Sunshine Financial 10Q/A 2014 Q3 Quarterly report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

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

For the quarterly period ended September 30, 2014

[ ] 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 xNo ¨

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

At November 13, 2014, there were issued and outstanding 1,157,510 shares of the issuer’s common stock.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A amends and restates the original Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 of Sunshine Financial, Inc. (the “Company”). The purpose of this Amendment No. 1 is to correct the Interactive Data Files "Detail" information for Note 7, Note 8 and the table in Note 10. In the EDGAR version of Note 8, the Weighted Average Exercise Price of $10.75 for Options Granted was changed to $18.25.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Index

		Page Number
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013	2

	Condensed Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)	3

	Condensed Consolidated Statements of Stockholders' Equity for the Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows For the Nine-Month Periods Ended September 30, 2014 and 2013 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements	6-19

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20-31

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	32

Item 4.	Controls and Procedures	32

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Mine Safety Disclosures	33

Item 5	Other Information	33

Item 6.	Exhibits	33

SIGNATURES		34

EXHIBIT INDEX

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands, except per share amounts)

	At September 30, 2014			At December 31, 2013
	(Unaudited)
Assets

Cash and due from banks	$	1,636			620
Interest-bearing deposits with banks		8,991			13,835

Cash and cash equivalents		10,627			14,455

Securities held to maturity (fair value of $26,744 and $25,956)		27,206			26,624
Loans, net of allowance for loan losses of $1,142 and $1,294		102,435			95,479
Premises and equipment, net		4,994			5,107
Federal Home Loan Bank stock, at cost		130			177
Deferred income taxes		2,575			2,556
Accrued interest receivable		350			311
Foreclosed real estate		195			724
Other assets		1,057			1,069

Total assets	$	149,569			146,502

Liabilities and Stockholders’ Equity

Liabilities:
Noninterest-bearing deposit accounts	$	24,748			23,435
Money-market deposit accounts		34,772			33,000
Savings accounts		38,746			37,054
Time deposits		26,801			28,571

Total deposits		125,067			122,060

Official checks		232			364
Advances by borrowers for taxes and insurance		300			1
Other liabilities		502			363

Total liabilities		126,101			122,788

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, 1,157,510 and 1,174,454 shares issued and outstanding at September 30, 2014 and December 31, 2013		11			11
Additional paid in capital		9,467			9,789
Retained earnings		14,678			14,670
Unearned Employee Stock Ownership Plan shares		(688	)		(756	)

Total stockholders' equity		23,468			23,714

Total liabilities and stockholders’ equity	$	149,569			146,502

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

($ in thousands, except per share information)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014			2013
Interest income:
Loans	$	1,347		1,311			3,927			4,008
Securities		145		95			451			252
Other		5		14			18			48

Total interest income		1,497		1,420			4,396			4,308

Interest expense		95		100			282			309

Net interest income		1,402		1,320			4,114			3,999

Provision for loan losses		-		50			100			2

Net interest income after provision for loan losses		1,402		1,270			4,014			3,997

Noninterest income:
Fees and service charges on deposit accounts		396		449			1,213			1,401
Gain on sale of loans		41		(7	)		113			401
Gain on sale of foreclosed real estate		49		126			49			301
Fees and charges on loans		30		25			65			70
Other		3		8			16			155

Total noninterest income		519		601			1,456			2,328

Noninterest expenses:
Salaries and employee benefits		878		851			2,640			2,651
Occupancy and equipment		319		308			923			870
Data processing services		196		198			601			580
Professional fees		142		153			403			549
Federal Deposit Insurance Corporation insurance		34		30			91			91
Advertising and promotion		36		19			87			56
Stationery and supplies		27		14			73			54
Telephone and postage		63		58			187			181
Foreclosed real estate		14		52			36			167
Credit card expense		29		31			98			93
Other		95		85			326			379

Total noninterest expenses		1,833		1,799			5,465			5,671

Earnings before income taxes (benefit)		88		72			5			654

Income taxes (benefit)		26		26			(3	)		253

Net earnings	$	62		46			8			401

Basic earnings per common share	$	0.06		0.04			0.01			0.35

Diluted earnings per common share	$	0.06		0.04			0.01			0.34

Cash dividends per common share	$	-		-			-			-

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Nine Months Ended September 30, 2014 and 2013 (Unaudited)

($ in thousands, except per share amounts)

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

Balance, December 31, 2012		1,234,454		$	12		11,481			14,285		(843	)		24,935

Net earnings (unaudited)		-			-		-			401		-			401

Stock based compensation expense (unaudited)		-			-		58			-		-			58

Repurchase of common stock (unaudited)		(25,700	)		-		(400	)		-		-			(400	)
Common stock allocated to Employee Stock Ownership Plan ("ESOP”) participants (unaudited)		-			-		(23	)		-		65			42

Balance, September 30, 2013 (unaudited)		1,208,754		$	12		11,116			14,686		(778	)		25,036


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

Net earnings (unaudited)		-			-		-			8		-			8

Stock based compensation expense (unaudited)		4,000			-		120			-		-			120

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

Common stock allocated to ESOP participants (unaudited)		-			-		(59	)		-		68			9

Balance, September 30, 2014 (unaudited)		1,157,510		$	11		9,467			14,678		(688	)		23,468

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine-Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net earnings	$	8			401
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		285			406
Provision for loan losses		100			2
Deferred income taxes (benefit)		(19	)		228
Net amortization of premiums/discounts on securities		32			51
Net amortization of deferred loan fees and costs		17			4
Loans originated for sale		(4,573	)		(7,791	)
Proceeds from loans sold		4,378			8,754
Gain on sale of loans		(113	)		(401	)
ESOP compensation expense		9			42
Share-based compensation expense		120			58
(Increase) decrease in accrued interest receivable		(39	)		74
(Increase) decrease in other assets		(34	)		174
Gain on sale of foreclosed real estate		(49	)		(301	)
Write-down of foreclosed real estate		34			28
Amortization of loan servicing rights		46			18
Decrease in official checks		(132	)		(34	)
Net increase in advances by borrowers for taxes and insurance		299			202
Increase in other liabilities		139			109

