Exhibit 13

SUNSHINE BANCORP, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Registered Public Accounting Firm			F-2
Consolidated Balance Sheets, as of December 31, 2016 and 2015			F-3
Consolidated Statements of Operations for the Years Ended December 31, 2016, and 2015			F-4
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2016, and 2015			F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, and 2015			F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, and 2015			F-7
Notes to Consolidated Financial Statements at December 31, 2016 and 2015			F-9-F-36

 

F-1

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Sunshine Bancorp, Inc.

Plant City, Florida:

We have audited the accompanying consolidated balance sheets of Sunshine Bancorp, Inc. and Subsidiary (the “Company”), as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2016 and 2015, and the consolidated results of its operations and their cash flows for years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

HACKER, JOHNSON & SMITH PA

Tampa, Florida

March 24, 2017

 

F-2

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

		As of December 31,
		2016				2015
Assets
Cash and due from banks		$	16,562			$	13,220
Interest-earning deposits with banks			21,386				16,523
Federal funds sold			12,325				29,601
Cash and cash equivalents			50,273				59,344
Time deposits with banks			2,794				4,410
Securities available for sale			109,668				65,944
Loans held for sale			443				790
Loans, net of allowance for loan losses of $3,274 and $2,511			683,784				326,266
Premises and equipment, net			25,920				17,612
Federal Home Loan Bank stock, at cost			3,478				1,597
Cash surrender value of bank-owned life insurance			22,462				12,122
Deferred income tax asset			6,660				6,426
Goodwill and other intangibles			22,308				10,101
Accrued interest receivable			2,077				1,048
Other real estate owned			32				32
Other assets			1,536				1,573
Total assets		$	931,435			$	507,265
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand accounts		$	217,418			$	89,114
Interest-bearing demand and savings accounts			354,327				198,977
Time deposits			158,204				111,020
Total deposits			729,949				399,111
Other Borrowings			71,867				28,927
Subordinated Notes			11,000				—
Other liabilities			6,518				7,833
Total liabilities			819,334				435,871
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 authorized; none outstanding			—				—
Common stock, $0.01 par value, 50,000,000 shares authorized; issued and outstanding of 7,986,074 at December 31, 2016 and 5,259,321 at December 31, 2015			80				53
Additional paid in capital			94,302				52,763
Retained income			21,803				21,846
Unearned employee stock ownership plan (“ESOP”) shares			(3,047	)			(3,160	)
Accumulated other comprehensive loss			(1,037	)			(108	)
Total stockholders’ equity			112,101				71,394
Total liabilities and stockholders’ equity		$	931,435			$	507,265

See accompanying Notes to Consolidated Financial Statements.

 

F-3

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

 

		Year Ended December 31,
		2016				2015
Interest income:
Loans		$	19,644			$	10,963
Securities			1,023				683
Other			260				200
Total interest income			20,927				11,846
Interest Expense:
Deposits			1,426				670
Borrowed funds			588				81
Total interest expense			2,014				751
Net interest income			18,913				11,095
Provision for loan losses			350				—
Net interest income after provision for loan losses			18,563				11,095
Noninterest income:
Fees and service charges on deposit accounts			1,368				762
Gain on sale of other real estate owned			18				20
Mortgage Broker Fees			152				146
Gain on sale of securities			208				195
Gain on sale of premises			563				—
Income from bank-owned life insurance			402				331
Other			475				175
Total noninterest income			3,186				1,629
Noninterest expenses:
Salaries and employee benefits			10,752				9,633
Occupancy and equipment			2,342				1,441
Data and item processing services			1,581				948
Professional fees			808				776
Advertising and promotion			107				302
Stationery and supplies			205				148
Deposit insurance and general insurance			422				289
Merger and acquisition			2,955				1,501
Other			2,443				2,238
Total noninterest expenses			21,615				17,276
Income (Loss) before income taxes			134				(4,552	)
Income tax expense (benefit)			177				(2,321	)
Net loss		$	(43	)		$	(2,231	)
Preferred Stock dividend paid			—				(14	)
Net loss available to common stockholders		$	(43	)		$	(2,245	)
Basic loss per share		$	(0.01	)		$	(0.56	)
Diluted loss per share		$	(0.01	)		$	(0.56	)

See accompanying Notes to Consolidated Financial Statements.

 

F-4

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Loss

(In thousands)

 

		Year Ended December 31,
		2016				2015
Net loss		$	(43	)		$	(2,231	)
Other comprehensive loss:
Change in unrealized gain on securities:
Unrealized gain (losses) arising during the period			(1,280	)			21
Reclassification adjustment for realized gains			(208	)			(195	)
Net change in unrealized gain			(1,488	)			(174	)
Deferred income tax benefit on above change			559				66
Total other comprehensive loss			(929	)			(108	)
Comprehensive loss		$	(972	)		$	(2,339	)

See accompanying Notes to Consolidated Financial Statements.

 

F-5

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity

(In thousands, except per share amounts)

Year Ended December 31, 2016 and 2015

 

		Preferred Stock								Common Stock								Additional Paid In Capital				Retained Income				Unearned ESOP Shares				Accumulated Other Comprehensive Loss				Total Stockholder’s Equity
		Shares				Amount				Shares				Amount
Balance, December 31, 2014			—			$	—				4,232,000			$	42			$	40,766			$	24,091			$	(3,273	)		$	—			$	61,626
Net loss			—				—				—				—				—				(2,231	)			—				—				(2,231	)
Dividends paid on preferred stock			—				—				—				—				—				(14	)			—				—				(14	)
Preferred stock exchanged			5,700				5,700				—				—				—				—				—				—				5,700
Preferred stock redeemed			(5,700	)			(5,700	)			—				—				—				—				—				—				(5,700	)
Proceeds from issuance of common stock, net of offering costs of $821			—				—				875,000				9				11,350				—				—				—				11,359
Issuance of common stock under share-based awards plan and Stock-based compensation expense			—				—				152,321				2				589				—				—				—				591
Employee Stock Ownership Plan allocation to participants			—				—				—				—				58				—				113				—				171
Net change in unrealized loss on Securities available for sale, net of taxes			—				—				—				—				—				—				—				(108	)			(108	)
Balance, December 31, 2015			—			$	—				5,259,321			$	53			$	52,763			$	21,846			$	(3,160	)		$	(108	)		$	71,394
Net loss			—				—				—				—				—				(43	)			—				—				(43	)
Issuance of common stock under share-based awards plan and Stock-based compensation expense			—				—				(8,057	)			—				758				—				—				—				758
Issuance of common stock in connection with a Business Combination			—				—				2,734,810				27				40,701				—				—				—				40,728
Employee Stock Ownership Plan allocation to participants			—				—				—				—				80				—				113				—				193
Net change in unrealized loss on Securities available for sale, net of taxes			—				—				—				—				—				—				—				(929	)			(929	)
Balance, December 31, 2016			—				—				7,986,074			$	80			$	94,302			$	21,803			$	(3,047	)		$	(1,037	)		$	112,101

See accompanying Notes to Consolidated Financial Statements.

