Sunshine Financial, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - Sunshine Financial, Inc.	ex-32.htm
EX-10.5 - Sunshine Financial, Inc.	ex10-5.htm
EX-31.1 - Sunshine Financial, Inc.	ex31-1.htm
EX-31.2 - Sunshine Financial, Inc.	ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

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

For the transition period from _______ to ________

Commission file number: 000-54280

SUNSHINE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Maryland		36-4678532
(State or other jurisdiction of incorporation of organization)		(IRS Employer Identification No.)

1400 East Park Avenue, Tallahassee, Florida 32301

(Address of principal executive offices; Zip Code)

(850) 219-7200

(Registrant’s telephone number, including area code)

None

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNo ¨

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

Large accelerated filer [ ]		Accelerated filer [ ]
Non-accelerated filer [ ]	(Do not check if a smaller reporting company)	Smaller reporting company [X]

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

At August 14, 2012, there were issued and outstanding 1,234,454 shares of the issuer’s common stock.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Index

		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011	2

	Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011 (Unaudited)	3

	Condensed Consolidated Statements of Stockholders' Equity for the Six-Month Periods Ended June 30, 2012 and 2011 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows For the Six-Month Periods Ended June 30, 2012 and 2011 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements	6-22

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23-34

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	35

Item 4.	Controls and Procedures	35

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

SIGNATURES		37

EXHIBIT INDEX

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(In thousands, except share information)

	At June 30, 2012			At December 31, 2011
	(Unaudited)
Assets

Cash and due from banks	$	875			2,053
Interest-bearing deposits with banks		2,327			6,546
Federal funds sold		30,785			16,456

Cash and cash equivalents		33,987			25,055

Securities held to maturity (fair value of $8,376 and $10,088)		8,125			9,835
Loans, net of allowance for loan losses of $1,467 and $1,329		94,464			102,002
Premises and equipment, net		3,509			3,623
Federal Home Loan Bank stock, at cost		225			247
Deferred income taxes		2,736			2,364
Accrued interest receivable		406			454
Foreclosed real estate		2,394			743
Other assets		1,462			1,437

Total assets	$	147,308			145,760

Liabilities and Stockholders’ Equity

Liabilities:
Noninterest-bearing deposit accounts		22,980			21,827
Money-market deposit accounts		29,089			27,028
Savings accounts		35,923			34,271
Time deposits		33,435			36,290

Total deposits		121,427			119,416

Official checks		494			572
Advances by borrowers for taxes and insurance		172			21
Other liabilities		416			366

Total liabilities		122,509			120,375

Stockholders' equity:
Common stock, $.01 par value, 6,000,000 shares authorized, 1,234,454 shares issued and outstanding at June 30, 2012 and December 31, 2011		12			12
Additional paid in capital		11,485			11,487
Retained earnings		14,187			14,813
Unearned Employee Stock Ownership Plan shares		(885	)		(927	)

Total stockholders' equity		24,799			25,385

Total liabilities and stockholders’ equity	$	147,308			145,760

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share information)

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Interest income:
Loans	$	1,403			1,686		2,864			3,393
Securities, held to maturity		53			72		115			109
Other		18			12		30			22

Total interest income		1,474			1,770		3,009			3,524

Interest expense-
Deposit accounts		147			252		312			555

Net interest income		1,327			1,518		2,697			2,969

Provision for loan losses		955			225		1,180			450

Net interest income after provision for loan losses		372			1,293		1,517			2,519

Noninterest income:
Fees and service charges on deposit accounts		533			565		1,040			1,109
Fees and charges on loans		97			26		169			48
Other		(12	)		6		6			22

Total noninterest income		618			597		1,215			1,179

Noninterest expenses:
Salaries and employee benefits		882			866		1,783			1,758
Occupancy and equipment		287			271		556			540
Data processing services		195			181		377			360
Professional fees		193			139		355			277
FDIC insurance		29			36		58			83
Advertising and promotion		20			18		37			32
Stationary and supplies		27			11		46			28
Other		279			259		518			498

Total noninterest expenses		1,912			1,781		3,730			3,576

Earnings (loss) before income taxes		(922	)		109		(998	)		122

Income taxes (benefit)		(339	)		39		(372	)		44

Net (loss) earnings	$	(583	)		70		(626	)		78

Basic (loss) earnings per common share	$	(0.47	)		0.06		(0.51	)		-

Cash dividends per common share	$	-			-		-			-

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Six Months Ended June 30, 2012 and 2011

(In thousands)


											Unearned
											Employee
											Stock
					Additional						Ownership			Total
	Common Stock				Paid In			Retained			Plan			Stockholders'
	Shares		Amount		Capital			Earnings			Shares			Equity

Balance, December 31, 2010		-	$	-		-			15,039			-			15,039

Net earnings (unaudited)		-		-		-			78			-			78

Proceeds from issuance of common stock, net of offering costs of $847 (unaudited)		1,135,698		11		10,498			-			-			10,509

Issuance of common stock for ESOP (unaudited)		98,756		1		987			-			(988	)		-

Common stock allocated to ESOP participants (unaudited)		-		-		3			-			25			28

Balance, June 30, 2011 (unaudited)		1,234,454	$	12		11,488			15,117			(963	)		25,654


Balance, December 31, 2011		1,234,454		12		11,487			14,813			(927	)		25,385

Net loss (unaudited)		-		-		-			(626	)		-			(626	)

Common stock allocated to ESOP participants (unaudited)		-		-		(2	)		-			42			40

Balance, June 30, 2012 (unaudited)		1,234,454	$	12		11,485			14,187			(885	)		24,799

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	2012			2011
Cash flows from operating activities:
Net (loss) earnings	$	(626	)		78
Adjustments to reconcile net (loss) earnings to net cash from operating activities:
Depreciation		248			245
Provision for loan losses		1,180			450
Deferred income taxes		(372	)		44
Net accretion of premiums/discounts on securities		39			1
Net amortization of deferred loan fees and costs		5			4
Loans originated for sale		(4,579	)		(792	)
Proceeds from loans sold		4,695			806
Gain on sale of loans		(116	)		(14	)
ESOP compensation expense		40			28
Decrease in accrued interest receivable		48			44
(Increase) decrease in other assets		(25	)		340
Loss on sale of foreclosed real estate		26			-
Write-down of foreclosed real estate		68			-
(Decrease) increase in official checks		(78	)		847
Net increase in advances by borrowers for taxes and insurance		151			125
Increase (decrease) in other liabilities		50			(128	)

