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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014.
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                  .
Commission file number: 000-55129
EDGEWATER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
46-3687434
(I.R.S. Employer
Identification Number)
321 Main Street, St. Joseph, Michigan
(Address of principal executive offices)
49085
(Zip Code)
Registrant’s telephone number, including area code: (296) 982-4175
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  No ☒
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 filing requirements for the past 90 days.  Yes ☒ No 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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 ☒ No 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
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 definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company ☒
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price at which the common equity was last sold, as of June 30, 2014, the last business day of the most recently completed second fiscal quarter was $7,026,140.
As of March 17, 2015, there were issued and outstanding 667,898 shares of the Registrant’s Common Stock with a par value of  $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for the Annual Meeting of Stockholders to be held on May 14, 2015 are incorporated by reference into Part III of this Report.

TABLE OF CONTENTS
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F-1
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Forward-Looking Statements
When used in this Annual Report on Form 10-K, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in our market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, and competition could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We advise readers that the factors listed above and other factors could affect the Company’s financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
We do not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
ii

PART I
ITEM 1.
Business
Edgewater Bancorp, Inc.
Edgewater Bancorp, Inc. was incorporated as a Maryland corporation on July 11, 2013 and owns all of the outstanding shares of common stock of Edgewater Bank as a result of the conversion from mutual to stock form of Edgewater Bank on January 16, 2014. Edgewater Bancorp, Inc. has not engaged in any business to date other than owning the common stock of Edgewater Bank.
On January 16, 2014, Edgewater Bancorp, Inc. completed its initial public offering of common stock. In the offering, Edgewater Bancorp, Inc. issued a total of 667,898 shares of its common stock for an aggregate of  $6,678,980 in total offering proceeds.
Our executive and administrative office is located at 321 Main Street, St. Joseph, Michigan 49085, and our telephone number at this address is (269) 982-4175. Our website address is www.edgewaterbank.com. Information on our website is not incorporated into this Annual Report and should not be considered part of this Annual Report.
Edgewater Bank
Edgewater Bank is a federal mutual savings association that was originally organized in 1910 as a state-chartered mutual savings and loan association under the name Industrial Building and Loan. In 1938, the Bank converted to a federal charter and changed its name to Buchanan Federal Savings and Loan Association. The Bank changed its name in 1965 to LaSalle Federal Savings and Loan Association of Buchanan and in 1989 to LaSalle Federal Savings Bank. The Bank changed its name to Edgewater Bank in 2005.
We conduct our operations from our main office in St. Joseph, Michigan and our four additional full-service banking offices located in Royalton Township, Coloma, Bridgman and Buchanan, Michigan. 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 cash on hand and approximately $10.0 million of advances from the Federal Home Loan Bank of Indianapolis (“FHLB-Indianapolis”).
Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate, commercial and industrial, and commercial real estate loans and, to a lesser extent, home equity lines of credit and other consumer loans. At December 31, 2014, $45.4 million, or 50% of our total loan portfolio, was comprised of one- to four-family residential real estate loans. We also invest in securities, which consist primarily of U.S. government agency obligations and mortgage-backed securities and to a lesser extent, state and municipal securities and collateralized mortgage obligations. We offer a variety of deposit accounts, including checking accounts, NOW accounts, savings accounts, money market accounts and certificate of deposit accounts. We utilize advances from the FHLB-Indianapolis for asset/liability management purposes and, to a much lesser extent, for additional funding for our operations. At December 31, 2014, we had $10 million in advances outstanding with FHLB-Indianapolis.
Our executive and administrative office is located at 321 Main Street, St. Joseph, Michigan 49085, and our telephone number at this address is (269) 982-4175.
Plan of Conversion and Reorganization
On September 3, 2013, the Board of Directors of Edgewater Bank adopted a plan of conversion and reorganization (the “Plan”). The Plan provided for the reorganization of Edgewater Bank from a federally chartered mutual savings association into a federally chartered stock savings association, the formation of Edgewater Bancorp, Inc. as the stock holding company of Edgewater Bank and an offering by Edgewater
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Bancorp, Inc. of shares of its common stock to eligible depositors of Edgewater Bank and the public. The Plan was approved by the Office of the Comptroller of the Currency (the “OCC”) and the holding company application of Edgewater Bancorp, Inc. was approved by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Plan was approved by the affirmative vote of a majority of the total votes eligible to be cast by the voting members of Edgewater Bank at a special meeting held on December 20, 2013 and the reorganization was completed on January 16, 2014.
Market Area and Competition
We conduct our operations from our main office in St. Joseph, Michigan and our four additional full-service banking offices located in Royalton Township, Coloma, Bridgman and Buchanan, Michigan. We have completed the sale of the Decatur office on January 24, 2014. Our primary market area includes Berrien County and, to a lesser extent, Van Buren County and Cass County, Michigan, all of which are located in southwestern Michigan near the border of Indiana, and portions of northern Indiana that are contiguous with Berrien and Cass Counties. We will, on occasion, make loans secured by properties located outside of our primary market are especially to borrowers with whom we have an existing relationship and who have a presence within our primary market area. Our primary market area includes small towns and rural communities, and St. Joseph, where our headquarters are located, is a community of upscale retirement, vacation or second homes. Our market area was historically a manufacturing and agricultural-based economy, including the world headquarters of Whirlpool Corporation and Leco Corporation. Our market area has experienced continued developments in the medical and health services and nuclear energy industries, with Lakeland Regional Health System and Indiana Michigan Power employing large numbers of people, as well as the metal fabrication and tourism industries. The economy in our market area also has a significant service component, particularly the food and beverage industries. The regional economy is fairly diversified, supported by government, professionals such as doctors, lawyers and accountants, wholesale and retail trade, manufacturing and agriculture.
We face competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from commercial banks, savings institutions, and mortgage banking firms, consumer finance companies and credit unions and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2014, based on the most recent available FDIC data, our market share of deposits represented 5.0% of FDIC-insured deposits in Berrien County, ranking us 6th in market share of deposits. We do not have a significant market share of either deposits or residential lending in Van Buren County, Cass County or areas that we serve in northern Indiana.
Lending Activities
General.   Our principal lending activity is originating one- to four-family residential real estate loans, commercial and industrial loans, commercial real estate loans, consumer loans (including home equity lines of credit, watercraft and automobile loans) and, to a lesser extent, residential and commercial construction loans. We sell in the secondary market a significant majority of the fixed-rate one- to four-family residential mortgage loans that we originate, generally on a servicing-retained, non-recourse basis, while retaining adjustable rate one- to four-family residential mortgages, in order to manage the maturity and time to re-price our loan portfolio. We may, at times, retain within our loan portfolio a modest amount of intermediate and longer term residential mortgage loans for asset-liability management purposes. In recent years, we have changed our strategy to focus on relationship-based banking, diversifying of our loan portfolio, increasing the yield of our loan portfolio and improving and managing our asset quality. Accordingly, subject to market conditions and our asset-liability analysis, we expect to take advantage of unique characteristics of our market area to increase our residential mortgage, commercial and industrial, and consumer loans. Our business strategy does not contemplate the origination of speculative construction and land development loans. We expect to develop a broader, more flexible array of residential, commercial and industrial and consumer loan products specifically suited to the customers and potential customers in our market area, hire additional personnel with residential, commercial and consumer lending experience and continue to improve our customer service. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Strategy” for more information regarding our future plans for lending activities.
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Loan Portfolio Composition.   The following table sets forth the composition of our loan portfolio, by type of loan at the dates indicated, excluding loans held for sale.
At December 31,
2014
2013
Amount
Percent
Amount
Percent
Real estate loans:
Residential 1 – 4 family
$ 45,353,599 50.09% $ 43,612,578 50.06%
Commercial Real Estate
27,908,662 30.83 24,705,387 28.36
Construction and land development
1,523,281 1.68 1,618,445 1.86
Total real estate(2)(3)
74,785,542 82.60 69,936,410 80.28
Commercial and industrial
5,536,805 6.12 5,524,011 6.34
Consumer loans:
Home equity loans and lines of credit
9,331,608 10.31 10,984,782 12.61
Other consumer loans
883,864 0.97 672,560 0.77
Total consumer
10,215,472 11.28 11,657,342 13.38
Total loans
90,537,819 100.00% 87,117,763 100.00%
Less other items:
Net deferred loan costs
(17,057) (35,416)
Allowance for loan losses
1,075,351 1,061,141
Total loans, net
$ 89,479,525 $ 86,092,038
(1)
Does not include loans held for sale of  $48,300 and $0 at December 31, 2014 and December 31, 2013, respectively.
(2)
At December 31, 2014, consists of  $17.1 million of owner occupied properties and $5.8 million of non-owner occupied properties.
(3)
Includes $4.0 million and $2.9 million of multi-family loans at December 31, 2014 and December 31, 2013, respectively.
Loan Portfolio Maturities and Yields.   The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2014. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2015. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.
One- to Four-Family
Commercial Real Estate
Construction and Land
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
Ending December 31,
2015
$ 191,728 4.25% $ 2,307,858 6.17% $ 1,093,177 8.66%
2016
146,499 2.59 1,431,932 5.91 267,383 5.14
2017 to 2018
624,928 5.63 3,824,764 5.44
2019 to 2023
1,501,468 4.61 15,141,562 4.83
2024 to 2028
6,205,528 3.88 2,898,021 5.76 115,714 3.91
2024 to 2028
11,689,705 3.63
2029 and beyond
24,993,743 3.69 2,304,525 5.52 47,007 4.38
Total
$ 45,353,599 3.76% $ 27,908,662 5.23% $ 1,523,281 7.55%
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Commercial and Industrial
Home Equity Loans and
Lines of Credit
Other Consumer
Total
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
Ending December 31,
2014
$ 2,952,351 4.51% $ 873,845 3.81% $ 298,252 3.97% $ 7,717,211 5.49%
2015
1,082,229 5.24 425,950 3.50 58,660 5.75 3,412,653 5.19
2016
117,686 5.05 762,433 3.72 58,607 3.71 5,388,418 5.19
2017 to 2018
1,341,160 4.19 2,359,570 3.60 253,718 3.96 20,597,478 4.62
2019 to 2023
43,379 5.00 4,897,864 4.70 189,808 5.33 14,350,314 4.56
2024 to 2028
11,946 8.00 24,819 3.99 11,726,470 3.63
2029 and beyond
27,345,275 3.84
Total
$ 5,536,805 4.59% $ 9,331,608 4.21% $ 883,864 4.36% $ 90,537,819 4.38%
Loan Approval Procedures and Authority.   Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Edgewater Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). In addition, we have established an in-house limit that is less than the legal limits on loans to one borrower. At December 31, 2014, our largest credit relationship totaled $1.9 million and was secured by multiple commercial real estate properties in our market area. Our second largest relationship at December 31, 2014 was a $1.8 million loan secured by an owner-occupied manufacturing facility in our market area. At December 31, 2014, both of these loans were performing in accordance with their terms.
