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, 2016

 

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 10, 2016, 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, 2016 (unaudited) and December 31, 2015		3
		Condensed Consolidated Statements of Operations for the Three Months Ended March  31, 2016 and 2015 (unaudited)		4
		Condensed Consolidated Statements of Comprehensive  Income (Loss) for the Three Months Ended March  31, 2016 and 2015 (unaudited)		5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March  31, 2016 (unaudited)		6
		Condensed Consolidated Statement of Cash Flows for the Three Months Ended March  31, 2016 and 2015 (unaudited)		7
		Notes to Condensed Consolidated Financial Statements (unaudited)		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		39
Item 4.		Controls and Procedures		39
Part II. Other Information
Item 1.		Legal Proceedings		39
Item 1A.		Risk Factors		39
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3.		Defaults upon Senior Securities		40
Item 4.		Mine Safety Disclosures		40
Item 5.		Other Information		40
Item 6.		Exhibits		40
		Signature Page		41

 

 

Part I. – Financial Information

Financial Statements

 

Edgewater Bancorp, Inc.

Condensed Consolidated Balance Sheets

 

		March 31,				December 31,
		2016				2015
		(Unaudited)
Assets
Cash and due from banks		$	1,025,498			$	877,780
Interest-bearing demand deposits in banks			8,780,568				10,029,113
Cash and cash equivalents			9,806,066				10,906,893
Available-for-sale securities			11,917,327				11,713,738
Loans held for sale			584,750				-
Loans receivable, net of allowance for losses of $1,074,315 and $1,075,374, respectively			107,849,345				106,955,455
Premises and equipment, net			3,590,920				3,606,170
Federal Home Loan Bank (FHLB) stock			686,200				686,200
Other real estate, net			227,100				262,100
Interest receivable			316,735				314,174
Mortgage servicing rights			387,927				408,715
Other assets			561,014				521,943
Total assets		$	135,927,384			$	135,375,388
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing		$	14,639,077			$	13,940,853
Interest-bearing			101,178,098				99,390,003
Total deposits			115,817,175				113,330,856
Federal Home Loan Bank advances			6,000,000				8,000,000
Accrued and other liabilities			752,675				672,470
Total liabilities			122,569,850				122,003,326
Commitments and Contingencies
Temporary Equity
ESOP shares subject to mandatory redemption			53,397				46,197
Stockholders’ Equity
Preferred Stock-shares authorized 5,000,000: none issued or outstanding at $.01 par value			-				-
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			8,590,383				8,650,052
Accumulated other comprehensive income (loss)			23,641				(14,300	)
Total equity			13,304,137				13,325,865
Total liabilities and stockholders’ equity		$	135,927,384			$	135,375,388

 

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

 

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Operations

 

		Three Months Ended March 31,
		2016				2015
		(Unaudited)
Interest Income
Loans, including fees		$	1,168,000			$	1,111,278
Debt securities
Taxable			31,803				30,412
Tax-exempt			10,042				12,172
Federal Home Loan Bank stock			7,351				13,620
Other			10,559				6,206
Total interest income			1,227,755				1,173,688
Interest Expense
Deposits			125,269				98,513
Federal Home Loan Bank advances			23,693				27,135
Total interest expense			148,962				125,648
Net Interest Income			1,078,793				1,048,040
Provision for Loan Losses			-				-
Net Interest Income After Provision for Loan Losses			1,078,793				1,048,040
Noninterest Income
Service charges, deposits			81,419				92,892
Mortgage banking activities			78,062				101,297
Other			20,947				35,133
Total noninterest income			180,428				229,322
Noninterest Expense
Salaries and employee benefits			688,910				639,162
Occupancy and equipment			197,762				200,282
Data processing			141,129				131,633
Loss on sale of other real estate, net			16,500				4,000
Interchange			23,709				21,503
Advertising			23,035				13,105
FDIC inurance premiums			26,579				37,084
Other real estate			1,193				5,529
Professional fees			110,049				118,545
Insurance			14,633				14,957
Other			75,391				61,287
Total noninterest expense			1,318,890				1,247,087
Net Income (Loss) Before Income Taxes			(59,669	)			30,275
Provision for Income Taxes			-				-
Net Income (Loss)		$	(59,669	)		$	30,275
Basic and Diluted Earnings (Loss) Per Share		$	(0.10	)		$	0.05

