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 September
30, 2008





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





For the
transition period from _______ to ________





Commission
file number:     000-53369








SUNSHINE
FINANCIAL, INC.


(Exact
name of registrant as specified in its charter)





United
      States
            30-0484296(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 [X]




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


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




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




APPLICABLE
ONLY TO CORPORATE ISSUERS




State the
number of shares outstanding of each issuer's classes of common equity, as of
the latest practicable date:  At November 14, 2008, there were no
shares of the issuers' common stock outstanding.











SUNSHINE
FINANCIAL, INC.





Index





Page
      NumberPART
      IFINANCIAL INFORMATIONItem
      1.                      Financial
      StatementsCondensed Consolidated Balance
      Sheets as of September 30, 2008 (Unaudited) and December 31,
      2007
            1Condensed Consolidated
      Statements of Operations for the Three-Month and Nine-Month Periods Ended
      September 30, 2008 and 2007 (Unaudited)
            2Condensed Consolidated
      Statements of Cash Flows For the Nine-Month Periods Ended September 30,
      2008 and 2007 (Unaudited)
            3-4Notes
      to Condensed Consolidated Financial Statements
            5-7Item
      2.Management's Discussion and Analysis of Financial Condition and Results
      of Operations
            8-16Item
      3.Quantitative and Qualitative Disclosures About Market Risk
            16Item
      4T.  Controls and Procedures
            17PART
      IIOTHER INFORMATIONItem
      1.     Legal Proceedings
              
              Item
      1A.   Risk Factors
            18
              
              18Item
      2.   Unregistered Sales of Equity Securities and
Use
              of
      Proceeds
            18Item
      3.   Defaults Upon Senior Securities
            18Item
      4.   Submission of Matters to a Vote of Security
              Holders
            18Item
      5.   Other Information
            18Item
      6.   Exhibits
            18SIGNATURES
            19EXHIBIT
      INDEX
            20








PART
I - FINANCIAL INFORMATION


Item
1.  Financial Statements





SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





Condensed
Consolidated Balance Sheets


(In
thousands)





At
      September 30,
              2008
            
            
            At
      December 31,
              2007(Unaudited)AssetsCash
      and due from banks
            
            $
            2,047
            
            
            
            2,127Interest-bearing
      deposits with banks
            
            
            3,427
            
            
            
            17,386Federal
      funds sold
            
            
            7,010
            
            
            
            5,002Cash
      and cash equivalents
            
            
            12,484
            
            
            
            24,515Securities
      held to maturity
            
            
            5,851
            
            
            
            -Loans,
      net of allowance for loan losses of $1,552 and $1,423
            
            
            135,686
            
            
            
            125,602Premises
      and equipment, net
            
            
            3,790
            
            
            
            3,553Federal
      Home Loan Bank stock, at cost
            
            
            283
            
            
            
            246Deferred
      income taxes
            
            
            1,038
            
            
            
            570Accrued
      interest receivable
            
            
            460
            
            
            
            458Other
      assets
            
            
            2,313
            
            
            
            1,981Total
      assets
            
            $
            161,905
            
            
            
            156,925Liabilities
      and Retained EarningsLiabilities:Noninterest-bearing
      deposit accounts
            
            
            19,580
            
            
            
            20,330Money-market
      deposit accounts
            
            
            18,323
            
            
            
            18,381Savings
      accounts
            
            
            29,927
            
            
            
            31,204Time
      deposits
            
            
            73,633
            
            
            
            67,653Total
      deposits
            
            
            141,463
            
            
            
            137,568Advances
      for stock subscriptions
            
            
            2,238
            
            
            
            -Borrowings
            
            
            -
            
            
            
            500Official
      checks
            
            
            274
            
            
            
            296Advances
      by borrowers for taxes and insurance
            
            
            309
            
            
            
            -Other
      liabilities
            
            
            613
            
            
            
            776Total
      liabilities
            
            
            144,897
            
            
            
            139,140Retained
      earnings
            
            
            17,008
            
            
            
            17,785Total
      liabilities and retained earnings
            
            $
            161,905
            
            
            
            156,925








See
accompanying Notes to Condensed Consolidated Financial
Statements.


1


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





Condensed
Consolidated Statements of Operations (Unaudited)


(In
thousands)





Three
      Months Ended
              September 30,
            
            
            Nine
      Months Ended
              September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      income:Loans
            
            $
            2,144
            
            
            
            2,183
            
            
            
            6,254
            
            
            
            6,459Securities,
      held to maturity
            
            
            75
            
            
            
            -
            
            
            
            87
            
            
            
            -Other
            
            
            80
            
            
            
            93
            
            
            
            407
            
            
            
            292Total
      interest income
            
            
            2,299
            
            
            
            2,276
            
            
            
            6,748
            
            
            
            6,751Interest
      expense on deposit accounts
            
            
            975
            
            
            
            849
            
            
            
            3,083
            
            
            
            2,249Interest
      expense on borrowings
            
            
            -
            
            
            
            -
            
            
            
            4
            
            
            
            1Total
      interest expense
            
            
            975
            
            
            
            849
            
            
            
            3,087
            
            
            
            2,250Net
      interest income
            
            
            1,324
            
            
            
            1,427
            
            
            
            3,661
            
            
            
            4,501Provision
      for loan losses
            
            
            195
            
            
            
            150
            
            
            
            631
            
            
            
            525Net
      interest income after provision for loan losses
            
            
            1,129
            
            
            
            1,277
            
            
            
            3,030
            
            
            
            3,976Noninterest
      income:Fees
      and service charges on deposit accounts
            
            
            512
            
            
            
            536
            
            
            
            1,465
            
            
            
            1,625Fees
      and charges on loans
            
            
            49
            
            
            
            61
            
            
            
            148
            
            
            
            227Other
            
            
            -
            
            
            
            8
            
            
            
            -
            
            
            
            9Total
      noninterest income
            
            
            561
            
            
            
            605
            
            
            
            1,613
            
            
            
            1,861Noninterest
      expenses:Salaries
      and employee benefits
            
            
            1,158
            
            
            
            1,108
            
            
            
            3,433
            
            
            
