Edgewater Bancorp, Inc. - FORM 10-Q

Attached files

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EX-31.2 - EXHIBIT 31.2 - Edgewater Bancorp, Inc.	t1502485_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Edgewater Bancorp, Inc.	t1502485_ex31-1.htm
EX-32 - EXHIBIT 32 - Edgewater Bancorp, Inc.	t1502485_ex32.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 000-55129

Edgewater Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland		46-3687434
(State or other jurisdiction of in Company or organization)		(I.R.S. Employer Identification Number)

321 Main Street, St. Joseph, Michigan		49085
(Address of Principal Executive Offices)		Zip Code

(269) 982-4175

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 requirements for the past 90 days.

YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO ¨

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. (Check one)

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company x
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO x

As of November 2, 2015, there were issued and outstanding 667,898 shares of the Registrant’s Common Stock with a par value of $0.01 per share.

Edgewater Bancorp, Inc.

Form 10-Q

Index

		Page
	Part I. Financial Information

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	3

	Condensed Consolidated Statements of Operations for the Three Months Ended and Nine Months Ended September 30, 2015 and 2014 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended and Nine Months Ended September 30, 2015 and 2014 (unaudited)	5

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2015 (unaudited)	6

	Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

Item 4.	Controls and Procedures	48

	Part II. Other Information

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults upon Senior Securities	48

Item 4.	Mine Safety Disclosures	48

Item 5.	Other Information	49

Item 6.	Exhibits	49

	Signature Page	50

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Part I. – Financial Information

Financial Statements

Edgewater Bancorp, Inc.

Condensed Consolidated Balance Sheets

	September 30,		December 31,
	2015		2014
	(Unaudited)
Assets
Cash and due from banks	$	796,987	$	763,968
Interest-bearing demand deposits in banks		4,605,698		12,680,629
Cash and cash equivalents		5,402,685		13,444,597

Available-for-sale securities		11,037,312		12,718,065
Loans held for sale		541,621		48,300
Loans receivable, net of allowance for losses of $1,054,474 and $1,075,351, respectively		109,025,154		89,479,525
Premises and equipment, net		3,697,663		3,912,291
Federal Home Loan Bank (FHLB) stock		686,200		1,078,900
Other real estate, net		262,100		467,000
Interest receivable		320,077		302,777
Mortgage servicing rights		410,177		432,105
Other assets		442,171		460,562

Total assets	$	131,825,160	$	122,344,122

Liabilities and Stockholders' Equity

Liabilities
Deposits
Noninterest bearing	$	13,131,493	$	11,730,674
Interest-bearing		90,637,264		86,762,438
Total deposits		103,768,757		98,493,112

Federal Home Loan Bank advances		14,000,000		10,000,000
Accrued and other liabilities		620,177		547,550
Total liabilities		118,388,934		109,040,662

Commitments and Contingencies

Temporary Equity
ESOP shares subject to mandatory redemption		39,385		22,193

Stockholders' Equity
Common Stock-shares authorized 7,000,000: shares issued and outstanding 667,898 at $.01 par value		6,679		6,679
Paid-in-capital		4,683,434		4,683,434
Retained earnings		8,669,539		8,607,914
Accumulated other comprehensive income (loss)		37,189		(16,760	)
Total equity		13,396,841		13,281,267

Total liabilities and stockholders' equity	$	131,825,160	$	122,344,122

The accompanying notes are an integral part of these financial statements.

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Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Operations

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015		2014
	(Unaudited)					(Unaudited)
Interest Income
Loans, including fees	$	1,167,746	$	999,769		$	3,406,986	$	2,936,397
Debt securities
Taxable		29,105		32,959			88,970		113,217
Tax-exempt		10,938		12,173			34,785		36,524
Federal Home Loan Bank stock		5,423		13,166			27,185		45,709
Other		3,104		3,264			12,788		11,797
Total interest income		1,216,316		1,061,331			3,570,714		3,143,644

Interest Expense
Deposits		99,503		88,924			296,136		293,123
Federal Home Loan Bank advances		36,505		29,049			95,872		77,817
Total interest expense		136,008		117,973			392,008		370,940

Net Interest Income		1,080,308		943,358			3,178,706		2,772,704

Provision for Loan Losses		30,000		-			45,000		-

Net Interest Income After Provision for Loan Losses		1,050,308		943,358			3,133,706		2,772,704

Noninterest Income
Service charges, deposits		95,934		100,201			287,855		285,466
Mortgage banking activities		108,641		84,503			313,034		166,161
Other		32,184		24,093			95,058		96,685
Total noninterest income		236,759		208,797			695,947		548,312

Noninterest Expense
Salaries and employee benefits		657,809		629,678			1,965,154		1,886,311
Occupancy and equipment		205,589		202,368			595,751		633,947
Data processing		138,289		134,205			404,173		409,159
(Gain) loss on sale of other real estate, net		1,167		12,729			5,167		(2,266	)
Interchange		23,107		22,843			71,898		57,118
Advertising		13,825		20,783			47,049		64,171
FDIC insurance premiums		23,305		38,526			77,892		114,270
Other real estate		12,716		40,927			26,059		68,056
Professional fees		117,513		148,890			343,503		430,651
Insurance		14,852		19,587			44,662		61,489
Other		59,419		59,641			186,720		198,026
Total noninterest expense		1,267,591		1,330,177			3,768,028		3,920,932

Net Income (Loss) Before Income Taxes		19,476		(178,022	)		61,625		(599,916	)

Provision for Income Taxes		-		-			-		-

Net Income (Loss)	$	19,476	$	(178,022	)	$	61,625	$	(599,916	)

Basic and Diluted Earnings (Loss) Per Share	$	0.03	$	(0.29	)	$	0.10	$	(1.03	)

The accompanying notes are an integral part of these financial statements.

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Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015		2014
	(Unaudited)					(Unaudited)

Net Income (Loss)	$	19,476	$	(178,022	)	$	61,625	$	(599,916	)

Other Comprehensive Income (Loss)

Net change in unrealized gains (losses) on investment securities available-for-sale		16,893		(4,975	)		53,949		86,498

Less: reclassification adjustment for realized gains (losses) included in net income (loss)		-		-			-		-

Other comprehensive income (loss) before income tax		16,893		(4,975	)		53,949		86,498

Tax expense (benefit), net of deferred tax asset valuation impact of $5,744, ($1,692), $18,343 and $29,409, respectively		-		-			-		-

Comprehensive Income (Loss)	$	36,369	$	(182,997	)	$	115,574	$	(513,418	)

The accompanying notes are an integral part of these financial statements.

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Edgewater Bancorp, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

	(Unaudited)
									Accumulated
									Other
			Common		Paid-in		Retained		Comprehensive
	Shares		Stock		Capital		Earnings		Income (Loss)			Total

Balance at January 1, 2015		667,898	$	6,679	$	4,683,434	$	8,607,914	$	(16,760	)	$	13,281,267
Net income		-		-		-		61,625		-			61,625
Other comprehensive income		-		-		-		-		53,949			53,949

Balance at September 30, 2015		667,898	$	6,679	$	4,683,434	$	8,669,539	$	37,189		$	13,396,841

The accompanying notes are an integral part of these financial statements.

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Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

	Nine Months Ended September 30,
	2015			2014
	(Unaudited)
Operating activities:
Net income (loss)	$	61,625		$	(599,916	)
Items not requiring cash:
Depreciation		321,774			354,922
Provision for loan losses		45,000			-
Amortization of premiums on securities		74,424			62,541
Change in fair value of mortgage servicing rights		22,723			22,715
(Gain) loss on sale of other real estate		5,167			(2,266	)
ESOP shares earned		17,192			16,768
Amortization of mortgage servicing rights		89,971			79,314
Loans originated for sale		(11,134,085	)		(4,532,310	)
Proceeds from loans sold		10,742,251			4,298,363
Gain on sale of loans		(192,253	)		(83,386	)
Loss (gain) on sale of premises and equipment		-			1,215
Net change in:
Interest receivable and other assets		1,091			160,599
Interest payable and other liabilities		72,627			(52,776	)
Net cash provided by (used in) operating activities		127,507			(274,217	)

Investing activities:
Proceeds from calls and maturities of available-for-sale securities		1,660,278			2,597,448
Proceeds from sale of FHLB Stock		392,700			-
Net change in loans		(19,689,629	)		(3,813,597	)
Proceeds from sale of other real estate		298,733			1,091,406
Payment for sale of branch, net		-			(13,327,513	)
Proceeds from sale of premises and equipment		-			222,635
Purchases of premises and equipment		(107,147	)		(104,744	)
Net cash used in investing activities		(17,445,065	)		(13,334,365	)

Financing activities:
Proceeds from stock conversion		-			2,368,033
Net change in deposits		5,275,646			(2,905,704	)
Proceeds from Federal Home Loan Bank advances		11,100,000			11,000,000
Repayment of Federal Home Loan Bank advances		(7,100,000	)		-
Net cash provided by financing activities		9,275,646			10,462,329

Net Change in Cash and Cash Equivalents		(8,041,912	)		(3,146,253	)

Cash and Cash Equivalents, Beginning of Period		13,444,597			10,322,076

Cash and Cash Equivalents, End of Period	$	5,402,685		$	7,175,823

Additional Cash Flows Information:
Interest paid	$	338,499		$	321,611
Loans transferred to other real estate		99,000			387,344
Capitalization of mortgage serving rights		90,766			37,534

The accompanying notes are an integral part of these financial statements.

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Edgewater Bancorp, Inc.

