Sunshine Financial, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - CERTIFICATIONS - Sunshine Financial, Inc.	ex-32.htm
EX-31.1 - CERTIFICATION - Sunshine Financial, Inc.	ex31-1.htm
EX-31.2 - CERTIFICATION - Sunshine Financial, Inc.	ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2016

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

For the transition period from _______ to ________

Commission file number: 001-54280

SUNSHINE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

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

1400 East Park Avenue, Tallahassee, Florida 32301

(Address of principal executive offices; Zip Code)

(850) 219-7200

(Registrant’s telephone number, including area code)

None

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒No ☐

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

At May 13, 2016, there were issued and outstanding 1,030,898 shares of the issuer’s common stock.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Index

		Page Number
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2016 (Unaudited) and December 31, 2015	2

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (Unaudited)	3

	Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2016 and 2015 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2016 and 2015 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6-21

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22-28

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	29

Item 4.	Controls and Procedures	29-30

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	31

Item 6.	Exhibits	31

	SIGNATURES	32

	EXHIBIT INDEX

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands)

	At March 31, 2016			At December 31, 2015
	(Unaudited)
Assets

Cash and due from banks	$	5,457			1,773
Interest-bearing deposits with banks		10,134			9,089

Cash and cash equivalents		15,591			10,862

Securities held to maturity (fair value of $20,137 and $20,854)		20,080			21,063
Loans, net of allowance for loan losses of $927 and $895		114,275			113,422
Premises and equipment, net		4,497			4,591
Bank owned life insurance		3,101			3,075
Federal Home Loan Bank stock, at cost		248			348
Deferred income taxes		2,645			2,613
Accrued interest receivable		364			322
Foreclosed real estate		545			433
Other assets		944			1,099

Total assets	$	162,290			157,828

Liabilities and Stockholders’ Equity

Liabilities:
Noninterest-bearing deposit accounts	$	31,403			28,211
Money-market deposit accounts		37,729			36,524
Savings accounts		44,653			41,717
Time deposits		23,172			24,018

Total deposits		136,957			130,470

Federal home loan bank advances		2,500			5,000
Official checks		699			526
Other liabilities		814			474

Total liabilities		140,970			136,470

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, 1,030,898 shares issued and outstanding		10			10
Additional paid in capital		7,314			7,285
Retained earnings		14,542			14,633
Unearned Employee Stock Ownership Plan shares		(546	)		(570	)

Total stockholders' equity		21,320			21,358

Total liabilities and stockholders’ equity	$	162,290			157,828

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share information)

	Three Months Ended March 31,
	2016			2015
Interest income:
Loans	$	1,427			1,346
Securities		103			130
Other		12			7
Total interest income		1,542			1,483

Interest expense:
Deposit accounts		92			93
Federal home loan bank borrowings		5			-
Total interest expense		97			93

Net interest income		1,445			1,390
Provision for loan losses		45			30
Net interest income after provision for loan losses		1,400			1,360

Noninterest income:
Fees and service charges on deposit accounts		352			349
Gain on loan sales		-			62
Gain on sale of foreclosed real estate		-			10
Fees and charges on loans		35			38
Income from bank owned life insurance		26			-
Other		5			6
Total noninterest income		418			465

Noninterest expenses:
Salaries and employee benefits		882			885
Occupancy and equipment		282			279
Data processing services		314			383
Professional fees		179			151
Deposit insurance		31			30
Advertising and promotion		7			6
Stationery and supplies		14			16
Telephone communications		27			41
Foreclosed real estate		15			17
Credit card expense		42			31
Other		148			140
Total noninterest expenses		1,941			1,979

Loss before income tax benefit		(123	)		(154	)
Income tax benefit		(32	)		(46	)

Net loss	$	(91	)		(108	)

Basic and diluted loss per common share	$	(0.10	)		(0.11	)

Dividends per share	$	-			-

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, 2016 and 2015 (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, 2014		1,094,110		$	10		8,334			14,709			(665	)		22,388

Net loss (unaudited)		-			-		-			(108	)		-			(108	)

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

Repurchase of common stock (unaudited)		(4,000	)		-		(72	)		-			-			(72	)

Common stock allocated to Employee Stock Ownership Plan ("ESOP”) participants (unaudited)		-			-		(20	)		-			23			3

Balance, March 31, 2015 (unaudited)		1,090,110		$	10		8,295			14,601			(642	)		22,264

Balance, December 31, 2015		1,030,898		$	10		7,285			14,633			(570	)		21,358

Net loss (unaudited)		-			-		-			(91	)		-			(91	)

Stock based compensation expense (unaudited)		-			-		51			-			-			51

Common stock allocated to ESOP participants (unaudited)		-			-		(22	)		-			24			2

Balance, March 31, 2016 (unaudited)		1,030,898		$	10		7,314			14,542			(546	)		21,320