 

F-6

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Statements of Cash Flows

(In thousands)

 

		Years Ended December 31,
		2016				2015
Cash flows from operating activities:
Net loss		$	(43	)		$	(2,231	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation, Amortization, Accretion, net			1,832				838
Provisions for loan losses			350				—
Gain on sale of loans held for sale			(152	)			(16	)
Proceeds from the sale of loans held for sale			2,066				1,967
Loans originated as held for sale			(1,318	)			(729	)
Income from bank-owned life insurance, net			(340	)			(278	)
(Gain) on sale of premise			(563	)			—
(Gain) on sale of other real estate owned			(18	)			(20	)
Gain on sale of securities available for sale			(208	)			(195	)
(Increase) decrease in accrued interest receivable			(420	)			250
Increase in deferred tax assets			(144	)			(1,483	)
Decrease (increase) in other assets			125				(1,060	)
Stock options and restricted stock compensation expense			758				591
Employee Stock Ownership Plan compensation expense			193				171
Increase in other liabilities			(4,733	)			2,834
Net cash (used in) provided by operating activities			(2,615	)			639
Cash flows from investing activities:
Maturities of time deposits with banks			1,616				1,470
Maturities & repayments of securities held to maturity			—				5,800
Proceeds from sale of premise			1,600				—
Proceeds from sale of securities available for sale			36,350				60,369
Purchases of securities available for sale			(91,278	)			(23,507	)
Calls, repayments, and maturities of securities available for sale			25,466				10,923
Net increase in loans			(121,352	)			(38,073	)
Proceeds from sale of other real estate owned			38				61
Purchases of premises and equipment, net			(1,139	)			(3,431	)
Purchase of bank owned life insurance			(10,000	)			—
Redemption of Federal Home Loan Bank stock			(1,622	)			123
Business acquisitions, net of cash received			60,676				15,424
Net cash (used in)provided by investing activities			(99,645	)			29,159
Cash flows from financing activities:
Net increase in deposits			44,266				9,260
Net increase (decrease) in Other Borrowings			37,923				(5,838	)
Redemption in Preferred Stock			—				(5,700	)
Payment of Dividend to Preferred Stock			—				(14	)
Net proceeds received from stock issuance			—				11,359
Net proceeds received from subordinated notes			11,000				—
Net cash provided by financing activities			93,189				9,067
(Decrease) increase in cash and cash equivalents			(9,071	)			38,865
Cash and cash equivalents at beginning of year			59,344				20,479
Cash and cash equivalents at end of year		$	50,273			$	59,344
Supplemental disclosure of cash flow information:
Cash paid during the period for-Interest		$	1,780			$	716

 

F-7

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Statements of Cash Flows

(In thousands)

 

		Year Ended December 31,
		2016				2015
Noncash transaction
Accumulated other comprehensive loss, net change in unrealized loss on securities available for sale, net of taxes		$	(929	)		$	(108	)
Securities held to maturity transferred to available for sale		$	—			$	69,665
Transfer from loans to other real estate owned		$	20			$	—
Noncash assets acquired and liabilities assumed and common stock issued:
Securities available for sale		$	16,179			$	44,372
Loans Held for Sale		$	249			$	—
Loans		$	236,447			$	179,408
Premises and equipment		$	9,329			$	8,727
Federal Home Loan Bank stock		$	259			$	1,540
Cash surrender value of bank-owned life insurance		$	—			$	4,585
Deferred income taxes		$	(469	)		$	2,095
Goodwill		$	10,726			$	9,500
Core Deposit Intangible		$	1,642			$	655
Accrued interest		$	609			$	685
Other Real Estate Owned		$	—			$	32
Other assets		$	88			$	98
Deposits		$	286,572			$	225,927
Federal Home Loan Bank advances		$	—			$	31,480
Other borrowings		$	5,017			$	3,285
Other liabilities		$	3,418			$	729
Preferred Stock		$	—			$	5,700
Common Stock issued		$	40,728			$	5,700

See accompanying Notes to Consolidated Financial Statements.

 

F-8

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2016 and 2015 and the Years Then Ended

 

(1)	Organization and Significant Accounting Policies

Organization. Sunshine Bancorp, Inc. (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”). Collectively, the Bank and the Holding Company are referred to as the “Company.” Sunshine Bancorp, Inc., a Maryland corporation owns all of the outstanding shares of common stock of Sunshine Bank. On July 14, 2014, Sunshine Bancorp completed its initial public offering of common stock and commenced trading on the NASDAQ Capital Market under the symbol “SBCP.” As part of the Conversion, the Holding Company established a liquidation account in an amount equal to retained income. The liquidation account will be maintained for the benefit of eligible account holders who maintain deposit accounts in the Bank after the conversion.

At December 31, 2016, the Company had total consolidated assets of $931.4 million, total deposits of $729.9 million and total stockholders’ equity of $112.1 million.

The Bank operations are conducted from the main banking office in Plant City, Florida and seventeen additional full service banking offices located throughout central Florida in Brevard, Hillsborough, Manatee, Orange, Osceola, Pasco, Polk, and Seminole counties. The Bank’s deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”).

Basis of Presentation. The accompanying 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 accounting and reporting practices of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. The following summarizes the more significant of these policies and practices.

Use of Estimates. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred income taxes, and the estimated fair value of the tangible assets and identifiable assets acquired, and liabilities and equity assumed.

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 reflected in the fair value measurement of the acquired loans and reflected in the purchase price. The Company 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.

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 seven 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.

 

(continued)

F-9

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(1)	Organization and Significant Accounting Policies, Continued

 

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 loan’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.

Cash and Cash Equivalents. For purposes of the statements of cash flows, cash and cash equivalents include cash and balances due from banks, interest-earning deposits with banks and federal funds sold, all of which have original maturities of ninety days or less.

The Bank is required under Federal Reserve Board regulations to maintain cash reserves, generally consisting of deposits with the Federal Reserve Bank, of cash or noninterest-earning accounts with qualifying banks, against its transaction accounts. At December 31, 2016 and 2015, the Bank’s cash reserve requirements were $6,226,000 and $6,348,000, respectively.

Securities. Securities may be classified as either trading, held to maturity or available for sale. Trading securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading securities are included immediately in operations. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities consist of securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses on available-for-sale securities are excluded from operations and reported in accumulated other comprehensive loss. Gains and losses on the sale of available-for-sale securities are recorded on the trade date determined using the specific-identification method. Premiums and discounts on securities available for sale are recognized in interest income using the interest method over the period to maturity.

Loans Held for Sale. Loans held for sale includes loans originated which are intended for sale in the secondary market and substandard loans transferred to loans held for sale and are carried at the lower of book value or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to operations.

Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.

Loan origination fees are deferred and certain direct origination costs are capitalized. The net amount are deferred and are recognized as an adjustment of the yield of the related loan.

The accrual of interest on all portfolio classes, including troubled debt restructurings, is discontinued at the time the loan is more than ninety days delinquent unless the loan is well collateralized and in process of collection. Nonaccrual loans are reviewed for charge-off if more than ninety-days past due, except for residential loans and consumer loans. Residential loans are reviewed at 180 days and consumer loans are reviewed at 120 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered unlikely.

All interest accrued but not collected for loans placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. In addition, a loan should be in accordance with the contractual terms for a reasonable period of time, usually requiring a payment history of six months.

 

(continued)

F-10

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(1)	Organization and Significant Accounting Policies, Continued

 

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. There were no material changes in the Bank’s accounting policies or methodology related to the allowance for loan losses during the years ended December 31, 2016 or 2015.

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the size and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors.

The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding sixteen quarters. This is supplemented by the risks for each portfolio segment. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and business spending as a result of unemployment and reduced credit availability and lack of confidence in the economy. The historical experience is adjusted for the following qualitative factors: (a) the existence and effect of any concentrations of credit and changes in the level of such concentrations; (b) changes in national, regional and local economic conditions that affect the collectability of the loan portfolio; (c) changes in levels or trends in charge-offs and recoveries; (d) changes in the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss; (e) changes in the nature and volume of the loan portfolio and terms of loans; (f) changes in lending policies and procedures, risk selection and underwriting standards; (g) changes in the experience, ability and depth of lending management and other relevant staff; (h) quality of loan review; (i) the effect of other external factors, trends or uncertainties that could affect management’s estimate of probable losses, such as competition and industry conditions.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial, commercial real estate and residential mortgage loan segments by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures.

