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EX-31.1 - Sunshine Financial, Inc.ex31-1.htm
EX-32 - Sunshine Financial, Inc.ex-32.htm
EX-31.2 - Sunshine Financial, Inc.ex31-2.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
(Amendment No. 1)

(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, 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 August 11, 2015, there were issued and outstanding 1,087,500 shares of the issuer's common stock.
 

Explanatory Note
Overview
Sunshine Financial, Inc. (the "Company"), is filing this Amendment No. 1 to Quarterly Report on Form 10-Q/A (this "Amendment") to restate and amend the Company's previously issued unaudited condensed consolidated financial statements and related financial information for the three and six months ended June 30, 2015 previously included in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 (the "Original Form 10-Q"), which was filed with the Securities and Exchange Commission on August 11, 2015 (the "Original Filing Date"). This Amendment amends and restates the Company's unaudited condensed consolidated financial statements and related disclosures in "Part I – Item 1. Financial Statements" for the three and six months ended June 30, 2015, as well as related disclosures in "Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part I – Item 4. Controls and Procedures."
Background to and Effects of the Restatements
On August 25, 2015, the Board of Directors of the Company concluded, in consultation with management and after discussion with Hacker, Johnson & Smith PA., the Company's independent registered accounting firm, that the Company's previously issued condensed consolidated financial statements for the quarters ended March 31, 2015 and June 30, 2015 should no longer be relied upon because of errors related to the omission of approximately $314,000 of certain data processing charges that resulted in a material misstatement of expenses.
The Company determined that data processing expense for the three and six months ended June 30, 2015, was understated by $103,000 and 314,000, respectively.  The Company migrated to a service bureau from an in-house processing core system and was not accruing the data processing expense due to the misdirection of the invoice to another financial institution by the processor.  This error was not discovered due to the lack of timely reconciliations of due from cash accounts and automated clearing house ("ACH") processing accounts.  The impact of the restatement on the condensed consolidated financial statements for the three and six months ended June 30, 2015 is summarized in Note 12 to the Company's unaudited condensed consolidated financial statements included in "Part I – Item 1. Financial Statements" of this Amendment.

The Company has amended and restated in its entirety each Item of the Original Form 10-Q that required a change to reflect this restatement and to include certain additional information, namely: "Part I – Item 1. Financial Statements," "Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part I – Item 4. Controls and Procedures" and "Part II – Item 6. Exhibits."
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, this Amendment contains only the items and exhibits to the Original Form 10-Q that are being amended and restated, and unaffected items and exhibits are not included herein. Except as stated above, the financial statements and other disclosures in the Original Form 10-Q are unchanged. In particular, this Amendment has not been updated to reflect any events that have occurred after the Original Form 10-Q was filed or to modify or update disclosures affected by other subsequent events. Accordingly, forward-looking statements included in this Amendment represent management's views as of the Original Filing Date and should not be assumed to be accurate as of any date thereafter. This Amendment should be read in conjunction with the Original Form 10-Q and the Company's filings with the Securities and Exchange Commission made subsequent to the Original Filing Date, together with any amendments to those filings.
"Part II – Item 6. Exhibits" of this Amendment has been amended to include currently dated certifications from the Company's principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
1

 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Index

 
Page Number
PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
   
 
Condensed Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014
3
   
 
Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2015 and 2014 (Unaudited)
4
   
 
Condensed Consolidated Statements of Stockholders' Equity for the Six-Month Periods Ended June 30, 2015 and 2014 (Unaudited)
5
   
 
Condensed Consolidated Statements of Cash Flows For the Six-Month Periods Ended June 30, 2015 and 2014 (Unaudited)
6
   
 
Notes to Condensed Consolidated Financial Statements (unaudited)
7-25
   
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
26-35
   
Item 4.
Controls and Procedures
36
   
PART II
OTHER INFORMATION
 
   
Item 6.
Exhibits
38
   
SIGNATURES
39
   
EXHIBIT INDEX
 
 
2


 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Condensed Consolidated Balance Sheets
($ in thousands)

   
At June 30,
2015
   
At December 31,
2014
 
   
(Unaudited)
     
Assets
       
         
Cash and due from banks
 
$
2,689
     
3,682
 
Interest-bearing deposits with banks
   
9,738
     
9,350
 
                 
Cash and cash equivalents
   
12,427
     
13,032
 
                 
Securities held to maturity (fair value of $23,352 and $25,835)
   
23,464
     
26,035
 
Loans, net of allowance for loan losses of $908 and $1,087
   
105,066
     
102,786
 
Premises and equipment, net
   
4,669
     
4,907
 
Bank owned life insurance
   
3,024
     
-
 
Federal Home Loan Bank stock, at cost
   
136
     
130
 
Deferred income taxes
   
2,513
     
2,561
 
Accrued interest receivable
   
378
     
350
 
Foreclosed real estate
   
300
     
206
 
Other assets
   
1,039
     
999
 
                 
Total assets
 
$
153,016
     
151,006
 
                 
Liabilities and Stockholders' Equity
               
                 
Liabilities:
               
Noninterest-bearing deposit accounts
 
$
27,262
     
26,206
 
Money-market deposit accounts
   
36,257
     
35,358
 
Savings accounts
   
40,792
     
39,606
 
Time deposits
   
25,054
     
26,735
 
                 
Total deposits
   
129,365
     
127,905
 
                 
Official checks
   
340
     
325
 
Advances by borrowers for taxes and insurance
   
293
     
29
 
Other liabilities
   
539
     
359
 
                 
Total liabilities
   
130,537
     
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 June 30, 2015
    and December 31, 2014, respectively
   
10
     
10
 
Additional paid in capital
   
8,327
     
8,334
 
Retained earnings
   
14,760
     
14,709
 
Unearned Employee Stock Ownership Plan shares
   
(618
)
   
(665
)
                 
Total stockholders' equity
   
22,479
     
22,388
 
                 
Total liabilities and stockholders' equity
 
$
153,016
     
151,006
 

See accompanying Notes to Condensed Consolidated Financial Statements.
 
