Sunshine Financial, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - SECTION 1350 CERTIFICATIONS - Sunshine Financial, Inc.	ex-32.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION - Sunshine Financial, Inc.	ex31-2.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION - Sunshine Financial, Inc.	ex31-1.htm

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2017

[ ] 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, smaller reporting company or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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]	Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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 10, 2017, there were issued and outstanding 1,030,039 shares of the issuer's common stock.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Index

		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016	2

	Condensed Consolidated Statements of Operations for the Three- and Six-Months Ended June 30, 2017 and 2016 (Unaudited)	3

	Condensed Consolidated Statements of Stockholders' Equity for the Six-Months Ended June 30, 2017 and 2016 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows For the Six-Months Ended June 30, 2017 and 2016 (Unaudited)	5

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

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

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	34

Item 4.	Controls and Procedures	34-35

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

SIGNATURES		37

EXHIBIT INDEX

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands)

	At June 30, 2017			At December 31, 2016
	(Unaudited)
Assets

Cash and due from banks	$	1,984			2,705
Interest-bearing deposits with banks		5,713			8,608

Cash and cash equivalents		7,697			11,313

Securities held to maturity (fair value of $14,660 and $16,294)		14,750			16,512
Loans, net of allowance for loan losses of $1,077 and $924		150,216			134,077
Premises and equipment, net		3,590			3,662
Bank owned life insurance		3,217			3,172
Federal Home Loan Bank stock, at cost		963			684
Deferred income taxes		2,410			2,550
Accrued interest receivable		427			449
Foreclosed real estate		137			141
Other assets		549			649

Total assets	$	183,956			173,209

Liabilities and Stockholders' Equity

Liabilities:
Noninterest-bearing deposit accounts	$	32,620			31,247
Money-market deposit accounts		42,110			39,633
Savings accounts		48,050			46,989
Time deposits		18,694			20,033

Total deposits		141,474			137,902

Federal home loan bank advances		19,000			12,750
Official checks		490			541
Other liabilities		1,021			360

Total liabilities		161,985			151,553

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, 1,030,039 shares issued and outstanding		10			10
Additional paid in capital		7,422			7,374
Retained earnings		14,959			14,743
Unearned Employee Stock Ownership Plan shares		(420	)		(471	)

Total stockholders' equity		21,971			21,656

Total liabilities and stockholders' equity	$	183,956			173,209

See accompanying Notes to Condensed Consolidated Financial Statements.

Index

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,
	2017		2016		2017		2016
Interest income:
Loans	$	1,735	$	1,469		3,378		2,897
Securities		76		95		157		198
Other		18		13		34		25
Total interest income		1,829		1,577		3,569		3,120

Interest expense:
Deposit accounts		94		92		186		184
Other borrowings		40		4		64		9
Total interest expense		134		96		250		193

Net interest income		1,695		1,481		3,319		2,927

Provision for loan losses		50		45		105		90

Net interest income after provision for loan losses		1,645		1,436		3,214		2,837

Noninterest income:
Fees and service charges on deposit accounts		346		355		695		707
Gain on sale of loans		-		21		11		21
Gain on sale of foreclosed real estate		-		-		30		-
Fees and charges on loans		58		40		107		76
Income from bank owned life insurance		22		23		45		49
Other		5		46		15		49
Total noninterest income		431		485		903		902

Noninterest expenses:
Salaries and employee benefits		817		878		1,609		1,761
Occupancy and equipment		251		276		513		558
Data processing services		330		294		625		608
Professional fees		207		182		380		361
Deposit insurance		16		32		32		63
Stationery and supplies		27		23		46		37
Telephone and postage		24		26		51		52
Credit card expense		36		41		102		83
Other		209		155		403		325
Total noninterest expenses		1,917		1,907		3,761		3,848

Earnings (loss) before income taxes (benefit)		159		14		356		(109	)
Income taxes (benefit)		67		8		140		(24	)

Net earnings (loss)	$	92	$	6		216		(85	)

Basic earnings (loss) per common share	$	0.10	$	0.01		0.23		(0.09	)

Diluted earnings (loss) per common share	$	0.09	$	0.01		0.22		(0.09	)

Dividends per common share	$	-	$	-		-		-

See accompanying Notes to Condensed Consolidated Financial Statements.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Six Months Ended June 30, 2017 and 2016

($ in thousands)

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

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

Net loss (unaudited)		-		-		-			(85	)		-			(85	)

Stock based compensation expense (unaudited)		-		-		102			-			-			102

Stock issued for options exercised (unaudited)		1,000				11									11

Common stock allocated to ESOP participants (unaudited)		-		-		(45	)		-			49			4

Balance, June 30, 2016 (unaudited)		1,031,898	$	10		7,353			14,548			(521	)		21,390

Balance, December 31, 2016		1,030,039	$	10		7,374			14,743			(471	)		21,656

Net earnings (unaudited)		-		-		-			216			-			216

Stock based compensation expense (unaudited)		-		-		100			-			-			100

Common stock allocated to ESOP participants (unaudited)		-		-		( 52	)		-			51			(1	)

Balance, June 30, 2017 (unaudited)		1,030,039	$	10		7,422			14,959			(420	)		21,971

