News Column

SUNSHINE FINANCIAL INC - 10-Q - Management's Discussion and Analysis of

August 12, 2014

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 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;

20 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. 21 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 Office of the Comptroller of the Currency ("OCC"). Sunshine Savings Bank is also regulated by 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.

22 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 June 30, 2014 (in thousands): Contract Amount Unused lines of credit $ 14,879 Commitments to extend credit $ 1,100 23 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 June 30, 2014, we had the capacity to borrow approximately $14.9 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 June 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-earning 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 $828,000 and $1,029,000 for the six-months ended June 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 $4.4 million and $3.9 million for six-months ended June 30, 2014 and 2013, respectively. During the six-months ended June 30, 2014 and 2013, we purchased $3.9 million and $3.0 million, respectively, in securities held to maturity. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, was $2.9 million for the six-months ended June 30, 2014 and $3.7 million for the six-months ended June 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 June 30, 2014, the Bank exceeded all regulatory capital requirements with a Tier 1 leverage capital level of 12.39% of adjusted total assets, which is above the required level of 5.00%; Tier 1 capital to risk-weighted assets of 19.25% of risk-weighted assets, which is above the required level of 6% and total risk-based capital of 20.49% of risk-weighted assets, which is above the required level of 10.00%. Accordingly, the Company was categorized as well-capitalized at June 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.". 24 SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES



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

General. Total assets increased $3.1 million, or 2.1%, to $149.6 million at June 30, 2014 from $146.5 million at December 31, 2013. The increase in total assets was due primarily to increases in securities held to maturity and net loans. Our securities held to maturity increased $1.8 million and net loans increased $2.5 million since December 31, 2013. The net increase in assets was funded by a $2.9 million increase in deposits. Loans. Our net loan portfolio increased $2.5 million, to $98.0 million at June 30, 2014 from $95.5 million at December 31, 2013. The increase in loans was due to a $4.4 million, or 24.3%, increase in commercial real estate loans, as well as a $268,000 increase in commercial business loans and a $304,000 increase in construction 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 $568,000 decrease in one- to four-family loans, $658,000 decrease in lot loans, and a $1.2 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 six-months ended June 30, 2014, we originated $2.7 million of one- to four-family mortgage loans for sale, and $2.7 million were sold to Freddie Mac or Crescent Mortgage at a gain on sale of $72,000. Allowance for Loan Losses. Our allowance for loan losses at June 30, 2014 was $1.2 million, or 1.18% of loans, compared to $1.3 million, or 1.34% of loans, at December 31, 2013. Nonperforming loans increased to $1.9 million at June 30, 2014 from $1.3 million at December 31, 2013. Nonperforming loans to total loans increased to 1.88% at June 30, 2014 from 1.35% at December 31, 2013. Loans on nonaccrual which were less than ninety days past due totaled $331,000 at June 30, 2014 compared to $457,000 million at December 31, 2013. Deposits. Total deposits increased $2.9 million, or 2.4%, to $125.0 million at June 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 $335,000 to $23.4 million at June 30, 2014. This decrease was primarily due to a net loss of $53,000 and the purchase 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 six-months ended June 30, 2014, which were partially offset by stock-based compensation of $95,000. 25 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 June 30, 2014 2013 Interest Average Interest Average Average and Yield/ Average and Yield/ Balance Dividends Rate Balance Dividend Rate ($ in thousands) Interest-earning assets: Loans (1) $ 96,976$ 1,297 5.35 % $ 95,247$ 1,328 5.58 % Securities held to maturity 29,048 155 2.13 14,567 77 2.12 Other interest-earning assets (2) 9,279 6 0.28 26,840 17 0.25 Total interest-earning assets 135,303 1,458 4.31 136,654 1,422 4.16 Noninterest-earning assets 11,525 10,498 Total assets $ 146,828$ 147,152 Interest-bearing liabilities: MMDA and statement savings 73,136 60 0.33 68,886 61 0.35 Time deposits 27,652 34 0.50 30,413 40 0.52 Total interest-bearing liabilities 100,788 94 0.37 99,299 101 0.41 Noninterest-bearing liabilities 22,686 22,764 Equity 23,354 25,089 Total liabilities and equity $ 146,828$ 147,152 Net interest income $ 1,364$ 1,321 Net interest rate spread (3) 3.94 % 3.75 % Net interest margin (4) 4.03 % 3.86 % Ratio of average interest-earning assets to average interest-bearing liabilities 1.34x 1.39x (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). 26 SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES Six Months Ended June 30, 2014 2013 Interest Average Interest Average Average and Yield/ Average and Yield/ Balance Dividends Rate Balance Dividend Rate ($ in thousands) Interest-earning assets: Loans receivable (1) $ 96,659$ 2,580 5.34 % $ 94,193$ 2,697 5.73 % Securities held to maturity 28,715 306 2.13 14,787 157 2.12 Other interest-earning assets (2) 9,350 13 0.27 26,651 33 0.25 Total interest-earning assets 134,724 2,899 4.30



