Sunshine Financial, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - Sunshine Financial, Inc.	ex31-1.htm
EX-31.2 - Sunshine Financial, Inc.	ex31-2.htm
EX-32 - Sunshine Financial, Inc.	ex-32.htm
EXCEL - IDEA: XBRL DOCUMENT - Sunshine Financial, Inc.	Financial_Report.xls

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 March 31, 2015

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

For the transition period from _______ to ________

Commission file number:001-54280

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 ☒No ☐

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

Large accelerated filer [ ]Accelerated filer [ ]

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

At May 13, 2015, there were issued and outstanding 1,088,700 shares of the issuer's common stock.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Index

	Page Number
PART IFINANCIAL INFORMATION
Item 1.Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014	2

Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2015 and 2014 (Unaudited)	3

Condensed Consolidated Statements of Stockholders' Equity for the Three-Month Periods Ended March 31, 2015 and 2014 (Unaudited)	4

Condensed Consolidated Statements of Cash Flows For the Three-Month Periods Ended March 31, 2015 and 2014 (Unaudited)	5

Notes to Condensed Consolidated Financial Statements (unaudited)	6-22

Item 2.Management's Discussion and Analysis of Financial Conditionand Results of Operations	23-30

Item 3.Quantitative and Qualitative Disclosure About Market Risk	31

Item 4.Controls and Procedures	31

PART IIOTHER INFORMATION

Item 1.Legal Proceedings	32

Item 1A.Risk Factors	32

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.Defaults Upon Senior Securities	32

Item 4.Mine Safety Disclosures	32

Item 5.Other Information	32

Item 6.Exhibits	32

SIGNATURES	33

EXHIBIT INDEX

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands)

	At March 31, 2015			At December 31, 2014
	(Unaudited)
Assets

Cash and due from banks	$	1,936			3,682
Interest-bearing deposits with banks		15,588			9,350

Cash and cash equivalents		17,524			13,032

Securities held to maturity (fair value of $24,943 and $25,835)		24,845			26,035
Loans, net of allowance for loan losses of $1,102 and $1,087		102,677			102,786
Premises and equipment, net		4,825			4,907
Federal Home Loan Bank stock, at cost		136			130
Deferred income taxes		2,551			2,561
Accrued interest receivable		359			350
Foreclosed real estate		354			206
Other assets		998			999

Total assets	$	154,269			151,006

Liabilities and Stockholders' Equity

Liabilities:
Noninterest-bearing deposit accounts	$	27,857			26,206
Money-market deposit accounts		35,327			35,358
Savings accounts		41,530			39,606
Time deposits		26,122			26,735

Total deposits		130,836			127,905

Official checks		369			325
Advances by borrowers for taxes and insurance		193			29
Other liabilities		475			359

Total liabilities		131,873			128,618

Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 authorized, none issued and outstanding		-			-
Common stock, $.01 par value, 6,000,000 shares authorized, 1,090,110 and 1,094,110 shares issued and outstanding at March 31, 2015 and December 31, 2014		10			10
Additional paid in capital		8,295			8,334
Retained earnings		14,733			14,709
Unearned Employee Stock Ownership Plan shares		(642	)		(665	)

Total stockholders' equity		22,396			22,388

Total liabilities and stockholders' equity	$	154,269			151,006

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 March 31,
	2015		2014
Interest income:
Loans	$	1,346	$	1,284
Securities		130		152
Other		7		6

Total interest income		1,483		1,442

Interest expense-deposits		93		93

Net interest income		1,390		1,349

Provision for loan losses		30		50

Net interest income after provision for loan losses		1,360		1,299

Noninterest income:
Fees and service charges on deposit accounts		349		401
Gain on loan sales		62		27
Gain on sale of foreclosed real estate		10		-
Fees and charges on loans		38		22
Other		6		10

Total noninterest income		465		460

Noninterest expenses:
Salaries and employee benefits		885		873
Occupancy and equipment		279		294
Data processing services		172		203
Professional fees		151		126
Federal Deposit Insurance Corporation insurance		30		26
Advertising and promotion		6		16
Stationery and supplies		16		18
Telephone communications		41		41
Foreclosed real estate		17		16
Credit card expense		31		33
Other		140		150

Total noninterest expenses		1,768		1,796

Earnings (loss) before income taxes (benefit)		57		(37	)

Income taxes (benefit)		33		(16	)

Net earnings (loss)	$	24	$	(21	)

Basic earnings (loss) per common share	$	0.02	$	(0.02	)

Diluted earnings (loss) per common share	$	0.02	$	(0.02	)

Dividends per share	$	-	$	-

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, 2015 and 2014 (Unaudited)

($ in thousands)

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

Balance, December 31, 2013		1,174,454		$	11		9,789			14,670			(756	)		23,714

Net loss (unaudited)		-			-		-			(21	)		-			(21	)