See accompanying Notes to Condensed Consolidated Financial Statements.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Six-Months Ended June 30,
	2017			2016
Cash flows from operating activities:
Net earnings (loss)	$	216			(85	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation		160			186
Provision for loan losses		105			90
Deferred income taxes (benefit)		140			(8	)
Net amortization of premiums on securities		12			22
Net amortization of deferred loan fees and costs		77			5
Income from bank owned life insurance		(45	)		(49	)
Loans originated for sale		(421	)		(642	)
Proceeds from loans sold		432			663
Gain on sale of loans		(11	)		(21	)
ESOP compensation expense		(1	)		4
Stock-based compensation expense		100			102
Decrease (increase) in accrued interest receivable		22			(41	)
Decrease in other assets		100			55
Gain on sale of foreclosed real estate		(30	)		-
Write-down of foreclosed real estate		-			27
Decrease in official checks		(51	)		(90	)
Increase in other liabilities		661			446

Net cash provided by operating activities		1,466			664
Cash flows from investing activities:
Principal pay-downs on securities held-to-maturity		1,750			2,155
Net increase in loans		(16,321	)		(5,983	)
Net purchases of premises and equipment		(88	)		(110	)
Purchase of Federal Home Loan Bank stock		(279	)		(28	)
Proceeds from sale of foreclosed real estate		34			-
Capital expenditures to foreclosed real estate		-			(14	)

Net cash used in investing activities		(14,904	)		(3,980	)

Cash flows from financing activities:
Net increase in deposits		3,572			6,224
Cash proceeds from stock options exercised		-			11
Net proceeds on Federal Home Loan Bank advances		6,250			500

Net cash provided by financing activities		9,822			6,735

(Decrease) increase in cash and cash equivalents		(3,616	)		3,419

Cash and cash equivalents at beginning of period		11,313			10,862

Cash and cash equivalents at end of period	$	7,697			14,281

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

Interest	$	250			193

Noncash transaction-
Transfer from loans to foreclosed real estate	$	-			98

See accompanying Notes to Condensed Consolidated Financial Statements.

Index

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 Community 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 five 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 accompanying condensed consolidated financial statements of the Company reflect all adjustments (consisting only of normal recurring accruals) which are necessary in order to present fairly the consolidated financial position at June 30, 2017 and the results of operations for the three- and six-month periods ended June 30, 2017 and 2016. 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, 2016 filed with the U.S. Securities and Exchange Commission ("SEC") on March 30, 2017 ("2016 Form 10-K"). The results of operations for the three- and six-month periods ended June 30, 2017, are not necessarily indicative of the results to be expected for the full year or for any other period.

2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customer (Topic 606). In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) which postponed the effective date. Subsequently, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. This amendment clarifies that an entity should determine if it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The core principle of Topic 606 is that an entity must recognize revenue when it has satisfied a performance obligation of transferring promised goods or services to a customer. The standard is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. The standard allows for full retrospective adoption for all periods presented or modified retrospective adoption to only the most current period presented in the financial statements. The cumulative effect of initially applying the standard is recognized at the date of the initial application. The Company's primary

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

RECENT ACCOUNTING PRONOUNCEMENTS (continued)

source of revenue is interest income from financial instruments which is scoped out of this ASU. The Company does not expect implementation of this standard to have a material impact on our consolidated financial statements.

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 ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its consolidated financial statements.

In June 2016, FASB issued Accounting Standards Update ("ASU") No. 2016-13 Financial Instruments-Credit Losses (Topic 326). The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio.

These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its consolidated financial statements. Once adopted, we expect our allowance for loan losses to increase; however, until our evaluation is complete the magnitude of the increase will be unknown.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium, the amendments require the premium to be amortized to the earliest call date. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation--Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The standard is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company's consolidated financial statements.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

3. Earnings (Loss) Per Share

Earnings (loss) 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, 2017, and the three-months ended June 30, 2016, the outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method. For the six-months ended June 30, 2016, 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):

	2017						2016
			Weighted-		Per				Weighted-		Per
			Average		Share		Earnings		Average		Share
	Earnings		Shares		Amount		(loss)		Shares		Amount
Three Months Ended June 30:
Basic EPS:
Net earnings (loss)	$	92		954,392	$	0.10	$	3		943,137	$	0.01
Effect of dilutive securities:
Incremental shares from assumed conversion
of options and restricted stock awards				37,681						33,064

Diluted EPS:
Net earnings (loss)	$	92		992,073	$	0.09	$	6		976,201	$	0.01

	2017						2016
			Weighted-		Per					Weighted-		Per
			Average		Share					Average		Share
	Earnings		Shares		Amount		Loss			Shares		Amount
Six Months Ended June 30:
Basic EPS:
Net earnings (loss)	$	216		953,157	$	0.23	$	(85	)		941,903	$	(0.09	)
Effect of dilutive securities:
Incremental shares from assumed conversion
of options and restricted stock awards				37,987							-

Diluted EPS:
Net earnings (loss)	$	216		991,144	$	0.22	$	(85	)		941,903	$	(0.09	)

(continued)

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SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

4. Securities Held to Maturity

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
At June 30, 2017
Agency mortgage-backed securities	$	535		19		-			554
Agency collateralized mortgage obligations		14,215		42		(151	)		14,106

Total	$	14,750		61		(151	)		14,660

At December 31, 2016
Agency mortgage-backed securities		697		24		-			721
Agency collateralized mortgage obligations		15,815		15		(257	)		15,573

Total	$	16,512		39		(257	)		16,294

There were no securities pledged at June 30, 2017 or December 31, 2016.