Net cash provided by operating activities		754			2,078
Cash flows from investing activities:
Net repayments (purchases) of securities held-to-maturity		1,671			(8,496	)
Net decrease in loans		4,470			6,234
Net purchases of premises and equipment		(134	)		(34	)
Proceeds from sale of Federal Home Loan Bank stock		22			25
Proceeds from sale of foreclosed real estate		138			-
Capital expenditures for foreclosed real estate		-			(26	)

Net cash provided by (used in) investing activities		6,167			(2,297	)

Cash flows from financing activities:
Net increase (decrease) in deposits		2,011			(8,415	)
Net proceeds from stock issuance		-			11,497
Issuance of common stock to ESOP		-			(988	)

Net cash provided by financing activities		2,011			2,094

Increase in cash and cash equivalents		8,932			1,875

Cash and cash equivalents at beginning of period		25,055			19,324

Cash and cash equivalents at end of period	$	33,987			21,199

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	-			-

Interest	$	312			555

Noncash transaction-
Transfer from loans to foreclosed real estate	$	1,883			114

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Basis of Presentation

Sunshine Financial, Inc. ("Sunshine Financial" or the "Holding Company"), a Maryland corporation, is the holding company for Sunshine Savings Bank (the "Bank") and owns all the outstanding common stock of the Bank. The Bank completed its reorganization from the mutual to stock holding company form of organization on April 5, 2011. A total of 1,234,454 shares of common stock were sold in the subscription and community offerings at a price of $10.00 per share. In accordance with the Plan of Conversion and Reorganization (the "Plan"), the Holding Company has succeeded to all rights and obligations of Sunshine Savings MHC and the old Sunshine Financial, Inc. ("Old Sunshine"). See Note 14 for details of the conversion. The transaction was accounted as a reorganization of entities under common control at historical cost and, the financial data for periods presented include the results of the Bank. The unaudited, condensed consolidated financial statements include the consolidated results of operations of Old Sunshine and its subsidiary, the Bank.

The Holding Company's only business is the operation of the Bank. The Bank through its four banking offices provides a variety of retail community banking services to individuals and businesses primarily in Leon County, Florida. The Bank's deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation. The Bank's subsidiary is Sunshine Member Insurance Services, Inc. ("SMSI"), which was established to sell automobile warranty and credit life and disability insurance products associated with loan products. Collectively the entities are referred to as the "Company."

These condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 8-03 of Regulation S-X and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company's financial condition and results of operations.

In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods. The results for the three and six-month periods ended June 30, 2012 should not be considered as indicative of results for a full year.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

2. Recent Accounting Standards Update

In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") No. 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2011-20. The amendments in this ASU delay the effective date of the disclosures about troubled debt restructurings in ASU 2011-20 for public entities. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring is effective as outlined in ASU No. 2011-02. The adoption of the ASU did not have a material impact on the Company's consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310) A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This amends the guidance for troubled debt restructurings. The guidance clarifies the guidance on a creditor's evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. For public entities, the amendments are effective for first interim or annual period beginning on or after September 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the ASU did not have a material impact on the Company's consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreement, which applies to all public entities. It affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. ASU 2011-03 removes the assessment of effective control the criterion relating to the transferor's ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. Consequently, it also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. Eliminating the transferor's ability criterion and related implementation guidance from an entity's assessment of effective control should improve the accounting for repos and other similar transactions. ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011 and is to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 did not have a material impact on the Company's consolidated financial statements.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

2. Recent Accounting Standards Update, Continued

In May 2011, the FASB issued ASU No. 2011-04 ("ASU 2011-04"), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The objective of ASU 2011-04 is to provide clarification of Topic 820 and, also, to ensure that fair value has the same meaning in U.S. generally accepted accounting principles ("GAAP") and in international financial reporting standards ("IFRSs") and that their respective fair value measurement and disclosure requirements are generally the same. Thus, this ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRSs. The amendment is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Early application is not permitted. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 ("ASU 2011-05"), Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To achieve this goal and to facilitate convergence of U.S. GAAP and IFRS, the FASB decided to eliminate the option to present components of other comprehensive income as part of the consolidated statement of changes in stockholders' equity. The amendments in ASU 2011-05 require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The adoption of this guidance had no effect on the Company's consolidated financial statements.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

2. Recent Accounting Standards Update, Continued

In December 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-12 ("ASU 2011-12"), Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-05"). Stakeholders raised concerns that the new presentation requirements about reclassifications of items out of accumulated other comprehensive income would be difficult for preparers and may add unnecessary complexity to financial statements. In addition, it is difficult for some stakeholders to change systems in time to gather the information for the new presentation requirements by the effective date of ASU 2011-05. All other requirements in ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The amendments in ASU 2011-12 are effective on a retrospective basis for public entities for annual periods beginning after December 15, 2011, and interim periods within those years. An entity should provide the disclosures required by ASU 2011-12 retrospectively for all comparative periods presented. The adoption of this guidance had no effect on the Company's consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11 ("ASU 2011-11"), Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. The objective of ASU 2011-11 is to enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with Section 210-20-45 or Section 815-10-45. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. The amendments in ASU 2011-11 are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by ASU 2011-11 retrospectively for all comparative periods presented. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

3. (Loss) Earnings Per Share

Earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period, which was 1,234,454 shares during the three and six-month periods ended June 30, 2012. The Company has no dilutive securities.

For the period ended June 30, 2011, earnings per share have been computed since April 1, 2011, as if conversion from a mutual holding company to a capital stock holding company occurred on that date. Basic earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period, which was 1,135,698 shares during the three-month period ended June 30, 2011.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

4. Securities Held to Maturity

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
At June 30, 2012-
Mortgage-backed securities	$	8,125		251		-			8,376

At December 31, 2011-
Mortgage-backed securities	$	9,835		255		(2	)		10,088

There were no sales of securities during the six months ended June 30, 2012 or 2011. There were no securities pledged at June 30, 2012 or December 31, 2011.

