SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended March 31, 2015

 

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 No. 000-55129

 

Edgewater Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland		46-3687434
(State or other jurisdiction of in Company or organization)		(I.R.S. Employer Identification Number)
321 Main Street, St. Joseph, Michigan		49085
(Address of Principal Executive Offices)		Zip Code

 

(269) 982-4175

(Registrant’s telephone number)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x     NO ¨

 

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

YES x     NO ¨

 

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

 

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

 

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

YES ¨     NO x

 

As of May 8, 2015, there were issued and outstanding 667,898 shares of the Registrant’s Common Stock with a par value of $0.01 per share.

 

 

 

Edgewater Bancorp, Inc.

Form 10-Q

 

Index

 

		Page
Part I. Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March  31, 2015 (unaudited) and December 31, 2014	4
	Condensed Consolidated Statements of Operations for the Three Months Ended March  31, 2015 and 2014 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive  Loss for the Three Months Ended March  31, 2015 and 2014 (unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March  31, 2015 (unaudited)	7
	Condensed Consolidated Statement of Cash Flows for the Three Months Ended March  31, 2015 and 2014 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	43

 

 

Part II. Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults upon Senior Securities	43
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
	Signature Page	45

 

 

Part I. – Financial Information

Financial Statements

 

Edgewater Bancorp, Inc.

Condensed Consolidated Balance Sheets

		March 31,				December 31,
		2015				2014
		(Unaudited)
Assets
Cash and due from banks		$	568,843			$	763,968
Interest-bearing demand deposits in banks			8,534,219				12,680,629
Cash and cash equivalents			9,103,062				13,444,597
Available-for-sale securities			12,449,383				12,718,065
Loans held for sale			862,787				48,300
Loans receivable, net of allowance for losses of $1,071,087 and $1,075,351, respectively			94,958,668				89,479,525
Premises and equipment, net			3,826,357				3,912,291
Federal Home Loan Bank (FHLB) stock			1,078,900				1,078,900
Other real estate, net			457,000				467,000
Interest receivable			291,588				302,777
Mortgage servicing rights			423,182				432,105
Other assets			531,272				460,562
Total assets		$	123,982,199			$	122,344,122
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing		$	11,577,460			$	11,730,674
Interest-bearing			87,279,979				86,762,438
Total deposits			98,857,439				98,493,112
Federal Home Loan Bank advances			11,000,000				10,000,000
Accrued and other liabilities			732,256				547,550
Total liabilities			110,589,695				109,040,662
Commitments and contingencies
Temporary Equity
ESOP shares subject to mandatory redemption			27,637				22,193
Stockholders’ Equity
Common Stock-shares authorized 7,000,000: shares issued and outstanding 667,898 at $.01 par value			6,679				6,679
Paid-in-capital			4,683,434				4,683,434
Retained earnings			8,638,189				8,607,914
Accumulated other comprehensive income (loss)			36,565				(16,760	)
Total equity			13,364,867				13,281,267
Total liabilities and shareholders’ equity		$	123,982,199			$	122,344,122

 

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

 

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Operations

		Three Months Ended March 31,
		2015				2014
		(Unaudited)
Interest Income
Loans, including fees		$	1,111,278			$	965,899
Debt securities
Taxable			30,412				42,223
Tax-exempt			12,172				12,180
Federal Home Loan Bank stock			13,620				19,522
Other			6,206				4,035
Total interest income			1,173,688				1,043,859
Interest Expense
Deposits			98,513				111,934
Federal Home Loan Bank advances			27,135				20,994
Total interest expense			125,648				132,928
Net interest income			1,048,040				910,931
Provision for loan losses			-				-
Net Interest Income After Provision for Loan Losses			1,048,040				910,931
Noninterest income
Service charges, deposits			92,892				89,344
Mortgage banking activities			101,297				43,176
Other			35,133				55,112
Total noninterest income			229,322				187,632
Noninterest expense
Salaries and employee benefits			639,162				640,590
Occupancy and equipment			200,282				229,189
Data processing			131,633				139,590
Loss on sale of other real estate, net			4,000				7,044
Interchange			21,503				15,594
Advertising			13,105				24,537
FDIC inurance premiums			37,084				41,400
Other real estate			5,529				8,852
Professional fees			118,545				133,174
Insurance			14,957				23,548
Other			61,287				81,471
Total noninterest expense			1,247,087				1,344,989
Net Income (Loss) Before Income Taxes			30,275				(246,426	)
Provision for Income Taxes			-				-
Net Income (Loss)		$	30,275			$	(246,426	)
Basic and Diluted Earnings (Loss) Per Share		$	0.05			$	(0.48	)

 

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

 

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

		Three Months Ended March 31,
		2015				2014
		(Unaudited)
Net Income (Loss)		$	30,275			$	(246,426	)
Other Comprehensive Income
Net change in unrealized gains on investment securities available-for-sale			53,325				56,407
Less:  reclassification adjustment for realized gains (losses) included in net loss			-				-
Other comprehensive income before income tax			53,325				56,407
Tax expense (benefit), net of deferred tax asset valuation  impact of $18,131 and $19,178, respectively			-				-
Comprehensive Income (Loss)		$	83,600			$	(190,019	)

 

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

 

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

		(Unaudited)
																		Accumulated
																		Other
						Common				Paid-in				Retained				Comprehensive
		Shares				Stock				Capital				Earnings				Income (Loss)				Total
Balance at January 1, 2015			667,898			$	6,679			$	4,683,434			$	8,607,914			$	(16,760	)		$	13,281,267
Net income			-				-				-				30,275				-				30,275
Other comprehensive income			-				-				-				-				53,325				53,325
Balance at March 31, 2015			667,898			$	6,679			$	4,683,434			$	8,638,189			$	36,565			$	13,364,867

 

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

 

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

		Three Months Ended March 31,
		2015				2014
		(Unaudited)
Operating activities:
Net income (loss)		$	30,275			$	(246,426	)
Items not requiring cash:
Depreciation			108,736				119,667
Provision for loan losses			-				-
Amortization of premiums on securities			25,610				32,807
Change in fair value of mortgage servicing rights			5,439				9,883
Loss on sale of other real estate			4,000				7,044
ESOP shares earned			5,444				5,530
Amortization of mortgage servicing rights			28,572				25,842
Loans originated for sale			(3,333,065	)			(1,509,087	)
Proceeds from loan sold			2,556,278				1,150,396
Gain on sale of loans			(62,788	)			(20,034	)
Loss on sale of premises and equipment			-				1,215
Net change in:
Interest receivable and other assets			(59,522	)			1,633
Interest payable and other liabilities			184,706				19,481
Net cash used in operating activities			(506,315	)			(402,049	)
Investing activities:
Proceeds from calls and maturities of available-for-sale securities			296,397				363,411
Net change in loans			(5,479,143	)			(649,379	)
Proceeds from sale of other real estate			6,000				362,792
Payment for sale of branch, net			-				(13,112,513	)
Proceeds from sale of premises and equipment			-				6,538
Purchases of premises and equipment			(22,802	)			(25,772	)
Net cash used in investing activities			(5,199,548	)			(13,054,923	)
Financing activities:
Proceeds from stock conversion			-				2,371,945
Net change in deposits			364,328				(1,199,170	)
Proceeds from Federal Home Loan Bank advances			2,000,000				10,000,000
Repayment of Federal Home Loan Bank advances			(1,000,000	)			-
Net cash provided by financing activities			1,364,328				11,172,775
Net Decrease in Cash and Cash Equivalents			(4,341,535	)			(2,284,197	)
Cash and Cash Equivalents, Beginning of Period			13,444,597				10,322,076
Cash and Cash Equivalents, End of Period		$	9,103,062			$	8,037,879
Additional Cash Flows Information:
Interest paid		$	105,627			$	103,627
Loans transferred to other real estate			-				207,000
Capitalization of mortgage serving rights			25,088				9,498

 

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

 

 

Edgewater Bancorp, Inc.

Form 10-Q

 

Notes to Condensed Consolidated Financial Statements

 

Note 1: Nature of Operation and Conversion

 

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

 

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

 

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

 

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

 

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

 

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

 

Note 2: Basis of Presentation

 

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

 

 

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

 

Note 3: Principles of Consolidation

 

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

 

Note 4: Securities

 

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

 

		March 31, 2015
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency		$	4,990,337			$	7,847			$	29,130			$	4,969,054
State and political subdivisions			3,353,773				22,948				4,425				3,372,296
Mortgage-backed -Government-Sponsored Enterprise (GSE)-residential			3,141,163				33,238				5,296				3,169,105
Collateralized mortgage obligations-GSE			927,545				11,383				-				938,928
Total available-for-sale securities		$	12,412,818			$	75,416			$	38,851			$	12,449,383

 

 

		December 31, 2014
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Available-for-sale securities:
U.S. Government and federal agency		$	5,002,617			$	3,230			$	66,017			$	4,939,830
State and political subdivisions			3,354,828				20,436				14,179				3,361,085
Mortgage-backed-Government-Sponsored Enterprise (GSE)-residential			3,357,163				32,790				5,951				3,384,002
Collateralized mortgage obligations-GSE			1,020,217				12,931				-				1,033,148
Total available-for-sale securities		$	12,734,825			$	69,387			$	86,147			$	12,718,065

 

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

 

		March 31, 2015								December 31, 2014
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
		(Unaudited)
Within one year		$	1,295,600			$	1,298,798			$	795,000			$	795,723
After one through five years			7,048,510				7,042,552				7,562,445				7,505,192
			8,344,110				8,341,350				8,357,445				8,300,915
Mortgage-backed -GSE residential			3,141,163				3,169,105				3,357,163				3,384,002
Collateralized mortgage obligations-GSE			927,545				938,928				1,020,217				1,033,148
		$	12,412,818			$	12,449,383			$	12,734,825			$	12,718,065

 

The carrying value of investment securities pledged as collateral, to secure public deposits and for other purposes was $318,284 at March 31, 2015 (unaudited) and $345,931 at December 31, 2014.

 

For the three month period ended March 31, 2015 and March 31, 2014, there were no sales of securities available-for-sale.

 

Certain investments in debt securities have fair values at an amount less than their historical cost. Total fair value of these investments at March 31, 2015 (unaudited) and December 31, 2014 was $5,230,559 and $6,066,781, which is approximately 42% and 48%, respectively, of the Company’s investment portfolio. These declines primarily resulted from changes in market interest rates since the securities were purchased.

 

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

 

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

 

 

Investment securities with unrealized losses were as follows:

 

		March 31, 2015
		Less than 12 Months								12 Months or Longer								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency		$	-			$	-			$	3,525,417			$	29,130			$	3,525,417			$	29,130
State and political subdivisions			-				-				495,575				4,425				495,575				4,425
Mortgage-backed -GSE residential			1,209,567				5,296				-				-				1,209,567				5,296
		$	1,209,567			$	5,296			$	4,020,992			$	33,555			$	5,230,559			$	38,851

 

		December 31, 2014
		Less than 12 Months								12 Months or Longer								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Available-for-sale securities:
U.S. Government and federal agency		$	-			$	-			$	3,492,139			$	66,017			$	3,492,139			$	66,017
State and political subdivisions			804,572				2,604				488,425				11,575				1,292,997				14,179
Mortgage-backed -GSE residential			1,281,645				5,951				-				-				1,281,645				5,951
		$	2,086,217			$	8,555			$	3,980,564			$	77,592			$	6,066,781			$	86,147

 

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

 

Note 5: Loans and Allowance

 

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

 

Loans Receivable

 

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

 

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

 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. There were no changes in the Company’s

 

 

nonaccrual policy during the three month-end periods ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited).

 

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

 

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

 

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

 

Allowance for Loan Losses

 

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

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

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

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan

 

 

basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

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

 

Categories of loans receivable include:

 

		March 31,				December 31,
		2015				2014
		(Unaudited)
Real estate loans:
Residential 1-4 family		$	44,757,556			$	45,353,599
Commercial			28,883,604				27,908,662
Construction and land			1,907,144				1,523,281
Total real estate			75,548,304				74,785,542
Commercial and industrial			5,434,358				5,536,805
Warehouse Line			5,000,004				-
Consumer loans:
Home equity loans and lines of credit			9,133,414				9,331,608
Other consumer loans			898,860				883,864
Total consumer			10,032,274				10,215,472
Gross loans			96,014,940				90,537,819
Less
Net deferred loan fees			(14,815	)			(17,057	)
Allowance for loan losses			1,071,087				1,075,351
Net loans		$	94,958,668			$	89,479,525

 

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

 

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

 

Commercial Real Estate including Construction and Land: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Construction and land real estate loans are usually based upon

 

 

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

 

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

 

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

 

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

 

		Residential				Commercial				Commercial				Warehouse
		1-4 Family				Real Estate				and Industrial				Line				Consumer				Total
		(Unaudited)
Three Months Ended March 31, 2015:
Balance, beginning of period		$	222,618			$	503,621			$	248,388			$	-			$	100,724			$	1,075,351
Provision (credit) for loan losses			(15,535	)			20,742				(21,672	)			28,812				(12,347	)			-
Loans charged to the allowance			-				(5,364	)			-				-				-				(5,364	)
Recoveries of loans previously charged off			-				1,100				-				-				-				1,100
Balance, end of period		$	207,083			$	520,099			$	226,716			$	28,812			$	88,377			$	1,071,087
Three Months Ended March 31, 2014:
Balance, beginning of period		$	188,325			$	587,331			$	138,268			$	-			$	147,217			$	1,061,141
Provision (credit) for loan losses			52,322				(97,156	)			19,242				-				25,592				-
Loans charged to the allowance			(20,984	)			-				-				-				-				(20,984	)
Recoveries of loans previously charged off			2,300				88,754				-				-				400				91,454
Balance, end of period		$	221,963			$	578,929			$	157,510			$	-			$	173,209			$	1,131,611