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 June 30, 2017:
Agency collateralized mortgage obligations	$	(50	)		4,205		(101	)		3,627

At December 31, 2016:
Agency collateralized mortgage obligations	$	(102	)		10,523		(155	)		3,941

At June 30, 2017 and December 31, 2016, the unrealized losses on eighteen securities and twenty-one securities, respectively 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)

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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):

	June 30,			December 31,
	2017			2016
Real estate mortgage loans:
One-to four-family	$	60,907			56,601
Commercial real estate		63,571			52,960
Construction and lot		4,568			4,247

Total real estate loans		129,046			113,808

Commercial loans		3,700			4,217

Consumer loans:
Home equity		6,878			7,166
Automobile and other		4,429			4,498
Credit cards and unsecured		5,764			5,796

Total consumer loans		17,071			17,460

Total loans		149,817			135,485

Deduct
Loans in process		1,361			(522	)
Deferred fees and discounts		115			38
Allowance for loan losses		(1,077	)		(924	)

Total loans, net	$	150,216			134,077

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

(continued)

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SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

Real Estate Mortgage Loans. Real estate mortgage loans are loans comprised of three classes: One- to four-family, Commercial real estate and Construction and lot 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. 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 and owner occupied properties. These loans are categorized as construction loans during the construction period, later converting to one-to-four family real estate loans after the construction is complete and amortization of the loan begins. Real estate construction loan funds are disbursed periodically based on the percentage of construction completed. If the estimate of construction cost proves to be inaccurate, the Company may be compelled to advance additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower to repay the loan. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Construction loans are typically secured by the properties under construction. The Company also makes loans for the purchase of developed lots for future construction of the borrower's primary residence. 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. 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 non-real estate secured and unsecured loans. The Company offers these commercial loans generally to its commercial real estate borrowers.

Consumer Loans. Consumer loans are comprised of three classes: Home Equity, Automobile and Other, and Credit cards and unsecured. 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)

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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 indicated, is as follows (in thousands):

	Real Estate Loans			Commercial Loans			Consumer Loans			Unallocated			Total
Three Months Ended June 30, 2017:
Beginning balance	$	558			69			335			6			968
Provision (credit) for loan loss		(112	)		(1	)		12			151			50
Charge-offs		-			-			(15	)		-			(15	)
Recoveries		68			-			6			-			74
Ending balance	$	514			68			338			157			1,077

Three Months Ended June 30, 2016:
Beginning balance	$	471			28			356			72			927
Provision (credit) for loan loss		22			(1	)		35			(11	)		45
Charge-offs		(14	)		-			(53	)		-			(67	)
Recoveries		2			-			17			-			19
Ending balance	$	481			27			355			61			924

Six Months Ended June 30, 2017:
Beginning balance	$	558			74			292			-			924
Provision (credit) for loan loss		(124	)		(6	)		78			157			105
Charge-offs		-			-			(54	)		-			(54	)
Recoveries		80			-			22			-			102
Ending balance	$	514			68			338			157			1,077

Six Months Ended June 30, 2016:
Beginning balance	$	503			10			381			1			895
Provision (credit) for loan loss		(12	)		17			25			60			90
Charge-offs		(14	)		-			(90	)		-			(104	)
Recoveries		4			-			39			-			43
Ending balance	$	481			27			355			61			924

At June 30, 2017:
Individually evaluated for impairment:
Recorded investment	$	2,326			-			153			-			2,479

Balance in allowance for loan losses	$	44			-			28			-			72
Collectively evaluated for impairment:
Recorded investment	$	126,720			3,700			16,918			-			147,338

Balance in allowance for loan losses	$	470			68			310			157			1,005

At December 31, 2016:
Individually evaluated for impairment:
Recorded investment	$	2,559			-			162			-			2,721

Balance in allowance for loan losses	$	44			-			28			-			72
Collectively evaluated for impairment:
Recorded investment	$	111,249			4,217			17,298			-			132,764

Balance in allowance for loan losses	$	514			74			264			-			852

(continued)

Index

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	One-to		Commercial		Constru-								Credit
Internally	Four-		Real		ction and		Comme-		Home		Automobile		Cards and
Assigned Grade:	Family		Estate		Lot		rcial		Equity		and Other		Unsecured		Total
At June 30, 2017:
Grade:
Pass	$	58,335		63,571		4,542		3,700		6,697		4,341		5,721		146,907
Special mention		1,393		-		26		-		4		-		9		1,432
Substandard		1,179		-		-		-		177		88		34		1,478

Total	$	60,907		63,571		4,568		3,700		6,878		4,429		5,764		149,817

At December 31, 2016:
Grade:
Pass	$	53,573		52,960		4,218		4,217		6,843		4,393		5,760		131,964
Special mention		807		-		-		-		-		-		4		811
Substandard		2,221		-		29		-		323		105		32		2,710

Total	$	56,601		52,960		4,247		4,217		7,166		4,498		5,796		135,485

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)

Index

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 June 30, 2017:
Real estate loans:
One-to four-family	$	766		104		-		870		58,858		1,179		60,907
Commercial real estate		-		-		-		-		63,571		-		63,571
Construction and lot		43		-		-		43		4,525		-		4,568
Commercial loans		-		-		-		-		3,700		-		3,700
Consumer loans:
Home equity		185		-		-		185		6,436		257		6,878
Automobile and other		47		4		-		51		4,289		89		4,429
Credit cards and unsecured		71		44		71		186		5,544		34		5,764