Income Taxes. There are two components of income taxes: current and deferred. Current income taxes reflect taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income taxes result from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Uncertain tax positions are recognized if it is more likely than not that the tax position will be realized or sustained upon examination including resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. As of December 31, 2016, management is not aware of any uncertain tax positions that would have a material effect on the Company’s consolidated financial statements.

 

(continued)

F-11

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(1)	Organization and Significant Accounting Policies, Continued

 

The Company recognizes interest and penalties on income taxes as a component of income taxes.

Premises and Equipment. Land is stated at cost. Buildings and improvements and furniture and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization expense is computed using the straight-line method over the estimated useful lives of the assets. Estimate useful lives for building and improvements is forty years; for furniture and equipment from three to ten years; leasehold improvements are amortized over the lease term.

Other Real Estate Owned. Other real estate owned includes assets acquired through, or in lieu of, loan foreclosure and are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value less estimated selling costs. Revenue and expenses from operations and changes in the valuation allowance are included in operations.

Fair Value Measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP has established a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.

Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.

The following describes valuation methodologies used for assets and liabilities measured at fair value:

Securities Available-for-Sale. Securities available-for-sale use valuation methodologies involving market-based or market-derived information, Level 2 measurements, to measure fair value. The fair value measurement is based upon recent observable market activity of such assets or comparable assets that occur in sufficient volume. The Company uses prices from independent pricing services to validate the fair value of investment securities.

Impaired Loans. Estimates of fair value for impaired loans is based on the estimated value of the underlying collateral which is determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s management related to values of properties in the Company’s market areas. Management takes into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, fair value estimates for impaired loans are classified as Level 3.

Other Real Estate Owned. Estimates of fair values are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s senior lending officers related to values of properties in the Company’s market areas. These officers take into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, the fair values estimates for other real estate owned are classified as Level 3.

Assets Acquired and Liabilities Assumed. The estimated fair values of the investment securities classified as available for sale were calculated utilizing Level 2 inputs. The prices for these instruments are based upon sales of the securities shortly after the acquisition date. The Company reviewed the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

 

(continued)

F-12

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(1)	Organization and Significant Accounting Policies, Continued

 

Level 3 inputs were utilized to value the acquired loan portfolio and included the use of present value techniques employing cash flow estimates and the incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value adjustments required under GAAP.

Core deposit premium represents the value assigned to demand, interest checking, money market and savings accounts assumed as part of an acquisition. The core deposit premium value represents the future economic benefit and was valued utilizing Level 3 inputs.

Certificates of deposit (time deposits) are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of certificates of deposits represents the present value of the certificates’ expected contractual payments discounted by market rates for similar CDs and is valued utilizing Level 3 inputs.

The estimated fair values of the borrowings were calculated utilizing Level 3 inputs. The prices for these instruments are based upon the termination costs of the borrowings shortly after the acquisition date.

Off-Balance Sheet Financial Instruments. In the ordinary course of business the Company has entered into off-balance sheet financial instruments consisting of unused lines of credit, commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded.

Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values of financial instruments:

Cash and Cash Equivalents. The carrying amounts approximate their fair value.

Time Deposits with Banks. The fair value of time deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Securities. Fair values for securities are based on quoted market prices for identical or similar securities.

Loans. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate mortgages (e.g. one-to-four family residential), commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

Loans Held for Sale. Loans held for sale fair values are established using sales prices based on secondary market valuations.

Federal Home Loan Bank Stock. The stock is not publicly traded and the estimated fair value is its redemption value.

Accrued Interest Receivable. The carrying amount of accrued interest receivable approximates its fair value.

Deposits. The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using discounted cash flow calculation that applies interest rates currently being offering on time deposits to a schedule of aggregated expected monthly maturities of time deposits.

FHLB Advances. The fair values for FHLB advances is estimated using current rates available to the Company for borrowings with similar terms and remaining time to maturity.

Other Borrowings. The fair values for other borrowings, which consist entirely of customer repurchases that are payable on demand, is equal to their carrying amounts.

Subordinated Notes. The fair value of the subordinated notes is based on its approximated redeemable value.

Off-Balance Sheet Financial Instruments. Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Comprehensive 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 loss, are components of comprehensive loss.

 

(continued)

F-13

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

Share-Based Compensation. The Company has an equity-based compensation plan that provide for the granting of stock options (incentive and nonqualified) and restricted stock to selected employees and directors. The Company recognizes all share-based payments to employees in the consolidated statement of operations based on their fair values. The fair value of such equity instruments is recognized as an expense in the historical financial statements over the service period. The Company uses the Black-Scholes Model to estimate the fair value of each option on the date of grant.

 

(2)	Organization and Significant Accounting Policies, Continued

The Company grants stock options to employees with an exercise price equal to the fair value of the shares at the date of grant. The fair value of restricted stock is equivalent to the fair value on the date of grant and is amortized over the vesting period.

Loss per Share. Basic loss per share represents loss available to common shareholders divided by the weighted-average number of common shares outstanding during the year. Diluted loss per share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares relate to outstanding stock options determined using the treasury stock method.

Recent Accounting Standards Update.

During June 2016, the FASB issued new guidance related to Credit Losses. The new guidance requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

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

During January 2016, the FASB issued new guidance related to Financial Instruments. The new guidance requires equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During September 2015, the FASB issued new guidance related to Business Combinations. The new guidance requires acquirers to recognize adjustments to provisional amounts (that are identified during the measurement period) in the reporting period in which the adjustment amounts are determined. The new guidance also requires such amounts to be disclosed in the consolidated financial statements. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During April 2015, the FASB issued new guidance related to Debt Issuance Costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

Reclassifications. Certain amounts in the 2015 financial statements have been reclassified to conform to the 2016 presentation.

 

(2)	Business Combinations

Acquisition of Florida Bank of Commerce. On October 31, 2016, pursuant to an Agreement and Plan of Merger entered into May 9, 2016, the Company completed its acquisition of FBC Bancorp, Inc. and its wholly-owned subsidiary Florida Bank of Commerce. At the effective time of the Merger, each share of common stock of FBC was converted into 0.88 shares of common stock of the Company. The Company acquired these assets and liabilities to expand its market presence in the Greater Orlando Metropolitan Statically Area (“MSA”) and to further its strategy of capitalizing on opportunities along the demographically attractive I-4 corridor. With the acquisition the Company entered Brevard, Osceola, and Seminole Counties, Florida. The Company incurred approximately $3.0 million in merger and acquisition related expenses included in the 2016 results of operations.

 

(continued)

F-14

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(2)	Business Combinations, continued

Agreement to Acquire Certain Assets and Liabilities of First Federal Bank of Florida. On November 13, 2015, pursuant to a purchase and assumption agreement signed July 16, 2015, the Bank assumed the deposits and certain loans from two branch offices of First Federal Bank of Florida in Manatee County. The branch offices are located in Bradenton and Sarasota, Florida. The purchase and assumption added $47.0 million in deposits and $7.9 million in loans. Sunshine Bank also purchased the real estate and some selected fixed assets associated with the branches. The Company acquired these assets and liabilities to expand its market presence to Sarasota and Manatee Counties, Florida and to capitalize on the demographically attractive I-75 corridor between Tampa and Sarasota, Fl. The Company incurred approximately $171,000 in merger and acquisition related expenses.

