PINX:SSNF Sunshine Financial Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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• 10-Q • EX-10.5 • EX-31.1 • EX-31.2 • EX-32

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, 2012

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

For the transition period from _______ to ________

Commission file number: 000-54280

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 August 14, 2012, there were issued and outstanding 1,234,454 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, 2012 (Unaudited) and December 31, 2011	2

	Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2012 and 2011 (Unaudited)	3

	Condensed Consolidated Statements of Stockholders' Equity for the Six-Month Periods Ended June 30, 2012 and 2011 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows For the Six-Month Periods Ended June 30, 2012 and 2011 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements	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	35

Item 4.	Controls and Procedures	35

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

SIGNATURES		37

EXHIBIT INDEX

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(In thousands, except share information)

	At June 30, 2012			At December 31, 2011
	(Unaudited)
Assets

Cash and due from banks	$	875			2,053
Interest-bearing deposits with banks		2,327			6,546
Federal funds sold		30,785			16,456

Cash and cash equivalents		33,987			25,055

Securities held to maturity (fair value of $8,376 and $10,088)		8,125			9,835
Loans, net of allowance for loan losses of $1,467 and $1,329		94,464			102,002
Premises and equipment, net		3,509			3,623
Federal Home Loan Bank stock, at cost		225			247
Deferred income taxes		2,736			2,364
Accrued interest receivable		406			454
Foreclosed real estate		2,394			743
Other assets		1,462			1,437

Total assets	$	147,308			145,760

Liabilities and Stockholders’ Equity

Liabilities:
Noninterest-bearing deposit accounts		22,980			21,827
Money-market deposit accounts		29,089			27,028
Savings accounts		35,923			34,271
Time deposits		33,435			36,290

Total deposits		121,427			119,416

Official checks		494			572
Advances by borrowers for taxes and insurance		172			21
Other liabilities		416			366

Total liabilities		122,509			120,375

Stockholders' equity:
Common stock, $.01 par value, 6,000,000 shares authorized, 1,234,454 shares issued and outstanding at June 30, 2012 and December 31, 2011		12			12
Additional paid in capital		11,485			11,487
Retained earnings		14,187			14,813
Unearned Employee Stock Ownership Plan shares		(885	)		(927	)

Total stockholders' equity		24,799			25,385

Total liabilities and stockholders’ equity	$	147,308			145,760

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 June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Interest income:
Loans	$	1,403			1,686		2,864			3,393
Securities, held to maturity		53			72		115			109
Other		18			12		30			22

Total interest income		1,474			1,770		3,009			3,524

Interest expense-
Deposit accounts		147			252		312			555

Net interest income		1,327			1,518		2,697			2,969

Provision for loan losses		955			225		1,180			450

Net interest income after provision for loan losses		372			1,293		1,517			2,519

Noninterest income:
Fees and service charges on deposit accounts		533			565		1,040			1,109
Fees and charges on loans		97			26		169			48
Other		(12	)		6		6			22

Total noninterest income		618			597		1,215			1,179

Noninterest expenses:
Salaries and employee benefits		882			866		1,783			1,758
Occupancy and equipment		287			271		556			540
Data processing services		195			181		377			360
Professional fees		193			139		355			277
FDIC insurance		29			36		58			83
Advertising and promotion		20			18		37			32
Stationary and supplies		27			11		46			28
Other		279			259		518			498

Total noninterest expenses		1,912			1,781		3,730			3,576

Earnings (loss) before income taxes		(922	)		109		(998	)		122

Income taxes (benefit)		(339	)		39		(372	)		44

Net (loss) earnings	$	(583	)		70		(626	)		78

Basic (loss) earnings per common share	$	(0.47	)		0.06		(0.51	)		-

Cash dividends per common share	$	-			-		-			-

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Six Months Ended June 30, 2012 and 2011

(In thousands)


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

Balance, December 31, 2010		-	$	-		-			15,039			-			15,039

Net earnings (unaudited)		-		-		-			78			-			78

Proceeds from issuance of common stock, net of offering costs of $847 (unaudited)		1,135,698		11		10,498			-			-			10,509

Issuance of common stock for ESOP (unaudited)		98,756		1		987			-			(988	)		-

Common stock allocated to ESOP participants (unaudited)		-		-		3			-			25			28

Balance, June 30, 2011 (unaudited)		1,234,454	$	12		11,488			15,117			(963	)		25,654