Total	$	1,112		152		71		1,335		146,923		1,559		149,817

At December 31, 2016:
Real estate loans:
One-to four-family	$	772		277		-		1,049		53,465		2,087		56,601
Commercial real estate		-		-		-		-		52,960		-		52,960
Construction and lot		85		-		-		85		4,162		-		4,247
Commercial loans		17		-		-		17		4,200		-		4,217
Consumer loans:
Home equity		60		-		-		60		6,786		320		7,166
Automobile and other		21		-		-		21		4,373		104		4,498
Credit cards and unsecured		138		4		7		149		5,614		33		5,796

Total	$	1,093		281		7		1,381		131,560		2,544		135,485

(continued)

Index

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 June 30, 2017:
Real estate loans:
One-to four-family	$	1,756		1,799		570		586		44		2,326		2,385		44
Consumer loans:
Home equity		119		130		34		43		28		153		173		28

	$	1,875		1,929		604		629		72		2,479		2,558		72

At December 31, 2016:
Real estate loans:
One-to four-family	$	1,985		2,037		574		591		44		2,559		2,628		44
Consumer loans:
Home equity		126		137		36		45		28		162		182		28

	$	2,111		2,174		610		636		72		2,721		2,810		72

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,
	2017						2016
	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	$	2,282		48		50		2,585		38		39
Consumer loans:
Home equity		125		3		3		183		4		5

Total	$	2,407		51		53	$	2,768		42		44

	Six Months Ended June 30,
	2017						2016
	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	$	2,292		86		89		2,594		76		77
Consumer loans:
Home equity		128		5		5		186		7		8

Total	$	2,420		91		94	$	2,780		83		85

(continued)

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

The Company had no troubled debt restructurings (TDR) entered into during the three and six months ended June 30, 2017 or 2016. The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs.

6. Lines of Credit

The Company has an unsecured federal funds line of credit for $6.0 million with a correspondent bank and a $45.2 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At June 30, 2017, the Company had $19.0 million outstanding in FHLB advances that mature in 2017 at a weighted average fixed rate of 1.16%. At December 31, 2016, the Company had $12.75 million outstanding in FHLB advances that mature in 2017 at a weighted average fixed rate of 0.63%. At June 30, 2017 and December 31, 2016, 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 June 30, 2017 (in thousands):

	Contract
	Amount
Unused lines of credit	$	21,838

Commitments to extend credit	$	196

(continued)

Index

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 June 30, 2017						At December 31, 2016
	Carrying		Fair				Carrying		Fair
	Amount		Value		Level		Amount		Value		Level
Financial assets:
Cash and cash equivalents	$	7,697		7,697		1		11,313		11,313		1
Securities held to maturity		14,750		14,660		2		16,512		16,294		2
Loans		150,216		157,230		3		134,077		132,454		3
Federal Home Loan Bank stock		963		963		3		684		684		3
Accrued interest receivable		427		427		3		449		449		3

Financial liabilities:
Deposits		141,474		135,388		3		137,902		132,280		3
Federal Home Loan Bank
advances		19,000		19,001		3		12,750		12,750		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 2016 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 $3,000 for the three-months ended June 30, 2017 and $8,000 for the three-months ended June 30, 2016. The ESOP expense was $10,000 for the six-months ended June 30, 2017 and $17,000 for the six-months ended June 30, 2016. At June 30, 2017 and 2016, there were 37,132 and 47,008 shares, respectively, that had not been allocated under the ESOP.

(continued)

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

10. Equity Incentive Plan

On May 23, 2012, the Holding Company's stockholders approved the 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 of which 41,945 shares were available for grant at June 30, 2017. The options granted have ten year terms and vest from one to five years. A summary of the activity in stock options under the Plan is as follows:

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

Outstanding at December 31, 2015		81,500			$	11.62
Exercised		(1,000	)			10.75

Outstanding at June 30, 2016		80,500			$	11.63		6.63 years

Outstanding at December 31, 2016		80,500				11.63
Exercised		-				-

Outstanding at June 30, 2017		80,500			$	11.63		5.63 years	$	823,000

Exercisable at June 30, 2017		10,000			$	10.75		5.45 years	$	111,000

At June 30, 2017, there was approximately $29,000 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 twenty-five months. The total fair value of shares vesting and recognized as compensation expense was $12,000 for both the three-months ended June 30, 2017 and 2016. The total fair value of shares vesting and recognized as compensation expense was $23,000 for both the six-months ended June 30, 2017 and 2016.

(continued)

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

10. Equity Incentive Plan, Continued

The Plan also authorizes the grant of up to 49,378 shares of restricted stock of which 4,078 shares were available for grant at June 30, 2017. The restricted stock awarded under the Plan vests equally over five years from the date of grant. Restricted stock awards are forfeited if employment is terminated before the restriction period expires. The record holder of the Holding Company's restricted stock possesses all the rights of a holder of the Holding Company common stock, including the right to receive dividends on and to vote the restricted stock. The restricted stock 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 $37,000 for the three-months ended June 30, 2017 and $39,000 for the three-months ended June 30, 2016. Compensation expense for restricted stock totaled $77,000 for the six-months ended June 30, 2017 and $79,000 for the six-months ended June 30, 2016. The income tax benefit recognized was $14,000 and $15,000 for the three months ended June 30, 2017 and June 30, 2016, respectively, and $29,000 and $30,000 for the six months ended June 30, 2017 and June 30, 2016, respectively.