Agreement to Acquire 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. Community Southern Holdings, Inc. was merged into the Company and Community Southern Bank was merged into the Bank. The Company acquired $250.4 million in assets and assumed $214.4 million in liabilities and stockholders’ equity and exchanged $5.7 million in preferred stock to the U.S. Treasury as part of its Small Business Lending Fund. The exchanged shares were subsequently redeemed on September 30, 2015 at their par value of $5.7 million. The Company acquired these assets and liabilities to expand its market presence to Polk and Orange Counties, Florida and to strengthen its position along the demographically attractive I-4 corridor. The Company incurred approximately $1.3 million in merger and acquisition related expenses.

The following table summarizes the fair value of assets acquired, liabilities assumed and stockholders’ equity exchanged on the date of acquisition and for the years ended December 31, 2016 and 2015 in total.

 

		2016				2015
		FBC Bancorp, Inc.				Community Southern Holdings, Inc.				First Federal Branch Acquisition				Total
Cash and cash equivalents		$	60,676			$	10,183			$	38,165			$	48,348
Securities available for sale			16,179				44,372				—				44,372
Loans held for sale			249				—				—				—
Loans			236,447				171,476				7,932				179,408
Premises and equipment			9,329				6,097				2,630				8,727
Federal Home Loan Bank stock			259				1,540				—				1,540
Bank owned life insurance			—				4,585				—				4,585
Deferred tax asset			(469	)			2,095				—				2,095
Goodwill			10,726				8,662				838				9,500
Core deposit intangible			1,642				588				67				655
Accrued interest receivable			609				685				—				685
Other real estate owned			—				32				—				32
Other assets			88				82				16				98
Total assets acquired		$	335,735			$	250,397			$	49,648			$	300,045
Deposits			286,572				178,912				47,015				225,927
Federal Home Loan Bank advances			—				31,480				—				31,480
Other borrowings			5,017				3,285				—				3,285
Other liabilities			3,418				726				3				729
Preferred Stock			—				5,700				—				5,700
Total liabilities assumed			295,007				220,103				47,018				267,121
Net assets acquired		$	40,728			$	30,294			$	2,630			$	32,924

 

(continued)

F-15

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(2)	Business Combinations, continued

Results of operations for FBC Bancorp, Inc. prior to the acquisition date are not included in the Consolidated Statement of Operations for the year ended December 31, 2016. The following table presents financial information regarding the former FBC Bancorp, Inc. operations excluded from the Consolidated Statement of Operations prior to the date of acquisition:

 

		Actual from January 1, 2016 Through October 31, 2016 (unaudited) (in thousands)
Net interest income		$	9,867
Noninterest income			716
Net loss			(847	)

The following table presents unaudited pro forma information as if the acquisition of FBC Bancorp, Inc. had occurred on January 1, 2016. The table does not consider the effect of expense savings created by the merger other than to exclude Merger Related expenses.

 

		Unaudited pro forma information For the year ended,
		2016				2015
		(in thousands, except per share data)
Net interest income			29,082				22,275
Noninterest income			3,902				3,189
Net income			3,503				1,082
Pro forma earnings per share-Basic and Diluted			0.52				0.16

The tables above 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.

 

(3)	Goodwill and Other Intangible Assets

Goodwill and Core Deposit Intangible (“CDI”) are as follows (in thousands):

 

		At December 31,
		2016				2015
Goodwill		$	20,226			$	9,500
CDI			2,082				601
		$	22,308			$	10,101

The future expected amortization of CDI with determinable useful lives as of December 31, 2016 are as follows (in thousands):

 

Year Ending December 31,		Amount
2017		$	397
2018			354
2019			312
2020			270
2021			228
Thereafter			521
		$	2,082

 

(continued)

F-16

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(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):

 

Securities Available for Sale:		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Loss				Fair Value
December 31, 2016:
Federal Home Loan Bank obligations		$	3,000				2				—			$	3,002
U.S. Government enterprise and agency obligations			15,347				5				(99	)			15,253
Agency Mortgage-backed securities			92,983				12				(1,582	)			91,413
Total		$	111,330				19				(1,681	)		$	109,668
December 31, 2015:
Federal Home Loan Bank obligations		$	15,074				6				(6	)		$	15,074
U.S. Government enterprise and agency obligations			14,037				7				(37	)			14,007
Agency Mortgage-backed securities			37,007				—				(144	)			36,863
Total		$	66,118				13				(187	)		$	65,944

The amortized cost and fair value of securities at December 31, 2016, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to call or prepayment rights. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately.

 

		Securities Available for sale
		Amortized Cost				Fair Value
Due in one year or less		$	13,006			$	13,010
Due from one year to five years			5,341				5,245
Agency Mortgage-backed securities			92,983				91,413
		$	111,330			$	109,668

The Company pledged securities with a fair market value of approximately $22.1 million at December 31, 2016 and $25.6 million at December 31, 2015 to secure public funds and other borrowings.

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

 

		Year ended December 31,
		2016				2015
Proceeds received from sale		$	36,350			$	60,369
Gross Gains on sale		$	208			$	195

 

(continued)

F-17

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(4)	Securities, Continued

 

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

 

		Less Than Twelve Months								More than Twelve Months
		Gross Unrealized Loss				Fair Value				Gross Unrealized Loss				Fair Value
Securities Available for sale:
At December 31, 2016:
U.S Government enterprise and agency obligations		$	(99	)		$	9,387			$	—			$	—
Agency Mortgage-backed securities			(1,582	)			77,800				—				—
Totals		$	(1,681	)		$	87,187			$	—			$	—
At December 31, 2015:
Federal Home Loan Bank obligations		$	(6	)		$	6,018			$	—			$	—
U.S Government enterprise and agency obligations			(37	)			12,000				—				—
Agency Mortgage-backed securities			(144	)			36,863				—				—
Totals		$	(187	)		$	54,881			$	—			$	—

At December 31, 2016 and 2015 there were thirty-two securities and twenty-four securities, respectively in a loss position. In considering the credit quality of the issuers, the nature and cause of the unrealized loss, the severity and length of time in an unrealized loss position, and other factors, it is expected that the securities would not be settled at a price less than the par value of the investments. Management determined that the decline in fair value is attributable to fluctuations in interest rates and other market conditions and not a deterioration of the credit quality of the issuers. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

 

(5)

Loans

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

 

		At December 31,
		2016				2015
Real estate loans:
One-to-four-family residential		$	155,262			$	68,169
Commercial real estate and multi-family			356,788				192,568
Construction and land			51,520				17,570
Home equity			21,902				6,623
Total real estate loans			585,472				284,930
Commercial loans			100,239				41,417
Consumer loans			1,478				2,726
Total loans			687,189				329,073
Deduct:
Deferred loan fees, net			(131	)			(296	)
Allowance for loan losses			(3,274	)			(2,511	)
Loans, net		$	683,784			$	326,266

 

(continued)

F-18

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(5)	Loans, continued

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

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

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

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

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

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

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

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

 

(continued)

F-19

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(5)	Loans, continued

 

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

 