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net loss	$	(91	)		(108	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		97			95
Provision for loan losses		45			30
Deferred income tax benefit		(32	)		(69	)
Net amortization of premiums/discounts on securities		10			12
Net amortization of deferred loan fees and costs		7			(2	)
Income from bank owned life insurance		(26	)		-
Loans originated for sale		-			(2,546	)
Proceeds from loans sold		-			2,220
Gain on sale of loans		-			(46	)
ESOP compensation expense		24			23
Decrease in additional paid in capital due to ESOP allocation		(22	)		(20	)
Stock-based compensation expense		51			53
Increase in accrued interest receivable		(42	)		(9	)
Decrease in other assets		155			1
Gain on sale of foreclosed real estate		-			(10	)
Increase in official checks		173			44
Increase in other liabilities		340			319
Net cash provided by (used in) operating activities		689			(13	)
Cash flows from investing activities:
Principal pay-downs on held-to-maturity securities		973			1,178
Net (increase) decrease in loans		(1,003	)		223
Net purchases of premises and equipment		(3	)		(13	)
Redemption (purchase) of Federal Home Loan Bank stock		100			(6	)
Proceeds from sale of foreclosed real estate		-			106
Capital expenditures for foreclosed real estate		(14	)		(14	)
Net cash provided in investing activities		53			1,474

Cash flows from financing activities:
Net increase in deposits		6,487			2,931
Paydown FHLB advances		(2,500	)		-
Repurchase of common stock		-			(72	)
Net cash provided by financing activities		3,987			2,859

Increase in cash and cash equivalents		4,729			4,320

Cash and cash equivalents at beginning of period		10,862			13,032

Cash and cash equivalents at end of period	$	15,591			17,352

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

Interest	$	97			93

Noncash transactions:
Transfer from loans to foreclosed real estate	$	98			230
Increase in loan servicing assets	$	-			16

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Basis of Presentation

Sunshine Financial, Inc. ("Sunshine Financial" or the "Holding Company"), a Maryland corporation, is the holding company for Sunshine Savings Bank (the "Bank") and owns all the outstanding common stock of the Bank.

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

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

In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the consolidated financial statements not misleading and for a fair representation of the results of operations for such periods. It is recommended that these unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission ("SEC") on March 29, 2016 ("2015 Form 10-K"). The results for the three month period ended March 31, 2016 should not be considered as indicative of results for a full year.

2. Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU requires equity investments to be measured at fair value with changes in fair values recognized in net earnings, , simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and eliminates the requirement to disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The ASU also clarifies that the Company should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with the Company’s other deferred tax assets. These amendments are effective for the Company beginning January 1, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842) which will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with term of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The Company is in the process of determining the effect of the ASU on its consolidated balance sheet and consolidated statements of operations. Early application will be permitted for all organizations.

In March the FASB issued ASU No. 2016-09 Compensation-Stock Compensation (Topic 718) intended to improve the accounting for employee share-based payments. The ASU affects all organizations that issue share-based payment awards to their employees. The ASU simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Early adoption is permitted for any organization in any interim or annual period. The Company is in the process of determining the effect of the ASU on its consolidated balance sheet and consolidated statements of operations.

3. Loss Per Share

Loss per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three months ended March 31, 2016 and 2015, 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):

	2016								2015
				Weighted-		Per						Weighted-		Per
				Average		Share						Average		Share
	Loss			Shares		Amount			Loss			Shares		Amount
Three Months Ended March 31:
Basic loss per share:
Net loss	$	(91	)		940,248	$	(0.10	)	$	(108	)		987,128	$	(0.11	)
Effect of dilutive securities:
Incremental shares from assumed conversion
of options and restricted stock awards					-								-

Diluted loss per share:
Net loss	$	(91	)		940,248	$	(0.10	)	$	(108	)		987,128	$	(0.11	)

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

4. Securities Held to Maturity

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
At March 31, 2016
Agency mortgage-backed securities	$	986		43		-			1,029
Agency collateralized mortgage obligations		19,094		142		(129	)		19,108

Total	$	20,080		185		(129	)		20,137

At December 31, 2015
Agency mortgage-backed securities		1,086		42		-			1,128
Agency collateralized mortgage obligations		19,977		27		(278	)		19,726

Total	$	21,063		69		(278	)		20,854

There were no securities pledged at March 31, 2016 or December 31, 2015.