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, 2015		28,700		$	16.92

Outstanding at June 30, 2016		28,700			16.92

Outstanding at December 31, 2016		19,400			16.94
Forfeited		(1,200	)		18.25

Outstanding at June 30, 2017		18,200		$	16.85

Total unrecognized compensation cost related to these non-vested shares of restricted stock amounted to approximately $206,000 at June 30, 2017. This cost is expected to be recognized monthly over the related vesting period using the straight-line method through 2019.

(continued)

Index

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 June 30, 2017:
One-to four-family	$	570		-		-		570		44		-
Home equity		34		-		-		34		28		-

Total	$	604		-		-		604		72		-

At December 31, 2016:
One-to four-family	$	574		-		-		574		44		-
Home equity		36		-		-		36		28		-

Total	$	610		-		-		610		72		-

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

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Losses

Identical

Observable

Unobservable

Recorded

Fair

Assets

Inputs

Total

During the

Value

(Level 1)

(Level 2)

(Level 3)

Losses

Period

At June 30, 2017:

Foreclosed real estate

137

At December 31, 2016:

Foreclosed real estate

141

(continued)

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

12. Regulatory Matters

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, 2017:
Total Capital to Risk-
Weighted Assets	$	18,161		13.03	%	$	11,147		8.00	%	$	13,933		10.00	%
Tier I Capital to Risk-
Weighted Assets		17,084		12.26			8,360		6.00			11,147		8.00
Tier I Capital
to Total Assets		17,084		9.91			6,896		4.00			8,620		5.00
Common equity Tier 1 Capital to Risk-Weighted Assets		17,084		12.26			6270		4.50			9,057		6.50

At December 31, 2016:
Total Capital to Risk-
Weighted Assets		19,539		15.34			10,191		8.00			12,739		10.00
Tier I Capital to Risk-
Weighted Assets		18,615		14.61			7,643		6.00			10,191		8.00
Tier I Capital
to Total Assets		18,615		11.42			6,519		4.00			8,148		5.00
Common equity Tier 1 Capital to Risk-Weighted Assets		18,615		14.61			5,733		4.50			8,280		6.50

Pursuant to the capital regulations of the FDIC and the other federal banking agencies, the Bank must maintain a capital conservation buffer consisting of additional common equity tier 1 ("CET1") capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. For our fiscal year ending December 31, 2017, the capital conservation buffer rule requires a buffer of greater than 1.25% of risk-weighted assets, which amount will increase by 0.625% yearly until the requirement is fully phased-in on January 1, 2019, when the buffer must exceed 2.5% of risk-weighted assets. As June 30, 2017, the Bank's CET1 capital exceeded the required capital conservation buffer.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Item 2.

Management's Discussion and Analysis of

Financial Condition and Results of Operations

Forward-Looking Statements

As used in this report, the terms "we," "our," "us," "Sunshine Financial" and "Company" refer to Sunshine Financial, Inc. including its wholly-owned subsidiary, Sunshine Community Bank, unless the context indicates otherwise.

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: When used in this report, as well as in future filings by us with the U.S. Securities and Exchange Commission ("SEC"), in our press releases or other public or shareholder communications, or in oral statements made with the approval or 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 Florida Office of Financial Regulation ("FOFR"), the Federal Deposit Insurance Corporation ("FDIC") 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;

Index

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, 2016 filed on March 30, 2017 ("2016 Form 10-K") and our other reports filed with the SEC.

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.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

General

Sunshine Financial, a Maryland corporation, is the holding company for its wholly owned subsidiary, Sunshine Community Bank. Sunshine Community 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 mutual holding company structure. On April 5, 2011, the Company completed a public offering as part of Sunshine Saving Bank's conversion and reorganization from a mutual holding company to a public stock holding company structure.

On July 1, 2016, Sunshine Savings Bank completed its conversion from a federal savings bank charter to a Florida state bank charter, changing its name to Sunshine Community Bank. As a Florida-chartered financial institution, the FOFR is the primary regulator for Sunshine Community Bank, with additional federal oversight provided by the FDIC. Sunshine Financial is regulated by the Board of Governors of the Federal Reserve System.

We currently operate out of five 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), lot loans, commercial real estate loans, commercial business loans and consumer loans. We offer a wide variety of secured and unsecured consumer loan products, including home equity, direct automobile loans and credit card loans in our market area.

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.

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

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

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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 2016 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 2016 Form 10-K.

Comparison of Financial Condition at June 30, 2017 and December 31, 2016

General. Total assets increased $10.7 million, or 6.2%, to $184.0 million at June 30, 2017 from $173.2 million at December 31, 2016 primarily funded by a $6.3 million increase in Federal Home Loan Bank advances, and a $3.6 million increase in deposits. The composition of total assets changed during the six months ended June 30, 2017 reflecting a $16.1 million increase in net loans, a $3.6 million decrease in cash and cash equivalents and a $1.7 million decrease in securities held to maturity.

Loans. Our net loan portfolio increased $16.1 million, to $150.2 million at June 30, 2017 from $134.1 million at December 31, 2016. The increase in loans was primarily due to a $15.2 million increase in total real estate loans, including a $10.6 million increase in commercial real estate loans, partially offset by small decreases in consumer and commercial business loans.

Allowance for Loan Losses. Our allowance for loan losses at June 30, 2017 was $1.1 million, or 0.71% of loans, compared to $924,000, or 0.69% of loans, at December 31, 2016. Nonperforming loans decreased to $1.6 million at June 30, 2017 compared to $2.5 million at December 31, 2016. Nonperforming loans to total loans decreased to 1.03% at June 30, 2017 from 1.88% at December 31, 2016 as a result of both the increase in the net loan portfolio and a decrease in nonperforming loans.