Net cash provided by operating activities		508			2,024
Cash flows from investing activities:
Purchases of securities held-to-maturity		(3,897	)		(5,540	)
Principal pay-downs on held-to-maturity securities		3,283			2,582
Net (increase) decrease in loans		(6,925	)		940
Net purchases of premises and equipment		(172	)		(2,167	)
Redemption of Federal Home Loan Bank stock		47			41
Proceeds from sale of foreclosed real estate		716			2,321
Capital improvements to foreclosed real estate		(12	)		-

Net cash used in investing activities		(6,960	)		(1,823	)

Cash flows from financing activities:
Net increase in deposits		3,007			2,105
Repurchase of common stock		(383	)		(400	)

Net cash provided by financing activities		2,624			1,705

(Decrease) increase in cash and cash equivalents		(3,828	)		1,906

Cash and cash equivalents at beginning of period		14,455			26,909

Cash and cash equivalents at end of period	$	10,627			28,815

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	-			25

Interest	$	282			309

Noncash transaction-
Transfer from loans to foreclosed real estate	$	160			736

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Basis of Presentation

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

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

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

In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on March 31, 2014 (“2013 Form 10-K”). The results for the three- and nine-month periods ended September 30, 2014 should not be considered as indicative of results for a full year.

2. Recent Accounting Standards Update

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The ASU is effective beginning January 1, 2015. The adoption of ASU 2014-04 is not expected to impact the Company's consolidated financial statements.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

2. Recent Accounting Standards Update, Continued

In June 2014, FASB issued ASU 2014-11, Transfers and Servicing - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ASU 2014-11 requires, among other things, two accounting changes. First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. The adoption of this ASU guidance is not expected to have any impact on the Company's consolidated financial statements.

In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires, among other things, that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The adoption of this ASU guidance is not expected to have any impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-14, “Receivables-Troubled Debt Restructuring by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”. The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim of the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of ASU No. 2014-14 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Recent Regulatory Developments

Basel III Legislation. On July 2, 2013, the Federal Reserve Board ("FRB") approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank. The rules include a new common equity Tier I capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier I capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. In July 2013, the federal regulators approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The federal regulators rules are identical in substance to the final rules issued by the FRB.

The phase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. We are currently evaluating the provisions of the final rules and their expected impact on us.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

3. Earnings Per Share

Earnings per share ("EPS") has been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three- and nine- months ended September 30, 2014 and 2013, the outstanding stock options were considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method. The shares purchased by the Employee Stock Ownership Plan (the "ESOP") are included in the weighted-average shares when they are committed to be released ($ in thousands, except per share amounts):

	2014							2013
				Weighted-		Per				Weighted-		Per
				Average		Share				Average		Share
	Earnings			Shares		Amount		Earnings		Shares		Amount
Three Months Ended September 30:
Basic EPS:
Net earnings		(62	)		1,045,897	$	0.06	$	46		1,156,487	$	0.04
Effect of dilutive securities:
Incremental shares from assumed conversion
of options and restricted stock awards					32,360						19,794
Diluted EPS:
Net earnings	$	(62	)		1,078,257	$	0.06	$	46		1,176,281	$	0.04

Nine Months Ended September 30:
Basic EPS:
Net earnings	$	8			1,043,888	$	0.01	$	401		1,155,993	$	0.35
Effect of dilutive securities:
Incremental shares from assumed conversion
of options and restricted stock awards					32,493						13,189
Diluted EPS:
Net earnings	$	8			1,076,381	$	0.01	$	401		1,169,182	$	0.34

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

4. Securities Held to Maturity

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
At September 30, 2014
Mortgage-backed securities	$	1,720		75		-			1,795
Collateralized mortgage obligations		25,486		47		(584	)		24,949

Total	$	27,206		122		(584	)		26,744

At December 31, 2013
Mortgage-backed securities		2,167		88		-			2,255
Collateralized mortgage obligations		24,457		34		(790	)		23,701

Total	$	26,624		122		(790	)		25,956

There were no securities pledged at September 30, 2014 or December 31, 2013.

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 September 30, 2014:
Collateralized mortgage obligations	$	100	$	11,980	$	484	$	9,539

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

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans

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

	September 30,			December 31,
	2014			2013
Real estate mortgage loans:
One-to four-family	$	49,474			50,629
Lot		4,455			5,293
Commercial real estate		26,148			18,189
Construction		1,502			381

Total real estate loans		81,579			74,492

Commercial loans		549			296

Consumer loans:
Home equity		8,258			8,817
Automobile		3,555			4,000
Credit cards and unsecured		6,598			7,100
Deposit account		562			622
Other		1,002			1,202

Total consumer loans		19,975			21,741

Total loans		102,103			96,529

Add (deduct):
Loans in process		1,574			318
Deferred fees and discounts		(100	)		(74	)
Allowance for losses		(1,142	)		(1,294	)

Total loans, net	$	102,435			95,479

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

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

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

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

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

An analysis of the change in the allowance for loan losses during the three- and nine- month periods ended September 30, 2014 and 2013 follows (in thousands):

	Real Estate Mortgage Loans													Consumer Loans
	One-to Four- Family			Lot			Commercial Real Estate			Constru-ction		Comme- rcial Loans		Home Equity			Auto- mobile			Credit Cards and Unsecured			Deposit Account		Other			Unallo-cated			Total
Three Months Ended September 30, 2014:
Beginning balance	$	470			55			159			1		8		156			22			140			-		50			105			1,166
Provision (credit) for loan loss		14			(9	)		24			2		1		(1	)		19			3			-		1			(54	)		-
Charge-offs		-			-			-			-		-		-			(10	)		(28	)		-		-			-			(38	)
Recoveries		-			-			-			-		-		-			-			14			-		-			-			14
Ending balance	$	484			46			183			3		9		155			31			129			-		51			51			1,142