 

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,
		2016				2015
		(Unaudited)
Net Income (Loss)		$	(59,669	)		$	30,275
Other Comprehensive Income
Net change in unrealized gains on investment securities available-for-sale			37,941				53,325
Less:  reclassification adjustment for realized gains (losses) included in net income (loss)			-				-
Other comprehensive income  before income tax			37,941				53,325
Tax expense (benefit), net of deferred tax asset valuation  impact of $12,900 and $18,131, respectively			-				-
Comprehensive Income (Loss)		$	(21,728	)		$	83,600

 

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, 2016			667,898			$	6,679			$	4,683,434			$	8,650,052			$	(14,300	)		$	13,325,865
Net loss			-				-				-				(59,669	)			-				(59,669	)
Other comprehensive income			-				-				-				-				37,941				37,941
Balance at March 31, 2016			667,898			$	6,679			$	4,683,434			$	8,590,383			$	23,641			$	13,304,137

 

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,
		2016				2015
		(Unaudited)
Operating activities:
Net income (loss)		$	(59,669	)		$	30,275
Items not requiring cash:
Depreciation			105,037				108,736
Provision for loan losses			-				-
Amortization of premiums on securities			22,356				25,610
Change in fair value of mortgage servicing rights			7,646				5,439
Loss on sale of other real estate			16,500				4,000
ESOP shares earned			7,200				5,444
Amortization of mortgage servicing rights			34,045				28,572
Loans originated for sale			(2,962,309	)			(3,333,065	)
Proceeds from loan sold			2,406,594				2,556,278
Gain on sale of loans			(49,938	)			(62,788	)
Gain on sale of premises and equipment			(3,929	)			-
Net change in:
Interest receivable and other assets			(41,632	)			(59,522	)
Interest payable and other liabilities			80,205				184,706
Net cash used in operating activities			(437,894	)			(506,315	)
Investing activities:
Purchases of available-for-sale securities			(1,969,750	)			-
Proceeds from calls and maturities of available-for-sale securities			1,781,746				296,397
Net change in loans			(893,890	)			(5,479,143	)
Proceeds from sale of other real estate			18,500				6,000
Proceeds from sale of premises and equipment			4,500				-
Purchases of premises and equipment			(90,358	)			(22,802	)
Net cash used in investing activities			(1,149,252	)			(5,199,548	)
Financing activities:
Net change in deposits			2,486,319				364,328
Proceeds from short term Federal Home Loan Bank advances			-				2,000,000
Repayment of short term Federal Home Loan Bank advances			-				(1,000,000	)
Repayment of long term Federal Home Loan Bank advances			(2,000,000	)			-
Net cash provided by financing activities			486,319				1,364,328
Net Change in Cash and Cash Equivalents			(1,100,827	)			(4,341,535	)
Cash and Cash Equivalents, Beginning of Period			10,906,893				13,444,597
Cash and Cash Equivalents, End of Period		$	9,806,066			$	9,103,062
Additional Cash Flows Information:
Interest paid		$	125,517			$	105,627
Capitalization of mortgage serving rights			20,904				25,088

 

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

 

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

 

On January 16, 2014, in accordance with a Plan of Conversion and Reorganization, the Bank completed a mutual–to-stock conversion pursuant to which the Bank became the wholly owned subsidiary of Edgewater Bancorp, Inc. (the “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, 2016, 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, 2015 included in Edgewater Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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, 2016
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(Unaudited)
Available-for-sale securities:
U.S. Government and federal agency		$	6,410,592			$	3,880			$	5,067			$	6,409,405
State and political subdivisions			2,554,477				8,628				2,090				2,561,015
Mortgage-backed -Government- Sponsored Enterprise (GSE)-residential			2,351,752				18,542				5,309				2,364,985
Collateralized mortgage obligations-GSE			576,865				5,057				-				581,922
Total available-for-sale securities		$	11,893,686			$	36,107			$	12,466			$	11,917,327

 

 