Deposits. Total deposits increased $3.6 million, or 2.6%, to $141.5 million at June 30, 2017 from $137.9 million at December 31, 2016. This increase was due to a $1.4 million increase in noninterest bearing deposits, a $2.5 million increase money-market deposit accounts ("MMDA") and a $1.1 million increase in savings accounts, partially offset by a $1.4 million decrease in time deposits.

Borrowings. Total FHLB borrowings increased $6.3 million, or 49.0%, to $19.0 million at June 30, 2017 from $12.8 million at December 31, 2016, providing additional funds for loan growth.

Equity. Total stockholders' equity increased $315,000 to $22.0 million at June 30, 2017. This increase was primarily due to net earnings of $216,000, and stock-based compensation of $100,000 for the six-months ended June 30, 2017.

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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,
	2017								2016
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividend		Average Yield/ Rate
						($ in thousands)
Interest-earning assets:
Loans (1)	$	144,943		$	1,735		4.79	%	$	116,901		$	1,469		5.03	%
Securities held to maturity		15,255			76		1.99			19,559			95		1.94
Other interest-earning assets (2)		4,362			18		1.65			6,910			13		0.75

Total interest-earning assets		164,560			1,829		4.45			143,370			1,577		4.40

Noninterest-earning assets		13,676								15,278

Total assets	$	178,236							$	158,648

Interest-bearing liabilities:
MMDA and statement savings		89,570			72		0.32			82,835			65		0.31
Time deposits		19,076			22		0.46			22,504			27		0.48
FHLB advances		17,067			40		0.94			3,725			4		0.43

Total interest-bearing liabilities		125,713			134		0.43			109,064			96		0.35

Noninterest-bearing liabilities		30,606								28,227
Equity		21,917								21,357

Total liabilities and equity	$	178,236							$	158,648

Net interest income				$	1,695							$	1,481

Net interest rate spread (3)							4.02	%							4.06	%

Net interest margin (4)							4.12	%							4.13	%

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

(1)	Does not include interest on loans in non-accrual status. Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
(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).

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SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

	Six Months Ended June 30,
	2017								2016
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividend		Average Yield/ Rate
						($ in thousands)
Interest-earning assets:
Loans receivable (1)	$	141,511		$	3,378		4.77	%	$	115,250		$	2,897		5.03	%
Securities held to maturity		15,676			157		2.00			20,080			198		1.97
Other interest-earning assets (2)		4,300			34		1.58			7,228			25		0.69

Total interest-earning assets		161,487			3,569		4.42			142,558			3,120		4.38

Noninterest-earning assets		13,750								15,236

Total assets	$	175,237							$	157,794

Interest-bearing liabilities:
MMDA and statement savings		88,354			141		0.32			81,333			130		0.32
Time deposits		19,399			45		0.46			23,029			54		0.48
FHLB advances		15,496			64		0.83			4,270			9		0.42


Total interest-bearing liabilities		123,249			250		0.41			108,632			193		0.36

Noninterest-bearing liabilities		30,142								27,812
Equity		21,846								21,350

Total liabilities and equity	$	175,237							$	157,794

Net interest income				$	3,319							$	2,927

Net interest rate spread (3)							4.01	%							4.02	%

Net interest margin (4)							4.11	%							4.11	%

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

(1)	Does not include interest on loans in non-accrual status. Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
(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).

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SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Three Months Ended June 30, 2017 and 2016

General. Net earnings for the three months ended June 30, 2017 was $92,000 compared to net earnings of $6,000 for the three months ended June 30, 2016, resulting in an annualized return on average assets of 0.21% for the three months ended June 30, 2017 and 0.02% for the three months ended June 30, 2016. The increase in net earnings was due primarily to an increase in our net interest income slightly offset by decreases in noninterest income and increases noninterest expense.

Net Interest Income. Net interest income increased $214,000, or 14.4%, to $1.7 million for the three months ended June 30, 2017 compared to $1.5 million for the three months ended June 30, 2016. The increase was primarily due to a $252,000 increase in interest income, slightly offset by a $38,000 increase in interest expense. The increase in interest income resulted primarily from an increase in average loans outstanding during the three months ended June 30, 2017 compared to the three months ended June 30, 2016, partially offset by a decrease in our average yield on loans. Our net interest rate spread decreased to 4.02% for the three months ended June 30, 2017 from 4.06% for the same period in 2016, while our net interest margin decreased to 4.12% from 4.13% between the same periods. The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended June 30, 2017 and 2016 was 1.31x.

Interest Income. Interest income for the three months ended June 30, 2017 increased $252,000, or 16.0%, to $1.8 million compared to the three month period ended June 30, 2016. The increase in interest income for the three months ended June 30, 2017 was primarily due to a $28.0 million increase in average loans outstanding during the three months ended June 30, 2017 compared to the three months ended 2016, partially offset by a 24 basis point decrease in our average yield on loans during the same period. Average loans outstanding increased to $144.9 million for the three months ended June 30, 2017, from $116.9 million for the same period in 2016. The average rate on loans decreased to 4.79% for the three months ended June 30, 2017 compared to 5.03% for the three months ended June 30, 2016.