5. Loans

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

	June 30,			December 31,
	2012			2011
Real estate mortgage loans:
One-to-four-family	$	64,370			70,144
Lot loans		6,809			7,363
Construction		462			74

Total real estate loans		71,641			77,581

Consumer loans:
Home equity		11,435			12,731
Automobile		2,433			2,483
Credit cards and unsecured		7,591			8,184
Deposit account		646			791
Other		1,568			1,818

Total consumer loans		23,673			26,007

Total loans		95,314			103,588

Less (plus):
Loans in process		(672	)		207
Deferred fees and discounts		55			50
Allowance for losses		1,467			1,329

Total loans, net	$	94,464			102,002

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

The Company grants real estate and consumer loans to customers primarily in the State of Florida with the majority of such loans in the Tallahassee, Florida metropolitan area. Therefore, the Company's exposure to credit risk could be significantly affected by changes in the economy and real estate market in the Tallahassee, Florida metropolitan area.

The Company has divided the loan portfolio into two 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 Board, including repayment capacity and source, value of the underlying property, credit history and stability. The portfolio segments identified by the Company are as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are loans comprised of three classes: One-to-four family, Lot loans and Construction loans. The Company generally originates mortgage loans in amounts up to 80% of the lesser of the appraised value or purchase price of a mortgaged property, but will also permit loan-to-value ratios of up to 95%. For loans exceeding an 80% loan-to-value ratio, the Company generally requires the borrower to obtain private mortgage insurance covering any loss on the amount of the loan in excess of 80% in the event of foreclosure. Construction loans to borrowers are to finance the construction of owner occupied properties. These loans are categorized as construction loans during the construction period, later converting to residential real estate loans after the construction is complete and amortization of the loan begins. Real estate construction loan funds are disbursed periodically based on the percentage of construction completed. If the estimate of construction cost proves to be inaccurate, the Company may be compelled to advance additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower to repay the loan. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Construction loans are typically secured by the properties under construction. The Company also makes loans for the purchase of developed lots for future construction of the borrower's primary residence. Construction and lot loan lending is generally considered to involve a higher degree of credit risk than long-term permanent financing of residential properties.

Consumer Loans. Consumer loans are comprised of five classes: Home Equity, Automobile, Credit cards and unsecured, Deposit account and Other. The Company offers a variety of secured consumer loans, including home equity, new and used automobile, boat and other recreational vehicle loans, and loans secured by savings deposits. The Company also offers unsecured consumer loans including a credit card product. The Company originates its consumer loans primarily in its market area. 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 twenty years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

	For the Three Months Ended June 30, 2012
	One-to Four- Family			Lot Loans			Construction		Home Equity			Automobile			Credit Cards and Unsecured			Deposit Account		Other			Total

Beginning balance	$	564			101			-		258			28			244			-		109			1,304
Provision (credit) for loan loss		546			54			-		224			(22	)		65			-		88			955
Charge-offs		(440	)		(43	)		-		(156	)		(2	)		(94	)		-		(74	)		(809	)
Recoveries		-			-			-		-			4			12			-		1			17

Ending balance	$	670			112			-		326			8			227			-		124			1,467

	For the Six Months Ended June 30, 2012
	One-to Four- Family			Lot Loans			Construction		Home Equity			Automobile			Credit Cards and Unsecured			Deposit Account		Other			Total

Beginning balance	$	475			144			-		235			39			337			-		99			1,329
Provision (credit) for loan loss		676			91			-		317			(22	)		1			-		117			1,180
Charge-offs		(481	)		(128	)		-		(226	)		(17	)		(133	)		-		(93	)		(1,078	)
Recoveries		-			5			-		-			8			22			-		1			36

Ending balance	$	670			112					326			8			227			-		124			1,467

Individually evaluated for impairment:
Recorded investment	$	2,719			59			-		265			-			41			-		-			3,084
Balance in allowance for loan losses	$	-			-			-		-			-			-			-		-			-

Collectively evaluated for impairment:
Recorded investment	$	61,651			6,750			462		11,170			2,433			7,550			646		1,568			92,230
Balance in allowance for loan losses	$	670			112			-		326			8			227			-		124			1,467

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

	For the Three Months Ended June 30,
	2011
	One-to Four- Family			Lot Loans		Construction		Home Equity			Automobile			Credit Cards and Unsecured			Deposit Accounts		Other			Total

Beginning balance	$	741			59		2		318			42			398			-		145			1,705
Provision for loan loss		175			78		4		(16	)		1			(27	)		-		10			225
Charge-offs		(61	)		-		-		(193	)		(4	)		(72	)		-		(16	)		(346	)
Recoveries		-			-		-		-			4			16			-		-			20

Ending balance	$	855			137		6		109			43			315			-		139			1,604

	For the Six Months Ended June 30,
	2011
	One-to Four- Family			Lot Loans		Construction		Home Equity			Automobile			Credit Cards and Unsecured			Deposit Accounts		Other			Total

Beginning balance	$	623			59		2		252			39			503			-		143			1,621
Provision for loan loss		293			78		4		88			2			(41	)		-		26			450
Charge-offs		(61	)		-		-		(231	)		(6	)		(181	)		-		(32	)		(511	)
Recoveries		-			-		-		-			8			34			-		2			44

Ending balance	$	855			137		6		109			43			315			-		139			1,604
Individually evaluated for impairment:
Recorded investment	$	2,814			24		-		302			-			-			-		-			3,140
Balance in allowance for loan losses	$	617			118		-		-			18			-			-		-			753

Collectively evaluated for impairment:
Recorded investment	$	72,983			8,980		-		13,698			2,177			8,254			787		2,016			108,895
Balance in allowance for loan losses	$	238			19		6		109			25			315			-		139			851

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

Credit Risk	One-to										Credit
Profile by Internally	Four-		Lot				Home				Cards and		Deposit
Assigned Grade:	Family		Loans		Construction		Equity		Automobile		Unsecured		Accounts		Other		Total
At June 30, 2012:
Grade:
Pass	$	60,076		6,750		462		11,002		2,414		7,493		646		1,494		90,337
Special mention		1,248		-		-		79		7		26		-		-		1,360
Substandard		3,046		27		-		354		12		64		-		-		3,503
Doubtful		-		32		-		-		-		8		-		74		114
Loss		-		-		-		-		-		-		-		-		-

Total	$	64,370		6,809		462		11,435		2,433		7,591		646		1,568		95,314

At December 31, 2011:
Grade:
Pass		64,888		7,151		74		12,218		2,449		8,166		791		1,743		97,480
Special mention		1,528		-		-		91		1		10		-		-		1,630
Substandard		3,728		212		-		422		3		7		-		13		4,385
Doubtful		-		-		-		-		12		1		-		62		75
Loss		-		-		-		-		18		-		-		-		18