Stock based compensation expense (unaudited)		-			-		48			-			-			48

Repurchase of common stock (unaudited)		(20,944	)		-		(383	)		-			-			(383	)

Common stock allocated to Employee Stock Ownership Plan ("ESOP") participants (unaudited)		-			-		(19	)		-			22			3

Balance, March 31, 2014 (unaudited)		1,153,510		$	11		9,435			14,649			(734	)		23,361

Balance, December 31, 2014		1,094,110		$	10		8,334			14,709			(665	)		22,388

Net earnings (unaudited)		-			-		-			24			-			24

Stock based compensation expense (unaudited)		-			-		53			-			-			53

Repurchase of common Stock (unaudited)		(4,000	)				(72	)								(72	)

Common stock allocated to ESOP participants (unaudited)		-			-		(20	)		-			23			3

Balance, March 31, 2015 (unaudited)		1,090,110		$	10		8,295			14,733			(642	)		22,396

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Three Months Ended March 31,
	2015			2014
Cash flows from operating activities:
Net earnings (loss)	$	24		$	(21	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation		95			92
Provision for loan losses		30			50
Deferred income taxes (benefit)		10			(16	)
Net amortization of premiums/discounts on securities		12			11
Net amortization of deferred loan fees and costs		(2	)		13
Loans originated for sale		(2,546	)		(1,072	)
Proceeds from loans sold		2,220			1,174
Gain on sale of loans		(46	)		(27	)
ESOP compensation expense		23			22
Decrease in additional paid in capital due to ESOP allocation		(20	)		(19	)
Share-based compensation expense		53			48
Increase in accrued interest receivable		(9	)		(10	)
Decrease (increase) in other assets		1			(139	)
Gain on sale of foreclosed real estate		(10	)		-
Write-down of foreclosed real estate		-			25
Increase in official checks		44			20
Net increase in advances by borrowers for taxes and insurance		164			131
Increase in other liabilities		116			86

Net cash provided by operating activities		159			368
Cash flows from investing activities:
Purchases of securities held-to-maturity		-			(3,910	)
Principal pay-downs on held-to-maturity securities		1,178			965
Net decrease (increase) in loans		223			(1,539	)
Net purchases of premises and equipment		(13	)		(63	)
(Purchase) redemption of Federal Home Loan Bank stock		(6	)		47
Proceeds from sale of foreclosed real estate		106			128
Capital expenditures for foreclosed real estate		(14	)		(12	)

Net cash provided (used) in investing activities		1,474			(4,384	)

Cash flows from financing activities:
Net increase in deposits		2,931			3,934
Repurchase of common stock		(72	)		(383	)

Net cash provided by financing activities		2,859			3,551

Increase (decrease) in cash and cash equivalents		4,492			(465	)

Cash and cash equivalents at beginning of period		13,032			14,455

Cash and cash equivalents at end of period	$	17,524		$	13,990

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

Interest	$	93		$	93

Noncash transactions:
Transfer from loans to foreclosed real estate	$	230		$	-
Increase in loan servicing assets	$	16		$	-

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 Holding Company's only business is the operation of the Bank. The Bank through its six 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, 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 accounting principles generally accepted in the United States of America ("GAAP") for a complete presentation of the Company's consolidated financial condition and consolidated 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-month period ended March 31, 2015 should not be considered as indicative of results for a full year.

2. Recent Accounting Standards Update

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The ASU was effective beginning January 1, 2015. The adoption of ASU 2014-04 is not expected to impact 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 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which creates Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the ASU requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The ASU is effective for public entities for interim and annual periods beginning after December 15, 2016; early adoption is not permitted. For financial reporting purposes, the ASU allows for either full retrospective adoption, meaning the ASU is applied to all of the periods presented, or modified retrospective adoption, meaning the ASU is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the ASU recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 to determine the potential impact ASU No. 2014-09 will have on the Company's consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. It also requires additional disclosures about repurchase agreements and other similar transactions. The ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The ASU also requires new and expanded disclosures. This ASU is effective for the first interim or annual period beginning after December 15, 2014. The adoption of ASU No. 2014-11 is not expected to have a material impact on the Company's consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-1, Income Statement —Extraordinary and Unusual Items (Subtopic 225-20). The objective of this ASU is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 with early adoption permitted. The Company does not expect this ASU to have a material impact on the Company's consolidated financial statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

3. Earnings (Loss) Per Share

Earnings (loss) earnings per share ("EPS") has been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three-months ended March 31, 2015, the outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method. For the three-months ended March 31, 2014, the outstanding stock options were not considered dilutive securities due to the net loss incurred by the Company. The shares purchased by the ESOP are included in the weighted-average shares when they are committed to be released ($ in thousands, except per share amounts):