Interest Expense. Interest expense for the three months ended June 30, 2017 increased $38,000, or 40.0% to $134,000 from $96,000 for the same period ended June 30, 2016. The increase in interest expense for the three months ended June 30, 2017 was primarily due to the cost of $17.1 million in average outstanding FHLB advances compared to $3.7 million outstanding during the same period in 2016. The total cost of interest-bearing liabilities for the three months ended June 30, 2017 was 0.43% compared to 0.35% for the three months ended June 30, 2016.

Provision for Loan Losses. We establish an allowance for loan losses by charging amounts to the loan provision at a level required to reflect estimated credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers, among other factors, historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers' ability to repay, estimated value of any underlying collateral, prevailing economic conditions and current risk factors specifically related to each loan type. See "- Critical Accounting Policies -- Allowance for Loan Loss" in our 2016 Form 10-K for a more detailed description of the manner in which the provision for loan losses is established.

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SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Based on management's evaluation of the foregoing factors, we recorded a provision for loan losses of $50,000 for the three months ended June 30, 2017 compared to $45,000 for the three months ended June 30, 2016. The provision for loan losses primarily reflected historical and incurred/probable loan losses, the increase in the size of our loan portfolio as well as the change in the mix of loans, in particular the increase in our commercial real estate loan portfolio. Net recoveries for the three months ended June 30, 2017 were $59,000 compared to net charge-offs of $47,000 for the three months ended June 30, 2016. Nonperforming loans to total loans at June 30, 2017 were 1.03% compared to 1.88% at December 31, 2016. The allowance for loan losses to total loans was 0.71% at June 30, 2017 compared to 0.69% at December 31, 2016.

Management considers the allowance for loan losses at June 30, 2017 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, 2017 decreased $54,000, or 11.1%, to $431,000 compared to $485,000 for the same period in 2016 as a result of decreases in the gains on sales of loans and in other noninterest income, slightly offset by an increase in fees and charges on loans. The decrease in other income was due to the gain on sale of stock invested in a credit union service organization sold in 2016. Management and the Board have continued its practice to retain most mortgage loans in portfolio in order to increase interest income in the long-term. 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 June 30, 2017 increased $10,000, or 0.5%, as compared to the same period in 2016. The largest increases were in data processing services, professional fees and other noninterest expense, partially offset by decreases in salaries and employee benefits, occupancy and equipment and deposit insurance. The increase in data processing was due to associated one-time costs for converting our credit card processing to a new company in 2017. The decrease in salaries and employee benefits was due to an increase in deferred loan origination costs because of the increase in commercial real estate lending volume. The decrease in occupancy and equipment expense was due to the sale of a branch office in December 2016 and the decrease in deposit insurance was due to lower FDIC insurance rates.

Income Taxes. For the three months ended June 30, 2017, we recorded income taxes of $67,000 on a before tax earnings of $159,000. For the three months ended June 30, 2016, we recorded income taxes of $8,000 on before tax earnings of $14,000. Our effective tax rate for the three months ended June 30, 2017 was 42.1% compared to 57.1% for the same time period in 2016.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Six Months Ended June 30, 2017 and 2016

General. Net earnings for the six months ended June 30, 2017 was $216,000 compared to a net loss of $85,000 for the six months ended June 30, 2016, resulting in an annualized return (loss) on average assets of 0.25% for the six months ended June 30, 2017 and (0.11)% for the six months ended June 30, 2016. The increase in net earnings was due primarily to an increase in our net interest income and a decrease in noninterest expense.

Net Interest Income. Net interest income increased $392,000, or 13.4%, to $3.3 million for the six months ended June 30, 2017 compared to $2.9 million for the six months ended June 30, 2016. The increase was primarily due to a $449,000 increase in interest income, partially offset by a $57,000 increase in interest expense. The increase in interest income resulted from an increase in average loans outstanding during the six months ended June 30, 2017 compared to the six months ended June 30, 2016, partially offset by a 26 basis point decrease in our average yield on loans. Our net interest rate spread decreased to 4.01% for the six months ended June 30, 2017 from 4.02% for the same period in 2016, while our net interest margin remained at 4.11% at both June 30, 2017 and June 30, 2016. The ratio of average interest-earning assets to average interest-bearing liabilities for the six months ended June 30, 2017 and 2016 remained at 1.31x.

Interest Income. Interest income for the six months ended June 30, 2017 increased $449,000, or 14.4%, to $3.6 million compared to the six month period ended June 30, 2016. The increase in interest income for the six months ended June 30, 2017 was primarily due to a $26.3 million increase in average loans outstanding during the six months ended June 30, 2017 compared to the six months ended June 30, 2016, partially offset by a 26 basis point decrease in our average yield on loans during the same period. Average loans outstanding increased to $141.5 million for the six months ended June 30, 2017, from $115.3 million for the same period in 2016. The average rate on loans decreased to 4.77% for the six months ended June 30, 2017 compared to 5.03% for the six months ended June 30, 2016.

Interest Expense. Interest expense for the six months ended June 30, 2017 increased $57,000, or 29.5% to $250,000 from $193,000 for the same period ended June 30, 2016. The increase in interest expense for the six months ended June 30, 2017 was primarily due to the cost of $15.5 million in average outstanding FHLB advances compared to $4.3 million outstanding during the same period in 2016. The total cost of interest-bearing liabilities for the six months ended June 30, 2017 was 0.41% compared to 0.36% for the same period in 2016.

Provision for Loan Losses. We recorded a provision for loan losses of $105,000 for the six months ended June 30, 2017 compared to $90,000 for the six months ended June 30, 2016. The provision for loan losses reflected historical and incurred loan losses, the increase in the size of our loan portfolio as well as the change in the mix of loans. Net recoveries for the six months ended June 30, 2017 were $48,000 compared to net charge-offs of $60,000 for the six months ended June 30, 2016.