Our lending is subject to written underwriting standards and origination procedures. Decisions on one- to four-family residential mortgage and consumer loans are made on the basis of detailed applications developed by our lending officers. Decisions on commercial real estate and commercial and industrial loans are made on the basis of information submitted by the prospective borrower and analyzed by our lending officers. Banking regulation require that for real estate loans of  $1.0 million or more, commercial real estate loans of  $250,000 or more and complex residential loans of  $250,000 or more, we require property appraisals prepared by an outside independent state-certified appraiser approved by our board of directors. For non-complex residential loans between $250,000 and $1.0 million, we require property appraisals prepared by an outside independent state-certified or state-licensed appraiser. Although the use of internal evaluations are permitted by banking regulations for commercial real estate loans of less than $1.0 million and other loans of less than $250,000, we require current third-party appraisals for all loans that we originate. We categorize a third-party appraisal as “current” if it was prepared within 18-months of the loan application and we know of no material changes in the property or surrounding areas. The loan application and review process is designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items obtained through the application process are verified through use of credit reports and credit history, financial and cash flow information and tax returns.
Personal guarantees are generally obtained from the principals of commercial real estate and commercial and industrial loans. Although this requirement may be waived depending upon the loan-to-value ratio and the debt service ratio associated with the loan, personal guarantees are obtained on substantially all business-related loans. For commercial real estate and construction loans, we require title and hazard insurance, and appropriate flood, fire and extended coverage insurance with Edgewater Bank named in the mortgagee clause.
We use the Loan ProspectorTM System for loans originated for sale to Freddie Mac. We generally do not make residential loans that are not approved by this system (other than loans above the Freddie Mac lending limit for conforming loans, which we refer to as “jumbo” loans), but we review all non-approved residential loans and will extend credit in certain circumstances upon approval by our loan committee, which consists of our President and Chief Executive Officer, our Chief Financial Officer, our Senior Lender, our Senior Retail Officer, our Assistant Vice President of Risk Management, and all other commercial lending officers.
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Approval of the loan committee requires the vote of a majority of the members. Our President and Chief Executive Officer may veto approval of any loan approved by the loan committee. Our board of directors may approve loans above those amounts, and may approve loans in excess of our in-house lending limit (up to our legal lending limit). Approval of the board of directors requires the vote of four of the six directors.
Fixed and Adjustable-Rate Loan Schedule.   The following table sets forth our fixed- and adjustable-rate loans at December 31, 2014 that are contractually due after December 31, 2015.
Due After December 31, 2015
Fixed
Adjustable
Total
(Dollars in thousands)
Real estate loans:
One- to four-family residential
$ 22,437 $ 22,851 $ 45,288
Commercial
23,914 1,687 25,601
Construction and land
440 440
Total real estate
46,791 24,538 71,329
Commercial and industrial
2,349 235 2,584
Consumer loans:
Home equity loans and lines of credit
733 7,734 8,467
Other consumer
599 599
Total consumer
1,332 7,734 9,066
Total loans
$ 50,472 $ 32,507 $ 82,979
One- to Four-Family Residential Real Estate Lending.   The focus of our lending program has historically been the origination of one- to four-family residential real estate loans. At December 31, 2014, we had $45.4 million of loans secured by one- to four-family real estate, representing 50.0% of our total loan portfolio. In addition, at December 31, 2014, we had a $48,300 in residential mortgage held for sale. We primarily originate fixed-rate residential mortgage loans, but we also offer adjustable-rate residential mortgage loans and home equity loans. At December 31, 2014, the one- to four-family residential mortgage loans held in our portfolio were comprised of 47.3% fixed-rate loans, and 52.7% adjustable-rate loans.
We sell the majority of the one- to four-family residential mortgage loans that we originate. During the years ended December 31, 2014 and December 31, 2013, we sold $6.9 million and $16.6 million, respectively, of residential mortgage loans for gains on sale of approximately $141,000 and $249,000, respectively. Almost all of these loans were sold on a servicing-retained basis. At December 31, 2014 and December 31, 2013, our servicing portfolio was $73.6 million and $76.7 million, respectively, all of which related to loans that we had originated. Servicing fees were approximately $57,000 and $189,000, respectively, during the years ended December 31, 2014 and December 31, 2013. See “— Originations, Purchases and Sales of Loans.”
Our fixed-rate one- to four-family residential real estate loans are generally underwritten according to Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Freddie Mac, which as of December 31, 2014 was generally $417,000 for single-family homes in our market area. We also originate jumbo loans, which we generally retain in our portfolio, although we may develop a secondary market program with a private purchaser for certain of these jumbo loans. At December 31, 2014, we had $6.2 million in jumbo loans. We currently have a program in place with a third party that allows us to refer FHA and VA loans to them for underwriting and servicing.
At December 31, 2014, almost all of our one- to four-family residential loans that we hold in our portfolio and our home equity loans and lines of credit were secured by properties located in our market area. In addition, almost all of the residential mortgage loans that we originate for sale are secured by properties located in our market area.
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We generally limit the loan-to-value ratios of our one- to four-family residential mortgage loans to 80% of the purchase price or appraised value, whichever is lower. In addition, we may make one- to four-family residential mortgage loans with loan-to-value ratios between 80% and 95% of the purchase price or appraised value, whichever is less, where the borrower obtains private mortgage insurance.
Our one- to four-family residential real estate loans typically have terms of 10 to 30 years. Our adjustable-rate one- to four-family residential real estate loans generally have fixed rates for initial terms of one, three, five, seven or ten years and adjust annually thereafter at a margin. In recent years, this margin has been 275 basis points over the weekly average yield on U.S. treasury securities adjusted to a constant maturity of one year. The margin will be increased from 275 basis points to 300 basis points for new loan approvals. The maximum amount by which the interest rate may be increased or decreased is generally 2.00% per adjustment period and the lifetime interest rate cap is generally 6.00% over the initial interest rate of the loan.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price (as interest rates increase the required payments due from the borrower also increase subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We also originate home equity lines of credit and fixed-term home equity loans. See “— Consumer Lending.”
We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on one- to four- family residential real estate loans (i.e., loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).
Commercial Real Estate Lending.   We have historically focused our non-residential lending activities on commercial real estate. However, we have revised our strategy to diversify our loan portfolio and increase our yield while improving asset quality, and we believe a key to successful implementation of this strategy is to reduce our reliance on commercial real estate lending by managing the run-off of loans that do not match our current strategy, while continuing to originate commercial real estate loans on a selective basis. In the future, we will focus on originating loans up to our in-house lending limit, where the property is located in our market area and where we have a strong existing relationship with the borrower. We will be more selective in our approval process based on the size of the loans and our overall relationship with the borrower. At December 31, 2014, we had $27.9 million in commercial real estate loans, representing 30.8% of our total loan portfolio.
Our commercial real estate loans are either fixed or adjustable rate based on the prime rate as set forth in the Wall Street Journal. Our commercial real estate loans generally have initial terms of not more than five years and amortization terms of not more than 20 years, with a balloon payment at the end of the initial term. The maximum loan-to-value ratio of our commercial real estate loans is generally 80% of the lower of the purchase price or appraised value of the property securing the loan, regardless of whether the property is owner-occupied or not. Our commercial real estate loans are typically secured by retail, industrial, warehouse, service, medical or other commercial properties, or apartment buildings.
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Set forth below is information regarding our commercial real estate loans at December 31, 2014.
Industry Type
Number of Loans
Balance
(Dollars in thousands)
Real estate development(1)
21 $ 10,010
Storage unit rental
4 614
Health care and social
3 1,138
Retail trade
13 1,875
Accommodation and food
7 1,921
Funeral homes
8 1,757
Legal services
2 627
Other services
14 2,369
Manufacturing
10 4,060
Recreational
4 2,217
Agriculture
3 1,135
Other miscellaneous
1 186
90 $ 27,909
(1)
These loans are primarily loans secured by multi-tenant properties.
At December 31, 2014, the average loan balance of our outstanding commercial real estate loans was $308,000, and the largest of such loans was a $1.5 million loan secured by an apartment complex in our market area. This loan was performing in accordance with its original repayment terms at December 31, 2014.
We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the value of the property, the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service ratio of at least 1.25 times.
Commercial real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties. If we foreclose on a commercial real estate loan, our holding period for the collateral is typically longer than for one- to four-family residential real estate loans because there are fewer potential purchasers of the collateral. Further, our commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, if any of our judgments regarding the collectability of our commercial real estate loans prove incorrect, the resulting charge-offs may be larger on a per loan basis than those incurred with respect to one- to four-family residential loans.
Commercial and Industrial Lending.   At December 31, 2014, we had $5.5 million of commercial and industrial loans, representing 6.1% of our total loan portfolio. Because we believe that expanding our organic origination of commercial and industrial loans is essential to our profitability, we intend to increase
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our commercial and industrial lending by targeting businesses with between $1.0 million and $15.0 million in revenues operating in our market area, including medical, legal, accounting and other professional practices as well as traditional commercial businesses, with loan products designed to meet the needs of professional and rural development borrowers.
We offer short-term commercial and industrial loans with terms of one year or less and long-term commercial and industrial loans with terms of up to five years (up to 10 years when guaranteed by a federal government agency or when a secondary market for the loan exists). Commercial and industrial loans are generally secured by equipment, furniture and fixtures, inventory, accounts receivable or other business assets. The maturity of commercial and industrial loans secured by purchased equipment is fixed to correspond to 80% of the useful life of the equipment or five years, whichever is less. We endeavor not to accept as collateral highly specialized or customer-made equipment that may be difficult to dispose of in foreclosure. In very limited circumstances where the borrower’s financial condition warrants, short-term commercial loans may be unsecured. The interest rates on these loans are commensurate with the term and value of the collateral securing the loans. We also offer revolving lines of credit to finance short-term working capital needs such as accounts payable and inventory. These lines of credit are in amounts proportionate to the borrower’s working capital position, are generally predicated on an advance formula based on the stated collateral, and typically require an annual full payoff. Our commercial lines of credit are generally priced on a floating rate basis utilizing an index rate such as the Wall Street Journal prime rate, and may be secured or, in very limited circumstances, unsecured. We generally obtain personal guarantees with respect to all commercial and industrial loans and lines of credit.
We also offer commercial and industrial loans utilizing the SBA’s 504 Loan Program, although we did not have any of these loans outstanding at December 31, 2014. The structure of loans provided under the SBA 504 Program reduces our credit risk and improves our collateral position. We also offer the SBA’s 7a Loan Program. Under the 7a Program, our credit risk is reduced as a result of a loan guaranty from the SBA, generally at 75% of the total loan amount. In addition, the guaranteed portion of the credit can be sold in the secondary market generating significant fee income opportunities. Because we face recourse liability on these loans if they do not meet all SBA requirements, we enhance the underwriting, servicing, and review processes on these loans. During the year ended December 31, 2014, we originated $2.3 million in SBA loans. We will continue to increasing our origination of SBA loans as part of our lending strategy.