	2015						2014
			Weighted-		Per					Weighted-		Per
			Average		Share					Average		Share
	Earnings		Shares		Amount		Loss			Shares		Amount
Three Months Ended March 31:
Basic EPS:
Net earnings (loss)	$	24		987,128	$	0.02	$	(21	)		1,042,973	$	0.02
Effect of dilutive securities:
Incremental shares from assumed conversion
of options and restricted stock awards				31,372							-
Diluted EPS:
Net earnings (loss)	$	24		1,018,500	$	0.02	$	(21	)		1,042,973	$	0.02

(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 March 31, 2015
Mortgage-backed securities	$	1,442		71		-			1,513
Collateralized mortgage obligations		23,403		194		(167	)		23,430

Total	$	24,845		265		(167	)		24,943

At December 31, 2014
Mortgage-backed securities		1,580		72		-			1,652
Collateralized mortgage obligations		24,455		65		(337	)		24,183

Total	$	26,035		137		(337	)		25,835

There were no securities pledged at March 31, 2015 or December 31, 2014.

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

	Less than Twelve Months					Twelve Months or Longer
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
At March 31, 2015:
Collateralized mortgage obligations	$	(2	)		838		(165	)		8,511

At December 31, 2014:
Collateralized mortgage obligations	$	(27	)		5,984		(310	)		11,283

At March 31, 2015 the unrealized losses on eleven securities are considered by management to be attributable to changes in market interest rates, and not attributable to credit risk on the part of the issuer. Accordingly, if market rates were to decline, much or all of the decline in market value would likely be recovered through market appreciation. As management has the ability and intent to hold debt securities until maturity, or for the foreseeable future, no declines in the fair value below amortized cost are deemed to be other than temporary.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans

The loan portfolio segments and classes as of the dates indicated are as follows (in thousands):

	March 31,			December 31,
	2015			2014
Real estate mortgage loans:
One-to four-family	$	48,631			48,957
Lot		4,033			4,109
Commercial real estate		31,168			29,803
Construction		438			1,140

Total real estate loans		84,270			84,009

Commercial loans		1,051			656

Consumer loans:
Home equity		7,967			8,212
Automobile		3,468			3,545
Credit cards and unsecured		6,368			6,583
Deposit account		489			534
Other		969			973

Total consumer loans		19,261			19,847

Total loans		104,582			104,512

Deduct
Loans in process		(692	)		(526	)
Deferred fees and discounts		(111	)		(113	)
Allowance for loan losses		(1,102	)		(1,087	)

Total loans, net	$	102,677			102,786

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

The Company has divided the loan portfolio into three portfolio segments and ten classes, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are loans comprised of four classes: One- to four-family, Lot, Commercial real estate and Construction loans. The Company generally originates one- to four-family 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 one- to four-family 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. The Company also makes loans for the purchase of developed lots for future construction of the borrower's primary residence. The Company will generally originate lot loans in an amount up to 75% of the lower of the purchase price or appraisal and have a maximum amortization of up to 20 years and maturities up to 20 years. Commercial real estate loans are generally originated at 75% or less loan-to-value ratio and have amortization terms of up to 20 years and maturities of up to ten years. Construction loans to borrowers are to finance the construction of one- to four-family, 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. Construction and lot loan lending is generally considered to involve a higher degree of credit risk than long-term permanent financing of residential properties.

Commercial Loans. Commercial loans are comprised of unsecured loans. The Company offers unsecured commercial loans generally to its commercial real estate borrowers.

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 deposit accounts. 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):

	Real Estate Mortgage Loans													Consumer Loans
	One-to Four- Family			Lot			Commercial Real Estate		Construction			Comme- rcial Loans		Home Equity			Auto- mobile			Credit Cards and Unsecured			Deposit Account		Other			Unallocated			Total
Three Months Ended March 31, 2015:
Beginning balance	$	454			46			206		2			10		115			31			111			-		39			73			1,087
Provision (credit) for loan loss		14			3			9		(1	)		6		31			(4	)		32			-		(14	)		(46	)		30
Charge-offs		-			-			-		-			-		-			-			(29	)		-		-			-			(29	)
Recoveries		-			-			-		-			-		-			-			14			-		-			-			14
Ending balance	$	468			49			215		1			16		146			27			128			-		25			27			1,102

Three Months Ended March 31, 2014:
Beginning balance	$	605			93			163		1			5		146			12			187			-		64			18			1,294
Provision (credit) for loan loss		39			(38	)		41		-			4		(7	)		10			(22	)		-		39			(16	)		50
Charge-offs		(79	)		-			-		-			-		(10	)		(5	)		(41	)		-		(40	)		-			(175	)
Recoveries		-			-			-		-			-		1			-			43			-		-			-			44
Ending balance	$	565			55			204		1			9		130			17			167			-		63			2			1,213

At March 31, 2015:
Individually evaluated for impairment:
Recorded investment	$	3,040			-			-		-			-		281			-			14			-		-			-			3,335
Balance in allowance for loan losses	$	80			-			-		-			-		4			-			2			-		-			-			86
Collectively evaluated for impairment:
Recorded investment	$	45,591			4,033			31,168		438			1,051		7,686			3,468			6,354			489		969			-			101,247
Balance in allowance for loan losses	$	388			49			215		1			16		142			27			126			-		25			27			1,016