		December 31, 2015
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Available-for-sale securities:
U.S. Government and federal agency		$	5,952,239			$	925			$	28,222			$	5,924,942
State and political subdivisions			2,555,544				8,357				5,015				2,558,886
Mortgage-backed -Government- Sponsored Enterprise (GSE)-residential			2,566,762				14,222				10,728				2,570,256
Collateralized mortgage obligations-GSE			653,493				6,161				-				659,654
Total available-for-sale securities		$	11,728,038			$	29,665			$	43,965			$	11,713,738

 

The amortized cost and fair value of investment securities at March 31, 2016 and December 31, 2015, 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, 2016								December 31, 2015
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
		(Unaudited)
Within one year		$	500,060			$	500,800			$	1,000,596			$	1,004,319
After one through five years			8,465,009				8,469,620				7,507,187				7,479,509
			8,965,069				8,970,420				8,507,783				8,483,828
Mortgage-backed - GSE residential			2,351,752				2,364,985				2,566,762				2,570,256
Collateralized mortgage obligations-GSE			576,865				581,922				653,493				659,654
		$	11,893,686			$	11,917,327			$	11,728,038			$	11,713,738

 

The carrying value of investment securities pledged as collateral, to secure public deposits and for other purposes was $233,484 at March 31, 2016 (unaudited) and $246,401 at December 31, 2015.

 

For the three month period ended March 31, 2016 and March 31, 2015, 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, 2016 (unaudited) and December 31, 2015 was $5,959,508 and $6,612,243, which is approximately 50% and 56%, 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, 2016
		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		$	3,537,624			$	3,112			$	997,083			$	1,955			$	4,534,707			$	5,067
State and political subdivisions			-				-				497,910				2,090				497,910				2,090
Mortgage-backed -GSE residential			926,891				5,309				-				-				926,891				5,309
		$	4,464,515			$	8,421			$	1,494,993			$	4,045			$	5,959,508			$	12,466

 

		December 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
Available-for-sale securities:
U.S. Government and federal agency		$	3,524,074			$	19,656			$	990,379			$	8,566			$	4,514,453			$	28,222
State and political subdivisions			-				-				494,985				5,015				494,985				5,015
Mortgage-backed -GSE residential			1,602,805				10,728				-				-				1,602,805				10,728
		$	5,126,879			$	30,384			$	1,485,364			$	13,581			$	6,612,243			$	43,965

 

The unrealized losses on the Company’s investments in direct obligations of U.S. Government and federal agencies, state and political subdivision and mortgage-backed GSE residential securities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2016, and December 31, 2015.

 

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, 2016 (unaudited) and March 31, 2015 (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,
		2016				2015
		(Unaudited)
Real estate loans:
Residential 1-4 family		$	44,548,538			$	45,402,431
Commercial			34,125,440				32,374,013
Construction and land			3,983,938				1,975,842
Total real estate			82,657,916				79,752,286
Commercial and industrial			6,839,642				8,147,480
Warehouse line			10,000,000				10,000,000
Consumer loans:
Home equity loans and lines of credit			8,234,164				9,003,016
Other consumer loans			1,170,684				1,101,856
Total consumer			9,404,848				10,104,872
Gross loans			108,902,406				108,004,638
Net deferred loan fees			(21,254	)			(26,191	)
Allowance for loan losses			1,074,315				1,075,374
Net loans		$	107,849,345			$	106,955,455

 

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, 2016:
Balance, beginning of period		$	337,230			$	504,023			$	69,337			$	60,787			$	103,997			$	1,075,374
Provision (credit) for loan losses			(35,318	)			101,860				(43,180	)			(6,155	)			(17,207	)			-
Loans charged to the allowance			(2,020	)			-				-				-				-				(2,020	)
Recoveries of loans previously charged off			562				399				-				-				-				961
Balance, end of period		$	300,454			$	606,282			$	26,157			$	54,632			$	86,790			$	1,074,315
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

 

  

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, 2016 and December 31, 2015:

 