3

 
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,
 
   
2015
   
2014
   
2015
   
2014
 
Interest income:
               
Loans
 
$
1,365
     
1,297
     
2,711
     
2,580
 
Securities
   
121
     
155
     
251
     
306
 
Other
   
5
     
6
     
12
     
13
 
                                 
Total interest income
   
1,491
     
1,458
     
2,974
     
2,899
 
                                 
Interest expense
   
93
     
94
     
186
     
186
 
                                 
Net interest income
   
1,398
     
1,364
     
2,788
     
2,713
 
                                 
Provision for loan losses
   
50
     
50
     
80
     
100
 
                                 
Net interest income after provision for loan losses
   
1,348
     
1,314
     
2,708
     
2,613
 
                                 
Noninterest income:
                               
Fees and service charges on deposit accounts
   
373
     
416
     
721
     
817
 
Gain on sale of loans
   
56
     
45
     
118
     
72
 
Gain on sale of foreclosed real estate
   
13
     
-
     
23
     
-
 
Gain on sale of land
   
451
     
-
     
451
     
-
 
Fees and charges on loans
   
45
     
13
     
83
     
36
 
Bank owned life insurance earnings
   
24
     
-
     
24
     
-
 
Other
   
9
     
3
     
16
     
12
 
                                 
Total noninterest income
   
971
     
477
     
1,436
     
937
 
                                 
Noninterest expenses:
                               
Salaries and employee benefits
   
955
     
889
     
1,841
     
1,762
 
Occupancy and equipment
   
276
     
310
     
555
     
603
 
Data processing services
   
282
     
201
     
665
     
404
 
Professional fees
   
175
     
135
     
326
     
261
 
Federal Deposit Insurance Corporation insurance
   
31
     
31
     
61
     
57
 
Advertising and promotion
   
22
     
35
     
28
     
51
 
Stationery and supplies
   
23
     
29
     
40
     
46
 
Telephone and postage
   
32
     
40
     
73
     
81
 
Foreclosed real estate
   
27
     
6
     
44
     
22
 
Credit card expense
   
31
     
36
     
62
     
69
 
Other
   
189
     
124
     
327
     
276
 
                                 
Total noninterest expenses
   
2,043
     
1,836
     
4,022
     
3,632
 
                                 
Earnings (loss) before income taxes (benefit)
   
276
     
(45
)
   
122
     
(82
)
                                 
Income taxes (benefit)
   
117
     
(13
)
   
71
     
(29
)
                                 
Net earnings (loss)
 
$
159
     
(32
)
   
51
     
(53
)
                                 
Basic earnings (loss) per common share
 
$
0.16
     
(0.03
)
   
0.05
     
(0.05
)
                                 
Diluted earnings (loss) per common share
 
$
0.16
     
(0.03
)
   
0.05
     
(0.05
)
                                 
Cash dividends per common share
 
$
-
     
-
     
-
     
-
 
                                 
 
 
4

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

 (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)
   
-
     
-
     
-
     
(53
)
   
-
     
(53
)
                                                 
Stock based compensation
    expense (unaudited)
   
-
     
-
     
95
     
-
     
-
     
95
 
                                                 
Repurchase of common
    stock (unaudited)
   
(20,944
)
   
-
     
(383
)
   
-
     
-
     
(383
)
                                                 
Common stock allocated to
    ESOP participants
    (unaudited)
   
-
     
-
     
(39
)
   
-
     
45
     
6
 
                                                 
Balance, June 30, 2014
    (unaudited)
   
1,153,510
   
$
11
     
9,462
     
14,617
     
(711
)
   
23,379
 
                                                 
Balance, December 31, 2014
   
1,094,110
   
$
10
     
8,334
     
14,709
     
(665
)
   
22,388
 
                                                 
Net earnings (unaudited)
   
-
     
-
     
-
     
51
     
-
     
51
 
                                                 
Stock based compensation
    expense (unaudited)
   
-
     
-
     
105
     
-
     
-
     
105
 
                                                 
Repurchase of common
    stock (unaudited)
   
(4,000
)
   
-
     
(72
)
   
-
     
-
     
(72
)
                                                 
Common stock allocated to
    ESOP participants
    (unaudited)
   
-
     
-
     
(40
)
   
-
     
47
     
7
 
                                                 
Balance, June 30, 2015
    (unaudited)
   
1,090,110
   
$
10
     
8,327
     
14,760
     
(618
)
   
22,479
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
5

 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

   
Six-Months Ended
June 30,
 
   
2015
   
2014
 
Cash flows from operating activities:
       
Net earnings (loss)
 
$
51
   
$
(53
)
Adjustments to reconcile net earnings (loss) to net cash provided by
    operating activities:
               
Depreciation
   
188
     
185
 
Provision for loan losses
   
80
     
100
 
Deferred income taxes (benefit)
   
48
     
(29
)
Net amortization of premiums/discounts on securities
   
25
     
20
 
Net amortization of deferred loan fees and costs
   
6
     
12
 
Bank owned life insurance earnings
   
(24
)
   
-
 
Loans originated for sale
   
(5,875
)
   
(2,629
)
Proceeds from loans sold
   
5,737
     
2,776
 
Gain on sale of loans
   
(118
)
   
(72
)
ESOP compensation expense
   
7
     
6
 
Stock-based compensation expense
   
105
     
95
 
Increase in accrued interest receivable
   
(28
)
   
(1
)
Increase in other assets
   
(40
)
   
(131
)
Gain on sale of foreclosed real estate
   
(23
)
   
(1
)
Write-down of foreclosed real estate
   
-
     
25
 
Amortization of loan servicing rights
   
-
     
35
 
Gain on the sale of land
   
(451
)
   
-
 
Increase in official checks
   
15
     
187
 
Net increase in advances by borrowers for taxes and insurance
   
264
     
177
 
Increase in other liabilities
   
180
     
201
 
                 
Net cash provided by operating activities
   
147
     
903
 
 
Cash flows from investing activities:
               
Purchases of securities held-to-maturity
   
-
     
(3,897
)
Principal pay-downs on held-to-maturity securities
   
2,546
     
2,088
 
Purchase of bank owned life insurance
   
(3,000
)
   
-
 
Net increase in loans
   
(2,340
)
   
(2,711
)
Net sales (purchases) of premises and equipment
   
501
     
(134
)
(Purchase) redemption of Federal Home Loan Bank stock
   
(6
)
   
47
 
Proceeds from sale of foreclosed real estate
   
173
     
128
 
Capital improvements to foreclosed real estate
   
(14
)
   
(11
)
                 
Net cash used in investing activities
   
(2,140
)
   
(4,490
)
                 
Cash flows from financing activities:
               
Net increase in deposits
   
1,460
     
2,908
 
Repurchase of common stock
   
(72
)
   
(383
)
                 
Net cash provided by financing activities
   
1,388
     
2,525
 
                 
Decrease in cash and cash equivalents
   
(605
)
   
(1,062
)
                 
Cash and cash equivalents at beginning of period
   
13,032
     
14,455
 
                 
Cash and cash equivalents at end of period
 
$
12,427
   
$
13,393
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Income taxes
 
$
-
   
$
-
 
                 
Interest
 
$
186
   
$
186
 
                 
Noncash transaction-
               
Transfer from loans to foreclosed real estate
 
$
230
   
$
-
 
                 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
6

 
 
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 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, 2015 should not be considered as indicative of results for a full year.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2015-01, 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.