At December 31, 2014:
Individually evaluated for impairment:
Recorded investment	$	3,297			-			-		-			-		289			-			14			-		-			-			3,600
Balance in allowance for loan losses	$	63			-			-		-			-		4			-			2			-		-			-			69
Collectively evaluated for impairment:
Recorded investment	$	45,660			4,109			29,803		1,140			656		7,923			3,545			6,569			534		973			-			100,912
Balance in allowance for loan losses	$	391			46			206		2			10		111			31			109			-		39			73			1,018

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

The following summarizes the loan credit quality by loan grade and class at the dates indicated (in thousands):

Credit Risk
Profile by Internally	One to Four				Commercial Real		Constru-		Comme-		Home		Auto-		Credit Cards and		Deposit
Assigned Grade:	Family		Lot		Estate		ction		rcial		Equity		mobile		Unsecured		Accounts		Other		Total
At March 31, 2015:
Grade:
Pass	$	44,824		3,998		31,168		438		1,051		7,604		3,431		6,291		489		945		100,239
Special mention		345		-		-		-		-		28		-		14		-		-		387
Substandard		3,462		35		-		-		-		335		37		63		-		24		3,956
Doubtful		-		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-		-

Total	$	48,631		4,033		31,168		438		1,051		7,967		3,468		6,368		489		969		104,582

At December 31, 2014:
Grade:
Pass		44,305		4,031		29,803		1,140		656		7,726		3,526		6,563		534		938		99,222
Special mention		375		34		-		-		-		57		14		7		-		12		499
Substandard		4,277		44		-		-		-		429		5		13		-		23		4,791
Doubtful		-		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-		-

Total	$	48,957		4,109		29,803		1,140		656		8,212		3,545		6,583		534		973		104,512

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 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.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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.

Age analysis of past-due loans at the dates indicated is as follows (in thousands):

	Accruing Loans
					90 Days
	30-59		60-89		and		Total
	Days		Days		Greater		Past				Nonaccrual		Total
	Past Due		Past Due		Past Due		Due		Current		Loans		Loans
At March 31, 2015:
Real estate loans:
One-to four-family	$	1,554		-		-		1,554		45,627		1,450		48,631
Lot		53		-		-		53		3,892		88		4,033
Commercial real estate		-		-		-		-		31,168		-		31,168
Construction		-		-		-		-		438		-		438
Commercial loans		-		-		-		-		1,051		-		1,051
Consumer loans:
Home equity		23		40		-		63		7,533		371		7,967
Automobile		10		21		-		31		3,420		17		3,468
Credit cards and unsecured		106		1		13		120		6,218		30		6,368
Deposit account		1		-		-		1		488		-		489
Other		-		-		-		-		969		-		969

Total	$	1,747		62		13		1,822		100,804		1,956		104,582

At December 31, 2014:
Real estate loans:
One-to four-family		417		90		-		507		46,709		1,741		48,957
Lot		69		34		-		103		3,962		44		4,109
Commercial real estate		-		-		-		-		29,803		-		29,803
Construction		-		-		-		-		1,140		-		1,140
Commercial loans		-		-		-		-		656		-		656
Consumer loans:
Home equity		154		27		-		181		7,767		264		8,212
Automobile		12		14		-		26		3,514		5		3,545
Credit cards and unsecured		29		83		7		119		6,441		23		6,583
Deposit account		5		-		-		5		529		-		534
Other		83		12		-		95		855		23		973

Total	$	769		260		7		1,036		101,376		2,100		104,512

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

	With No Related Allowance Recorded				With an Allowance Recorded						Total
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
At March 31, 2015:
Real estate loans:
One-to four-family	$	1,828		1,955		1,212		1,229		80		3,040		3,184		80
Consumer loans:
Home equity		149		177		132		132		4		281		309		4
Credit card and unsecured		-		-		14		14		2		14		14		2

	$	1,977		2,132		1,358		1,375		86		3,335		3,507		86

At December 31, 2014:
Real estate loans:
One-to four-family		2,069		2,196		1,228		1,244		63		3,297		3,440		63
Consumer loans:
Home equity		155		183		134		134		4		289		317		4
Credit card and unsecured		-		-		14		14		2		14		14		2

	$	2,224		2,379		1,376		1,392		69		3,600		3,771		69

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

	Average		Interest		Interest
	Recorded		Income		Income
	Investment		Recognized		Received
For the Three Months Ended March 31, 2015:
Real estate loans:
One-to four-family	$	2,961		25		29
Consumer loans:
Home equity		276		3		3
Credit card and unsecured		12		-		-

Total	$	3,249		28		32

For the Three Months Ended March 31, 2014:
Real estate loans:
One-to four-family		2,938		21		21
Consumer loans:
Home equity		281		2		2
Credit card and unsecured		47		-		-

Total	$	3,266		23		23

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

The Company had no troubled debt restructurings (TDR) entered into during the three months ended March 31, 2015 or 2014. There were no TDR loans that were modified within the 12 months prior to March 31, 2015, and for which there was a payment default during the three months ended March 31, 2015.