            3,262Occupancy
      and equipment
            
            
            323
            
            
            
            265
            
            
            
            888
            
            
            
            767Data
      processing services
            
            
            212
            
            
            
            199
            
            
            
            593
            
            
            
            596Professional
      fees
            
            
            45
            
            
            
            22
            
            
            
            123
            
            
            
            209Advertising
      and promotion
            
            
            31
            
            
            
            48
            
            
            
            160
            
            
            
            109Stationary
      and supplies
            
            
            23
            
            
            
            57
            
            
            
            73
            
            
            
            99Other
            
            
            247
            
            
            
            239
            
            
            
            618
            
            
            
            682Total
      noninterest expenses
            
            
            2,039
            
            
            
            1,938
            
            
            
            5,888
            
            
            
            5,724(Loss)
      earnings before income tax benefit
            
            
            (349
            )
            
            
            (56
            )
            
            
            (1,245
            )
            
            
            113Income
      taxes (benefit)
            
            
            (131
            )
            
            
            (429
            )
            
            
            (468
            )
            
            
            (429
            )Net
      (loss) earnings
            
            $
            (218
            )
            
            
            373
            
            
            
            (777
            )
            
            
            542





See
accompanying Notes to Condensed Consolidated Financial
Statements.


2


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





Condensed
Consolidated Statements of Cash Flows (Unaudited)


(In
thousands)





Nine Months Ended September
    30,2008
            
            
            2007Cash
      flows from operating activities:Net
      (loss) earnings
            
            $
            (777
            )
            
            
            534Adjustments
      to reconcile net (loss) earnings to net cash from operating
      activities:Depreciation
            
            
            337
            
            
            
            370Provision
      for loan losses
            
            
            631
            
            
            
            525Deferred
      income tax benefit
            
            
            (468
            )
            
            
            (429
            )Accretion
      of discounts on securities
            
            
            (2
            )
            
            
            -Net
      amortization of deferred loan fees and costs
            
            
            41
            
            
            
            71(Increase)
      decrease in accrued interest receivable
            
            
            (2
            )
            
            
            16(Increase)
      decrease in other assets
            
            
            (332
            )
            
            
            334Decrease
      in NCUSIF deposit
            
            
            -
            
            
            
            1,118Decrease
      in official checks
            
            
            (22
            )
            
            
            (8
            )Net
      increase in advances by borrowers for taxes and insurance
            
            
            309
            
            
            
            -(Decrease)
      increase in other liabilities
            
            
            (163
            )
            
            
            92Net
      cash (used in) provided by operating activities
            
            
            (448
            )
            
            
            2,623Cash
      flows from investing activities:Purchase
      of held-to-maturity securities
            
            
            (5,849
            )
            
            
            -Net
      increase in loans
            
            
            (10,756
            )
            
            
            (6,450
            )Net
      purchases of premises and equipment
            
            
            (574
            )
            
            
            (105
            )(Purchase
      of) proceeds from sale of Federal Home Loan Bank stock
            
            
            (37
            )
            
            
            45Net
      cash used in investing activities
            
            
            (17,216
            )
            
            
            (6,510
            )Cash
      flows from financing activities:Net
      increase in deposits
            
            
            3,895
            
            
            
            11,339Increase
      in advances for stock subscriptions
            
            
            2,238
            
            
            
            -Net
      decrease in borrowings
            
            
            (500
            )
            
            
            -Net
      cash provided by financing activities
            
            
            5,633
            
            
            
            11,339(Decrease)
      increase in cash and cash equivalents
            
            
            (12,031
            )
            
            
            7,452Cash
      and cash equivalents at beginning of period
            
            
            24,515
            
            
            
            10,701Cash
      and cash equivalents at end of period
            
            $
            12,484
            
            
            
            18,153





(continued)


3


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





Condensed
Consolidated Statements of Cash Flows (Unaudited), Continued


(In
thousands)








Nine Months Ended September
    30,2008
            
            
            2007Supplemental
      disclosure of cash flow information-Cash
      paid during the period for:Income
      taxes
            
            $
            -
            
            
            
            -Interest
            
            $
            3,085
            
            
            
            2,249






















































































See
accompanying Notes to Condensed Consolidated Financial Statements.





4


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





Notes
to Condensed Consolidated Financial Statements








1.
            Basis of
      Presentation.The unaudited,
      condensed consolidated financial statements include the consolidated
      results of operations of Sunshine Financial, Inc. ("Company" or "Sunshine
      Financial") and its subsidiary, Sunshine Savings Bank
      ("Bank").  These financial statements do not include the
      accounts of the Company's parent company, Sunshine Savings
      MHC.  These condensed consolidated financial statements have
      been prepared in accordance with the instructions for Form 10-Q and
      Article 8-03 of Regulation S-X and do not include all disclosures required
      by generally accepted accounting principles for a complete presentation of
      the Company's financial condition and results of operations.  In
      the opinion of management, the information reflects all adjustments
      (consisting only of normal recurring adjustments) which are necessary in
      order to make the financial statements not misleading and for a fair
      representation of the results of operations for such
      periods.  The results for the three- and nine-month periods
      ended September 30, 2008 should not be considered as indicative of results
      for a full year.  For further information, refer to the
      consolidated financial statements and footnotes for the year ended
      December 31, 2007, included in the Company's Registration Statement on
      Form S-1.





2.
            Loan
      Impairment and Loan Losses.The activity in the allowance for loan
      losses is as follows (in
thousands):





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember 30,
            
            
            September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            1,484
            
            
            
            1,368
            
            
            
            1,423
            
            
            
            1,526Provision
      for loan losses
            
            
            195
            
            
            
            150
            
            
            
            631
            
            
            
            525Charge-offs
            
            
            (169
            )
            
            
            (240
            )
            
            
            (601
            )
            
            
            (863
            )Recoveries
            
            
            42
            
            
            
            47
            
            
            
            99
            
            
            
            137Balance
      at end of period
            
            $
            1,552
            
            
            
            1,325
            
            
            
            1,552
            
            
            
            1,325





Nonaccrual
      and past due loans were as follows (in
  thousands):





At September 30,2008
            
            
            2007Nonaccrual
      loans
            
            $
            1,946
            
            
            
            275Past
      due ninety days or more, still accruing
            
            
            -
            
            
            
            -$
            1,946
            
            
            
            275





The
      Company has not identified any individual loans as
    impaired.