Form 10-Q

Notes to Condensed Consolidated Financial Statements

Note 1: Nature of Operation and Conversion

Edgewater Bank, a federally chartered thrift institution (the “Bank”) is primarily engaged in providing a full range of banking and financial services to individual and corporate customers in the Berrien, Van Buren and to a lesser extent Cass Counties, Michigan. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulation of the certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

The Banks’s wholly-owned subsidiaries, Explorer Financial Service Corporation (EFSC) and Edgewater Insurance Agency, Inc. (EIA) are included in the consolidated financial statements. EFSC is primarily engaged in providing title insurance services and EIA is used to collect premiums and receive commissions for insurance related benefits the Bank offers its employees.

On January 16, 2014, in accordance with a Plan of Conversion and Reorganization, the Bank completed a mutual–to-stock conversion pursuant to which the Bank became the wholly owned subsidiary of Edgewater Bancorp, Inc. (the “Company”), a Maryland stock holding corporation. In connection with the Conversion, the Company sold 667,898 shares of common stock, at an offering price of $10 per share. The Company’s stock began being quoted on the OTC Bulletin Board on January 17, 2014 under the symbol “EGDW,” and is currently quoted on the OTCQB operated by OTC Markets Group, Inc. under the symbol “EGDW.”

The net proceeds from the stock offering, net of offering costs of approximately $1,455,000, amounted to approximately $4,690,000.

Also, in connection with the Conversion, the Bank established an employee stock ownership plan (the “ESOP”), which purchased 53,431 shares of the Company’s common stock at a price of $10 per share.

In accordance with the OCC regulations, at the time of the Conversion of the mutual bank to a stock holding company, the Company was required to substantially restrict retained earnings by establishing a liquidation account and the Bank established a parallel liquidation account. The liquidations account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holders’ interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

Note 2: Basis of Presentation

The accompanying condensed consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Rule 10-01 of Regulation S-X and, therefore, certain information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information have been condensed or omitted pursuant to such rules and regulations. The

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preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month and nine-month period ended September 30, 2015, are not necessarily indicative of the results which may be expected for the entire year. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company as of December 31, 2014 included in Edgewater Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014.

Note 3: Principles of Consolidation

The consolidated financial statements include the accounts of the Edgewater Bancorp, Inc. and its wholly owned subsidiary, Edgewater Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 4: Securities

The amortized cost and approximate fair values of investment securities are as follows:

	September 30, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency	$	4,965,647	$	5,932	$	11,127	$	4,960,452
State and political subdivisions		2,556,637		16,734		2,230		2,571,141
Mortgage-backed-Government Sponsored Enterprise (GSE)-residential		2,739,764		24,491		5,470		2,758,785
Collateralized mortgage obligations-GSE		738,075		8,859		-		746,934

Total available-for-sale securities	$	11,000,123	$	56,016	$	18,827	$	11,037,312

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	December 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale securities:
U.S. Government and federal agency	$	5,002,617	$	3,230	$	66,017	$	4,939,830
State and political subdivisions		3,354,828		20,436		14,179		3,361,085
Mortgage-backed-Government Sponsored Enterprise (GSE)-residential		3,357,163		32,790		5,951		3,384,002
Collateralized mortgage obligations-GSE		1,020,217		12,931		-		1,033,148

Total available-for-sale securities	$	12,734,825	$	69,387	$	86,147	$	12,718,065

The amortized cost and fair value of investment securities at September 30, 2015 and December 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2015				December 31, 2014
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Unaudited)

Within one year	$	1,001,203	$	1,008,656	$	795,000	$	795,723
After one through five years		6,521,081		6,522,937		7,562,445		7,505,192
		7,522,284		7,531,593		8,357,445		8,300,915
Mortgage-backed - GSE residential		2,739,764		2,758,785		3,357,163		3,384,002
Collateralized debt obligations		738,075		746,934		1,020,217		1,033,148

	$	11,000,123	$	11,037,312	$	12,734,825	$	12,718,065

The carrying value of investment securities pledged as collateral, to secure public deposits and for other purposes was $273,669 at September 30, 2015 (unaudited) and $345,931 at December 31, 2014.

For the nine month period ended September 30, 2015 and September 30, 2014, there were no sales of securities available-for-sale.

Certain investments in debt securities have fair values at an amount less than their historical cost. Total fair value of these investments at September 30, 2015 (unaudited) and December 31, 2014 was $5,109,696 and $6,066,781, which is approximately 46% and 48%, respectively, of the Company’s investment portfolio. These declines primarily resulted from changes in market interest rates since the securities were purchased.

Management believes the declines in fair value for these investment securities are temporary.

Should the impairment of any of these investment securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

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Investment securities with unrealized losses were as follows:

	September 30, 2015
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency	$	-	$	-	$	3,536,177	$	11,127	$	3,536,177	$	11,127
State and political subdivisions		-		-		497,770		2,230		497,770		2,230
Mortgage-backed -GSE residential		1,075,749		5,470		-		-		1,075,749		5,470

	$	1,075,749	$	5,470	$	4,033,947	$	13,357	$	5,109,696	$	18,827

	December 31, 2014
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

Available-for-sale securities:
U.S. Government and federal agency	$	-	$	-	$	3,492,139	$	66,017	$	3,492,139	$	66,017
State and political subdivisions		804,572		2,604		488,425		11,575		1,292,997		14,179
Mortgage-backed -GSE residential		1,281,645		5,951		-		-		1,281,645		5,951

	$	2,086,217	$	8,555	$	3,980,564	$	77,592	$	6,066,781	$	86,147

The unrealized losses on the Company’s investments in direct obligations of U.S. Government and federal agencies, state and political subdivisions and mortgage-backed GSE residential securities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2015, and December 31, 2014.

Note 5: Loans and Allowance

The Company’s loan and allowance policies are as follows:

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

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The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. There were no changes in the Company’s nonaccrual policy during the six month-end periods ended September 30, 2015 (unaudited) and September 30, 2014 (unaudited).

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

For all loan portfolio segments, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility 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 allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines

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the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Categories of loans receivable include:

	September 30			December 31,
	2015			2014
	(Unaudited)
Real estate loans:
Residential 1-4 family	$	44,960,702		$	45,353,599
Commercial		35,486,264			27,908,662
Construction and land		2,154,603			1,523,281
Total real estate		82,601,569			74,785,542
Commercial and industrial		7,360,460			5,536,805
Warehouse Line		10,000,000			-
Consumer loans:
Home equity loans and lines of credit		9,036,190			9,331,608
Other consumer loans		1,065,147			883,864
Total consumer		10,101,337			10,215,472
Gross loans		110,063,366			90,537,819
Less
Net deferred loan fees		(16,262	)		(17,057	)
Allowance for loan losses		1,054,474			1,075,351
Net loans	$	109,025,154		$	89,479,525

The risk characteristics of each loan portfolio segment are as follows:

Residential 1-4 Family, Home Equity Loans and Lines of Credit and Other Consumer: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Home equity loans and lines of credit are typically secured by a subordinate interest in 1-4 family residences and consumer loans are secured by consumer assets such as automobiles and other personal property. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial Real Estate including Construction and Land: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on

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the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Construction and land real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

Commercial and Industrial: The commercial and industrial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Warehouse Line: The residential mortgage warehouse line is a wholesale mortgage line participation. The lending is done with a specific mortgage company that is a customer with the participating bank. The participating bank underwrites each individual mortgage and the related mortgagee. Financing is provided to an approved mortgage company for the origination and sale of residential mortgage loans. A portion of each individual mortgage is assigned to the Edgewater Bank until the loans is sold on the secondary market. These loans are typically sold within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Edgewater Bank has established several controls to minimize potential risks including reviewing documents provided on the approved mortgage warehouse participants. Also, certain loan documents are received and reviewed on each loan in which Edgewater Bank is asked to participate in that allows Edgewater Bank to accept or reject the individual loan participation.

The following presents by portfolio segment, the activity in the allowance for loan losses:

	Residential			Commercial			Commercial			Warehouse
	1-4 Family			Real Estate			and Industrial			Line		Consumer			Total
	(Unaudited)
Three Months Ended September 30, 2015:
Balance, beginning of period	$	205,076		$	479,157		$	229,584		$	54,988	$	55,273		$	1,024,078
Provision (credit) for loan losses		30,751			173,933			(193,321	)		5,092		13,545			30,000
Loans charged to the allowance		(569	)		-			-			-		-			(569	)
Recoveries of loans previously charged off		365			600			-			-		-			965

Balance, end of period	$	235,623		$	653,690		$	36,263		$	60,080	$	68,818		$	1,054,474

Nine Months Ended September 30, 2015:
Balance, beginning of period	$	222,618		$	503,621		$	248,388		$	-	$	100,724		$	1,075,351
Provision (credit) for loan losses		209			210,084			(212,125	)		60,080		(13,248	)		45,000
Loans charged to the allowance		(569	)		(62,015	)		-			-		(18,658	)		(81,242	)
Recoveries of loans previously charged off		13,365			2,000			-			-		-			15,365

Balance, end of period	$	235,623		$	653,690		$	36,263		$	60,080	$	68,818		$	1,054,474

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	Residential			Commercial			Commercial		Warehouse
	1-4 Family			Real Estate			and Industrial		Line		Consumer			Total
	(Unaudited)
Three Months Ended September 30, 2014:
Balance, beginning of period	$	232,254		$	555,963		$	131,219	$	-	$	162,969		$	1,082,405
Provision (credit) for loan losses		36,558			(120,302	)		31,764		-		51,980			-
Loans charged to the allowance		(6,150	)		-			-		-		(23,104	)		(29,254	)
Recoveries of loans previously charged off		300			1,000			-		-		-			1,300

Balance, end of period	$	262,962		$	436,661		$	162,983	$	-	$	191,845		$	1,054,451

Nine Months Ended September 30, 2014:
Balance, beginning of period	$	188,325		$	587,331		$	138,268	$	-	$	147,217		$	1,061,141
Provision (credit) for loan losses		98,861			(241,024	)		24,715		-		117,448			-
Loans charged to the allowance		(27,134	)		-			-		-		(73,220	)		(71,100	)
Recoveries of loans previously charged off		2,910			90,354			-		-		400			92,364