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					Gross
	Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value
At March 31, 2016:
Agency collateralized mortgage obligations	$	(24	)		2,464		(105	)		4,411

At December 31, 2015:
Agency collateralized mortgage obligations	$	(94	)		8,332		(184	)		5,839

At March 31, 2016 the unrealized losses on eleven securities are considered by management to be attributable to changes in market interest rates, and not attributable to credit risk on the part of the issuer. Accordingly, if market rates were to decline, much or all of the decline in market value would likely be recovered through market appreciation. As management has the ability and intent to hold debt securities until maturity, or for the foreseeable future, no declines in the fair value below amortized cost are deemed to be other than temporary.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans

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

	March 31,			December 31,
	2016			2015
Real estate mortgage loans:
One-to four-family	$	47,474			46,293
Lot		3,361			3,612
Commercial real estate		43,846			43,419
		2,015			1,563

Total real estate loans		96,696			94,887

Commercial loans		1,194			1,177

Consumer loans:
Home equity		7,597			7,609
Automobile		3,287			3,321
Credit cards and unsecured		5,787			6,100
Deposit account		574			576
Other		674			736

Total consumer loans		17,919			18,342

Total loans		115,809			114,406

Deduct
Loans in process		(468	)		43
Deferred fees and discounts		(139	)		(132	)
Allowance for loan losses		(927	)		(895	)

Total loans, net	$	114,275			113,422

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

Real Estate Mortgage Loans. Real estate mortgage loans are loans comprised of four classes: One- to four-family, Lot, Commercial real estate and Construction loans. The Company generally originates one- to four-family mortgage loans in amounts up to 80% of the lesser of the appraised value or purchase price of a mortgaged property, but will also permit loan-to-value ratios of up to 95%. For one- to four-family loans exceeding an 80% loan-to-value ratio, the Company generally requires the borrower to obtain private mortgage insurance covering any loss on the amount of the loan in excess of 80% in the event of foreclosure. The Company also makes loans for the purchase of developed lots for future construction of the borrower's primary residence. The Company will generally originate lot loans in an amount up to 75% of the lower of the purchase price or appraisal and have a maximum amortization of up to 20 years and maturities up to 20 years. Commercial real estate loans are generally originated at 75% or less loan-to-value ratio and have amortization terms of up to 20 years and maturities of up to ten years. Construction loans to borrowers are to finance the construction of one- to four-family, owner occupied properties. These loans are categorized as construction loans during the construction period, later converting to residential real estate loans after the construction is complete and amortization of the loan begins. Real estate construction loan funds are disbursed periodically based on the percentage of construction completed. If the estimate of construction cost proves to be inaccurate, the Company may be compelled to advance additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower to repay the loan. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Construction loans are typically secured by the properties under construction. Construction and lot loan lending is generally considered to involve a higher degree of credit risk than long-term permanent financing of residential properties.

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

Consumer Loans. Consumer loans are comprised of five classes: Home Equity, Automobile, Credit cards and unsecured, Deposit account and Other. The Company offers a variety of secured consumer loans, including home equity, new and used automobile, boat and other recreational vehicle loans, and loans secured by deposit accounts. The Company also offers unsecured consumer loans including a credit card product. The Company originates its consumer loans primarily in its market area. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to twenty years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

	Real Estate Mortgage Loans																	Consumer Loans
	One-to Four- Family			Lot			Commercial Real Estate			Constru-ction			Comme- rcial Loans		Home Equity			Auto- mobile			Credit Cards and Unsecured			Deposit Account		Other			Unallocated			Total
Three Months Ended March 31, 2016:
Beginning balance	$	226			30			245			2			10		195			19			151			-		16			1			895
Provision (credit) for loan loss		(27	)		(3	)		(5	)		-			18		(6	)		(6	)		6			-		(3	)		71			45
Charge-offs		-			-			-			-			-		(17	)		-			(21	)		-		-			-			(38	)
Recoveries		2			1			-			-			-		5			3			14			-		-			-			25
Ending balance	$	201			28			240			2			28		177			16			150			-		13			72			927

Three Months Ended March 31, 2015:
Beginning balance	$	454			46			206			2			10		115			31			111			-		39			73			1,087
Provision (credit) for loan loss		14			3			9			(1	)		6		31			(4	)		32			-		(14	)		(46	)		30
Charge-offs		-			-			-			-			-		-			-			(29	)		-		-			-			(29	)
Recoveries		-			-			-			-			-		-			-			14			-		-			-			14
Ending balance	$	468			49			215			1			16		146			27			128			-		25			27			1,102

At March 31, 2016:
Individually evaluated for impairment:
Recorded investment	$	2,712			-			-			-			-		216			-			-			-		-			-			2,928
Balance in allowance for loan losses	$	45			-			-			-			-		28			-			-			-		-			-			73
Collectively evaluated for impairment:
Recorded investment	$	44,762			3,361			43,846			2,015			1,194		7,381			3,287			5,787			574		674			-			112,881
Balance in allowance for loan losses	$	156			28			240			2			28		149			16			150			-		13			72			854

At December 31, 2015:
Individually evaluated for impairment:
Recorded investment	$	2,728			-			-			-			-		221			-			-			-		-			-			2,949
Balance in allowance for loan losses	$	73			-			-			-			-		33			-			-			-		-			-			106
Collectively evaluated for impairment:
Recorded investment	$	43,565			3,612			43,419			1,563			1,177		7,388			3,321			6,100			576		736			-			111,457
Balance in allowance for loan losses	$	153			30			245			2			10		162			19			151			-		16			1			789