4.
            Regulatory
      Capital.  The Bank is required to maintain certain
      minimum regulatory capital requirements.  At September 30, 2008,
      the Bank was in compliance with its regulatory capital requirements, and
      was considered to be
“well-capitalized.”


5


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





Notes
to Condensed Consolidated Financial Statements, Continued








4.
            Adoption of
      Plan of Reorganization and Stock Issuance.On January 29,
      2008, the Board of Directors unanimously adopted a Plan of Reorganization
      and Stock Issuance (the "Plan") pursuant to which the Bank proposes to
      reorganize from a federally-chartered mutual savings bank into a
      federally-chartered mutual holding company structure (the
      "Reorganization") under the laws of the United States of America and the
      rules and regulations of the Office of Thrift Supervision ("OTS"). 
      The Mutual Holding Company ("MHC") will be owned by, and exclusive voting
      rights will be vested in, the members of the Bank.  As part of the
      Reorganization, the Bank will convert to a federal stock savings bank (the
      "Stock Bank") and will establish a federal stock holding company (the
      "Stock Holding Company") that will be a majority-owned subsidiary of the
      MHC at all times so long as the MHC structure is maintained.  As part
      of the Reorganization and concurrently with it, the Stock Holding Company
      intends to undertake a stock issuance through the offering of up to 49% of
      its to be outstanding common stock (the "Common Stock") in the stock
      offering (the "Stock Offering").  The remaining common stock to be
      outstanding will be issued to the
MHC.





The Stock
Offering provides that nontransferable subscription rights to purchase Stock
Holding Company Common Stock be offered first to Eligible Account Holders of
record as of the Eligibility Record Date, then to the Bank's Tax-Qualified
Employee Plans, then to Supplemental Eligible Account Holders of record as of
the Supplemental Eligibility Record Date, and then to Other Members. 
Concurrently with, at any time during, or promptly after the Subscription
Offering, and on a lowest priority basis, an opportunity to subscribe will be
offered to the general public in a Direct Community Offering or a Public
Offering.  The price of the Stock Holding Company Common Stock will be
based upon an independent appraisal of the Bank.





Through
September 30, 2008, the Bank incurred approximately $423,000 in stock offering
costs.  Should the offering be successful, these offering costs plus
any additional costs will be accounted for as a reduction from the proceeds
received.  Should the offering be unsuccessful, these amounts plus any
additional costs will be charged to expense.





On
September 18, 2008, the Bank announced that Sunshine Financial its proposed
holding company, has extended the community offering phase of its stock
offering.  The subscription offering phase to certain depositors of
the Bank and other eligible subscribers expired at 12:00 p.m., Eastern time, on
September 16, 2008.  Sunshine Financial will hold all subscribers'
funds received to date, with interest on those funds continuing to accrue until
the completion of the offering as disclosed in its prospectus dated August 12,
2008.





In
addition, Sunshine Financial announced that it has increased the individual
purchase limitation and the overall group purchase limitation of the common
stock sold in the offering (688,500 shares at the minimum of the offering range
and 931,500 shares at the maximum of the offering range) to 34,425
shares.  Persons who submitted orders in the subscription offering at
the original maximum individual purchase limit or overall purchase limitation
may increase their order by submitting an additional stock order form with full
payment for the additional shares ordered. For subscribers who wish to increase
their order, Sunshine Financial must receive the completed stock order form,
with full payment or direct deposit account withdrawal authorization, not later
than Noon, Eastern time, on September 29, 2008. Interested persons should
request offering materials and return stock order forms promptly. All other
eligible subscribers who properly completed and timely submitted a stock order
form will be allocated the number of shares of common stock requested in their
stock order form and can submit an additional order in the extended community
offering, if desired.  Sunshine Financial may terminate the community
offering at any time.


6


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





Notes
      to Condensed Consolidated Financial Statements,
  Continued








4.
            Adoption of
      Plan of Reorganization and Stock Issuance, Continued.


On
November 3, 2008, the Bank announced that Sunshine Financial Inc., its proposed
holding company, received approval from the Office of Thrift Supervision, its
primary regulator, to extend its stock offering period until January 29,
2009.  In connection with the extension, Sunshine Financial is seeking
a reduction in the offering range of its common stock, which is subject to the
Office of Thrift Supervision’s approval.





As of
September 30, 2008, the Bank had $2.2 million in advances for stock
subscriptions which will earn 0.75% and will be returned to the subscriber if
the stock transaction is not successful.


7


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY




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





Forward-Looking
Statements





When used in this report and in future
filings by Sunshine Financial with the 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.  Such statements are subject to risks and
uncertainties, including but not limited to changes in economic conditions in
Sunshine Financial's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in Sunshine Financial's market
area, changes in the position of banking regulators on the adequacy of our
allowance for loan losses, and competition, all or some of which could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected.




Sunshine Financial wishes to caution
readers not to place undue reliance on any forward-looking statements, which
speak only as of the date made, and advise readers that various factors,
including regional and national economic conditions, substantial changes in
levels of market interest rates, credit and other risks of lending and investing
activities, and competitive and regulatory factors, could affect Sunshine
Financial's financial performance and could cause Sunshine Financial's actual
results for future periods to differ materially from those anticipated or
projected.




Sunshine Financial does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events or circumstances after
the date of such statements.




General




On July
1, 2007, Sunshine Savings Bank (the "Bank") converted its charter from a
state-chartered credit union to a federally-chartered savings
bank.  On that date the name was changed from Sunshine State Credit
Union to Sunshine Savings Bank, and we became a taxable
organization.  The banking operations are conducted through four
offices in Tallahassee, Florida and one office in Broward County,
Florida.  The Bank's deposits are insured to the extent of the law, by
the Federal Deposit Insurance Corporation.