7



SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on simplifying the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities by reducing the number of consolidation model from four to two, among other changes.  The ASU will be effective for periods beginning after December 31, 2015, while early adoption is permitted.  The Company does not expect this ASU to have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. ASU No 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  ASU No. 2015-03 should be applied on a retrospective basis.  The Company is currently evaluating the impacts of this ASU on the Company's consolidated financial statements.

























8

 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

2.  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 and six-months ended June 30, 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 and six-months ended June 30, 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 June 30:
                       
Basic EPS:
                       
  Net earnings (loss)
 
$
159
     
988,269
   
$
0.16
   
$
(32
)
   
1,043,428
   
$
(0.03
)
  Effect of dilutive securities:
                                               
    Incremental shares from assumed conversion
                                               
      of options and restricted stock awards
           
29,561
                     
-
         
                                                 
Diluted EPS:
                                               
  Net earnings (loss)
 
$
159
     
1,017,830
   
$
0.16
   
$
(32
)
   
1,043,428
   
$
(0.03
)

   
2015
   
2014
 
       
Weighted-
   
Per
       
Weighted-
   
Per
 
       
Average
   
Share
       
Average
   
Share
 
   
Earnings
   
Shares
   
Amount
   
Loss
   
Shares
   
Amount
 
Six Months Ended June 30:
                       
Basic EPS:
                       
  Net earnings (loss)
 
$
51
     
994,681
   
$
0.05
   
$
(53
)
   
1,083,387
   
$
(0.05
)
  Effect of dilutive securities:
                                               
    Incremental shares from assumed conversion
                                               
      of options
           
30,239
                     
-
         
                                                 
Diluted EPS:
                                               
  Net earnings (loss)
 
$
51
     
1,024,920
   
$
0.05
   
$
(53
)
   
1,083,387
   
$
(0.05
)



(continued)
 
9

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


3.  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, 2015
               
Mortgage-backed securities
 
$
1,313
     
60
     
-
     
1,373
 
Collateralized mortgage obligations
   
22,151
     
98
     
(270
)
   
21,979
 
                                 
Total
 
$
23,464
     
158
     
(270
)
   
23,352
 
                                 
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 June 30, 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 June 30, 2015:
               
Collateralized mortgage obligations
 
$
(21
)
   
5,840
     
(249
)
   
7,913
 
                                 
At December 31, 2014: 
Collateralized mortgage obligations
 
$
(27
)
   
5,984
     
(310
)
   
11,283
 

At June 30, 2015 the unrealized losses on seventeen securities are considered by management to be attributable to changes in market interest rates, and not to credit risk on the part of the issuer. Accordingly, if market interest 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)
 
10

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


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

   
June 30,
   
December 31,
 
   
2015
   
2014
 
Real estate mortgage loans:
       
One-to four-family
 
$
46,401
     
48,957
 
Lot
   
3,900
     
4,109
 
Commercial real estate
   
35,589
     
29,803
 
Construction
   
623
     
1,140
 
                 
Total real estate loans
   
86,513
     
84,009
 
                 
Commercial loans
   
1,033
     
656
 
                 
Consumer loans:
               
Home equity
   
7,540
     
8,212
 
Automobile
   
3,482
     
3,545
 
Credit cards and unsecured
   
6,221
     
6,583
 
Deposit account
   
469
     
534
 
Other
   
963
     
973
 
                 
Total consumer loans
   
18,675
     
19,847
 
                 
Total loans
   
106,221
     
104,512
 
                 
Deduct
               
Loans in process
   
(128
)
   
(526
)
Deferred fees and discounts
   
(119
)
   
(113
)
Allowance for loan losses
   
(908
)
   
(1,087
)
                 
Total loans, net
 
$
105,066
     
102,786
 
 
(continued)
 
11

 
 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


4.  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)
 
12

 
 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


4.  Loans, Continued
An analysis of the change in the allowance for loan losses for the periods indicated, is as follows (in thousands):

   
Real Estate Loans
   
Consumer Loans
         
   
One-to
Four-
Family
   
Lot
Loans
   
Commercial
Real
Estate
   

Constru-ction
   
Comme-
rcial
Loans
   
Home Equity
   
Auto-
mobile
   
Credit
Cards and
Unsecured
   
Deposit
Account
   
Other
   
Unallocated
   
Total
 
Three Months Ended
June 30, 2015:
                                               
Beginning balance
 
$
468
     
49
     
215
     
1
     
16
     
146
     
27
     
128
     
-
     
25
     
27
     
1,102
 
Provision (credit) for
    loan loss
   
(206
)
   
(22
)
   
(1
)
   
-
     
(3
)
   
267
     
(12
)
   
51
     
-
     
2
     
(26
)
   
50
 
Charge-offs
   
-
     
-
     
-
     
-
     
-
     
(211
)
   
(6
)
   
(62
)
   
-
     
-
     
-
     
(279
)
Recoveries
   
4
     
7
     
-
     
-
     
-
     
10
     
5
     
9
     
-
     
-
     
-
     
35
 
Ending balance
 
$
266
     
34
     
214
     
1
     
13
     
212
     
14
     
126
     
-
     
27
     
1
     
908
 
 
Three Months Ended
June 30, 2014:
                                                                                               
Beginning balance
 
$
565
     
55
     
204
     
1
     
9
     
130
     
17
     
167
     
-
     
63
     
2
     
1,213
 
Provision (credit) for
    loan loss
   
(45
)
   
24
     
(45
)
   
-
     
(1
)
   
26
     
7
     
(6
)
   
-
     
(13
)
   
103
     
50
 
Charge-offs
   
(50
)
   
(24
)
   
-
     
-
     
-
     
-
     
(2
)
   
(37
)
   
-
     
-
     
-
     
(113
)
Recoveries
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
16
     
-
     
-
     
-
     
16
 
Ending balance
 
$
470
     
55
     
159
     
1
     
8
     
156
     
22
     
140
     
-
     
50
     
105
     
1,166
 
 
Six Months Ended
June 30, 2015:
                                                                                               