Balance, end of period	$	262,962		$	436,661		$	162,983	$	-	$	191,845		$	1,054,451

The following presents the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2015 and December 31, 2014:

	Residential		Commercial		Commercial		Warehouse
	1-4 Family		Real Estate		and Industrial		Line		Consumer		Total
	(Unaudited)
At September 30, 2015:
Allowance:
Balance, end of period	$	235,623	$	653,690	$	36,263	$	60,080	$	68,818	$	1,054,474
Ending balance: individually evaluated for impairment	$	14,440	$	465	$	-	$	-	$	277	$	15,182
Ending balance: collectively evaluated for impairment	$	221,183	$	653,225	$	36,263	$	60,080	$	68,541	$	1,039,292
Loans:
Ending balance	$	44,960,702	$	37,640,867	$	7,360,460	$	10,000,000	$	10,101,337	$	110,063,366
Ending balance individually evaluated for impairment	$	2,363,178	$	380,002	$	-	$	-	$	127,657	$	2,870,837
Ending balance collectively evaluated for impairment	$	42,597,524	$	37,260,865	$	7,360,460	$	10,000,000	$	9,973,680	$	107,192,529

	Residential		Commercial		Commercial		Warehouse
	1-4 Family		Real Estate		and Industrial		Line		Consumer		Total
At December 31, 2014:
Allowance:
Balance, end of period	$	222,618	$	503,621	$	248,388	$	-	$	100,724	$	1,075,351
Ending balance: individually evaluated for impairment	$	16,325	$	644	$	-	$	-	$	533	$	17,502
Ending balance: collectively evaluated for impairment	$	206,293	$	502,977	$	248,388	$	-	$	100,191	$	1,057,849
Loans:
Ending balance	$	45,353,599	$	29,431,943	$	5,536,805	$	-	$	10,215,472	$	90,537,819
Ending balance individually evaluated for impairment	$	2,727,712	$	1,356,103	$	-	$	-	$	152,879	$	4,236,694
Ending balance collectively evaluated for impairment	$	42,625,887	$	28,075,840	$	5,536,805	$	-	$	10,062,593	$	86,301,125

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Internal Risk Categories

In adherence with policy, the Bank uses the following internal risk grading categories and definitions for loans:

RISK RATING 1 – EXCELLENT

General: The highest quality asset rating reflects superior, in-depth management, and superior financial flexibility. Conservative balance sheets are both strong and liquid, and historic cash flows (last five years) have provided exceptionally large and stable margins of protection.

Specific: Financial statements are current, audited, of superior quality and in complete detail. Financial condition is superior and compares favorably to the industry average. Cash flow is outstanding relative to historical and projected debt service requirements. The borrower adheres to all loan covenants. Management (or individual) integrity and ability are outstanding.

RISK RATING 2 – STRONG

General: The borrower is fully responsible for the credit. Asset quality and liquidity are very good, and debt capacity and coverage are strong. The company has strong management in all positions, and is highly regarded with excellent financial flexibility including access to other sources of financing.

Specific: Financial statements are current, of excellent quality and in adequate detail. Financial condition is very good and compares favorably to the industry average. Statements reflect a stable record of earnings over time and consistent profitability. Cash flow is strong relative to historical and projected debt service requirements. The borrower consistently adheres to the repayment schedules for both principal and interest. The borrower adheres to all loan covenants. Management (or individual) integrity and ability are outstanding.

RISK RATING 3 – GOOD

General: Asset quality and liquidity are strong, and debt capacity and coverage are good to above average. General financial trends are stable to favorable and financial and profitability ratios are consistent with industry peers. Management strength is apparent. The industry is average. Some modest elements of uncertainty may be present due to liquidity, margin and cash flow stability, asset of customer concentrations, dependence on one business type, or cyclical trends that may affect the borrower.

Specific: The financial statements are generally current, of adequate detail, and of good quality. Publication of statements is at least once annually but in most cases more frequent. Financial condition is good relative to the industry. The earnings record is stable and consistent, although modest year-to-year earnings may fluctuate more than for borrowers rated Excellent (1) or Strong (2). Cash flow may vary during the repayment of the loan but does not fall below debt service requirements. Historical profitability may be inconsistent but losses are typically non-existent or infrequent. Liquidity and leverage are at the industry average. The borrower consistently adheres to repayment schedules for both principal and interest, and adheres to all loan covenants. Any waivers are immaterial, and do not negatively impact the strength of the credit. Management (or individual) integrity and ability are sound. Depth and breadth of management is also sound.

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RISK RATING 4 – ACCEPTABLE

General: Asset quality and liquidity are good, and debt capacity and coverage are average to good. General financial trends are stable to favorable and financial and profitability ratios are consistent with industry peers. Management strength is apparent but may be limited to key positions. The industry is average. Some elements of uncertainty may be present due to liquidity, margin and cash flow stability, asset of customer concentrations, dependence on one business type, or cyclical trends that may affect the borrower. Adverse economic conditions may lead to declining trends.

Specific: The financial statements are generally current, of adequate detail, and of average quality. Publication of statements is at least once annually. Financial condition is average relative to the industry. The earnings record is satisfactory, although year-to-year earnings patterns may fluctuate more than for borrowers rated Good (3). Cash flow may vary during the repayment of the loan but does not fall below debt service requirements. Historical profitability may be inconsistent and may have losses in recent years. Liquidity and leverage may be below the industry average, and the borrower may be highly leveraged. The borrower consistently adheres to repayment schedules for both principal and interest, and adheres to all loan covenants. Any waivers are immaterial, and do not negatively impact the strength of the credit. Management (or individual) integrity and ability are sound. Depth and breadth of management is also sound.

RISK RATING 5 – WATCH

General: Loans in this category are considered to be acceptable credit quality, but contain greater credit risk than Risk Rating 4 loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that potential weaknesses do not emerge. The level of risk in a Watch loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

Specific: The financial statements may be missing, outdated, of poor quality, or lacking in important details. Financial condition is below the industry average. The borrower may be experiencing negative trends and/or erratic or unstable financial performance. The borrower may have suffered a loss in a recent period; however, losses have not been of the magnitude to have adversely affected the balance sheet. The borrower generally adheres to repayment schedules for principal and consistently for interest. Cash flow from primary sources has generally been adequate but, if existing trends continue may not be adequate to meet projected debt service requirements in the future. The borrower may have violated one or more financial or other covenants, but such has not materially impacted financial condition or performance. Industry outlook may be unfavorable. The integrity and quality of management remains good; however, management depth may be limited.

RISK RATING 6 – SPECIAL MENTION

General: Assets in this category have potential weaknesses that deserve the Bank’s close attention. If potential weaknesses are left unchecked or uncorrected, they may result in deterioration of the repayment prospects for the asset or inadequately protect the Bank’s credit position at some future date. These assets pose elevated risk, but their weakness does not expose the Bank to sufficient risk to warrant adverse classification.

Specific: Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill-proportioned balance sheet (increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention (6) rating. Nonfinancial reasons for rating a credit Special Mention (6) include management problems, pending litigation, an

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ineffective loan agreement or other material structural weaknesses, and any other significant deviation from prudent lending practices.

RISK RATING 7 – SUBSTANDARD

General: Assets in this category are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. These assets have a well-defined weakness or weaknesses that jeopardize the timely liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Specific: Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. The financial statements may be missing, seriously outdated, of poor quality, or lacking in important details. Financial condition is less than satisfactory. The borrower is experiencing negative trends and material losses. The primary source of cash flow is inadequate to meet current debt service requirements, and unless present conditions improve is potentially inadequate to meet projected debt service requirements. The borrower may have reached the point of employing its secondary source of cash flow. The borrower inconsistently adheres to repayment schedules for either principal or interest. The borrower may have violated one or more financial or other covenants, reflecting unsatisfactory liquidity and/or capitalization. Either the integrity or the ability of management may be in question. For some Substandard (7) assets, the likelihood of full collection of interest and principal may be in doubt; such assets should be placed on nonaccrual.

RISK RATING 8 – DOUBTFUL

General: Assets in this category have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Specific: An asset in this category has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity and capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, and the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on new information. Because of high probability of loss, nonaccrual accounting treatment is required for Doubtful (8) assets.

RISK RATING 9 – LOSS

General: Assets in this category are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be obtained in the future.

Specific: With Loss (9) assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified Loss (9), there is little prospect of collecting either its principal or interest. Losses are to be recorded in the period an obligation becomes uncollectable.

