Edgewater Bancorp (EGDW) 10-Q 2014 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

OR

oTransition 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 o

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 o

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 o	Accelerated filer o
Non-accelerated filer o	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 o  NO x

As of August 8, 2014, 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 June 30, 2014 (unaudited) and December 31, 2013	4
	Condensed Consolidated Statements of Operations for the Three Months Ended and Six Months Ended June 30, 2014 and 2013 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended and Six Months Ended June 30, 2014 and 2013 (unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2014	7
	Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.	Controls and Procedures	46

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Part II. Other Information
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults upon Senior Securities	46
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47
	Signature Page	48

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Part I. — Financial Information

Financial Statements

Edgewater Bancorp, Inc.

Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2014			2013
	(Unaudited)
Assets
Cash and due from banks	$	777,917		$	683,930
Interest-bearing demand deposits in banks	8,841,626			9,638,146
Cash and cash equivalents	9,619,543			10,322,076
Available-for-sale securities	13,415,013			15,593,540
Federal Home Loan Bank (FHLB) stock	1,408,200			1,408,200
Loans held for sale	761,491			—
Loans receivable, net of allowance for losses of $1,082,405 and $1,061,141, respectively	86,411,637			86,092,038
Premises and equipment, net	4,053,437			4,473,690
Other real estate, net	1,028,000			1,168,796
Interest receivable	301,539			312,615
Mortgage servicing rights (includes $136,280 and $148,171, respectively, carried at fair value)	464,104			513,170
Other assets	367,418			1,242,327
Total assets	$	117,830,382		$	121,126,452
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	10,250,247		$	12,188,446
Interest-bearing	82,921,273			95,882,580
Total deposits	93,171,520			108,071,026
Federal Home Loan Bank advances	10,000,000			—
Stock conversion proceeds in escrow	—			3,076,038
Accrued and other liabilities	999,092			690,457
Total liabilities	104,170,612			111,837,521
Commitments and contingencies
Temporary Equity
ESOP shares subject to mandatory redemption	11,151			—
Stockholders’ Equity
Common Stock-shares authorized 7,000,000: shares issued and outstanding 667,898 at $.01 par value	6,679			—
Paid-in-capital	4,683,430			—
Retained earnings	9,002,293			9,424,187
Accumulated other comprehensive loss	(43,783		)	(135,256		)
Total equity	13,648,619			9,288,931
Total liabilities and stockholders’ equity	$	117,830,382		$	121,126,452

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 June 30						Six Months Ended June 30,
	2014			2013			2014			2013
	(Unaudited)						(Unaudited)
Interest Income
Loans, including fees	$	970,729		$	992,286		$	1,936,628		$	2,002,608
Debt securities
Taxable	38,035			44,968			80,258			87,227
Tax-exempt	12,171			9,880			24,351			18,312
Federal Home Loan Bank stock	13,021			12,653			32,543			25,042
Other	4,498			17,194			8,533			22,903
Total interest income	1,038,454			1,076,981			2,082,313			2,156,092
Interest Expense
Deposits	92,265			139,451			204,199			283,446
Federal Home Loan Bank advances	27,774			2,317			48,768			7,702
Total interest expense	120,039			141,768			252,967			291,148
Net interest income	918,415			935,213			1,829,346			1,864,944
Provision for loan losses	—			225,000			—			240,000
Net Interest Income After Provision for Loan Losses	918,415			710,213			1,829,346			1,624,944
Noninterest income
Service charges, deposits	95,921			126,191			185,265			243,915
Mortgage banking activities	38,482			109,664			81,658			248,144
Other	17,480			45,815			72,592			75,544
Total noninterest income	151,883			281,670			339,515			567,603
Noninterest expense
Salaries and employee benefits	616,043			575,572			1,256,633			1,150,886
Occupancy and equipment	202,390			211,921			431,579			436,311
Data processing	135,364			154,514			274,954			315,707
(Gain) loss on sale of other real estate, net	(22,039		)	4,999			(14,995		)	8,542
Interchange	18,681			16,003			34,275			40,903
Advertising	18,851			18,516			43,388			43,175
FDIC insurance premiums	34,344			43,000			75,744			85,456
Other real estate	18,277			68,290			27,129			117,632
Professional fees	148,587			142,433			281,761			246,557
Insurance	18,354			20,574			41,902			40,876
Other	56,914			107,479			138,385			204,206
Total noninterest expense	1,245,766			1,363,301			2,590,755			2,690,251
Net Loss Before Income Taxes	(175,468		)	(371,418		)	(421,894		)	(497,704		)
Provision for Income Taxes	—			—			—			—
Net Loss	$	(175,468	)	$	(371,418	)	$	(421,894	)	$	(497,704	)
Basic and Diluted Earnings (Loss) Per Share	$	(0.29	)	N/A			$	(0.75	)	N/A

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

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Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Loss

	Three Months Ended June 30						Six Months Ended June 30,
	2014			2013			2014			2013
	(Unaudited)						(Unaudited)
Net Loss	$	(175,468	)	$	(371,418	)	$	(421,894	)	$	(497,704	)
Other Comprehensive Income (Loss)
Net change in unrealized gains (losses) on investment securities available-for-sale	35,066			193,779			91,473			(263,089		)
Less: reclassification adjustment for realized gains (losses) included in net loss	—			—			—			—
Other comprehensive income (loss) before income tax	35,066			193,779			91,473			(263,089		)
Tax expense (benefit), net of deferred tax asset valuation impact of $11,922, $65,885, $31,101 and ($89,450), respectively	—			—			—			—
Comprehensive Loss	$	(140,402	)	$	(177,639	)	$	(330,421	)	$	(760,793	)

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, 2014	—	$	—	$	—	$	9,424,187		$	(135,256	)	$	9,288,931
Issuance of common stock, net of offering costs	667,898	6,679		4,683,430		—			—			4,690,109
Net loss	—	—		—		(421,894		)	—			(421,894		)
Other comprehensive income	—	—		—		—			91,473			91,473
Balance at June 30, 2014	667,898	$	6,679	$	4,683,430	$	9,002,293		$	(43,783	)	$	13,648,619

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Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