Total	$	70,144		7,363		74		12,731		2,483		8,184		791		1,818		103,588

Internally assigned loan grades are defined as follows:

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 net 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)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

	Accruing Loans
					Greater
		30-59		60-89	Than 90		Total
	Days		Days		Days		Past				Nonaccrual		Total
	Past Due		Past Due		Past Due		Due		Current		Loans		Loans
At June 30, 2012:
Real estate loans:
One-to four-family	$	315		92		-		407		61,628		2,335		64,370
Lot loans		-		-		-		-		6,750		59		6,809
Construction		-		-		-		-		462		-		462
Consumer loans:
Home equity		298		39		-		337		10,886		212		11,435
Automobile		11		-		-		11		2,403		19		2,433
Credit cards and unsecured		74		20		-		94		7,460		37		7,591
Deposit account		-		-		-		-		646		-		646
Other		-		-		-		-		1,493		75		1,568

Total	$	698		151		-		849		91,728		2,737		95,314

At December 31, 2011:
Real estate loans:
One-to four-family		1,894		146		-		2,040		64,148		3,956		70,144
Lot loans		-		-		-		-		7,152		211		7,363
Construction		-		-		-		-		74		-		74
Consumer loans:
Home equity		465		91		-		556		11,815		360		12,731
Automobile		-		1		-		1		2,458		24		2,483
Credit cards and unsecured		107		25		-		132		8,040		12		8,184
Deposit account		-		-		-		-		791		-		791
Other		-		-		-		-		1,743		75		1,818

Total	$	2,466		263		-		2,729		96,221		4,638		103,588

At June 30, 2012 and December 31, 2011, there were no loans past due ninety days or more but still accruing.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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. 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 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.

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		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
At June 30, 2012:
Real estate loans:
One-to four-family	$	2,719		3,098		-		-		-		-		2,719		3,098		-
Lot loans		59		304		-		-		-		-		59		304		-
Consumer loans:
Home equity		265		442		-		-		-		-		265		442		-
Credit cards and unsecured		41		48		-		-		-		-		41		48		-

	$	3,084		3,892		-		-		-		-		3,084		3,892		-

At December 31, 2011:
Real estate loans:
One-to four-family		2,786		3,328		-		301		301		36		3,087		3,629		36
Lot loans		47		182		-		108		108		85		155		290		85
Consumer loans:
Home equity		574		660		-		16		16		3		590		676		3
Automobile		-		-		-		18		18		18		18		18		18

	$	3,407		4,170		-		443		443		142		3,850		4,613		142

At June 30, 2012 and December 31, 2011, the Company's loan portfolio included primarily large groups of smaller balance homogeneous loans. The Company considers individual loans which are in the process of foreclosure for impairment.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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 Six Months Ended June 30, 2012:
Real estate loans:
One-to four-family	$	4,113		14		17
Lot loans		84		3		3
Consumer loans:
Home equity		419		2		2
Credit cards and unsecured		20		7		8

Total	$	4,636		26		30

For the Six Months Ended June 30, 2011:
Real estate loans:
One-to four-family		2,941		7		7
Lot loans		24		-		-
Consumer loans-
Home equity		192		-		-

Total	$	3,157		7		7

A troubled debt restructuring is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind. The Company has granted a variety of concessions to borrowers in the form of loan modifications.

The Company had troubled debt restructurings totaling $230,000 entered into during the six months ended June 30, 2012 and totaling $176,000 for the six months ended June 30, 2011. Impairment losses totaled $16,000 for both periods. The Company has not had any troubled debt restructurings which were restructured during the last twelve months that subsequently defaulted during the period ended June 30, 2012.

6. Foreclosed Real Estate

Expenses applicable to foreclosed assets are included in other noninterest expense and include operating expenses of $53,000 and $32,000 for the six months ended June 30, 2012 and 2011, respectively. There were write-downs of $68,000 and two sales of foreclosed real estate during the six months ended June 30, 2012 and no sales or write-downs for the six months ended June 30, 2011.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

7. Line of Credit

The Company has an unsecured federal funds line of credit for $4.5 million with a correspondent bank and a $14.8 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At June 30, 2012 and December 31, 2011 the Company had no outstanding balances on these lines.

8. 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 and commitments to extend 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 and commitments to extend 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 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.

Unused lines of credit and commitments to extend 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 follows at June 30, 2012 (in thousands):

	Contract
	Amount
Unused lines of credit (rates range from
3.25% to 18.00%)	$	17,384

Commitments to extend credit (all fixed rates
ranging from 2.49% to 13.90%)	$	2,053

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

9. Fair Value of Financial Instruments

The carrying amounts and estimated fair values of the Company's financial instruments are as follows (in thousands):

	At June 30, 2012				At December 31, 2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents (1)	$	33,987		33,987		25,055		25,055
Securities held to maturity (2)		8,125		8,376		9,835		10,088
Loans (3)		94,464		94,105		102,002		101,736
Federal Home Loan Bank stock (3)		225		225		247		247
Accrued interest receivable (3)		406		406		454		454

Financial liabilities:
Deposits (3)		121,427		119,351		119,416		117,135
Off-balance-sheet financial instruments (3)		-		-		-		-

(1) We consider these fair value measurements to be Level 1.

(2) We consider these fair value measurements to be Level 2.

(3) We consider these fair value measurements to be Level 3.

10. Employee Benefit Plans

The Company has a 401(k) plan for its employees who meet certain age and length-of-service requirements. Eligible employees can contribute up to $16,500 of their compensation to the plan on a pre-tax basis. Employer matching contributions are made at 100 percent of employee contribution up to five percent. Employer contributions made to the 401(k) plan were $53,000 and $56,000 for the six-months ended June 30, 2012 and 2011, respectively.