We typically originate commercial and industrial loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, the experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for the repayment of commercial and industrial loans may be substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial and industrial loans that we originate have greater credit risk than one- to four-family residential real estate loans or, generally, consumer loans. In addition, commercial and industrial loans often result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts.
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Set forth below is information regarding our commercial and industrial loans at December 31, 2014.
Industry Type
Number of Loans
Balance
(Dollars in thousands)
Real estate(1)
4 $ 401
Storage unit rental
6 150
Health care and social
7 75
Retail trade
6 742
Accommodation and food
2 63
Cabling / Fiber
0
Other services
22 2,375
Manufacturing
12 1,091
Municipality
3 529
Other miscellaneous
3 111
65 $ 5,537
(1)
Consists of working lines of credit to owners of rental properties that are not secured by real estate.
At December 31, 2014, the average loan balance of our outstanding commercial and industrial term loans was $74,000, and the largest outstanding balance was a $405,000 loan secured by all of the business assets, including equipment and accounts receivable, of a law office in our market area. This loan was performing in accordance with its original repayment terms at December 31, 2014.
We believe that commercial and industrial loans will provide growth opportunities for us, and we expect to increase this business line in the future in order to develop banking relationships with depositors and related mortgage lending customers. We expect to hire one or two additional commercial lenders with credit administration experience and business development and marketing skills, which we expect will increase our pipeline of commercial and industrial loan commitments. The additional capital we received in connection with the stock offering will modestly increase our maximum lending limits and will allow us to increase the amounts of our loans to one borrower.
Our commercial and industrial loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of equipment, inventory or accounts receivable. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value, and the cash flows of the borrower may fluctuate based on the success of the business.
Consumer Lending.   At December 31, 2014, we had $10.2 million, or 11.3% of our loan portfolio, in consumer loans, including $9.3 million in home equity loans and lines of credit and $884,000 in other consumer loans.
Our home equity lines of credit and fixed-term equity loans are secured by residential property, are fixed or variable rate, and are approved with a maximum maturity of 10 years. Home equity lines of credit and fixed-term equity loans are generally originated in accordance with the same standards as one- to four-family residential mortgage loans. We extend home equity lines of credit and fixed-term equity loans on owner-occupied property regardless of whether we hold the first mortgage, and on investment properties only if we hold the first mortgage. We do not extend home equity lines of credit unless the combined loan-to-value ratio of the first mortgage and the home equity line of credit or fixed-term equity loan is less than 70%, or less than 80% if we hold the first mortgage. If we hold the first mortgage and the borrower’s credit score is above 740, we will extend credit up to a combined 90% loan-to-value ratio.
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Home equity lines of credit and fixed-term equity loans have greater risk than one- to four-family residential real estate loans secured by first mortgages. Our interest is generally subordinated to the interest of the institution holding the first mortgage. Even where we hold the first mortgage, we face the risk that the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity lines of credit and fixed-term equity loans, decreases in real estate values could adversely affect the value of property used as collateral.
At December 31, 2014, we had $8.6 million, or 9.5% of our loan portfolio, in home equity lines of credit and $738,000, or 0.8% of our loan portfolio, in fixed-term equity loans. We also had an additional $8.1 million in unused commitments on home equity lines of credit. The largest outstanding balance of any home equity line of credit was $263,000 and the largest outstanding balance of any fixed-term equity loan was $51,000. These loans were performing in accordance with their original repayment terms at December 31, 2014.
Consumer loans other than home equity lines of credit and fixed-term equity loans have either a variable or fixed-rate of interest for a term of up to six years, depending on the type of collateral and the creditworthiness of the borrower. Our consumer loans may be secured by deposits, automobiles, boats, motorcycles, snowmobiles or recreational vehicles. Consumer loans are generally limited to 100% of the purchase price (excluding sales tax) with respect to new vehicles, and 100% of NADA retail value or cost, whichever is less, with respect to used vehicles, and loans of up to $5,000 may be unsecured depending on the creditworthiness of the borrower.
Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.
Consumer loans generally have greater credit risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly unsecured loans and consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Construction and Land Lending.   At December 31, 2014, we had $1.5 million, or 1.7% of our total loan portfolio, in construction and land loans. Of these, $664,000 were loans for the construction by individuals of their primary residences, $836,000 were loans where raw land serves as collateral other than for construction and development purposes (including one loan in the amount of approximately $263,000 secured by a parcel of land utilized by an RV dealer as an outdoor showroom), and $400,000 were construction and land development loans. At December 31, 2014, our largest construction and land loan was a $605,000 loan secured by a primary residence located in our market area. This loan was performing in accordance with its original repayment terms at December 31, 2014.
Our residential construction loans generally have initial terms of 12 months (subject to extension), during which the borrower pays interest only. Upon completion of construction, these loans convert to conventional amortizing mortgage loans. We do not extend credit if construction has already commenced, except in unique circumstances and upon the approval of the President and Chief Executive Officer or the loan committee and if title insurance is obtained. Our residential construction loans have rates and terms comparable to one- to four-family residential real estate loans that we originate. The maximum loan-to-value ratio of our residential construction loans is generally 80% of the lesser of the appraised value of the completed property, which may be up to 100% of the cost to build if the land is owned by borrower free and clear, or the total cost of the construction project. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans.
Our commercial construction loans generally have terms consistent with the duration of the construction process, with a maximum of 18 months, during which the borrower pays interest only. The borrower must have a commitment for permanent financing at the conclusion of the construction loan,
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preferably with Edgewater Bank. Our commercial construction loans have rates and terms comparable to commercial real estate loans that we originate. The maximum loan-to-value of our commercial construction loans is 80% of the lesser of the appraised value of the completed property or the confirmed purchase price for the land plus the value of the improvements. Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating permanent commercial real estate loans.
All construction loans require the borrower to engage a licensed contractor and for the contractor to provide a complete construction budget and timeline, plus a statement of planned sub-contractors and estimated payments to each. The borrower must obtain title insurance. Construction advances are approved through the title insurance company and require appropriate lien waivers from the contractor and sub-contractors. For each draw request, an inspection of the construction is required prior to disbursement of loan proceeds.
We make raw land loans on a very limited basis. These loans have terms of not more than five years with amortization periods of not more than 15 years. The maximum loan-to-value of these loans is 65% of the lesser of the appraised value or the purchase price of the property. We will also originate land loans secured by building lots. Lot loans may be approved on a short-term interest-only basis if the borrower plans to pay-off the loan through construction financing or other means within 12 months and the borrower qualifies for such financing. If the lot loan is not short-term in nature, it will be structured on a fully amortizing basis, with the borrower obligated to pay principal and interest.
Construction and land lending generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction or land loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction and land loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. Land loans pose additional risk because the property generally does not produce income and may be relatively illiquid.
Loan Originations, Participations, Purchases and Sales.
We originate real estate and other loans through employee marketing and advertising efforts, our existing customer base, walk-in customers and referrals from customers. All loans that we originate are underwritten pursuant to our policies and procedures.
We sell a majority of the conventional one- to four-family residential mortgage loans that we originate into the secondary market. In recent years, we have sold most of the fixed-rate, one- to four-family residential real estate loans that we originated for sale to Freddie Mac on a servicing-retained basis, although we are also approved to sell to the Federal Home Loan Bank of Indianapolis and intend to investigate the possibility of becoming approved to sell to Fannie Mae. We originate a limited number of residential mortgage loans for sale on a servicing-released basis based on the circumstances of the borrower and with specific loan approval. Otherwise we consider the secondary market conditions and our asset and liability management and liquidity demands and interest rate risk analysis on an ongoing basis in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. For the years ended December 31, 2014 and December 31, 2013, we sold $6.9 million and $16.6 million of mortgage loans, respectively. All of the mortgage loans were sold on a servicing-retained basis. At December 31, 2014, we serviced $73.6 million of fixed-rate, one- to four-family residential real estate loans that we originated and sold in the secondary market.
From time to time, we may purchase loan participations secured by properties within and outside of our primary lending market area in which we are not the lead lender, but where we are familiar with the lead lender and its underwriting standards, lending staff and credit risk tolerance. In these circumstances,
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we follow our customary loan underwriting and approval policies, and do not rely solely on the underwriting processes of the lead lender. We do not currently have any purchased loan participations, but we intend to review a limited number of participation opportunities in the future.
The following table shows our loan origination, purchases, sales and repayment activities for the years indicated.
Years Ended December 31,
2014
2013
(Dollars in thousands)
Total loans, including loans held for sale, at beginning of period
$ 87,596 $ 90,651
Loans originated:
Real estate loans:
One- to four-family residential
15,317 22,495
Commercial real estate
10,291 4,761
Construction and land
Total real estate
25,608 27,256
Commercial and industrial
2,323 3,877
Consumer loans:
Home equity loans and lines of credit
1,226 1,824
Other consumer
926 476
Total consumer
2,152 2,300
Total loans
30,083 33,433
Loans Purchased
Loans sold:
Real estate loans:
One- to four-family residential
(6,888) (16,586)
Commercial real estate
(2,092)
Construction and land
Total real estate
(6,888) (18,678)
Commercial and industrial
Consumer loans:
Home equity loans and lines of credit
Other consumer
Total consumer
Total loans
(6,888) (18,678)
Principal repayments
(20,205) (17,810)
Net loan activity
2,990 (3,055)
Total loans, including loans held for sale, at end of period
$ 90,586 $ 87,596
Delinquencies, Classified Assets and Non-Performing Assets
Delinquency Procedures.   When a borrower fails to make a required monthly payment on a residential real estate loan, the loan officer reports the delinquency to the loan committee, which then determines whether responsibility for the loan will remain with the loan officer or transferred to the appropriate collections or risk management personnel. Our policies provide that a late notice be sent when a loan is 15