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

Credit Risk
Profile by Internally	One to Four				Commercial Real		Constru-		Comme-		Home		Auto-		Credit Cards and		Deposit
Assigned Grade:	Family		Lot		Estate		ction		rcial		Equity		mobile		Unsecured		Accounts		Other		Total
At March 31, 2016:
Grade:
Pass	$	43,536		3,361		43,846		2,015		1,194		7,088		3,272		5,761		574		591		111,238
Special mention		79		-		-		-		-		94		-		-		-		-		173
Substandard		3,859		-		-		-		-		415		15		26		-		83		4,398
Doubtful		-		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-		-

Total	$	47,474		3,361		43,846		2,015		1,194		7,597		3,287		5,787		574		674		115,809

At December 31, 2015:
Grade:
Pass		41,995		3,591		43,419		1,563		1,177		7,221		3,311		6,068		575		653		109,573
Special mention		419		21		-		-		-		23		-		-		1		-		464
Substandard		3,879		-		-		-		-		365		10		32		-		83		4,369
Doubtful		-		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-		-

Total	$	46,293		3,612		43,419		1,563		1,177		7,609		3,321		6,100		576		736		114,406

Internally assigned loan grades are defined as follows:

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

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

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

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

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

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

	Accruing Loans
					90 Days
	30-59		60-89		and		Total
	Days		Days		Greater		Past				Nonaccrual		Total
	Past Due		Past Due		Past Due		Due		Current		Loans		Loans
At March 31, 2016:
Real estate loans:
One-to four-family	$	758		79		-		837		45,335		1,302		47,474
Lot		19		-		-		19		3,342		-		3,361
Commercial real estate		-		-		-		-		43,846		-		43,846
Construction		-		-		-		-		2,015		-		2,015
Commercial loans		-		-		-		-		1,194		-		1,194
Consumer loans:
Home equity		92		-		-		92		7,161		344		7,597
Automobile		6		-		-		6		3,271		10		3,287
Credit cards and unsecured		71		-		6		77		5,683		27		5,787
Deposit account		-		-		-		-		574		-		574
Other		9		-		-		9		582		83		674

Total	$	955		79		6		1,040		113,003		1,766		115,809

At December 31, 2015:
Real estate loans:
One-to four-family		698		419		-		1,117		43,832		1,344		46,293
Lot		-		21		-		21		3,591		-		3,612
Commercial real estate		-		-		-		-		43,419		-		43,419
Construction		-		-		-		-		1,563		-		1,563
Commercial loans		-		-		-		-		1,177		-		1,177
Consumer loans:
Home equity		77		51		-		128		7,192		289		7,609
Automobile		22		-		-		22		3,289		10		3,321
Credit cards and unsecured		54		-		7		61		6,007		32		6,100
Deposit account		4		1		-		5		571		-		576
Other		-		-		-		-		653		83		736

Total	$	855		492		7		1,354		111,294		1,758		114,406

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

	With No Related Allowance Recorded				With an Allowance Recorded						Total
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
At March 31, 2016:
Real estate loans:
One-to four-family	$	1,817		1,869		895		911		45		2,712		2,780		45
Consumer loans:
Home equity		178		194		38		47		28		216		241		28

	$	1,995		2,063		933		958		73		2,928		3,021		73

At December 31, 2015:
Real estate loans:
One-to four-family		1,552		1,604		1,176		1,193		73		2,728		2,797		73
Consumer loans:
Home equity		56		71		165		174		33		221		245		33

	$	1,608		1,675		1,341		1,367		106		2,949		3,042		106

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):

	Average		Interest		Interest
	Recorded		Income		Income
	Investment		Recognized		Received
For the Three Months Ended March 31, 2016:
Real estate loans:
One-to four-family	$	2,712		34		36
Consumer loans:
Home equity		216		3		4

Total	$	2,928		37		40

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

Total	$	3,249		28		32

The Company had no troubled debt restructurings (TDR) entered into during the three months ended March 31, 2016 or 2015. There were no TDR loans that were modified within the 12 months prior to March 31, 2016, and for which there was a payment default during the three months ended March 31, 2016. The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

6. Lines of Credit

The Company has an unsecured federal funds line of credit for $2.5 million with a correspondent bank and a $15.7 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At March 31, 2016, the Company had $2.5 million outstanding in FHLB advances that mature in 2016 at a weighted average fixed rate of 0.40%. At December 31, 2015, the Company had $5.0 million outstanding in FHLB advances that mature in 2016 at a weighted average fixed rate of 0.39%. At March 31, 2016 and December 31, 2015, the Company had no outstanding balances on the federal funds line of credit.

