased deposits assumed in the Merger. The average cost of deposits increased by 4 basis points to 0.27% for the nine months ended September 30, 2015 from 0.23% for the nine months ended September 30, 2014.

Net Interest Income. The effect of higher average balances on loans and securities and an increased average yield on loans and securities has increased the Bank’s net interest income for the nine months ended September 30, 2015 compared to the prior year period. Net interest income increased $2.8 million, or 63.8%, to $7.2 million for the nine months ended September 30, 2015 compared to the prior year period. The increase was primarily due to the increase in our net interest rate spread to 3.28% for the nine months ended September 30, 2015 from 2.81% for the nine months ended September 30, 2014. Our net interest margin increased to 3.37% for the nine months ended September 30, 2015 from 2.89% for the nine months ended September 30, 2014.

Provision for Loan Losses. We recorded no provision for loan losses for the nine months ended September 30, 2015 compared to a provision of $660,000 for the nine months ended September 30, 2014. Net recoveries for the nine months ended September 30, 2015 were $221,000 compared to net charge-offs of $582,000 for the nine months ended September 30, 2014. The change was primarily due to the charge-off of a commercial loan relationship in the amount of $624,000 for the nine months ended September 30, 2014.

Management considers the allowance for loan losses at September 30, 2015 to be adequate to cover losses inherent in the loan portfolio based on an assessment of the qualitative and quantitative factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of

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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.

Accounting for business combination under the GAAP acquisition method prohibits “carrying over” valuation allowances, such as the allowance for loan losses. Uncertainties relating to the expected future cash flows was reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Bank will establish loan loss allowances for the acquired loans in periods after the Merger, but only for losses incurred on these loans due to credit deterioration after Merger. As a result, the allowance for loan losses reflected in these financial statements are only that of historical Sunshine Bank.

Noninterest Income. Noninterest income increased $393,000, or 51.4%, to $1.2 million for the nine months ended September 30, 2015 from $765,000 for the nine months ended September 30, 2014. The increase was primarily related to a $195,000 gain on sales of securities, a $113,000 increase in income from bank-owned life insurance, a $36,000 increase in the deposit related fees, and a $16,000 gain on sales of loans held for sale.

Noninterest Expense. Non-interest expense increased $5.5 million, or 110.1%, to $10.4 million for the nine months ended September 30, 2015 compared to the same period in 2014. The increase primarily reflected an increase of $2.9 million in salaries and employee benefits expense. The salaries and employee benefits expense increase period over period was attributable to the addition of key Bank employees since October 2014 and the increased number of employees resulting from the Merger. The key employees have been critical to the organic growth in the first nine months of 2015 as well as preparing and positioning the Company for future organic and strategic growth. Most expense categories grew proportionally with the increased size of the Company. The Company had an increase of $1.2 million in merger related expenses predominately associated with the Merger with Community Southern Holdings, Inc. The Company also had an increase of $229,000 in professional fees which related to the increased costs of legal and audit reporting as a public company.

Income Tax Benefit. Income tax benefit was $1.6 million for the nine months ended September 30, 2015 due to pretax losses of $2.1 million and a change in accounting estimates. The Company performed a change in accounting estimate for bank owned life insurance, which resulted in a benefit of approximately $733,000 for the nine months ended September 30, 2015.

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Asset Quality

Non-Performing Assets. We define non-performing loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due and non-accruing troubled debt restructurings. Non-performing assets, including non-performing loans and other real estate owned, totaled $896,000 or 0.27% of total assets, at September 30, 2015 and $2.8 million, or 1.20% of total assets, at December 31, 2014. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. We had no accruing loans past due 90 days or more at December 31, 2014. At September 30, 2015, we had $160,000 of accruing loans that were past due 90 days or more. These loans were performing loans awaiting renewal and were subsequently renewed.