		Real Estate Loans				Commercial Loans				Consumer Loans				Unallocated				Total
Year Ended December 31, 2016:
Beginning balance		$	1,354			$	583			$	23			$	551			$	2,511
Provision (credit) for loan losses			1,171				(581	)			(15	)			(225	)			350
Charge-offs			(95	)			(12	)			(6	)			—				(113	)
Recoveries			43				479				4				—				526
Ending balance		$	2,473			$	469			$	6			$	326			$	3,274
Individually evaluated for impairment:
Recorded investment		$	1,035				500				36				—			$	1,571
Balance in allowance for loan losses			21				9				1				—				31
Collectively evaluated for impairment:
Recorded investment		$	274,513				59,586				608				—			$	334,707
Balance in allowance for loan losses		$	1,687				378				4				326			$	2,395
Recorded investment in loans accounted for under ASC 310-20 Loan Receivables		$	307,605				40,153				834				—			$	348,592
Balance in allowance for loan losses		$	765				82				1				—			$	848
Recorded investment in loans accounted for under ASC 310-30 Loans Acquired with Deteriorated Credit Quality		$	2,319				—				—				—			$	2,319
Balance in allowance for loan losses			—				—				—				—				—
Year Ended December 31, 2015:
Beginning balance		$	1,409			$	308			$	9			$	—			$	1,726
Provision (credit) for loan losses			(185	)			(382	)			16				551				—
Charge-offs			(1	)			(9	)			(4	)			—				(14	)
Recoveries			131				666				2				—				799
Ending balance		$	1,354			$	583			$	23			$	551			$	2,511
Individually evaluated for impairment:
Recorded investment		$	1,527				539				—				—			$	2,066
Balance in allowance for loan losses		$	39				9				—				—			$	48
Collectively evaluated for impairment:
Recorded investment		$	159,738				11,830				1,124				—			$	172,692
Balance in allowance for loan losses		$	1,315				574				23				551			$	2,463
Recorded investment in loans accounted for under ASC 310-20 Loan Receivables		$	123,022				28,990				1,602				—			$	153,614
Balance in allowance for loan losses		$	—				—				—				—			$	—
Recorded investment in loans accounted for under ASC 310-30 Loans Acquired with Deteriorated Credit Quality		$	643				58				—				—			$	701
Balance in allowance for loan losses		$	—				—				—				—			$	—

 

(continued)

F-20

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(5)	Loans, continued

 

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

 

		Real Estate Loans
		One-to-				Commercial				Construction
		Four Family				Real Estate/				and				Home
		Residential				Multi Family				Land				Equity				Commercial				Consumer				Total
Credit Risk Profile by Internally Assigned Grade:
At December 31, 2016:
Grade:
Pass		$	153,965			$	351,096			$	49,901			$	21,902			$	98,714			$	1,442			$	677,020
Special mention			490				730				543				—				79				—				1,842
Substandard			807				4,962				1,076				—				1,446				36				8,327
Total		$	155,262			$	356,788			$	51,520			$	21,902			$	100,239			$	1,478			$	687,189
At December 31, 2015:
Grade:
Pass		$	66,271				189,979				16,705				6,241				38,375				2,726				320,297
Special mention			972				1,066				707				382				70				—				3,197
Substandard			926				1,523				158				—				2,972				—				5,579
Total		$	68,169			$	192,568			$	17,570			$	6,623			$	41,417			$	2,726			$	329,073

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

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

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

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

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

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

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

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

 

(continued)

F-21

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(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				Total Past Due				Current				Nonaccrual Loans				Total Loans
At December 31, 2016:
Real estate mortgage loans:
One-to-four family residential		$	501				274				—				775				154,487				—			$	155,262
Commercial Real Estate and Multifamily			778				—				—				778				355,755				255				356,788
Construction and Land			1,519				—				—				1,519				50,001				—				51,520
Home Equity			22				—				—				22				21,880				—				21,902
Commercial loans			217				—				—				217				100,022				—				100,239
Consumer loans			10				—				—				10				1,432				36				1,478
Total		$	3,047				274				—				3,321			$	683,577				291			$	687,189
At December 31, 2015:
Real estate mortgage loans:
One-to-four family residential		$	255				13				—				268				67,861				40			$	68,169
Commercial Real Estate and Multifamily			355				—				—				355				191,660				553				192,568
Construction and Land			192				—				—				192				17,220				158				17,570
Home Equity			11				—				—				11				6,612				—				6,623
Commercial loans			193				—				—				193				41,224				—				41,417
Consumer loans			—				—				—				—				2,726				—			$	2,726
Total		$	1,006			$	13			$	—			$	1,019			$	327,303			$	751			$	329,073

 

(continued)

F-22

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(5)	Loans, continued

 

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

 

		With No Related Allowance Recorded								With an Allowance Recorded												Total
		Recorded Investment				Unpaid Principal Balance				Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
December 31, 2016:
Real estate mortgage loans:
One-to-four family residential		$	—			$	—			$	448			$	448			$	21			$	448			$	448			$	21
Commercial and Multifamily			587				1,568				—				—				—				587				1,568				—
Commercial loans			427				457				73				77				9				500				534				9
Consumer loans			—				—				36				36				1				36				36				1
		$	1,014			$	2,025			$	557			$	561			$	31			$	1,571			$	2,586			$	31
December 31, 2015:
Real estate mortgage loans:
One-to-four family residential		$	—			$	—			$	460			$	460			$	39			$	460			$	460			$	39
Commercial and Multifamily			909				1,849				—				—				—				909				1,849				—
Construction and Land			158				164				—				—				—				158				164				—
Commercial loans			452				482				87				92				9				539				574				9
		$	1,519			$	2,495			$	547			$	552			$	48			$	2,066			$	3,047			$	48

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

 

		Average				Interest				Interest
		Recorded				Income				Income
		Investment				Recognized				Received
For the year ended December 31, 2016:
Real estate mortgage loans:
One-to-four family residential		$	453			$	26			$	24
Commercial and Multifamily			855				47				81
Consumer loans			9				—				—
Commercial loans			518				36				36
		$	1,835			$	109			$	141
For the year ended December 31, 2015:
Real estate mortgage loans:
One-to-four family residential		$	289			$	18			$	16
Commercial and Multifamily			1,317				115				135
Construction and Land			119				—				12
Commercial loans			578				28				39
		$	2,303			$	161			$	202

 

(continued)

F-23

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(5)	Loans, continued

 

Troubled Debt Restructurings (“TDR”) entered into during the years ended December 31, 2016 and 2015 are as follows (dollars in thousands):

 

		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Year Ended December 31, 2016
One-to-four family residential loans - Modified interest rate and amortization			—				—				—
Year Ended December 31, 2015
One-to-four family residential loans - Modified interest rate and amortization			1				328				328

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

There were no TDRs entered during the years ended December 31, 2016 or December 31, 2015 that subsequently defaulted.

The Company grants real estate, commercial and consumer loans to customers primarily in the State of Florida with the majority of such loans in Hillsborough, Polk, Manatee, Orange, Pasco Counties, Brevard, Osceola, and Seminole Counties Florida. Therefore, the Company’s exposure to credit risk could be significantly affected by changes in the economy and real estate market in these market areas.

 

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

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

 

		During the Year Ended December 31, 2016				During the Year Ended December 31, 2015
Contractually required principal and interest at acquisition		$	4,285			$	1,272
Nonaccretable difference			(1,208	)			(404	)
Cash flows expected to be collected at acquisition			3,077				868
Accretable yield adjustment			(510	)			(128	)
Total carrying amount of PCI loans			2,567			$	740

The carrying amounts as of PCI loans at December 31, 2016 was $2.3 million and $701,000 at December 31, 2015.