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The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2015:

	Residential		Commercial		Construction		Commercial		Warehouse
	1-4 Family		Real Estate		and Land		and Industrial		Line		Home Equity		Consumer		Total
	(Unaudited)

Pass (1-5)	$	44,233,257	$	32,386,594	$	2,120,297	$	7,360,460	$	10,000,000	$	9,036,190	$	1,065,147	$	106,201,945
Special Mention (6)		-		1,732,016		-		-		-		-		-		1,732,016
Substandard (7)		727,445		1,367,654		34,306		-		-		-		-		2,129,405
Doubtful (8)		-		-		-		-		-		-		-		-
Loss (9)		-		-		-		-		-		-		-		-

Total	$	44,960,702	$	35,486,264	$	2,154,603	$	7,360,460	$	10,000,000	$	9,036,190	$	1,065,147	$	110,063,366

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2014:

	Residential		Commercial		Construction		Commercial		Warehouse
	1-4 Family		Real Estate		and Land		and Industrial		Line		Home Equity		Consumer		Total

Pass (1-5)	$	44,618,696	$	25,726,754	$	1,344,107	$	5,536,805	$	-	$	9,321,255	$	883,864	$	87,431,481
Special Mention (6)		-		219,157		-		-		-		-		-		219,157
Substandard (7)		734,903		1,962,751		179,174		-		-		10,353		-		2,887,181
Doubtful (8)		-		-		-		-		-		-		-		-
Loss (9)		-		-		-		-		-		-		-		-

Total	$	45,353,599	$	27,908,662	$	1,523,281	$	5,536,805	$	-	$	9,331,608	$	883,864	$	90,537,819

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2015:

													Total Loans >
	30-59 Days		60-89 Days		Greater Than		Total				Total		90 Days &
	Past Due		Past Due		90 Days		Past Due		Current		Loans		Accruimg
	(Unaudited)

Residential 1-4 family	$	751,115	$	108,486	$	727,445	$	1,587,046	$	43,373,656	$	44,960,702	$	-
Commercial real estate		-		-		-		-		35,486,264		35,486,264		-
Construction and land		-		1,553		34,306		35,859		2,118,744		2,154,603		-
Commercial and industrial		-		-		-		-		7,360,460		7,360,460		-
Warehouse Line		-		-		-		-		10,000,000		10,000,000		-
Home equity		162,214		56,848		-		219,062		8,817,128		9,036,190		-
Other consumer		3,680		-		-		3,680		1,061,467		1,065,147		-

	$	917,009	$	166,887	$	761,751	$	1,845,647	$	108,217,719	$	110,063,366	$	-

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The following tables present the Company’s loan portfolio aging analysis as of December 31, 2014:

													Total Loans >
	30-59 Days		60-89 Days		Greater Than		Total				Total		90 Days &
	Past Due		Past Due		90 Days		Past Due		Current		Loans		Accruimg
	(Unaudited)

Residential 1-4 family	$	1,147,797	$	557,817	$	734,903	$	2,440,517	$	42,913,082	$	45,353,599	$	-
Commercial real estate		11,782				-		11,782		27,896,880		27,908,662		-
Construction and land		27,817		-		21,972		49,789		1,473,492		1,523,281		-
Commercial and industrial		-		-		-		-		5,536,805		5,536,805		-
Warehouse Line		-		-		-		-		-		-		-
Home equity		54,224		25,601		10,353		90,178		9,241,430		9,331,608		-
Other consumer		-		6,057		-		6,057		877,807		883,864		-

	$	1,241,620	$	589,475	$	767,228	$	2,598,323	$	87,939,496	$	90,537,819	$	-

The following table presents the Company’s nonaccrual loans at September 30, 2015 and December 31, 2014. This table excludes performing troubled debt restructurings.

	September 30,		December 31,
	2015		2014
	(Unaudited)

Residential 1-4 family	$	1,538,572	$	1,397,529
Commercial real estate		10,067		729,032
Construction and land		35,859		49,789
Commercial and industrial		-		-
Warehouse Line		-		-
Home equity		48,559		76,937
Other consumer		-		-

	$	1,633,057	$	2,253,287

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings.

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The following table presents impaired loans and specific valuation allowance based on class level at September 30, 2015:

	Residential		Commercial		Construction		Commercial		Warehouse
	1-4 Family		Real Estate		and Land		and Industrial		Line		Home Equity		Total
	(Unaudited)
Impaired loans without a specific allowance:
Recorded investment	$	837,193	$	276,836	$	57,240	$	-	$	-	$	79,097	$	1,250,366
Unpaid principal balance		906,464		276,836		57,240		-		-		79,097		1,319,637

Impaired loans with a specific allowance:
Recorded investment		1,525,985		10,066		35,860		-		-		48,560		1,620,471
Unpaid principal balance		1,586,078		11,387		39,239		-		-		50,249		1,686,953
Specific allowance		14,440		161		304		-		-		277		15,182

Total impaired loans:
Recorded investment		2,363,178		286,902		93,100		-		-		127,657		2,870,837
Unpaid principal balance		2,492,542		288,223		96,479		-		-		129,346		3,006,590
Specific allowance		14,440		161		304		-		-		277		15,182

The following table presents average impaired loans based on class level for the three and nine months ended September 30, 2015 and 2014:

	Residential		Commercial		Construction		Commercial		Warehouse
	1-4 Family		Real Estate		and Land		and Industrial		Line		Home Equity		Total
	(Unaudited)
Average recorded investment in impaired loans for the three months ended September 30, 2015	$	2,317,506	$	287,989	$	95,764	$	-	$	-	$	121,496	$	2,822,755
Average recorded investment in impaired loans for the three months ended September 30, 2014		2,143,289		1,057,206		333,095		-		-		128,325		3,661,915

	Residential		Commercial		Construction		Commercial		Warehouse
	1-4 Family		Real Estate		and Land		and Industrial		Line		Home Equity		Total
	(Unaudited)
Average recorded investment in impaired loans for the nine months ended September 30, 2015	$	2,286,919	$	292,505	$	135,334	$	-	$	-	$	133,985	$	2,848,743
Average recorded investment in impaired loans for the nine months ended September 30, 2014		2,165,843		1,091,228		339,569		-		-		130,941		3,727,581

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The following table presents impaired loans and specific valuation allowance based on class level at December 31, 2014:

	Residential		Commercial		Construction		Commercial		Warehouse
	1-4 Family		Real Estate		and Land		and Industrial		Line		Home Equity		Total
	(Unaudited)
Impaired loans without a specific allowance:
Recorded investment	$	1,396,878	$	1,003,575	$	290,956	$	-	$	-	$	86,296	$	2,777,705
Unpaid principal balance		1,475,218		1,121,615		304,827		-		-		92,277		2,993,937

Impaired loans with a specific allowance:
Recorded investment		1,330,834		11,782		49,790		-		-		66,583		1,458,989
Unpaid principal balance		1,373,484		12,700		56,120		-		-		69,627		1,511,931
Specific allowance		16,325		46		598		-		-		533		17,502

Total impaired loans:
Recorded investment		2,727,712		1,015,357		340,746		-		-		152,879		4,236,694
Unpaid principal balance		2,848,702		1,134,315		360,947		-		-		161,904		4,505,868
Specific allowance		16,325		46		598		-		-		533		17,502

Interest income of $10,777, $32,296, $20,789, $46,657 and $61,499 was recognized on impaired loans for the three and nine months ended September 30, 2015 (unaudited) and September 30, 2014 (unaudited) and for year-end December 31, 2014, respectively.

At September 30, 2015, the Company had loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

The following table presents information regarding troubled debt restructurings by class for the three and nine months ended September 30, 2015 and 2014.

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Newly classified troubled debt restructurings:

	Three Months Ended September 30, 2015						Three Months Ended September 30, 2014
			Pre-		Post				Pre-		Post
			Modification		Modification				Modification		Modification
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of Loans		Balance		Balance		of Loans		Balance		Balance
	(Unaudited)

Residential 1-4 family		-	$	-	$	-		1	$	263,518	$	263,518
Commercial real estate		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Warehouse Line		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Other consumer		-		-		-		-		-		-

		-	$	-	$	-		1	$	263,518	$	263,518

	Nine Months Ended September 30, 2015						Nine Months Ended September 30, 2014
			Pre-		Post				Pre-		Post
			Modification		Modification				Modification		Modification
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of Loans		Balance		Balance		of Loans		Balance		Balance
	(Unaudited)

Residential 1-4 family		-	$	-	$	-		2	$	324,518	$	324,518
Commercial real estate		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Warehouse Line		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Other consumer		-		-		-		-		-		-

		-	$	-	$	-		2	$	324,518	$	324,518

The troubled debt restructurings described above increased the allowance for loan losses by $0 for the three months and nine months ended September 30, 2015 and $2,063 for the three and nine months ended September 30, 2014. Charge offs resulted of $0 for three and nine months ended September 30, 2015 and $0 for three and nine months ended September 30, 2014.

Newly restructured loans by type of modification:

Interest

Total

Only

Term

Combination

Modification

(Unaudited)

Three and Nine Months Ended September 30, 2015:

Residential 1-4 family

Commercial real estate

Construction and land

Commercial and industrial

Warehouse Line

Home equity

Other consumer

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		Interest			Total
		Only	Term	Combination	Modification
	(Unaudited)
Three Months Ended September 30, 2014:

Residential 1-4 family		$ -	$ -	$ 263,518	$ 263,518
Commercial real estate		-	-	-	-
Construction and land		-	-	-	-
Commercial and industrial		-	-	-	-
Home equity		-	-	-	-
Other consumer		-	-	-	-

		$ -	$ -	$ 263,518	$ 263,518

	Interest						Total
	Only		Term		Combination		Modification
	(Unaudited)
Nine Months Ended September 30, 2014:

Residential 1-4 family	$	-	$	61,000	$	263,518	$	324,518
Commercial real estate		-		-		-		-
Construction and land		-		-		-		-
Commercial and industrial		-		-		-		-
Home equity		-		-		-		-
Other consumer		-		-		-		-

	$	-	$	61,000	$	263,518	$	324,518

Troubled debt restructurings modified in the past 12 months that subsequently defaulted:

	September 30, 2015				September 30, 2014
	Number of		Recorded		Number of		Recorded
	Loans		Balance		Loans		Balance
	(Unaudited)

Residential 1-4 family		-	$	-		-	$	-
Commercial real estate		-		-		1		214,736
Construction and land		-		-		-		-
Commercial and industrial		-		-		-		-
Home equity		-		-		-		-
Other consumer		-		-		-		-

		-	$	-	$	1	$	214,736

At September 30, 2015, the Company held no residential real estate as foreclosed property. Also, at September 30, 2015, there were no consumer mortgage loans in the process of foreclosure according to local requirements of the applicable jurisdictions.

Note 6: Disclosures about Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.