Three Months Ended September 30, 2013:
Beginning balance	$	629			92			151			1		2		229			12			168			-		87			81			1,452
Provision (credit) for loan loss		17			22			(6	)		-		-		(18	)		(7	)		46			-		(14	)		10			50
Charge-offs		(57	)		(10	)		-			-		-		-			-			(40	)		-		-			-			(107	)
Recoveries		-			-			-			-		-		1			1			7			-		-			-			9
Ending balance	$	589			104			145			1		2		212			6			181			-		73			91			1,404

Nine Months Ended September 30, 2014:
Beginning balance	$	605			93			163			1		5		146			12			187			-		64			18			1,294
Provision (credit) for loan loss		8			(23	)		17			2		4		21			36			(25	)		-		27			33			100
Charge-offs		(129	)		(24	)		-			-		-		(10	)		(17	)		(106	)		-		(40	)		-			(326	)
Recoveries		-			-			-			-		-		1			-			73			-		-			-			74
Ending balance	$	484			46			180			3		9		158			31			129			-		51			51			1,142

Nine Months Ended September 30, 2013:
Beginning balance	$	690			88			78			-		-		343			9			231			-		94			-			1,533
Provision (credit) for loan loss		95			48			67			1		2		(290	)		(6	)		6			-		(12	)		91			2
Charge-offs		(199	)		(32	)		-			-		-		(35	)		(1	)		(104	)		-		(9	)		-			(380	)
Recoveries		3			-			-			-		-		194			4			48			-		-			-			249
Ending balance	$	589			104			145			1		2		212			6			181			-		73			91			1,404

At September 30, 2014:
Individually evaluated for impairment:
Recorded investment	$	3,605			12			-			-		-		263			-			15			-		-			-			3,895
Balance in allowance for loan losses	$	95			-			-			-		-		2			-			2			-		-			-			99
Collectively evaluated for impairment:
Recorded investment	$	45,869			4,443			26,148			1,502		549		7,995			3,555			6,583			562		1,002			-			98,208
Balance in allowance for loan losses	$	389			46			183			3		9		153			31			127			-		51			51			1,043

At December 31, 2013:
Individually evaluated for impairment:
Recorded investment	$	2,935			-			-			-		-		281			-			47			-		-			-			3,263
Balance in allowance for loan losses	$	68			-			-			-		-		3			-			3			-		-			-			74
Collectively evaluated for impairment:
Recorded investment	$	47,694			5,293			18,189			381		296		8,536			4,000			7,053			622		1,202			-			93,266
Balance in allowance for loan losses	$	537			93			163			1		5		143			12			184			-		64			18			1,220

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

Credit Risk
Profile by Internally	One-to Four-				Commercial Real		Constru-		Comme-		Home		Auto-		Credit Cards and		Deposit
Assigned Grade:	Family		Lot		Estate		ction		rcial		Equity		mobile		Unsecured		Accounts		Other		Total
At September 30, 2014:
Grade:
Pass	$	44,605		4,398		26,148		1,502		549		7,782		3,535		6,547		562		978		96,606
Special mention		502		26		-		-		-		100		15		4		-		-		647
Substandard		4,367		31		-		-		-		376		5		47		-		24		4,850
Doubtful		-		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-		-

Total	$	49,474		4,455		26,148		1,502		549		8,258		3,555		6,598		562		1,002		102,103

At December 31, 2013:
Grade:
Pass		46,775		5,293		18,189		381		296		8,464		3,958		7,029		622		1,008		92,015
Special mention		483		-		-		-		-		75		4		13		-		28		603
Substandard		3,371		-		-		-		-		278		38		58		-		166		3,911
Doubtful		-		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-		-

Total	$	50,629		5,293		18,189		381		296		8,817		4,000		7,100		622		1,202		96,529

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

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

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

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

	Accruing Loans
					90 Days
		30-59		60-89	and		Total
	Days		Days		Greater		Past				Nonaccrual		Total
	Past Due		Past Due		Past Due		Due		Current		Loans		Loans
At September 30, 2014:
Real estate mortgage loans:
One-to four-family	$	1,266		138		-		1,404		46,643		1,427		49,474
Lot		34		26		-		60		4,364		31		4,455
Commercial real estate		-		-		-		-		26,148		-		26,148
Construction		-		-		-		-		1,502		-		1,502
Commercial loans		-		-		-		-		549		-		549
Consumer loans:
Home equity		174		55		-		229		7,823		206		8,258
Automobile		-		15		-		15		3,535		5		3,555
Credit cards and unsecured		86		5		-		91		6,473		34		6,598
Deposit account		-		-		-		-		562		-		562
Other		-		-		-		-		979		23		1,002

Total	$	1,560		239		-		1,799		98,578		1,726		102,103

At December 31, 2013:
Real estate mortgage loans:
One-to four-family		912		494		-		1,406		48,226		997		50,629
Lot		-		35		-		35		5,238		20		5,293
Commercial real estate		-		-		-		-		18,189		-		18,189
Construction		-		-		-		-		381		-		381
Commercial loans		-		-		-		-		296		-		296
Consumer loans:
Home equity		123		72		-		195		8,553		69		8,817
Automobile		2		4		-		6		3,956		38		4,000
Credit cards and unsecured		63		13		-		76		7,011		13		7,100
Deposit account		-		-		-		-		622		-		622
Other		130		29		-		159		877		166		1,202