Our
principal business consists of attracting retail deposits from the general
public and investing those funds, along with borrowed funds, in loans secured by
first and second mortgages on one- to four-family residences, home equity loans
and lines of credit, 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.  We have adopted a plan of reorganization and
stock issuance, primarily to increase our capital to grow our loan portfolio and
to continue to build our franchise.




Sunshine
Savings Bank is 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 of
the Bank include primarily deposits, borrowings, payments on loans and income
provided from operations.




8


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY







The
Bank's earnings are primarily dependent upon our net interest income, the
difference between interest income and interest expense.  Interest
income is a function of the balances of loans and investments outstanding during
a given period and the yield earned on these loans and
investments.  Interest expense is a function of the amount of deposits
and borrowings outstanding during the same period and interest rates paid on
these deposits and borrowings.  The Bank's earnings are also affected
by our provision for loan losses, service charges and fees, gains from sales of
loans, commission income, other income, operating expenses and income
taxes.




Over the
last year, our net interest margin has narrowed and the level of our
nonperforming loans has increased. These trends are primarily attributable to
our change in lending emphasis from higher risk and higher rate consumer
automobile and unsecured lending to lower risk and lower yielding single-family
mortgage lending, the effect of rapidly declining short-term interest rates and
the economic slowdown that began during this period.  As rates have
declined, our yields on adjustable rate loans also declined. While funding costs
also moved significantly lower, the more immediate impact of lower rates on a
substantial portion of our loan portfolio resulted in compression of our net
interest margin. This decline was compounded by the adverse effect of an
increase in the level of nonaccrual loans and other nonperforming assets.
Reflecting these generally lower market interest rates as well as the changes in
our asset mix and a higher level of nonaccrual loans, the yield on earning
assets for the nine months ended September 30, 2008 decreased by 101 basis
points compared to the prior year's nine month period, while funding costs for
the nine months ended September 30, 2008 increased by 34 basis points compared
to the same period last year, as we increased the amount of higher costing
certificates of deposit as a percentage of our overall
deposits.  Likewise, our net interest rate-spread declined to 2.66%
for the nine months ended September 30, 2008 as compared to 4.01% for the same
period last year. Importantly, during the first nine months of 2008, the Federal
Reserve was aggressively lowering short-term interest rates.  Due to
the timing of those changes, we anticipate further compression of our net
interest margin over the next quarter, despite the fact that funding costs are
expected to continue declining.  In addition, to the extent the
economic slowdown continues or worsens, our nonperforming assets may increase,
further negatively impacting our earnings.




The Bank
has received approval from the Office of Thrift Supervision to relocate two of
its existing branches which is expected to reduce annual expenses associated
with their operation by approximately $225,000.  However, we also
expect our operating costs to increase as a result of an increase in Federal
Deposit Insurance premiums.  These premiums are expected to increase
in 2009 due to recent strains on the Federal Deposit Insurance Corporation
deposit insurance fund due to the cost of large bank failures and increase in
the number of troubled banks.  The current rates for Federal Deposit
Insurance Corporation assessments have ranged from 5 to 43 basis points,
depending on the health of the insured institution.  The Federal
Deposit Insurance Corporation has proposed increasing the current deposit
insurance assessment rates uniformly for all institutions by 7 basis points (to
a range from 12 to 50 basis points) for the first quarter of
2009.  The proposed rule would also alter the way the FDIC calculates
federal deposit insurance assessment rates beginning in the second quarter of
2009 and thereafter.




Additionally,
following the completion of the offering, we anticipate that our operating
expenses will also increase as a result of our branch expansion strategy and the
costs associated with being a public company.  We also expect,
however, to decrease the level of discretionary contributions to our existing
benefit plans to  substantially offset the projected cost of our
proposed stock based benefit plans. While these additional expenses will
negatively impact earnings, we do not expect them to offset the additional
income we expect to receive by leveraging the proceeds from our stock
offering.




The
recently enacted Emergency Economic Stabilization Act of 2008 (“EESA”)
authorizes the U.S. Department of the Treasury (“Treasury Department”) to
purchase from financial institutions and their holding companies up to $700
billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial
institutions and their holding companies in




9


a
troubled asset relief program (”TARP”).  The purpose of TARP is to
restore confidence and stability to the U.S. banking system and to encourage
financial institutions to increase their lending to customers and to each
other.  The Treasury Department has allocated $250 billion towards the
TARP Capital Purchase Program (“CPP”).  Under the CPP, Treasury will
purchase debt or equity securities from participating
institutions.  At this time, the Company has not determined whether or
not it will participate in this program.




EESA also
increased FDIC deposit insurance on most accounts from $100,000 to
$250,000.  This increase is in place until the end of 2009 and is not
covered by deposit insurance premiums paid by the banking
industry.  In addition, the FDIC has implemented two temporary
programs to provide deposit insurance for the full amount of most
noninterest-bearing transaction accounts through the end of 2009 and to
guarantee certain unsecured debt of financial institutions and their holding
companies through June 2012.  Financial institutions have until
December 18, 2008 to opt out of these two programs.  We expect to
participate only in the program that provides unlimited deposit insurance
coverage through December 31, 2009 for noninterest-bearing transaction accounts
(typically business checking accounts) and certain funds swept into
noninterest-bearing savings accounts.  Under that program, we will pay
a 10 basis points fee (annualized) on the balance of each covered account in
excess of $250,000, while the extra deposit insurance is in place.  At
September 30, 2008, we had no accounts in excess of $250,000.




The
purpose of these legislative and regulatory actions is to stabilize the
volatility in the U.S. banking system.  EESA, TARP and the FDIC’s
recent regulatory initiatives may not have the desired effect.  If the
volatility in the market and the economy continue or worsen, our business,
financial condition, results of operations, access to funds and the price of our
stock could be materially and adversely impacted.




Critical Accounting
Policies




Certain
of our accounting policies are important to the portrayal of our financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain.  Estimates associated with these policies are susceptible
to material changes as a result of changes in facts and
circumstances.  Facts and circumstances which could affect these
judgments include, but are not limited to, changes in interest rates, changes in
the performance of the economy and changes in the financial condition of
borrowers.  Management believes that its critical accounting policies
include, determining the allowance for loan losses and accounting for deferred
income taxes.