7. Off-Balance-Sheet Financial Instruments

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

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

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

Unused lines of credit and commitments to extend credit typically result in loans with a market interest rate when funded. A summary of the amounts of the Company's financial instruments, with off-balance-sheet risk follows at March 31, 2016 (in thousands):

	Contract
	Amount

Unused lines of credit	$	17,874
Commitments to extend credit	$	355

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

8. Fair Value of Financial Instruments

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

	At March 31, 2016						At December 31, 2015
	Carrying		Fair				Carrying		Fair
	Amount		Value		Level		Amount		Value		Level
Financial assets:
Cash and cash equivalents	$	15,591		15,591		1		10,862		10,862		1
Securities held to maturity		20,080		20,137		2		21,063		20,854		2
Loans		114,275		115,817		3		113,422		113,558		3
Federal Home Loan Bank stock		248		248		3		348		348		3
Accrued interest receivable		364		364		3		322		322		3

Financial liabilities:
Deposits		136,957		133,108		3		130,470		126,230		3
Federal Home Loan Bank
advances		2,500		2,500		3		5,000		5,000		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 2015 Form 10-K.

9. Employee Stock Ownership Plan

The Holding Company has established an ESOP which acquired 98,756 shares of common stock in exchange for a $988,000 note payable from the Bank to the Holding Company. The note bears interest at a fixed rate of 4.25%, is payable in annual installments and is due in 2021. The ESOP expense was $24,000 for the three months ended March 31, 2016 and $23,000 for the three months ended March 31, 2015. At March 31, 2016 and 2015, there were 49,477 and 59,353 shares, respectively, that had not been allocated under the ESOP.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

10. 2012 Equity Incentive Plan

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

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

Outstanding at December 31, 2014		84,000	$	11.70

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

Outstanding at December 31, 2015		81,500		11.62

Outstanding at March 31, 2016		81,500	$	11.62	6.87 years

Exercisable at March 31, 2016		10,000	$	10.75	6.70 years	$	84,500

At March 31, 2016, there was approximately $85,000 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 forty months. The total fair value of shares vesting and recognized as compensation expense was $12,000 for both the three-months ended March 31, 2016 and 2015.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

10. 2012 Equity Incentive Plan, Continued

The Company's 2012 Equity Incentive Plan also authorized the grant of up to 49,378 restricted common shares. The restricted shares awarded vest equally over five years from the date of grant. Restricted shares are forfeited if employment is terminated before the restriction period expires. The record holder of the Company's restricted shares of common stock possesses all the rights of a holder of the Company common stock, including the right to receive dividends on and to vote the restricted shares. The restricted shares may not be sold, transferred, pledged, assigned, encumbered, or otherwise alienated or hypothecated until they become fully vested and transferable in accordance with the agreements. Compensation expense for restricted stock totaled $39,000 for the three months ended March 31, 2016 and $41,000 for the three months ended March 31, 2015. The income tax benefit recognized was $15,000 for the three months ended March 31, 2016 and 2015.

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, 2014		38,000	$	16.91

Outstanding at March 31, 2015		38,000		16.91

Outstanding at December 31, 2015		28,700		16.92

Outstanding at March 31, 2016		28,700	$	16.92

Total unrecognized compensation cost related to these non-vested restricted stock amounted to approximately $418,000 at March 31, 2016. This cost is expected to be recognized monthly over the related vesting period using the straight-line method through 2019.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

11. Fair Value Measurements

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

	Fair Value		Level 1		Level 2		Level 3		Total Losses		Losses Recorded During the Period
At March 31, 2016:
One-to four-family	$	754		-		-		754		69		-
Home equity		16		-		-		16		5		-

Total	$	770		-		-		770		74		-

At December 31, 2015:
One-to four-family	$	754		-		-		754		69		-
Home equity		16		-		-		16		5		-

Total	$	770		-		-		770		74		-

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

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Losses

Identical

Observable

Unobservable

Recorded

Fair

Assets

Inputs

Total

During the

Value

(Level 1)

(Level 2)

(Level 3)

Losses

Period

At March 31, 2016:

Foreclosed real estate

545

103

At December 31, 2015:

Foreclosed real estate

433

103

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

12. Regulatory Matters

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

At March 31, 2016, the Bank exceeded all regulatory capital requirements. Consistent with its goals to operate a sound and profitable organization, the Bank’s policy is to maintain a “well-capitalized” status under the capital categories of the OCC. Based on capital levels at March 31, 2016, the Bank was considered to be well-capitalized.