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days past due, and a second late notice be sent when a loan is 30 days past due. In addition, we may call the borrower when the loan is 15 days past due, and we attempt to cooperate with the borrower to determine the reason for nonpayment and to work with the borrower to establish a repayment schedule that will cure the delinquency. Once the loan is considered in default, generally at 90 days past due, a certified letter is generally sent to the borrower explaining that the entire balance of the loan is due and payable, the loan is placed on non-accrual status, and additional efforts are made to contact the borrower. If the borrower does not respond, we generally initiate foreclosure proceedings when the loan is 150 to 180 days past due. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments. In certain instances, we may modify the loan or grant a limited exemption from loan payments to allow the borrower to reorganize his or her financial affairs.
When we foreclose on real estate located in the state of Michigan and have acquired the sheriff’s deed on the property through the foreclosure process, the loan is classified as “in redemption” pursuant to Michigan law for a period of up to one year during which time the borrower is able to redeem the subject property. As a result, during this period, the borrower is permitted to occupy the property, and we are not permitted to dispose of the property, although we classify the property as real estate owned. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal which is obtained as soon as practicable. Subsequent decreases in the value of the property are charged to operations. After acquisition, and potentially during the redemption period, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. We generally attempt to sell real estate owned as soon as possible after foreclosure. Foreclosure laws vary depending on the state in which the property is located, so our foreclosure process may vary as a result. For example, there is no redemption period in the state of Indiana, so we become the owner of foreclosed property upon acquisition of the sheriff’s deed. The majority of our mortgage loans are secured by property located in the state of Michigan.
Delinquent commercial and industrial, commercial real estate, construction and consumer loans are handled in a similar fashion. Our procedures for repossession and sale of consumer collateral are subject to various requirements under applicable laws, including consumer protection laws. In addition, we may determine that foreclosure and sale of such collateral would not be cost-effective for us.
Troubled Debt Restructurings.   We occasionally modify loans to extend the term or make other concessions to help a borrower stay current on his or her loan and to avoid foreclosure. We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral pledged. We generally do not forgive principal or interest on loans, but may do so if it is in our best interest and increases the likelihood that we can collect the remaining principal balance. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for fixed interest rates on loans where fixed rates are otherwise not available, to provide for longer amortization schedules (up to 40 years), or to provide for interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests. We generally limit the terms of workout plans to 24 months and the amortization periods of workout plans to 30 years for residential real estate loans, 15 years for commercial real estate loans and 5 years for other secured loans.
At December 31, 2014, we had 16 loans totaling $2.1 million that were classified as troubled debt restructuring. Of these, 7 loans totaling $791,000 were included in our non-accrual loans at such date because they were either not performing in accordance with their modified terms or had been performing in accordance with their modified terms for less than six months since the date of restructuring.
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Delinquent Loans.   The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
Loans Delinquent For
30 – 59 Days
60 – 89 Days
90 Days and Over
Total
Number
Amount
Number
Amount
Number
Amount
Number
Amount
(Dollars in thousands)
At December 31, 2014
Real estate loans:
One- to four-family residential
14 $ 1,148 5 $ 558 11 $ 735 30 $ 2,441
Commercial real estate
1 12 1 12
Construction and land
1 28 2 22 3 50
Total real estate
16 1,188 5 558 13 757 34 2,503
Commercial and industrial
Consumer loans:
Home equity loans and lines of credit
6 54 2 25 1 10 9 89
Other consumer
1 6 1 6
Total consumer
6 54 3 31 1 10 10 95
Total loans
22 $ 1,242 8 $ 589 14 $ 767 44 $ 2,598
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
Classified Assets.   Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific allowance for loan losses is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management. At December 31, 2014, we had $219,000 of loans designated as “special mention”.
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When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover losses that were both probable and reasonable to estimate. General allowances represent allowances which have been established to cover accrued losses associated with lending activities that were both probable and reasonable to estimate, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific allowances.
In connection with the filing of our periodic regulatory reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or delinquency status, or if the loan possesses weaknesses although currently performing. Management reviews the status of each loan on our watch list on a quarterly basis with the directors’ loan committee and then with the full board of directors. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.”
The following table sets forth our amounts of classified assets as of the dates indicated. Amounts shown at December 31, 2014 and December 31, 2013 include approximately $1.6 million and $2.7 million of nonperforming loans, respectively. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $17,502 and $22,479 at December 31, 2014 and December 31, 2013, respectively.
At December 31,
2014
At December 31,
2013
(Dollars in thousands)
Classified assets:
Substandard loans(1)
$ 2,887 $ 3,852
Doubtful loans
Loss loans
Real estate owned and other
Real estate owned and other repossessed assets(2)
467 1,169
Total classified assets
$ 3,354 $ 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 $3.4 million at December 31, 2014 from $5.0 million at December 31, 2013 is the continuation of a trend of declining classified assets that began in 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. Management believes it has resolved the majority of our problem assets, particularly the speculative construction and land development loans originated prior to 2009, but continues to closely monitor and aggressively manage these classified loans. We resolved these remaining loan relationships throughout 2014 and into early 2015. Our level of classified assets and expenses to resolve such loans remained elevated during this period. It is our experience that a significant number of classified non-owner occupied commercial real estate loans that were originated prior to 2009 historically have become non-performing loans.
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Non-Performing Assets.   Non-performing assets decreased to $3.4 million, or 2.8% of total assets, at December 31, 2014 from $3.9 million, or 3.2% of total assets, at December 31, 2013. Nonperforming loans were $2.9 million at December 31, 2014 and $2.7 million from December 31, 2013. The largest decline was in commercial real estate which decreased $327,000 from December 31, 2013. Residential 1-4 family mortgages increased $526,000 over December 31, 2013. Real estate owned was $467,000 on December 31, 2014 and $1.2 million on December 31, 2013, declining $701,000. This was a result of the sale of two commercial real estate properties totaling $477,000. As of December 31, 2014, commercial real estate loans totaled $397,000, or 33.5% of our non-performing assets. At December 31, 2014, one-to-four family residential mortgage loans were zero a decrease of  $352,000 from December 31, 2013. One-to-four family residential mortgage loans were 53.8% of nonperforming assets at December 31, 2014.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans is applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Troubled debt restructurings are loans that have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans, with modifications to loan terms including a lower interest rate, a reduction in principal, or a longer term to maturity. Troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the revised contractual terms for six months and the ultimate collectability of the total contractual principal and interest is deemed probable.
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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 allowances for loan losses. 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.
At December 31,
2014
At December 31,
2013
(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One- to four-family residential
$ 1,811 $ 1,285
Commercial real estate
729 1,056
Construction and land
207 197
Total real estate
2,747 2,538
Commercial and industrial
Consumer loans:
Home equity loans and lines of credit
151 208
Other consumer
Total consumer
151 208
Total loans
2,898 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
2,898 2,746
Real estate owned and other repossessed assets:
Real estate loans:
One- to four-family residential
353
Commercial real estate
397 697
Construction and land
70 75
Total real estate
467 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
467 1,125
Loans in redemption(1)
44
Total real estate owned and other repossessed assets
467 1,169
Total non-performing assets
$ 3,365 $ 3,915
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At December 31,
2014
At December 31,
2013
(Dollars in thousands)
Troubled debt restructurings:
Real estate loans:
One- to four-family residential
$ 916 $ 2,014
Commercial real estate
286 443
Construction and land
134
Total real estate
1,336 2,457
Commercial and industrial
Consumer loans:
Home equity loans and lines of credit
2 24
Other consumer
Total consumer
2 24
Total loans
$ 1,338 $ 2,481
Total non-performing loans and troubled debt restructurings
$ 4,236 $ 5,227
Ratios:
Non-performing loans to total loans
3.20% 3.15%
Non-performing assets to total assets
2.75% 3.23%
Non-performing assets and troubled debt restructurings to total
assets
3.46% 4.32%
(1)
Represents real estate that is subject to the redemption period under Michigan law.
Interest income that would have been recorded for the years ended December 31, 2014 and December 31, 2013, had non-accruing loans been current according to their original terms amounted to $23,000 and $89,000, respectively. No interest related to these loans was included in interest income for the years ended December 31, 2014 and December 31, 2013.
Non-performing one- to four-family residential real estate loans totaled $1.8 million at December 31, 2014 and consisted of 24 loans, the largest of which totaled $261,000. Non-performing commercial real estate loans totaled $729,000 at December 31, 2014 and consisted of three loan relationships. There were no nonperforming commercial and industrial loans, non-performing construction and land development loans totaled $207,000, and other non-performing loans totaled $151,000 at December 31, 2014.
Real estate owned totaled $467,000 at December 31, 2014, including $397,000 of commercial real estate properties and $70,000 of residential and commercial vacant land parcels.
At December 31, 2014, our three largest non-performing loan relationships were two commercial real estate relationships totaling $717,000 and $157,000, and a 1 – 4 family residential of  $261,000.
Other Loans of Concern.   Other than $219,000 of loans designated by management as “special mention,” of which $219,000 related to commercial real estate loans, there were no other loans at December 31, 2014 that are 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.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses.   Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
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We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value could result in our charging off the loan or the portion of the loan that was impaired.
Among other factors, we consider current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our local markets from third party sources that we believe to be reliable as a basis for assumptions about the impact of housing depreciation.
Substantially all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using either the original independent appraisal if it is less than 18 months old, adjusted for current economic conditions and other factors, or a new independent appraisal, and related general or specific allowances for loan losses are adjusted on a quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent appraisal if it has not already been obtained. Any shortfall would result in immediately charging off the portion of the loan that was impaired.
Specific Allowances for Identified Problem Loans.   We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.
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The following table sets forth activity in our allowance for loan losses for the periods indicated.
At or For the Years Ended December 31,
2014
2013
(Dollars in thousands)
Balance at beginning of period
$ 1,061 $ 1,504
Charge-offs:
Real estate loans:
One- to four-family residential
(27) (203)
Commercial real estate
(350)
Construction and land
(133)
Total real estate
(27) (686)
Commercial and industrial
(351)
Consumer loans:
Home equity loans and lines of credit
(73) (88)
Other consumer
Total consumer
(73) (88)
Total loans
$ (100) $ (1,125)
Recoveries:
Real estate loans:
One- to four-family residential
$ 3 $ 14
Commercial real estate
91
Construction and land
1
Total real estate
94 15
Commercial and industrial
25
Consumer loans:
Home equity loans and lines of credit
20 2
Other consumer
Total consumer
20 2
Total loans
$ 114 $ 42
Net (charge-offs) recoveries
14 (1,083)
Provision for loan losses
640
Balance at end of period