 

(7)	Premises and Equipment

Premises and equipment are summarized as follows (in thousands):

 

		At December 31,
		2016				2015
Land		$	7,953			$	4,971
Buildings and improvements			18,586				13,286
Furniture and equipment			5,744				5,604
Total, at cost			32,283				23,861
Less accumulated depreciation and amortization			(6,363	)			(6,249	)
Premises and equipment, net		$	25,920			$	17,612

 

(continued)

F-24

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(8)

Deposits

The following is a summary of deposits at December 31, 2016 and 2015 (in thousands):

 

		At December 31,
		2016				2015
Noninterest-bearing demand		$	217,418			$	89,114
Interest-bearing demand			97,807				64,984
Money Market			215,178				100,348
Savings			41,342				33,645
Time deposits under $100			41,567				39,543
Time deposits of $100 or more			116,637				71,477
Total deposits		$	729,949			$	399,111

Brokered deposits at December 31, 2016 were $89.8 million and $19.4 million at December 31, 2015. As of December 31, 2016 and December 31, 2015, reciprocal brokered deposits were $19.8 million and $8.3 million, respectively.

Deposits in excess of $250,000 are not insured by the FDIC.

At December 31, 2016, the scheduled maturities of time deposits are as follows (in thousands):

 

Year Ending December 31,		Amount
2017		$	144,169
2018			9,562
2019			3,798
2020			369
2021			306
		$	158,204

 

(9)	Federal Home Loan Bank (“FHLB”) Advances

A summary of FHLB advances at December 31, 2016 and 2015 is presented below (dollars in thousands).

 

At December 31, 2016
Maturing in the year ending		Advance type				Interest rate				Amount
2017			Fixed Rate				0.71	%		$	10,000
2017			Fixed Rate				0.51	%			10,000
2017			Fixed Rate				0.71	%			3,000
2017			Fixed Rate				0.84	%			8,000
2017			Fixed Rate				0.76	%			7,000
2017			Fixed Rate				0.80	%			7,000
2017			Fixed Rate				0.93	%			10,000
2017			Fixed Rate				0.66	%			10,000
										$	65,000
At December 31, 2015
Maturing in the year ending		Advance type				Interest rate				Amount
2016			Fixed Rate				0.32	%		$	7,500
2016			Fixed Rate				0.37	%			20,000
										$	27,500

 

(continued)

F-25

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(9)	Federal Home Loan Bank Advances, continued

 

At December 31, 2016, the Company had total credit availability of approximately $52.8 million with the FHLB. Advances are secured by a blanket lien on certain 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 December 31, 2016 the Company had qualifying collateral pledged of $117.8 million in loans and FHLB stock of $3.5 million.

 

(10)	Other Borrowings

The Company enters into sweep agreements with customers that sweep funds from deposit accounts into investment accounts. These investment accounts are not federally insured and are treated as borrowings. At December 31, 2016 and 2015 the outstanding balance of such borrowings totaled $6.9 million and $1.4 million, respectively. As of December 31, 2016 the Company pledged securities with a market value of $9.9 million and $4.0 million at December 31, 2015 as collateral for these agreements.

 

(11)	Subordinated notes

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

 

(12)	Available Other Borrowings

At December 31, 2016 and 2015, the Company also has lines of credit at three financial institutions that would allow the Company to borrow up to $25.5 million. None of the credit lines were drawn upon at December 31, 2016 or 2015.

 

(continued)

F-26

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(13)	Fair Value Measurements

Securities available for sale measured at fair value on a recurring basis at December 31, 2016 are summarized below (in thousands):

 

		Fair Value				Level1				Level2				Level3
At December 31, 2016:
Federal Home Loan Bank obligations		$	3,002				—				3,002				—
U.S. Government enterprise and agency obligations			15,253				—				15,253				—
Mortgage-backed securities			91,413				—				91,413				—
Total		$	109,668				—				109,668				—
		Fair Value				Level1				Level2				Level3
At December 31, 2015:
Federal Home Loan Bank obligations			15,074				—				15,074				—
U.S. Government enterprise and agency obligations			14,007				—				14,007				—
Mortgage-backed securities			36,863				—				36,863				—
Total		$	65,944				—				65,944				—

During the year ended December 31, 2016, no securities were transferred in or out of Level 1, Level 2, or Level 3.

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

 

		Fair Value				Level 1				Level 2				Level 3				Total Losses				Losses Recorded During the Year
At December 31, 2016:
Other real estate owned		$	32				—				—				32				—				—
At December 31, 2015:
Other real estate owned		$	32				—				—				32				—				—

Impaired collateral-dependent loans are carried at the lower of carrying value or fair value. Those impaired collateral-dependent loans which are measured at fair value or a nonrecurring basis are as follows (in thousands):

 

		Fair Value				Level 1				Level 2				Level 3				Total Losses				Losses Recorded During the Year
At December 31, 2016:
Commercial and Multifamily		$	587				—				—			$	587				718				73
Commercial			427				—				—				427				72				—
Total		$	1,014				—				—			$	1,014				790				—
At December 31, 2015:
Commercial and Multifamily			450				—				—				450				645				—
Commercial			452				—				—				452				72				—
Total		$	902				—				—				902				717				—

 

(continued)

F-27

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(13)	Fair Value Measurements, Continued

 

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

 

		For the Year Ended December 31, 2016																				Losses Recorded
		Fair Value				Level 1				Level 2				Level 3				Total Losses				During the Year
Securities available for sale		$	16,179				—				16,179				—				—				—
Loans, net of discount		$	236,696				—				—				236,696				—				—
Premises and equipment		$	9,329				—				—				9,329				—				—
Federal Home Loan Bank Stock		$	259				—				—				259				—				—
Deferred income taxes		$	(469	)			—				—				(469	)			—				—
Goodwill		$	10,726				—				—				10,726				—				—
Core deposit intangible		$	1,642				—				—				1,642				—				—
Accrued interest		$	609				—				—				609				—				—
Other assets		$	88				—				—				88				—				—
Deposits		$	286,572				—				—				286,572				—				—
Other borrowings		$	5,017				—				—				5,017				—				—
Other liabilities		$	3,418				—				—				3,418				—				—
		For the Year Ended December 31, 2015																				Losses Recorded
		Fair Value				Level 1				Level 2				Level 3				Total Losses				During the Year
Securities available for sale		$	44,372				—				44,372				—				—				—
Loans, net of discount		$	179,408				—				—				179,408				—				—
Premises and equipment		$	8,727				—				—				8,727				—				—
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		$	9,500				—				—				9,500				—				—
Core deposit intangible		$	655				—				—				655				—				—
Accrued interest		$	685				—				—				685				—				—
Other assets		$	130				—				—				130				—				—
Deposits		$	225,927				—				—				225,927				—				—
FHLB Advances		$	31,480				—				—				31,480				—				—
Other borrowings		$	3,285				—				—				3,285				—				—
Other liabilities		$	729				—				—				729				—				—
Preferred Stock		$	5,700				—				—				5,700				—				—

 

(continued)

F-28

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(14)	Off-Balance Sheet Financial Instruments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are unused lines of credit, commitments to extend credit and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unused lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

Commitments to extend credit and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty.

Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party and to support public and private borrowing arrangements. Generally letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers.