Total	$	1,230		647		-		1,877		93,349		1,303		96,529

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

	With No Related
	Allowance Recorded				With an Allowance Recorded						Total
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
At September 30, 2014:
Real estate loans-
One-to four-family	$	1,441		1,491		2,164		2,164		95		3,605		3,655		95
Lot		12		12		-		-		-		12		12		-
Consumer loans:
Home equity		160		188		103		103		2		263		291		2
Credit card and unsecured		-		-		15		15		2		15		15		2

	$	1,613		1,691		2,282		2,282		99		3,895		3,973		99

At December 31, 2013:
Real estate loans-
One-to four-family		1,468		1,578		1,467		1,467		68		2,935		3,045		68
Consumer loans:																-
Home equity		236		265		45		45		3		281		310		3
Credit card and unsecured		31		37		16		16		3		47		53		3

	$	1,735		1,880		1,528		1,528		74		3,263		3,408		74

The average net investment in impaired loans and interest income recognized and received on impaired loans during the three- and nine- month periods ended September 30, 2014 and 2013 was as follows (in thousands):

	Three Months Ended September 30,
	2014						2013
	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	$	3,695	$	33	$	35	$	3,063	$	35	$	41
Lot loans	$	12	$	-	$	-	$	-	$	-	$	-
Consumer loans:
Home equity	$	291	$	2	$	2	$	247	$	3	$	3
Credit card and unsecured	$	15	$	-	$	-	$	32	$	-	$	-

Total	$	4,013	$	35	$	37	$	3,342	$	38	$	44

	Nine Months Ended September 30,
	2014						2013
	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	$	2,896	$	100	$	101	$	3,207	$	53	$	57
Lot loans	$	4	$	-	$	-	$	11	$	-	$	-
Consumer loans:
Home equity	$	280	$	6	$	6	$	264	$	4	$	5
Credit card and unsecured	$	45	$	-	$	-	$	34	$	7	$	8

Total	$	3,225	$	106	$	106	$	3,516	$	57	$	62

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

The Company had 5 troubled debt restructurings during the three- and nine-months ended September 30, 2014. Troubled debt restructurings for the three- and nine-month periods ended September 30, 2014 and 2013 was as follows (dollars in thousands):

Outstanding Recorded Investment

Number of

Pre-

Post-

Contracts

Modification

For the Three Months Ended September 30, 2014:

Real estate mortgage loans:

One-to four-family-

Modified interest rates

1,083

1,016

For the Three Months Ended September 30, 2013:

Real estate mortgage loans:

One-to four-family-

Modified interest rates

696

Outstanding Recorded Investment

Number of

Pre-

Post-

Contracts

Modification

For the Nine Months Ended September 30, 2014:

Real estate mortgage loans:

One-to four-family-

Modified interest rates

1,083

1,016

For the Nine Months Ended September 30, 2013:

Real estate mortgage loans:

One-to four-family-

Modified interest rates

696

The Company had no troubled debt restructurings which were restructured during the three or nine months ended September 30, 2014 that subsequently defaulted.

6. Fair Value of Financial Instruments

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

	At September 30, 2014						At December 31, 2013
	Carrying		Fair				Carrying		Fair
	Amount		Value		Level		Amount		Value		Level
Financial assets:
Cash and cash equivalents	$	10,627		10,627		1		14,455		14,455		1
Securities held to maturity		27,206		26,744		2		26,624		25,956		2
Loans, net		102,435		102,589		3		95,479		95,617		3
Federal Home Loan Bank stock		130		130		3		177		177		3
Accrued interest receivable		312		312		3		311		311		3

Financial liabilities:
Deposits		125,067		121,094		3		122,060		118,443		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 Notes to Consolidated Financial Statements included in the Company's 2013 Form 10-K.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

7. Employee Stock Ownership Plan

Effective April 5, 2011, the Holding Company established an ESOP which acquired 8% of the total number of shares of common stock sold during the Company's initial public offering. A total of 98,756 shares were acquired in exchange for a $988,000 note payable to the Holding Company from the ESOP. The loan is being repaid principally by the Bank through contributions to the ESOP over a p eriod of 10 years. The note bears interest at a fixed rate of 4.25%, is payable in annual installments and is due in 2021. The employer expense was $2,000 and $11,000 for the three-month periods ended September 30, 2014 and September 30, 2013, respectively. The employer expense was $9,000 and $42,000 for the nine-month periods ended September 30, 2014 and September 30, 2013, respectively.

8. 2012 Equity Incentive Plan

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

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

Outstanding at December 31, 2012		90,000		$	10.75		-		-
Forfeited		(8,500	)		10.75

Outstanding at September 30, 2013		81,500		$	10.75		-		-

Outstanding at December 31, 2013		87,500			11.23		-		-
Granted		5,000			18.25
Forfeited		(5,000	)		10.75		-		-

Outstanding at September 30, 2014		86,000		$	11.69	8.34 years			-

Exercisable at September 30, 2014		10,000		$	10.75	8.20 years			75,000

At September 30, 2014, there was approximately $204,000 of unrecognized compensation expense related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted average period of forty-nine months. The total fair value of shares vesting and recognized as compensation expense was $13,000 and $37,000 for the three- and nine-months ended September 30, 2014 and $24,000 and $57,000 for the three- and nine-months ended September 30, 2013. The Company recognized a tax benefit of $5,000 and $14,000 for the three- and nine- months ended September 30, 2014. The Company recognized a tax benefit of $9,000 and $21,000 for the three- and nine- months ended September 30, 2013.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

8. 2012 Equity Incentive Plan, continued

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 2014:

	2014

Risk-free interest rate		2.22	%
Dividend yield		-
Expected stock volatility		9.92	%
Expected life in years		6.5
Per share grant-date fair value of options issued
during the period	$	3.19

The Plan also authorized the grant of up to 49,378 restricted common shares. The restricted shares awarded vest equally over five years from the date of grant. Restricted shares are forfeited if employment is terminated before the restriction period expires. The record holder of the Company's restricted shares of common stock possesses all the rights of a holder of the Company's common stock, including the right to receive dividends on and to vote the restricted shares. The restricted shares may not be sold, transferred, pledged, assigned, encumbered, or otherwise alienated or hypothecated until they become fully vested and transferable in accordance with the agreements. Compensation expense for restricted stock totaled $36,000 and $83,000 for the three- and nine-months ended September 30, 2014, respectively. Compensation expense for restricted stock totaled $24,000 for the three- and nine-months ended September 30, 2013. The Company recognized a tax benefit of $14,000 and $31,000 for the three- and nine- months ended September 30, 2014. The Company recognized a tax benefit of $9,000 for the three- and nine- months ended September 30, 2013.