Beginning balance
 
$
454
     
46
     
206
     
2
     
10
     
115
     
31
     
111
     
-
     
39
     
73
     
1,087
 
Provision (credit) for
    loan loss
   
(192
)
   
(19
)
   
8
     
(1
)
   
3
     
298
     
(16
)
   
83
     
-
     
(12
)
   
(72
)
   
80
 
Charge-offs
   
-
     
-
     
-
     
-
     
-
     
(211
)
   
(6
)
   
(91
)
   
-
     
-
     
-
     
(308
)
Recoveries
   
4
     
7
     
-
     
-
     
-
     
10
     
5
     
23
     
-
     
-
     
-
     
49
 
Ending balance
 
$
266
     
34
     
214
     
1
     
13
     
212
     
14
     
126
     
-
     
27
     
1
     
908
 
 
Six  Months Ended
June 30, 2014:
                                                                                               
Beginning balance
 
$
605
     
93
     
163
     
1
     
5
     
146
     
12
     
187
     
-
     
64
     
18
     
1,294
 
Provision (credit) for
    loan loss
   
(6
)
   
(14
)
   
(4
)
   
-
     
3
     
19
     
17
     
(28
)
   
-
     
26
     
87
     
100
 
Charge-offs
   
(129
)
   
(24
)
   
-
     
-
     
-
     
(10
)
   
(7
)
   
(78
)
   
-
     
(40
)
   
-
     
(288
)
Recoveries
   
-
     
-
     
-
     
-
     
-
     
1
     
-
     
59
     
-
     
-
     
-
     
60
 
Ending balance
 
$
470
     
55
     
159
     
1
     
8
     
156
     
22
     
140
     
-
     
50
     
105
     
1,166
 
                                                                                                 
At June 30, 2015:
                                                                                               
Individually evaluated
   for impairment:
                                                                                               
Recorded investment
 
$
3,014
     
-
     
-
     
-
     
-
     
274
     
-
     
-
     
-
     
-
     
-
     
3,288
 
Balance in allowance
    for loan losses
 
$
76
     
-
     
-
     
-
     
-
     
33
     
-
     
-
     
-
     
-
     
-
     
109
 
Collectively evaluated
   for impairment:
                                                                                               
Recorded investment
 
$
43,387
     
3,900
     
35,589
     
623
     
1,033
     
7,266
     
3,482
     
6,221
     
469
     
963
     
-
     
102,933
 
Balance in allowance
   for loan losses
 
$
190
     
34
     
214
     
1
     
13
     
179
     
14
     
126
     
-
     
27
     
1
     
799
 
 
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)
 
13

 
 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


4.  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 June 30, 2015:
                                           
  Grade:
                                           
    Pass
 
$
42,220
     
3,865
     
35,589
     
623
     
1,033
     
7,090
     
3,444
     
6,170
     
469
     
963
     
101,466
 
    Special mention
   
85
     
-
     
-
     
-
     
-
     
25
     
7
     
27
     
-
     
-
     
144
 
    Substandard
   
4,096
     
35
     
-
     
-
     
-
     
425
     
31
     
24
     
-
     
-
     
4,611
 
    Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
    Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
                                                                                         
  Total
 
$
46,401
     
3,900
     
35,589
     
623
     
1,033
     
7,540
     
3,482
     
6,221
     
469
     
963
     
106,221
 
                                                                                         
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)
 
14

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


4.  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 June 30, 2015:
                                   
    Real estate loans:
                                   
        One-to four-family
 
$
1,274
     
44
     
-
     
1,318
     
43,659
     
1,424
     
46,401
 
        Lot
   
52
     
-
     
-
     
52
     
3,813
     
35
     
3,900
 
        Commercial real estate
   
1,782
     
-
     
-
     
1,782
     
33,807
     
-
     
35,589
 
        Construction
   
-
     
-
     
-
     
-
     
623
     
-
     
623
 
    Commercial loans
   
-
     
-
     
-
     
-
     
1,033
     
-
     
1,033
 
    Consumer loans:
                                                       
        Home equity
   
-
     
42
     
-
     
42
     
7,186
     
312
     
7,540
 
        Automobile
   
17
     
-
     
-
     
17
     
3,434
     
31
     
3,482
 
        Credit cards and unsecured
   
38
     
71
     
23
     
132
     
6,065
     
24
     
6,221
 
        Deposit account
   
-
     
-
     
-
     
-
     
469
     
-
     
469
 
        Other
   
-
     
-
     
-
     
-
     
963
     
-
     
963
 
                                                         
    Total
 
$
3,163
     
157
     
23
     
3,343
     
101,052
     
1,826
     
106,221
 
                                                         
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)
 
15

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


4.  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 June 30, 2015:
                               
  Real estate loans:
                               
    One-to four-family
 
$
1,817
     
1,944
     
1,197
     
1,213
     
76
     
3,014
     
3,157
     
76
 
  Consumer loans:
                                                               
    Home equity
   
144
     
173
     
130
     
130
     
33
     
274
     
303
     
33
 
                                                                 
   
$
1,961
     
2,117
     
1,327
     
1,343
     
109
     
3,288
     
3,460
     
109
 
                                                                 
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 periods shown are as follows (in thousands):

   
Three Months Ended June 30,
 
   
2015
   
2014
 
   
Average
   
Interest
   
Interest
   
Average
   
Interest
   
Interest
 
   
Recorded
   
Income
   
Income
   
Recorded
   
Income
   
Income
 
   
Investment
   
Recognized
   
Received
   
Investment
   
Recognized
   
Received
 
Residential estate loans:
                       
  One-to-four family
 
$
2,946
     
32
     
28
     
3,764
     
32
     
32
 
Consumer loans:
                                               
  Home equity
   
251
     
3
     
3
     
269
     
2
     
2
 
  Credit card and unsecured
   
-
     
-
     
-
     
43
     
-
     
-
 
                                                 
  Total
 
$
3,197
     
35
     
31
     
4,076
     
34
     
34
 

   
Six Months Ended June 30,
 
   
2015
   
2014
 
   
Average
   
Interest
   
Interest
   
Average
   
Interest
   
Interest
 
   
Recorded
   
Income
   
Income
   
Recorded
   
Income
   
Income
 
   
Investment
   
Recognized
   
Received
   
Investment
   
Recognized
   
Received
 
Residential estate loans:
                       
  One-to-four family
 
$
2,953
     
57
     
57
     
3,777
     
60
     
60
 
Consumer loans:
                                               
  Home equity
   
274
     
6
     
6
     
276
     
4
     
4
 
  Credit card and unsecured
   
-
     
-
     
-
     
46
     
-
     
-
 
                                                 
  Total
 
$
3,227
     
63
     
63
     
4,099
     
64
     
64
 


(continued)
 
16

 
 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


4.  Loans, Continued
The Company had no troubled debt restructurings (TDR) entered into during the three- or six-months ended June 30, 2015 or 2014. There were no TDR loans that were modified within the 12 months prior to June 30, 2015, and for which there was a payment default during the three- or six-months ended June 30, 2015.