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Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 (unaudited) and for the year end December 31, 2014:

	September 30, 2015
	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)
	(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency	$	4,960,452	$	-	$	4,960,452	$	-
State and political subdivisions		2,571,141		-		2,571,141		-
Mortgage-backed - GSE residential		2,758,785				2,758,785
Collateralized mortgage obligations-GSE		746,934		-		746,934		-
Mortgage servicing rights		91,470		-		-		91,470

	December 31, 2014
	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)
	(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency	$	4,939,830	$	-	$	4,939,830	$	-
State and political subdivisions		3,361,085		-		3,361,085		-
Mortgage-backed - GSE residential		3,384,002				3,384,002
Collateralized mortgage obligations-GSE		1,033,148		-		1,033,148		-
Mortgage servicing rights		114,193		-		-		114,193

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine months ended September 30, 2015 (unaudited) and the year ended December 31, 2014. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy including U.S. Government and federal agency, state and political subdivisions, mortgage-backed securities, and collateralized mortgage debt obligations.

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In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities classified as Level 3.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Mortgage servicing rights are tested for impairment on a quarterly basis. The Chief Financial Officer’s (CFO) office contracts with a pricing specialist to generate fair value estimates on at least a quarterly basis. The CFO’s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Unaudited)

Balance, beginning of period	$	100,170		$	136,282		$	114,193		$	148,171
Total changes in fair value included in earnings		(8,700	)		(10,826	)		(22,723	)		(22,715	)

Balance, end of period	$	91,470		$	125,456		$	91,470		$	125,456

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 (unaudited) and December 31, 2014:

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	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)

September 30, 2015 (Unaudited)

Other real estate owned	$	202,100	$	-	$	-	$	202,100
Collateral-dependent impaired loans,		1,605,289		-		-		1,605,289
Net of ALLL

December 31, 2014

Other real estate owned	$	190,000	$	-	$	-	$	190,000
Collateral-dependent impaired loans,		1,441,487		-		-		1,441,487
Net of ALLL

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Other Real Estate Owned

Other real estate owned (OREO) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the CFO’s office. Appraisals are reviewed for accuracy and consistency by the CFO’s office. Appraisers are selected from the list of approved appraisers maintained by management.

Collateral-dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the CFO’s office. Appraisals are reviewed for accuracy and consistency by the CFO’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the CFO’s office by comparison to historical results.

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Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:

			Valuation		Weighted
	Fair Value		Technique	Unobservable Inputs	Average

At September 30, 2015 (Unaudited):

Other real estate owned	$	202,100	Market comparable properties	Comparability adjustment (%)	Not available

Collateral-dependent impaired loans		1,605,289	Market comparable properties	Marketability discount	10% - 15% (12%)

Mortgage servicing rights		91,470	Discounted cash flow	Constant prepayment rate	7.50%-18% (10.8%)
				Probability of default	1% - 8% (4.2%)
				Discount rate	5.8% - 14% (9.5%)

At December 31, 2014

Other real estate owned	$	190,000	Market comparable properties	Comparability adjustment (%)	Not available

Collateral-dependent impaired loans		1,441,487	Market comparable properties	Marketability discount	10% - 15% (12%)

Mortgage servicing rights		114,193	Discounted cash flow	Constant prepayment rate	8.50%-16% (11.2%)
				Probability of default	1% - 8% (2.1%)
				Discount rate	7.6% - 13% (10.4%)

Fair Value of Financial Instruments

The following tables present estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 and December 31, 2014.

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	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
	(Unaudited)
At September 30, 2015:
Financial assets:
Cash and cash equivalents	$	5,402,685	$	5,402,685	$	-	$	-
FHLB Stock		686,200		-		686,200		-
Loans held for sale		541,621		-		541,621
Loans, net of allowance for loan losses		109,025,154		-		-		109,567,000
Accrued interest receivable		320,077		-		320,077		-
Mortgage servicing rights		318,707		-		-		563,892

Financial liabilities:
Deposits		103,768,757		13,131,493		90,760,264		-
FHLB advances		14,000,000		-		14,123,000		-
Accrued interest payable		45,308		-		45,308		-

	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
At December 31, 2014:
Financial assets:
Cash and cash equivalents	$	13,444,597	$	13,444,597	$	-	$	-
FHLB Stock		1,078,900		-		1,078,900		-
Loans held for sale		48,300		-		48,300		-
Loans, net of allowance for loan losses		89,479,525		-		-		89,756,000
Accrued interest receivable		302,777		-		302,777		-
Mortgage servicing rights		317,912		-		-		526,647

Financial liabilities:
Deposits		98,493,112		11,730,674		86,842,438		-
Federal Home Loan Bank advances		10,000,000		-		10,098,000		-
Accrued interest payable		6,256		-		6,256		-

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Cash Equivalents and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Loans Held for Sale

The carrying amount approximates fair value due to the insignificant time between origination and date of sale. The carrying amount is the amount funded and accrued interest.

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Loans, Net of Allowance for Loan Losses

Fair value is estimated by discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities. The market rates used are based on current rates the Bank would impose for similar loans and reflect a market participant assumption about risks associated with nonperformance, illiquidity, and the structure and term of the loans along with local economic and market conditions.

Accrued Interest Receivable and Payable

The carrying amount approximates fair value. The carrying amount is determined using the interest rate, balance and last payment date.

Deposits

Fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities. The market rates used were obtained from a knowledgeable independent third party and reviewed by the Bank. The rates were the average of current rates offered by local competitors of the Bank.

The estimated fair value of demand, savings and money market deposits is the book value since rates are regularly adjusted to market rates and amounts are payable on demand at the reporting date.

Federal Home Loan Bank Advances

Fair value is estimated by discounting the future cash flows using rates of similar advances with similar maturities. These rates were obtained from current rates offered by the FHLB.

Note 7: Accounting Developments

Financial Accounting Standards Board (“FASB”)

In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. Early adoption was permitted. The adoption of this guidance did have a significant effect on the Company’s consolidated financial statements.

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In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financing, and Disclosures.” The amendments in this update require entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), eliminates accounting guidance on linking repurchase financing transactions, and expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers, such as repos, securities lending transactions, and repurchase-to-maturity transactions, accounted for as secured borrowings. The amendments in ASU 2014-11 are effective for annual periods beginning after December 15, 2014. The amendments must present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The adoption of this guidance did not have an effect on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure,” The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU were effective for annual periods, and interim periods within those annual period, beginning after December 15, 2014. The adoption of this guidance did not have a significant effect on the Company’s consolidated financial statements.

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Note 8: Earnings Per Share

	Three Months Ended		Nine Months Ended
	September 30, 2015		September 30, 2015
	(Unaudited)		(Unaudited)

Net Income	$	19,476	$	61,625

Shares outstanding for basic EPS:

Average shares outstanding		667,898		667,898
Less: Average unearned ESOP shares		50,043		50,572
		617,855		617,326
Additional dilutive shares		-		-

Shares outstanding for basic and diluted EPS		617,855		617,326

Basic and diluted earnings per share	$	0.03	$	0.10

		Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
		(Unaudited)			(Unaudited)

Net Income	$	(178,022	)	$	(599,916	)

Shares outstanding for basic EPS:

Average shares outstanding		667,898			631,200
Less: Average unearned ESOP shares		52,180			49,774
		615,718			581,426
Additional dilutive shares		-			-

Shares outstanding for basic and diluted EPS		615,718			581,426


Basic and diluted earnings per share	$	(0.29	)	$	(1.03	)

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Item 2.

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

General

Management’s discussion and analysis of the financial condition and results of operations at and for three months and nine months ended September 30, 2015 and 2014 is intended to assist in understanding the financial condition and results of operations of the Company on a consolidated basis. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. 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 our current beliefs and expectations 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. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.

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:

our ability to manage our operations under the current adverse economic conditions nationally and in our market area;

adverse changes in the financial industry, securities, credit and national local real estate markets (including real estate values);

significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

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

competition among depository and other financial institutions;

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our success in increasing our one- to four-family, commercial and industrial and consumer lending, and selling one- to four-family loans in the secondary market;

our ability to attract and maintain deposits and our success in introducing new financial products;

our ability to improve our asset quality even as we increase our commercial and industrial and consumer lending;

changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;

technological changes that may be more difficult or expensive than expected;

changes in consumer spending, borrowing and savings habits;

declines in the yield on our assets resulting from the current low interest rate environment;

risks related to a high concentration of loans secured by real estate located in our market area;

the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

changes in the level of government support of housing finance;

our ability to enter new markets successfully and capitalize on growth opportunities;

changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address such changes;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;

loan delinquencies and changes in the underlying cash flows of our borrowers;

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our ability to control costs and expense, particularly those associated with operating as a publicly traded company;

the failure or security breaches of computer systems on which we depend;

the ability of key third-party service providers to perform their obligations to us;

changes in the financial condition or future prospects of issuers of securities that we own; and

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Edgewater Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014.

Branch Sale

We completed the sale of the Decatur office on January 24, 2014. In connection with the sale of the Decatur office, our deposits decreased by approximately $13.3 million, including $8.4 million of core deposits (which we define to include demand deposit, money market and savings accounts) and $4.9 million of certificates of deposit. We retained all loans associated with the Decatur office. We funded the assumption of deposits by the purchaser with $3.0 million of cash on hand and $10.0 million of advances from the Federal Home Loan Bank of Indianapolis (“FHLB-Indianapolis”).

Comparison of Financial Condition at September 30, 2015 and December 31, 2014

Total Assets. Total assets increased by $9.5 million, or 7.8%, to $131.8 million at September 30, 2015 from $122.3 million at December 31, 2014. The increase was primarily the result of increases in loans and loans held for sale loans of $19.5 million and $493,000, respectively. This is partially offset by decreases in cash and cash equivalents of $8.0 million and available-for-sale securities of $1.7 million.