11. Employee Stock Ownership Plan

Effective April 5, 2011, upon closing of the stock offering, the Holding Company established an Employee Stock Ownership Plan which acquired 8% of the total number of shares of common stock sold during the public offering. A total of 98,756 shares were acquired in exchange for a $988,000 note payable to the Holding Company. The note bears interest at the prime plus one percent rate and is payable in annual installments and is due in 2021. The employer expense was $29,000 and $60,000 for the three- and six-month periods ended June 30, 2012, respectively. The employer expense was $28,000 for the three- and six-month periods ended June 30, 2011, respectively.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

12. Fair Value Measurements

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

	Fair Value		Level 1		Level 2		Level 3		Total Losses		Losses Recorded During the Period
At June 30, 2012:
One-to four-family	$	1,924		-		-		1,924		378		186
Lot loans		59		-		-		59		246		43
Home equity		265		-		-		265		177		129
Credit cards and unsecured		41		-		-		41		6		6

Total	$	2,289		-		-		2,289		807		364

At December 31, 2011:
One-to four-family		1,667		-		-		1,667		592		378
Lot loans		70		-		-		70		220		129
Home equity		501		-		-		501		89		89
Automobile		-		-		-		-		18		18

Total	$	2,238		-		-		2,238		919		614

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

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Losses

Identical

Observable

Unobservable

Recorded

Fair

Assets

Inputs

Total

During the

Value

(Level 1)

(Level 2)

(Level 3)

Losses

Period

At June 30, 2012-

Foreclosed real estate

2,394

122

At December 31, 2011-

Foreclosed real estate

743

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

13. Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of June 30, 2012, that the Bank meets all capital adequacy requirements to which it was subject.

At June 30, 2012, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

13. Regulatory Matters, Continued

The Bank's actual regulatory capital amounts and percentages are presented in the table ($ in thousands).

	Actual					Minimum For Capital Adequacy Purposes					Minimum To Be Well Capitalized Under Prompt and Corrective Action Provisions
	Amount		%			Amount		%			Amount		%
At June 30, 2012:
Total Capital to Risk-
Weighted Assets	$	18,195		21.65	%	$	6,724		8.00	%	$	8,405		10.00	%
Tier I Capital to Risk-
Weighted Assets		17,140		20.39			3,362		4.00			5,043		6.00
Tier I Capital
to Total Assets		17,140		11.86			4,335		3.00			7,225		5.00

At December 31, 2011:
Total Capital to Risk-
Weighted Assets		19,431		22.35			6,955		8.00			8,694		10.00
Tier I Capital to Risk-
Weighted Assets		18,102		20.82			3,478		4.00			5,216		6.00
Tier I Capital
to Total Assets		18,102		12.69			4,279		3.00			7,132		5.00

14. Adoption of Plan of Reorganization and Subsequent Stock Issuance

On April 5, 2011, in accordance with a Plan of Conversion and Reorganization (the “Plan”) adopted by its Board of Directors and approved by its members, the Bank converted from a mutual holding company to a stock holding company form of organization, with the Bank becoming a wholly owned subsidiary of the Holding Company. The conversion and reorganization was accomplished through the sale and issuance of 1,234,454 shares of common stock at a price of $10.00 per share, through which the Holding Company received proceeds of approximately $10.5 million, net of offering expenses of approximately $847,000.

In accordance with Office of the Comptroller of the Currency ("OCC") regulations, upon the completion of the conversion, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Item 2.

Management's Discussion and Analysis of

Financial Condition and Results of Operations

Forward-Looking Statements

"When used in this report and in future filings by Sunshine Financial with the SEC, in Sunshine Financial's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, "anticipate," "believes," "expects," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "projected," or similar expressions are intended to identify forward-looking statements." These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;

changes in general economic conditions, either nationally or in our market area;

changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;

results of examinations of us by the Federal Reserve Board, OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Act, Basel III, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

our ability to attract and retain deposits;

further increases in premiums for deposit insurance;

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

our ability to control operating costs and expenses;

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

difficulties in reducing risks associated with the loans on our balance sheet;

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

computer systems on which we depend could fail or experience a security breach;

our ability to retain key members of our senior management team;

costs and effects of litigation, including settlements and judgments;

our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and out ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

our ability to pay dividends on our common stock;

adverse changes in the securities markets;

inability of key third-party providers to perform their obligations to us;

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods including relating to fair value accounting and loan loss reserve requirements; and

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this report.

Any of the forward-looking statements are based upon management's beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

General

On July 1, 2007, Sunshine Savings Bank converted its charter from a state-chartered credit union to a federally-chartered savings bank. On that date the name was changed from Sunshine State Credit Union to Sunshine Savings Bank, and we became a taxable organization. In January 2009, we reorganized into a mutual holding company structure, with Sunshine Savings Bank as a wholly-owned subsidiary of Sunshine Financial, Inc., a federal corporation ("Old Sunshine"), which was the wholly-owned subsidiary of Sunshine Savings MHC (the "MHC"). On April 5, 2011, in accordance with a Plan of Conversion and Reorganization (the "Plan") adopted by its Board of Directors and approved by its members, we converted from a mutual to a stock holding company form of organization, with the MHC and Old Sunshine being merged into a new holding company, Sunshine Financial, Inc. ("Sunshine Financial" or the "Holding Company"), and the Bank becoming a wholly-owned subsidiary of the Holding Company. See Notes 1 and 14 to the Notes to Condensed Consolidated Financial Statements. References to we, us and our throughout this document refer to Sunshine Financial and Sunshine Savings Bank, as the context requires.

We currently operate out of four full-service branch offices serving the Tallahassee, Florida metropolitan area. Our principal business consists of attracting retail deposits from the general public and investing those funds in loans secured by first and second mortgages on one- to four-family residences, home equity loans and lines of credit, lot loans, and direct automobile, credit card and other consumer loans.

We offer a variety of deposit accounts, which are our primary source of funding for our lending activities.

The Bank is significantly affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles. Sources of funds for lending activities of the Bank include primarily deposits, borrowings, payments on loans and income provided from operations.

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services. Our noninterest expense has typically exceeded our net interest income and we have relied primarily upon noninterest income to supplement our net interest income and to achieve earnings.

Our operating expenses consist primarily of salaries and employee benefits, general and administrative, occupancy and equipment, data processing services, professional services and marketing expenses. Salaries and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, taxes, depreciation charges, maintenance and costs of utilities.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Critical Accounting Policies

Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting policies include, determining the allowance for loan losses, valuation of foreclosed assets and accounting for deferred income taxes.

Foreclosed Assets. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value less costs to sell. Revenue and expenses from operations are included in the consolidated statements of operations.

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 uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. There were no changes in the Bank's accounting policies or methodology during the period ended June 30, 2012.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume 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 industry loss experience adjusted for qualitative factors.