Balance, December 31, 2011		1,234,454		12		11,487			14,813			(927	)		25,385

Net loss (unaudited)		-		-		-			(626	)		-			(626	)

Common stock allocated to ESOP participants (unaudited)		-		-		(2	)		-			42			40

Balance, June 30, 2012 (unaudited)		1,234,454	$	12		11,485			14,187			(885	)		24,799

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	2012			2011
Cash flows from operating activities:
Net (loss) earnings	$	(626	)		78
Adjustments to reconcile net (loss) earnings to net cash from operating activities:
Depreciation		248			245
Provision for loan losses		1,180			450
Deferred income taxes		(372	)		44
Net accretion of premiums/discounts on securities		39			1
Net amortization of deferred loan fees and costs		5			4
Loans originated for sale		(4,579	)		(792	)
Proceeds from loans sold		4,695			806
Gain on sale of loans		(116	)		(14	)
ESOP compensation expense		40			28
Decrease in accrued interest receivable		48			44
(Increase) decrease in other assets		(25	)		340
Loss on sale of foreclosed real estate		26			-
Write-down of foreclosed real estate		68			-
(Decrease) increase in official checks		(78	)		847
Net increase in advances by borrowers for taxes and insurance		151			125
Increase (decrease) in other liabilities		50			(128	)

Net cash provided by operating activities		754			2,078
Cash flows from investing activities:
Net repayments (purchases) of securities held-to-maturity		1,671			(8,496	)
Net decrease in loans		4,470			6,234
Net purchases of premises and equipment		(134	)		(34	)
Proceeds from sale of Federal Home Loan Bank stock		22			25
Proceeds from sale of foreclosed real estate		138			-
Capital expenditures for foreclosed real estate		-			(26	)

Net cash provided by (used in) investing activities		6,167			(2,297	)

Cash flows from financing activities:
Net increase (decrease) in deposits		2,011			(8,415	)
Net proceeds from stock issuance		-			11,497
Issuance of common stock to ESOP		-			(988	)

Net cash provided by financing activities		2,011			2,094

Increase in cash and cash equivalents		8,932			1,875

Cash and cash equivalents at beginning of period		25,055			19,324

Cash and cash equivalents at end of period	$	33,987			21,199

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

Interest	$	312			555

Noncash transaction-
Transfer from loans to foreclosed real estate	$	1,883			114

See accompanying Notes to Condensed Consolidated Financial Statements.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Basis of Presentation

Sunshine Financial, Inc. ("Sunshine Financial" or the "Holding Company"), a Maryland corporation, is the holding company for Sunshine Savings Bank (the "Bank") and owns all the outstanding common stock of the Bank. The Bank completed its reorganization from the mutual to stock holding company form of organization on April 5, 2011. A total of 1,234,454 shares of common stock were sold in the subscription and community offerings at a price of $10.00 per share. In accordance with the Plan of Conversion and Reorganization (the "Plan"), the Holding Company has succeeded to all rights and obligations of Sunshine Savings MHC and the old Sunshine Financial, Inc. ("Old Sunshine"). See Note 14 for details of the conversion. The transaction was accounted as a reorganization of entities under common control at historical cost and, the financial data for periods presented include the results of the Bank. The unaudited, condensed consolidated financial statements include the consolidated results of operations of Old Sunshine and its subsidiary, the Bank.

The Holding Company's only business is the operation of the Bank. The Bank through its four 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 and 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 generally accepted accounting principles for a complete presentation of the Company's financial condition and results of operations.

In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods. The results for the three and six-month periods ended June 30, 2012 should not be considered as indicative of results for a full year.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

2. Recent Accounting Standards Update

In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") No. 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2011-20. The amendments in this ASU delay the effective date of the disclosures about troubled debt restructurings in ASU 2011-20 for public entities. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring is effective as outlined in ASU No. 2011-02. The adoption of the ASU did not have a material impact on the Company's consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310) A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This amends the guidance for troubled debt restructurings. The guidance clarifies the guidance on a creditor's evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. For public entities, the amendments are effective for first interim or annual period beginning on or after September 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the ASU did not have a material impact on the Company's consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreement, which applies to all public entities. It affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. ASU 2011-03 removes the assessment of effective control the criterion relating to the transferor's ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. Consequently, it also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. Eliminating the transferor's ability criterion and related implementation guidance from an entity's assessment of effective control should improve the accounting for repos and other similar transactions. ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011 and is to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 did not have a material impact on the Company's consolidated financial statements.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