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

			Weighted-
			Average
	Number of		Grant-Date
	Shares		Fair Value
Outstanding at December 31, 2012		-	$	-
Issued November 19, 2013		42,500		16.75

Outstanding at December 31, 2013		42,500		16.75
Issued September 30, 2014		4,000		18.25

Outstanding at September 30, 2014		46,500		16.88

Total unrecognized compensation cost related to these nonvested restricted stock amounted to approximately $678,000 at September 30, 2014. This cost is expected to be recognized monthly over the related vesting period using the straight-line method through August 2019.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

9. 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 at the dates indicated are as follows (in thousands):

	Fair Value		Level 1		Level 2		Level 3		Total Losses		Losses Recorded During the Period
At September 30, 2014:
One-to four-family	$	3,667		-		-		3,667		228		49
Home equity		261		-		-		261		31		-
Credit cards and unsecured		15		-		-		15		9		-

Total	$	3,943		-		-		3,943		268		49

At December 31, 2013:
One-to four-family		2,866		-		-		2,866		179		128
Home equity		278		-		-		278		31		8
Credit cards and unsecured		45		-		-		45		9		3

Total	$	3,189		-		-		3,189		219		139

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 at the dates indicated 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 September 30, 2014:

Foreclosed real estate

195

At December 31, 2013:

Foreclosed real estate

724

10. Regulatory Matters

The Bank is required to maintain certain minimum regulatory capital requirements. The following is a summary at September 30, 2014 of the regulatory capital requirements and the Bank's capital on a percentage basis:

Tier I capital to adjusted total assets	12.46	%

Tier I capital to risk-weighted assets	18.87	%

Total capital to risk-weighted assets	20.05	%

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations

Forward-Looking Statements

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

·	statements of our goals, intentions and expectations;

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

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

·	estimates of our risks and future costs and benefits.

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

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

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

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

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

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

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

·	legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Act, 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;

·	increases in premiums for deposit insurance;

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

·	our ability to control operating costs and expenses;

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

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

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

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

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

·	costs and effects of litigation, including settlements and judgments;

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

·	increased competitive pressures among financial services companies;

·	changes in consumer spending, borrowing and savings habits;

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

·	our ability to pay dividends on our common stock;

·	adverse changes in the securities markets;

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

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

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this report and our Form 10-K for the year ended December 31, 2013 filed on March 28, 2014 ("2013 Form 10-K") and our other reports filed with the SEC.

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

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

General

Sunshine Financial is the holding company for its wholly owned subsidiary, Sunshine Savings Bank. Sunshine Savings Bank was originally chartered as a credit union in 1952 as Sunshine State Credit Union to serve state government employees in the metropolitan Tallahassee area. On July 1, 2007, we converted from a state-chartered credit union known as Sunshine State Credit Union to a federal mutual savings bank known as Sunshine Savings Bank, and in 2009 reorganized into the non-stock mutual holding company structure. On April 5, 2011, Sunshine Financial completed a public offering as part of Sunshine Saving Bank's conversion and reorganization from a non-stock mutual holding company to a stock holding company structure. References to we, us and our throughout this document refer to Sunshine Financial and Sunshine Savings Bank, as the context requires.

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

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

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

Critical Accounting Policies

There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

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 September 30, 2014 (in thousands):

	Contract
	Amount

Unused lines of credit	$	14,951

Commitments to extend credit	$	341

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Liquidity and Capital Resources

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, and proceeds from maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At September 30, 2014, we had the capacity to borrow approximately $14.8 million from the Federal Home Loan Bank of Atlanta. We also have lines of credit at one financial institution that would allow us to borrow up to $2.5 million at September 30, 2014.

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

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $0.5 million and $2.0 million for the nine-months ended September 30, 2014 and 2013, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from pay-downs on securities, was $7.0 million and $1.8 million for nine-months ended September 30, 2014 and 2013, respectively. During the nine-months ended September 30, 2014 and 2013, we purchased $3.9 million and $5.5 million, respectively, in securities held to maturity. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, was $2.6 million for the nine-months ended September 30, 2014 and $1.7 million for the nine-months ended September 30, 2013.

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.

At September 30, 2014, the Bank exceeded all regulatory capital requirements with a Tier 1 leverage capital level of 12.46% of adjusted total assets, which is above the required level of 5.00%; Tier I capital to risk-weighted assets of 18.87% of risk-weighted assets, which is above the required level of 6% and total risk-based capital of 20.05% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Bank was categorized as well-capitalized at September 30, 2014. Management is not aware of any conditions or events since the most recent notification that would change our category. For additional information see Note 10 of the Notes to Unaudited Condensed Consolidated Financial Statements contained in “Item 1, Financial Statements.”

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of Financial Condition at September 30, 2014 and December 31, 2013

General. Total assets increased $3.1 million, or 2.1%, to $149.6 million at September 30, 2014 from $146.5 million at December 31, 2013. The increase in total assets was due primarily to increases in net loans and securities held to maturity partially offset by reductions in cash and cash equivalents. Our net loans increased $7.0 million, or 7.3%, and securities held to maturity increased $0.6 million, or 2.2%, since December 31, 2013. The net increase in assets was funded primarily by a $3.0 million, or 2.5%, increase in deposits from December 31, 2013 to September 30, 2014.