Net Loans. Net loans increased by $19.5 million, or 21.8%, to $109.0 million at September 30, 2015 from $89.5 million at December 31, 2014. During the nine months ended September 30, 2015, one-to- four family residential real estate loans decreased $393,000, or 0.9%, to $45.0 million at September 30, 2015 from $45.4 million at December 31, 2014; commercial real estate loans increased $7.6 million or 27.2%, to $35.5 million from $27.9 million; construction and land loans increased $631,000, or 41.4%, to $2.2 million from $1.5 million; commercial and industrial loans increased $1.8 million or 32.9%, to $7.4 million to from $5.5 million; warehouse line increased $10.0 million or 100% from $0 at December 31, 2014 and consumer loans, including home equity loans and lines of credit, decreased $114,000, or 1.1%, to $10.1 million from $10.2 million. The increase in commercial real estate is the result of new customer relationships being established. The increase in construction and land is due to new residential home construction projects. The increase in the warehouse line is due to the new volume received through a participation with another financial institution. These are 1-4 family residential loans that are held in the portfolio until they are funded by a third-party. The decreases in the remaining loan classes reflect repayments in excess of originations, and loan sales of refinanced loans.

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Investment Securities. Investment securities available for sale decreased $1.7 million, or 13.2%, to $11.0 million at September 30, 2015. Mortgage-backed securities including collateralized mortgage obligations, decreased $625,000, or 18.5%, to $2.7 million at September 30, 2015 from $3.4 million at December 31, 2014, and states and political subdivision securities decreased $790,000, or 23.5%, to $2.6 million at September 30, 2015 from $3.4 million at December 31, 2014. U.S. government and federal agency securities increased $21,000, or 0.4%, to $5.0 million at September 30, 2015 from $4.9 million at December 31, 2014. There were no securities purchased during the third quarter of 2015. Net unrealized gains on securities recognized in accumulated other comprehensive income (loss) increased by $53,949 to an unrealized gain of $37,189 at September 30, 2015 compared to an unrealized loss of $16,700 at December 31, 2014. At September 30, 2015, investment securities classified as available-for-sale consisted entirely of government-sponsored mortgage-backed securities, government-sponsored debentures, state and political subdivision securities, and U.S. government and agency securities with a focus on suitable government-sponsored securities to augment risk-based capital.

Real Estate Owned and Other Repossessed Assets. Real estate owned and held for sale decreased $205,000, or 43.9% to $262,100 at September 30, 2015 from $467,000 at December 31, 2014, as we sold $299,000 of foreclosed properties, there was one foreclosed non-performing loan for $99,000, a $4,900 recorded valuation adjustments, $15,947 in net loss on sales, and $15,680 in net gains on sales during the nine months ended September 30, 2015. At September 30, 2015 our real estate owned included one land development property, one residential lot property and one commercial real estate propery, the largest has a carrying value of $202,100.

Deposits. Deposits increased by $5.3 million, or 5.4%, to $103.8 million at September 30, 2015. Noninterest bearing increased $1.4 million or 11.9%, and interest-bearing deposits increased $3.9 million or 4.5% to $90.6 million at September 30, 2015 from $86.8 million at December 31, 2014.

Federal Home Loan Bank Advances and Other Liabilities. Federal Home Loan Bank advances increased $4.0 million, or 40.0% to $14.0 million at September 30, 2015 from $10 million at December 31, 2014. The $4.0 million increase, for the nine months ended September 30, 2015, was due to loan growth. We partially funded the sale of the Decatur branch with $10.0 million in Federal Home Loan Bank advances during the first quarter of 2014. Other liabilities, which include, interest and accounts payable, customer escrow balances, and accruals for items such as employee pension and medical plans, increased $73,000 or 13.3%, to $620,000 at September 30, 2015 from $548,000 at December 31, 2014.

Total Equity. Total equity increased $115,574 or 0.9%, to $13.4 million at September 30, 2015. Retained earnings increased $61,625 due to net income at September 30, 2015, as well as an increase of $54,000 in accumulated other comprehensive income due to unrecognized gains on investment securities.

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Delinquencies, Classified Assets and Non-Performing Assets

Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

	Loans Delinquent For
	30-59 Days				60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount		Number		Amount
	(Dollars in thousands)
At September 30, 2015 (unaudited)
Real estate loans:
One- to four-family residential		10	$	751		4	$	108		11	$	728		25	$	1,587
Commercial real estate		-		-		-		-		-		-		-		-
Construction and land		-		-		1		2		2		34		3		36
Total real estate		10		751		5		110		13		762		28		1,623
Commercial and industrial		-		-		-		-		-		-		-		-
Warehouse Line		-		-		-		-		-		-		-		-
Consumer loans:		-		-		-		-		-		-		-		-
Home equity loans and lines of credit		5		162		3		57		-		-		8		219
Other consumer		1		4		-		-		-		-		1		4
Total consumer		6		166		3		57		-		-		9		223
Total loans		16	$	917		8	$	167		13	$	762		37	$	1,846

At December 31, 2014
Real estate loans:
One- to four-family residential		14	$	1,148		5	$	558		11	$	735		30	$	2,441
Commercial real estate		1		12		-		-		-		-		1		12
Construction and land		1		28		-		-		2		22		3		50
Total real estate		16		1,188		5		558		13		757		34		2,503
Commercial and industrial		-		-		-		-		-		-		-		-
Consumer loans:
Home equity loans and lines of credit		6		54		2		25		1		10		9		89
Other consumer		-		-		1		6		-		-		1		6
Total consumer		6		54		3		31		1		10		10		95
Total loans		22	$	1,242		8	$	589		14	$	767		44	$	2,598

The decrease in delinquent loans at September 30, 2015 compared to December 31, 2014 was primarily attributable to loans that were paid off or brought to a current status.

Classified Assets. The following table sets forth our amounts of classified assets as of the dates indicated. Amounts shown at September 30, 2015 and December 31, 2014 include approximately $1.6 million and $2.9 million of nonperforming loans, respectively. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $15,182 and $17,502 at September 30, 2015 and December 31, 2014, respectively.

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	At September 30,		At December 31,
	2015		2014
	(Dollars in thousands)
	(Unaudited)
Classifed assets:
Substandard loans (1)	$	2,129	$	2,887
Doubtful loans		-		-
Loss loans		-		-
Real estate owned and other				-
Real estate owned and other repossessed assets (2)		262		467
Total classified assets	$	2,391	$	3,354

(1) Includes non-accruing loans that are more than 90 days past due.

The decrease in classified assets to $2.4 million at September 30, 2015 from $3.4 million at December 31, 2014 is the continuation of a trend of declining classified assets that has been ongoing since 2009. This decrease was primarily due to the enhanced review of our nonperforming assets, which resulted in charge-offs of $81,000 and losses on sales of real estate owned as well as loans paying off. The largest component of classified loans is commercial real estate loans which totaled $1.4 million, or 64.2% of our total classified loans, at September 30, 2015. Our largest classified loan relationship, was a commercial real estate relationship totaling $577,000 at September 30, 2015.

Non-Performing Assets. The following table sets forth information regarding our non-performing assets and troubled debt restructurings at the dates indicated. The information reflects net charge-offs but not specific reserves. Troubled debt restructurings are loans where the borrower is experiencing financial difficulty and for which either a portion of interest or principal has been forgiven or an extension of term granted, or the terms of which have been modified to reflect interest rates materially less than current market rates.

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	At September 30,		At December 31,
	2015		2014
	(Dollars in thousands)
	(Unaudited)

Non-accrual loans:
Real estate loans:
One- to four-family residential	$	1,539	$	1,811
Commercial real estate		10		729
Construction and land		36		207
Total real estate		1,585		2,747
Commercial and industrial		-		-
Warehouse line		-		-
Consumer loans:
Home equity loans and lines of credit		48		151
Other consumer		-		-
Total consumer		48		151
Total loans		1,633		2,898

Loans 90 days or more past due and still accruing:
Real estate loans:
One- to four-family residential		-		-
Commercial real estate		-		-
Construction and land		-		-
Total real estate		-		-
Commercial and industrial		-		-
Warehouse line		-		-
Consumer loans:
Home equity loans and lines of credit		-		-
Other consumer		-		-
Total consumer		-		-
Total loans		-		-

Total non-performing loans		1,633		2,898

Real estate owned and other repossessed assets:
Real estate loans:
One- to four-family residential		-		-
Commercial real estate		202		397
Construction and land		60		70
Total real estate		262		467
Commercial and industrial		-		-
Consumer loans:
Home equity loans and lines of credit		-		-
Other consumer		-		-
Total consumer		-		-
Total real estate owned before loans in redemption		262		467
Loans in redemption (1)		-		-
Total real estate owned and other repossessed assets		262		467

Total non-performing assets	$	1,895	$	3,365

(table continues on following page)

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	At September 30,			At December 31,
	2015			2014
	(Dollars in thousands)
	(Unaudited)
Troubled debt restructurings:
Real estate loans:
One- to four-family residential	$	965		$	916
Commercial real estate		277			286
Construction and land		57			134
Total real estate		1,299			1,336
Commercial and industrial		-			-
Consumer loans:
Home equity loans and lines of credit		79			2
Other consumer		-			-
Total consumer		79			2
Total loans	$	1,378		$	1,338

Total non-performing loans and troubled debt restructurings	$	3,011		$	4,236

Ratios:
Non-performing loans to total loans		1.48	%		3.20	%
Non-performing assets to total assets		1.44	%		2.75	%
Non-performing assets and troubled debt restructurings to total assets		2.28	%		3.46	%

(1) Represents real estate that is subject to the redemption period under Michigan law.

Non-performing assets decreased to $1.9 million, or 1.44% of total assets, at September 30, 2015 from $3.4 million, or 2.75% of total assets, at December 31, 2014. Nonperforming commercial real estate loans decreased $719,000 to $10,000, or 0.6% of total non-performing loans, at September 30, 2015 from $729,000, or 25.2% of total non-performing loans at December 31, 2014. One-to four- family residential nonperforming loans decreased $272,000 to $1.5 million on September 30, 2015 from $1.8 million at December 31, 2014. Our largest non-performing loan relationship was a one-to-four family residential mortgage relationship totaling $240,000 at September 30, 2015.