		Residential				Commercial				Commercial				Warehouse
		1-4 Family				Real Estate				and Industrial				Line				Consumer				Total
		(Unaudited)
At March 31, 2016:
Allowance:
Balance, end of period		$	300,454			$	606,282			$	26,157			$	54,632			$	86,790			$	1,074,315
Ending balance: individually evaluated for impairment		$	8,175			$	251			$	-			$	-			$	347			$	8,773
Ending balance: collectively evaluated for impairment		$	292,279			$	606,031			$	26,157			$	54,632			$	86,443			$	1,065,542
Loans:
Ending balance		$	44,548,538			$	38,109,378			$	6,839,642			$	10,000,000			$	9,404,848			$	108,902,406
Ending balance individually evaluated for impairment		$	1,367,743			$	287,673			$	-			$	-			$	117,216			$	1,772,632
Ending balance collectively evaluated for impairment		$	43,180,795			$	37,821,705			$	6,839,642			$	10,000,000			$	9,287,632			$	107,129,774

 

		Residential				Commercial				Commercial				Warehouse
		1-4 Family				Real Estate				and Industrial				Line				Consumer				Total
At December 31, 2015:
Allowance:
Balance, end of period		$	337,230			$	504,023			$	69,337			$	60,787			$	103,997			$	1,075,374
Ending balance: individually evaluated for impairment		$	13,969			$	302			$	-			$	-			$	372			$	14,643
Ending balance: collectively evaluated for impairment		$	323,261			$	503,721			$	69,337			$	60,787			$	103,625			$	1,060,731
Loans:
Ending balance		$	45,402,431			$	34,349,855			$	8,147,480			$	10,000,000			$	10,104,872			$	108,004,638
Ending balance individually evaluated for impairment		$	2,051,278			$	315,658			$	-			$	-			$	122,809			$	2,489,745
Ending balance collectively evaluated for impairment		$	43,351,153			$	34,034,197			$	8,147,480			$	10,000,000			$	9,982,063			$	105,514,893

 

Internal Risk Categories

 

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

 

RISK RATING 1 – EXCELLENT

 

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

 

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

 

RISK RATING 2 – STRONG

 

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

 

 

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

 

RISK RATING 3 – GOOD

 

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

 

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

 

RISK RATING 4 – ACCEPTABLE

 

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

  

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

 

RISK RATING 5 – WATCH

 

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

 

 

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

 

RISK RATING 6 – SPECIAL MENTION

 

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

 

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

 

RISK RATING 7 – SUBSTANDARD

 

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

 

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

 

RISK RATING 8 – DOUBTFUL

 

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

 

Specific: An asset in this category has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity and capital, and lack the resources

 

 

necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, and the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on new information. Because of high probability of loss, nonaccrual accounting treatment is required for Doubtful (8) assets.

 

RISK RATING 9 – LOSS

 

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

 

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

 

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, 2016:

 

		Residential				Commercial				Construction				Commercial				Warehouse								Other
		1-4 Family				Real Estate				and Land				and Industrial				Line				Home Equity				Consumer				Total
		(Unaudited)
Pass (1-5)		$	43,967,789			$	32,348,698			$	3,975,380			$	6,839,642			$	10,000,000			$	8,193,326			$	1,170,684			$	106,495,519
Special Mention (6)			-				-				-				-				-				-				-				-
Substandard (7)			580,749				1,776,742				8,558				-				-				40,838				-				2,406,887
Doubtful (8)			-				-				-				-				-				-				-				-
Loss (9)			-				-				-				-				-				-				-				-
Total		$	44,548,538			$	34,125,440			$	3,983,938			$	6,839,642			$	10,000,000			$	8,234,164			$	1,170,684			$	108,902,406

 

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, 2015:

 

		Residential				Commercial				Construction				Commercial				Warehouse								Other
		1-4 Family				Real Estate				and Land				and Industrial				Line				Home Equity				Consumer				Total
Pass (1-5)		$	44,838,588			$	30,037,894			$	1,966,182			$	8,147,480			$	10,000,000			$	9,003,016			$	1,101,856			$	105,095,016
Special Mention (6)			-				1,553,936				-				-				-				-				-				1,553,936
Substandard (7)			563,843				782,183				9,660				-				-				-				-				1,355,686
Doubtful (8)			-				-				-				-				-				-				-				-
Loss (9)			-				-				-				-				-				-				-				-
Total		$	45,402,431			$	32,374,013			$	1,975,842			$	8,147,480			$	10,000,000			$	9,003,016			$	1,101,856			$	108,004,638

 

 

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2016:

 