Loans. Our net loan portfolio increased $7.0 million, to $102.4 million at September 30, 2014 from $95.5 million at December 31, 2013. The increase in loans was due to a $7.9 million, or 43.8%, increase in commercial real estate loans, a $1.1 million increase in single family construction loans, as well as a $0.3 million increase in commercial business loans, which is consistent with our strategy to originate commercial loans and to diversify our portfolio. The increases in the aforementioned loans were partially offset by a $1.2 million decrease in one- to four-family loans, a $0.8 million decrease in lot loans, and a $1.8 million decrease in consumer loans. We originate and sell one- to four-family real estate mortgage loans to Freddie Mac and Crescent Mortgage to generate additional income. For the nine-months ended September 30, 2014, we originated $4.6 million of one- to four-family mortgage loans for sale, and $4.3 million were sold at a gain on sale of $113,000.

Allowance for Loan Losses. Our allowance for loan losses at September 30, 2014 was $1.1 million, or 1.12% of loans, compared to $1.3 million, or 1.34% of loans, at December 31, 2013. Nonperforming loans increased to $1.7 million at September 30, 2014 from $1.3 million at December 31, 2013 primarily due to an increase of three one- to four- family real estate loans. Nonperforming loans to loans increased to 1.69% at September 30, 2014 from 1.35% at December 31, 2013. Loans on nonaccrual which were less than ninety days past due totaled $291,000 at September 30, 2014 compared to $457,000 million at December 31, 2013.

Deposits. Total deposits increased $3.0 million, or 2.4%, to $125.1 million at September 30, 2014 from $122.1 million at December 31, 2013. This increase was due to increases in noninterest bearing deposits, money market accounts and savings accounts, partially offset by decreases in time deposits.

Equity. Total stockholders' equity decreased $246,000 to $23.5 million at September 30, 2014. This decrease was primarily due to the repurchase of 20,944 shares of common stock at an average price of $18.29 per share for a total cost of $383,000 during the nine-months ended September 30, 2014, which were partially offset by stock-based compensation of $120,000 and net earnings of $8,000.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Results of Operations

The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) interest-rate spread; and (v) net interest margin. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances.

	Three Months Ended September 30,
	2014								2013
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividend		Average Yield/ Rate
						($ in thousands)
Interest-earning assets:
Loans (1)	$	100,164		$	1,347		5.38	%	$	94,455		$	1,311		5.55	%
Securities held to maturity		27,858			145		2.08			18,022			95		2.11
Other interest-earning assets (2)		7,463			5		0.27			23,127			14		0.24

Total interest-earning assets		135,485			1,497		4.42			135,604			1,420		4.19

Noninterest-earning assets		11,245								11,845

Total assets	$	146,730							$	147,449

Interest-bearing liabilities:
MMDA and statement savings		73,438			61		0.33			69,679			61		0.35
Time deposits		27,070			34		0.50			30,359			39		0.51

Total interest-bearing liabilities		100,508			95		0.38			100,038			100		0.40

Noninterest-bearing liabilities		22,853								22,144
Equity		23,369								25,267

Total liabilities and equity	$	146,730							$	147,449

Net interest income				$	1,402							$	1,320

Net interest rate spread (3)							4.04	%							3.79	%

Net interest margin (4)							4.14	%							3.89	%

Ratio of average interest-earning assets
to average interest-bearing liabilities		1.35	x							1.36	x

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

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

	Nine Months Ended September 30,
	2014								2013
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividend		Average Yield/ Rate
						($ in thousands)
Interest-earning assets:
Loans (1)	$	97,828		$	3,927		5.35	%	$	94,280		$	4,008		5.67	%
Securities held to maturity		28,430			451		2.12			15,865			252		2.12
Other interest-earning assets (2)		8,721			18		0.27			25,476			48		0.25

Total interest-earning assets		134,979			4,396		4.34			135,621			4,308		4.24

Noninterest-earning assets		11,401								11,090

Total assets	$	146,380							$	146,711

Interest-bearing liabilities:
MMDA and statement savings		72,719			182		0.33			68,621			184		0.36
Time deposits		27,658			100		0.48			30,624			125		0.54

Total interest-bearing liabilities		100,377			282		0.37			99,245			309		0.42

Noninterest-bearing liabilities		22,645								22,359
Equity		23,358								25,107

Total liabilities and equity	$	146,380							$	146,711

Net interest income				$	4,114							$	3,999

Net interest rate spread (3)							3.97	%							3.82	%

Net interest margin (4)							4.06	%							3.93	%

Ratio of average interest-earning assets
to average interest-bearing liabilities		1.34	x							1.37	x

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

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Three Months Ended September 30, 2014 and 2013

General. Net earnings for the three months ended September 30, 2014 was $62,000 compared to net earnings of $46,000 for the three months ended September 30, 2013, resulting in an annualized return on average assets of 0.17% for the three months ended September 30, 2014 and 0.12% for the three months ended September 30, 2013. The increase in net earnings was due primarily to an increase in net interest income, and a decrease in the provision for loan loss, partially offset by a decrease in noninterest income and an increase in our noninterest expenses.

Net Interest Income. Net interest income increased $82,000, or 6.2%, to $1.4 million for the three months ended September 30, 2014 from $1.3 million for the same period in 2013, primarily due to the $9.8 million increase in average balance of securities held to maturity earning an average yield of 2.08% and a $5.7 million increase in the average balance of loans earning an average yield of 5.38%, partially offset by a $15.7 million decrease in average other interest-earning assets earning an average yield of 0.27%and a 17 basis point decline in the average yield on loans. Our average cost of funds declined to 0.38% for the period ended September 30, 2014, from 0.40% for the same period in 2013. Our net interest rate spread increased to 4.04% for the three months ended September 30, 2014 from 3.79% for the same period in 2013, while our net interest margin increased to 4.14% at September 30, 2014 from 3.89% at September 30, 2013. The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended September 30, 2014 decreased to 1.35x, from 1.36x for the three months ended September 30, 2013.