10


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY







Allowance for
Loan Loss.  The allowance for loan losses is the amount
estimated by management as necessary to cover losses in the loan portfolio at
the balance sheet date.  The allowance is established through the
provision for loan losses, which is charged to income.  Determining
the amount of the allowance for loan losses necessarily involves a high degree
of judgment.  The allowance for loan losses is evaluated on a regular
basis by management and is based upon management's periodic review of the
collectability of the loans in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and prevailing
economic conditions.  This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available.




The
allowance consists of specific and general components.  The specific
component relates to loans that are classified as impaired.  For such
loans that are also classified as impaired, an allowance is established when the
discounted cash flows, collateral value or observable market price of the
impaired loan is lower than the carrying value of that loan.  The
general component covers all other loans and is based on historical industry
loss experience adjusted for qualitative factors.




Loans are
considered impaired if, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan
agreement.  The measurement of impaired loans is generally based on
the present value of expected future cash flows discounted at the historical
effective interest rate stipulated in the loan agreement, except that all
collateral-dependent loans are measured for impairment based on fair value of
the collateral.  In measuring the fair value of the collateral,
management uses assumptions (e.g., discount rates) and methodologies (e.g.,
comparison to the recent selling price of similar assets) consistent with those
that would be utilized by unrelated third parties.




Deferred Tax
Assets.  Income taxes are reflected in our financial statements
to show the tax effects of the operations and transactions reported in the
financial statements and consist of taxes currently payable plus deferred
taxes.  SFAS No. 109, "Accounting for Income Taxes," requires the
asset and liability approach for financial accounting and reporting for deferred
income taxes.  Deferred tax assets and liabilities result from
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities.  They are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled and are determined using the
assets and liability method of accounting.  The deferred income
provision represents the difference between net deferred tax asset/liability at
the beginning and end of the reported period.  In formulating our
deferred tax asset, we are required to estimate our income and taxes in the
jurisdiction in which we operate.  This process involves estimating
our actual current tax exposure for the reported period together with assessing
temporary differences resulting from differing treatment of items, such as
depreciation and the provision for loan losses, for tax and financial reporting
purposes.  Deferred tax assets and liabilities are the expected future
tax amounts for the temporary differences between carrying amounts and tax bases
of assets and liabilities, computed using enacted tax rates.  The
realization of deferred tax assets is dependent on results of future
operations.  A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.




11


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





Management's
Discussion and Analysis of Financial Condition and Results of
Operations





Comparison
of Financial Condition at September 30, 2008 and December 31, 2007




General.  Total
assets increased $5.1 million, or 3.3%, to $162.0 million at September 30, 2008
from $156.9 million at December 31, 2007. The increase in total assets was due
primarily to increases in securities and in our loan portfolio, offset by a
decrease in cash and cash equivalents.  Securities increased by $5.8
million at September 30, 2008 from none at December 31, 2007, while our loan
portfolio increased $10.1 million since December 31, 2007.  This
increase was offset by a $12.0 million decrease in cash and cash
equivalents.  The increase in total assets was funded by an increase
in our certificates of deposits.




Loans.Our
loan portfolio increased $10.1 million, to $135.7 million at September 30, 2008
from $125.6 million at December 31, 2007.  Our one-to-four family real
estate mortgage loans increased $13.4 million, home equity loans increased $0.8
million, and other secured loans increased $2.8 million.  These
increases were offset by a decrease in automobile loans of $4.9 million, and a
decrease in credit card and unsecured loans of $1.5 million. The decrease in
automobile and credit card and unsecured loans was primarily due to a
combination of more stringent underwriting policies and a greater emphasis on
providing mortgage lending.




Allowance
for Loan Losses.  The allowance for loan losses is maintained
to cover losses that have been estimated on the date of the evaluation in
accordance with generally accepted accounting principles in the United
States.  It is our estimate of probable incurred credit losses in our
loan portfolio.




Our
methodology for analyzing the allowance for loan losses consists of specific and
general components.  We stratify the loan portfolio into homogeneous
groups of loans that possess similar loss-potential characteristics and apply an
appropriate loss ratio to the homogeneous pools of loans to estimate the
incurred losses in the loan portfolio.  The amount of loan losses
incurred in our consumer portfolio is estimated by using historical loss ratios
for major loan collateral types adjusted for current factors.  The
historical loss experience is generally defined as an average percentage of net
loan losses to loans outstanding.  A separate valuation of known
losses for individual impaired large-balance, non-homogeneous loans is also
established. Impaired loans are loans that we believe are probable of not being
paid in accordance with the loan agreement.  The allowance for loan
losses on individually analyzed loans includes one- to four-family and consumer
loans, where management has concerns about the borrower’s ability to
repay.  Loss estimates include the difference between the estimated
current fair value of the collateral and the loan amount due.




Our
allowance for loan losses at September 30, 2008 was $1.55 million or 1.14% of
net loans receivable, compared to $1.4 million or 1.12% of net loans receivable
at December 31, 2007.  Non-performing loans increased to $1.9 million
at September 30, 2008 from $1.4 million at December 31,
2007.  Non-performing loans to total loans increased to 1.43% at
September 30, 2008 from 1.10% at December 31, 2007.





Deposits.Total
deposits increased $3.9 million to $141.5 million at September 30, 2008 from
$137.6 million at December 31, 2007.  This increase was due primarily
to a $6.0 million or 8.8% increase in certificate of deposit accounts offset by
decreases in savings and noninterest bearing deposit accounts.  The
increase in our certificate accounts was the result of paying more competitive
interest rates and our recent access to the general public for deposits as we
had no field of membership limitation since our conversion to a thrift
charter.


12


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





As of
September 30, 2008, the Bank had $2.2 million in advances for stock
subscriptions which will earn 0.75% and be returned to the subscriber if the
stock transaction is not successful.





Equity.Total
equity decreased $0.8 million to $17.0 million at September 30, 2008 or 10.50%
of total assets, from $17.8 million at December 31, 2007.  This
decrease was solely due to the net operating loss for the nine months ended
September 30, 2008.