5.            Lines of Credit
The Company has an unsecured federal funds line of credit for $2.5 million with a correspondent bank and a $15.4 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At June 30, 2015 and December 31, 2014, the Company had no outstanding balances on these lines.

6.            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, 2015 (in thousands):

   
Contract
 
   
Amount
 
     
Unused lines of credit
 
$
17,215
 
         
Commitments to extend credit
 
$
1,176
 
(continued)
 
17

 
 
 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


7.            Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows (in thousands):

   
At June 30, 2015
   
At December 31, 2014
 
                   
Fair
     
   
Carrying
   
Fair
       
Carrying
   
Value
   
Level
 
   
Amount
   
Value
   
Level
   
Amount
         
Financial assets:
                       
Cash and cash equivalents
 
$
12,427
     
12,427
     
1
     
13,032
     
13,032
     
1
 
Securities held to maturity
   
23,464
     
23,352
     
2
     
26,035
     
25,835
     
2
 
Loans
   
105,066
     
106,591
     
3
     
102,786
     
103,152
     
3
 
Federal Home Loan Bank stock
   
136
     
136
     
3
     
130
     
130
     
3
 
Accrued interest receivable
   
378
     
378
     
3
     
350
     
350
     
3
 
                                                 
Financial liabilities:
                                               
Deposits
   
129,365
     
125,170
     
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").

8.  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 $4,000 for the three-months ended June 30, 2015 and $3,000 for the three-months ended June 30, 2014.  The ESOP expense was $7,000 for the six-months ended June 30, 2015 and $6,000 for the six-months ended June 30, 2014.  At June 30, 2015 and 2014, there were 56,883 and 66,759 shares, respectively, that had not been allocated under the ESOP.

 (continued)
 
18

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


9.  Equity Incentive Plan
On May 23, 2012, the stockholders approved the Company's 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
   
(5,000
)
   
10.75
      
                         
Outstanding at June 30, 2014
   
82,500
   
$
11.26
 
8.74 years
 
                         
Outstanding at December 31, 2014
   
84,000
     
11.70
      
                         
Outstanding at June 30, 2015
   
84,000
   
$
11.70
 
7.64 years
 
                         
Exercisable at June 30, 2015
   
10,000
   
$
10.75
 
  7.45 years
$
72,000

At June 30, 2015, there was approximately $126,000 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 the three-months ended June 30, 2015 and $11,000 for the same period in 2014.   The total fair value of shares vesting and recognized as compensation expense was $24,000 for the six-months ended June 30, 2015 and $22,000 for the same period in 2014















(continued)
 
19

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


9.  Equity Incentive Plan, Continued
The 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 $39,000 for the three-months ended June 30, 2015 and $36,000 for the three-months ended June 30, 2014. Compensation expense for restricted stock totaled $81,000 for the six-months ended June 30, 2015 and $71,000 for the six-months ended June 30, 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 June 30, 2014
   
42,500
     
16.75
 
                 
Outstanding at December 31, 2014
   
46,500
     
16.88
 
Vested
   
(8,500
)
   
16.75
 
 
Outstanding at June 30, 2015
   
38,000
   
$
16.91
 
 
Total unrecognized compensation cost related to these non-vested restricted stock amounted to approximately $537,000 at June 30, 2015.  This cost is expected to be recognized monthly over the related vesting period using the straight-line method through 2019.

(continued)
 
20

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


10.  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, 2015:
                       
One-to four-family
 
$
2,813
     
-
     
-
     
2,813
     
219
     
12
 
Home equity
   
241
     
-
     
-
     
241
     
62
     
29
 
                                                 
Total
 
$
3,054
     
-
     
-
     
3,054
     
281
     
41
 
                                                 
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
   
Inputs
   
Total
   
During the
 
   
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Losses
   
Period
 
At June 30, 2015:
                       
    Foreclosed real estate
 
$
300
     
-
     
-
     
300
     
196
     
-
 
                                                 
At December 31, 2014:
                                               
    Foreclosed real estate
 
$
206
     
-
     
-
     
206
     
63
     
16
 
                                                 
(continued)
 
21

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


11.  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 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.
 
 
22


 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


11.  Regulatory Matters, Continued

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 June 30, 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 June 30, 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 June 30, 2015:
                       
    Total Capital to Risk-
                       
        Weighted Assets
 
$
19,255
     
18.85
%
 
$
8,174
     
8.00
%
 
$
10,217
     
10.00
%
    Tier I Capital to Risk-
                                               
        Weighted Assets
   
18,347
     
17.96
     
6,130
     
6.00
     
8,174
     
8.00
 
    Tier I Capital
                                               
        to Total Assets
   
18,347
     
12.19
     
5,938
     
4.00
     
7,422
     
5.00
 
   Common equity Tier 1 Capital to
                                               
        Risk-Weighted Assets
   
18,347
     
17.96
     
4,598
     
4.50
     
6,641
     
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.
 
 
23

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


12.  Restatement of Previously Issued Financial Statements

After August 11, 2015, the date the Original Form 10-Q was filed, the Company determined that data processing expense for the three and six months ended June 30, 2015, was understated by $103,000 and $314,000, respectively.  The Company migrated to a service bureau from an in-house processing core system and was not accruing the data processing expense due to the misdirection of the invoice to another financial institution by the processor.  This error was not discovered due to the lack of timely reconciliations of due from cash accounts and ACH processing accounts.