The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding year. This is supplemented by the risks for each portfolio segment. Risk factors impacting loans in each of the portfolio segments include changes in property values, changes in consumer and business spending and changes in credit availability. The historical experience is adjusted for qualitative factors such as economic conditions and other trends or uncertainties that could affect management's estimate of probable losses.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Deferred Tax Assets. Income taxes are reflected in our financial statements to show the tax effects of the operations and transactions reported in the financial statements and consist of taxes currently payable plus deferred taxes. Generally accepted accounting principles require the asset and liability approach for financial accounting and reporting for deferred income taxes. Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of assets and liabilities. They are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled and are determined using the assets and liability method of accounting. The deferred income provision represents the difference between net deferred tax asset/liability at the beginning and end of the reported period. In formulating our deferred tax asset, we are required to estimate our income and taxes in the jurisdiction in which we operate. This process involves estimating our actual current tax exposure for the reported period together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The realization of deferred tax assets is dependent on results of future operations. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

General. Total assets increased $1.5 million, or 1.06%, to $147.3 million at June 30, 2012 from $145.8 million at December 31, 2011. The increase in total assets was due primarily to increases in federal funds sold offset by decreases in loans, securities held to maturity and interest-bearing deposits with banks. Our federal funds sold increased $14.3 million, loans decreased $7.5 million, securities held to maturity decreased $1.7 million, and interest bearing deposits with banks decreased $4.2 million since December 31, 2011.

Loans. Our net loan portfolio decreased $7.5 million, or 7.4%, to $94.5 million at June 30, 2012 from $102.0 million at December 31, 2011. Real estate mortgage loans decreased $5.9 million while consumer loans decreased $2.3 million. The decrease in loans receivable was due primarily to loan repayments exceeding loan originations. The decrease in loan originations was primarily attributable to the weakness in the housing market and the economy. In an attempt to increase future one- to four- family real estate mortgage loan originations and generate income we have been approved to originate and sell residential loans to Freddie Mac. For the six months ended June 30, 2012, the Bank originated and sold $4.6 million in loans to Freddie Mac. In order to maintain or increase our loan portfolio and increase interest income, management and the Board have approved a program of keeping in portfolio, 15 year single family mortgage loans that meet certain interest rate parameters and would qualify for sale to Freddie Mac. In addition, the Bank has begun a commercial real estate lending program for owner occupied commercial buildings.

Allowance for Loan Losses. Our allowance for loan losses at June 30, 2012 was $1.5 million, or 1.55% of net loans receivable, compared to $1.3 million, or 1.30% of net loans receivable, at December 31, 2011. Nonperforming loans decreased to $2.7 million at June 30, 2012 from $4.6 million at December 31, 2011. Nonperforming loans to total loans decreased to 2.87% at June 30, 2012 from 4.47% at December 31, 2011. This decrease in nonperforming loans was primarily due to transferring seven loans to real estate owned with fair values totaling $1.4 million and loan balances of $1.8 million. Loans on nonaccrual which were less than ninety days past due totaled $218,000 at June 30, 2012 compared to $242,000 at December 31, 2011.

As of June 30, 2012 the Bank had 17 properties in real estate owned with a fair value of $2.4 million and total unpaid principal balances of $3.7 million. In addition, the Bank was in the process of foreclosure on 11 properties with a total fair value of $1.4 million and total unpaid principal balances of $2.1 million. However, only two of these foreclosures were started in 2012.

Deposits. Total deposits increased $2.0 million, or 1.68%, to $121.4 million at June 30, 2012 from $119.4 million at December 31, 2011. This increase was due primarily to increases in money market, savings, and noninterest bearing deposits offset by decreases in time deposits. These increases were primarily matured time deposits moving to liquid deposit accounts in anticipation of higher rates in the future.

Equity. Total equity decreased $586,000 to $24.8 million at June 30, 2012. This decrease was due to the net loss of $626,000, offset by Employee Stock Ownership Plan share allocation of $40,000 for the six months ended June 30, 2012.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Results of Operations

The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest-rate spread; and (v) net interest margin. Nonaccruing loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual.

	Three Months Ended June 30,
	2012								2011
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividend		Average Yield/ Rate
Interest-earning assets:
Loans receivable (1)	$	96,736		$	1,403		5.80	%	$	112,626		$	1,686		5.99	%
Investments held to maturity		8,535			53		2.48			8,388			72		3.43
Other interest-earning assets (2)		31,313			18		0.23			24,194			12		0.20

Total interest-earning assets		136,584			1,474		4.32			145,208			1,770		4.88

Noninterest-earning assets		10,729								10,634

Total assets	$	147,313							$	155,842

Interest-bearing liabilities:
MMDA and statement savings		64,638			85		0.53			60,647			105		0.69
Time deposits		33,793			62		0.73			48,371			147		1.22

Total interest-bearing liabilities		98,431			147		0.60			109,018			252		0.92

Noninterest-bearing liabilities		23,684								23,852
Equity		25,198								22,972

Total liabilities and equity	$	147,313							$	155,842

Net interest income				$	1,327							$	1,518

Net interest rate spread (3)							3.72	%							3.96	%

Net interest margin (4)							3.89	%							4.18	%

Ratio of average interest-earning assets
to average interest-bearing liabilities		1.39	x							1.33	x

(1)	Includes nonaccrual loans.
(2)	Other interest-earnings assets including federal funds sold, Federal Home Loan Bank stock and interest-bearing deposits.
(3)	Interest-rate spread represents the difference between the average yield on interest-earning assets and the average rate of interest-bearing liabilities.
(4)	Net interest margin is net interest income divided by average interest-earning assets (annualized).

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

	Six Months Ended June 30,
	2012								2011
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividend		Average Yield/ Rate
Interest-earning assets:
Loans receivable (1)	$	97,915		$	2,864		5.85	%	$	113,838		$	3,393		5.96	%
Investments held to maturity		8,824			115		2.61			6,540			109		3.33
Other interest-earning assets (2)		29,674			30		0.20			22,631			22		0.19

Total interest-earning assets		136,413			3,009		4.41			143,009			3,524		4.92

Noninterest-earning assets		10,408								10,677

Total assets	$	146,821							$	153,976

Interest-bearing liabilities:
MMDA and statement savings		63,886			181		0.57			59,594			215		0.72
Time deposits		34,346			131		0.76			50,701			340		1.34

Total interest-bearing liabilities		98,232			312		0.64			110,295			555		1.01

Noninterest-bearing liabilities		23,326								23,343
Equity		25,263								20,338

Total liabilities and equity	$	146,821							$	153,976

Net interest income				$	2,697							$	2,969

Net interest rate spread (3)							3.77	%							3.91	%

Net interest margin (4)							3.95	%							4.14	%

Ratio of average interest-earning assets
to average interest-bearing liabilities		1.39	x							1.30	x

(1)	Includes nonaccrual loans.
(2)	Other interest-earnings assets including federal funds sold, Federal Home Loan Bank stock and interest-bearing deposits.
(3)	Interest-rate spread represents the difference between the average yield on interest-earning assets and the average rate of interest-bearing liabilities.
(4)	Net interest margin is net interest income divided by average interest-earning assets (annualized).