																										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		$	760,462			$	156,835			$	580,749			$	1,498,046			$	43,050,492			$	44,548,538			$	-
Commercial real estate			-				-				9,715				9,715				34,115,725				34,125,440				-
Construction and land			21,402				-				8,558				29,960				3,953,978				3,983,938				-
Commercial and industrial			-				-				-				-				6,839,642				6,839,642				-
Warehouse Line			-				-				-				-				10,000,000				10,000,000				-
Home equity			38,668				2,913				-				41,581				8,192,583				8,234,164				-
Other consumer			1,996				-				-				1,996				1,168,688				1,170,684				-
		$	822,528			$	159,748			$	599,022			$	1,581,298			$	107,321,108			$	108,902,406			$	-

  

The following tables present the Company’s loan portfolio aging analysis as of December 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
Residential 1-4 family		$	1,124,518			$	312,454			$	555,497			$	1,992,469			$	43,409,962			$	45,402,431			$	-
Commercial real estate			9,715				-				-				9,715				32,364,298				32,374,013				-
Construction and land			-				23,118				9,660				32,778				1,943,064				1,975,842				-
Commercial and industrial			99,541				-				-				99,541				8,047,939				8,147,480				-
Warehouse Line			-				-				-				-				10,000,000				10,000,000				-
Home equity			72,128				10,288				8,309				90,725				8,912,291				9,003,016				-
Other consumer			-				2,852				-				2,852				1,099,004				1,101,856				-
		$	1,305,902			$	348,712			$	573,466			$	2,228,080			$	105,776,558			$	108,004,638			$	-

 

The following table presents the Company’s nonaccrual loans at March 31, 2016 and December 31, 2015. This table excludes performing troubled debt restructurings.

 

		March 31				December 31,
		2016				2015
		(Unaudited)
Residential 1-4 family		$	580,749			$	1,233,905
Commercial real estate			9,715				9,715
Construction and land			8,558				32,777
Commercial and industrial			-				-
Warehouse Line			-				-
Home equity			40,838				43,712
Other consumer			-				-
		$	639,860			$	1,320,109

 

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, 2016:

 

		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		$	594,124			$	269,400			$	-			$	-			$	-			$	76,378			$	939,902
Unpaid principal balance			663,903				269,400				-				-				-				76,378				1,009,681
Impaired loans with a specific allowance:
Recorded investment			773,619				9,715				8,558				-				-				40,838				832,730
Unpaid principal balance			798,921				11,111				9,116				-				-				44,161				863,309
Specific allowance			8,175				151				100				-				-				347				8,773
Total impaired loans:
Recorded investment			1,367,743				279,115				8,558				-				-				117,216				1,772,632
Unpaid principal balance			1,462,824				280,511				9,116				-				-				120,539				1,872,990
Specific allowance			8,175				151				100				-				-				347				8,773

 

The following table presents average impaired loans based on class level for the three months ended March 31, 2016 and 2015:

 

		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, 2016		$	1,319,341			$	280,998			$	8,558			$	-			$	-			$	120,012			$	1,728,909
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

 

 

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

 

		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		$	848,467			$	273,166			$	-			$	-			$	-			$	79,097			$	1,200,730
Unpaid principal balance			921,718				273,166				-				-				-				79,097				1,273,981
Impaired loans with a specific allowance:
Recorded investment			1,202,811				9,715				32,777				-				-				43,712				1,289,015
Unpaid principal balance			1,259,063				11,111				36,696				-				-				45,687				1,352,557
Specific allowance			13,969				129				173				-				-				372				14,643
Total impaired loans:
Recorded investment			2,051,278				282,881				32,777				-				-				122,809				2,489,745
Unpaid principal balance			2,180,781				284,277				36,696				-				-				124,784				2,626,538
Specific allowance			13,969				129				173				-				-				372				14,643

 

Interest income of $11,622, $10,696 and $41,740 was recognized on impaired loans for the three months ended March 31, 2016 (unaudited) and March 31, 2015 (unaudited) and for year-end December 31, 2015, respectively.

 

At March 31, 2016, 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. Total troubled debt restructured loan balance on ten loans was $1.2 million for the three months ended March 31, 2016 (unaudited).

 

There were no troubled debt restructurings for the three months ended March 31, 2016 and 2015.