Commitments to extend credit and standby letters of credit typically result in loans with a market interest rate when funded. A summary of the amounts of the Company’s financial instruments, with off-balance sheet risk at December 31, 2016 follows (in thousands):

 

		Contract
		Amount
Unused lines of credit and standby letters of credit		$	94,727
Commitments to extend credit		$	2,366

 

(15)	Fair Value of Financial Instruments

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

 

		At December 31, 2016								At December 31, 2015
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents (Level 1)		$	50,273			$	50,273			$	59,344				59,344
Time deposits with banks (Level 1)			2,794				2,794				4,410				4,410
Securities available for sale (Level 2)			109,668				109,668				65,944				65,944
Loans held for sale (Level 3)			443				450				790				806
Loans (Level 3)			683,784				718,111				326,266				330,801
Federal Home Loan Bank stock (Level 3)			3,478				3,478				1,597				1,597
Accrued interest receivable (Level 3)			2,077				2,077				1,048				1,048
Financial liabilities:
Deposits (Level 3)			729,949				729,553				399,111				399,000
FHLB Advances (Level 3)			65,000				64,975				27,500				27,487
Other borrowings (Level 3)			6,867				6,867				1,427				1,427
Subordinated notes (Level 3)			11,000				10,860				—				—
Off-balance-sheet financial instruments (Level 3)			—				—				—				—

 

(continued)

F-29

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(16)	Income Taxes

Allocation of Federal and state income tax benefit between current and deferred portions is as follows (in thousands):

 

		Current				Deferred				Total
Year Ended December 31, 2016:
Federal		$	33			$	119			$	152
State			—				25				25
Total income tax expense		$	33			$	144			$	177
Year Ended December 31, 2015:
Federal		$	(731	)		$	(1,260	)		$	(1,991	)
State			(107	)			(223	)		$	(330	)
Total income tax benefit		$	(838	)		$	(1,483	)		$	(2,321	)

The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are as follows (dollars in thousands):

 

		Year Ended December 31,
		2016								2015
		Amount				%				Amount				%
Income taxes (benefit) at Federal statutory rate		$	46				34.0	%		$	(1,547	)			(34.0	%)
Increase (decrease) in taxes resulting from:
State taxes, net of Federal tax benefit			17				12.7	%			(218	)			(4.8	%)
Officer’s life insurance			(116	)			(86.6	%)			(747	)			(16.4	%)
Merger Costs			159				118.7	%			118				2.6	%
Other, net			71				53.3	%			73				1.6	%
Total		$	177				132.1	%		$	(2,321	)			(51.0	%)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):

 

		At December 31,
		2016				2015
Deferred tax assets:
Allowance for loan losses		$	727			$	879
Net operating loss carryforwards			3,566				4,029
Deferred compensation			868				858
Deferred loan fees			49				111
Alternative minimum tax credits			257				224
Accrued interest income			188				143
Fair Market Value adjustments			50				—
Unrealized loss on Securities AFS			625				66
Other			397				247
Deferred tax assets			6,727				6,557
Deferred tax liabilities:
Premises and equipment			(67	)			(18	)
Fair Market Value adjustments			—				(113	)
Deferred tax liabilities			(67	)			(131	)
Net deferred tax asset		$	6,660			$	6,426

 

(continued)

F-30

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(16)	Income Taxes, Continued

 

At December 31, 2016, the Company has net operating loss carryforwards of approximately $9.2 million available to offset future taxable income. These carryforwards will begin to expire as follows:

 

Year		Amount
2034		$	3,687
2035			5,542
		$	9,229

The Company performs periodic evaluations on the deferred tax asset to determine if a valuation allowance is necessary. The analysis weighs positive evidence against negative evidence to determine if it is more likely than not to recognize the future benefit of the deferred tax asset. The Company’s analysis includes internal forecasts that demonstrate the Company’s ability to fully utilize the deferred tax asset prior to the expiration of the related net operating loss periods discussed above. The Company’s internal forecasts include growth assumptions relating to loans, noninterest income and noninterest expense, as well as estimating loan losses and other nonrecurring items. Management determined that a valuation allowance against the deferred tax asset was not necessary at December 31, 2016 or 2015.

The Company files income tax returns in the U.S. federal jurisdiction and the State of Florida. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2013.

 

(17)	Contingencies

Various legal claims can arise from time to time all of which are considered incidental to the normal conduct of business. Contingent liabilities in connection with outstanding legal proceedings or other claims are assessed utilizing the latest information available. When it becomes probable that a loss will be incurred and the amount of the loss is reasonably estimable, a liability is recorded in the consolidated financial statements. Where a loss is not probable or the amount of the loss is not estimable, reserves are not accrued. Based on current information available, management believes that any liabilities arising from legal proceedings and other claims will not have a material adverse effect on the Company’s financial statements.

 

(18)	Lease Obligations

We are obligated under operating leases for two of our banking offices. For the years ended December 31, 2016 and 2015 rental expense under operating leases was $289,000 and $83,000, respectively, which is included in the occupancy and equipment expenses. Office leases generally include renewal options for various additional terms after the expiration of the initial term of each lease, which are not included in the future minimum lease payments below. At December 31, 2016, future minimum lease payments for the fixed, non-cancelable terms of operating leases are as follows:

 

2017		$	295
2018			230
2019			196
2020			200
2021			101
Thereafter			1,917
		$	2,939

 

(continued)

F-31

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(19)	Related Parties

In the ordinary course of business, the Company may make loans to, accept deposits, and sell subscriptions to its executive officers and directors and their related entities. The activity is as follows (in thousands):

 

		Year Ended December 31,
		2016				2015
Loans:
Balance at beginning of year		$	888			$	268
Balance at end of year		$	4,830			$	888
Total unused commitments at end of year		$	5,621			$	3,898
Aggregate amount of all extensions of credit		$	10,451			$	4,787
Deposits at end of year		$	32,040			$	3,297
Subordinated notes		$	7,000			$	—

 

(20)	Employee Benefit Plans

The Company has a 401(k) Profit Sharing plan. For the years ended December 31, 2016 and 2015, the Company’s contributions were approximately $101,000 and $93,000, respectively.

The Company provided a supplemental executive retirement plans for certain of its officers and a supplemental executive retirement plans for the CEO. The terms of the plan agreements provide for a specific percentage of the participants compensation to be accrued for deferred compensation of which one participant is still receiving a salary deferral. The remaining participants are no employed by the Company and are receiving distributions. The Company is accruing interest on these undisbursed deferred amounts at a rate of 6%. The CEO plan entitles the CEO to an annual benefit in the amount of 40% of his “final pay,” defined as the highest annualized base salary and bonus from the three years prior to Mr. Samuel’s separation from service, disability or death, including the year such separation occurs. The benefit percentage could increase to 50% or 60%, provided certain core earnings thresholds are met by Sunshine Bank in any calendar year before his separation from service. The normal retirement benefit under the SERP is payable in monthly installments over a period of 15 years. The Company expenses the present value of the estimated future payments as a charge to operations. For the years ended December 31, 2016 and 2015, the Company expense in connection with the plans was approximately $456,000 and $381,000, respectively. At December 31, 2016 and 2015, the balance in the accrued deferred compensation accounts was $2.3 million and $2.3 million, respectively, and it was included with other liabilities in the consolidated balance sheets.

 

(continued)

F-32

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(21)	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. Generally the grants vest over a five year period. On September 28, 2016, stockholders approved an amendment to the Plan. The amendment increased the total number of shares available for issuance from 592,480 shares to 742,480 shares and the corresponding increase in the maximum number of shares issuable pursuant to the exercise of stock options. Awards granted as replacements for awards granted by a company Sunshine subsequently acquired do not reduce the total available for issuance. In connection with the overall increase, stockholders approved to simplify and consolidate the various limitations on issuances of types of award. The fair value of options is measured on the grant date using the Black-Scholes option-pricing model. The Company’s assumptions included the one year Treasury-bill rate to establish a risk free interest rate of 0.32%, expected volatility of 16.7%, and an expected life of seven years.