As a result of the restatement, the following financial statement line items were adjusted (in thousands except per share amounts):


       
Previously
   
Effect of
 
   
Restated
   
Reported
   
Change
 
Consolidated Balance Sheet:
           
  At June 30, 2015:
           
Cash and due from banks
 
$
2,689
     
2,964
     
(275
)
Cash and cash equivalents
   
12,427
     
12,702
     
(275
)
Deferred income taxes
   
2,513
     
2,395
     
118
 
Total assets
   
153,016
     
153,173
     
(157
)
Other liabilities
   
539
     
500
     
39
 
Total liabilities
   
130,537
     
130,498
     
39
 
Retained earnings
   
14,760
     
14,956
     
(196
)
Total stockholders' equity
   
22,479
     
22,675
     
(196
)
Total liabilities and stockholders' equity
   
153,016
     
153,173
     
(157
)
                         
Statement of Operations:
                       
  For the Three Months Ended June 30, 2015:
                       
Data processing expense
   
282
     
179
     
103
 
Total noninterest expense
   
2,043
     
1,940
     
103
 
Earnings before income taxes
   
276
     
379
     
(103
)
Income taxes
   
117
     
156
     
(39
)
Net earnings
   
159
     
223
     
(64
)
                         
  Earnings per share:
                       
Basic
   
0.16
     
0.23
     
(0.07
)
Diluted
   
0.16
     
0.22
     
(0.06
)
                         
  For the Six Months Ended June 30, 2015:
                       
Data processing expense
   
665
     
351
     
314
 
Total noninterest expense
   
4,022
     
3,708
     
314
 
Earnings before income taxes
   
122
     
436
     
(314
)
Income taxes
   
71
     
189
     
(118
)
Net earnings
   
51
     
247
     
(196
)
                         
  Earnings per share:
                       
Basic
   
0.05
     
0.25
     
(0.20
)
Diluted
   
0.05
     
0.24
     
(0.19
)
                         

 
24


 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued


12.  Restatement of Previously Issued Financial Statements (continued)

Consolidated Statement of Stockholders' Equity:
           
  For the Six Months Ended June 30, 2015:
           
Net earnings (unaudited)
   
51
     
247
     
(196
)
Retained earnings
   
14,760
     
14,956
     
(196
)
Total stockholders' equity
   
22,479
     
22,675
     
(196
)
                         
Consolidated Statement of Cash Flows:
                       
  For the Six Months Ended June 30, 2015:
                       
Net earnings, cash at period ended
   
51
     
247
     
(196
)
Deferred income taxes
   
48
     
166
     
(118
)
Increase in other liabilities
   
180
     
141
     
39
 
Cash provided from operation activity
   
147
     
422
     
(275
)
Decrease in cash and cash equivalents
   
605
     
330
     
(275
)
Cash and cash equivalents at end of period
   
12,427
     
12,702
     
(275
)


As a result of the restatement, Notes (2, 7 and 11) of the financial statements was affected.


 
 
 
25

 
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;
 
 
26

 
 
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 our 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.
 
 
27


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, commercial business loans, 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.

On July 10, 2015, the Company announced that Sunshine Savings Bank had submitted an application to the Florida Office of Financial Regulation ("OFR") to convert its charter from a federally-chartered savings bank to a Florida-chartered commercial bank.  Subject to receiving the necessary regulatory approvals, the conversion is expected to be completed in the fourth quarter of calendar year 2015.

Upon completion of the conversion, the Bank's primary regulator will be the OFR, with additional federal oversight provided by the Federal Deposit Insurance Corporation ("FDIC").  The Federal Reserve Board will continue to be the primary banking regulator for Sunshine Financial, Inc.
The conversion to a state charter will not affect the Bank's customers in any way.  Depositors will continue to have full protection of the FDIC.

Sunshine Financial is currently 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").



28

 

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 June 30, 2015 and December 31, 2014

General.  Total assets increased $2.0 million, or 1.33%, to $153.0 million at June 30, 2015 from $151.0 million at December 31, 2014. The increase in total assets was due primarily to the purchase of $3.0 million in bank owned life insurance (BOLI) and a $2.3 million increase in loans, partially offset by a decrease in securities held to maturity of $2.6 million.  The net increase in assets was primarily funded by a $1.5 million increase in deposits.

Loans.  Our net loan portfolio increased $2.3 million, to $105.1 million at June 30, 2015 from $102.8 million at December 31, 2014.  The increase in loans was due to a $5.8 million increase in commercial real estate loans, and a $377,000 increase in commercial business loans, partially 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 six-months ended June 30, 2015, we originated $5.9 million of one- to four-family mortgage loans for sale, and $5.7 million were sold to Freddie Mac at a gain on sale of $118,000.

Allowance for Loan Losses.  Our allowance for loan losses at June 30, 2015 was $908,000, or 0.85% of loans, compared to $1.1 million, or 1.04% of loans, at December 31, 2014.  Nonperforming loans decreased slightly to $1.8 million at June 30, 2015 from $2.1 million at December 31, 2014.  Nonperforming loans to total loans decreased to 1.72% at June 30, 2015 from 2.01% at December 31, 2014.  Loans on nonaccrual which were less than ninety days past due totaled $386,000 at June 30, 2015 compared to $534,000 at December 31, 2014.

Deposits.  Total deposits increased $1.5 million, or 1.1%, to $129.3 million at June 30, 2015 from $127.9 million at December 31, 2014.  This increase was primarily due to a $1.1 million increase in noninterest bearing deposits and a $2.1 million increase in money market and savings accounts, partially offset by a $1.7 million decrease in time deposits.  The increases were the result of retail sales efforts during the period as we continued our emphasis on attracting low-cost core deposit accounts.  The decrease in time deposits was primarily the result of some customers shifting these funds into shorter term interest-bearing demand accounts. 

Equity.  Total stockholders' equity increased $91,000 to $22.5 million at June 30, 2015.  This increase was primarily due to net earnings of $51,000 and stock-based compensation of $112,000, partially offset by the repurchase of 4,000 shares of common stock totaling $72,000 for the six-months ended June 30, 2015.
 