$ 1,075 $ 1,061
Ratios:
Net charge-offs (recoveries) to average loans outstanding (annualized)
0.02% 1.25%
Allowance for loan losses to non-performing loans at end of
period
37.09% 38.64%
Allowance for loan losses to total loans at end of period
1.19% 1.22%
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Allocation of Allowance for Loan Losses.   The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At December 31,
2014
2013
Allowance
for Loan
Losses
Percent of
Allowance
for Loan
Loss by
Category
Percent of
Loans in
Each
Category to
Total Loans
Allowance
for Loan
Losses
Percent of
Allowance
for Loan
Loss by
Category
Percent of
Loans in
Each
Category to
Total Loans
(Dollars in thousands)
Real estate loans:
One- to four-family residential
$ 223 20.74% 50.09% $ 188 16.22% 49.46%
Commercial real estate(1)
504 46.88 32.50 588 72.41 31.97
Total real estate
727 67.63 82.59 776 88.63 81.43
Commercial and industrial
248 23.07 6.12 138 2.19 4.65
Consumer loans(2)
100 9.30 11.28 147 9.18 13.92
Total allocated allowance
1,075 100.00% 100.00% 1,061 100.00% 100.00%
Unallocated allowance
Total allowance for loan losses
$ 1,075 $ 1,061
(1)
Includes construction and land loans.
(2)
Includes home equity loans and lines of credit.
At December 31, 2014, our allowance for loan losses represented 1.19% of total loans and 37.1% of non-performing loans, and at December 31, 2013, our allowance for loan losses represented 1.22% of total loans and 38.6% of non-performing loans. There were net recoveries of  $14,000 and $1.1 million in net loan charge-offs during the years ended December 31, 2014 and December 31, 2013, respectively.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of any portion of our loan portfolio deteriorates as a result. Furthermore, as an integral part of its examination process, the OCC will periodically review our allowance for loan losses. The OCC may require that we increase our allowance based on its judgments of information available to it at the time of its examination. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Securities Activities
General.   The goals of our investment policy are to provide and maintain liquidity to meet day-to-day, cyclical and long-term liquidity need, to help mitigate interest rate and market risk within the parameters of our interest rate risk policy, and to generate a dependable flow of earnings within the context of our interest rate and credit risk objectives. In recent years, beginning with the recession which began in 2008 and the subsequent challenging economic environment, our strategy has been to reduce the maturities of our investment securities portfolio and to focus on quality and liquidity instead of yield. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity.
Our investment policy was adopted by the board of directors. The investment policy is reviewed annually by the board of directors. Authority to make investments under the approved investment policy is
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delegated to our Chief Financial Officer, who serves as Investment Officer. We utilize the services of a third party investment advisor for specific recommendations and review of our investment portfolio and investment activities. The investment portfolio is reviewed quarterly by the Bank’s asset liability management committee and the third party advisor, and an independent market pricing of the investment portfolio is obtained on at least a monthly basis. The Chief Financial Officer reports to the board of directors on at least a quarterly basis with respect to liquidity, credit quality, market risk and recent investment activity. Any exceptions to the investment policy are made only upon the recommendation of the President and Chief Executive Officer and the Chief Financial Officer, and with the concurrence of our third party advisor.
Our current investment policy permits, with certain limitations, investments in United States Treasury securities with maturities up to 10 years; securities issued by the United States Government and its agencies or government sponsored enterprises with maturities up to 30 years (15 years for agency notes and bonds); pass-through mortgage-backed securities (MBS) issued by Fannie Mae, Ginnie Mae and Freddie Mac with an average life up to seven years; collateralized mortgage obligations (CMO) with an average life up to seven years; private issue MBSs and CMOs with average life up to five years; general, revenue, and escrowed obligations issued by states, counties and municipalities with maturities up to 15 years; corporate notes and bonds issued by U.S. corporations with maturities up to five years; bank notes with maturities up to five years; insured certificates of deposit with maturities up to four years; Fed funds sold to U.S. banks; and equity investments in the Federal Reserve Bank of Indianapolis and the Federal Home Loan Bank of Indianapolis or acquired in foreclosure, settlement or workout of debts previously contracted.
Prior to any investment and on an ongoing basis, MBSs, CMOs and certain other investment instruments are subject to an independent analysis as to the impact that changes in interest rates will have on cash flow and market value of each security. In addition, prior to any purchase and on an ongoing basis, all securities are subject to a price sensitivity test to determine the impact of an immediate and sustained shift in the yield curve. This test will be performed using either our internal interest rate simulation model or a model available from a reputable third party other than the broker or dealer selling the instrument. If the change in price exceeds, generally, an increase of 17% resulting from changes in interest rates of  +300 bp to -300 bp, or a decrease of 17% resulting from changes in interest rates of  +100 bp to +300 bp, these securities may be purchased, but are limited to 10% of our portfolio.
Our current investment policy does not permit any investment with the intent to sell or capture changes in price over 30 days or less. Specifically, our policy prohibits hedging activities and higher risk transactions such as futures, options or swap transactions; coupon stripping; gains trading; short sales; securities lending; buying or selling a security between the announcement of an offering and the issuance of the security, or “when issued” trading; transactions that are closed or sold on or before the settlement date, or “pair-offs”; selling securities at a price above market value while purchasing other securities at above market value, or “adjusted” trading; covered calls; extended settlements other than in the normal course of business; or repurchase or reverse repurchase agreements. In addition, we do not invest in stripped mortgage-backed securities; purchasing securities on margin; CMOs secured by mortgage assets not backed by the credit support of a U.S. government agency; floating rate derivatives; CMO residual or “Z tranche” bonds; long-term zero coupon bonds; complex securities and derivatives as defined in federal banking regulations; and other high-risk securities that do not pass the interest rate sensitivity tests set forth in our investment policy.
Our investment policy also requires that certain investment instruments be rated, and that our investment portfolio meet certain diversification requirements, with U.S. Treasury permitted up to 100% of our portfolio; GNMA obligations permitted up to 50% of our portfolio; and U.S. government and agency notes and bonds permitted up to 30% of our portfolio per issuer; U.S. government and agency MBSs permitted up to 30% of our portfolio per issuer; U.S. government agency CMOs permitted up to 30% of our portfolio per issuer (combined with MBSs issued by the same issuer); private issue MBSs and CMOs permitted up to 10% of our portfolio; SBA pools up to 10% of our portfolio; rated general obligation bank-qualified municipal obligations permitted up to 50% of our portfolio; and corporate and other investments generally limited to 10% of our portfolio.
U.S. Government and Federal Agencies.   At December 31, 2014, we had U.S. government and agency securities with a carrying value of  $5.0 million, which constituted 39.3% of our securities portfolio. While
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these securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and for prepayment protection.
State and Political Subdivisions.   At December 31, 2014, we had state and political subdivision securities with a carrying value of  $3.4 million, which constituted 26.3% of our securities portfolio. Most of our current state and political subdivision securities are in principal amounts of  $500,000 or less, were issued by counties and municipalities located in the states of Michigan, Ohio, Wisconsin, Indiana and Pennsylvania, and have maturities not in excess of 5 years. These securities generally provide slightly higher yields than U.S. government and agency securities and mortgage-backed securities, but are not as liquid as such other investments, so we typically maintain investments in municipal securities, to the extent appropriate, for generating returns in our investment portfolio.
Mortgage-Backed Securities and Collateralized Mortgage Obligations.   At December 31, 2014, we had mortgage-backed securities with a carrying value of  $3.4 million, which constituted 26.4% of our securities portfolio, and CMOs with a carrying value of  $1.0 million, which constituted 8.0% of our securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Edgewater Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed securities are either backed by Ginnie Mae, a United States Government agency, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Residential mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Federal Home Loan Bank Stock.   We hold common stock of the Federal Home Loan Bank of Indianapolis in connection with our borrowing activities totaling $1.1 million at December 31, 2014. The Federal Home Loan Bank common stock is carried at cost and classified as restricted equity securities. We may be required to purchase additional Federal Home Loan Bank stock if we increase borrowings in the future.
The following table sets forth the composition of our investment securities portfolio, all of which were available for sale, at the dates indicated, excluding stock of the Federal Home Loan Bank of Indianapolis.
December 31, 2014
December 31, 2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(Dollars in thousands)
Available-for-sale securities:
U.S. Government and federal agency
$ 5,003 $ 4,940 $ 6,558 $ 6,441
State and political subdivisions
3,355 3,361 3,359 3,338
Mortgage-backed – GSE-residential
3,357 3,384 4,225 4,231
Collateralized mortgage obligations – GSE
1,020 1,033 1,587 1,584
$ 12,735 $ 12,718 $ 15,729 $ 15,594
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At December 31, 2014, we had no investments in a single entity (other than United States government or agency sponsored securities) that had an aggregate book value in excess of 10% of our total equity.
Securities Portfolio Maturities and Yields.   The following table sets forth the composition, stated maturities and weighted average yields of our investment securities portfolio at December 31, 2014. Securities available for sale are carried at fair value. Mortgage-backed securities, including collateralized mortgage obligations, are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan repayments. In addition, under the structure of some of our CMOs, the short- and intermediate-term tranche interests have repayment priority over the longer term tranche interests of the same underlying mortgage pool. Finally, some of our U.S. Treasury and other securities are callable at the option of the issuer. Certain securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules have not been reflected in the table below.
One Year or Less
More than One Year
through Five Years
More than Five Years
through Ten Years
More than Ten Years
Total Securities
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
(Dollars in thousands)
Securities available-for-sale:
U.S. Government and federal agency
$ % $ 5,003 1.06% % % $ 5,003 $ 4,940 1.06%
State and political subdivisions
795 1.14 2,560 1.54 3,355 3,361 1.45
Mortgage-backed – GSE-residential
0.00 2,707 1.54 650 2.68 3,357 3,384 1.76
Collateralized mortgage obligations – GSE
537 1.64 483 2.40 1,020 1,033 2.00
Total available-for-sale securities
$ 795 1.14% $ 8,100 1.25% $ 2,707 1.54% $ 1,133 2.56% $ 12,735 $ 12,718 1.42%
The following table shows the purchase, sale and amortization and repayment activity in our securities portfolio during the periods indicated:
For the years ended
December 31,
2014
2013
(Dollars in thousands)
Total at beginning of period
$ 15,729 $ 14,318
Purchases of:
U.S. government and federal agency obligations
3,586
U.S. government-sponsored enterprise mortgage-backed securities
U.S. government-sponsored enterprise collateralized mortgage obligations
securities
State and political subdivisions
1,311
Corporate
Deduct:
U.S. government and federal agency obligations
(1,555) (1,069)
U.S. government-sponsored enterprise mortgage-backed securities
(868) (1,491)
U.S. government-sponsored enterprise collateralized mortgage obligations
securities
(567) (924)
State and political subdivisions
(4) (2)
Corporate
Net activity
(2,994) 1,411
Total at end of period
$ 12,735 $ 15,729
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Sources of Funds
General.   Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Indianapolis advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. To a lesser extent, we may utilize repurchase agreements or Federal Funds sold as funding sources.