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Three Months Ended June 30, 2012 and 2011

General. Net loss for the three months ended June 30, 2012 was $(583,000) compared to net earnings of $70,000 for the three months ended June 30, 2011, resulting in an annualized loss on average assets of (1.58)% for the three months ended June 30, 2012 and annualized income of 0.18% for the three months ended June 30, 2011. The decrease in net earnings was due primarily to an increase in our provision for loan loss, a decrease in our net interest income, and an increase in noninterest expense.

Net Interest Income. Net interest income decreased $191,000, or 12.6%, to $1,327,000 for the three months ended June 30, 2012 from $1,518,000 for the same period in 2011, primarily due to the decline in average balance of our loan portfolio, partially offset by our lower cost of deposits. Our interest-rate-spread decreased to 3.72% for the three months ended June 30, 2012 from 3.96% for the same period in 2011, while our net interest margin decreased to 3.89% from 4.18%. The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended June 30, 2012 increased to 1.39x, from 1.33x for the three months ended June 30, 2011.

Interest Income. Interest income for the three months ended June 30, 2012 decreased $296,000, or 16.7%, to $1,474,000 from $1,770,000 for the same period ended June 30, 2011. The decrease in interest income for the three months ended June 30, 2012 was primarily due to lower average balances of loans receivable. Average interest-earning loans decreased to $96.7 million during the three months ended June 30, 2012 compared to $112.6 million for the three months ended June 30, 2011. In addition, the average yield on average interest earning assets decreased 56 basis points to 4.32% from 4.88%.

Interest Expense. Interest expense for the three months ended June 30, 2012 was $147,000 compared to $252,000 for the same period in 2011, a decrease of $105,000 or 41.7%. The decrease was primarily the result of decreases in both the average balance of and the average rate paid on time deposits. The average balance of time deposits decreased to $33.8 million for the three month period ended June 30, 2012 from $48.4 million for the same period in 2011 and the average rate paid on certificates of deposit decreased to 0.73% from 1.22%. The total cost of funds for the three months ended June 30, 2012 decreased to 0.60% from 0.92% for the three months ended June 30, 2011.

Provision for Loan Losses. We recorded a provision for loan loss of $955,000 for the three months ended June 30, 2012 compared to $225,000 for the same period in 2011. The provision for loan losses reflected the increase in net charge-offs and in nonperforming single family mortgage loans in foreclosure and the resulting write-downs based on fair value calculations. Net charge-offs for the three months ended June 30, 2012 were $792,000 compared to $326,000 for the three months ended June 30, 2011. For the three months ended June 30, 2012, net charge-offs consisted of $82,000 for credit card and unsecured loans, $43,000 for lot loans, $156,000 for second mortgage loans, $440,000 for first mortgages, $73,000 for other secured consumer loans, and a net recovery of $2,000 for automobile loans. For the same period in 2011, net charge-offs consisted of $56,000 for credit card and unsecured loans, $193,000 for second mortgage loans, $61,000 for first mortgages and $16,000 for other secured consumer loans. Nonperforming loans to total loans at June 30, 2012 were 2.87% compared to 4.16% at June 30, 2011. The allowance for loan losses to net loans receivable was 1.55% at June 30, 2012 compared to 1.44% at June 30, 2011.

Our provision for loan losses increased for the three months ended June 30, 2012, despite a decrease in our nonperforming loans. As mentioned above, this increase was primarily due to an increase in net charge-offs and in nonperforming single family real estate loans in foreclosure. As of June 30, 2012, the Bank was in the process of foreclosure on 11 single family real estate loans. As of June 30, 2011, the Bank was in the process of foreclosure on 13 single family real estate loans.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Three Months Ended June 30, 2012 and 2011, Continued

Management considers the allowance for loan losses at June 30, 2012 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income for the three months ended June 30, 2012 increased $21,000, or 3.5%, to $618,000 compared to $597,000 for the same period in 2011. Loan fees increased $71,000 and service charges on deposit accounts and other income decreased by $50,000 for the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The primary cause for the increase in loan fee income was due to gains on the sale of loans to Freddie Mac. The primary cause for the decrease in fees from deposit accounts and other income was a decrease in income from NSF fees on transaction accounts and losses on the sale of real estate owned.

Noninterest Expense. Noninterest expense for the three months ended June 30, 2012 increased $131,000, or 7.4%, to $1,912,000 compared to $1,781,000 for the same period in 2011. The largest increase occurred in professional fees which increased $54,000, or 38.8% to $193,000 for the three months ended June 30, 2012, from $139,000 for the same period last year. The increase in professional fees was primarily due to an increase in legal fees associated with our annual meeting and stockholder vote as a public company. For the three months ended June 30, 2012, other expense increased $20,000, or 7.7%, to $279,000 compared to $259,000 for the same period in 2011. The increase in other expense was primarily due to an increase in real estate owned expenses.

Income Taxes. For the three months ended June 30, 2012, we recorded an income tax benefit of $339,000 on before tax losses of $922,000. For the three months ended June 30, 2011, we recorded income tax expense of $39,000 on a before tax income of $109,000. Our effective tax rate for the three months ended June 30, 2012 was 36.8% compared to 35.8% for the same time period in 2011.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Six Months Ended June 30, 2012 and 2011

General. Net loss for the six months ended June 30, 2012 was $(626,000) compared to net earnings of $78,000 for the six months ended June 30, 2011, resulting in an annualized loss on average assets of 0.85% for the six months ended June 30, 2012 and a net gain on average assets of 0.10% for the six months ended June 30, 2011. The decrease in net earnings was due primarily to an increase in our provision for loan loss, a decrease in our net interest income, and an increase in noninterest expense.

Net Interest Income. Net interest income decreased $272,000, or 9.2%, to $2,697,000 for the six months ended June 30, 2012 from $2,969,000 for the same period in 2011, primarily due to the decline in average balance and yield of our loan portfolio, partially offset by our lower cost of deposits. Our interest-rate-spread decreased to 3.77% for the six months ended June 30, 2012 from 3.91% for the same period in 2011, while our net interest margin decreased to 3.95% from 4.14%. The ratio of average interest-earning assets to average interest-bearing liabilities for the six months ended June 30, 2012 increased to 1.39x, from 1.30x for the six months ended June 30, 2011.