Comparison
of Results of Operation for the Three Months Ended September 30, 2008 and
2007




General.  Net
loss for the three months ended September 30, 2008 was $218,000 compared to net
earnings of $373,000 for the three months ended September 30,
2007.  The (loss)/earnings represent an annualized return on
average assets of (0.55) % for the three months ended September 30, 2008 and
1.06% for the three months ended September 30, 2007.  The
decrease in net earnings was due primarily to a decrease in our income tax
benefit and our interest-rate spread.  The income tax benefit
decreased to $131,000 for the three months ended September 30, 2008, from
$429,000 for the three months ended September 30, 2007.  The average
yield on assets decreased to 6.18% for the three months ended September 30, 2008
from 6.91% for the three months ended September 30, 2007.  This
decline was expected due to a change in emphasis from higher risk and higher
rate consumer automobile and unsecured lending to lower risk and lower yielding
single-family mortgage lending.  This was partially offset due to the
average cost of liabilities decreasing to 3.17% for the three months ended
September 30, 2008 from 3.25% for the three months ended September 30, 2007,
primarily due to the lower cost of certificate of deposit accounts.




Net
Interest Income.  Net interest income decreased $103,000, or
7.2%, to $1.3 million for the three months ended September 30, 2008 from $1.4
million for the same period in 2007, as the increase in the average balance of
our loan portfolio was just enough to offset the lower rates we were earning on
our loans, but not enough to cover the increase cost due to the volume of our
deposits.  Our interest rate spread decreased to 3.01% for the three
months ended September 30, 2008 from 3.65% for the same period in 2007, while
our average net interest margin declined to 3.56% at September 30, 2008
from 4.09% at September 30, 2007.  The ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
120.85% at September 30, 2008, from 126.26% as of September 30,
2007.





Interest
Income. Interest income for the three months ended September 30, 2008
increased $23,000 to $2.3 million compared to the same period ended September
30, 2007.  While total interest income increased slightly, the yield
on loans decreased to 6.42% for the three months ended September 30, 2008 from
7.06% for the three months ended September 30, 2007, primarily the result of
emphasizing lower yielding and lower risk mortgage loan
products.   The yield on other interest-earning assets decreased
to 4.06% for the three months ended September 30, 2008 from 4.59% for the three
months ended September 30, 2007, primarily the result of lower rates on other
interest-bearing assets.  The overall yield on average earning assets
decreased to 6.18% from 6.91% for the same period due to lower yielding loans
and federal funds sold.





Interest
Expense. Interest expense for the three months ended September 30, 2008
was $975,000 compared to $849,000 for the same period in 2007, an increase of
$126,000.  The increase was primarily the result of an increase in the
average balance of certificate accounts, offset by a decrease in the average
rate of certificate accounts.  Average certificate accounts increased
to $74.3 million for the three month period ended September 30, 2008 from $53.9
million for the same period in 2007 and the average rate paid on certificates
decreased to 4.39% from 5.00% due to the lower rate environment.





13


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





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 factors.




Based on
management’s evaluation of these factors, the provision for loan losses was
$195,000 for the three months ended September 30, 2008 and $150,000 for the same
period in 2007.  Net charge-offs for the three months ended September
30, 2008 were $127,000 compared to $193,000 for the three month period ended
September 30, 2007.  For the third quarter of 2008, net charge-offs
consisted of $65,000 for credit card and unsecured loans, $12,000 for
one-to-four family mortgage loans, $67,000 for automobile loans, less a $17,000
recovery for home equity loans.  For the same period in 2007, net
charge-offs consisted of $131,000 for automobile loans, and $62,000 for credit
card and unsecured loans.


Non-performing
loans to total loans at September 30, 2008 were 1.43% compared to 0.22% at
September 30, 2007. The allowance for loan losses to net loans receivable was
1.14% at September 30, 2008 compared to 1.07% at September 30,
2007.




Noninterest
Income. Noninterest income for the three months ended September 30, 2008
declined $44,000 to $561,000 compared to $605,000 for the same period in
2007.  Loan fees and service charges on deposit accounts decreased by
$20,000 and $24,000, respectively, for the three months ended September 30,
2008, compared to the three months ended September 30, 2007 due to a reduction
in our fee schedule and the number of demand accounts.





Noninterest
Expense. Noninterest expense for the three months ended September 30,
2008 increased $101,000 to $2.0 million compared to the same period in
2007.  The largest increases occurred in salaries and employee
benefits and occupancy and equipment costs.  Salaries and employee
benefits increased due to normal merit pay increases as well as increased
insurance costs, and occupancy and equipment costs increased due to increased
rent and utilities.  This was offset by decreases in other noninterest
expense.  The number of full-time equivalent employees at September
30, 2008 was 72, compared to 80 as of September 30, 2007.





Federal deposit insurance premiums
during the three months ended September 30, 2008 totaled $25,720, compared none
for the same period in 2007. The bank did not begin paying federal deposit
insurance premiums until December 2007.  These premiums are expected
to increase in 2009 due to recent strains on the Federal Deposit Insurance
Corporation deposit insurance fund due to the cost of large bank failures and
increase in the number of troubled banks.  The current rates for
Federal Deposit Insurance Corporation assessments have ranged from 5 to 43 basis
points, depending on the health of the insured institution.  The
Federal Deposit Insurance Corporation has proposed increasing the current
deposit insurance assessment rates uniformly for all institutions by 7 basis
points (to a range from 12 to 50 basis points) for the first quarter of
2009.  The proposed rule would also alter the way the FDIC calculates
federal deposit insurance assessment rates beginning in the second quarter of
2009 and thereafter.  The FDIC also proposed that it could increase
assessment rates in the future without formal rulemaking.





Income
Taxes. As a result of our charter conversion to a mutual savings bank on
July 1, 2007, we became a for-profit, taxable organization.  Pursuant
to FASB 109, when an enterprise’s tax status changes from nontaxable to taxable
or from taxable to nontaxable, a deferred tax asset or liability is recognized
for temporary differences at the date that a nontaxable enterprise becomes a
taxable enterprise.  On July 1, 2007, a deferred tax asset was
recorded in the amount of $408,000 as a result of timing
differences.  Beginning July 1, 2007, our earnings as a savings bank
were subject to federal and state income taxes at a combined rate of
37.6%.