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SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Six Months Ended June 30, 2017 and 2016, Continued

Noninterest Income. Noninterest income for the six months ended June 30, 2017 remained relatively stable at $903,000 compared to $902,000 for the same period in 2016 primarily as a result of small decreases in fees and service charges on deposit accounts and in other noninterest income, offset by increases in gains on sale of foreclosed assets and in fees and charges on loans. The decrease in other income was due to the gain on sale of stock invested in a credit union service organization sold in 2016. The increase in fees and charges on loans was a result of an increased volume of commercial real estate lending.

Noninterest Expense. Noninterest expense for the six months ended June 30, 2017 decreased $87,000, or 2.3%, to $3.8 million as compared to the same period in 2016. The largest decreases were in salaries and employee benefits, occupancy and equipment, and deposit insurance, partially offset by increases in data processing, professional fees, credit card expense and other noninterest expense. The decrease in salaries and employee benefits was due to an increase in deferred loan origination costs because of the increase in commercial real estate lending volume. The decrease in occupancy and equipment expense was due to the sale of a branch office in December 2016 and the decrease in deposit insurance was due to lower FDIC insurance rates. The increase in data processing and credit card expense was due to converting our credit card processing to a new company in 2017 and the issuance of new credit cards for all customers.

Income Taxes. For the six months ended June 30, 2017, we recorded an income tax expense of $140,000 on before tax earnings of $356,000. For the six months ended June 30, 2016, we recorded an income tax benefit of $24,000 on a before tax loss of $109,000. Our effective tax rate for the six months ended June 30, 2017 was 39.3% compared to an effective tax benefit rate of 22.0% for the same time period in 2016.

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 $6.0 million with a correspondent bank and a $45.2 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At June 30, 2017 the Company had $19.0 million outstanding in FHLB advances that mature in 2017 at a weighted average fixed rate of 1.16%. At December 31, 2016, the Company had $12.8 million outstanding in FHLB advances that mature in 2017 at a weighted average fixed rate of 0.63%.

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.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For the six-months ended June 30, 2017, cash provided by operating activities totaled $1.5 million. Net cash used by investing activities, which consists primarily of disbursements for loan originations, offset by principal collections on loans and proceeds from pay-downs on securities, totaled $14.9 million for the six-months ended June 30, 2017. Net cash provided by financing activities, consisting primarily of the activity in FHLB advances and deposit accounts, was $9.8 million for the six-months ended June 30, 2017.

In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and funds paid out for Company stock repurchases, when and if declared by the Board. 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.

On June 28, 2017, with the approval of the FDIC, the Bank repurchased shares from the Holding Company totaling $2.0 million. The effect of this transaction was to increase cash at the Holding Company and decrease the Holding Company's investment in the Bank. At June 30, 2017, the Company (on an unconsolidated basis) had liquid assets of $2.3 million.

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 six-months ended June 30, 2017, 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 June 30, 2017, is as follows (in thousands):

Unused lines of credit		$	21,838
Commitments to extend credit		$	196

Capital Resources

At June 30, 2017, the Bank exceeded all regulatory capital requirements.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Consistent with our goals to operate a sound and profitable organization, our policy is for Sunshine Community Bank to maintain a "well-capitalized" status under the capital categories of the Bank regulations. At June 30, 2017, Sunshine Community Bank exceeded all regulatory capital requirements to be categorized as well capitalized under applicable regulatory guidelines with a CET1 capital ratio of 12.26% of risk-weighted assets, which is above the required level of 6.5%, a Tier 1 leverage capital level of 9.91% of adjusted total assets, which is above the required level of 5.00%, Tier I capital to risk-weighted assets of 12.26%, which is above the required level of 8.00% and total risk-based capital to risk-weighted assets of 13.03%, which is above the required level of 10.00%.

Management is not aware of any conditions or events 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 June 30, 2017, stockholders' equity at Sunshine Community Bank totaled $19.5 million. Management monitors the capital levels of Sunshine Community Bank to provide for current and future business opportunities and to meet regulatory guidelines for "well-capitalized" institutions.

For a bank 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. If Sunshine Financial was subject to regulatory guidelines for bank holding companies with $1.0 billion or more in assets, at June 30, 2017 Sunshine Financial would have exceeded all regulatory capital requirements.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company provided information about market risk in Item 7A of its 2016 Form 10-K. There have been no material changes in our market risk since our 2016 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 June 30, 2017, 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 June 30, 2017, 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.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

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 June 30, 2017 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 Securities

Nothing to report.

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SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION (continued)

Item 4. Mine Safety Disclosures

Nothing to report.

Item 5. Other Information

Nothing to report.

Item 6. Exhibits

See Exhibit Index.

Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

SIGNATURES

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

	SUNSHINE FINANICAL, INC.


Date: August 10, 2017	By:	/s/ Louis O. Davis, Jr.
		Louis O. Davis, Jr.
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: August 10, 2017	By:	/s/ Scott A. Swain
		Scott A, Swain
		Senior Vice President, Treasurer and
		Chief Financial Officer
		(Principal Financial Officer)

Index

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	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))

10.5	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))

10.6	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))

11.0	Statement re computation of per share earnings (See Note 3 of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in this Form10-Q).

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 - August 10, 2017

Attached files

Sunshine Financial, Inc. Reports