Interest Income. Interest income for the six months ended June 30, 2012 decreased $515,000, or 14.60%, to $3,009,000 from $3,524,000 for the same period ended June 30, 2011. The decrease in interest income for the six months ended June 30, 2012 was primarily due to lower average balances of loans receivable and an 11 basis point decline in the yield earned on loans. Average interest-earning loans decreased to $97.9 million during the six months ended June 30, 2012 compared to $113.8 million for the six months ended June 30, 2011.

Interest Expense. Interest expense for the six months ended June 30, 2012 was $312,000 compared to $555,000 for the same period in 2011, a decrease of $243,000 or 43.8%. The decrease was primarily the result of decreases in both the average balance of and the average rate paid on time deposits. The average balance of time deposits decreased to $34.3 million for the six month period ended June 30, 2012 from $50.7 million for the same period in 2011 and the average rate paid on certificates of deposit decreased to 0.76% from 1.34%. The total cost of funds for the six months ended June 30, 2012 decreased to 0.64% from 1.01% for the six months ended June 30, 2011.

Provision for Loan Losses. We recorded a provision for loan loss of $1,180,000 for the six months ended June 30, 2012 and $450,000 for the same period in 2011. The provision for loan losses reflected the increase in net loan charge-offs and in nonperforming single family mortgage loans in foreclosure and the increase in real estate owned and the resulting write-downs based on fair value calculations. Net charge-offs for the six months ended June 30, 2012 were $1,042,000 compared to $467,000 for the six months ended June 30, 2011. For the first six months of 2012, net charge-offs consisted of $111,000 for credit card and unsecured loans, $226,000 for second mortgage loans, $123,000 for lot loans, $481,000 for first mortgages, $92,000 for other secured consumer loans, and $9,000 for automobile loans. For the first six months of 2011, net charge-offs consisted of $147,000 for credit card and unsecured loans, $231,000 for second mortgage loans, $61,000 for first mortgages, $30,000 for other secured consumer loans, and a net recovery of $2,000 for automobile loans. Nonperforming loans to total loans at June 30, 2012 were 2.87% compared to 4.16% at June 30, 2011. The allowance for loan losses to net loans receivable was 1.55% at June 30, 2012 compared to 1.44% at June 30, 2011.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Six Months Ended June 30, 2012 and 2011, Continued

Our provision for loan losses increased for the six months ended June 30, 2012, despite a decrease in our nonperforming loans. As mentioned above, this increase was primarily due to an increase in net charge-offs and in nonperforming single family real estate loans. As of June 30, 2012, the Bank was in the process of foreclosure on 11 single family real estate loans. As of June 30, 2011, the Bank was in the process of foreclosure on 13 single family real estate loans.

Noninterest Income. Noninterest income for the six months ended June 30, 2012 increased $36,000, or 3.1%, to $1,215,000 compared to $1,179,000 for the same period in 2011. Loan fees increased $121,000 and service charges on deposit accounts and other income decreased by $85,000 for the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The primary cause for the increase in loan fee income was due to gains on the sale of loans to Freddie Mac. The primary cause for the decrease in fees from deposit accounts and other income was a decrease in income from NSF fees on transaction accounts and losses on the sale of real estate owned.

Noninterest Expense. Noninterest expense for the six months ended June 30, 2012 was $3,730,000 compared to $3,576,000 for the same period in 2011, an increase of $154,000 or 4.3%. The largest increase occurred in professional fees which increased $78,000, or 28.2%, to $355,000 compared to $277,000 for the same period in 2011. The increase in professional fees was primarily due to an increase in legal fees associated our first annual meeting and stockholder vote as a public company, and both accounting and legal fees associated with being a public company. For the six months ended June 30, 2012, other expense increased $20,000, or 4.0%, to $518,000 compared to $498,000 for the same period in 2011. The increase in other expense was primarily due to an increase in real estate owned expenses. For the six months ended June 30, 2012, FDIC insurance expense decreased $25,000, or 30.1%, to $58,000 compared to $83,000 for the same period in 2011. The decrease in FDIC insurance expense was primarily due to a decrease in our base deposits and a decrease in the assessment rate for the six months ended June 30, 2012.

Income Taxes. For the six months ended June 30, 2012, we recorded an income tax benefit of $372,000 on before tax losses of $998,000. For the six months ended June 30, 2011, we recorded income tax expense of $44,000 on a before tax income of $122,000. Our effective tax rate for the six months ended June 30, 2012 was 37.3% compared to 36.1% for the same time period in 2011.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not required by smaller reporting companies.

Item 4. Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of June 30, 2012, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of June 30, 2012, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not required for smaller reporting companies.

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

Nothing to report.

Item 3. Defaults Upon Senior Securities

Nothing to report.

Item 4. Mine Safety Disclosures

Nothing to report.

Item 5. Other Information

Nothing to report.

Item 6. Exhibits

See Exhibit Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

SIGNATURES

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

	SUNSHINE FINANICAL, INC.


Date: August 14, 2012	By:	/s/ Louis O. Davis, Jr.
		Louis O. Davis, Jr.
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: August 14, 2012	By:	/s/ Scott A. Swain
		Scott A, Swain
		Senior Vice President, Treasurer and
		Chief Financial Officer
		(Principal Financial Officer)

EXHIBIT INDEX

Exhibits:
2.0	Plan of Conversion and Reorganization (incorporated herein by reference to Exhibit 2.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
3.1	Articles of Incorporation of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
3.2	Bylaws of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
4.0	Form of Common Stock Certificate of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.1	Employment Agreement by and between Sunshine Savings Bank and Louis O Davis, Jr. (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.2	Form of Change of Control Agreement by and between Sunshine Financial, Inc. and Louis O. Davis Jr. (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.3	Form of Change of Control Agreement by and between Sunshine Financial, Inc. and each of Brian P. Baggett and Scott A. Swain (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.4	Employee Severance Policy (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.5	Director Fee Arrangements
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.0	Section 1350 Certification
101	Interactive Data Files*

¯ To be filed by amendment.

Sunshine Financial, Inc. - FORM 10-Q - August 14, 2012

Attached files

Sunshine Financial, Inc. Reports