Interest Income. Interest income for the three months ended September 30, 2014 increased $77,000, or 5.4%, to $1.5 million from $1.4 million for the same period ended September 30, 2013. The increase in interest income for the three months ended September 30, 2014 was primarily due to higher average balances of securities held to maturity and loans receivable, partially offset by lower yields earned on loans. The average balance of securities held to maturity increased to $27.8 million for the three months ended September 30, 2014 compared to $18.0 million for the three months ended September 30, 2013. The average balance of loans increased to $100.2 million for the three months ended September 30, 2014 compared to $94.5 million for the three months ended September 30, 2013. The average yield on loans decreased to 5.38% for the three months ended September 30, 2014 compared to 5.55% for the three months ended September 30, 2013.

Interest Expense. Interest expense for the three months ended September 30, 2014 was $95,000 compared to $100,000 for the same period in 2013, a decrease of $5,000 or 5.0%. The decrease was primarily the result of decreases in both the average balance and the average rate paid on time deposits, partially offset by an increase the average balance of lower costing money market and savings accounts. The average balance of time deposits decreased $3.3 million to $27.1 million for the three month period ended September 30, 2014 from $30.4 million for the same period in 2013 and the average rate paid on time deposits decreased to 0.50% from 0.51%, respectively. The average balance of money market and savings accounts increased $3.8 million to $73.4 million for the three month period ended September 30, 2014 from $69.7 million for the same period in 2013 and the average rate paid on these deposits decreased to 0.33% from 0.35%, respectively. The total cost of funds for the three months ended September 30, 2014 decreased to 0.38% from 0.40% for the three months ended September 30, 2013.

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended September 30, 2014 compared to a $50,000 provision for the three months ended September 30, 2013. The provision for loan losses reflected historical and expected future loan losses. Net charge-offs for the three months ended September 30, 2014 were $24,000 compared to a net charge-offs of $98,000 for the three months ended September 30, 2013. Nonperforming loans to net loans at September 30, 2014 was 1.69% compared to 1.67% at September 30, 2013. The allowance for loan losses to net loans was 1.12% at September 30, 2014 compared to 1.34% at December 31, 2013 and 1.49% at September 30, 2013.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Three Months Ended September 30, 2014 and 2013, Continued

Management considers the allowance for loan losses at September 30, 2014 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 September 30, 2014 decreased $82,000, or 13.6%, to $519,000 compared to $601,000 for the same period in 2013. The gain on sale of foreclosed real estate decreased $77,000 and fees and service charges on deposit accounts decreased $53,000 for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. There was a $49,000 gain on sale of foreclosed real estate during the three months ended September 30, 2014 compared to a gain of $126,000 for the three months ended September 30, 2013. The primary cause for a decrease in fees and service charges on deposit accounts was a decrease in income from non-sufficient fund charges and debit card interchange fee income. These decreases in noninterest income were offset somewhat by a $48,000 increase in gain on the sale of loans as these volumes increased over the same time period in 2013.

Noninterest Expense. Noninterest expense for the three months ended September 30, 2014 increased $34,000, or 1.9%, to $1,833,000 compared to $1,799,000 for the same period in 2013. The largest increase was in salaries and employee benefits while the largest decrease was foreclosed real estate expense. The increase in salaries and employee benefits was due to restricted stock award costs in 2014. The decrease in foreclosed assets expense was primarily due to decreases in the volume of foreclosures during the three months ended September 30, 2014 and related costs and write-downs as compared to the same period last year.

Income Taxes. For the three months ended September 30, 2014, we recorded income taxes of $26,000 on earnings before income taxes of $88,000. For the three months ended September 30, 2013, we recorded income taxes of $26,000 on earnings before income taxes of $72,000. Our effective tax rate for the three months ended September 30, 2014 was 29.6% compared to 36.1% for the same time period in 2013.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Nine Months Ended September 30, 2014 and 2013

General. Net earnings for the nine months ended September 30, 2014 was $8,000 compared to net earnings of $401,000 for the nine months ended September 30, 2013, resulting in an annualized return on average assets of 0.01% for the nine months ended September 30, 2014 and 0.36 % for the nine months ended September 30, 2013. The decrease in net earnings was due primarily to a decrease in noninterest income, an increase in our provision for loan loss, partially offset by a decrease in noninterest expense and an increase in net interest income.

Net Interest Income. Net interest income increased $115,000, or 2.9%, to $ 4.1 million for the nine months ended September 30, 2014 from $4.0 million for the same period in 2013, primarily due to the $12.6 million increase in average balance of securities held to maturity earning an average yield of 2.12% and a $3.5 million increase in the average balance of loans earning an average yield of 5.35%, partially offset bythe $16.8 million decrease in the average balance of other interest-earning assets earning an average yield of 0.27% and a 32 basis point decline in the average yield on loans. Our average cost of funds declined to 0.37% for the nine month period ended September 30, 2014, from 0.42% for the same period in 2013. Our net interest rate spread increased to 3.97% for the nine months ended September 30, 2014 from 3.82% for the same period in 2013, while our net interest margin increased to 4.06% at September 30, 2014 from 3.93% at September 30, 2013. The ratio of average interest-earning assets to average interest-bearing liabilities for the nine months ended September 30, 2014 decreased to 1.34, from 1.37 for the nine months ended September 30, 2013.