	Six Months Ended June 30,
	2014			2013
	(Unaudited)
Operating activities:
Net loss	$	(421,894	)	$	(497,704	)
Items not requiring cash:
Depreciation	237,123			256,472
Provision for loan losses	—			240,000
Amortization of premiums on securities	62,541			83,024
Change in fair value of mortgage servicing rights	11,892			55,082
Loss (gain) on sale of other real estate	(14,995		)	8,542
ESOP shares earned	11,151			—
Amortization of mortgage servicing rights	52,116			42,547
Loans originated for sale	(2,515,531		)	(9,778,520		)
Proceeds from loan sold	1,771,362			10,624,637
Gain on sale of loans	(32,264		)	(249,664		)
Loss (gain) on sale of premises and equipment	1,215			(1,000		)
Net change in:
Interest receivable and other assets	132,022			52,735
Interest payable and other liabilities	308,635			256,916
Net cash provided by (used in) operating activities	(396,627		)	1,093,067
Investing activities:
Purchases of available-for-sale securities	—			(4,894,274		)
Proceeds from calls and maturities of available-for-sale securities	2,207,459			1,372,078
Net change in loans	(526,599		)	3,911,785
Proceeds from sale of other real estate	362,792			2,185,573
Payment for sale of branch, net	(13,112,513		)	—
Proceeds from sale of premises and equipment	6,538			211,000
Purchases of premises and equipment	(39,623		)	(132,812		)
Net cash provided by (used in) investing activities	(11,101,946		)	2,653,350
Financing activities:
Proceeds from stock conversion	2,368,033			—
Net change in deposits	(1,571,993		)	1,370,856
Proceeds from Federal Home Loan Bank advances	10,000,000			—
Repayment of Federal Home Loan Bank advances	—			(4,000,000		)
Net cash provided by (used in) financing activities	10,796,040			(2,629,144		)
Net Change in Cash and Cash Equivalents	(702,533		)	1,117,273
Cash and Cash Equivalents, Beginning of Period	10,322,076			9,022,796
Cash and Cash Equivalents, End of Period	$	9,619,543		$	10,140,069
Additional Cash Flows Information:
Interest paid	$	217,341		$	231,030
Loans transferred to other real estate	207,000			365,296
Capitalization of mortgage serving rights	14,942			86,547

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 mutual savings association (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 “Conversion”), 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 $1,451,000, amounted to $4,694,000.

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 liquidation 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.  All information as of and for the period ended June 30, 2013 is Bank only pre-conversion data.

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

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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 preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 six-month period ended June 30, 2014, 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, 2013 included in Edgewater Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013.

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:  Investment Securities

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

	June 30, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency	$	5,027,080	$	3,674	$	93,849	$	4,936,905
State and political subdivisions	3,356,935		21,154		16,063		3,362,026
Mortgage-backed -GSE residential	3,792,196		28,539		6,879		3,813,856
Collateralized mortgage obligations-GSE	1,282,586		19,640		—		1,302,226
Total available-for-sale securities	$	13,458,797	$	73,007	$	116,791	$	13,415,013

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	December 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale securities:
U.S. Government and federal agency	$	6,557,658	$	9,682	$	126,202	$	6,441,138
State and political subdivisions	3,359,021		18,008		39,304		3,337,725
Mortgage-backed -GSE residential	4,224,511		36,873		30,254		4,231,130
Collateralized mortgage obligations-GSE	1,587,606		9,908		13,967		1,583,547
Total available-for-sale securities	$	15,728,796	$	74,471	$	209,727	$	15,593,540

The amortized cost and fair value of investment securities at June 30, 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.

	June 30, 2014				December 31, 2013
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Unaudited)
Within one year	$	295,000	$	295,421	$	1,506,265	$	1,513,109
After one through five years	8,089,015		8,003,510		8,410,414		8,265,754
After five through ten years	—		—		—		—
After ten years	—		—		—		—
	8,384,015		8,298,931		9,916,679		9,778,863
Mortgage-backed - GSE residential	3,792,196		3,813,856		4,224,511		4,231,130
Collateralized debt obligations	1,282,586		1,302,226		1,587,606		1,583,547
	$	13,458,797	$	13,415,013	$	15,728,796	$	15,593,540

The carrying value of investment securities pledged as collateral, to secure public deposits and for other purposes was $400,779 at June 30, 2014 (unaudited) and $459,263 at December 31, 2013.

For the period ended June 30, 2014 and June 30, 2013, 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 June 30, 2014 (unaudited) and December 31, 2013 was $6,977,473 and $10,024,662, which is approximately 46% and 64%, respectively, of the Company’s investment portfolio.  These declines primarily resulted from increases in market interest rates since the securities were purchased.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these investment securities are temporary.

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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.

Investment securities with unrealized losses were as follows:

	June 30, 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
	(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency	$	959,555	$	1,114	$	3,472,604	$	92,735	$	4,432,159	$	93,849
State and political subdivisions			—		883,937		16,063		883,937		16,063
Mortgage-backed -GSE residential	1,661,377		6,879		—		—		1,661,377		6,879
	$	2,620,932	$	7,993	$	4,356,541	$	108,798	$	6,977,473	$	116,791

	December 31, 2013
	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	$	4,423,805	$	126,202	$	—	$	—	$	4,423,805	$	126,202
State and political subdivisions	2,015,891		39,304		—		—		2,015,891		39,304
Mortgage-backed -GSE residential	2,948,777		30,254		—		—		2,948,777		30,254
Collateralized mortgage obligations-GSE	636,189		13,967		—		—		636,189		13,967
	$	10,024,662	$	209,727	$	—	$	—	$	10,024,662	$	209,727

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 market interest rate increases.  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 June 30, 2014, and December 31, 2013.

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 three and six month-end periods ended June 30, 2014 (unaudited) and June 30, 2013 (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:

	June 30			December 31,
	2014			2013
	(Unaudited)
Real estate loans:
Residential 1-4 family	$	44,744,724		$	43,612,578
Commercial	25,687,500			24,705,387
Construction and land	907,987			1,618,445
Total real estate	71,340,211			69,936,410
Commercial and industrial	4,871,938			5,524,011
Consumer loans:
Home equity loans and lines of credit	10,444,882			10,984,782
Other consumer loans	818,610			672,560
Total consumer	11,263,492			11,657,342
Gross loans	87,475,641			87,117,763
Less
Net deferred loan costs	(18,401		)	(35,416		)
Allowance for loan losses	1,082,405			1,061,141
Net loans	$	86,411,637		$	86,092,038

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.

14

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 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.

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

	Residential			Commercial			Commercial
	1-4 Family			Real Estate			and Industrial			Consumer			Total
	(Unaudited)
Three Months Ended June 30, 2014:
Balance, beginning of period	$	221,963		$	578,929		$	157,510		$	173,209		$	1,131,611
Provision (credit) for loan losses	9,981			(23,566		)	(26,291		)	39,876			—
Loans charged to the allowance	—			—			—			(50,116		)	(50,116		)
Recoveries of loans previously charged off	310			600			—			—			910
Balance, end of period	$	232,254		$	555,963		$	131,219		$	162,969		$	1,082,405
Six Months Ended June 30, 2014:
Balance, beginning of period	$	188,325		$	587,331		$	138,268		$	147,217		$	1,061,141
Provision (credit) for loan losses	62,303			(120,722		)	(7,049		)	65,468			—
Loans charged to the allowance	(20,984		)	—			—			(50,116		)	(71,100		)
Recoveries of loans previously charged off	2,610			89,354			—			400			92,364
Balance, end of period	$	232,254		$	555,963		$	131,219		$	162,969		$	1,082,405

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	Residential			Commercial			Commercial
	1-4 Family			Real Estate			and Industrial		Consumer			Total
	(Unaudited)
Three Months Ended June 30, 2013:
Balance, beginning of period	$	202,813		$	1,119,815		$	29,298	$	147,696		$	1,499,622
Provision (credit) for loan losses	47,216			(43,850		)	188,314		33,320			225,000
Loans charged to the allowance	(123,377		)	(244,763		)	—		(64,611		)	(432,751		)
Recoveries of loans previously charged off	300			—			—		275			575
Balance, end of period	$	126,952		$	831,202		$	217,612	$	116,680		$	1,292,446
Six Months Ended June 30, 2013:
Balance, beginning of period	$	243,867		$	1,089,654		$	32,663	$	137,985		$	1,504,169
Provision (credit) for loan losses	5,862			(13,689		)	184,949		62,878			240,000
Loans charged to the allowance	(123,377		)	(244,763		)	—		(84,758		)	(452,898		)
Recoveries of loans previously charged off	600			—			—		575			1,175
Balance, end of period	$	126,952		$	831,202		$	217,612	$	116,680		$	1,292,446