 

 

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

 

		Residential				Commercial				Commercial				Warehouse
		1-4 Family				Real Estate				and Industrial				Line				Consumer				Total
		(Unaudited)
At March 31, 2015:
Allowance:
Balance, end of period		$	207,083			$	520,099			$	226,716			$	28,812			$	88,377			$	1,071,087
Ending balance: individually evaluated for impairment		$	13,634			$	3,992			$	-			$	-			$	621			$	18,247
Ending balance: collectively evaluated for impairment		$	193,449			$	516,107			$	226,716			$	28,812			$	87,756			$	1,052,840
Loans:
Ending balance		$	44,757,556			$	30,790,748			$	5,434,358			$	5,000,004			$	10,032,274			$	96,014,940
Ending balance individually evaluated for impairment		$	2,008,593			$	601,462			$	-			$	-			$	160,049			$	2,770,104
Ending balance collectively evaluated for impairment		$	42,748,963			$	30,189,286			$	5,434,358			$	5,000,004			$	9,872,225			$	93,244,836

 

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

 

Internal Risk Categories

 

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

 

RISK RATING 1 – EXCELLENT

 

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

 

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

 

RISK RATING 2 – STRONG

 

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

 

Specific: Financial statements are current, of excellent quality and in adequate detail. Financial condition is very good and compares favorably to the industry average. Statements reflect a stable

 

 

record of earnings over time and consistent profitability. Cash flow is strong relative to historical and projected debt service requirements. The borrower consistently adheres to the repayment schedules for both principal and interest. The borrower adheres to all loan covenants. Management (or individual) integrity and ability are outstanding.

 

RISK RATING 3 – ACCEPTABLE

 

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

 

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

 

RISK RATING 4 – WATCH

 

General: Loans in this category are considered to be acceptable credit quality, but contain greater credit risk than Risk Rating 3 loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that potential weaknesses do not emerge. The level of risk in a Watch loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

 

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

 

RISK RATING 5 – SPECIAL MENTION

 

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

 

 

Specific: Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill-proportioned balance sheet (increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention (5) rating. Nonfinancial reasons for rating a credit Special Mention (5) include management problems, pending litigation, an ineffective loan agreement or other material structural weaknesses, and any other significant deviation from prudent lending practices.

 

RISK RATING 6 – SUBSTANDARD

 

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

 

Specific: Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. The financial statements may be missing, seriously outdated, of poor quality, or lacking in important details. Financial condition is less than satisfactory. The borrower is experiencing negative trends and material losses. The primary source of cash flow is inadequate to meet current debt service requirements, and unless present conditions improve is potentially inadequate to meet projected debt service requirements. The borrower may have reached the point of employing its secondary source of cash flow. The borrower inconsistently adheres to repayment schedules for either principal or interest. The borrower may have violated one or more financial or other covenants, reflecting unsatisfactory liquidity and/or capitalization. Either the integrity or the ability of management may be in question. For some Substandard (6) assets, the likelihood of full collection of interest and principal may be in doubt; such assets should be placed on nonaccrual.

 

RISK RATING 7 – DOUBTFUL

 

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

 

Specific: An asset in this category has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity and capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, and the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on new information. Because of high probability of loss, nonaccrual accounting treatment is required for Doubtful (7) assets.

 

RISK RATING 8 – LOSS

 

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

 

Specific: With Loss (8) assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified Loss (8), there is little prospect of collecting either its principal or interest. Losses are to be recorded in the period an obligation becomes uncollectable.

 

 

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2015:

 

		Residential				Commercial				Construction				Commercial				Warehouse								Other
		1-4 Family				Real Estate				and Land				and Industrial				Line				Home Equity				Consumer				Total
		(Unaudited)
Pass (1-4)		$	44,157,048			$	27,349,151			$	1,737,378			$	5,434,358			$	5,000,004			$	9,110,628			$	898,860			$	93,687,427
Special Mention (5)			-				304,255				-				-				-				-				-				304,255
Substandard (6)			600,508				1,230,198				169,766				-				-				22,786				-				2,023,258
Doubtful (7)			-				-				-				-				-				-				-				-
Loss (8)			-				-				-				-				-				-				-				-
Total		$	44,757,556			$	28,883,604			$	1,907,144			$	5,434,358			$	5,000,004			$	9,133,414			$	898,860			$	96,014,940

 

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

 

		Residential				Commercial				Construction				Commercial				Warehouse								Other
		1-4 Family				Real Estate				and Land				and Industrial				Line				Home Equity				Consumer				Total
Pass (1-4)		$	44,618,696			$	25,726,754			$	1,344,107			$	5,536,805			$	-			$	9,321,255			$	883,864			$	87,431,481
Special Mention (5)			-				219,157				-				-				-				-				-				219,157
Substandard (6)			734,903				1,962,751				179,174				-				-				10,353				-				2,887,181
Doubtful (7)			-				-				-				-				-				-				-				-
Loss (8)			-				-				-				-				-				-				-				-
Total		$	45,353,599			$	27,908,662			$	1,523,281			$	5,536,805			$	-			$	9,331,608			$	883,864			$	90,537,819

 

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2015:

 

																										Total Loans >
		30-59 Days				60-89 Days				Greater Than				Total								Total				90 Days &
		Past Due				Past Due				90 Days				Past Due				Current				Loans				Accruimg
		(Unaudited)
Residential 1-4 family		$	662,478			$	638,968			$	600,508			$	1,901,954			$	42,855,602			$	44,757,556			$	-
Commercial real estate			-				-				-				-				28,883,604				28,883,604				-
Construction and land			272,804				-				13,861				286,665				1,620,479				1,907,144				-
Commercial and industrial			-				-				-				-				5,434,358				5,434,358				-
Warehouse Line			-				-				-				-				5,000,004				5,000,004				-
Home equity			180,200				-				22,786				202,986				8,930,428				9,133,414				-
Other consumer			-				-				-				-				898,860				898,860				-
		$	1,115,482			$	638,968			$	637,155			$	2,391,605			$	93,623,335			$	96,014,940			$	-

 

 

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

 

																										Total Loans >
		30-59 Days				60-89 Days				Greater Than				Total								Total				90 Days &
		Past Due				Past Due				90 Days				Past Due				Current				Loans				Accruimg
Residential 1-4 family		$	1,147,797			$	557,817			$	734,903			$	2,440,517			$	42,913,082			$	45,353,599			$	-
Commercial real estate			11,782								-				11,782				27,896,880				27,908,662				-
Construction and land			27,817				-				21,972				49,789				1,473,492				1,523,281				-
Commercial and industrial			-				-				-				-				5,536,805				5,536,805				-
Warehouse Line			-				-				-				-				-				-				-
Home equity			54,224				25,601				10,353				90,178				9,241,430				9,331,608				-
Other consumer			-				6,057				-				6,057				877,807				883,864				-
		$	1,241,620			$	589,475			$	767,228			$	2,598,323			$	87,939,496			$	90,537,819			$	-

 

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

 

		March 31				December 31,
		2015				2014
		(Unaudited)
Residential 1-4 family		$	1,433,363			$	1,397,529
Commercial real estate			11,097				729,032
Construction and land			204,267				49,789
Commercial and industrial			-				-
Warehouse Line			-				-
Home equity			80,710				76,937
Other consumer			-				-
		$	1,729,437			$	2,253,287

 

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

 

 

The following table presents impaired loans and specific valuation allowance based on class level at March 31, 2015:

 

		Residential				Commercial				Construction				Commercial				Warehouse
		1-4 Family				Real Estate				and Land				and Industrial				Line				Home Equity				Total
		(Unaudited)
Impaired loans without a specific allowance:
Recorded investment		$	912,494			$	282,264			$	103,834			$	-			$	-			$	79,339			$	1,377,931
Unpaid principal balance			987,444				282,264				103,834				-				-				79,339				1,452,881
Impaired loans with a specific allowance:
Recorded investment			1,096,099				11,097				204,267				-				-				80,710				1,392,173
Unpaid principal balance			1,127,159				12,180				227,375				-				-				84,407				1,451,121
Specific allowance			13,634				43				3,949				-				-				621				18,247
Total impaired loans:
Recorded investment			2,008,593				293,361				308,101				-				-				160,049				2,770,104
Unpaid principal balance			2,114,603				294,444				331,209				-				-				163,746				2,904,002
Specific allowance			13,634				43				3,949				-				-				621				18,247

 

The following table presents average impaired loans based on class level for the three months ended March 31, 2015 and 2014:

 

		Residential				Commercial				Construction				Commercial				Warehouse
		1-4 Family				Real Estate				and Land				and Industrial				Line				Home Equity				Total
		(Unaudited)
Average recorded investment in impaired loans for the three months ended March 31, 2015		$	1,786,178			$	295,734			$	330,402			$	-			$	-			$	153,885			$	2,566,199
Average recorded investment in impaired loans for the three months ended March 31, 2014			3,026,450				1,581,800				168,577				-				-				259,538			$	5,036,365

 

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

 

		Residential				Commercial				Construction				Commercial				Warehouse
		1-4 Family				Real Estate				and Land				and Industrial				Line				Home Equity				Total
Impaired loans without a specific allowance:
Recorded investment		$	1,396,878			$	1,003,575			$	290,956			$	-			$	-			$	86,296			$	2,777,705
Unpaid principal balance			1,475,218				1,121,615				304,827				-				-				92,277				2,993,937
Impaired loans with a specific allowance:
Recorded investment			1,330,834				11,782				49,790				-				-				66,583				1,458,989
Unpaid principal balance			1,373,484				12,700				56,120				-				-				69,627				1,511,931
Specific allowance			16,325				46				598				-				-				533				17,502
Total impaired loans:
Recorded investment			2,727,712				1,015,357				340,746				-				-				152,879				4,236,694
Unpaid principal balance			2,848,702				1,134,315				360,947				-				-				161,904				4,505,868
Specific allowance			16,325				46				598				-				-				533				17,502

 

Interest income of $10,696, $28,601 and $61,499 was recognized on impaired loans for the three months ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited) and for year-end December 31, 2014, respectively.

 

 

At March 31, 2015, the Company had several loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

 

The following table presents information regarding troubled debt restructurings by class for the three months ended March 31, 2015 and 2014.

 

Newly classified troubled debt restructurings:

 

		Three Months Ended March 31, 2015												Three Months Ended March 31, 2014
						Pre-				Post								Pre-				Post
						Modification				Modification								Modification				Modification
		Number				Recorded				Recorded				Number				Recorded				Recorded
		of Loans				Balance				Balance				of Loans				Balance				Balance
		(Unaudited)
Residential 1-4 family			-			$	-			$	-				1			$	61,000			$	61,000
Commercial real estate			-				-				-				-				-				-
Construction and land			-				-				-				-				-				-
Commercial and industrial			-				-				-				-				-				-
Warehouse Line			-				-				-				-				-				-
Home equity			-				-				-				-				-				-
Other consumer			-				-				-				-				-				-
			-			$	-			$	-				1			$	61,000			$	61,000

 

The troubled debt restructurings described above increased the allowance for loan losses by $0 and $178 for the three months ended March 31, 2015 and 2014, respectively and resulted in charge offs of $0 and $19,937 for the three months ended March 31, 2015 and 2014, respectively.

 

Newly restructured loans by type of modification:

 

Interest

Total

Only

Term

Combination

Modification

(Unaudited)

Three Months Ended March 31, 2015:

Residential 1-4 family

$

-

$

-

$

-

$

-

Commercial real estate

-

-

-

-

Construction and land

-

-

-

-

Commercial and industrial

-

-

-

-

Warehouse Line

-

-

-

-

Home equity

-

-

-

-

Other consumer

-

-

-

-

$

-

$

-

$

-

$

-

 

 

		Interest												Total
		Only				Term				Combination				Modification
		(Unaudited)
Three Months Ended March 31, 2014:
Residential 1-4 family		$	-			$	61,000			$	-			$	61,000
Commercial real estate			-				-				-				-
Construction and land			-				-				-				-
Commercial and industrial			-				-				-				-
Warehouse Line			-				-				-				-
Home equity			-				-				-				-
Other consumer			-				-				-				-
		$	-			$	61,000			$	-			$	61,000

 

There were no troubled debt restructured loans modified in the past 12 months that subsequently defaulted.

 

At March 31, 2015, the Company held no residential real estate as foreclosed property. Also, at March 31, 2015, there were no consumer mortgage loans in the process of foreclosure according to local requirements of the applicable jurisdictions.

 

Note 6: Disclosures about Fair Value of Assets and Liabilities

 

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

 

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

 

Level 2       Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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

 

Recurring Measurements

 

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

 

 

		March 31, 2015
		Fair Value Measurements Using
						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
		Fair				Assets				Inputs				Inputs
Assets		Value				(Level 1)				(Level 2)				(Level 3)
		(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency		$	4,969,054			$	-			$	4,969,054			$	-
State and political subdivisions			3,372,296				-				3,372,296				-
Mortgage-backed -GSE residential			3,169,105				-				3,169,105				-
Collateralized mortgage obligations-GSE			938,928				-				938,928				-
Mortgage servicing rights			108,754				-				-				108,754

 

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

 

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

 

Available-for-Sale Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy including U.S. Government and federal agency, state and political subdivisions, mortgage-backed securities, and collateralized mortgage debt obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities classified as Level 3.

 

Mortgage Servicing Rights

 

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

 

 

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

 

Level 3 Reconciliation

 

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

 

		Three Months Ended
		2015				2014
		(Unaudited)
Balance, beginning of period		$	114,193			$	148,171
Total changes in fair value  included in earnings			(5,439	)			(9,883	)
Balance, end of period		$	108,754			$	138,288

 

Nonrecurring Measurements

 

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

 

		Fair Value Measurements Using
						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
		Fair				Assets				Inputs				Inputs
Assets		Value				(Level 1)				(Level 2)				(Level 3)
March 31, 2015 (Unaudited)
Collateral-dependent impaired loans,		$	1,373,926			$	-			$	-			$	1,373,926
Net of ALLL
December 31, 2014
Other real estate owned		$	190,000			$	-			$	-			$	190,000
Collateral-dependent impaired loans,			1,441,487				-				-				1,441,487
Net of ALLL

 

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

 

 

Other Real Estate Owned

 

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

 

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

 

Collateral-dependent Impaired Loans, Net of ALLL

 

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

 

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

 

 

Unobservable (Level 3) Inputs

 

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

 

						Valuation				Weighted
		Fair Value				Technique		Unobservable Inputs		Average
At March 31, 2015 (Unaudited):
Collateral-dependent impaired loans		$	1,373,926			Market comparable properties		Marketability discount		0% - 2.54% (1.31%)
Mortgage servicing rights			108,754			Discounted		Constant
						cash flow		prepayment rate		10% - 18% (16.7%)
								Probability
								of default		1% - 8% (1.9%)
								Discount rate		7.6% - 12% (9.6%)
At December 31, 2014:
Other real estate owned		$	190,000			Market comparable		Comparability
						properties		adjustment (%)		Not available
Collateral-dependent impaired loans			1,441,487			Market comparable properties		Marketability discount		10% - 15% (12%)
Mortgage servicing rights			114,193			Discounted		Constant
						cash flow		prepayment rate		8.5% - 16% (11.2%)
								Probability
								of default		1% - 8% (2.1%)
								Discount rate		7.6% - 13.0% (10.4%)

 

Fair Value of Financial Instruments

 

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

 

 

		Fair Value Measurements Using
						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
		Carrying				Assets				Inputs				Inputs
		Amount				(Level 1)				(Level 2)				(Level 3)
		(Unaudited)
At March 31, 2015:
Financial assets:
Cash and cash equivalents		$	9,103,062			$	9,103,062			$	-			$	-
FHLB Stock			1,078,900				-				1,078,900				-
Loans held for sale			862,787				-				862,787
Loans, net of allowance for loan losses			94,958,668				-				-				96,204,000
Accrued interest receivable			291,588				-				291,588				-
Mortgage servicing rights			314,428				-				-				525,730
Financial liabilities:
Deposits			98,857,439				11,577,460				87,501,979				-
FHLB advances			11,000,000				-				11,136,000				-
Accrued interest payable			26,277				-				26,277				-

 

		Fair Value Measurements Using
						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
		Carrying				Assets				Inputs				Inputs
		Amount				(Level 1)				(Level 2)				(Level 3)
At December 31, 2014:
Financial assets:
Cash and cash equivalents		$	13,444,597			$	13,444,597			$	-			$	-
FHLB Stock			1,078,900				-				1,078,900				-
Loans held for sale			48,300				-				48,300
Loans, net of allowance for loan losses			89,479,525				-				-				89,756,000
Accrued interest receivable			302,777				-				302,777				-
Mortgage servicing rights			317,912				-				-				526,647
Financial liabilities:
Deposits			98,493,112				11,730,674				86,842,438				-
Federal Home Loan Bank advances			10,000,000				-				10,098,000				-
Accrued interest payable			6,256				-				6,256				-

 

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

 

Cash and Cash Equivalents and Federal Home Loan Bank Stock

 

The carrying amount approximates fair value.

 

Loan Held for Sale

 

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

 

Loans, Net of Allowance for Loan Losses

 

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

 

 

illiquidity, and the structure and term of the loans along with local economic and market conditions.

 

Accrued Interest Receivable and Payable

 

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

 

Deposits

 

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

 

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

 

Federal Home Loan Bank Advances

 

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

 

Note 7: Accounting Developments

 

Financial Accounting Standards Board (“FASB”)

 

In January 2014, the FASB issued ASU2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” ASU 2014-01 applies to all reporting entities that invest in qualified affordable housing projects through limited liability entities. The pronouncement permits reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. The pronouncement also requires disclosure that enables users of its financial statements to understand the nature of these investments. Under the proportional amortization method, an entity amortized the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The pronouncement should be applied retrospectively for all period presented, effective for annual period and interim reporting period within those annual period, beginning after December 15, 2014. Early adoption was permitted. The adoption of this guidance did not have an effect on the Company’s consolidated financial statements.

 

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

 

 

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

 

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

 

Note 8: Earnings (Loss) Per Share

 

		Three Months Ended March 31,				Three Months Ended March 31,
		2015				2014
		(Unaudited)				(Unaudited)
Net Income (Loss)		$	30,275			$	(246,426	)
Shares outstanding for basic EPS (LPS):
Average shares outstanding			667,898				556,582
Less:  Average unearned ESOP shares			51,110				44,342
			616,788				512,240
Additional dilutive shares			-				-
Shares outstanding for basic and diluted EPS (LPS)			616,788				512,240
Basic and diluted earnings (loss) per share		$	0.05			$	(0.48	)

 

 

Item 2.

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

 

General

 

Management’s discussion and analysis of the financial condition and results of operations at and for three months ended March 31, 2015 and 2014 is intended to assist in understanding the financial condition and results of operations of the Company on a consolidated basis. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

 

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·

statements of our goals, intentions and expectations;

 

·

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

 

·

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

 

·

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.

 

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

competition among depository and other financial institutions;

 

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

changes in consumer spending, borrowing and savings habits;

 

·

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

 

·

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

 

·

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

 

·

changes in the level of government support of housing finance;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

Critical Accounting Policies

 

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

 

Branch Sale

 

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

 

Comparison of Financial Condition at March 31, 2015 and December 31, 2014

 

Total Assets. Total assets increased by $1.6 million, or 1.3%, to $124.0 million at March 31, 2015 from $122.3 million at December 31, 2014. The increase was primarily the result of increases in loans and loans held for sale loans of $5.5 million and $814,000, respectively. This is partially offset by decreases in cash and cash equivalents of $4.3 million.

 

Net Loans. Net loans increased by $5.5 million, or 6.1%, to $95.0 million at March 31, 2015 from $89.5 million at December 31, 2014. During the three months ended March 31, 2015, one-to-four family residential real estate loans decreased $596,000, or 1.3%, to $44.8 million at March 31, 2015 from $45.4 million at December 31, 2014; commercial real estate loans increased $975,000 or 3.5%, to $28.9 million from $27.9 million; construction and land loans increased $384,000, or 25.2%, to $1.9 million from $1.5 million; commercial and industrial loans decreased $102,000, or 1.9%, to $5.4 million to from $5.5 million; warehouse line increased $5.0 million or 100% from $0 at December 31, 2014 and consumer loans, including home equity loans and lines of credit, decreased $183,000, or 1.8%, to $10.0 million from $10.2 million. The increase in commercial real estate is the result of new customer relationships being established. The increase in construction in land is due to residential home construction beginning during the first quarter. The increase in the warehouse line is due to the new volume received through a participation with another financial institution. These are 1-4 family residential loans that are held in the portfolio until they are funded by a third-party. The decreases in the remaining loan classes reflect repayments in excess of originations, and loan sales of refinanced loans.

 

 

Investment Securities. Investment securities available for sale decreased $269,000, or 2.1%, to $12.4 million at March 31, 2015. Mortgage-backed securities including collateralized mortgage obligations, decreased $215,000, or 6.4%, to $3.2 million at March 31, 2015 from $3.4 million at December 31, 2014, and states and political subdivision securities increased $11,000, or 0.3%, to $3.4 million at March 31, 2015 from $3.3 million at December 31, 2014. U.S. government and federal agency securities increased $29,000, or 0.6%, to $5.0 million at March 31, 2015 from $4.9 million at December 31, 2014. There were no securities purchased during the first quarter of 2015. Net unrealized gains on securities recognized in accumulated other comprehensive income increased by $53,300 to an unrealized gain of $36,600 at March 31, 2015 compared to an unrealized loss of $16,700 at December 31, 2014. At March 31, 2015, investment securities classified as available-for-sale consisted entirely of government-sponsored mortgage-backed securities, government-sponsored debentures, state and political subdivision securities, and U.S. government and agency securities with a focus on suitable government-sponsored securities to augment risk-based capital.

 

Real Estate Owned and Other Repossessed Assets. Real estate owned and held for sale decreased $10,000, or 2.1% to $457,000 at March 31, 2015 from $467,000 at December 31, 2014, as we sold $10,000 of foreclosed properties, there were no foreclosed non-performing loans, no recorded valuation adjustments and $4,000 in net loss on sales during the three months ended March 31, 2015. At March 31, 2015 our real estate owned included one land development property and two commercial real estate properties, the largest has a carrying value of $207,000.

 

Deposits. Deposits increased by $364,000, or 0.4%, to $98.9 million at March 31, 2015. Interest-bearing deposits increased $518,000 or 0.6% to $87.3 million at March 31, 2015 from $86.8 million at December 31, 2014. Noninterest bearing decreased $153,000 or 1.3% to $11.6 million at March 31, 2015 from $11.7 million at December 31, 2014.

 

Federal Home Loan Bank Advances and Other Liabilities. Federal Home Loan Bank advances increased $1.0 million, or 10.0% to $11.0 million at March 31, 2015 from $10 million at December 31, 2014. We partially funded the sale of the Decatur branch with $10.0 million in Federal Home Loan Bank advances during the first quarter of 2014. Other liabilities, which include, interest and accounts payable, customer escrow balances, and accruals for items such as employee pension and medical plans, increased $185,000 or 33.7%, to $732,000 at March 31, 2015 from $548,000 at December 31, 2014.

 

Total Equity. Total equity increased $83,600 or 0.6%, to $13.4 million at March 31, 2015. Retained earnings increased $30,300 due to net income at March 31, 2015, as well as an increase of $53,300 in accumulated other comprehensive income due to unrecognized gains on investment securities.

 

 

Delinquencies, Classified Assets and Non-Performing Assets

 

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

 

		Loans Delinquent For
		30-59 Days								60-89 Days								90 Days and Over								Total
		Number				Amount				Number				Amount				Number				Amount				Number				Amount
		(Dollars in thousands)
At March 31, 2015 (unaudited)
Real estate loans:
One- to four-family residential			10			$	662				10			$	639				6			$	601				26			$	1,902
Commercial real estate			-				-				-				-				-				-				-				-
Construction and land			3				273				-				-				2				14				5				287
Total real estate			13				935				10				639				8				615				31				2,189
Commercial and industrial			-				-				-				-				-				-				-				-
Consumer loans:
Home equity loans and lines of credit			5				180				-				-				2				23				7				203
Other consumer			-				-				-				-				-				-				-				-
Total consumer			5				180				-				-				2				23				7				203
Total loans			18			$	1,115				10			$	639				10			$	638				38			$	2,392
At December 31, 2014
Real estate loans:
One- to four-family residential			14			$	1,148				5			$	558				11			$	735				30			$	2,441
Commercial real estate			1				12				-				-				-				-				1				12
Construction and land			1				28				-				-				2				22				3				50
Total real estate			16				1,188				5				558				13				757				34				2,503
Commercial and industrial			-				-				-				-				-				-				-				-
Consumer loans:
Home equity loans and lines of credit			6				54				2				25				1				10				9				89
Other consumer			-				-				1				6				-				-				1				6
Total consumer			6				54				3				31				1				10				10				95
Total loans			22			$	1,242				8			$	589				14			$	767				44			$	2,598

 

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

 

Classified Assets. The following table sets forth our amounts of classified assets as of the dates indicated. Amounts shown at March 31, 2015 and December 31, 2014 include approximately $1.7 million and $2.6 million of nonperforming loans, respectively. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $18,000 and $27,000 at March 31, 2015 and December 31, 2014, respectively.

 

 

		At March 31,				At December 31,
		2015				2014
		(Dollars in thousands)
		(Unaudited)
Classifed assets:
Substandard loans (1)		$	2,023			$	2,887
Doubtful loans			-				-
Loss loans			-				-
Real estate owned and other			-				-
Real estate owned and other repossessed assets			457				467
Total classified assets		$	2,480			$	3,354

 

 

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

 

The decrease in classified assets to $2.5 million at March 31, 2015 from $3.4 million at December 31, 2014 is the continuation of a trend of declining classified assets that has been ongoing since 2009. This decrease was primarily due to the enhanced review of our nonperforming assets, which resulted in significant charge-offs and losses on sales of real estate owned as well as loans paying off. The largest component of classified loans is commercial real estate loans which totaled $1.2 million, or 60.8% of our total classified loans, at March 31, 2015. Our largest classified loan relationship, was a commercial real estate relationship totaling $594,000 at March 31, 2015.

 

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

 

 

		At March 31,				At December 31,
		2015				2014
		(Dollars in thousands)
		(Unaudited)
Non-accrual loans:
Real estate loans:
One- to four-family residential		$	1,433			$	1,811
Commercial real estate			11				729
Construction and land			204				207
Total real estate			1,648				2,747
Commercial and industrial			-				-
Consumer loans:
Home equity loans and lines of credit			81				151
Other consumer			-				-
Total consumer			81				151
Total loans			1,729				2,898
Loans 90 days or more past due and still accruing:
Real estate loans:
One- to four-family residential			-				-
Commercial real estate			-				-
Construction and land			-				-
Total real estate			-				-
Commercial and industrial			-				-
Consumer loans:
Home equity loans and lines of credit			-				-
Other consumer			-				-
Total consumer			-				-
Total loans			-				-
Total non-performing loans			1,729				2,898
Real estate owned and other repossessed assets:
Real estate loans:
One- to four-family residential			-				-
Commercial real estate			397				397
Construction and land			60				70
Total real estate			457				467
Commercial and industrial			-				-
Consumer loans:
Home equity loans and lines of credit			-				-
Other consumer			-				-
Total consumer			-				-
Total real estate owned before loans
in redemption			457				467
Loans in redemption (1)			-				-
Total real estate owned and other
repossessed assets			457				467
Total non-performing assets		$	2,186			$	3,365

 

(table continues on following page)

 

 

		At March 31,				At December 31,
		2015				2014
		(Dollars in thousands)
		(Unaudited)
Troubled debt restructurings:
Real estate loans:
One- to four-family residential		$	978			$	916
Commercial real estate			282				286
Construction and land			260				134
Total real estate			1,520				1,336
Commercial and industrial			-				-
Consumer loans:
Home equity loans and lines of credit			79				2
Other consumer			-				-
Total consumer			79				2
Total loans		$	1,599			$	1,338
Total non-performing loans and troubled
debt restructurings		$	3,328			$	4,236
Ratios:
Non-performing loans to total loans			1.80	%			3.20	%
Non-performing assets to total assets			1.76	%			2.75	%
Non-performing assets and troubled debt
restructurings to total assets			2.68	%			3.46	%

 

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

 

Non-performing assets decreased to $2.2 million, or 1.76% of total assets, at March 31, 2015 from $3.4 million, or 2.75% of total assets, at December 31, 2014. Nonperforming commercial real estate loans decreased $718,000 to $11,000, or 0.6% of total non-performing loans, at March 31, 2015 from $729,000, or 25.2% of total non-performing loans at December 31, 2014. One-to four- family residential nonperforming loans decreased $378,000 to $1.4 million on March 31, 2015 from $1.8 million at December 31, 2014. Our largest non-performing loan relationship was a one-to-four family residential mortgage relationship totaling $258,000 at March 31, 2015.

 

Other Loans of Concern. At March 31, 2015, there were $304,000 of loans designated by management as “special mention,” of which $173,000 is related to one commercial real estate relationship at March 31, 2015 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.

 

Comparison of Operating Results for the Three Months Ended March 31, 2015 and 2014

 

General. Net income for the three months ended March 31, 2015 was $30,000, compared to net loss of $246,000 for the three months ended March 31, 2014, an increase of $276,000. The increase in earnings was primarily due to increases in net interest income, other non-interest income, and decreases in occupancy and equipment and professional fees. The increase in non-interest income is a result of residential mortgage loan sales volume increasing due to rate decreases which resulted in an increase in

 

 

gains booked of $58,000. We also have a decline in occupancy and equipment expense due to the Decatur branch sale that occurred on January 24, 2014.

 

Interest Income. Interest income increased $130,000, or 12.4%, to $1.2 million for the three months ended March 31, 2015 from $1.0 million for the three months ended March 31, 2014. This increase was primarily attributable to a $145,000 increase in interest and fee income on loans receivable. Approximately, $119,000 of interest income was collected on a paid off nonaccrual loan. The average balance of loans during the three months ended March 31, 2015 increased $3.8 million to $91.4 million compared to $87.6 million for the three months ended March 31, 2014, and the average yield on loans increased by 46 basis points to 4.93% for the three months ended March 31, 2015 from 4.47% for the three months ended March 31, 2014. The average balance of investment securities decreased $2.9 million to $12.6 million for the three months ended March 31, 2015 from $15.5 million for the three months ended March 31, 2014, while the average yield on investment securities decreased by 6 basis point to 1.37% for the three months ended March 31, 2015 from 1.43% for the three months ended March 31, 2014, resulting in income on securities decreasing.

 

Interest Expense. Total interest expense decreased $7,000, or 5.5%, to $126,000 for the three months ended March 31, 2015 from $133,000 for the three months ended March 31, 2014. Interest expense on deposit accounts decreased $13,000, or 12.0%, to $99,000 for the three months ended March 31, 2015 from $112,000 for the three months ended March 31, 2014. The decrease was primarily due to a decrease of 7 basis points in the average cost of interest-bearing deposits to 0.46% for the three months ended March 31, 2015 from 0.53% for the three months ended March 31, 2014, reflecting the declining interest rate environment, however, there was an increase of $1.2 million, or 1.4%, in the average balance of deposits to $87.4 million for the three months ended March 31, 2015 from $86.2 million for the three months ended March 31, 2014. The increase in deposits is in demand deposit of $9.7 million and $1.8 million in savings for the three months ended March 31, 2015. This was offset partially by declines of $4.0 million in money market accounts and $6.4 million in certificates of deposit for the three months ended March 31, 2015.

 

Interest expense on FHLB-Indianapolis advances increased $6,000 to $27,000 for the three months ended March 31, 2015 from $21,000 for the three months ended March 31, 2014. The average balance of advances increased by $1.8 million to $9.4 million for the three months ended March 31, 2015 from $7.6 million for the three months ended March 31, 2014. Borrowing increased $10.0 million to fund the Decatur branch sale on January 24, 2014. The average cost on the advances increased 4 basis points to 1.17% for the three months ended March 31, 2015 from 1.13% for the three months ended March 31, 2014.

 

Net Interest Income. Net interest income increased $137,000, or 15.0%, to $1.0 million for the three months ended March 31, 2015 from $911,000 for the three months ended March 31, 2014. The increase reflected an increase in our interest rate spread to 3.55% for the three months ended March 31, 2015 from 3.19% for the three months ended March 31, 2014, and an increase in our net interest margin to 3.65% for the three months ended March 31, 2015 from 3.29% for the three months ended March 31, 2014. The increase in our interest rate spread and net interest margin reflected primarily the increase in interest income in net loans and a decrease in interest expense on deposits.

 

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we recorded a provision for loan losses of $0 for the three months ended March 31, 2015 and $0 for the three months ended March 31, 2014. The allowance for loan losses was $1.1 million, or 1.12% of total loans, at March 31, 2015, compared to $1.1 million, or 1.29% of total loans, at March 31, 2014. Total nonperforming loans were $1.7 million at March 31, 2015, compared to $2.9 million at March 31, 2014. As a percentage of nonperforming loans, the allowance for loan losses was 62.0% at March 31, 2015 compared to 39.0% at March 31, 2014. At March 31, 2015, $576,000 of the $1.7 million in nonperforming loans were contractually current, compared to $1.3 million of $2.6 million at March 31, 2014.

 

 

The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at March 31, 2015 and March 31, 2014. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.

 

Non-Interest Income. Non-interest income increased $42,000, or 22.2%, to $229,000 for the three months ended March 31, 2015 from $188,000 for the three months ended March 31, 2014. The increase was primarily due to an increase of $58,000 in income from mortgage banking activities, which includes gains on sale of loans and changes in the value of mortgage servicing rights. Gains on sale of loans increased as originations, particularly on new home purchases, increased during the period.

 

Non-Interest Expense. Non-interest expense decreased $98,000, or 7.3%, to $1.2 million for the three months ended March 31, 2014 from $1.3 million for the three months ended March 31, 2014. The decrease primarily reflected a decrease of $29,000 in occupancy and equipment and $15,000 in professional fees. Occupancy and equipment decreased as a result of the Decatur branch sale on January 24, 2014. Professional fees declined due to the leveling off of expenses associated with becoming a public company as well as legal expenses associated with non-performing loans. At this time, we do not expect any reductions in non-interest expenses related to our participation in the defined benefit plan because of the continued participation in the plan.

 

 

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

 

		For the Three Months Ended March 31,
		2014				2015								2014
		Average												Average
		Outstanding								Yield/Rate				Outstanding								Yield/Rate
		Balance				Interest				(1)				Balance				Interest				(1)
	(Dollars in thousands)
Interest-earning assets:
Loans		$	91,442			$	1,111				4.93	%		$	87,632			$	966				4.47	%
Investment securities			12,607				43				1.37				15,459				54				1.43
Other interest-earning assets (2)			12,532				20				0.64				9,363				24				1.02
Total interst-earning assets			116,581				1,174				4.08				112,454				1,044				3.77
Noninterest-earning assets			6,666												8,188
Allowance for loan losses			(1,071	)											(1,119	)
Total assets		$	122,176											$	119,523
Interest-earning liabilities:
Demand deposits		$	25,733				24				0.38	%		$	16,005				7				0.19	%
Money market accounts			20,596				15				0.29				24,554				18				0.29
Savings accounts			13,976				7				0.20				12,171				4				0.14
Certificates of deposit			27,127				53				0.79				33,477				83				1.00
Total deposits			87,432				99				0.46				86,207				112				0.53
FHLB-Indianapolis advances			9,378				27				1.17				7,567				21				1.13
Total interest-bearing liabilities			96,810				126				0.53				93,774				133				0.58
Noninterest-bearing demand deposits			12,438												13,133
Other noninterest-bearing liabilities			662												1,431
Total liabilities			109,910												108,338
Equity			12,266												11,185
Total liabilities and equity		$	122,176											$	119,523
Net interest income						$	1,048											$	911
Net interest spread (3)											3.55	%											3.19	%
Net interest-earning assets (4)		$	19,771											$	18,680
Net interest margin (5)											3.65	%											3.29	%
Average interest-earning assets to
interest-bearing liabilities											120.42	%											119.92	%

 

(1)

Yield and rates are annualized.

(2)

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

(3)

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

(4)

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

(5)

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

 

 

Liquidity and Capital Resources

 

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities and calls of securities. We also have the ability to borrow from the FHLB-Indianapolis. At March 31, 2015, we had the capacity to borrow approximately $11.1 million from the FHLB-Indianapolis and an additional $2.0 million on a line of credit with the FHLB-Indianapolis and United Bankers Bank. At March 31, 2015 and December 31, 2014, we had $11.0 million and $10.0 million, respectively, outstanding in advances from the FHLB-Indianapolis.

 

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

 

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $506,000 and $402,000 for the three months ended March 31, 2015 and 2014, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations, offset by principal collections on loan, proceeds from maturing securities and pay downs of mortgage-backed securities and the 2014 net payment on the sale of the branch, was $5.2 million and $13.1 million for three months ended March 31, 2015 and 2014, respectively. During the three months ended March 31, 2015 and 2014, net cash provided by financing activities was $1.3 million and $11.2 million, which consisted primarily of the activity in deposit accounts, the Federal Home Loan Bank advances, and proceeds from the stock conversion.

 

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

 

At March 31, 2015, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $12.4 million, or 10.12% of adjusted total assets, which is above the required level of $4.9 million, or 4.00%; the common equity tier 1 capital ratio of $12.4 million, or 15.54 %, which is above the required level of $3.6 million or 4.5% and the total capital ratio of $13.4 million, or 16.79% of risk-weighted assets, which is above the required level of $6.4 million, or 8.0%. We have opted-out of the accumulated other comprehensive income (AOCI) capital rule that went into effect on January 1, 2015. At December 31, 2014, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $12.3 million, or 10.03% of adjusted total assets, which is above the required level of $6.1 million, or 5.00%; and total risk-based capital of $13.2 million, or 17.87% of risk-weighted assets, which is above the required level of $7.4 million, or 10.00%. Accordingly, the Bank was categorized as well capitalized at March 31, 2015 and December 31, 2014. Management is not aware of any conditions or events since the most recent notification that would change our category.

 

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

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.

Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2015. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2015.

 

During the quarter ended March 31, 2015, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1.

Legal Proceedings

 

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

 

Item 1A.

Risk Factors

 

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

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

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

 

(b)

Not applicable.

 

(c)

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

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

  

Item 6.

Exhibits

 

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

 

 

SIGNATURES

 

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

 

		Edgewater Bancorp, Inc.
Date:  May 13, 2015		/s/ Richard E. Dyer
		Richard E. Dyer
		President and Chief Executive Officer
Date:  May 13, 2015		/s/ Coleen S. Frens-Rossman
		Coleen S. Frens-Rossman
		Senior Vice President and
		Chief Financial Officer

 

 

INDEX TO EXHIBITS

 

3.1

Articles of Incorporation of Edgewater Bancorp, Inc.*

3.2

Bylaws of Edgewater Bancorp, Inc.*

31.1

Certification of Richard E. Dyer, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002

31.2

Certification of Coleen S. Frens-Rossman, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002

32

Certification of Richard E. Dyer, President and Chief Executive Officer, and Coleen S. Frens-Rossman, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following materials from the Company’s Quarterly Report on Form 10Q for the quarter ended March 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Loss; (iv) Condensed Consolidated Statement of Changes in Stockholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (v) Notes to Condensed Consolidated Financial Statements**

 

*

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