Interest Income. Interest income for the nine months ended September 30, 2014 increased $88,000, or 2.0%, to $4,396,000 from $4,308,000 for the same period ended September 30, 2013. The increase in interest income for the nine months ended September 30, 2014 was primarily due to a higher average balance of securities held to maturity and loans, partially offset by lower rates on loans. The average balance of securities held to maturity increased to $28.4 million for the nine months ended September 30, 2014 compared to $15.9 million for the nine months ended September 30, 2013. The average balance of loans increased to $97.8 million for the nine months ended September 30, 2014 compared to $94.3 million for the nine months ended September 30, 2013. The average rate on loans decreased to 5.35% for the nine months ended September 30, 2014 compared to 5.67% for the nine months ended September 30, 2013.

Interest Expense. Interest expense for the nine months ended September 30, 2014 was $282,000 compared to $309,000 for the same period in 2013, a decrease of $27,000 or 8.7%. The decrease was primarily the result of a decrease in both the average balance and the average rate paid on time deposits. The average balance of time deposits decreased to $27.6 million for the nine month period ended September 30, 2014 from $30.6 million for the same period in 2013 and the average rate paid on time deposit decreased to 0.48% from 0.54%. This decrease was partially offset by a $4.1 million increase the average balance of lower costing money market and savings accounts The total average cost of funds for the nine months ended September 30, 2014 decreased to 0.37% from 0.42% for the nine months ended September 30, 2013.

Provision for Loan Losses. We recorded provision for loan losses of $100,000 for the nine months ended September 30, 2014 and $2,000 for the same period in 2013 due to higher loan balances and higher net charged off loans. Net charge-offs for the nine months ended September 30, 2014 were $252,000 compared to $131,000 for the nine months ended September 30, 2013.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Comparison of the Nine Months Ended September 30, 2014 and 2013, Continued

Noninterest Income. Noninterest income for the nine months ended September 30, 2014 decreased $872,000, or 37.5%, to $1.5 million compared to $2.3 million for the same period in 2013. The gain on sale of loans decreased $288,000, other income decreased $139,000, the gain on sale of foreclosed assets decreased $252,000 and fees and service charges on deposit accounts decreased $188,000 for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013. The primary cause for the decrease in the gain on sale of loans was the initial recording of a mortgage servicing asset for loans serviced for FHLMC in June 2013 and decreases in the volume of loans sold to FHLMC due to an increase in mortgage interest rates which reduced refinancing activity in 2014. Gain on the sale of foreclosed real estate decreased $252,000 as there were only two sales during the nine months ended September 30, 2014 due to the reduction in real estate owned. Other income decreased $139,000 due to a one time recovery of a previously written off asset during the nine months ended September 30, 2013. Fees and service charges on deposit accounts also decreased $188,000 for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013. The primary cause for the decrease in fees from deposit accounts was a decrease in income from non-sufficient fund charges and debit card interchange fee income.

Noninterest Expense. Noninterest expense for the nine months ended September 30, 2014 was $5.5 million compared to $5.7 million for the same period in 2013, a decrease of $206,000 or 3.6%. The largest decrease occurred in professional fees which decreased $146,000, or 26.6%, to $403,000 compared to $549,000 for the same period in 2013. The decrease in professional fees expense was due to a decrease in legal fees associated with foreclosed real estate. In addition, foreclosed real estate expense decreased $131,000 due to a lower number of foreclosures.

Income Taxes. For the nine months ended September 30, 2014, we recorded an income tax benefit of $3,000 on earnings before income tax benefit of $5,000 due to stock based compensation expense. For the nine months ended September 30, 2013, we recorded income taxes of $253,000 on earnings before income taxes of $654,000. Our effective tax rate for the nine months ended September 30, 2014 was (60.0)% compared to 38.7% for the same time period in 2013.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company provided information about market risk in Item 7A of its 2013 Form 10-K. There have been no material changes in our market risk since our 2013 Form 10-K.

Item 4. Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of September 30, 2014, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of September 30, 2014, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not required for smaller reporting companies.

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

Nothing to report.

Item 3. Defaults Upon Senior Securities

Nothing to report.

Item 4. Mine Safety Disclosures

Nothing to report.

Item 5. Other Information

Nothing to report.

Item 6. Exhibits

See Exhibit Index

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

SIGNATURES

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

	SUNSHINE FINANICAL, INC.


Date: November 14, 2014	By:	/s/ Louis O. Davis, Jr.
		Louis O. Davis, Jr.
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: November 14, 2014	By:	/s/ Scott A. Swain
		Scott A, Swain
		Senior Vice President, Treasurer and
		Chief Financial Officer
		(Principal Financial Officer)

EXHIBIT INDEX

Exhibits:
3.1	Articles of Incorporation of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
3.2	Bylaws, as amended, of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 28, 2013 (File No. 000-54280))
4.0	Form of Common Stock Certificate of Sunshine Financial, Inc. (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.1	Employment Agreement by and between Sunshine Savings Bank and Louis O Davis, Jr. (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.2	Form of Change of Control Agreement by and between Sunshine Financial, Inc. and Louis O. Davis Jr. (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.3	Form of Change of Control Agreement by and between Sunshine Financial, Inc. and each of Brian P. Baggett and Scott A. Swain (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-169555))
10.4	Director Fee Arrangements (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (File No. 000-54280))
10.5	Sunshine Financial, Inc. 2012 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement filed on Schedule 14A on April 20, 2012 (File No. 000-54280))
10.6	Forms of Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Agreements under the 2012 Equity Incentive Plan (incorporated by reference to the Exhibits to the Registrant's Registration Statement on Form S-8 filed with the SEC on September 29, 2012 (File No. 333-182450))
10.7	Commercial Contract for the acquisition of property located at 3641 Coolidge Ct., Tallahassee, FL. (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 20, 2013 (File No. 000-54280))
10.8	Commercial Contract for the acquisition of property located at 503 Appleyard Dr., Tallahassee, FL. (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 20, 2013 (File No. 000-54280))
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.0	Section 1350 Certification
101	Interactive Data Files *

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

Sunshine Financial Inactive 10-Q/A2014 Q3 Quarterly report (amended)