2. Recent Accounting Standards Update, Continued

In May 2011, the FASB issued ASU No. 2011-04 ("ASU 2011-04"), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The objective of ASU 2011-04 is to provide clarification of Topic 820 and, also, to ensure that fair value has the same meaning in U.S. generally accepted accounting principles ("GAAP") and in international financial reporting standards ("IFRSs") and that their respective fair value measurement and disclosure requirements are generally the same. Thus, this ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRSs. The amendment is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Early application is not permitted. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 ("ASU 2011-05"), Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To achieve this goal and to facilitate convergence of U.S. GAAP and IFRS, the FASB decided to eliminate the option to present components of other comprehensive income as part of the consolidated statement of changes in stockholders' equity. The amendments in ASU 2011-05 require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The adoption of this guidance had no effect on 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 December 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-12 ("ASU 2011-12"), Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-05"). Stakeholders raised concerns that the new presentation requirements about reclassifications of items out of accumulated other comprehensive income would be difficult for preparers and may add unnecessary complexity to financial statements. In addition, it is difficult for some stakeholders to change systems in time to gather the information for the new presentation requirements by the effective date of ASU 2011-05. All other requirements in ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The amendments in ASU 2011-12 are effective on a retrospective basis for public entities for annual periods beginning after December 15, 2011, and interim periods within those years. An entity should provide the disclosures required by ASU 2011-12 retrospectively for all comparative periods presented. The adoption of this guidance had no effect on the Company's consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11 ("ASU 2011-11"), Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. The objective of ASU 2011-11 is to enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with Section 210-20-45 or Section 815-10-45. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. The amendments in ASU 2011-11 are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by ASU 2011-11 retrospectively for all comparative periods presented. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

3. (Loss) Earnings Per Share

Earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period, which was 1,234,454 shares during the three and six-month periods ended June 30, 2012. The Company has no dilutive securities.

For the period ended June 30, 2011, earnings per share have been computed since April 1, 2011, as if conversion from a mutual holding company to a capital stock holding company occurred on that date. Basic earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period, which was 1,135,698 shares during the three-month period ended June 30, 2011.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

4. Securities Held to Maturity

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
At June 30, 2012-
Mortgage-backed securities	$	8,125		251		-			8,376

At December 31, 2011-
Mortgage-backed securities	$	9,835		255		(2	)		10,088

There were no sales of securities during the six months ended June 30, 2012 or 2011. There were no securities pledged at June 30, 2012 or December 31, 2011.

5. Loans

The loan portfolio segments and classes are as follows (in thousands):

	June 30,			December 31,
	2012			2011
Real estate mortgage loans:
One-to-four-family	$	64,370			70,144
Lot loans		6,809			7,363
Construction		462			74

Total real estate loans		71,641			77,581

Consumer loans:
Home equity		11,435			12,731
Automobile		2,433			2,483
Credit cards and unsecured		7,591			8,184
Deposit account		646			791
Other		1,568			1,818

Total consumer loans		23,673			26,007

Total loans		95,314			103,588

Less (plus):
Loans in process		(672	)		207
Deferred fees and discounts		55			50
Allowance for losses		1,467			1,329

Total loans, net	$	94,464			102,002

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

The Company grants real estate and consumer loans to customers primarily in the State of Florida with the majority of such loans in the Tallahassee, Florida metropolitan area. Therefore, the Company's exposure to credit risk could be significantly affected by changes in the economy and real estate market in the Tallahassee, Florida metropolitan area.

The Company has divided the loan portfolio into two portfolio segments, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten in accordance with policies set forth and approved by the Board, including repayment capacity and source, value of the underlying property, credit history and stability. The portfolio segments identified by the Company are as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are loans comprised of three classes: One-to-four family, Lot loans and Construction loans. The Company generally originates 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 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. Construction loans to borrowers are to finance the construction of 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. The Company also makes loans for the purchase of developed lots for future construction of the borrower's primary residence. Construction and lot loan lending is generally considered to involve a higher degree of credit risk than long-term permanent financing of residential properties.

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 savings deposits. The Company also offers unsecured consumer loans including a credit card product. The Company originates its consumer loans primarily in its market area. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to twenty years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

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

	For the Three Months Ended June 30, 2012
	One-to Four- Family			Lot Loans			Construction		Home Equity			Automobile			Credit Cards and Unsecured			Deposit Account		Other			Total

Beginning balance	$	564			101			-		258			28			244			-		109			1,304
Provision (credit) for loan loss		546			54			-		224			(22	)		65			-		88			955
Charge-offs		(440	)		(43	)		-		(156	)		(2	)		(94	)		-		(74	)		(809	)
Recoveries		-			-			-		-			4			12			-		1			17

Ending balance	$	670			112			-		326			8			227			-		124			1,467

	For the Six Months Ended June 30, 2012
	One-to Four- Family			Lot Loans			Construction		Home Equity			Automobile			Credit Cards and Unsecured			Deposit Account		Other			Total

Beginning balance	$	475			144			-		235			39			337			-		99			1,329
Provision (credit) for loan loss		676			91			-		317			(22	)		1			-		117			1,180
Charge-offs		(481	)		(128	)		-		(226	)		(17	)		(133	)		-		(93	)		(1,078	)
Recoveries		-			5			-		-			8			22			-		1			36

Ending balance	$	670			112					326			8			227			-		124			1,467

Individually evaluated for impairment:
Recorded investment	$	2,719			59			-		265			-			41			-		-			3,084
Balance in allowance for loan losses	$	-			-			-		-			-			-			-		-			-

Collectively evaluated for impairment:
Recorded investment	$	61,651			6,750			462		11,170			2,433			7,550			646		1,568			92,230
Balance in allowance for loan losses	$	670			112			-		326			8			227			-		124			1,467

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

	For the Three Months Ended June 30,
	2011
	One-to Four- Family			Lot Loans		Construction		Home Equity			Automobile			Credit Cards and Unsecured			Deposit Accounts		Other			Total

Beginning balance	$	741			59		2		318			42			398			-		145			1,705
Provision for loan loss		175			78		4		(16	)		1			(27	)		-		10			225
Charge-offs		(61	)		-		-		(193	)		(4	)		(72	)		-		(16	)		(346	)
Recoveries		-			-		-		-			4			16			-		-			20

Ending balance	$	855			137		6		109			43			315			-		139			1,604

	For the Six Months Ended June 30,
	2011
	One-to Four- Family			Lot Loans		Construction		Home Equity			Automobile			Credit Cards and Unsecured			Deposit Accounts		Other			Total

Beginning balance	$	623			59		2		252			39			503			-		143			1,621
Provision for loan loss		293			78		4		88			2			(41	)		-		26			450
Charge-offs		(61	)		-		-		(231	)		(6	)		(181	)		-		(32	)		(511	)
Recoveries		-			-		-		-			8			34			-		2			44

Ending balance	$	855			137		6		109			43			315			-		139			1,604
Individually evaluated for impairment:
Recorded investment	$	2,814			24		-		302			-			-			-		-			3,140
Balance in allowance for loan losses	$	617			118		-		-			18			-			-		-			753

Collectively evaluated for impairment:
Recorded investment	$	72,983			8,980		-		13,698			2,177			8,254			787		2,016			108,895
Balance in allowance for loan losses	$	238			19		6		109			25			315			-		139			851

(continued)

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5. Loans, Continued

The following summarizes the loan credit quality (in thousands):

Credit Risk	One-to										Credit
Profile by Internally	Four-		Lot				Home				Cards and		Deposit
Assigned Grade:	Family		Loans		Construction		Equity		Automobile		Unsecured		Accounts		Other		Total
At June 30, 2012:
Grade:
Pass	$	60,076		6,750		462		11,002		2,414		7,493		646		1,494		90,337
Special mention		1,248		-		-		79		7		26		-		-		1,360
Substandard		3,046		27		-		354		12		64		-		-		3,503
Doubtful		-		32		-		-		-		8		-		74		114
Loss		-		-		-		-		-		-		-		-		-

Total	$	64,370		6,809		462		11,435		2,433		7,591		646		1,568		95,314

At December 31, 2011:
Grade:
Pass		64,888		7,151		74		12,218		2,449		8,166		791		1,743		97,480
Special mention		1,528		-		-		91		1		10		-		-		1,630
Substandard		3,728		212		-		422		3		7		-		13		4,385
Doubtful		-		-		-		-		12		1		-		62		75
Loss		-		-		-		-		18		-		-		-		18