6. Lines of Credit

The Company has an unsecured federal funds line of credit for $2.5 million with a correspondent bank and a $15.1 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At March 31, 2015 and December 31, 2014, the Company had no outstanding balances on these lines.

7. 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 March 31, 2015 (in thousands):

	Contract
	Amount

Unused lines of credit	$	15,344

Commitments to extend credit	$	686

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

8. Fair Value of Financial Instruments

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

	At March 31, 2015						At December 31, 2014
	Carrying		Fair				Carrying		Fair
	Amount		Value		Level		Amount		Value		Level
Financial assets:
Cash and cash equivalents	$	17,524		17,524		1		13,032		13,032		1
Securities held to maturity		24,845		24,943		2		26,035		25,835		2
Loans		102,677	104,192			3		102,786		103,152		3
Federal Home Loan Bank stock		136		136		3		130		130		3
Accrued interest receivable		359		359		3		350		350		3

Financial liabilities:
Deposits		130,836	127,158			3		127,905		125,524		3
Off-balance-sheet financial
instruments		-		-		3		-		-		3

Discussion regarding the assumptions used to compute the estimated fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2014 filed with the U.S. Securities and Exchange Commission ("SEC") on March 30, 2015 ("2014 Form 10-K").

9. Employee Stock Ownership Plan

The Holding Company has established an ESOP which acquired 98,756 shares of common stock in exchange for a $988,000 note payable from the Bank to the Holding Company. The note bears interest at a fixed rate of 4.25%, is payable in annual installments and is due in 2021. The ESOP expense was $23,000 for the three-months ended March 31, 2015 and $22,000 for the three-months ended March 31, 2014. At March 31, 2015 and 2014, there were 59,353 and 69,228 shares, respectively, that had not been allocated under the ESOP.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

10. 2012 Equity Incentive Plan

On May 23, 2012, the Company's stockholders approved its 2012 Equity Incentive Plan ("Plan"). The Plan authorizes the grant of options for up to 123,445 shares of the Holding Company's common stock. The options granted have ten year terms and vest from one to five years. A summary of the activity in the Company's stock options is as follows:

						Weighted-
				Weighted-		Average
				Average		Remaining	Aggregate
	Number of			Exercise		Contractual	Intrinsic
	Options			Price		Term	Value

Outstanding at December 31, 2013		87,500		$	11.23			-
Forfeited		(2,000	)		10.75

Outstanding at March 31, 2014		85,500		$	11.24	8.74 years		-

Outstanding at December 31, 2014		84,000			11.70			-

Outstanding at March 31, 2015		84,000		$	11.70	7.89 years		-

Exercisable at March 31, 2015		10,000		$	10.75	7.70 years		76,500

At March 31, 2015, there was approximately $138,000 of unrecognized compensation expense related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted average period of fifty-two months. The total fair value of shares vesting and recognized as compensation expense was $12,000 for both the three-months ended March 31, 2015 and 2014.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

10. 2012 Equity Incentive Plan, Continued

The Company's 2012 Equity Incentive Plan also authorized the grant of up to 49,378 restricted common shares. The restricted shares awarded vest equally over five years from the date of grant. Restricted shares are forfeited if employment is terminated before the restriction period expires. The record holder of the Company's restricted shares of common stock possesses all the rights of a holder of the Company common stock, including the right to receive dividends on and to vote the restricted shares. The restricted shares may not be sold, transferred, pledged, assigned, encumbered, or otherwise alienated or hypothecated until they become fully vested and transferable in accordance with the agreements. Compensation expense for restricted stock totaled $41,000 for the three months ended March 31, 2015 and $36,000 for the three months ended March 31, 2014. There was no associated income tax benefit recognized.

A summary of the status of the Company's restricted stock and changes during the periods then ended are presented below:

	Number of Shares			Weighted-Average Grant-Date Fair Value

Outstanding at December 31, 2013		42,500		$	16.75

Outstanding at March 31, 2014		42,500			16.75

Outstanding at December 31, 2014		46,500			16.88
Vested		(8,500	)		16.75
Outstanding at March 31, 2015		38,000		$	16.91

Total unrecognized compensation cost related to these non-vested restricted stock amounted to approximately $576,000 at March 31, 2015. This cost is expected to be recognized monthly over the related vesting period using the straight-line method through 2019.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

11. 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 March 31, 2015:
One-to four-family	$	3,137		-		-		3,137		223		16
Home equity		277		-		-		277		32		1

Total	$	3,414		-		-		3,414		255		17

At December 31, 2014:
One-to four-family	$	2,875		-		-		2,875		206		61
Home equity		285		-		-		285		32		1

Total	$	3,160		-		-		3,160		238		62

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 March 31, 2015:

Foreclosed real estate

354

233

At March 31, 2014:

Foreclosed real estate

583

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

12. Regulatory Matters

The Bank is subject to minimum capital requirements imposed by the Office of the Comptroller of the Currency ("OCC"). Capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital.

Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital adequacy requirements adopted by the OCC which created a new required ratio for common equity Tier 1 ("CET1") capital, increased the minimum Tier 1 risk-based capital ratio, changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over required risk-based capital ratios, and changed what qualifies as capital for purposes of meeting these various capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company's financial statements.

In addition to the capital requirements, there are a number of changes in what constitutes regulatory capital, subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital, of which the Bank has none. Mortgage servicing rights and deferred tax assets over designated percentages of CET1 are deducted from capital, subject to a transition period ending December 31, 2017. CET1 consists of Tier 1 capital less all capital components that are not considered common equity. In addition, Tier 1 capital includes accumulated other comprehensive income, which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a transition period end December 31, 2017. Because of the Bank's asset size, the Bank is not are considered an advanced approaches banking organization and has elected to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in its Tier 1 capital calculations.

The new requirements also include changes in the risk-weighting of assets to better reflect credit risk and other risk exposure. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancelable (currently set at 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.

In addition to the minimum CET1, Tier 1, and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional CET1 capital equal to 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement is to be phased in over a period of four years starting with an increase of 0.625% beginning in January 2016 and increasing by the same amount each year until the full 2.5% becomes effective in January 2019.

Under the new standards, in order to be considered well-capitalized, the Bank must have a CET1 risk-based ratio of 6.5% (new), a Tier 1 risk-based ratio of 8% (increased from 6%), a total risk-based capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged).

At March 31, 2015, the Bank exceeded all regulatory capital requirements. Consistent with its goals to operate a sound and profitable organization, the Bank's policy is to maintain a "well-capitalized" status under the capital categories of the OCC. Based on capital levels at March 31, 2015, the Bank was considered to be well-capitalized.

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 March 31, 2015:
Total Capital to Risk-
Weighted Assets	$	19,300		16.41	%	$	9,407		8.00	%	$	11,759		10.00	%
Tier I Capital to Risk-
Weighted Assets		18,198		15.48			7,055		6.00			9,407		8.00
Tier I Capital
to Total Assets		18,198		12.44			5,853		4.00			7,316		5.00
Common equity Tier 1 Capital to
Risk-Weighted Assets		18,198		15.48			5,292		4.50			7,643		6.50

At December 31, 2014:
Total Capital to Risk-
Weighted Assets		19,211		19.33			7,949		8.00			9,937		10.00
Tier I Capital to Risk-
Weighted Assets		18,124		18.24			3,975		4.00			5,962		6.00
Tier I Capital
to Total Assets		18,124		12.21			5,936		4.00			7,420		5.00

Savings and loan holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a savings and loan holding company with less than $1.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations.

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 Inc. ("Sunshine Financial") with the U.S. Securities and Exchange Commission ("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 Office of the Comptroller of the Currency ("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, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III;

·	our ability to attract and retain deposits;

·	changes 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;

the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection and insurance and the impact of other governmental initiatives affecting the financial services industry;

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 and our Form 10-K for the year ended December 31, 2014 filed on March 30, 2015 ("2014 Form 10-K") and our other reports filed with the SEC.

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

Sunshine Financial is the holding company for its wholly owned subsidiary, Sunshine Savings Bank. Sunshine Savings Bank was originally chartered as a credit union in 1952 as Sunshine State Credit Union to serve state government employees in the metropolitan Tallahassee area. On July 1, 2007, we converted from a state-chartered credit union known as Sunshine State Credit Union to a federal mutual savings bank known as Sunshine Savings Bank, and in 2009 reorganized into the non-stock mutual holding company structure. On April 5, 2011, Sunshine Financial completed a public offering as part of Sunshine Saving Bank's conversion and reorganization from a non-stock mutual holding company to a stock holding company structure. 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 six 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, commercial real estate, 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. Our operations are 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 include primarily deposits, borrowings, payments on loans and income provided from operations.

Sunshine Financial is regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve") and Sunshine Savings Bank is regulated by the OCC and the Federal Deposit Insurance Corporation ("FDIC").

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Critical Accounting Policies

The Company has identified several accounting policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company's 2014 Form 10-K under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies." That discussion highlights estimates the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company's critical accounting policies and estimates as previously disclosed in the Company's 2014 Form 10-K.