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

	Actual					Minimum For Capital Adequacy Purposes					Minimum To Be Well Capitalized Under Prompt and Corrective Action Provisions
	Amount		%			Amount		%			Amount		%
At March 31, 2016:
Total Capital to Risk-
Weighted Assets	$	19,099		16.71	%	$	9,143		8.00	%	$	11,429		10.00	%
Tier I Capital to Risk-
Weighted Assets		18,172		15.90			6,858		6.00			9,143		8.00
Tier I Capital
to Total Assets		18,172		11.78			6,170		4.00			7,713		5.00
Common equity Tier 1 Capital to Risk-Weighted Assets		18,172		15.90			5,143		4.50			7,429		6.50

At December 31, 2015:
Total Capital to Risk-
Weighted Assets		19,117		17.03			8,978		8.00			11,222		10.00
Tier I Capital to Risk-
Weighted Assets		18,222		16.24			6,733		6.00			8,978		8.00
Tier I Capital
to Total Assets		18,222		12.56			5,803		4.00			7,253		5.00
Common equity Tier 1 Capital to Risk-Weighted Assets		18,222		16.24			5,050		4.50			7,295		6.50

In addition to the minimum common equity Tier 1 (“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 began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by the same amount each year until fully implemented in January 2019.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

12. Regulatory Matters, Continued

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

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations

Forward-Looking Statements

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

·	statements of our goals, intentions and expectations;

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

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

·	estimates of our risks and future costs and benefits.

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

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

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

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

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

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

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

·	legislative or regulatory changes that adversely affect our business, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III;

·	our ability to attract and retain deposits;

·	changes in premiums for deposit insurance;

·	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, 2015 filed on March 29, 2016 ("2015 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.

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 (including residential construction loans), 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.

The Company is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and Sunshine Savings Bank is regulated by the Office of the Comptroller of the Currency (“OCC”). Sunshine Savings Bank is also regulated by the Federal Deposit Insurance Corporation (“FDIC”). On July 10, 2015, the Company announced that Sunshine Savings Bank had submitted an application to the Florida Office of Financial Regulation (“FOFR”) to convert its charter from a federally-chartered savings bank to a Florida-chartered commercial bank, which it subsequently approved. Completion of the conversion is subject to the receipt by the Company of approval from the Federal Reserve to form a bank holding company. Upon completion of the conversion, which is expected to occur during the third quarter of 2016, the name of the bank will be changed to Sunshine Community Bank.

Upon completion of the conversion, the Bank's primary regulator will be the FOFR, with additional federal oversight provided by the FDIC. The Federal Reserve will continue to be the primary banking regulator for Sunshine Financial.

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.

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 2015 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 2015 Form 10-K.

Comparison of Financial Condition at March 31, 2016 and December 31, 2015

General. Total assets increased $4.5 million, or 2.8%, to $162.3 million at March 31, 2016 from $157.8 million at December 31, 2015 primarily funded by a $6.5 million increase in deposits less a $2.5 million decrease in Federal Home Loan Bank advances. The composition of total assets changed during the three months ended March 31, 2016 reflecting a $4.7 million increase in cash and cash equivalents, an $853,000 increase in net loans, offset by a $1.0 million decrease in securities held to maturity.

Loans. Our net loan portfolio increased $853,000, to $114.3 million at March 31, 2016 from $113.4 million at December 31, 2015. The increase in loans was due to a $1.9 million increase in real estate loans, principally one- to four- family residential loans, partially offset by decreases in consumer loans and loans in process.

Allowance for Loan Losses. Our allowance for loan losses at March 31, 2016 was $927,000, or 0.81% of loans, compared to $895,000, or 0.79% of loans, at December 31, 2015. Nonperforming loans remained at $1.8 million at both March 31, 2016 and December 31, 2015. Nonperforming loans to total loans decreased to 1.52% at March 31, 2016 from 1.54% at December 31, 2015 as a result of the increase in our loan portfolio.

Deposits. Total deposits increased $6.5 million, or 5.0%, to $137.0 million at March 31, 2016 from $130.5 million at December 31, 2015. This increase was primarily due to increases in noninterest bearing deposits and savings accounts, partially offset by decreases in time deposits.

Equity. Total stockholders' equity decreased $38,000 to $21.3 million at March 31, 2016. This decrease was primarily due to a net loss of $91,000, partially offset by stock-based compensation of $51,000 for the three-months ended March 31, 2016.

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 by the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense paid by the Company on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) interest-rate spread; and (v) net interest margin. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances.

	Three Months Ended March 31,
	2016								2015
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividend		Average Yield/ Rate
						($ in thousands)
Interest-earning assets:
Loans (1)	$	113,599		$	1,427		5.03	%	$	102,532		$	1,346		5.25	%
Securities held to maturity		20,601			103		2.01			25,513			130		2.04
Other interest-earning assets (2)		7,545			12		0.63			9,708			7		0.27

Total interest-earning assets		141,745			1,542		4.35			137,753			1,483		4.31

Noninterest-earning assets		15,195								11,666

Total assets	$	156,940							$	149,419

Interest-bearing liabilities:
MMDA and statement savings accounts		79,830			64		0.32			75,570			61		0.32
Time deposits		23,554			28		0.48			26,414			32		0.49
FHLB advances		4,815			5		0.43			-			-		-

Total interest-bearing liabilities		108,199			97		0.36			101,984			93		0.37

Noninterest-bearing liabilities		27,362								25,080
Equity		21,379								22,355

Total liabilities and equity	$	156,940							$	149,419

Net interest income				$	1,445							$	1,390

Net interest rate spread (3)							3.99	%							3.94	%

Net interest margin (4)							4.08	%							4.04	%

Ratio of average interest-earning assets
to average interest-bearing liabilities		1.31	x							1.35	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).