135,631 2,887 4.26

Noninterest-earning assets 11,480

10,713 Total assets $ 146,204$ 146,344 Interest-bearing liabilities: MMDA and statement savings 72,359 119 0.33 68,093 123 0.36 Time deposits 27,952 67 0.48 30,757 85 0.55 Total interest-bearing liabilities 100,311 186 0.37 98,850 208 0.42 Noninterest-bearing liabilities 22,541 22,468 Equity 23,352 25,026 Total liabilities and equity $ 146,204$ 146,344 Net interest income $ 2,713$ 2,679 Net interest rate spread (3) 3.93 % 3.84 % Net interest margin (4) 4.03 % 3.96 % Ratio of average interest-earning assets to average interest-bearing liabilities 1.34x 1.37x (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). 27 SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES



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

General. Net loss for the three months ended June 30, 2014 was $32,000 compared to net earnings of $234,000 for the three months ended June 30, 2013, resulting in an annualized return on average assets of (0.09)% for the three months ended June 30, 2014 and 0.64% for the three months ended June 30, 2013. The decrease in net earnings was due primarily to a decrease in noninterest income, and an increase in the provision for loan losses, partially offset by a decrease in our noninterest expenses. Net Interest Income. Net interest income increased $43,000, or 3.3%, to $1,364,000 for the three months ended June 30, 2014 from $1,321,000 for the same period in 2013, primarily due to the $14.0 million increase in average securities held to maturity earning an average rate of 2.13% and the corresponding $17.6 million decrease in average other interest-earning assets earning an average rate of 0.28%, offset somewhat by a 39 basis point decline in the average yield on loans. Our average cost of funds declined to 0.37% for the period ended June 30, 2014, from 0.41% for the same period in 2013. Our net interest rate spread increased to 3.94% for the three months ended June 30, 2014 from 3.75% for the same period in 2013, while our net interest margin increased to 4.03% at June 30, 2014 from 3.86% at June 30, 2013. The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended June 30, 2014 decreased to 1.34x, from 1.39x for the three months ended June 30, 2013. Interest Income. Interest income for the three months ended June 30, 2014 increased $36,000, or 2.5%, to $1,458,000 from $1,422,000 for the same period ended June 30, 2013. The increase in interest income for the three months ended June 30, 2014 was primarily due to higher balances of securities held to maturity, partially offset by lower rates on loans. Average securities held to maturity increased to $29.0 million for the three months ended June 30, 2014 compared to $14.6 million for the three months ended June 30, 2013. The average rate on loans decreased to 5.35% for the three months ended June 30, 2014 compared to 5.58% for the three months ended June 30, 2013. Interest Expense. Interest expense for the three months ended June 30, 2014 was $94,000 compared to $101,000 for the same period in 2013, a decrease of $7,000 or 6.9%. The decrease was primarily the result of decreases in both the average balance and the average rate paid on time deposits. The average balance of time deposits decreased to $27.7 million for the three month period ended June 30, 2014 from $30.4 million for the same period in 2013 and the average rate paid on certificates of deposit decreased to 0.50% from 0.52%. The total cost of funds for the three months ended June 30, 2014 decreased to 0.37% from 0.41% for the three months ended June 30, 2013. Provision for Loan Losses. We recorded a provision for loan losses of $50,000 for the three months ended June 30, 2014 compared to no provision for the three months ended June 30, 2013. The provision for loan losses reflected historical and expected future loan losses, the slight increase in the size of our loan portfolio as well as the change in the mix of loans. Net charge-offs for the three months ended June 30, 2014 were $97,000 compared to a net charge-offs of $175,000 for the three months ended June 30, 2013. Nonperforming loans to total loans at June 30, 2014 were 1.88% compared to 2.02% at June 30, 2013. The allowance for loan losses to net loans receivable was 1.18% at June 30, 2014 compared to 1.34% at December 31, 2013 and 1.46% at June 30, 2013. 28 SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES



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

Management considers the allowance for loan losses at June 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 June 30, 2014 decreased $495,000, or 50.9%, to $477,000 compared to $972,000 for the same period in 2013. The gain on sale of loans decreased $283,000, other income decreased $101,000, the gain on sale of foreclosed assets decreased $45,000 and fees and service charges on deposit accounts decreased $41,000 for the three months ended June 30, 2014, compared to the three months ended June 30, 2013. The primary cause for the decrease in the gain on sale of loans was the initial recording of a $278,000 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. There was no gain on sale of foreclosed assets during the three months ended June 30, 2014. The primary cause for a decrease in fees and service charges on deposit accounts was a decrease in income from non-sufficient fund charges and debit card interchange fee income. Other income increased due to a one time recovery of a previously written off asset during the three months ended June 30, 2013. Noninterest Expense. Noninterest expense for the three months ended June 30, 2014 decreased $70,000, or 3.7%, to $1,836,000 compared to $1,906,000 for the same period in 2013. The largest decreases were in professional fees and foreclosed real estate expense. The decrease in professional fees expense primarily was due to a decrease in legal fees associated with settlement of a former lawsuit in which the Bank was the plaintiff. The decrease in foreclosed real estate expenses was primarily due to lower foreclosure activity. Income Taxes. For the three months ended June 30, 2014, we recorded an income tax benefit of $13,000 on a before tax loss of $45,000. For the three months ended June 30, 2013, we recorded income taxes of $153,000 on before tax earnings of $387,000. Our effective tax rate for the three months ended June 30, 2014 was (28.9)% compared to 39.5% for the same time period in 2013. 29 SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES



Comparison of the Six Months Ended June 30, 2014 and 2013

General. Net loss for the six months ended June 30, 2014 was $53,000 compared to net earnings of $355,000 for the six months ended June 30, 2013, resulting in an annualized return on average assets of (0.07)% for the six months ended June 30, 2014 and 0.49 % for the six months ended June 30, 2013. The decrease in net earnings was due primarily to an increase in our provision for loan loss and a decrease in noninterest income, partially offset by a decrease in noninterest expense. Net Interest Income. Net interest income increased $34,000, or 1.3%, to $ 2,713,000 for the six months ended June 30, 2014 from $2,679,000 for the same period in 2013, primarily due to the $13.9 million increase in average securities held to maturity earning an average rate of 2.13% and corresponding $17.3 million decrease in average other interest-earning assets earning an average rate of 0.27%, offset somewhat by a 39 basis point decline in the average yield on loans. Our average cost of funds declined to 0.37% for the six month period ended June 30, 2014, from 0.42% for the same period in 2013. Our net interest rate spread increased to 3.93% for the six months ended June 30, 2014 from 3.84% for the same period in 2013, while our net interest margin increased to 4.03% at June 30, 2014 from 3.96% at June 30, 2013. The ratio of average interest-earning assets to average interest-bearing liabilities for the six months ended June 30, 2014 decreased to 1.34, from 1.37 for the six months ended June 30, 2013. Interest Income. Interest income for the six months ended June 30, 2014 increased $12,000, or 0.4%, to $2,889,000 from $2,887,000 for the same period ended June 30, 2013. The increase in interest income for the six months ended June 30, 2014 was primarily due to a higher average balance of securities held to maturity, partially offset by lower rates on loans. Average securities held to maturity increased to $28.7 million for the three months ended June 30, 2014 compared to $14.8 million for the six months ended June 30, 2013. The average rate on loans receivable decreased to 5.34% for the six months ended June 30, 2014 compared to 5.73% for the six months ended June 30, 2013. Interest Expense. Interest expense for the six months ended June 30, 2014 was $186,000 compared to $208,000 for the same period in 2013, a decrease of $22,000 or 10.6%. 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 $28.0 million for the six month period ended June 30, 2014 from $30.8 million for the same period in 2013 and the average rate paid on certificates of deposit decreased to 0.48% from 0.55%. The total average cost of funds for the six months ended June 30, 2014 decreased to 0.37% from 0.42% for the six months ended June 30, 2013. Provision for Loan Losses. We recorded a provision for loan losses of $100,000 for the six months ended June 30, 2014 and a credit for loan losses of $(48,000) for the same period in 2013 primarily due to increased net loan charge-offs. Net charge-offs for the six months ended June 30, 2014 were $228,000 compared to $33,000 for the six months ended June 30, 2013. 30 SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES



Comparison of the Six Months Ended June 30, 2013 and 2012, Continued

Noninterest Income. Noninterest income for the six months ended June 30, 2014 decreased $790,000, or 45.7%, to $937,000 compared to $1,727,000 for the same period in 2013. The gain on sale of loans decreased $336,000, other income decreased $135,000, the gain on sale of foreclosed assets decreased $175,000 and fees and service charges on deposit accounts decreased $135,000 for the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The primary cause for the decrease in the gain on sale of loans was the initial recording of a $278,000 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 $175,000 as there were no sales during the six months ended June 30, 2014. Other income decreased $135,000 due to a one time recovery of a previously written off asset during the three months ended June 30, 2013. Fees and service charges on deposit accounts also decreased $135,000 for the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The primary cause for a 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 six months ended June 30, 2014 was $3,632,000 compared to $3,872,000 for the same period in 2013, a decrease of $240,000 or 6.2%. The largest decrease occurred in professional fees which decreased $135,000, or 34.1%, to $261,000 compared to $396,000 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 $93,000 due to a lower number of foreclosures. Income Taxes. For the six months ended June 30, 2014, we recorded an income tax benefit of $29,000 on a before tax loss of $82,000. For the six months ended June 30, 2013, we recorded income taxes of $227,000 on before tax income of $582,000. Our effective tax rate for the six months ended June 30, 2014 was (35.4)% compared to 39.0% for the same time period in 2013. 31 SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES


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