	At September 30, 2015			At December 31, 2014
	(Dollars in thousands)
Non-accrual loans:
Real estate mortgage loans:
One- to four-family residential	$	40		$	—
Commercial		—			—
Multi-family		—			—
Land and construction		—			—
Commercial business loans		—			570
Consumer loans		—			—
Total non-accrual loans		40			570
Non-accruing troubled debt restructured loans:
Real estate mortgage loans:
One- to four-family residential		—			—
Commercial		471			—
Multi-family		99			124
Land and construction		254			—
Commercial business loans		—			198
Consumer loans		—			—
Total non-accruing troubled debt restructured loans		824			322
Total non-performing loans		864			892
Loans Held for Sale		—			1,829
Other real estate owned:
One- to four-family		—			41
Commercial		—			—
Multi-family		—			—
Land and construction		32			—
Commercial business loans		—			—
Consumer loans		—			—
Total other real estate owned		32			41
Total non-performing assets	$	896		$	2,762
Total accruing troubled debt restructured loans	$	1,334		$	3,903
Total non-performing loans to total loans		0.27	%		0.81	%
Total non-performing assets to total assets		0.20	%		1.20	%

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

	For the Nine Months Ended September 30,
	2015			2014
	(Dollars in thousands)
Allowance at beginning of period	$	1,726		$	1,718
Provision for loan losses		—			660
Charge offs:
Real estate mortgage loans:
One- to four-family residential		(1	)		(17	)
Commercial		—			—
Multi-family		—			—
Land and construction		—			(2	)
Commercial business loans		(9	)		(626	)
Consumer loans		—			(10	)
Total charge-offs		(10	)		(655	)
Recoveries:
Real estate mortgage loans:
One- to four-family residential		—			9
Commercial		124			9
Multi-family		—			1
Land and construction		—			—
Commercial business loans		104			45
Consumer loans		3			9
Total recoveries		231			73
Net recoveries (charge-offs)		221			(582	)
Allowance at end of period	$	1,947		$	1,796
Allowance to nonperforming loans		225.35	%		38.09	%
Allowance to total loans outstanding at the end of the period		0.60	%		1.59	%
Net recoveries (charge-offs) to average loans outstanding during the period (annualized)		0.16	%		(0.69	)%

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, 2015, we had the capacity to borrow approximately $95.3 million from the Federal Home Loan Bank of Atlanta. At September 30, 2015, we had outstanding advances of approximately $20.0 million and at December 31, 2014 we had no outstanding advances from the Federal Home Loan Bank of Atlanta. We also have lines of credit at three financial institutions that would allow us to borrow up to $25.5 million at September 30, 2015. No credit lines were drawn upon at September 30, 2015.

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, 2015 by operating activities was $1.0 million. During the nine months ended September 30, 2015, we had an increase in deferred tax asset of $1.8 million and $729,000 increase in loans held for sale, partially offset by $1.9 million received from the proceeds of sales on loans held for sale. Net cash used in investing activities, which consisted primarily of the net assets acquired in the Merger with Community Southern Holdings, Inc., disbursements for loan originations and the purchase of premises and equipment, offset by principal collections on loans and proceeds from maturing securities, was $9.7 million for the nine months ended September 30, 2015. Net cash used in financing activities, consisting primarily of the activity in deposit accounts and repayments of FHLB advances and preferred stock, was $7.2 million for the nine months ended September 30, 2015.

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Net cash provided by the nine months ended September 30, 2014 by operating activities was $1.1 million. 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 activity in deposit accounts and net proceeds from the stock offerings, was $28.2 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, 2015, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of 10.59% of adjusted total assets, which is above the required level of 5.00%, common equity tier 1 capital to risk-weighted assets of 13.75%, which is above the required level of 6.50%, tier 1 capital to risk-weighted assets of 13.75%, which is above the required level of 8.00%, and total risk-based capital of 14.31% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Bank was categorized as well-capitalized at September 30, 2015. 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, 2015, we had outstanding commitments to originate loans of $8.9 million, unused lines of credit totaling $46.2 million, and stand-by letters of credit of $732,000. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from September 30, 2015 totaled $81.5 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits are not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities. The Company has also entered into a branch purchase agreement with First Federal Bank of Florida.

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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 September 30, 2015, 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, 2015, 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, 2015, 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 as of September 30, 2015.

Item 1A. Risk Factors

Not required for smaller reporting companies.

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

Nothing to report.

Item 3. Defaults Upon Senior Securities

Nothing to report.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Nothing to report.

Item 6. Exhibits

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

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

SIGNATURES

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

	SUNSHINE BANCORP, INC.
Date: November 12, 2015	By:	/s/ Andrew S. Samuel
		Andrew S. Samuel
		President and Chief Executive Officer
		(Duly Authorized Officer)
Date: November 12, 2015	By:	/s/ John Finley
		John Finley
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

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