 

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

 

At March 31, 2016, the Company held no residential real estate as foreclosed property. Also, at March 31, 2016, 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, 2016 (unaudited) and for the year end December 31, 2015:

 

		March 31, 2016
		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		$	6,409,405			$	-			$	6,409,405			$	-
State and political subdivisions			2,561,015				-				2,561,015				-
Mortgage-backed - GSE residential			2,364,985				-				2,364,985				-
Collateralized mortgage obligations-GSE			581,922				-				581,922				-
Mortgage servicing rights			75,530				-				-				75,530

 

		December 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)
Available-for-sale securities:
U.S. Government and federal agency		$	5,924,942			$	-			$	5,924,942			$	-
State and political subdivisions			2,558,886				-				2,558,886				-
Mortgage-backed - GSE residential			2,570,256				-				2,570,256				-
Collateralized mortgage obligations-GSE			659,654				-				659,654				-
Mortgage servicing rights			83,176				-				-				83,176

 

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, 2016 (unaudited) and the year ended December 31, 2015. 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 GSE, and collateralized mortgage debt obligations GSE. 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
		2016				2015
		(Unaudited)
Balance, beginning of period		$	83,176			$	114,193
Total changes in fair value included in earnings			(7,646	)			(5,439	)
Balance, end of period		$	75,530			$	108,754

 

 

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, 2016 (unaudited) and December 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)
March 31, 2016 (Unaudited)
Collateral-dependent impaired loans,		$	823,957			$	-			$	-			$	823,957
Net of ALLL
December 31, 2015
Other real estate owned		$	202,100			$	-			$	-			$	202,100
Collateral-dependent impaired loans,			1,274,372				-				-				1,274,372
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, 2016 (Unaudited):
Collateral-dependent		$	823,957			Market comparable		Marketability
impaired loans						properties		discount		10% - 15% (10.5%)
Mortgage servicing rights			75,530			Discounted		Constant
						cash flow		prepayment rate		8.0% - 16% (11.5%)
								Probability
								of default		1% - 8% (1.9%)
								Discount rate		7.6% - 12% (10.5%)
At December 31, 2015:
Other real estate owned		$	202,100			Market comparable		Comparability
						properties		adjustment (%)		Not available
Collateral-dependent						Market comparable		Marketability
impaired loans			1,274,372			properties		discount		10% - 15% (11.4%)
Mortgage servicing rights			83,176			Discounted		Constant
						cash flow		prepayment rate		8.8% - 16% (11.9%)
								Probability
								of default		1% - 8% (1.6%)
								Discount rate		5.6% - 12.0% (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, 2016 and December 31, 2015.

 

		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, 2016:
Financial assets:
Cash and cash equivalents		$	9,806,066			$	9,806,066			$	-			$	-
FHLB Stock			686,200				-				686,200				-
Loans held for sale			584,750				-				584,750
Loans, net of allowance for loan losses			107,849,345				-				-				108,868,000
Accrued interest receivable			316,735				-				316,735				-
Mortgage servicing rights			312,397				-				-				591,526
Financial liabilities:
Deposits			115,817,175				14,639,077				101,352,098				-
FHLB advances			6,000,000				-				6,097,000				-
Accrued interest payable			29,582				-				29,582				-

 

		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, 2015:
Financial assets:
Cash and cash equivalents		$	10,906,893			$	10,906,893			$	-			$	-
FHLB Stock			686,200				-				686,200				-
Loans, net of allowance for loan losses			106,955,455				-				-				107,347,000
Accrued interest receivable			314,174				-				314,174				-
Mortgage servicing rights			325,539				-				-				612,290
Financial liabilities:
Deposits			113,330,856				13,940,853				99,414,003				-
Federal Home Loan Bank advances			8,000,000				-				8,063,000				-
Accrued interest payable			6,137				-				6,137				-

 

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 May 2014, the FASB issued ASU2014-09, “Revenue from contracts with Customers” (Topic 606) ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  This guidance is effective prospectively for the Company for annual and interim periods beginning after December 15, 2017.  The Company is currently evaluating the effect the guidance will have on the Company’s consolidated financial statements.

 

In April 2015, the Financial Accounting Standards Board (FASB) issued ASU2015-03 “Interest-imputation of interest” (Subtopic 835-30) simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.