Deposits.   Our deposits are generated primarily from our primary market area. We offer a selection of deposit accounts, including non-interest-bearing and interest-bearing checking accounts, passbook and statement savings accounts, variable rate money market accounts, and certificates of deposit. Unlike most thrift institutions, a significant majority of our deposits are core deposits, which we believe are less susceptible than certificates of deposit to large-scale withdrawals as a result of changes in interest rates. We have not in the past used, and currently do not hold any, brokered or Internet deposits. Depending on our future needs we may participate in the Certificate of Deposit Registry Service (CDARS) and the Qwickrate programs as alternative funding sources, but do not anticipate doing so. At December 31, 2014, our core deposits, which are deposits other than time deposits and certificates of deposit, were $71.6 million, representing 72.7% of total deposits.
Our deposits are primarily obtained from areas surrounding our branch offices, and therefore deposit generation is significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition in our market area, which includes numerous financial institutions of varying sizes offering a wide range of products and services. Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Branch managers of each branch are permitted to authorize certificate of deposit interest rate adjustments up to 0.15%. The President and Chief Executive Officer or Chief Financial Officer may approve any certificate of deposit interest rate adjustment in excess of 0.15%. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits and the rates paid on these deposits has been and will continue to be significantly affected by market conditions, including competition and prevailing interest rates. At December 31, 2014, $26.9 million, or 27.3% of our total deposit accounts, were certificates of deposit, of which $14.5 million had maturities of one year or less.
In order to attract and retain deposits we rely on pro-active marketing and promotional programs, broadening banking relationships with lending customers, offering attractive interest rates, and offering competitive products to meet the needs of the varied demographic groups in our market areas, such as remote deposit capture for business customers, high-yield checking for higher balances, and low-cost overdraft for lower balances. We intend to continue to refine our product offerings and promotional programs, focus on employee training and development with respect to deposit generation and retention, and leverage relationship-based commercial and industrial and consumer lending to increase our core deposits.
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The following table sets forth the distribution of our average total deposit accounts, by account type, for the periods indicated. As a result of the sale of our Decatur office, deposits decreased by approximately $13.3 million, including decreases of approximately $8.4 million of core deposits and $4.9 million of certificates of deposit, as of the sale date of January 24, 2014.
For the Years Ended December 31,
2014
2013
Average
Balance
Percent
Weighted
Average
Rate
Average
Balance
Percent
Weighted
Average
Rate
(Dollars in thousands)
Deposit type:
Demand deposit accounts:
Interest bearing
$ 17,571 18.3% 0.23% $ 17,515 16.3% 0.16%
Non-interest bearing
12,525 13.1 10,967 10.2
Money market accounts
22,858 23.8 0.29 25,579 23.7 0.29
Savings accounts
13,840 14.4 0.20 13,492 12.5 0.13
Certificates of deposit
29,091 30.3 0.87 40,187 37.3 1.07
Total deposits
$ 95,885 100.00% 0.46% $ 107,740 100.0% 0.57%
The following table sets forth our deposit activities for the periods indicated.
At or For the Years Ended December 31,
2014
2013
(Dollars in thousands)
Beginning balance
$ 108,071 $ 106,408
Net deposits (withdrawals) before interest credited
3,263 1,079
Branch deposit sale
(13,328)
Interest credited
487 584
Net increase (decrease) in deposits
(9,578) 1,663
Ending balance
$ 98,493 $ 108,071
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.
At December 31,
2014
2013
(Dollars in thousands)
Interest Rate:
Less than 1.00%
$ 20,879 $ 23,217
1.00% to 1.99%
4,516 10,810
2.00% to 2.99%
1,437 1,789
3.00% to 3.99%
1,908
4.00% to 4.99%
24 32
5.00% and above
Total
$ 26,856 $ 37,756
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Maturities of Certificates of Deposit Accounts.   The following table sets forth the amount and maturities of certificates of deposit accounts at the dates indicated.
At December 31, 2014
Period to Maturity
Less Than
or
Equal to
One Year
More Than
One to
Two Years
More Than
Two to
Three Years
More Than
Three Years
Total
Percent of
Total
(Dollars in thousands)
Interest Rate Range:
Less than 1.00%
$ 13,398 $ 5,649 $ 1,771 $ 61 $ 20,879 77.7%
1.00% to 1.99%
318 1,464 1,311 1,423 4,516 16.8
2.00% to 2.99%
764 456 217 1,437 5.4
3.00% to 3.99%
4.00% to 4.99%
20 4 24 0.1
5.00% and above
Total
$ 14,500 $ 7,569 $ 3,086 $ 1,701 $ 26,856 100.00%
At December 31, 2014, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $7.7 million. The following table sets forth the maturity of those certificates as of December 31, 2013.
At December 31, 2014
(Dollars in thousands)
Three months or less
$ 835
Over three months through six months
696
Over six months through one year
2,384
Over one year to three years
3,532
Over three years
217
Total
$ 7,664
Borrowings.   We may obtain advances from the Federal Home Loan Bank of Indianapolis upon the security of our capital stock in the Federal Home Loan Bank of Indianapolis and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to reprice than our deposits, they can change our interest rate risk profile. At December 31, 2014, we had $10 million in outstanding advances from the FHLB-Indianapolis. At December 31, 2014, based on available collateral and our ownership of FHLB stock, and based upon our internal policy, we had access to additional Federal Home Loan Bank advances of up to $13.5 million, and an additional $2 million on a line of credit with the Federal Home Loan Bank and $2 million on a line of credit with United Bankers Bank. As a result of our Decatur office sale on January 24, 2014, we borrowed $10.0 million in advances fund the sale.
The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the dates and for the periods indicated. We did not have any borrowings other than Federal Home Loan Bank advances at the dates or during the periods indicated.
At or For the Years Ended December 31,
2014
2013
(Dollars in thousands)
Balance at end of period
$ 10,000 $
Average balance during period
$ 9,564 $ 1,858
Maximum outstanding at any month end
$ 11,000 $ 5,000
Weighted average interest rate at end of period
0.00% 0.00%
Average interest rate during period
1.11% 0.48%
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Subsidiary Activities
Edgewater Bank is the wholly-owned subsidiary of Edgewater Bancorp, Inc. Edgewater Bank has three subsidiaries. Explorer Financial Services Corporation is a Michigan corporation established to own approximately 8.91% of MBT Title Services, LLC, a multi-bank owned title insurance company. Edgewater Insurance Agency, Inc. is a Michigan corporation formed to receive the commissions for the Bank’s employee benefit plans. This agency does not sell insurance products to the general public. Waters Edge Real Estate Holdings, LLC is a Michigan limited liability company formed to own and operate certain real estate owned properties between the time of foreclosure and divestiture of these properties. This entity currently does not hold any real estate owned properties.
Employees
As of December 31, 2014 we had 36 full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.
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REGULATION AND SUPERVISION
General
As a federal savings association, Edgewater Bank is subject to examination and regulation by the OCC, and is also subject to examination by the FDIC. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Edgewater Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund, and not for the protection of security holders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Edgewater Bank also is regulated to a lesser extent by the Federal Reserve Board, which governs the reserves to be maintained against deposits and other matters. Edgewater Bank must comply with consumer protection regulations issued by the Consumer Financial Protection Bureau. Edgewater Bank also is a member of and owns stock in the Federal Home Loan Bank of Indianapolis, which is one of the twelve regional banks in the Federal Home Loan Bank System. The OCC examines Edgewater Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Edgewater Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts, the form and content of Edgewater Bank’s loan documents and certain consumer protection matters.
As a savings and loan holding company, Edgewater Bancorp, Inc. is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. Edgewater Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Set forth below are certain material regulatory requirements that are applicable to Edgewater Bank and Edgewater Bancorp, Inc. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Edgewater Bank and Edgewater Bancorp, Inc. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on Edgewater Bancorp, Inc., Edgewater Bank and their operations.
Dodd-Frank Act
The Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies. However, the Dodd-Frank Act’s changes go well beyond that and affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Edgewater Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than on
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total deposits. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and noninterest-bearing transaction accounts had unlimited deposit insurance through December 31, 2012. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage origination.
Many provisions of the Dodd-Frank Act involve delayed effective dates and/or require implementing regulations or have not been issued in final form. Their impact on our operations cannot yet fully be assessed. However, there is a significant possibility that the Dodd-Frank Act will result in an increased regulatory burden and compliance, operating and interest expense for Edgewater Bank and Edgewater Bancorp, Inc.
Federal Banking Regulation
Business Activities.   A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Edgewater Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts, effective July 21, 2011. Edgewater Bank may also establish subsidiaries that may engage in certain activities not otherwise permissible for Edgewater Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements.   Federal regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% core capital to assets leverage ratio (3% for savings associations receiving the highest rating on the CAMELS rating system), and an 8% risk-based capital ratio.
The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 200%, assigned by the regulations, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings association that retains credit risk in connection with an asset sale is required to maintain additional regulatory capital because of the purchaser’s recourse against the savings association. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors, but qualitative factors as well and has the authority to establish higher capital requirements for individual associations where necessary.
At December 31, 2014, Edgewater Bank’s capital exceeded all applicable requirements.
Individual Minimum Capital Requirement.   On January 23, 2013, the OCC notified Edgewater Bank that the OCC had established an IMCR that requires Edgewater Bank to maintain certain individual minimum capital ratio requirements. During the fourth quarter of 2014, Edgewater Bank was notified that IMCR was terminated by the OCC.
New Capital Rule.   On July 9, 2013, the OCC and the other federal bank regulatory agencies issued a final rule that will revise their risk-based capital requirements and the method for calculating risk-weighted
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assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of  $500 million or more and top-tier savings and loan holding companies.
The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.
The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition period. Edgewater Bank has the one-time option in the first quarter of 2015 to permanently opt out of the inclusion of accumulated other comprehensive income in its capital calculation. Edgewater is considering whether to opt out in order to reduce the impact of market volatility on its regulatory capital levels.
The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 day past due or otherwise on non-accrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%) for equity exposures.
Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
The final rule becomes effective for Edgewater Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets increasing each year until fill implemented at 2.5% on January 1, 2019.
Edgewater Bank has conducted a pro forma analysis of the application of these new capital requirements as of December 31, 2014. We have determined that Edgewater Bank meets all of these new requirements, including the full 2.5% capital conservation buffer, as if these new requirements had been in effect on that date.
Loans-to-One Borrower.   Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2014, Edgewater Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test.   As a federal savings association, Edgewater Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Edgewater Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
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Alternatively, Edgewater Bank may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended.
A federal savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to enforcement action for a violation of law. At December 31, 2014, Edgewater Bank maintained 74.53% of its portfolio assets in qualified thrift investments and, therefore, satisfied the QTL test. Edgewater Bank has satisfied the QTL test in each of the last 12 months.
Capital Distributions.   Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application for approval of a capital distribution if:

the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;

the savings association would not be at least adequately capitalized following the distribution;

the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

the savings association is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as Edgewater Bank, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution may be disapproved if:

the federal savings association would be undercapitalized following the distribution;

the proposed capital distribution raises safety and soundness concerns; or

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form. In addition, beginning in 2016, Edgewater Bank’s ability to pay dividends will be limited if Edgewater Bank does not have the capital conservation buffer required by the new capital rules, which may limit the ability of Edgewater Bancorp, Inc. to pay dividends to its stockholders. See — New Capital Rule.
Community Reinvestment Act and Fair Lending Laws.   All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the OCC is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. Edgewater Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
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Transactions with Related Parties.   A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository institution such as Edgewater Bank. Edgewater Bancorp, Inc. is an affiliate of Edgewater Bank because of its control of Edgewater Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings associations to maintain detailed records of all transactions with affiliates.
Edgewater Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Edgewater Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Edgewater Bank’s loan committee or board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement.   The OCC has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Standards for Safety and Soundness.   Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations.   The OCC is required by law to take supervisory actions against undercapitalized savings institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital.
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Current OCC prompt corrective action regulations state that to be adequately capitalized, Edgewater Bank must have a Tier 1 leverage ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least 4.0%, and a total risk-based capital ratio of at least 8.0%. To be well-capitalized, Edgewater Bank must have a Tier 1 leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 10.0%. A savings association that has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 risk-based capital ratio that generally is less than 4.0% is considered to be undercapitalized. A savings association that has total risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.” A savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.”
Generally, the OCC is required to appoint a receiver or conservator for a savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date that a federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures such as a restrictions on capital distributions and asset growth. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At December 31, 2014, Edgewater Bank met the criteria for being considered “well capitalized.”
In addition, the final capital rule adopted in July 2013 revises the prompt corrective action categories to incorporate the revised minimum capital requirements of that rule when it becomes effective. The OCC’s prompt corrective action standards will change when these new capital ratios become effective. Under the new standards, in order to be considered well-capitalized, Edgewater Bank would have to have a common equity Tier 1 ratio of 6.5% (new), a Tier 1 risk-based capital ratio of 8.0% (increased from 6.0%), a total risk-based capital ratio of 10.0% (unchanged), and a Tier 1 leverage ratio of 5.0% (unchanged). Edgewater Bank has conducted a pro forma analysis of the application of these new capital requirements as of December 31, 2014. We have determined that Edgewater Bank is well-capitalized under these new standards, as if these new requirements had been in effect on that date. See “— New Capital Rule.”
Insurance of Deposit Accounts.   The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as Edgewater Bank. Deposit accounts in Edgewater Bank are insured by the FDIC generally up to a maximum of  $250,000 per separately insured depositor and up to a maximum of  $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates.
In February 2011, the FDIC published a final rule under the Dodd-Frank Act to reform the deposit insurance assessment system. The rule redefined the assessment base used for calculating deposit insurance assessments effective April 1, 2011. Under the new rule, assessments are based on an institution’s average consolidated total assets minus average tangible equity instead of total deposits. The proposed rule revised the assessment rate schedule to establish assessments ranging from 2.5 to 45 basis points.
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In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended September 30, 2013, the annualized FICO assessment was equal to 0.62 basis points of total assets less tangible capital.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Edgewater Bank. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Prohibitions Against Tying Arrangements.   Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System.   Edgewater Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Indianapolis, Edgewater Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2014, Edgewater Bank was in compliance with this requirement. While Edgewater Bank’s ability to borrow from the Federal Home Loan Bank of Indianapolis provides an additional source of liquidity, Edgewater Bank has historically not used advances from the Federal Home Loan Bank to fund its operations.
Other Regulations
Interest and other charges collected or contracted for by Edgewater Bank are subject to state usury laws and federal laws concerning interest rates. Edgewater Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