 
29

 
 
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 earned from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense paid 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 June 30,
 
   
2015
   
2014
 
   
Average
Balance
   
Interest
and
Dividends
   
Average
Yield/
Rate
   
Average
Balance
   
Interest
and
Dividend
   
Average
Yield/
Rate
 
           
($ in thousands)
         
Interest-earning assets:
                       
    Loans (1)
 
$
103,885
   
$
1,365
     
5.26
%
 
$
96,976
   
$
1,297
     
5.35
%
    Securities held to maturity
   
24,446
     
121
     
1.98
     
29,048
     
155
     
2.13
 
    Other interest-earning assets (2)
   
8,373
     
5
     
0.24
     
9,279
     
6
     
0.28
 
                                                 
        Total interest-earning assets
   
136,704
     
1,491
     
4.36
     
135,303
     
1,458
     
4.31
 
                                                 
Noninterest-earning assets
   
14,122
                     
11,525
                 
                                                 
        Total assets
 
$
150,826
                   
$
146,828
                 
                                                 
Interest-bearing liabilities:
                                               
    MMDA and statement savings
   
76,497
     
62
     
0.32
     
73,136
     
60
     
0.33
 
    Time deposits
   
25,890
     
31
     
0.48
     
27,652
     
34
     
0.50
 
                                                 
        Total interest-bearing liabilities
   
102,387
     
93
     
0.36
     
100,788
     
94
     
0.37
 
                                                 
Noninterest-bearing liabilities
   
25,851
                     
22,686
                 
Equity
   
22,588
                     
23,354
                 
                                                 
        Total liabilities and equity
 
$
150,826
                   
$
146,828
                 
                                                 
Net interest income
         
$
1,398
                   
$
1,364
         
                                                 
Net interest rate spread (3)
                   
4.00
%
                   
3.94
%
                                                 
Net interest margin (4)
                   
4.09
%
                   
4.03
%
                                                 
Ratio of average interest-earning assets
                                               
    to average interest-bearing liabilities
   
1.34
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 earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4)
Net interest margin is net interest income divided by average interest-earning assets (annualized).
 
 
30

 
 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES


   
Six Months Ended June 30,
 
   
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)
 
$
103,385
   
$
2,711
     
5.25
%
 
$
96,659
   
$
2,580
     
5.34
%
    Securities held to maturity
   
24,867
     
251
     
2.02
     
28,715
     
306
     
2.13
 
    Other interest-earning assets (2)
   
8,399
     
12
     
0.29
     
9,350
     
13
     
0.27
 
                                                 
        Total interest-earning assets
   
136,651
     
2,974
     
4.35
     
134,724
     
2,899
     
4.30
 
                                                 
Noninterest-earning assets
   
13,420
                     
11,480
                 
                                                 
        Total assets
 
$
150,071
                   
$
146,204
                 
                                                 
Interest-bearing liabilities:
                                               
    MMDA and statement savings
   
76,019
     
122
     
0.32
     
72,359
     
119
     
0.33
 
    Time deposits
   
26,098
     
64
     
0.49
     
27,952
     
67
     
0.48
 
                                                 
        Total interest-bearing liabilities
   
102,117
     
186
     
0.36
     
100,311
     
186
     
0.37
 
                                                 
Noninterest-bearing liabilities
   
25,450
                     
22,541
                 
Equity
   
22,504
                     
23,352
                 
                                                 
        Total liabilities and equity
 
$
150,071
                   
$
146,204
                 
                                                 
Net interest income
         
$
2,788
                   
$
2,713
         
                                                 
Net interest rate spread (3)
                   
3.99
%
                   
3.93
%
                                                 
Net interest margin (4)
                   
4.08
%
                   
4.03
%
                                                 
Ratio of average interest-earning assets
                                               
    to average interest-bearing liabilities
   
1.34
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 earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4)
Net interest margin is net interest income divided by average interest-earning assets (annualized).
 
31

 

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES


Comparison of the Three Months Ended June 30, 2015 and 2014

General. Net earnings for the three months ended June 30, 2015 was $159,000 compared to a net loss of $32,000 for the three months ended June 30, 2014, resulting in an annualized return on average assets of 0.42% for the three months ended June 30, 2015 and (0.09)% for the three months ended June 30, 2014.  The increase in net earnings was due primarily to increases in noninterest income, and to a lesser extent net interest income, partially offset by an increase in noninterest expense.

Net Interest Income.  Net interest income increased $34,000, or 2.5%, to $1.4 million for the three months ended June 30, 2015 from the same period in 2014, primarily due to a $6.9 million increase in average loans for 2015, offset somewhat by a nine basis point decrease in our average yield on loans.  Our net interest rate spread increased to 4.00% for the three months ended June 30, 2015 from 3.94% for the same period in 2014, while our net interest margin increased to 4.09% at June 30, 2015 from 4.03% at June 30, 2014.  The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended June 30, 2015 stayed constant at 1.34 for both periods.

Interest Income. Interest income for the three months ended June 30, 2015 increased $33,000, or 2.3%, to $1.5 million from the same period in 2014.  The increase in interest income for the three months ended June 30, 2015 was primarily due to a $6.9 million increase in average loans for 2015, offset somewhat by a nine basis point decrease in our average yield on loans.  Average loans increased to $103.9 million for the three months ended June 30, 2015 from $97.0 million for the same period in 2014.  The average rate on loans decreased to 5.26% for the three months ended June 30, 2015 compared to 5.35% for the three months ended June 30, 2014.

Interest Expense. Interest expense for the three months ended June 30, 2015 and June 30, 2014 was $93,000 and $94,000, respectively.  The total cost of funds for the three months ended June 30, 2015 and June 30, 2014 was 0.36% and 0.37%, respectively.

Provision for Loan Losses.  We recorded a provision for loan losses of $50,000 for the three months ended June 30, 2015 and 2014.  The provision for loan losses reflected historical and incurred future loan losses, the increase in our loan portfolio and decline in nonaccrual loans. Net charge-offs for the three months ended June 30, 2015 were $244,000 compared to a net charge-offs of $97,000 for the three months ended June 30, 2014. The increase in net charge-offs was primarily due to one home equity loan which was charged-off due to inadequate collateral.  Nonperforming loans to total loans at June 30, 2015 were 1.72% compared to 2.01% at December 31, 2014.  The allowance for loan losses to loans was 0.85% at June 30, 2015 compared to 1.04% at December 31, 2014.
 
 
32

 
 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES


Comparison of the Three Months Ended June 30, 2015 and 2014, Continued

Management considers the allowance for loan losses at June 30, 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 June 30, 2015 increased $494,000, or 103.6%, to $971,000 compared to $477,000 for the same period in 2014, primarily due to a $451,000 gain on the sale of excess land located at the home office location.  Income from BOLI purchased in April 2015 was $24,000, gain on loan sales increased $11,000, the gain on sale of foreclosed assets increased $13,000, fees and charges on loans increased $32,000 and fees and service charges on deposit accounts decreased $44,000 for the three months ended June 30, 2015, compared to the three months ended June 30, 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 as 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 June 30, 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 June 30, 2015 increased $207,000, or 11.3%, as compared to the same period in 2014.  The largest increases were in data processing services, salaries and benefits, other, and professional fees.  Data processing services expense increased due to migrating to a service bureau from an in-house processing core system, which was undertaken to avoid higher upgrade and cyber security costs in the future. The increase in salaries and benefits was due to a one-time bonus paid to non-executive officer employees.  Other expense increased due to setting up a reserve for debit card losses based on information available from our debit card servicer, and professional fees increased due primarily to increased legal fees.

Income Taxes. For the three months ended June 30, 2015, we recorded income taxes of $117,000 on before tax earnings of $276,000.  For the three months ended June 30, 2014, we recorded an income tax benefit of $13,000 on a before tax loss of $45,000.  Our effective tax rate for the three months ended June 30, 2015 was 42.4% compared to (28.9)% for the same time period in 2014.



33



SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES


Comparison of the Six Months Ended June 30, 2015 and 2014

General.  Net earnings for the six months ended June 30, 2015 was $51,000 compared to a net loss of $53,000 for the six months ended June 30, 2014, resulting in an annualized return on average assets of 0.07% for the six months ended June 30, 2015 and (0.07) % for the six months ended June 30, 2014.  The increase in net earnings was due primarily to an increase in noninterest income, and to a lesser extent an increase in net interest income, partially offset by an increase in noninterest expense.

Net Interest Income.  Net interest income increased $75,000, or 2.8%, to $ 2.8 million for the six months ended June 30, 2015 from $2.7 million for the same period in 2014, primarily due to a $6.7 million increase in average loans for 2015, offset somewhat by a nine basis point decrease in our average yield on loans.  Our net interest rate spread increased to 3.99% for the six months ended June 30, 2015 from 3.93% for the same period in 2014, while our net interest margin increased to 4.08% at June 30, 2015 from 4.03% at June 30, 2014.  The ratio of average interest-earning assets to average interest-bearing liabilities for the six months ended June 30, 2015 stayed constant at 1.34x for both periods.  Our average cost of funds declined to 0.36% for the six month period ended June 30, 2015, from 0.37% for the same period in 2014.

Interest Income. Interest income for the six months ended June 30, 2015 increased $75,000, or 2.6%, to $3.0 million from $2.9 million for the same period ended June 30, 2014.  The increase in interest income for the six months ended June 30, 2015 was primarily due to a higher average balance of loans, partially offset by lower rates on loans and lower average balances and yields on investments.  Average securities held to maturity decreased to $24.9 million for the six months ended June 30, 2015 compared to $28.7 million for the six months ended June 30, 2014.  The average rate on investments decreased to 2.02% for the six months ended June 30, 2015 compared to 2.13% for the six months ended June 30, 2014.

Interest Expense. Interest expense for the six months ended June 30, 2015 and June 30, 2014 was $186,000.  Neither the average balance nor the average rate paid on deposits significantly changed.

Provision for Loan Losses.  We recorded a provision for loan losses of $80,000 for the six months ended June 30, 2015 and a provision for loan losses of $100,000 for the same period in 2014.  Net charge-offs for the six months ended June 30, 2015 were $259,000 compared to $228,000 for the six months ended June 30, 2014.
 
 
34

 
 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES


Comparison of the Six Months Ended June 30, 2015 and 2014, Continued

Noninterest Income. Noninterest income for the six months ended June 30, 2015 increased $499,000, or 53.3%, to $1.4 million compared to $937,000 for the same period in 2014, primarily due to a $451,000 gain on the sale of excess land located at the home office location.  Income from BOLI purchased in April 2015 was $24,000, gain on loan sales increased $46,000, gain on sale of foreclosed assets increased $23,000, fees and charges on loans increased $47,000 and fees and service charges on deposit accounts decreased $96,000 for the six months ended June 30, 2015, compared to the six months ended June 30, 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 as 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 six months ended June 30, 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 six months ended June 30, 2015 was $4.0 million compared to $3.6 million for the same period in 2014, an increase of $390,000 or 10.7%.  The largest increases were in data processing services, salaries and benefits, other, and professional fees.  Data processing services expense increased due to migrating to a service bureau from an in-house processing core system, which was undertaken to avoid higher upgrade and cyber security costs in the future. The increase in salaries and benefits was due to a one-time bonus paid to non-executive officer employees.  Other expense increased due to setting up a reserve for debit card losses based on information available from our debit card servicer, and professional fees increased due primarily to increased legal fees.

Income Taxes. For the six months ended June 30, 2015, we recorded income taxes of $71,000 on before tax income of $122,000.  For the six months ended June 30, 2014, we recorded income tax benefit of $29,000 on a before tax loss of $82,000.  Our effective tax rate for the six months ended June 30, 2015 was 58.2% compared to (35.4)% for the same time period in 2014.






















35

 

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES


Item 4.  Controls and Procedures

(a) Evaluation of Disclosure 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, 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 in connection with our Original Form 10-Q. Based on this evaluation, 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, 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.

Subsequent to that evaluation, in connection with the restatement discussed in Note 12 to the condensed consolidated financial statements included in Item 1 of this report and the filing of this Amendment, management, with the participation of our Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015, and our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2015.

In connection with the restatement discussed in Note 12 to the condensed consolidated financial statements included in Item 1 of this report, management identified a material weakness in our internal control over financial reporting.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.  The material weakness identified was that management did not maintain effective control over the reconciliation process related to the Company's ACH and correspondent bank accounts.  Specifically, the members of our management team with the requisite level of accounting knowledge, experience and training commensurate with our financial reporting requirements did not timely reconcile these accounts. This material weakness resulted in the restatement of the Company's unaudited condensed consolidated financial statements for the quarters ended March 31, 2015 and June 30, 2015 and the six month period ended June 30, 2015.

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
 
36

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

 
Item 4.  Controls and Procedures (continued)

(a) Evaluation of Disclosure Controls and Procedures (continued)

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.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Management's Remediation Initiatives

As of the date of this Amendment a new control has been designed and implemented. This control includes changes to the process and timing of the reconciliations of ACH and correspondent bank accounts.  We believe that the action described above will remediate the material weakness we have identified and strengthen our internal control over financial reporting.






37

 
SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART II.  OTHER INFORMATION


Item 6.      Exhibits
 
See Exhibit Index
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
38


 
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 31, 2015
By:
/s/ Louis O. Davis, Jr.
   
Louis O. Davis, Jr.
   
President and Chief Executive Officer
   
(Duly Authorized Officer)
     
Date:  August 31, 2015
By:
/s/ Scott A. Swain
   
Scott A, Swain
   
Senior Vice President, Treasurer and
   
Chief Financial Officer
   
(Principal Financial Officer)

 
 

 
39


 
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