14


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





For the
three months ended September 30, 2008, we recorded an income tax benefit of
$131,000 on a before tax loss of $349,000.  For the three months ended
September 30, 2007, we recorded an income tax benefit of $429,000 ($408,000 of
which was for timing differences as discussed above) on a before tax loss of
$56,000.





Comparison
of Results of Operation for the Nine Months Ended September 30, 2008 and
2007





General.Net
loss for the nine months ended September 30, 2008 was $777,000 compared to net
earnings of $542,000 for the nine months ended September 30,
2007.  The earnings/(loss) represent an annualized return on
average assets of (0.65) % for the nine months ended September 30, 2008 and
0.53% for the nine months ended September 30, 2007.  The decrease
in net earnings was due primarily to a decrease in our average yield on assets,
a decrease in noninterest income and an slight increase in our noninterest
expenses.  The average yield on assets decreased to 5.98% for the nine
months ended September 30, 2008 from 6.99% for the nine months ended September
30, 2007.  This decline was expected due to a change in emphasis from
higher risk and higher rate consumer automobile and unsecured lending to lower
risk and lower yielding single-family mortgage lending.  In addition
the average cost of liabilities increased to 3.32% for the nine months ended
September 30, 2008 from 2.98% for the nine months ended September 30, 2007,
primarily due to the higher volume and cost of certificate of deposit
accounts.




Net Interest
Income.  Net interest income decreased $840,000, or 18.7%, to
$3.7 million for the nine months ended September 30, 2008 from $4.5 million for
the same period in 2007.  While the increase in the average balance of
our loan portfolio was just enough to offset the lower rates we were earning on
our loans, it was not enough to cover the increased cost due to the volume of
our deposits.  Our interest rate spread decreased to 2.66% for the
nine months ended September 30, 2008 from 4.01% for the same period in 2007,
while our average net interest margin declined to 3.56% at September 30,
2008 from 4.09% at September 30, 2007.  The ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
121.46% for the nine month period ended September 30, 2008, from 127.92% for the
same period ended September 30, 2007.





Interest
Income.  Interest income for the nine months ended September
30, 2008 remained stable compared to same period ended September 30,
2007.  While the total interest income remained relatively stable, the
yield on loans decreased to 6.46% for the nine months ended September 30, 2008
from 7.10% for the nine months ended September 30, 2007, primarily the result of
emphasizing lower yielding and lower risk mortgage loan
products.   In addition, the yield on other interest-earning
assets decreased to 3.08% for the nine months ended September 30, 2008 from
5.23% for the nine months ended September 30, 2007, primarily the result of
lower rates on other interest-bearing assets.  The overall yield on
average earning assets decreased to 5.98% from 6.99% for the same period due to
lower yielding loans and federal funds sold.





Interest
Expense. Interest expense for the nine months ended September 30, 2008
was $3.1 million compared to $2.3 million for the same period in 2007, an
increase of $0.8 million.  The increase was primarily the result of an
increase in the average balance of certificate accounts.  Average
certificate accounts increased to $74.3 million for the nine month period ended
September 30, 2008 from $48.2 million for the same period in 2007 and the
average rate paid on certificates decreased to 4.65% from 4.75% due to the lower
rate environment.





15


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY








Provision for
Loan Losses.  For the nine months ended September 30, 2008 the
provision for loan losses was $631,000 and $525,000 for the same period in
2007.   Net charge-offs for the nine months ended September 30, 2008
were $502,000 compared to $726,000 for the nine month period ended September 30,
2007. For the nine months ended September 30, 2008, net charge-offs consisted of
$264,000 for credit card and unsecured loans, $46,000 for one- to four-family
mortgage loans, $183,000 for automobile loans, $5,000 for home equity loans and
$4,000 for other secured consumer loans.  For the same period in 2007,
net charge-offs consisted of $397,000 for automobile loans, $84,000 for home
equity loans and $245,000 for credit card and unsecured loans.





Noninterest
Income. Noninterest income for the nine months ended September 30, 2008
declined $248,000 to $1.6 million compared to $1.9 million for the same period
in 2007.  Loan fees and service charges on deposit accounts decreased
by $88,000 and $160,000, respectively, for the nine months ended September 30,
2008, compared to the nine months ended September 30, 2007 due to a reduction in
our fee schedule and the number of demand accounts.





Noninterest
Expense.Noninterest expense for the nine months ended September 30, 2008 was $5.9
million, compared to $5.7 million for the same period in 2007.  The
largest increases occurred in salaries and employee benefits and occupancy and
equipment costs.  Salaries and employee benefits increased due to
normal merit pay increases as well as increased insurance costs, and occupancy
and equipment costs increased due to increased rent and utilities.  This
was offset by decreases in other noninterest expense.





Income
Taxes.For the nine months ended September 30, 2008, we recorded an
income tax benefit of $468,000 on a before tax loss of $1.2
million.  Had our total earnings in 2007 been subject to income taxes,
we would have recorded tax expense of $43,000 and our net earnings after income
taxes would have been $70,000.





Off-Balance
Sheet Arrangements





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 nine
months ended September 30, 2008 and the year ended December 31, 2007, 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 to extend credit at September 30, 2008, is
as follows (in thousands):




Off-balance sheet loan
      commitments:Commitments
      to make loans
            
            $
            1,144Unused
      lines of
      credit
            
            
            12,523Total
      loan
      commitments
            
            $
            13,667





16


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY








Capital




Sunshine
Savings Bank is subject to minimum capital requirements imposed by the
OTS.  Based on its capital levels at September 30, 2008, Sunshine
Savings Bank exceeded these requirements as of that date and continues to exceed
them as of the date of this report.  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
OTS.  Based on capital levels at September 30, 2008, Sunshine Savings
Bank was considered to be well-capitalized.  In addition, as part of
our conversion to a federally-chartered savings bank, Sunshine Savings Bank is
required to maintain a minimum Tier I capital to total assets ratio of no less
than 8% for three years of operation.