The following presents the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2014 and December 31, 2013:

	Residential		Commercial		Commercial
	1-4 Family		Real Estate		and Industrial		Consumer		Total
	(Unaudited)
At June 30, 2014:
Allowance:
Balance, end of period	$	232,254	$	555,963	$	131,219	$	162,969	$	1,082,405
Ending balance: individually evaluated for impairment	$	8,860	$	464	$	—	$	1,623	$	10,947
Ending balance: collectively evaluated for impairment	$	223,394	$	555,499	$	131,219	$	161,346	$	1,071,458
Loans:
Ending balance	$	44,744,724	$	26,595,487	$	4,871,938	$	11,263,492	$	87,475,641
Ending balance individually evaluated for impairment	$	2,372,630	$	1,491,408	$	164,021	$	242,874	$	4,270,933
Ending balance collectively evaluated for impairment	$	42,372,094	$	25,104,079	$	4,707,917	$	11,020,618	$	83,209,708

	Residential		Commercial		Commercial
	1-4 Family		Real Estate		and Industrial		Consumer		Total
At December 31, 2013:
Allowance:
Balance, end of period	$	188,325	$	587,331	$	138,268	$	147,217	$	1,061,141
Ending balance: individually evaluated for impairment	$	16,704	$	3,447	$	—	$	2,328	$	22,479
Ending balance: collectively evaluated for impairment	$	171,621	$	583,884	$	138,268	$	144,889	$	1,038,662
Loans:
Ending balance	$	43,612,578	$	26,323,832	$	5,524,011	$	11,657,342	$	87,117,763
Ending balance individually evaluated for impairment	$	3,245,415	$	1,777,437	$	—	$	237,558	$	5,260,410
Ending balance collectively evaluated for impairment	$	40,367,163	$	24,546,395	$	5,524,011	$	11,419,784	$	81,857,353

Internal Risk Categories

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

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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 — ACCEPTABLE

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 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 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 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 4 — WATCH

General:  Loans in this category are considered to be acceptable credit quality, but contain greater credit risk than Risk Rating 3 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

17

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 5 — 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 (5) rating.  Nonfinancial reasons for rating a credit Special Mention (5) include management problems, pending litigation, an ineffective loan agreement or other material structural weaknesses, and any other significant deviation from prudent lending practices.

RISK RATING 6 — 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 (6) assets, the likelihood of full collection of interest and principal may be in doubt; such assets should be placed on nonaccrual.

RISK RATING 7 — 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, the perfection of liens on additional collateral, the valuation of collateral and refinancing.  Generally, pending events should be resolved within a relatively short

18

period and the ratings will be adjusted based on new information.  Because of high probability of loss, nonaccrual accounting treatment is required for Doubtful (7) assets.

RISK RATING 8 — 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 (8) 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 (8), there is little prospect of collecting either its principal or interest.  Losses are to be recorded in the period an obligation becomes uncollectable.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity at June 30, 2014:

	Residential		Commercial		Construction		Commercial
	1-4 Family		Real Estate		and Land		and Industrial		Home Equity		Consumer		Total
	(Unaudited)
Pass (1-4)	$	44,354,966	$	23,602,334	$	720,303	$	4,871,938	$	10,354,522	$	818,610	$	84,722,673
Special Mention (5)	—		47,738		—		—		—		—		47,738
Substandard (6)	389,758		2,037,428		187,684		—		90,360		—		2,705,230
Doubtful (7)	—		—		—		—		—		—		—
Loss (8)	—		—		—		—		—		—		—
Total	$	44,744,724	$	25,687,500	$	907,987	$	4,871,938	$	10,444,882	$	818,610	$	87,475,641

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity at December 31, 2013:

	Residential		Commercial		Construction		Commercial
	1-4 Family		Real Estate		and Land		and Industrial		Home Equity		Consumer		Total
Pass (1-4)	$	42,899,910	$	21,414,636	$	1,341,806	$	5,059,361	$	10,828,478	$	672,560	$	82,216,751
Special Mention (5)	—		798,627		250,000		—		—		—		1,048,627
Substandard (6)	712,668		2,492,124		26,639		464,650		156,304		—		3,852,385
Doubtful (7)	—		—		—		—		—		—		—
Loss (8)	—		—		—		—		—		—		—
Total	$	43,612,578	$	24,705,387	$	1,618,445	$	5,524,011	$	10,984,782	$	672,560	$	87,117,763

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The following tables present the Company’s loan portfolio aging analysis at June 30, 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	$	918,318	$	527,996	$	389,758	$	1,836,072	$	42,908,652	$	44,744,724	$	—
Commercial real estate	—		148,544		—		148,544		25,538,956		25,687,500		—
Construction and land	—		30,775		23,663		54,438		853,549		907,987		—
Commercial and industrial	—		—		—		—		4,871,938		4,871,938		—
Home equity	139,283		—		90,360		229,643		10,215,239		10,444,882		—
Other consumer	7,941		—		—		7,941		810,669		818,610		—
	$	1,065,542	$	707,315	$	503,781	$	2,276,638	$	85,199,003	$	87,475,641	$	—

The following tables present the Company’s loan portfolio aging analysis at December 31, 2013:

													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
Residential 1-4 family	$	1,583,953	$	537,596	$	529,097	$	2,650,646	$	40,961,932	$	43,612,578	$	—
Commercial real estate	—		—		16,862		16,862		24,688,525		24,705,387		—
Construction and land	32,418		—		26,639		59,057		1,559,388		1,618,445		—
Commercial and industrial	—		—		—		—		5,524,011		5,524,011		—
Home equity	54,136		51,663		156,304		262,103		10,722,679		10,984,782		—
Other consumer	1,565		9,144		—		10,709		661,851		672,560		—
	$	1,672,072	$	598,403	$	728,902	$	2,999,377	$	84,118,386	$	87,117,763	$	—

The following table presents the Company’s nonaccrual loans at June 30, 2014 and December 31, 2013.  This table excludes performing troubled debt restructurings.