Other Loans of Concern. At September 30, 2015, there were $1.7 million of loans designated by management as “special mention,” of which $1.1 million is related to one commercial real estate relationship at September 30, 2015 where there is information about possible credit problems of borrowers that caused management to have doubts about the ability of the borrowers to comply with present loan repayment terms. Management continues to actively monitor the performance of these loans.

Comparison of Operating Results for the Three Months Ended September 30, 2015 and 2014

General. Net income for the three months ended September 30, 2015 was $19,000, compared to net loss of $178,000 for the three months ended September 30, 2014, an increase of $197,000. The increase in earnings was primarily due to increases in net interest income, other non-interest income, and decreases in professional fees and other real estate expenses. The increase in non-interest income is a result of residential mortgage loan sales volume increasing due to new home sales which resulted in an

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increase in gains booked of $24,000. We also have a decline in occupancy and equipment expense for the Decatur branch sale that occurred on January 24, 2014.

Interest Income. Interest income increased $156,000, or 14.7 %, to $1.2 million for the three months ended September 30, 2015 from $1.1 million for the three months ended September 30, 2014. This increase was primarily attributable to a $168,000 increase in interest and fee income on loans receivable. The average balance of loans during the three months ended September 30, 2015 increased $17.0 million to $106.6 million compared to $89.6 million for the three months ended September 30, 2014, and the average yield on loans decreased by 8 basis points to 4.35% for the three months ended September 30, 2015 from 4.43% for the three months ended September 30, 2014. The average balance of investment securities decreased $1.7 million to $11.5 million for the three months ended September 30, 2015 from $13.3 million for the three months ended September 30, 2014, while the average yield on investment securities increased by 3 basis point to 1.38% for the three months ended September 30, 2015 from 1.35% for the three months ended September 30, 2014, resulting in income on securities decreasing.

Interest Expense. Total interest expense increased $18,000, or 15.3%, to $136,000 for the three months ended September 30, 2015 from $118,000 for the three months ended September 30, 2014. Interest expense on deposit accounts increased $11,000, or 12.4%, to $100,000 for the three months ended September 30, 2015 from $89,000 for the three months ended September 30, 2014. The increase was a result of $6.8 million, or 8.4%, in the average balance on deposits to $87.9 million for the three months ended September 30, 2015 from $81.1 million for the three months ended September 30, 2014. The average cost of interest-bearing deposits was 0.51% for the three months ended September 30, 2015 and 0.51% for the three months ended September 30, 2014, reflecting the current interest rate environment. The increase in deposits is in demand deposits of $8.5 million and $420,000 in certificates of deposit for the three months ended September 30, 2015. This was offset partially by declines of $1.8 million in money market accounts and $247,000 in savings for the three months ended September 30, 2015.

Interest expense on FHLB-Indianapolis advances increased $7,000 to $36,000 for the three months ended September 30, 2015 from $29,000 for the three months ended September 30, 2014. The average balance of advances increased by $7.0 million to $17.4 million for the three months ended September 30, 2015 from $10.4 million for the three months ended September 30, 2014. Borrowings increased $7.0 million to fund the loan growth activity for the three months ended September 30, 2015. Borrowing increased $10.0 million to fund the Decatur branch sale on January 24, 2014 for the three months ended September 30, 2014. The average cost on the advances decreased 0.29% basis points to 0.82% for the three months ended September 30, 2015 from 1.11% for the three months ended September 30, 2014.

Net Interest Income. Net interest income increased $137,000, or 14.5%, to $1.1 million for the three months ended September 30, 2015 from $943,000 for the three months ended September 30, 2014. The increase reflected an increase in our interest rate spread to 3.33% for the three months ended September 30, 2015 from 3.29% for the three months ended September 30, 2014, and an increase in our net interest margin to 3.41% for the three months ended September 30, 2015 from 3.38% for the three months ended September 30, 2014. The increase in our interest rate spread and net interest margin reflected primarily the increase in interest income in net loans and a flat yield paid on deposits.

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we recorded a provision for loan losses of $30,000 for the three months ended September 30, 2015 and $0 for the three months ended September 30, 2014. The additional provision for loan losses was needed because of the increase in outstanding loan balances during the three months ended September 30, 2015. The allowance for loan losses was $1.1 million, or .96% of total loans, at September 30, 2015, compared to $1.1 million, or 1.16% of total loans, at September 30, 2014. Total nonperforming loans were $1.6 million at September 30, 2015, compared to $2.5 million at September 30, 2014. As a percentage of nonperforming loans, the allowance for loan losses was 64.5% at September 30, 2015 compared to 42.5% at September 30, 2014. At September 30,

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2015, $762,000 of the $1.6 million in nonperforming loans were contractually current, compared to $1.6 million of $2.5 million at September 30, 2014.

The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at September 30, 2015 and September 30, 2014. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.

Non-Interest Income. Non-interest income increased $28,000, or 13.4%, to $237,000 for the three months ended September 30, 2015 from $209,000 for the three months ended September 30, 2014. The increase was primarily due to an increase of $24,000 in income from mortgage banking activities, which includes gains on sale of loans and changes in the value of mortgage servicing rights. Gains on sale of loans increased as originations, particularly on new home purchases, increased during the period.

Non-Interest Expense. Non-interest expense decreased $63,000, or 4.7%, to $1.3 million for the three months ended September 30, 2015 from $1.3 million for the three months ended September 30, 2014. The decrease is primarily reflected a decrease in professional fees of $31,000 due to the leveling off of expenses associated with becoming a public company as well as legal expenses associated with non-performing loans. Other real estate decreased $28,000 as a result of less properties being held and a decrease in FDIC insurance premiums of $15,000. These were partially offset by an increase in salaries and employee benefit cost of $28,000. At this time, we do not expect any reductions in non-interest expenses related to our participation in the defined benefit plan because of the continued participation in the plan.

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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are accreted to interest income.

		For the Three Months Ended September 30,
		2015								2014
		(Dollars in thousands)
		Average								Average
		Outstanding					Yield/Rate			Outstanding					Yield/Rate
		Balance			Interest		(1)			Balance			Interest		(1)
	(Dollars in thousands)
Interest-earning assets:
Loans		$	106,570		$	1,168		4.35	%	$	89,553		$	1,000		4.43	%
Investment securities			11,538			40		1.38			13,257			45		1.35
Other interest-earning assets (2)			7,540			8		0.47			8,008			16		0.01
Total interst-earning assets			125,648			1,216		3.84			110,818			1,061		3.80
Noninterest-earning assets			8,248								7,207
Allowance for loan losses			(1,038	)							(1,080	)
Total assets		$	132,858							$	116,945

Interest-earning liabilities:
Demand deposits		$	25,477			21		0.33	%	$	17,024			9		0.21	%
Money market accounts			20,009			15		0.30			21,796			16		0.29
Savings accounts			14,662			7		0.19			14,909			8		0.22
Certificates of deposit			27,792			57		0.81			27,372			56		0.81
Total deposits			87,940			100		0.45			81,101			89		0.44

FHLB-Indianapolis advances			17,387			36		0.82			10,402			29		1.11
Total interest-bearing liabilities			105,327			136		0.51			91,503			118		0.51

Noninterest-bearing demand deposits			14,373								12,039
Other noninterest-bearing liabilities			754								855
Total liabilities			120,454								104,397
Equity			12,404								12,548
Total liabilities and equity		$	132,858							$	116,945

Net interest income					$	1,080							$	943
Net interest spread (3)								3.33	%							3.29	%
Net interest-earning assets (4)		$	20,321							$	19,315
Net interest margin (5)								3.41	%							3.38	%
Average interest-earning assets to interest-bearing liabilities								119.29	%							121.11	%

(1)

Yield and rates are annualized.

(2)

Consists of stock in the FHLB-Indianapolis and interest bearing deposits in other banks.

(3)

Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5)

Net interest margin represents net interest income divided by average total interest-earning assets.

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Comparison of Operating Results for the Nine Months Ended September 30, 2015 and 2014

General. Net income for the nine months ended September 30, 2015 was $62,000, compared to net loss of $600,000 for the nine months ended September 30, 2014, an increase of $662,000. The increase in earnings was primarily due to increases in net interest income, other non-interest income, and decreases in other real estate expense and professional fees. The increase in non-interest income is a result of residential mortgage loan sales volume increasing due to rate decreases which resulted in an increase in gains booked of $147,000. We also have a decline in occupancy and equipment expense due to the Decatur branch sale that occurred on January 24, 2014.

Interest Income. Interest income increased $427,000, or 13.6%, to $3.6 million for the nine months ended September 30, 2015 from $3.1 million for the nine months ended September 30, 2014. This increase was primarily attributable to a $471,000 increase in interest and fee income on loans receivable. Approximately, $119,000 of interest income was collected on a paid off nonaccrual loan. The average balance of loans during the nine months ended September 30, 2015 increased $12.3 million to $100.4 million compared to $88.2 million for the nine months ended September 30, 2014, and the average yield on loans increased by 9 basis points to 4.54% for the nine months ended September 30, 2015 from 4.45% for the nine months ended September 30, 2014. The average balance of investment securities decreased $2.2 million to $12.1 million for the nine months ended September 30, 2015 from $14.3 million for the nine months ended September 30, 2014, while the average yield on investment securities decreased by 3 basis point to 1.37% for the nine months ended September 30, 2015 from 1.40% for the nine months ended September 30, 2014, resulting in income on securities decreasing.