The following table summarizes the outstanding stock options and restricted stock:

 

		2016								2015
		Stock Options				Weighted Average Exercise Price				Stock Options				Weighted Average Exercise Price
Outstanding at January 1,			353,747			$	13.96				—			$	—
Granted			240,380				14.37				372,760				13.96
Replacement awards granted in acquisition			237,418				9.20				—				—
Forfeited			(20,400	)			13.96				(19,013	)			13.96
Exercised or Expired			(10,955	)			13.96				—				13.96
Outstanding at December 31,			800,190				13.04				353,747				13.96
Exercisable at December 31,			387,594				11.82				74,552				13.96
Unvested awards			412,596				14.19				279,195				13.96
		Restricted Stock Awards				Weighted Average Exercise Price				Restricted Stock Awards				Weighted Average Exercise Price
Outstanding at January 1,			152,321			$	13.96				—			$	—
Granted			7,000				14.37				162,248				13.96
Shares withheld for income tax purposes			(6,457	)			13.97				(6,403	)			13.96
Forfeited			(10,600	)			13.96				(3,524	)			13.96
Unvested awards			82,874				13.97				126,264				13.96
Vested			38,399				13.97				32,460				13.96

 

		2016				2015
Compensation Expense (in 000’s)
Stock Options		$	290			$	227
Restricted Shares			557				453
Fair Value of Shares withheld for income tax purposes			(89	)			(89	)
Stock-based compensation expense		$	758			$	591
Unearned Compensation (in 000’s)
Stock Options Issued		$	1,210			$	907
Restricted Shares Issued			1,158				1,812
Total unearned compensation		$	2,368			$	2,719

 

(continued)

F-33

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(22)	Dividend Restrictions

The Holding Company is limited in the amount of cash dividends it may declare and pay by the amount of dividends it can receive from the Bank. The Bank is limited in the amount of cash dividends that may be paid based on current regulations governing national associations. In addition, bank regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an unsafe or unsound practice.

 

(23)	Regulatory Matters

Effective January 1, 2015, the Bank became subject to new capital requirements set forth by federal banking regulations. These changes were designed to ensure capital positions remain strong during the events of economic downturns or unforeseen losses.

The Company is exempt from consolidated capital requirements as the Federal Reserve Board amended its “small bank holding company” policy statement to generally exempt savings and loan holding companies with less than $1.0 billion in assets from capital requirements.

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

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

Changes that could affect the Bank going forward include additional constraints on the inclusion of deferred tax assets in capital and increased risk weightings for nonperforming loans and acquisition/development loans in regulatory capital. Under the new regulations in the first quarter of 2015, the Bank elected an irreversible one-time opt-out to exclude accumulated other comprehensive income (loss) from regulatory capital. Beginning January 1, 2016, the Bank became subject to the capital conservation buffer rules which place limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers. In order to avoid these limitations, a bank must hold a capital conservation buffer above its minimum risk-based capital requirements. As of December 31, 2016, the Bank’s capital conservation buffer of 5.39% exceeds the minimum requirement of 0.625% for 2016. The required buffer is to be phased in over three years.

The following table shows the Bank’s capital amounts and ratios and regulatory thresholds at December 31, 2016 and 2015. (dollars in thousands)

 

		Actual								Minimum for Capital Adequacy Purposes								Minimum to be Well Capitalized
		Amount				%				Amount				%				Amount				%
December 31, 2016
Common Equity Tier 1 Capital to Risk-Weighted Assets		$	93,083				12.93	%		$	32,387				4.50	%		$	46,781				6.50	%
Tier I Capital to Risk-Weighted Assets			93,083				12.93				43,183				6.00				57,577				8.00
Total Capital to Risk-Weighted Assets			96,357				13.39				57,577				8.00				71,971				10.00
Tier I Capital to Total Assets			93,083				12.10				30,771				4.00				38,464				5.00
December 31, 2015
Common Equity Tier 1 Capital to Risk-Weighted Assets		$	45,056				12.44	%		$	16,297				4.50	%		$	23,540				6.50	%
Tier I Capital to Risk-Weighted Assets			45,056				12.44				21,729				6.00				28,972				8.00
Total Capital to Risk-Weighted Assets			47,567				13.13				28,972				8.00				36,215				10.00
Tier I Capital to Total Assets			45,056				9.76				18,466				4.00				23,082				5.00

As of December 31, 2016, 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.

 

(continued)

F-34

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(24)	Employee Stock Ownership Plan

The Holding Company has 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.

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

 

		2016				2015
Allocated shares			33,855				22,571
Unallocated shares			304,705				315,989
Total ESOP shares			338,560				338,560
Fair value of unallocated shares		$	5,223			$	4,803

 

(25)	Loss Per Share

Basic loss per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. For the year ended December 31, 2016 and 2015, basic and diluted loss per share is the same due the stock options not being considered dilutive due to the loss incurred by the Company. The shares purchased by the Employee Stock Ownership Plan are included in the weighted-average shares when they are committed to be released (dollars in thousands, except per share amounts):

 

		Net loss available to common stockholders				Basic / Diluted Weighted Average Shares				Basic / Diluted Loss Per Share Amount
Year Ended December 31, 2016
Basic and diluted loss per share		$	(43	)			5,401,566			$	(0.01	)
Year Ended December 31, 2015
Basic and diluted loss per share		$	(2,245	)			3,993,560			$	(0.56	)

 

(26)	Parent Company Only Financial Information

The holding Company’s unconsolidated financial information at December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015 are as follows (in thousands):

 

Condensed Balance Sheet (in thousands)		December 31,
		2016				2015
Assets
Cash		$	3,180			$	11,671
Investment in Subsidiary			115,830				56,193
Other assets			4,246				3,604
Total Assets		$	123,256			$	71,468
Liabilities and Stockholder Equity
Subordinated notes		$	11,000			$	—
Other liabilities			155				74
Stockholder’s Equity			112,101				71,394
Total liabilities and Stockholder Equity		$	123,256			$	71,468

 

(continued)

F-35

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SUNSHINE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, continued

 

(26)	Parent Company Only Financial Information, Continued

 

Condensed Statement of Operations (in thousands)		December 31,
		2016				2015
Revenues		$	104			$	106
Expenses			(1,110	)			(1,222	)
Income tax benefit			379				319
Loss before net loss of subsidiary			(627	)			(797	)
Net income (loss) of subsidiary			584				(1,434	)
Net loss		$	(43	)		$	(2,231	)

 

Condensed Statement of Cash Flows (in thousands)		December 31,
		2016				2015
Net loss:		$	(43	)		$	(2,231	)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in (income) loss of subsidiary			(584	)			1,434
Change in other assets and other liabilities			(238	)			(256	)
Stock-based compensation expense			266				220
Net cash used in operating activities			(599	)			(833	)
Cash flows from investing activities:
Dividends received from subsidiary			—				18,800
Cash received (paid) in acquisition			108				(34,676	)
Investment to bank subsidiary, net ESOP			(19,000	)			—
Net cash used in investing activities			(18,892	)			(15,876	)
Cash flows from financing activities:
Net proceeds received from stock issuance			—				11,359
Net proceeds received from subordinated notes issuance			11,000				—
Payment of Dividend to Preferred Stock			—				(14	)
Net cash provided by financing activities			11,000				11,345
Net Decrease in Cash		$	(8,491	)		$	(5,364	)
Cash at beginning of year			11,671				17,035
Cash at end of year		$	3,180			$	11,671
Noncash items:
Accumulated other comprehensive loss, net change in unrealized gain on securities available for sale, net of taxes		$	(929	)		$	(108	)
Employee stock option expense from subsidiary		$	492			$	371
Employee stock ownership plan expense from subsidiary		$	193			$	171

 

F-36