Comparison of Financial Condition at March 31, 2015 and December 31, 2014

General. Total assets increased $3.3 million, or 2.2%, to $154.3 million at March 31, 2015 from $151.0 million at December 31, 2014. The increase in total assets was due primarily to increases in interest-bearing deposits with banks. The net increase in assets was primarily funded by a $2.9 million increase in deposits.

Loans. Our net loan portfolio decreased $109,000, to $102.7 million at March 31, 2015 from $102.8 million at December 31, 2014. The decrease in loans was due to a $1.4 million increase in commercial real estate loans, as well as a $395,000 increase in commercial business loans offset by decreases in one- to four-family loans, lot loans, construction loans and consumer loans. We originate and sell one- to four-family real estate mortgage loans to Freddie Mac to generate additional income. For the three-months ended March 31, 2015, we originated $2.5 million of one- to four-family mortgage loans for sale, and $2.2 million were sold to Freddie Mac at a gain on sale of $62,000.

Allowance for Loan Losses. Our allowance for loan losses at March 31, 2015 was $1.1 million, or 1.05% of loans, compared to $1.1 million, or 1.04% of loans, at December 31, 2014. Nonperforming loans decreased slightly to $2.0 million at March 31, 2015 from $2.1 million at December 31, 2014. Nonperforming loans to total loans decreased to 1.87% at March 31, 2015 from 2.01 % at December 31, 2014. Loans on nonaccrual which were less than ninety days past due totaled $41,000 at March 31, 2015 compared to $534,000 at December 31, 2014.

Deposits. Total deposits increased $2.9 million, or 2.3%, to $130.8 million at March 31, 2015 from $127.9 million at December 31, 2014. This increase was primarily due to increases in noninterest bearing deposits and savings accounts, partially offset by decreases in time deposits.

Equity. Total stockholders' equity increased $8,000 to $22.4 million at March 31, 2015. This increase was primarily due to net earnings of $24,000 and stock-based compensation of $53,000, partially offset by the repurchase of 4,000 shares of common stock totaling $72,000 for the three-months ended March 31, 2015.

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 rates; (iii) net interest income; (iv) interest-rate spread; and (v) net interest margin. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances.

	Three Months Ended March 31,
	2015								2014
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividend		Average Yield/ Rate
						($ in thousands)
Interest-earning assets:
Loans receivable (1)	$	102,532		$	1,346		5.25	%	$	96,343		$	1,284		5.33	%
Securities held to maturity		25,513			130		2.04			28,382			152		2.14
Other interest-earning assets (2)		9,708			7		0.27			9,420			6		0.27

Total interest-earning assets		137,753			1,483		4.31			134,145			1,442		4.30

Noninterest-earning assets		11,666								11,437

Total assets	$	149,419							$	145,582

Interest-bearing liabilities:
MMDA and statement savings		75,570			61		0.32			71,582			60		0.34
Time deposits		26,414			32		0.49			28,251			33		0.47

Total interest-bearing liabilities		101,984			93		0.37			99,833			93		0.37

Noninterest-bearing liabilities		25,080								22,398
Equity		22,355								23,351

Total liabilities and equity	$	149,419							$	145,582

Net interest income				$	1,390							$	1,349

Net interest rate spread (3)							3.94	%							3.93	%

Net interest margin (4)							4.04	%							4.02	%

Ratio of average interest-earning assets
to average interest-bearing liabilities		1.35	x							1.34	x

(1)	Includes nonaccrual loans.
(2)	Other interest-earnings assets consist of 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 March 31, 2015 and 2014

General. Net earnings for the three months ended March 31, 2015 was $24,000 compared to a net loss of $21,000 for the three months ended March 31, 2014, resulting in an annualized return on average assets of 0.06% for the three months ended March 31, 2015 and (0.06)% for the three months ended March 31, 2014. The increase in net earnings was due primarily to an increase in net interest income, a decrease in our provision for loan loss and a decrease in our noninterest expense.

Net Interest Income. Net interest income increased $41,000, or 3.0%, to $1.4 million for the three months ended March 31, 2015 from $1.3 million for the same period in 2014, primarily due to a $6.2 million increase in average loans for 2015, offset somewhat by an eight basis point decrease in our average yield on loans. Our net interest rate spread increased to 3.94% for the three months ended March 31, 2015 from 3.93% for the same period in 2014, while our net interest margin increased to 4.04% at March 31, 2015 from 4.02% at March 31, 2014. The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended March 31, 2015 increased to 1.35, from 1.34 for the three months ended March 31, 2014.

Interest Income. Interest income for the three months ended March 31, 2015 increased $41,000, or 2.8%, to $1.5 million from $1.4 million for the same period ended March 31, 2014. The increase in interest income for the three months ended March 31, 2015 was primarily due to a $6.2 million increase in average loans for 2015, offset somewhat by an eight basis point decrease in our average yield on loans. Average loans increased to $102.5 million, or $6.2 million, for the three months ended March 31, 2015, from $96.3 million for the same period in 2014. The average rate on loans receivable decreased to 5.25% for the three months ended March 31, 2015 compared to 5.33% for the three months ended March 31, 2014.