Comparison of the Three Months Ended March 31, 2016 and 2015

General. Net loss for the three months ended March 31, 2016 was $91,000 compared to a net loss of $108,000 for the three months ended March 31, 2015, resulting in an annualized return on average assets of (0.23)% for the three months ended March 31, 2016 and (0.29)% for the three months ended March 31, 2015. The decrease in net loss was due primarily to an increase in our net interest income and a decrease in our noninterest expense, partially offset by an increase in our provision for loan loss and a decrease in our noninterest income.

Net Interest Income. Net interest income increased $55,000, or 4.0%, and was $1.4 million for both the three months ended March 31, 2016 and 2015. The increase was primarily due to a $59,000 increase in interest income, partially offset by a $4,000 increase in interest expense. The increase in interest income resulted from an increase in average loans outstanding during the three months ended March 31, 2016 compared to the three months ended March 31, 2015, partially offset by a decrease in our average yield on loans. Our net interest rate spread increased to 3.99% for the three months ended March 31, 2016 from 3.94% for the same period in 2015, while our net interest margin increased to 4.08% at March 31, 2016 from 4.04% at March 31, 2015. The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended March 31, 2016 decreased to 1.31x, from 1.35x for the three months ended March 31, 2015.

Interest Income. Interest income for the three months ended March 31, 2016 increased $59,000, or 4.0%, to $1.5 million compared to the three month period ended March 31, 2015. The increase in interest income for the three months ended March 31, 2016 was primarily due to an $11.1 million increase in average loans outstanding during the three months ended March 31, 2016 compared to the three months ended 2015, partially offset by a 22 basis point decrease in our average yield on loans during the same period. Average loans outstanding increased to $113.6 million for the three months ended March 31, 2016, from $102.5 million for the same period in 2015. The average rate on loans receivable decreased to 5.03% for the three months ended March 31, 2016 compared to 5.25% for the three months ended March 31, 2015.

Interest Expense. Interest expense for the three months ended March 31, 2016 increased $4,000, or 4.3% to $97,000 from $93,000 for the same period ended March 31, 2015. The increase in interest expense for the three months ended March 31, 2016 was primarily due to the cost of $4.8 million in average outstanding FHLB advances compared to none during the same period in 2015. The total cost of funds for the three months ended March 31, 2016 was 0.36% compared to 0.37% for the three months ended March 31, 2015.

Provision for Loan Losses. We recorded a provision for loan losses of $45,000 for the three months ended March 31, 2016 compared to $30,000 for the three months ended March 31, 2015. The provision for loan losses reflected historical and expected future loan losses, the increase in the size of our loan portfolio as well as the change in the mix of loans. Net charge-offs for the three months ended March 31, 2016 were $13,000 compared to net charge-offs of $15,000 for the three months ended March 31, 2015. Nonperforming loans to total loans at March 31, 2016 were 1.52% compared to 1.54% at December 31, 2015. The allowance for loan losses to loans was 0.81% at March 31, 2016 compared to 0.79% at December 31, 2015.

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

Management considers the allowance for loan losses at March 31, 2016 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income for the three months ended March 31, 2016 decreased $47,000, or 10.1%, to $418,000 compared to $465,000 for the same period in 2015 as a result of a $62,000 decrease in the gain on loan sales and a $10,000 decrease in the gain on sale of foreclosed assets, partially offset by $26,000 in income from bank owned life insurance. The decrease in the gain on loan sales was due to management’s and the Board’s decision to retain all mortgage loans in portfolio in order to increase interest income in the long-term, which also has the effect of reducing short-term fee income. Management intends to continually review this strategy’s effect on the Bank’s interest-rate risk and recommend corrective action if deemed necessary.

Noninterest Expense. Noninterest expense for the three months ended March 31, 2016 decreased $38,000, or 1.9%, as compared to the same period in 2015. The largest decreases were in data processing services and telephone communications, offset slightly by an increase in professional fees. The decrease in data processing services was primarily due to lower billings from migrating to a service bureau from an in-house processing core system, which was undertaken to avoid higher upgrade and cybersecurity costs in the future, and a decrease in third party interchange fees. The increase in professional fees was due to higher legal fees for Sunshine Financial, Inc. related to regulatory filings.

Income Taxes. For the three months ended March 31, 2016, we recorded an income tax benefit of $32,000 on a before tax loss of $123,000. For the three months ended March 31, 2015, we recorded an income tax benefit of $46,000 on a before tax loss of $154,000. Our effective tax benefit rate for the three months ended March 31, 2016 was 26.0% compared to 29.9% for the same time period in 2015.