Truth in Savings Act; and

rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
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In addition, the Consumer Financial Protection Bureau issues regulations and standards under these federal consumer protection laws that affect our consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage loan servicing and originator compensation standards. Edgewater Bank is evaluating recent regulations and proposals, and devotes significant compliance, legal and operational resources to compliance with consumer protection regulations and standards.
The operations of Edgewater Bank also are subject to the:

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General.   Edgewater Bancorp, Inc. is a savings and loan holding company within the meaning of HOLA. As such, Edgewater Bancorp, Inc. is registered with the Federal Reserve Board and is subject to regulations, examinations, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over Edgewater Bancorp, Inc. and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Permissible Activities.   Under present law, the business activities of Edgewater Bancorp, Inc. are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations.
Federal law prohibits a savings and loan holding company, including Edgewater Bancorp, Inc., directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings
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institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

the approval of interstate supervisory acquisitions by savings and loan holding companies; and

the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital.   Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to establish for all depository institution holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries. Under regulations recently enacted by the Federal Reserve Board, Edgewater Bancorp, Inc. is be subject to regulatory capital requirements that generally are the same as the new capital requirements for Edgewater Bank. These new capital requirements include provisions that might limit the ability of Edgewater Bancorp, Inc. to pay dividends to its stockholders or repurchase its shares. See “— Federal Banking Regulation — New Capital Rule.” Edgewater Bancorp, Inc. has conducted a pro forma analysis of the application of these new capital requirements as of December 31, 2014, has determined that it met all of these new requirements, including the full 2.5% capital conservation buffer, and remains well-capitalized, if these new requirements had been in effect on that date.
Source of Strength.   The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all savings and loan holding companies serve as a source of managerial and financial strength to their subsidiary savings associations by providing capital, liquidity and other support in times of financial stress.
Dividends.   The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a savings and loan holding company to pay dividends may be restricted if a subsidiary savings association becomes undercapitalized. The policy statement also states that a savings and loan holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the savings and loan holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Edgewater Bancorp, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Acquisition.   Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the
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company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” Edgewater Bancorp, Inc. qualifies as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, Edgewater Bancorp, Inc. will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. Edgewater Bancorp, Inc. has elected to comply with new or amended accounting pronouncements in the same manner as a private company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of  $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
38

TAXATION
Federal Taxation
General.   Edgewater Bancorp, Inc. and Edgewater Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Edgewater Bancorp, Inc. and Edgewater Bank.
Method of Accounting.   For federal income tax purposes, Edgewater Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing its federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.
Minimum Tax.   The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, less an exemption amount, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent tax computed this way exceeds tax computed by applying the regular tax rates to regular taxable income. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2014, Edgewater Bank had no minimum tax credit carryforward.
Net Operating Loss Carryovers.   Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. However, as a result of recent legislation, subject to certain limitations, the carryback period for net operating losses incurred in 2008 or 2009 (but not both years) has been expanded to five years. At December 31, 2014, Edgewater Bank had $9.0 million of federal net operating loss carryforwards and $1.3 million of Michigan state net operating loss carryforwards available for future use.
Capital Loss Carryovers.   Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five year carryover period is not deductible. At December 31, 2014, Edgewater Bank had no capital loss carryover.
Corporate Dividends.   We may generally exclude from our income 100% of dividends received from Edgewater Bank as a member of the same affiliated group of corporations.
Audit of Tax Returns.   Edgewater Bank’s tax returns for tax year 2009 were subject to an ordinary audit by the Internal Revenue Service. As a result, Edgewater Bank was not required to amend its tax returns and was not required to pay any additional taxes or penalties. Edgewater Bank considers the matter fully resolved.
State Taxation
Companies headquartered in Michigan, such as Edgewater Bancorp, Inc., are subject to a Michigan capital tax which is an assessment of 0.235% of a company’s consolidated net capital, based on a rolling five-year average. Other applicable state taxes include generally applicable sales, use and real property taxes. As a Maryland business corporation, Edgewater Bancorp, Inc. is required to file annual franchise tax return with the State of Maryland. Edgewater Bank’s state income tax returns have not been audited in recent years.
Availability of Annual Report on Form 10-K
This Annual Report on Form 10-K is available on our website at www.edgewaterbank.com. Information on the website is not incorporated into, and is not otherwise considered a part of, this Annual Report on Form 10-K.
39

ITEM 1A.
Risk Factors
The presentation of Risk Factors is not required for smaller reporting companies.
ITEM 1B.
Unresolved Staff Comments
Not applicable.
ITEM 2.
Properties
At December 31, 2014, the net book value of our properties was $3.2 million, and the net book value of our furniture, fixtures and equipment (including computer software) was $732,000. We believe that our current facilities are adequate to meet our present and foreseeable needs, other than modest and customary repair and replacement needs.
The following table sets forth information regarding our office properties as of December 31, 2014.
Location
Leased or Owned
Year Acquired
or Leased
Square Footage
Main Office:
(including land)
Saint Joseph − Main Office
321 Main Street
St. Joseph, Michigan 49085
Owned
1998 14,614
Full Service Branches:
(including land)
Bridgman Office
4509 Lake Street
Bridgman, Michigan 49106
Owned
1961 3,980
Buchanan Office(1)
720 East Front Street
Buchanan, Michigan 49107
Leased
2013 1,800
Coloma Office
167 Paw Paw Street
Coloma, Michigan 49038
Owned
1969 2,700
Royalton Township Office
4097 Hollywood Road
St. Joseph, Michigan 49085
Owned
2006 3,692
(1)
Prior to June 2013, we owned the entire building in which our Buchanan office is located. In June 2013, we sold the building to a third party and entered into a lease agreement with the current owner for 1,800 square feet that we occupy.
ITEM 3.
Legal Proceedings
We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. At December 31, 2014, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.
ITEM 4.
Mine Safety Disclosure
None.
40

PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market, Holder and Dividend Information.   Our common stock is quoted on the OTCQB Bulletin Board under the symbol “EGDW.” The approximate number of holders of record of Edgewater Bancorp, Inc.’s common stock as of March 27, 2015, was 158. Certain shares of Edgewater Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. The common stock of Edgewater Bancorp, Inc. began trading on the OTCQB Bulletin Board on January 17, 2014. Accordingly, there is no market information for the periods ended December 31, 2013 and 2012.
The following table shows the high and low sales prices for our common stock as reported by the OTC Bulletin Board for the periods indicated and all dividends, if any, paid by us during those periods.
High
Low
Dividend
2014
First Quarter
$ 11.00 $ 10.00 $ 0
Second Quarter
$ 10.50 $ 10.40 $ 0
Third Quarter
$ 11.00 $ 10.25 $ 0
Fourth Quarter
$ 10.25 $ 10.10 $ 0
Edgewater Bancorp, Inc. has not declared dividends on its common stock. Dividend payments by Edgewater Bancorp, Inc. are dependent in part on dividends it receives from Edgewater Bank because Edgewater Bancorp, Inc. has no source of income other than dividends from Edgewater Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by Edgewater Bancorp, Inc. and interest payments with respect to Edgewater Bancorp, Inc.’s loan to the Employee Stock Ownership Plan. Our bank’s ability to pay dividends is subject to limitations under various laws and regulations.
(b) Sales of Unregistered Securities.   Not applicable.
(c) Use of Proceeds.   On September 12, 2013, Edgewater Bancorp, Inc. filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in connection with the conversion of Edgewater Bank and the related offering of common stock by Edgewater Bancorp, Inc. The Registration Statement (File No. 333-191125) was declared effective by the Securities and Exchange Commission on November 12, 2013. Edgewater Bancorp, Inc. registered 1,031,550 shares of common stock, par value $0.01 per share, pursuant to the Registration Statement for an aggregate price of  $10.3 million. The stock offering commenced on November 21, 2013, and ended on January 9, 2014. The issuance of 667,898 shares was completed on January 16, 2014 and the shares began trading on January 17, 2014.
Edgewater Bancorp, Inc. contributed $4.6 million of the net proceeds of the offering to Edgewater Bank. In addition, $534,000 of the net proceeds were used to fund the loan to the employee stock ownership plan; and $1.7 million of the net proceeds are reserved for use to pay costs associated with withdrawal from a defined benefit plan in which Edgewater Bank participates.
(d) Securities Authorized for Issuance Under Equity Compensation Plans.   None.
(e) Stock Repurchases.   None.
(f) Stock Performance Graph.   Not required for smaller reporting companies.
41

ITEM 6.
Selected Financial Data
Not required for smaller reporting companies.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Edgewater Bank provides financial services to individuals and businesses from our main office in St. Joseph, Michigan and our four additional full-service banking offices located in Royalton Township, Coloma, Bridgman and Buchanan, Michigan. We completed the sale of our Decatur office on January 24, 2014. Our primary market area includes Berrien County, Van Buren County, and, to a lesser extent, Cass County, Michigan, all of which are located in southwestern Michigan near the border of Indiana, and portions of northern Indiana that are contiguous with Berrien and Cass Counties.
Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate, commercial and industrial, and commercial real estate loans, and, to a lesser extent, home equity lines of credit and other consumer loans. At December 31, 2014, $45.4 million, or 50.1% of our total loan portfolio, was comprised of one- to four-family residential real estate loans. We also invest in securities, which consist primarily of U.S. government agency obligations and mortgage-backed securities and to a lesser extent, state and municipal securities and collateralized mortgage obligations.
We offer a variety of deposit accounts, including checking accounts, NOW accounts, savings accounts, money market accounts and certificate of deposit accounts. We utilize advances from the FHLB-Indianapolis for asset/liability management purposes and, to a much lesser extent, for additional funding for our operations. At December 31, 2014, we had $10.0 million in advances outstanding with FHLB-Indianapolis.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts, loan servicing income, gain on sales of securities and loans, debit card income and miscellaneous other income. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, data processing, federal deposit insurance premiums, ATM charges, professional fees, advertising and other operating expenses.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory