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

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

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

For the transition period from _______ to ________

Commission file number:001-54280

SUNSHINE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

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

1400 East Park Avenue, Tallahassee, Florida  32301

(Address of principal executive offices; Zip Code)

(850) 219-7200

(Registrant's telephone number, including area code)

None

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

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

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

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

Large accelerated filer ☐Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☒Emerging growth company ☐

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

At May 12, 2017, there were issued and outstanding 1,030,039 shares of the issuer's common stock.

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Index

		Page Number
PART I   FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016	2
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2017 and 2016 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6-22
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23-31
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	31
Item 4.	Controls and Procedures	31-32
PART II   OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
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

2

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands)

	At March 31, 2017			At December 31, 2016
	(Unaudited)
Assets
Cash and due from banks	$	2,285			2,705
Interest-bearing deposits with banks		8,699			8,608
Cash and cash equivalents		10,984			11,313
Securities held to maturity (fair value of $15,465 and $16,294)		15,625			16,512
Loans, net of allowance for loan losses of $968 and $924		143,088			134,077
Premises and equipment, net		3,643			3,662
Bank owned life insurance		3,195			3,172
Federal Home Loan Bank stock, at cost		836			684
Deferred income taxes		2,477			2,550
Accrued interest receivable		413			449
Foreclosed real estate		137			141
Other assets		528			649
Total assets	$	180,926			173,209
Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing deposit accounts	$	33,734			31,247
Money-market deposit accounts		40,679			39,633
Savings accounts		48,240			46,989
Time deposits		19,438			20,033
Total deposits		142,091			137,902
Federal home loan bank advances		16,000			12,750
Official checks		261			541
Other liabilities		742			360
Total liabilities		159,094			151,553
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 authorized, none       issued and outstanding		-			-
Common stock, $.01 par value, 6,000,000 shares authorized, 1,030,039 shares issued and outstanding		10			10
Additional paid in capital		7,401			7,374
Retained earnings		14,867			14,743
Unearned Employee Stock Ownership Plan ("ESOP") shares		(446	)		(471	)
Total stockholders' equity		21,832			21,656
Total liabilities and stockholders' equity	$	180,926			173,209

See accompanying Notes to Condensed Consolidated Financial Statements.

3

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share information)

	Three Months Ended March 31,
	2017		2016
Interest income:
Loans	$	1,643		1,427
Securities		81		103
Other		16		12
Total interest income		1,740		1,542
Interest expense:
Deposit accounts		92		92
Other borrowings		24		5
Total interest expense		116		97
Net interest income		1,624		1,445
Provision for loan losses		55		45
Net interest income after provision for loan losses		1,569		1,400
Noninterest income:
Fees and service charges on deposit accounts		349		352
Gain on loan sales		11		-
Gain on sale of foreclosed real estate		30		-
Fees and charges on loans		50		35
Income from bank owned life insurance		23		26
Other		9		5
Total noninterest income		472		418
Noninterest expenses:
Salaries and employee benefits		793		882
Occupancy and equipment		262		282
Data processing services		309		314
Professional fees		173		179
Deposit insurance		16		31
Advertising and promotion		15		7
Stationery and supplies		18		14
Telephone communications		27		27
Foreclosed real estate		8		15
Credit card expense		53		42
Other		170		148
Total noninterest expenses		1,844		1,941
Earnings (loss) before income tax expense (benefit)		197		(123	)
Income tax expense (benefit)		73		(32	)
Net earnings (loss)	$	124		(91	)
Basic and diluted earnings (loss) per common share	$	0.13		(0.10	)
Dividends per share	$	-		-

See accompanying Notes to Condensed Consolidated Financial Statements.

4

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, 2017 and 2016 (Unaudited)

($ in thousands)

											Unearned
											Employee
											Stock
					Additional						Ownership			Total
	Common Stock				Paid In			Retained			Plan			Stockholders'
	Shares		Amount		Capital			Earnings			Shares			Equity
Balance, December 31, 2015		1,030,898	$	10		7,285			14,633			(570	)		21,358
Net loss (unaudited)		-		-		-			(91	)		-			(91	)
Stock based compensation     expense (unaudited)		-		-		51			-			-			51
Common stock allocated to     ESOP  participants     (unaudited)		-		-		(22	)		-			24			2
Balance, March 31, 2016     (unaudited)		1,030,898	$	10		7,314			14,542			(546	)		21,320
Balance, December 31, 2016		1,030,039	$	10		7,374			14,743			(471	)		21,656
Net earnings (unaudited)		-		-		-			124			-			124
Stock based compensation     expense (unaudited)		-		-		51			-			-			51
Common stock allocated to     ESOP participants     (unaudited)		-		-		(24	)		-			25			1
Balance, March 31, 2017     (unaudited)		1,030,039	$	10		7,401			14,867			(446	)		21,832

See accompanying Notes to Condensed Consolidated Financial Statements.

5

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net earnings (loss)	$	124			(91	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		83			97
Provision for loan losses		55			45
Deferred income tax expense (benefit)		73			(32	)
Net amortization of premiums on securities		7			10
Net amortization of deferred loan fees and costs		35			7
Income from bank owned life insurance		(23	)		(26	)
Loans originated for sale		(421	)		-
Proceeds from loans sold		432			-
Gain on sale of loans		(11	)		-
ESOP compensation expense		1			2
Stock-based compensation expense		51			51
Decrease (increase) in accrued interest receivable		36			(42	)
Decrease in other assets		121			155
Gain on sale of foreclosed real estate		(30	)		-
(Decrease) increase in official checks		(280	)		173
Increase in other liabilities		382			340
Net cash provided by operating activities		635			689
Cash flows from investing activities:
Principal pay-downs on held-to-maturity securities		880			973
Net decrease in loans		(9,101	)		(1,003	)
Net purchases of premises and equipment		(64	)		(3	)
(Purchase) redemption of Federal Home Loan Bank stock		(152	)		100
Proceeds from the sale of foreclosed real estate		34			-
Capital expenditures for foreclosed real estate		-			(14	)
Net cash (used) provided by investing activities		(8,403	)		53
Cash flows from financing activities:
Net increase in deposits		4,189			6,487
Net proceeds (paydown) on FHLB advances		3,250			(2,500	)
Net cash provided by financing activities		7,439			3,987
(Decrease) increase in cash and cash equivalents		(329	)		4,729
Cash and cash equivalents at beginning of period		11,313			10,862
Cash and cash equivalents at end of period	$	10,984			15,591
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	-			-
Interest	$	116			97
Noncash transactions:
Transfer from loans to foreclosed real estate	$	-			98

See accompanying Notes to Condensed Consolidated Financial Statements.

6

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.   Organization and Basis of Presentation

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

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

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

In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the consolidated financial statements not misleading and for a fair representation of the results of operations for such periods. It is recommended that these unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2016 filed with the U.S. Securities and Exchange Commission ("SEC") on March 30, 2017 ("2016 Form 10-K"). The results for the three month period ended March 31, 2017 should not be considered as indicative of results for a full year.

2.  Recent Accounting Pronouncements

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

7

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

RECENT ACCOUNTING PRONOUNCEMENTS (continued)

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

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires equity investments to be measured at fair value with changes in fair values recognized in net earnings, simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and eliminates the requirement to disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost.  The ASU also clarifies that the Company should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with the Company's other deferred tax assets.  These amendments were effective for the Company beginning January 1, 2017.  The ASU did not have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842) which will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with term of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.  The new ASU will require both types of leases to be recognized on the balance sheet.  The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.  The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.  Once adopted, the Company expects to report higher assets and liabilities as a result of including additional lease information on the consolidated balance sheet. The Company is in the process of determining the effect of the ASU on its consolidated financial statements.

In March 2016 the FASB issued ASU No. 2016-09 Compensation-Stock Compensation (Topic 718).  The ASU simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  Early adoption is permitted. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  The ASU is not expected to have a material impact on the Company's financial statements.

In June 2016, FASB issued Accounting Standards Update ("ASU") No. 2016-13 Financial Instruments-Credit Losses (Topic 326).  The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical

8

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

RECENT ACCOUNTING PRONOUNCEMENTS (continued)

experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its consolidated financial statements.Once adopted, we expect our allowance for loan losses to increase; however, until our evaluation is complete the magnitude of the increase will be unknown.

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

9

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

3.  Earnings (Loss) Per Share

Earnings (loss) per share ("EPS") has been computed on the basis of the weighted-average number of shares of common stock outstanding.  For the three-months ended March 31, 2017 the outstanding stock options were considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method. For the three-months ended March 31, 2016 the outstanding stock options were are not considered dilutive securities due to the net loss incurred by the Company.  The shares purchased by the ESOP are included in the weighted-average shares when they are committed to be released (dollars in thousands, except per share amounts):

	2017						2018
			Weighted-		Per					Weighted-		Per
			Average		Share					Average		Share
	Earnings		Shares		Amount		Loss			Shares		Amount
Three-Months Ended March 31:
Basic EPS:
Net earnings (loss)	$	124		951,161	$	0.13	$	(91	)		940,248	$	(0.10	)
Effect of dilutive securities:
Incremental shares from assumed conversion
of options				33,949							-
Diluted EPS:
Net earnings (loss)	$	124		985,110	$	0.13	$	(91	)		940,248	$	(0.10	)

(continued)

10

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

4.  Securities Held to Maturity

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
At March 31, 2017
Agency mortgage-backed securities	$	610		22		-			632
Agency collateralized mortgage obligations		15,015		21		(203	)		14,833
Total	$	15,625		43		(203	)		15,465
At December 31, 2016
Agency mortgage-backed securities	$	697		24		-			721
Agency collateralized mortgage obligations		15,815		15		(257	)		15,573
Total	$	16,512		39		(257	)		16,294

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

Securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at the date indicated, are as follows (in thousands):

	Less than Twelve Months					Twelve Months or Longer
	Gross					Gross
	Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value
At March 31, 2017:
Agency collateralized mortgage obligations	$	(69	)		6,927		(134	)		3,766
At December 31, 2016:
Agency collateralized mortgage obligations	$	(102	)		10,523		(155	)		3,941

At March 31, 2017 and December 31, 2016 the unrealized losses on eighteen securities and twenty-one securities, respectively are considered by management to be attributable to changes in market interest rates, and not attributable to credit risk on the part of the issuer. Accordingly, if market rates were to decline, much or all of the decline in market value would likely be recovered through market appreciation. As management has the ability and intent to hold debt securities until maturity, or for the foreseeable future, no declines in the fair value below amortized cost are deemed to be other than temporary.

(continued)

11

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5.  Loans

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

	March 31,			December 31,
	2017			2016
Real estate mortgage loans:
One-to four-family	$	57,400			56,601
Commercial real estate		58,763			52,960
Construction and lot		4,814			4,247
Total real estate loans		120,977			113,808
Commercial loans		4,915			4,217
Consumer loans:
Home equity		7,054			7,166
Automobile and other		4,495			4,498
Credit cards and unsecured		5,558			5,796
Total consumer loans		17,107			17,460
Total loans		142,999			135,485
Add (deduct):
Loans in process		984			(522	)
Deferred loan (fees) costs		73			38
Allowance for loan losses		(968	)		(924	)
Total loans, net	$	143,088			134,077

(continued)

12

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

Commercial Loans.  Commercial loans are primarily underwritten on the basis of the borrowers' ability to service such debt from income.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  As a general practice, the Company takes as collateral a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis.  Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.

Consumer Loans.  Consumer loans are comprised of four classes: Home Equity, Automobile, Other, and Credit cards and unsecured.  The Company offers a variety of secured consumer loans, including home equity, new and used automobile, boat and other recreational vehicle loans, and loans secured by deposit accounts.  The Company also offers unsecured consumer loans including a credit card product.  The Company originates its consumer loans primarily in its market area.  Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the

13

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5.  Loans, Continued

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.

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

	Real Estate Mortgage Loans			CommercialLoans			ConsumerLoans			Unallocated		Total
Three-Months Ended March 31, 2017:
Beginning balance	$	558			74			292			-		924
Provision (credit) for loan loss		(13	)		(5	)		67			6		55
Charge-offs		-			-			(39	)		-		(39	)
Recoveries		13			-			15			-		28
Ending balance	$	558			69			335			6		968
Three-Months Ended March 31, 2016:
Beginning balance	$	503			10			381			1		895
Provision (credit) for loan loss		(35	)		18			(9	)		71		45
Charge-offs		-			-			(38	)		-		(38	)
Recoveries		3			-			22			-		25
Ending balance	$	471			28			356			72		927
At March 31, 2017:
Individually evaluated for impairment:
Recorded investment	$	2,547			-			210			-		2,757
Balance in allowance for loan losses	$	44			-			81			-		125
Collectively evaluated for impairment:
Recorded investment	$	118,430			4,915			16,897			-		140,242
Balance in allowance for loan losses	$	514			69			254			6		843
At December 31, 2016:
Individually evaluated for impairment:
Recorded investment	$	2,559			-			162			-		2,721
Balance in allowance for loan losses	$	44			-			28			-		72
Collectively evaluated for impairment:
Recorded investment	$	111,249			4,217			17,298			-		132,764
Balance in allowance for loan losses	$	514			74			264			-		852

(continued)

14

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	One to		Commercial		Construc-								Credit
Profile by	Four		Real		tion and		Commer-		Home		Automobile		Cards and
Internally	Family		Estate		Lot		cial		Equity		and Other		Unsecured		Total
Assigned Grade:
At March 31, 2017:
Grade:
Pass	$	54,628		58,763		4,814		4,915		6,798		4,405		5,533		139,856
Special mention		533		-		-		-		25		-		-		558
Substandard		2,239		-		-		-		231		90		25		2,585
Total	$	57,400		58,763		4,814		4,915		7,054		4,495		5,558		142,999
At December 31, 2016:
Grade:
Pass	$	53,573		52,960		4,218		4,217		6,843		4,393		5,760		131,964
Special mention		807		-		-		-		-		-		4		811
Substandard		2,221		-		29		-		323		105		32		2,710
Total	$	56,601		52,960		4,247		4,217		7,166		4,498		5,796		135,485

Internally assigned loan grades are defined as follows:

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

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

Substandard – A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that theCompany 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)

15

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

5.  Loans, Continued

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

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

	Accruing Loans
					90 Days
		30-59		60-89	and		Total
	Days		Days		Greater		Past				Nonaccrual		Total
	Past Due		Past Due		Past Due		Due		Current		Loans		Loans
At March 31, 2017:
Real estate loans:
One-to four-family	$	1,110		5		-		1,115		54,046		2,239		57,400
Commercial real estate		-		-		-		-		58,763		-		58,763
Construction and lot		32		-		-		32		4,782		-		4,814
Commercial loans		-		-		-		-		4,915		-		4,915
Consumer loans:
Home equity		51		-		-		51		6,691		312		7,054
Automobile and other		-		-		-		-		4,405		90		4,495
Credit cards and unsecured		32		-		57		89		5,444		25		5,558
Total	$	1,225		5		57		1,287		139,046		2,666		142,999
At December 31,  2016:
Real estate loans:
One-to-four family	$	772		277		-		1,049		53,465		2,087		56,601
Commercial		-		-		-		-		52,960		-		52,960
Construction and lot		85		-		-		85		4,162		-		4,247
Commercial loans		17		-		-		17		4,200		-		4,217
Consumer loans:
Home equity		60		-		-		60		6,786		320		7,166
Automobile and other		21		-		-		21		4,373		104		4,498
Credit cards and unsecured		138		4		7		149		5,614		33		5,796
Total	$	1,093		281		7		1,381		131,560		2,544		135,485

(continued)

16

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 RelatedAllowance Recorded				With an Allowance Recorded						Total
	RecordedInvestment		UnpaidPrincipalBalance		RecordedInvestment		UnpaidPrincipalBalance		RelatedAllowance		RecordedInvestment		UnpaidPrincipalBalance		RelatedAllowance
At March 31, 2017:
Real estate loans:
One-to four-family	$	1,975		2,027		572		588		44		2,547		2,615		44
Consumer loans:
Home equity		122		133		88		97		81		210		230		81
	$	2,097		2,160		660		685		125		2,757		2,845		125
At December 31, 2016:
Real estate loans:
One-to four-family	$	1,985		2,037		574		591		44		2,559		2,628		44
Consumer loans:
Home equity		126		137		36		45		28		162		182		28
	$	2,111		2,174		610		636		72		2,721		2,810		72

The average net investment in impaired loans and interest income recognized and received on impaired loans for the periods shown are as follows (in thousands):

	Average		Interest		Interest
	Recorded		Income		Income
	Investment		Recognized		Received
For the Three Months Ended March 31, 2017:
Real estate loans:
One-to four-family	$	2,506		38		39
Consumer loans:
Home equity		130		2		2
Total	$	2,636		40		41
For the Three Months Ended March 31, 2016:
Real estate loans:
One-to four-family		2,712		34		36
Consumer loans:
Home equity		216		3		4
Total	$	2,928		37		40

The Company had no troubled debt restructurings (TDR) entered into during the three months ended March 31, 2017 or 2016. There were no TDR loans that were modified within the 12 months prior to March 31, 2017, and for which there was a payment default during the three months ended March 31, 2017. The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs.

(continued)

17

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

6.    Lines of Credit

The Company has an unsecured federal funds line of credit for $6.0 million with a correspondent bank and a $43.3 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At March 31, 2017, the Company had $16.0 million outstanding in FHLB advances that mature in 2017 at a weighted average fixed rate of 0.87%.  At December 31, 2016, the Company had $12.75 million outstanding in FHLB advances that mature in 2017 at a weighted average fixed rate of 0.63%.  At March 31, 2017 and December 31, 2016, the Company had no outstanding balances on the federal funds line of credit.

7.    Off-Balance-Sheet Financial Instruments

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

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

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

Unused lines of credit and commitments to extend credit typically result in loans with a market interest rate when funded.  A summary of the amounts of the Company's financial instruments, with off-balance-sheet risk follows at March 31, 2017 (in thousands):

	Contract
	Amount
Unused lines of credit	$	13,861
Unused construction loan commitments	$	3,137
Commitments to extend credit	$	1,200

(continued)

18

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

8.    Fair Value of Financial Instruments

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

	At March 31, 2017						At December 31, 2016
	Carrying		Fair				Carrying		Fair
	Amount		Value		Level		Amount		Value		Level
Financial assets:
Cash and cash equivalents	$	10,984		10,984		1		11,313		11,313		1
Securities held to maturity		15,625		15,465		2		16,512		16,294		2
Loans		143,088		144,046		3		134,077		132,454		3
Federal Home Loan Bank stock		836		836		3		684		684		3
Accrued interest receivable		413		413		3		449		449		3
Financial liabilities:
Deposits		142,091		135,904		3		137,902		132,280		3
Federal Home Loan Bank
advances		16,000		15,999		3		12,750		12,750		3
Off-balance-sheet financial
instruments		-		-		3		-		-		3

Discussion regarding the assumptions used to compute the estimated fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the 2016 Form 10-K.

9.  Employee Stock Ownership Plan

The Holding Company has established an ESOP which acquired 98,756 shares of Holding Company common stock in exchange for a $988,000 note payable from the Bank to the Holding Company.  The note bears interest at a fixed rate of 4.25%, is payable in annual installments and is due in 2021.  The ESOP expense was $25,000 for the three months ended March 31, 2017 and $24,000 for the three months ended March 31, 2016.  At March 31, 2017 and 2016, there were 39,601 and 49,477 shares, respectively, that had not been allocated under the ESOP.

 (continued)

19

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

10.  2012 Equity Incentive Plan

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

					Weighted-
			Weighted-		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Options		Price		Term	Value
Outstanding at December 31, 2015		81,500	$	11.62
Outstanding at March 31, 2016		81,500	$	11.62	6.87 years
Outstanding at December 31, 2016		80,500		11.63
Outstanding at March 31, 2017		80,500	$	11.63	5.88 years	$698,000
Exercisable at March 31, 2017		10,000	$	10.75	5.70 years	$ 95,500

At March 31, 2017, there was approximately $40,000 of unrecognized compensation expense related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted average period of twenty-eight months.  The total fair value of shares vesting and recognized as compensation expense was $12,000 for both the three-months ended March 31, 2017 and 2016.

(continued)

20

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

10.  2012 Equity Incentive Plan, Continued

The Plan also authorizes the grant of up to 49,378 shares of restricted stock.  The restricted stock awarded under the Plan vests equally over five years from the date of grant. Restricted stock awards are forfeited if employment is terminated before the restriction period expires.  The record holder of the Holding Company's restricted stock possesses all the rights of a holder of the Holding Company common stock, including the right to receive dividends on and to vote the restricted stock. The restricted stock may not be sold, transferred, pledged, assigned, encumbered, or otherwise alienated or hypothecated until they become fully vested and transferable in accordance with the agreements. Compensation expense for restricted stock totaled $39,000 for both the three months ended March 31, 2017 and March 31, 2016. The income tax benefit recognized was $15,000 for the three months ended March 31, 2017 and 2016.

A summary of the activity in restricted stock under the Plan is as follows:

	Number ofShares		Weighted-AverageGrant-DateFair Value
Outstanding at December 31, 2015		28,700	$	16.92
Outstanding at March 31, 2016		28,700		16.92
Outstanding at December 31, 2016		19,400		16.94
Outstanding at March 31, 2017		19,400	$	16.94

Total unrecognized compensation cost related to these non-vested restricted stock amounted to approximately $261,000 at March 31, 2017.  This cost is expected to be recognized monthly over the related vesting period using the straight-line method through 2019.

(continued)

21

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

11.  Fair Value Measurements

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

	FairValue		Level 1		Level 2		Level 3		TotalLosses		LossesRecordedDuring thePeriod
At March 31, 2017:
One-to four-family	$	572		-		-		572		44		-
Home equity		35		-		-		35		28		-
Total	$	607		-		-		607		72		-
At December 31, 2016:
One-to four-family	$	574		-		-		574		44		-
Home equity		36		-		-		36		28		-
Total	$	610		-		-		610		72		-

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

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Losses

Identical

Observable

Unobservable

Recorded

Fair

Assets

Inputs

Inputs

Total

During the

Value

(Level 1)

(Level 2)

(Level 3)

Losses

Period

At March 31, 2017:

Foreclosed real estate

$

137

-

-

137

-

-

At December 31, 2016:

Foreclosed real estate

$

141

-

-

141

32

27

(continued)

22

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

12.  Regulatory Matters

On March 31, 2017, the Bank was subject to minimum capital requirements imposed by the Federal Deposit Insurance Corporation.  Capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital.

At March 31, 2017, the Bank exceeded all regulatory capital requirements. Consistent with its goals to operate a sound and profitable organization, the Bank's policy is to maintain a "well-capitalized" status under the capital categories. Based on capital levels at March 31, 2017, the Bank was considered to be well-capitalized.

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

	Actual					MinimumFor Capital AdequacyPurposes					MinimumTo Be WellCapitalized UnderPrompt and CorrectiveAction Provisions
	Amount		%			Amount		%			Amount		%
At March 31, 2017:
Total Capital to Risk-
Weighted Assets	$	19,821		14.71	%	$	10,782		8.00	%	$	13,477		10.00	%
Tier I Capital to Risk-
Weighted Assets		18,853		13.99			8,086		6.00			10,782		8.00
Tier I Capital
to Total Assets		18,853		11.33			6,659		4.00			8,323		5.00
Common equity Tier 1 Capital to      Risk-Weighted Assets		18,853		13.99			6,065		4.50			8,760		6.50
At December 31, 2016:
Total Capital to Risk-
Weighted Assets		19,539		15.34			10,191		8.00			12,739		10.00
Tier I Capital to Risk-
Weighted Assets		18,615		14.61			7,643		6.00			10,191		8.00
Tier I Capital
to Total Assets		18,615		11.42			6,519		4.00			8,148		5.00
Common equity Tier 1 Capital to    Risk-Weighted Assets		18,615		14.61			5,733		4.50			8,280		6.50

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

23

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of

Financial Condition and Results of Operations

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

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: When used in this report, as well as in future filings by us with the U.S. Securities and Exchange Commission ("SEC"), in our press release or other public or shareholder communications, or in oral statements made with the approval or an authorized executive officer, the words or phrases, "anticipate," "believes," "expects," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "projected," or similar expressions are intended to identify forward-looking statements."  These forward-looking statements include, but are not limited to:

· statements of our goals, intentions and expectations;

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

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

· estimates of our risks and future costs and benefits.

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

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

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

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

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

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

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

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

· our ability to attract and retain deposits;

· changes in premiums for deposit insurance;

24

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 our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

· increased competitive pressures among financial services companies;

· changes in consumer spending, borrowing and savings habits;

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

· our ability to pay dividends on our common stock;

· adverse changes in the securities markets;

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

· the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection and insurance and the impact of other governmental initiatives affecting the financial services industry;

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

· other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this report and our Form 10-K for the year ended December 31, 2016 filed on March 30, 2017 ("2016 Form 10-K") and our other reports filed with the SEC.

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

25

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

General

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

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

We currently operate out of five full-service branch offices serving the Tallahassee, Florida metropolitan area.  Our principal business consists of attracting retail deposits from the general public and investing those funds in loans secured by first and second mortgages on one- to four-family residences (including residential construction loans), lot loans commercial real estate loans, commercial business loans and consumer loans.  We offer a wide variety of secured and unsecured consumer loan products, including home equity, direct automobile loans and credit card loans in our market area.

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

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

26

SUNSHINE FINANCIAL, INC. AND SUBSIDIARIES

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

Critical Accounting Policies

The Company has identified several accounting policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company's 2016 Form 10-K under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies." That discussion highlights estimates the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company's critical accounting policies and estimates as previously disclosed in the Company's 2016 Form 10-K.

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

General.  Total assets increased $7.7 million, or 4.5%, to $180.9 million at March 31, 2017 from $173.2 million at December 31, 2016 funded by a $4.2 million increase in deposits and $3.2 million increase in Federal Home Loan Bank advances. The composition of total assets changed during the three months ended March 31, 2017 reflecting a $9.0 million increase in net loans, slightly offset by a $1.0 million decrease in securities held to maturity.

Loans.  Our net loan portfolio increased $9.0 million, to $143.1 million at March 31, 2017 from $134.1 million at December 31, 2016.  The increase in loans was primarily due to a $7.2 million increase in real estate loans, principally commercial real estate, partially offset by decreases in consumer loans.

Allowance for Loan Losses.  Our allowance for loan losses at March 31, 2017 was $968,000, or 0.68% of total loans, compared to $924,000, or 0.69% of total loans, at December 31, 2016.  Nonperforming loans increased to $2.7 million at March 31, 2017 compared to $2.5 million at December 31, 2016.  Nonperforming loans to total loans decreased to 1.86% at March 31, 2017 from 1.88% at December 31, 2016 as a result of the increase in our loan portfolio.

Deposits.  Total deposits increased $4.2 million, or 3.0%, to $142.1 million at March 31, 2017 from $137.9 million at December 31, 2016.  This increase was due to a $2.5 million increase in noninterest bearing deposits, a $1.0 million increase money-market deposit accounts and a $1.3 million increase in savings accounts, partially offset by a $595,000 decrease in time deposits.

Borrowings.  Total FHLB borrowings increased $3.2 million, or 25.5%, to $16.0 million at March 31, 2017 from $12.8 million at December 31, 2016, which funds were used to fund loan demand.

27

Equity.  Total stockholders' equity increased $176,000 to $21.8 million at March 31, 2017.  This increase was primarily due to net earnings of $124,000, and stock-based compensation of $51,000 for the three-months ended March 31, 2017.

Results of Operations

Average Balances, Interest and Average Yields/Cost.  The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.  Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis.  All average balances are daily average balances. Nonaccruing loans have been included in the table as loans carrying a zero yield for the period they have been on non-accrual.

	Three Months Ended March 31,
	2017								2016
	AverageBalance			InterestandDividends		AverageYield/Rate			AverageBalance			InterestandDividend		AverageYield/Rate
						($ in thousands)
Interest-earning assets:
Loans (1)	$	138,080		$	1,643		4.76	%	$	113,599		$	1,427		5.03	%
Securities held to maturity		16,097			81		2.01			20,601			103		2.01
Other interest-earning assets (2)		4,238			16		1.51			7,545			12		0.63
Total interest-earning assets		158,415			1,740		4.39			141,745			1,542		4.35
Noninterest-earning assets		13,910								15,195
Total assets	$	172,325							$	156,940
Interest-bearing liabilities:
MMDA and statement savings accounts		87,137			69		0.32			79,830			64		0.32
Time deposits		19,722			23		0.47			23,554			28		0.48
FHLB advances		13,925			24		0.69			4,815			5		0.43
Total interest-bearing liabilities		120,784			116		0.38			108,199			97		0.36
Noninterest-bearing liabilities		29,768								27,362
Equity		21,773								21,379
Total liabilities and equity	$	172,325							$	156,940
Net interest income				$	1,624							$	1,445
Net interest rate spread (3)							4.01	%							3.99	%
Net interest margin (4)							4.10	%							4.08	%
Ratio of average interest-earning assets
to average interest-bearing liabilities		1.31	x							1.31	x

(1)	Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
(2)	Other interest-earnings assets consist of Federal Home Loan Bank stock and interest-bearing deposits.
(3)	Interest-rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4)	Net interest margin is net interest income divided by average interest-earning assets (annualized).

28

Comparison of the Three Months Ended March 31, 2017 and 2016

General. Net earnings for the three months ended March 31, 2017 were $124,000 compared to a net loss of $91,000 for the three months ended March 31, 2016, resulting in an annualized return on average assets of 0.29% for the three months ended March 31, 2017 and (0.23)% for the three months ended March 31, 2016.  The increase in net earnings was due to an increase in our net interest income, an increase in our noninterest income, and a decrease in our noninterest expense, slightly offset by an increase in our provision for loan losses.

Net Interest Income.  Net interest income increased $179,000, or 12.4%, to $1.6 million for the three months ended March 31, 2017, compared to $1.4 million for the three months ended March 31, 2016. The increase was primarily due to a $198,000, or 12.8%, increase in interest income, partially offset by a $19,000 increase in interest expense.  Our net interest rate spread increased to 4.01% for the three months ended March 31, 2017 from 3.99% for the same period in 2016, while our net interest margin increased to 4.10% at March 31, 2017 from 4.08% at March 31, 2016.  The ratio of average interest-earning assets to average interest-bearing liabilities for the three months ended March 31, 2017 and 2016 was 1.31x.

Interest Income. Interest income for the three months ended March 31, 2017 increased $198,000, or 12.8%, to $1.7 million compared to the three month period ended March 31, 2016.  The increase in interest income for the three months ended March 31, 2016 was primarily due to a $24.5 million increase in average loans outstanding during the three months ended March 31, 2017 compared to the three months ended 2016, partially offset by a 27 basis point decrease in our average yield on loans during the same period.  Average loans outstanding increased to $138.1 million for the three months ended March 31, 2017, from $113.6 million for the same period in 2016.  The average rate on loans receivable decreased to 4.76% for the three months ended March 31, 2017 compared to 5.03% for the three months ended March 31, 2016.

Interest Expense. Interest expense for the three months ended March 31, 2017 increased $19,000, or 19.9%, to $116,000 from $97,000 for the same period ended March 31, 2016.  The increase in interest expense for the three months ended March 31, 2017 was primarily due to an increase in both the average balance of, and rate paid on, FHLB borrowing during the three months ended March 31, 2017 compared to the same period the prior year.  The average balance of FHLB advances increased $9.1 million, or 189.2%, to $13.9 million during the quarter ended March 31, 2017 compared to $4.8 million during the same period in 2016.  The average rate paid on FHLB advances increased 26 basis points to 0.69% for the three months ended March 31, 2017 compared to 0.43% for the three months ended March 31, 2016.  Our total cost of funds for the three months ended March 31, 2017 was 0.38% compared to 0.36% for the three months ended March 31, 2016.

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

29

Comparison of the Three Months Ended March 31, 2017 and 2016, Continued

Based on management's evaluation of the foregoing factors, we recorded a provision for loan losses of $55,000 for the three months ended March 31, 2017 compared to $45,000 for the three months ended March 31, 2016.  The provision for loan losses primarily reflected historical and incurred/probable loan losses, the increase in the size of our loan portfolio as well as the change in the mix of loans, in particular the increase in our commercial real estate loan portfolio.  Net charge-offs for the three months ended March 31, 2017 were $11,000 compared to net charge-offs of $13,000 for the three months ended March 31, 2016.  Nonperforming loans to total loans at March 31, 2017 were 1.86% compared to 1.88% at December 31, 2016.  The allowance for loan losses to loans receivable, net was 0.67% at March 31, 2017 compared to 0.69% at December 31, 2016.

Management considers the allowance for loan losses at March 31, 2017 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest Income. Noninterest income for the three months ended March 31, 2017 increased $54,000, or 13.0%, to $472,000 compared to $418,000 for the same period in 2016 as a result of a $30,000 increase in the gain on sale of foreclosed real estate, a $15,000 increase in fees and charges on loans and an 11,000 increase in gain on loan sales.  The gain on the sale of foreclosed assets was the result of the sale of one lot during the three months ended March 31, 2017, compared to no sales of foreclosed assets during the comparable period in 2016.  Fees and charges on loans increased during the period as a result of the increase in the origination of commercial real estate loans during the period.  The increase in the gain on loan sales was due to the sales of originated FHA loans which the Bank does not service, with no comparable sales during the same period in 2016.  Management and the Board have continued its practice to retain most mortgage loans in portfolio in order to increase interest income in the long-term.    Management intends to continually review this strategy's effect on the Bank's interest-rate risk and recommend corrective action if deemed necessary.

Noninterest Expense. Noninterest expense for the three months ended March 31, 2017 decreased $97,000, or 5.0%, as compared to the same period in 2016.  The largest decreases were in salaries and employee benefits, occupancy and equipment and deposit insurance.  The decreases in salaries and employee benefits are due to an increase in deferred loan origination costs because of the increase in commercial real estate lending volume.  The decrease in occupancy and equipment expense is due to the sale of a branch office in December 2016 and the decrease in deposit insurance is due to lower FDIC rates.

Income Taxes. For the three months ended March 31, 2017, we recorded income taxes of $73,000 on before tax earnings of $197,000.  For the three months ended March 31, 2016, we recorded an income tax benefit of $32,000 on a before tax loss of $123,000.  Our effective tax rate for the three months ended March 31, 2017 was 37.1% compared to an effective tax benefit rate of 26.0% for the same time period in 2016.

Liquidity

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business.  Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures.  Our primary sources of funds are deposits, principal and interest payments on loans and securities, FHLB advances, and proceeds from maturities and calls of securities.  The Company has an unsecured federal funds line of credit for $6.0 million with a correspondent bank and a $43.3 million line with the Federal Home Loan Bank of Atlanta collateralized by a blanket lien on qualifying loans. At March 31, 2017 the Company had $16.0 million outstanding in FHLB advances that mature in 2017 at a weighted average fixed rate of 0.87%.  At December 31, 2016 the Company had $12.8 million outstanding in FHLB advances that mature in 2017 at a weighted average fixed rate of 0.63%.

30

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

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  For the quarter ended March 31, 2017, cash provided by operating activities totaled $635,000. Net cash used by investing activities, which consists primarily of disbursements for loan originations, offset by principal collections on loans and proceeds from pay-downs on securities, totaled $8.4 million for the quarter ended March 31, 2017. Net cash provided by financing activities, consisting primarily of the activity in FHLB advances and deposit accounts, was $7.4 million for the quarter ended March 31, 2017.

In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and funds paid out for Company stock repurchases, when and if declared by the Board.  The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.  At March 31, 2017, the Company (on an unconsolidated basis) had liquid assets of $398,000.

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

In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements.  These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks.  These transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit.  For the quarter ended March 31, 2017, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

A summary of our off-balance sheet commitments at March 31, 2017, is as follows (in thousands):

Unused lines of credit	$	16,998
Commitments to extend credit	$	1,200

Capital Resources

On July 1, 2016, the Bank converted to a State of Florida commercial bank, and is now subject to the same regulatory minimum capital requirements as when it was regulated by the Office of the Comptroller of the Currency. At March 31, 2017, the Bank exceeded all regulatory capital requirements.

Consistent with our goals to operate a sound and profitable organization, our policy is for Sunshine Savings Bank to maintain a "well-capitalized" status under the capital categories of the

31

Bank regulations.  At March 31, 2017, Sunshine Community Bank exceeded all regulatory capital requirements to be categorized as well capitalized under applicable regulatory guidelines with a CET1 capital ratio of 13.99% of risk-weighted assets, which is above the required level of 6.5%, a Tier 1 leverage capital level of 11.33% of adjusted total assets, which is above the required level of 5.00%, Tier I capital to risk-weighted assets of 13.99%, which is above the required level of 8.00% and total risk-based capitalto risk-weighted assets of 14.71%, which is above the required level of 10.00%.

Management is not aware of any conditions or events that would change our category. For additional information see Note 12 of the Notes to Condensed Consolidated Financial Statements contained in Item1, Part 1 of this Form 10-Q.

At March 31, 2017, stockholders' equity at Sunshine Community Bank totaled $21.3 million. Management monitors the capital levels of Sunshine Community Bank to provide for current and future business opportunities and to meet regulatory guidelines for "well-capitalized" institutions.

For a bank holding company with less than $1.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well capitalized under the prompt corrective action regulations.  If Sunshine Financial was subject to regulatory guidelines for bank holding companies with $1.0 billion or more in assets, at March 31, 2017 Sunshine Financial would have exceeded all regulatory capital requirements.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

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

Item 4.  Controls and Procedures
(a)    Evaluation of Disclosure Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of March 31, 2017, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officerand several other members of the Company's senior management.Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of March 31, 2017, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

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

32

procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings

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

Item 1A.  Risk Factors

Not required for smaller reporting companies.

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

(a) Not applicable

(b) Not applicable

(c)  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

33

SIGNATURES

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

	SUNSHINE FINANICAL, INC.
Date:  May 12, 2017	By:	/s/ Louis O. Davis, Jr.
		Louis O. Davis, Jr.
		President and Chief Executive Officer
		(Duly Authorized Officer)
Date:  May 12, 2017	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	Sunshine Financial, Inc. 2012 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement filed on Schedule 14A on April 20, 2012 (File No. 000-54280))
10.5	Forms of Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Agreements under the 2012 Equity Incentive Plan (incorporated by reference to the Exhibits to the Registrant's Registration Statement on Form S-8 filed with the SEC on June 29, 2012 (File No. 333-182450))
10.6	Agreement, dated February 5, 2016, by and among, Sunshine Financial, Inc., Sunshine Savings Bank, Stilwell Value Partners VII, L.P., Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P., Stilwell Partners, L.P. and Stilwell Value LLC, and Corissa J. Briglia (incorporated by reference to the Registrant's Current Report on Form 8-K filed on February 8, 2016 (File No. 000-54280))
11.0	Statement re computation of per share earnings (See Note 3 of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in this Form10-Q).
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.0	Section 1350 Certification
101	Interactive Data Files

34