The
following table sets forth our regulatory capital ratios at September 30,
2008:




Actual
            Minimum Capital
              Requirements
            Minimum Required to
              Be Well-Capitalized
              Under Prompt
              Corrective
              Action
      ProvisionsAmount
            Ratio
            Amount
            Ratio
            Amount
            Ratio(Dollars
      in thousands)Core capital (to total
      adjusted  assets)
            $15,732
            9.79%
            $6,430
            4.00%
            $  8,038
            5.00%Core
      capital (to risk-weighted assets)
            $15,732
            14.75%
            $6,401
            6.00%
            $  6,401
            6.00%Risked-based capital (to risk-weighted assets)
            $17,067
            16.00%
            $8,535
            8.00%
            $10,668
            10.00%







The capital expected to be raised in
our pending offering, while less than the $6.1 million to $9.9 million of net
proceeds initial anticipated, will still significantly increase our regulatory
capital levels and ratios.  Based upon our existing capital, and the
capital to be raised in our pending offering, we believe that we will have
sufficient capital to carry out our proposed business plan for at least the next
year and to meet any applicable regulatory capital requirements during that
period.




Impact of Inflation




The
effects of price changes and inflation can vary substantially for most financial
institutions.   While management believes that inflation affects
the growth of total assets, it believes that it is difficult to assess the
overall impact.   Management believes this to be the case due to
the fact that generally neither the timing nor the magnitude of the inflationary
changes in the consumer price index ("CPI") coincides with changes in interest
rates.   The price of one or more of the components of the CPI
may fluctuate considerably and thereby influence the overall CPI without having
a corresponding affect on interest rates or upon the cost of those good and
services normally purchased by Sunshine Savings Bank.   In years
of high inflation and high interest rates, intermediate and long-term interest
rates tend to increase, thereby adversely impacting the market values of
investment securities, mortgage loans and other long-term fixed rate
loans.   In addition, higher short-term interest rates caused by
inflation tend to increase the cost of funds.   In other years,
the opposite may occur.




Item 3.  Quantitative and Qualitative Controls
Disclosures About Market Risk





Not required for smaller reporting
companies.


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SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY








Item4T.   Controls and
Procedures





An evaluation of the Company's
disclosure controls and procedures as defined in Rule 13a -15(e) under the
Securities Exchange Act of 1934 (the"Act") as ofSeptember 30, 2008, was carried out under the supervision
and with the participation of the Company's Chief Executive Officer, Chief
Financial Officer and several other members of the Company's senior management.
The Chief Executive Officer and Chief Financial Officer concluded that, as ofSeptember 30, 2008, the Company's disclosure controls and
procedures 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 the 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. There were no changes in our internal control over
financial reporting (as defined in Rule 13a - 15(f) under the Act) that occurred
during the quarter endedSeptember 30, 2008, that has materially affected, or is
likely to materially affect our internal control over financial
reporting.




The Company intends to continually
review and evaluate the design and effectiveness of its disclosure controls and
procedures and to improve its controls and procedures over time and to correct
any deficiencies that it may discover in the future. The goal is to ensure that
senior management has timely access to all material financial and nonfinancial
information concerning the Company's business. While the Company believes the
present design of its disclosure controls and procedures is effective to achieve
its goal, future events affecting its business may cause the Company to modify
its disclosure controls and procedures.






The Company does not expect that its
disclosure controls and procedures 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 can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any control procedure is also 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 and 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.




18


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY







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)Recent Sales of Unregistered
Securities





Nothing to report.





(b)Use of Proceeds





Nothing to report.





(c)Stock Repurchases





Nothing
to report.





Item
3.    Defaults Upon Senior Securities





Nothing
to report.





Item
4.    Submission of Matters to a Vote of Security
Holders





Nothing
to report.





Item
5.    Other Information


Nothing
to report.





Item
6.  Exhibits





See
Exhibit Index


19


SUNSHINE
FINANCIAL, INC. AND SUBSIDIARY





SIGNATURES








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








SUNSHINE
      FINANICAL, INC.Date:   November
      14, 2008
            By:
            /s/ Louis O. Davis, Jr.Louis
      O. Davis, Jr.President
      and Chief Executive Officer(Duly
      Authorized Officer)Date:   November
      14, 2008
            By:
            /s/ Scott A. SwainScott
      A. SwainSenior
      Vice President, Treasurer andChief
      Financial Officer(Principal
      Financial Officer)














EXHIBIT
INDEX





Reference to
      PriorFiling
      or Exhibit No.Exhibits:
            
            Attached
      Hereto2.0
            Plan
      of Reorganization and Stock Issuance
            *3.1
            Charter
      for Sunshine Financial, Inc.
            **3.2
            Bylaws
      of Sunshine Financial, Inc.
            **4.0
            Form
      of Stock Certificate of Sunshine Financial, Inc.
            **10.1
            Form
      of Employment Agreement entered into with Louis O. Davis
            **10.2
            Director
      Fee Arrangements
            **14.
            Code
      of Business Conduct and Ethics
            +15
            Letter on unaudited interim
      financial information
            None18
            Letter re change in accounting
      principles
            None19
            Reports furnished to security
      holders
            None20
            Other documents to security
      holders or incorporated by reference
            None22
            Published report on matters
      submitted for shareholder vote
            None23
            Consents
            None24
            Power of
      Attorney
            None31.1
            Rule 13a–14(a) Certification of
      Chief Executive Officer
            31.131.2
            Rule 13a–14(a) Certification of
      Chief Financial Officer
            31.232
            Section 1350
      Certification
            32





*
            Filed
      as an exhibit toPre-effective
      Amendment No. 1 tothe
      Company’s
      Form S–1registration
      statement filed onJuly
      8,
      2008(File
      No.333–151131) pursuant
      to Section 5 of the Securities Act of
  1933.**
            Filed
      as an exhibit to the Company’s
      Form S-1registration
      statement filed onMay
      23,
      2008(File
      No.333–151131) pursuant
      to Section 5 of the Securities Act of
  1933.+
            Company
      is in formation and will not be chartered until the closing of its stock
      offering.  It will adopt a Code of Conduct and Ethics at its
      organization.