	June 30,		December 31,
	2014		2013
	(Unaudited)
Residential 1-4 family	$	1,304,353	$	1,237,062
Commercial real estate	764,750		841,612
Construction and land	187,684		26,639
Commercial and industrial	—		—
Home equity	215,500		207,967
Other consumer	—		—
	$	2,472,287	$	2,313,280

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 June 30, 2014:

	Residential		Commercial		Construction		Commercial				Other
	1-4 Family		Real Estate		and Land		and Industrial		Home Equity		Consumer		Total
	(Unaudited)
Impaired loans without a specific allowance:
Recorded investment	$	1,119,017	$	1,459,307	$	164,021	$	—	$	85,111	$	—	$	2,827,456
Unpaid principal balance	1,242,279		1,554,716		171,072		—		89,753		—		3,057,820
Impaired loans with a specific allowance:
Recorded investment	1,253,613		32,101				—		157,763		—		1,443,477
Unpaid principal balance	1,295,290		32,101				—		159,835		—		1,487,226
Specific allowance	8,860		464				—		1,623		—		10,947
Total impaired loans:
Recorded investment	2,372,630		1,491,408		164,021		—		242,874		—		4,270,933
Unpaid principal balance	2,537,569		1,586,817		171,072		—		249,588		—		4,545,046
Specific allowance	8,860		464		—		—		1,623		—		10,947

The following table presents average impaired loans based on class level for the three months ended June 30, 2014 and 2013:

	Residential		Commercial		Construction		Commercial
	1-4 Family		Real Estate		and Land		and Industrial		Home Equity		Consumer		Total
	(Unaudited)
Average recorded investment in impaired loans for the three months ended June 30, 2014	$	2,304,116	$	1,281,992	$	165,551	$	—	$	239,047	$	—	$	3,990,706
Average recorded investment in impaired loans for the three months ended June 30, 2013	2,251,561		2,390,975		382,525		637,630		187,123		—		5,849,814

	Residential		Commercial		Construction		Commercial
	1-4 Family		Real Estate		and Land		and Industrial		Home Equity		Consumer		Total
	(Unaudited)
Average recorded investment in impaired loans for the six months ended June 30, 2014	$	2,326,988	$	1,300,422	$	167,047	$	—	$	237,581	$	—	$	4,032,038
Average recorded investment in impaired loans for the six months ended June 30, 2013	2,542,282		2,828,422		526,533		322,261		133,415		—		6,352,913

The following table presents impaired loans and specific valuation allowance based on class level at December 31, 2013:

	Residential		Commercial		Construction		Commercial				Other
	1-4 Family		Real Estate		and Land		and Industrial		Home Equity		Consumer		Total
Impaired loans without a specific allowance:
Recorded investment	$	1,904,315	$	1,063,947	$	170,071	$	—	$	—	$	—	$	3,138,333
Unpaid principal balance	2,008,561		1,222,080		171,073		—		—		—		3,401,714
Impaired loans with a specific allowance:
Recorded investment	1,341,100		543,419		—		—		237,558		—		2,122,077
Unpaid principal balance	1,376,123		680,219		—		—		240,295		—		2,296,637
Specific allowance	16,704		3,447		—		—		2,328		—		22,479
Total impaired loans:
Recorded investment	3,245,415		1,607,366		170,071		—		237,558		—		5,260,410
Unpaid principal balance	3,384,684		1,902,299		171,073		—		240,295		—		5,698,351
Specific allowance	16,704		3,447		—		—		2,328		—		22,479

Interest income of $20,815, $38,212, $40,626, $62,076 and $130,035 was recognized on impaired loans for the three and six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited) and for yearend December 31, 2013, respectively.

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At June 30, 2014, 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 six months ended June 30, 2014 and 2013.

Newly classified troubled debt restructurings:

	Three Months Ended June 30, 2014					Three Months Ended June 30, 2013
		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	—	$	—	$	—	—	$	—	$	—
Commercial real estate	—	—		—		1	502,764		308,000
Construction and land	—	—		—		—	—		—
Commercial and industrial	—	—		—		—	—		—
Home equity	—	—		—		—	—		—
Other consumer	—	—		—		—	—		—
	—	$	—	$	—	1	$	502,764	$	308,000

	Six Months Ended June 30, 2014					Six Months Ended June 30, 2013
		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	$	61,000	$	61,000	—	$	—	$	—
Commercial real estate	—	—		—		1	502,764		308,000
Construction and land	—	—		—		—	—		—
Commercial and industrial	—	—		—		—	—		—
Home equity	—	—		—		—	—		—
Other consumer	—	—		—		—	—		—
	1	$	61,000	$	61,000	1	$	502,764	$	308,000

The troubled debt restructurings described above increased the allowance for loan losses by $178 and $0 for the three months ended June 30, 2014 and 2013, respectively and resulted in charge offs of $19,937 and $0 for the three and six months ended June 30, 2014 and 2013, respectively.

Newly restructured loans by type of modification:

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	Interest						Total
	Only		Term		Combination		Modification
	(Unaudited)
Six Months Ended June 30, 2014:
Residential 1-4 family	$	—	$	61,000	$	—	$	61,000
Commercial real estate	—		—		—		—
Construction and land	—		—		—		—
Commercial and industrial	—		—		—		—
Home equity	—		—		—		—
Other consumer	—		—		—		—
	$	—	$	61,000	$	—	$	61,000

	Interest						Total
	Only		Term		Combination		Modification
	(Unaudited)
Six Months Ended June 30, 2013:
Residential 1-4 family	$	—	$	308,000	$	—	$	308,000
Commercial real estate	—		—		—		—
Construction and land	—		—		—		—
Commercial and industrial	—		—		—		—
Home equity	—		—		—		—
Other consumer	—		—		—		—
	$	—	$	308,000	$	—	$	308,000

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

	June 30, 2014			June 30, 2013
	Number of	Recorded		Number of	Recorded
	Loans	Balance		Loans	Balance
	(Unaudited)
Residential 1-4 family	—	$	—	—	$	—
Commercial real estate	—	—		2	782,739
Construction and land	—	—		—	—
Commercial and industrial	—	—		—	—
Home equity	—	—		—	—
Other consumer	—	—		—	—
	—	$	—	2	$	782,739

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 1Quoted prices in active markets for identical assets or liabilities.

Level 2Observable 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

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observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying 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 June 30, 2014 (unaudited) and at December 31, 2013:

	June 30, 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	$	4,936,905	$	—	$	4,936,905	$	—
State and political subdivisions	3,362,026		—			3,362,026	—
Mortgage-backed - GSE residential	3,813,856					3,813,856
Collateralized mortgage obligations-GSE	1,302,226		—			1,302,226	—
Mortgage servicing rights	136,280		—		—		136,280

	December 31, 2013
	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)
Available-for-sale securities:
U.S. Government and federal agency	$	6,441,138	$	—	$	6,441,138	$	—
State and political subdivisions	3,337,725		—		3,337,725		—
Mortgage-backed - GSE residential	4,231,130				4,231,130
Collateralized mortgage obligations-GSE	1,583,547		—		1,583,547		—
Mortgage servicing rights	148,171		—		—		148,171

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 three months ended June 30, 2014 (unaudited) and the year ended December 31, 2013.  For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

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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.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

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 an annual 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 June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(Unaudited)
Balance, beginning of period	$	138,288		$	203,114		$	148,171		$	230,655
Total changes in fair value included in earnings	(2,006		)	(27,541		)	(11,889		)	(55,082		)
Balance, end of period	$	136,282		$	175,573		$	136,282		$	175,573

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 June 30, 2014 (unaudited) and December 31, 2013:

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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)
June 30, 2014 (Unaudited)
Collateral-dependent impaired loans	1,432,530		—		—		1,432,530
December 31, 2013
Other real estate owned	$	234,000	$	—	$	—	$	234,000
Collateral-dependent impaired loans	2,099,598		—		—		2,099,598

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.

Unobservable (Level 3) Inputs

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

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			Valuation		Weighted
	Fair Value		Technique	Unobservable Inputs	Average
At June 30, 2014 (Unaudited):
Collateral-dependent impaired loans	1,432,530		Market comparable properties	Marketability discount	10% - 15% (12%)
Mortgage servicing rights	136,280		Discounted cash flow	Constant prepayment rate	14% - 24% (19.2%)
				Probability of default	1% - 8% (3.2%)
				Discount rate	5.8% - 12.9% (8.4%)
At December 31, 2013:
Other real estate owned	$	234,000	Market comparable properties	Comparability adjustment (%)	Not available
Collateral-dependent impaired loans	2,099,598		Market comparable properties	Marketability discount	10% - 15% (12%)
Mortgage servicing rights	148,171		Discounted cash flow	Constant prepayment rate	14% - 24% (19.2%)
				Probability of default	1% - 8% (5.8%)
				Discount rate	5.8% - 12.9% (8.4%)

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Mortgage Servicing Rights

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are discount rates, conditional prepayment rates and probability of default.  Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement.

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 June 30, 2014 and December 31, 2013.

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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 June 30, 2014:
Financial assets:
Cash and cash equivalents	$	9,619,543	$	9,619,543	$	—	$	—
FHLB Stock	1,408,200		—		1,408,200		—
Loans held for sale	761,491		—		761,491
Loans	86,411,637		—		—		86,873,000
Accrued interest receivable	301,539		—		301,539		—
Mortgage servicing rights	327,824		—		—		529,817
Financial liabilities:
Deposits	93,171,520		10,250,247		83,051,273		—
FHLB advances	10,000,000		—		10,104,000		—
Accrued interest payable	36,658		—		36,658		—

	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, 2013:
Financial assets:
Cash and cash equivalents	$	10,322,076	$	10,322,076	$	—	$	—
FHLB Stock	1,408,200		—		1,408,200		—
Loans held for sale	—		—		—		—
Loans	86,092,038		—		—		86,442,000
Accrued interest receivable	312,615		—		312,615		—
Mortgage servicing rights	364,999		—		—		543,975
Financial liabilities:
Deposits	108,071,026		12,188,447		96,083,579		—
Accrued interest payable	1,032		—		1,032		—

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.

Loan 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.

Loans

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,

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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,” to reduce diversity by clarifying 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 ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU2014-01, “Accounting for Investments in Qualified Affordable Housing Projects,” to permit entities to make an accounting policy election to account for their investment in qualified affordable housing projects using the proportional amortization methods if certain conditions are met.  The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statement.

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Note 8:  Earnings (Loss) Per Share

	Three Months Ended June 30,			Six Months Ended June 30,
	2014			2014
	(Unaudited)			(Unaudited)
Net Loss	$	(175,468	)	$	(421,894	)
Shares outstanding for basic EPS:
Average shares outstanding	667,898			612,547
Less: Average unearned ESOP shares	52,713			48,550
	615,185			563,997
Additional dilutive shares	—			—
Shares outstanding for basic and diluted EPS	615,185			563,997
Basic and diluted loss per share	$	(.29	)	$	(.75	)

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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 six months ended June 30, 2014 and 2013 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;

·our ability to comply with the terms of the individual minimum capital requirements (IMCR) imposed by the Office of the Comptroller of the Currency (OCC);

31

·competition among depository and other financial institutions;

·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 Basel III, 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;

32

·our ability to control costs and expenses, 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, 2013.

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 June 30, 2014 and December 31, 2013

Total Assets.  Total assets decreased by $3.3 million, or 2.72%, to $117.8 million at June 30, 2014 from $121.1 million at December 31, 2013.  The decrease was primarily the result of decreases in investment securities of $2.2 million and other assets of $875,000 in other assets.  This is partially offset by increases in net loans of $320,000 and held for sale loans of $761,000.

Net Loans.  Net loans increased by $320,000, or 0.37%, to $86.4 million at June 30, 2014 from $86.1 million at December 31, 2013.  During the six months ended June 30, 2014, one-to- four family residential real estate loans increased $1.1 million, or 2.60%, to $44.7 million at June 30, 2014 from $43.6 million at December 31, 2013; commercial real estate loans increased $982,000 or 3.98%, to $25.7 million from $24.7 million; construction and land loans decreased $710,000, or 43.9%, to $908,000 from $1.7 million; commercial and industrial loans decreased $652,000, or 11.8%, to $4.9 million to from $5.5 million and consumer loans, including home equity loans and lines of credit, decreased $394,000, or 3.38%, to $11.3 million from $11.6 million.  The increase in one-to-four family is a result of an increase in new home sales and refinancing while the increase in commercial real estate loans is the result of new customer relationships being established.  The decreases in the remaining loan classes reflect repayments in excess of originations, and sales of refinanced loans.

Investment Securities.  Investment securities available for sale decreased $2.2 million, or 13.97%, to $13.4 million at June 30, 2014.  U.S. Government and federal agency securities decreased $1.5 million, or 23.35% to $4.9 million at June 30, 2014 from $6.4 million at December 31, 2013.  Mortgage-backed securities including collateralized mortgage obligations, decreased $699,000, or

33

13.65%, to $5.1 million at June 30, 2014 from $5.8 million at December 31, 2013, and municipal securities increased $24,000, or 0.73%, to $3.4 million at June 30, 2014 from $3.3 million at December 31, 2013.  There were no securities purchased during the second quarter of 2014.  Net unrealized loss on securities recognized in accumulated other comprehensive loss decreased by $91,000 to an unrealized loss of $44,000 at June 30, 2014 compared to an unrealized loss of $135,000 at December 31, 2013.  At June 30, 2014, investment securities classified as available-for-sale consisted entirely of government-sponsored mortgage-backed securities, government-sponsored debentures, state and municipal 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 $141,000, or 12.05% to $1.0 million at June 30, 2014 from $1.2 million at December 31, 2013, as we sold $348,000 of foreclosed properties, foreclosed on a $207,000 non-performing loan and recorded no valuation adjustments.  At June 30, 2014 our real estate owned included one- to four-family residential real estate properties, one land development property and four commercial real estate properties, the largest of which was a commercial manufacturing facility with a carrying value of $234,000.

Deposits.  Deposits decreased by $14.9 million, or 13.79%, to $93.2 million at June 30, 2014 from $108.1 million at December 31, 2013.  A decrease in deposits of $13.3 million is the result of our Decatur office sale that occurred on January 24, 2014.  The sale included $8.4 million of core deposits and $4.9 million of certificates of deposit.  The sale of the Decatur office resulted primarily from management’s efforts to reduce our balance sheet in order to improve capital ratios and reduce interest expenses and noninterest expense. No premium was paid for the deposits.

Federal Home Loan Bank Advances and Other Liabilities.  Federal Home Loan Bank advances increased $10.0 million, to $10.0 million at June 30, 2014 from $0 at December 31, 2013.  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 stock offering proceeds in escrow, interest and accounts payable, customer escrow balances, and accruals for items such as employee pension and medical plans, decreased $2.8 million or 73.5%, to $999,000 at June 30, 2014 from $3.8 million at December 31, 2013.  On January 16, 2014, the conversion was completed in which $3.1 million of stock offering proceeds held in escrow on December 31, 2013 was released to the Company.

Total Equity.  Total equity increased $4.4 million, or 46.9%, to $13.6 million at June 30, 2014.  The increase resulted from 667,898 shares of common stock being issued at a par value of $.01 for $6,679 and $4.7 million in additional paid-in-capital received net of offering costs.  Retained earnings decreased $422,000 due to the net loss at June 30, 2014, a decrease of $91,000 in accumulated other comprehensive loss was due to an unrecognized gain on investment securities during the six month period.

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Delinquencies, Classified Assets and Non-Performing Assets

Delinquent Loans. The following table sets forth our loan delinquencies, including delinquent 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 June 30, 2014 (unaudited)
Real estate loans:
One- to four-family residential	11	$	918	7	$	528	6	$	390	24	$	1,836
Commercial real estate	—	—		1	149		—	—		1	149
Construction and land	—	—		1	31		2	24		3	55
Total real estate	11	918		9	708		8	414		28	2,040
Commercial and industrial	—	—		—	—		—	—		—	—
Consumer loans:
Home equity loans and lines of credit	6	139		—	—		4	90		—	229
Other consumer	2	8		—	—		—	—		2	8
Total consumer	8	147		—	—		4	90		12	237
Total loans	19	$	1,065	9	$	708	12	$	504	40	$	2,277
At December 31, 2013
Real estate loans:
One- to four-family residential	16	$	1,584	6	$	537	9	$	529	31	$	2,650
Commercial real estate	—	—		—	—		1	17		1	17
Construction and land	1	32		—	—		2	27		3	59
Total real estate	17	1,616		6	537		12	573		35	2,726
Commercial and industrial	—	—		—	—		—	—		—	—
Consumer loans:
Home equity loans and lines of credit	3	54		1	52		3	156		7	262
Other consumer	1	2		1	9		—	—		2	11
Total consumer	4	56		2	61		3	156		9	273
Total loans	21	$	1,672	8	$	598	15	$	729	44	$	2,999

The decrease in delinquent loans at June 30, 2014 compared to December 31, 2013 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 June 30, 2014 and December 31, 2013 include approximately $2.7 million and $3.9 million of nonperforming loans, respectively.  The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $11,000 and $22,000 at June 30, 2014 and December 31, 2013, respectively.

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	At June 30,		At December 31,
	2014		2013
	(Dollars in Thousands)
	(Unaudited)
Classifed assets:
Substandard loans (1)	$	2,705	$	3,852
Doubtful loans	—		—
Loss loans	—		—
Real estate owned and other
Real estate owned and other repossessed assets (2)	1,028		1,169
Total classified assets	$	3,733	$	5,021

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

(2)  Includes real estate totaling $44,100 at December 31, 2013, that was subject to the redemption period under Michigan law.

The decrease in classified assets to $3.7 million at June 30, 2014 from $5.0 million at December 31, 2013 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 significant charge-offs and losses on sales of real estate owned.  The largest component of classified loans is commercial real estate loans which totaled $2.0 million, or 75.31% of our total classified loans, at June 30, 2014.  Our largest classified loan relationship was a commercial real estate relationship totaling $765,000 at June 30, 2014.

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 June 30,		At December 31,
	2014		2013
	(Dollars in Thousands)
	(Unaudited)
Non-accrual loans:
Real estate loans:
One- to four-family residential	$	1,304	$	1,285
Commercial real estate	765		1,056
Construction and land	188		197
Total real estate	2,257		2,538
Commercial and industrial	—		—
Consumer loans:
Home equity loans and lines of credit	215		208
Other consumer	—		—
Total consumer	215		208
Total loans	2,472		2,746
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	—		—
Consumer loans:
Home equity loans and lines of credit	—		—
Other consumer	—		—
Total consumer	—		—
Total loans	—		—
Total non-performing loans	2,472		2,746
Real estate owned and other repossessed assets:
Real estate loans:
One- to four-family residential	292		353
Commercial real estate	661		697
Construction and land	75		75
Total real estate	1,028		1,125
Commercial and industrial	—		—
Consumer loans:
Home equity loans and lines of credit	—		—
Other consumer	—		—
Total consumer	—		—
Total real estate owned before loans in redemption	1,028		1,125
Loans in redemption (1)	—		44
Total real estate owned and other repossessed assets	1,028		1,169
Total non-performing assets	$	3,500	$	3,915

(table continues on following page)

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	At June 30,			At December 31,
	2014			2013
	(Dollars in Thousands)
	(Unaudited)
Troubled debt restructurings:
Real estate loans:
One- to four-family residential	$	1,321		$	2,014
Commercial real estate	294			443
Construction and land	302			—
Total real estate	1,917			2,457
Commercial and industrial	—			—
Consumer loans:
Home equity loans and lines of credit	102			24
Other consumer	—			—
Total consumer	102			24
Total loans	$	2,019		$	2,481
Total non-performing loans and troubled debt restructurings	$	4,491		$	5,227
Ratios:
Non-performing loans to total loans	2.83		%	3.15		%
Non-performing assets to total assets	2.97		%	3.23		%
Non-performing assets and troubled debt restructurings to total assets	3.81		%	4.32		%

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

Non-performing assets decreased to $3.5 million, or 2.97% of total assets, at June 30, 2014 from $3.9 million, or 3.23% of total assets, at December 31, 2013.  Nonperforming commercial real estate loans decreased $291,000 to $765,000, or 30.9% of total non-performing loans, at June 30, 2014 from $1.1 million, or 38.5% of total non-performing loans at December 31, 2013.  One-to four- family residential nonperforming loans were $1.3 million on June 30, 2014 and were $1.3 million at December 31, 2013.  Our largest non-performing loan relationship was a commercial real estate relationship totaling $765,000 at June 30, 2014.

Other Loans of Concern.  At June 30, 2014, there was one loan totaling $48,000 designated by management as “special mention,” which was a commercial real estate relationship, that is not already disclosed where there is information about possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

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

General.  Net loss for the three months ended June 30, 2014 was $175,000 compared to net loss of $371,000 for the three months ended June 30, 2013, a decrease of $196,000. The increase in earnings was primarily due to no provision for loan losses required for the three months ended June 30, 2014 compared to $225,000 provision for the three months ended June 30, 2013.  Non-interest expenses which includes the loss on sale of other real estate as well as other real estate expenses decreased $27,000 and 50,000, respectively.  In addition non-interest income decreased as a

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result of the slowdown in the residential mortgage loan sales due to rate increases which resulted in a decrease in gains booked of $71,000.  We also have additional salaries and benefits cost due to staff additions that occurred late in the second quarter of 2013.

Interest Income. Interest income decreased $39,000, or 3.6%, to $1.0 million for the three months ended June 30, 2014 from $1.1 million for the three months ended June 30, 2013. This decrease was primarily attributable to a $22,000 decrease in interest and fee income on loans receivable.  The average balance of loans during the three months ended June 30, 2014 increased $1.5 million to $87.3 million from $85.8 million for the three months ended June 30, 2013, and the average yield on loans decreased by 18 basis points to 4.46% for the three months ended June 30, 2014 from 4.64% for the three months ended June 30, 2013.  The average balance of investment securities decreased $2.2 million to $14.3 million for the three months ended June 30, 2014 from $16.5 million for the three months ended June 30, 2013, while the average yield on investment securities increased by 8 basis point to 1.41% for the three months ended June 30, 2014 from 1.33% for the three months ended June 30, 2013, resulting in income on securities increasing.

Interest Expense. Total interest expense decreased $22,000, or 15.33%, to $120,000 for the three months ended June 30, 2014 from $142,000 for the three months ended June 30, 2013.  Interest expense on deposit accounts decreased $47,000, or 33.84%, to $92,000 for the three months ended June 30, 2014 from $139,000 for the three months ended June 30, 2013.  The decrease was primarily due to a decrease of 12 basis points in the average cost of interest-bearing deposits to 0.45% for the three months ended June 30, 2014 from 0.57% for the three months ended June 30, 2013, reflecting the declining interest rate environment, and by a decrease of $15.4 million, or 15.81%, in the average balance of deposits to $82.2 million for the three months ended June 30, 2014 from $97.7 million for the three months ended June 30, 2013.  This decline in deposits is primarily the result of the Decatur branch sale that occurred on January 24, 2014 in which $13.3 million in deposits were sold.

Interest expense on FHLB-Indianapolis advances increased $26,000 to $28,000 for the three months ended June 30, 2014 from $2,000 for the three months ended June 30, 2013.  The average balance of advances increased by $8.1 million to $10.0 million for the three months ended June 30, 2014 from $1.9 million for the three months ended June 30, 2013.  Borrowing increased $10.0 million to fund the Decatur branch sale on January 24, 2014.  The average cost on the advances increased 63 basis points to 1.11% for the three months ended June 30, 2014 from 0.48% for the three months ended June 30, 2013.

Net Interest Income. Net interest income decreased $17,000, or 1.80%, to $918,000 for the three months ended June 30, 2014 from $935,000 for the three months ended June 30, 2013.  Despite the decrease there was a slight increase in our interest rate spread to 3.24% for the three months ended June 30, 2014 from 3.22% for the three months ended June 30, 2013, and a slight increase in our net interest margin to 3.33% for the three months ended June 30, 2014 from 3.29% for the three months ended June 30, 2013. The slight increase in our interest rate spread and net interest margin reflected primarily the continuation of a low interest rate environment, in net loans and a greater increase in lower earning securities and cash.

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 $0 for the three months ended June 30, 2014 and $225,000 for the three months ended June 30, 2013.  The allowance for loan losses was $1.1 million, or 1.24% of total loans, at June 30, 2014, compared to $1.3 million, or 1.52% of total loans, at June 30, 2013.  Total nonperforming loans were $2.5 million at June 30, 2014, compared to $4.0 million at June 30, 2013.  As a percentage of nonperforming loans, the allowance for loan losses was 43.77% at June 30, 2014 compared to 32.00% at June 30, 2013.  At June 30, 2014, $1.5 million of the $2.5 million in nonperforming loans were contractually current, compared to $2.0 million of $4.0 million at June 30, 2013.

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 June 30, 2014 and June 30, 2013.  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.

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Non-Interest Income.  Non-interest income decreased $130,000, or 46.08%, to $152,000 for the three months ended June 30, 2014 from $282,000 for the three months ended June 30, 2013. The decrease was primarily due to a decrease of $71,000 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 decreased as originations, particularly of refinancings, decreased during the period.  An increase in interest rates and a decline in refinancing activity in future periods may further decrease our income from mortgage banking activities.

Non-Interest Expense.  Non-interest expense decreased $118,000, or 8.62%, to $1.2 million for the three months ended June 30, 2014 from $1.4 million for the three months ended June 30, 2013.  The decrease primarily is reflected in loss on sale of other real estate and other real estate expenses of $27,000 and $50,000, respectively.  We anticipate the elevated levels of professional fees and expenses associated with being a public company will continue throughout the year in 2014.

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.

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	For the Three Months Ended June 30,
	2014							2013
	(Dollars in thousands)
	Average							Average
	Outstanding					Yield/Rate		Outstanding					Yield/Rate
	Balance			Interest		(1)		Balance			Interest		(1)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	87,315		$	971	4.46	%	$	85,800		$	992	4.64	%
Investment securities	14,295			50		1.41		16,514			55		1.33
Other interest-earning assets (2)	9,185			18		0.77		11,657			30		1.03
Total interst-earning assets	110,795			1,039		3.76		113,971			1,077		3.79
Noninterest-earning assets	7,257							9,195
Allowance for loan losses	(1,122		)					(1,369		)
Total assets	$	116,930						$	121,797
Interest-earning liabilities:
Demand deposits	$	16,452		8		0.19	%	$	17,735		7		0.16	%
Money market accounts	23,934			17		0.29		25,556			18		0.29
Savings accounts	13,233			6		0.18		13,538			4		0.13
Certificates of deposit	28,595			61		0.86		40,823			110		1.08
Total deposits	82,214			92		0.45		97,652			139		0.57
FHLB-Indianapolis advances	10,000			28		1.11		1,923			2		0.48
Total interest-bearing liabilities	92,214			120		0.52		99,575			141		0.57
Noninterest-bearing demand deposits	12,788							10,185
Other noninterest-bearing liabilities	778							957
Total liabilities	105,780							110,717
Equity	11,150							11,080
Total liabilities and equity	$	116,930						$	121,797
Net interest income				$	919						$	936
Net interest spread (3)						3.24	%						3.22	%
Net interest-earning assets (4)	$	18,581						$	14,396
Net interest margin (5)						3.33	%						3.29	%
Average interest-earning assets to interest-bearing liabilities						120.15	%						114.46	%

(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 Six Months Ended June 30, 2014 and 2013

General.  Net loss for the six months ended June 30, 2014 was $422,000 compared to net loss of $498,000 for the six months ended June 30, 2013, a decrease of $76,000. The increase in earnings was primarily due to no provision for loan losses required for the six months ended June 30, 2014 compared to $240,000 provision for the six months ended June 30, 2013.  Non-interest expenses, which includes the loss on sale of other real estate as well as other real estate expenses, decreased $24,000 and $91,000, respectively.  In addition non-interest income decreased as a result of the slowdown in the residential mortgage loan sales due to rate increases which resulted in a decrease in gains booked of $166,000.  Salaries and employee benefits increased $106,000 from June 30, 2013 due to staff additions that occurred late in the second quarter of 2013.

Interest Income. Interest income decreased $74,000, or 3.42%, to $2.1 million for the six months ended June 30, 2014 from $2.2 million for the six months ended June 30, 2013. This decrease was primarily attributable to a $66,000 decrease in interest and fee income on loans receivable.  The average balance of loans during the six months ended June 30, 2014 increased $967,000 to $87.5 million compared to $86.5 million for the six months ended June 30, 2013, and the average yield on loans decreased by 21 basis points to 4.46% for the six months ended June 30, 2014 from 4.67% for the six months ended June 30, 2013.  The average balance of investment securities decreased $517,000 to $14.9 million for the six months ended June 30, 2014 from $15.4 million for the six months ended June 30, 2013, while the average yield on investment securities increased by 4 basis point to 1.42% for the six months ended June 30, 2014 from 1.38% for the six months ended June 30, 2013, resulting in income on securities increasing.