Interest Expense. Interest expense for the three months ended March 31, 2015 and March 31, 2014 was $93,000. The total cost of funds for both the three months ended March 31, 2015 and March 31, 2014 was 0.37%.

Provision for Loan Losses. We recorded a provision for loan losses of $30,000 for the three months ended March 31, 2015 compared to $50,000 for the three months ended March 31, 2014. The provision for loan losses reflected historical and expected future loan losses, the slight increase in the size of our loan portfolio as well as the change in the mix of loans. Net charge-offs for the three months ended March 31, 2015 were $15,000 compared to a net charge-offs of $131,000 for the three months ended March 31, 2014. Nonperforming loans to total loans at March 31, 2015 were 1.87% compared to 1.69% at March 31, 2014. The allowance for loan losses to loans was 1.05% at March 31, 2015 compared to 1.04% at December 31, 2014.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Three Months Ended March 31, 2014 and 2013, Continued

Management considers the allowance for loan losses at March 31, 2015 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 March 31, 2015 increased $5,000, or 1.1%, to $465,000 compared to $460,000 for the same period in 2014. The gain on loan sales increased $35,000, the gain on sale of foreclosed assets increased $10,000, fees and charges on loans increased $16,000 and fees and service charges on deposit accounts decreased $52,000 for the three months ended March 31, 2015, compared to the three months ended March 31, 2014. The primary cause for the increase in the gain on loan sales was an increase in the volume of loans sold to Freddie Mac refinancing activity increased due to lower mortgage rates as compared to the same period last year. There was no gain on sale of foreclosed assets during the three months ended March 31, 2014. The primary cause for a decrease in fees from deposit accounts was a decrease in income from debit card activity.

Noninterest Expense. Noninterest expense for the three months ended March 31, 2015 decreased $28,000, or 1.6%, as compared to the same period in 2014. The largest decreases were in data processing services and occupancy and equipment. The decrease in data processing services was primarily due to lower software maintenance costs and disaster recovery costs due to migrating to a service bureau for core processing, offset by higher item processing costs. The decrease in occupancy and equipment expense primarily was due to a decrease in ATM maintenance.

Income Taxes. For the three months ended March 31, 2015, we recorded income taxes of $33,000 on before tax earnings of $57,000. For the three months ended March 31, 2014, we recorded an income tax benefit of $16,000 on a before tax loss of $37,000. Our effective tax rate for the three months ended March 31, 2015 was 57.9% compared to 43.2% for the same time period in 2014.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company provided information about market risk in Item 7A of its 2014 Form 10-K. There have been no material changes in our market risk since our 2014 Form 10-K.

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 March 31, 2015, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of March 31, 2015, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended March 31, 2015, 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

(a) Not applicable.

(b) Not applicable.

(c) The following table sets forth information for the three months ended March 31, 2014 with respect to our repurchases of our outstanding common shares:

	Total Number of Shares Purchased	Average Price Paid per Share	Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
January 1, 2015 – January 31, 2015	4,000	$18.00	4,000	52,351
February 1, 2015 – February 28, 2015	---	---	---	---
March 1, 2015 – March 31, 2015	---	---	---	---
Total	4,000	$18.00	4,000	52,351

On October 1, 2014, the Company announced that its board of directors authorized the Company to purchase up to 115,351 shares, or approximately 10%, of its common stock in the open market or privately negotiated transaction from time to time over a twelve month period, subject to market conditions and other factors. The stock repurchase program is continuing.

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: May 13, 2015	By:	/s/ Louis O. Davis, Jr.
		Louis O. Davis, Jr.
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: May 13, 2015	By:	/s/ Scott A. Swain
		Scott A, Swain
		Senior Vice President, Treasurer and
		Chief Financial Officer
		(Principal Financial Officer)

EXHIBIT INDEX

Exhibits:
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, as amended, of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed with the SEC on August 28, 2013 (File No. 000-54280))
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	Director Fee Arrangements (incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No. 000-54280))
10.5	Sunshine Financial, Inc. 2012 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement filed on Schedule 14A on April 20, 2012 (File No. 000-54280))
10.6	Forms of Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Agreements under the 2012 Equity Incentive Plan (incorporated by reference to the Exhibits to the Registrant's Registration Statement on Form S-8 filed with the SEC on June 29, 2012 (File No. 333-182450))
10.7	Commercial Contract for the acquisition of property located at 3641 Coolidge Ct., Tallahassee, FL. (incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 20, 2013 (File No. 000-54280))
10.8	Commercial Contract for the acquisition of property located at 503 Appleyard Dr., Tallahassee, FL. (incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 20, 2013 (File No. 000-54280))
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 *

¯In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Sunshine Financial, Inc. - FORM 10-Q - May 13, 2015

Attached files

Sunshine Financial, Inc. Reports