Liquidity

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, FHLB advances, and proceeds from maturities and calls of securities. The Company has an unsecured federal funds line of credit for $2.5 million with a correspondent bank and a $15.2 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At March 31, 2016 the Company had $2.5 million outstanding in FHLB advances that mature in 2016 at a weighted average fixed rate of 0.40%.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For the quarter ended March 31, 2016, cash provided by operating activities totaled $689,000. Net cash provided by investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from pay-downs on securities, totaled $53,000 for the quarter ended March 31, 2016. Net cash provided by financing activities, consisting primarily of the activity in FHLB advances and deposit accounts, was $4.0 million for the quarter ended March 31, 2016.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for repurchasing shares pursuant to any Board approved stock repurchase program and paying any dividends, when and if declared by the Board, to its shareholders. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At March 31, 2016, the Company (on an unconsolidated basis) had liquid assets of $428,000.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

Off-Balance Sheet Activities

In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the quarter ended March 31, 2016, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

A summary of our off-balance sheet commitments at March 31, 2016, is as follows (in thousands):

Unused lines of credit		$	17,874
Commitments to extend credit		$	355

Capital Resources

Sunshine Savings Bank is subject to minimum capital requirements imposed by the OCC. Based on its capital levels at March 31, 2016, Sunshine Savings Bank exceeded these requirements as of that date. Consistent with our goals to operate a sound and profitable organization, our policy is for Sunshine Savings Bank to maintain a “well-capitalized” status under the capital categories of the OCC. At March 31, 2016, Sunshine Savings Bank exceeded all regulatory capital requirements to be categorized as well capitalized under applicable regulatory guidelines with a common equity

Tier 1 ("CET1") capital ratio of 15.90% of risk-weighted assets, which is above the required level of 6.5%, a Tier 1 leverage capital level of 11.78% of adjusted total assets, which is above the required level of 5.00%, Tier I capital to risk-weighted assets of 15.90%, which is above the required level of 8.00% and total risk-based capital to risk-weighted assets of -1-6.71%, which is above the required level of 10.00%. Management is not aware of any conditions or events since the most recent notification that would change our category. For additional information see Note 12 of the Notes to Condensed Consolidated Financial Statements contained in Item1, Part 1 of this Form 10-Q.

At December 31, 2015, stockholders’ equity at Sunshine Savings Bank totaled $19.1 million. Management monitors the capital levels of Sunshine Savings Bank to provide for current and future business opportunities and to meet regulatory guidelines for “well-capitalized” institutions.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company provided information about market risk in Item 7A of its 2015 Form 10-K. There have been no material changes in our market risk since our 2014 Form 10-K.

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 March 31, 2016, 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. 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 March 31, 2016, 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.

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

(b)	Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not required for smaller reporting companies.

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

(a) Not applicable

(b) Not applicable

Item 3. Defaults Upon Senior SecuritiesNothing to report.

Item 4. Mine Safety Disclosures

Nothing to report.

Item 5. Other Information

Nothing to report.

Item 6.

Exhibits

See Exhibit Index

SIGNATURES

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

	SUNSHINE FINANICAL, INC.


Date: May 13, 2016	By:	/s/ Louis O. Davis, Jr.
		Louis O. Davis, Jr.
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: May 13, 2016	By:	/s/ Scott A. Swain
		Scott A, Swain
		Senior Vice President, Treasurer and
		Chief Financial Officer
		(Principal Financial Officer)

EXHIBIT INDEX

Exhibits:
3.1	Articles of Incorporation of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
3.2	Bylaws, as amended, of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 28, 2013 (File No. 000-54280))
4.0	Form of Common Stock Certificate of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.1	Employment Agreement by and between Sunshine Savings Bank and Louis O Davis, Jr. (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.2	Form of Change of Control Agreement by and between Sunshine Financial, Inc. and Louis O. Davis Jr. (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.3	Form of Change of Control Agreement by and between Sunshine Financial, Inc. and each of Brian P. Baggett and Scott A. Swain (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.4	Director Fee Arrangements (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No. 000-54280))
10.5	Sunshine Financial, Inc. 2012 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement filed on Schedule 14A on April 20, 2012 (File No. 000-54280))
10.6	Forms of Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Agreements under the 2012 Equity Incentive Plan (incorporated by reference to the Exhibits to the Registrant's Registration Statement on Form S-8 filed with the SEC on June 29, 2012 (File No. 333-182450))
10.7	Agreement, dated February 5, 2016, by and among, Sunshine Financial, Inc., Sunshine Savings Bank, Stilwell Value Partners VII, L.P., Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P., Stilwell Partners, L.P. and Stilwell Value LLC, and Corissa J. Briglia (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 8, 2016 (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

Sunshine Financial, Inc. - FORM 10-Q - May 13, 2016

Attached files

Sunshine Financial, Inc. Reports