Interest Expense. Total interest expense decreased $38,000, or 13.11%, to $253,000 for the six months ended June 30, 2014 from $291,000 for the six months ended June 30, 2013.  Interest expense on deposit accounts decreased $79,000, or 27.96%, to $204,000 for the six months ended June 30, 2014 from $283,000 for the six months ended June 30, 2013.  The decrease was primarily due to a decrease of 10 basis points in the average cost of interest-bearing deposits to 0.49% for the six months ended June 30, 2014 from 0.59% for the six months ended June 30, 2013, reflecting the declining interest rate environment, and by a decrease of $13.0 million, or 13.31%, in the average balance of deposits to $84.2 million for the six months ended June 30, 2014 from $97.1 million for the six months ended June 30, 2013.  This decline in deposits is primarily the result of the Decatur branch sale that occurred on January 24, 2014 in which $13.3 million in deposits were sold.

Interest expense on FHLB-Indianapolis advances increased $41,000 to $49,000 for the six months ended June 30, 2014 from $8,000 for the six months ended June 30, 2013.  The average balance of advances increased by $5.5 million to $8.8 million for the six months ended June 30, 2014 from $3.3 million for the six months ended June 30, 2013.  Borrowing increased $10.0 million to fund the Decatur branch sale on January 24, 2014.  The average cost on the advances increased 65 basis points to 1.12% for the six months ended June 30, 2014 from 0.47% for the six months ended June 30, 2013.

Net Interest Income. Net interest income decreased $36,000, or 1.91%, to $1.8 million for the six months ended June 30, 2014 from $1.9 million for the six months ended June 30, 2013.  The decrease reflected a decrease in our interest rate spread to 3.21% for the six months ended June 30, 2014 from 3.23% for the six months ended June 30, 2013; however there was a slight increase in our net interest margin to 3.31% for the six months ended June 30, 2014 from 3.30% for the six months ended June 30, 2013. The decrease in our interest rate spread reflected primarily the continuation of a low interest rate environment, in net loans and a greater increase in lower earning securities and cash.

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 $0 for the six months ended June 30, 2014 and $240,000 for the six months ended June 30, 2013.  See“—Comparison of Operating Results for Three months ended June 30, 2014 and 2013. “Provision for Loan Losses” for additional information.

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Non-Interest Income.  Non-interest income decreased $228,000, or 40.18%, to $340,000 for the six months ended June 30, 2014 from $568,000 for the six months ended June 30, 2013. The decrease was primarily due to a decrease of $166,000 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 decreased as originations, particularly of refinancing’s, decreased during the period.  An increase in interest rates and a decline in refinancing activity in future periods may further decrease our income from mortgage banking activities.

Non-Interest Expense.  Non-interest expense decreased $99,000, or 3.70%, to $2.6 million for the six months ended June 30, 2014 from $2.7 million for the six months ended June 30, 2013.  The decrease primarily is reflected in other real estate expenses and data processing expense of $91,000 and $41,000, respectively.  We anticipate the elevated levels of professional fees and expenses associated with becoming a public company will continue throughout the year in 2014.

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.

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	For the Six��Months Ended June 30,
	2014							2013
	(Dollars in thousands)
	Average							Average
	Outstanding					Yield/Rate		Outstanding					Yield/Rate
	Balance			Interest		(1)		Balance			Interest		(1)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	87,471		$	1,937	4.46	%	$	86,504		$	2,003	4.67
Investment securities	14,874			105		1.42		15,391			106		1.38
Other interest-earning assets (2)	9,203			41		0.90		12,240			48		0.79
Total interst-earning assets	111,548			2,083		3.76		114,135			2,157		3.81
Noninterest-earning assets	7,637							10,020
Allowance for loan losses	(1,120		)					(1,435		)
Total assets	$	118,065						$	122,720
Interest-earning liabilities:
Demand deposits	$	16,229		15		0.19	%	$	17,240		13		0.15
Money market accounts	24,242			35		0.29		25,395			36		0.29
Savings accounts	12,705			10		0.16		13,170			8		0.12
Certificates of deposit	31,022			144		0.94		41,318			226		1.10
Total deposits	84,198			204		0.49		97,123			283		0.59
FHLB-Indianapolis advances	8,790			49		1.12		3,271			8		0.47
Total interest-bearing liabilities	92,988			253		0.55		100,394			291		0.58
Noninterest-bearing demand deposits	12,960							10,254
Other noninterest-bearing liabilities	1,100							884
Total liabilities	107,048							111,532
Equity	11,017							11,188
Total liabilities and equity	$	118,065						$	122,720
Net interest income				$	1,830						$	1,866
Net interest spread (3)						3.21	%						3.23	%
Net interest-earning assets (4)	$	18,560						$	13,741
Net interest margin (5)						3.31	%						3.30	%
Average interest-earning assets to interest-bearing liabilities						119.96	%						113.69	%

(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 June 30, 2014, we had the capacity to borrow approximately $2.6 million from the FHLB-Indianapolis and an additional $2.0 million on a line of credit with the FHLB-Indianapolis and United Bankers Bank.  We have historically not used Federal Home Loan Bank advances to fund our operations; however, we borrowed funds to support the sale of the Decatur office.  At June 30, 2014 and December 31, 2013, we had $10.0 million and $0, 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 ($397,000) and $1.09 million for the six months ended June 30, 2014 and 2013, respectively. Net cash provided by (used in) investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on mortgage-backed securities and the 2014 net payment on the sale of the branch, was $11.1 million and $2.7 million for the six months ended June 30, 2014 and 2013, respectively.  During the six months ended June 30, 2014 and 2013, we purchased $0 and $4.9 million, respectively and sold $0, in securities held as available-for-sale.  Net cash provided by (used in) financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was $10.8 million for the six months ended June 30, 2014 and ($2.6 million) during the six months ended June 30, 2013.

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

At June 30, 2014, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $13.7 million, or 11.63% of adjusted total assets, which is above the required level of $5.9 million, or 5.00%; and total risk-based capital of $14.6 million, or 19.77% of risk-weighted assets, which is above the required level of $7.4 million, or 10.00%.  At December 31, 2013, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $9.4 million, or 7.75% of adjusted total assets, which is above the required level of $6.1 million, or 5.00%; and total risk-based capital of $10.4 million, or 13.54% of risk-weighted assets, which is above the required level of $7.7 million, or 10.00%.  Accordingly, the Bank was categorized as well capitalized at June 30, 2014 and December 31, 2013.  Management is not aware of any conditions or events since the most recent notification that would change our category.  In addition, at June 30, 2014 and December 31, 2013, the Bank was in compliance with the IMCR, which requires the Bank to maintain a tier 1 leverage capital ratio of at least 7.50% and a total risk-based capital ratio of at least 12.00%.

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

45

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 customers’ 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 about 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 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 June 30, 2014.  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 June 30, 2014, 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.

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Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

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:  August 14, 2014	/s/ Richard E. Dyer
	Richard E. Dyer
	President and Chief Executive Officer
Date:  August 14, 2014	/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.*
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 10-Q for the quarter ended June 30, 2014, 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)

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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