Interest Expense. Total interest expense increased $21,000, or 5.7%, to $392,000 for the nine months ended September 30, 2015 from $371,000 for the nine months ended September 30, 2014. Interest expense on deposit accounts increased $3,000 or 1.0%, to $296,000 for the nine months ended September 30, 2015 from $293,000 for the nine months ended September 30, 2014. An increase of $4.4 million, or 5.3%, in the average balance of deposits to $87.6 million for the nine months ended September 30, 2015 from $83.2 million for the nine months ended September 30, 2014. The increase in deposits is in demand deposits of $8.7 million and $896,000 in savings for the nine months ended September 30, 2015. This was offset partially by declines of $3.1 million in money market accounts and $2.1 million in certificates of deposit for the nine months ended September 30, 2015.

Interest expense on FHLB-Indianapolis advances increased $18,000 to $96,000 for the nine months ended September 30, 2015 from $78,000 for the nine months ended September 30, 2014. The average balance of advances increased by $4.3 million to $13.7 million for the nine months ended September 30, 2015 from $9.3 million for the nine months ended September 30, 2014. Borrowings increased to fund the loan growth activity for the nine months ended September 30, 2015. Borrowing increased $10.0 million to fund the Decatur branch sale on January 24, 2014 for the nine months ended September 30, 2014. The average cost on the advances decreased 0.17% basis points to 0.94% for the nine months ended September 30, 2015 from 1.11% for the nine months ended September 30, 2014.

Net Interest Income. Net interest income increased $406,000, or 14.6%, to $3.2 million for the nine months ended September 30, 2015 from $2.8 million for the nine months ended September 30, 2014. The increase reflected an increase in our interest rate spread to 3.40% for the nine months ended September 30, 2015 from 3.24% for the nine months ended September 30, 2014, and an increase in net interest margin to 3.49% for the nine months ended September 30, 2015 from 3.33% for the nine months ended September 30, 2014. The increase in our interest rate spread and net interest margin reflected primarily the increase in interest income in net loans and a decrease in interest expense on deposits and borrowings.

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Non-Interest Income. Non-interest income increased $148,000, or 26.9%, to $696,000 for the nine months ended September 30, 2015 from $548,000 for the nine months ended September 30, 2014. The increase was primarily due to an increase of $147,000 in income from mortgage banking activities, which includes gains on sale of loans and changes in the value of mortgage servicing rights. Gains on sale of loans increased as originations, particularly on new home purchases, increased during the period.

Non-Interest Expense. Non-interest expense decreased $153,000, or 3.9%, to $3.8 million for the nine months ended September 30, 2014 from $3.9 million for the nine months ended September 30, 2014. The decrease is primarily reflected in a decrease of $38,000 in occupancy and equipment, a decrease in other real estate expenses of $42,000 and a decrease of $87,000 in professional fees. Occupancy and equipment decreased as a result of the Decatur branch sale on January 24, 2014. Professional fees declined due to the leveling off of expenses associated with becoming a public company as well as legal expenses associated with non-performing loans. Other real estate expenses decreased as a result of less properties being held. At this time, we do not expect any reductions in non-interest expenses related to our participation in the defined benefit plan because of the continued participation in the plan.

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		For the Nine Months Ended September 30,
		2015								2014
		(Dollars in thousands)
		Average								Average
		Outstanding					Yield/Rate			Outstanding					Yield/Rate
		Balance			Interest		(1)			Balance			Interest		(1)
	(Dollars in thousands)
Interest-earning assets:
Loans		$	100,443		$	3,407		4.54	%	$	88,178		$	2,936		4.45	%
Investment securities			12,090			124		1.37			14,329			150		1.40
Other interest-earning assets (2)			9,110			40		0.59			8,801			58		87.00
Total interst-earning assets			121,643			3,571		3.92			111,308			3,144		3.78
Noninterest-earning assets			7,154								7,491
Allowance for loan losses			(1,056	)							(1,107	)
Total assets		$	127,741							$	117,692

Interest-earning liabilities:
Demand deposits		$	25,246			67		0.36	%	$	16,497			24		0.20	%
Money market accounts			20,324			44		0.29			23,418			51		0.29
Savings accounts			14,344			21		0.19			13,448			18		0.18
Certificates of deposit			27,651			164		0.79			29,792			200		0.90
Total deposits			87,565			296		0.45			83,155			293		0.47

FHLB-Indianapolis advances			13,664			96		0.94			9,333			78		1.11
Total interest-bearing liabilities			101,229			392		0.52			92,488			371		0.54

Noninterest-bearing demand deposits			13,505								12,649
Other noninterest-bearing liabilities			753								1,022
Total liabilities			115,487								106,159
Equity			12,254								11,533
Total liabilities and equity		$	127,741							$	117,692

Net interest income					$	3,179							$	2,773
Net interest spread (3)								3.40	%							3.24	%
Net interest-earning assets (4)		$	20,414							$	18,820
Net interest margin (5)								3.49	%							3.33	%
Average interest-earning assets to interest-bearing liabilities								120.17	%							120.35	%

(1)

Yield and rates are annualized.

(2)

Consists of stock in the FHLB-Indianapolis and interest bearing deposits in other banks.

(3)

Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5)

Net interest margin represents net interest income divided by average total interest-earning assets.

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Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities and calls of securities. We also have the ability to borrow from the FHLB-Indianapolis. At September 30, 2015, we had the capacity to borrow approximately $5.2 million from the FHLB-Indianapolis and an additional $2.0 million on a line of credit with the FHLB-Indianapolis and United Bankers Bank. At September 30, 2015 and December 31, 2014, we had $14.0 million and $10.0 million, respectively, outstanding in advances from the FHLB-Indianapolis.

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

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $128,000 and ($274,000) for the nine months ended September 30, 2015 and 2014, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations, offset by principal collections on loan, proceeds from maturing securities and pay downs of mortgage-backed securities and the 2014 net payment on the sale of the branch, was $17.4 million and $13.3 million for nine months ended September 30, 2015 and 2014, respectively. During the nine months ended September 30, 2015 and 2014, net cash provided by financing activities was $9.3 million and $10.5 million, which consisted primarily of the activity in deposit accounts, the Federal Home Loan Bank advances, and proceeds from the stock conversion.

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

At September 30, 2015, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $12.5 million, or 9.46% of adjusted total assets, which is above the required level of $5.3 million, or 4.00%; the common equity tier 1 capital ratio of $12.5 million, or 13.86 %, which is above the required level of $4.1 million or 4.5% and the total capital ratio of $13.6 million, or 15.02% of risk-weighted assets, which is above the required level of $7.2 million, or 8.0%. We have opted-out of the accumulated other comprehensive income (AOCI) capital rule that went into effect on January 1, 2015. At December 31, 2014, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $12.3 million, or 10.03% of adjusted total assets, which is above the required level of $6.1 million, or 5.00%; and total risk-based capital of $13.2 million, or 17.87% of risk-weighted assets, which is above the required level of $7.4 million, or 10.00%. Accordingly, the Bank was categorized as well capitalized at September 30, 2015 and December 31, 2014. Management is not aware of any conditions or events since the most recent notification that would change our category.

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. Generally Accepted Accounting Principles are not recorded in our financial statements. These transactions involved, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customer’s

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request for funding and take the form of loan commitments, lines of credit and standby letters of credit.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures above market risk are not required by smaller reporting companies, such as the Company.

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2015. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2015, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

Item 1A.

Risk Factors

Disclosure of risk factors is not required by smaller reporting companies, such as the Company.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

There were no sales of unregistered securities during the period covered by this Report.

(b)

Not applicable.

(c)

There were no issuer repurchases of securities during the period covered by this Report.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

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Not applicable.

Item 5.

Other Information

Edgewater Bank is a federal savings bank. Edgewater Bank has applied to the appropriate state and federal regulators to convert its charter from a federal savings bank to a state bank chartered under the laws of the State of Michigan. In connection with those applications, Edgewater Bancorp, Inc. has applied to convert from a savings and loan holding company to a bank holding company. The proposed change in charter is subject to prior receipt of all necessary regulatory approvals. The proposed charter change, if it occurs, is not expected to result in any changes to the bank's products, services or operations.

Item 6.

Exhibits

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the signatures.

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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.

		Edgewater Bancorp, Inc.

Date: November 13, 2015		/s/ Richard E. Dyer
		Richard E. Dyer
		President and Chief Executive Officer

Date: November 13, 2015		/s/ Coleen S. Frens-Rossman
		Coleen S. Frens-Rossman
		Senior Vice President and
		Chief Financial Officer

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INDEX TO EXHIBITS

3.1	Articles of Incorporation of Edgewater Bancorp, Inc.*
3.2	Bylaws of Edgewater Bancorp, Inc.*
10.1	Amended and Restated Employment Agreement dated as of August 19, 2015, by and between Edgewater Bank, Edgewater Bancorp, Inc. and Richard E. Dyer, incorporated by reference to Exhibit 10.1 to the Edgewater Bancorp, Inc.'s Current Report on Form 8-K filed August 21, 2015.
10.2	Amended and Restated Employment Agreement dated as of August 19, 2015, by and between Edgewater Bank, Edgewater Bancorp, Inc. and Coleen S. Frens-Rossman, incorporated by reference to Exhibit 10.2 to the Edgewater Bancorp, Inc.'s Current Report on Form 8-K filed August 21, 2015.
31.1	Certification of Richard E. Dyer, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of Coleen S. Frens-Rossman, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32	Certification of Richard E. Dyer, President and Chief Executive Officer, and Coleen S. Frens-Rossman, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from the Company’s Quarterly Report on Form 10Q for the quarter ended September 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Loss; (iv) Condensed Consolidated Statement of Changes in Stockholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (v) Notes to Condensed Consolidated Financial Statements*

Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-191125)

Edgewater Bancorp, Inc. - FORM 10-Q - November 13, 2015

Attached files

Edgewater Bancorp, Inc. Reports