 

 

This update will be effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. The adoption of this guidance is not expected to have a significant effect on the Company’s consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement –Period Adjustments (Topic 805)”.  The amendments clarify that an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  The acquirer needs to record, in the same period’s financial statements, the effect of changes in depreciation, amortization, or other income as a result of the change to the provisional amounts as if the accounting had been completed at the acquisition date.  This amendment requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item as if the provisional adjustments had been recognized as of the acquisition date.  This guidance is effective for annual and interim periods beginning after December 15, 2015.  The adoption of the 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,
		2016				2015
		(Unaudited)				(Unaudited)
Net Income (Loss)		$	(59,669	)		$	30,275
Shares outstanding for basic EPS (LPS):
Average shares outstanding			667,898				667,898
Less:  Average unearned ESOP shares			48,973				51,110
			618,925				616,788
Additional dilutive shares			-				-
Shares outstanding for basic and diluted EPS (LPS)			618,925				616,788
Basic and diluted earnings (loss) per share		$	(0.10	)		$	0.05

 

 

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, 2016 and 2015 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.

 

Forward Looking Statements

 

This report contains forward-looking statements that are based on management’s beliefts, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and our company. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. We undertake no obligation to update, amend, or clarify forward looking-statements, whether as a result of new information, future events (whether anticipated or unanticipated), or other Future Factors include, among others, changes in interest rates and interest rates relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation or actions by bank regulators; changes in tax laws; our ability to manage expenses; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economies; and risk factors described in our annual report on Form 10-K for the year ended December 31, 2015. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.

 

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, 2015.

 

Comparison of Financial Condition at March 31, 2016 and December 31, 2015

 

Total Assets. Total assets increased by $552,000, or 0.4%, to $135.9 million at March 31, 2016 from $135.4 million at December 31, 2015. The increase was primarily the result of increases in loans and loans held for sale loans of $894,000 and $585,000, respectively. This is partially offset by decreases in cash and cash equivalents of $1.1 million.

 

Net Loans. Net loans increased by $894,000, or 0.8%, to $107.8 million at March 31, 2016 from $107.0 million at December 31, 2015. During the three months ended March 31, 2016, one-to- four family residential real estate loans decreased $854,000, or 1.9%, to $44.5 million at March 31, 2016 from $45.4 million at December 31, 2015; commercial real estate loans increased $1.8 million or 5.4%, to $34.1 million from $32.4 million; construction and land loans increased $2.0 million, or

 

  

101.6%, to $4.0 million from $2.0 million; commercial and industrial loans decreased $1.3 million, or 16.0%, to $6.8 million to from $8.1 million; warehouse line remained the same at $10.0 million at March 31, 2016 and December 31, 2015 and consumer loans, including home equity loans and lines of credit, decreased $700,000, or 6.9%, to $9.4 million from $10.1 million. The increase in commercial real estate is the result of new customer relationships being established. The increase in construction and land is due to residential home construction and commercial real estate construction beginning during the first quarter. 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 increased $204,000, or 1.7%, to $11.9 million at March 31, 2016 from $11.7 million at December 31, 2015. Mortgage-backed securities including collateralized mortgage obligations, decreased $283,000, or 8.8%, to $2.9 million at March 31, 2016 from $3.2 million at December 31, 2015, and states and political subdivision securities increased $2,000, or 0.1%, to $2.6 million at March 31, 2016 from $2.6 million at December 31, 2015. U.S. government and federal agency securities increased $484,000, or 8.1%, to $6.4 million at March 31, 2016 from $6.0 million at December 31, 2015. There were three securities purchased for $2.0 million and one security called for $1.0 million during the first quarter of 2016. Net unrealized gains on securities recognized in accumulated other comprehensive income (loss) increased by $38,000 to an unrealized gain of $23,641 at March 31, 2016 compared to an unrealized loss of $14,300 at December 31, 2015. At March 31, 2016, 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 $35,000, or 13.4% to $227,100 at March 31, 2016 from $262,100 at December 31, 2015, as we sold $35,000 of foreclosed properties, there were no foreclosed non-performing loans, no recorded valuation adjustments and $16,500 in net loss on sales during the three months ended March 31, 2016. At March 31, 2016 our real estate owned included two commercial real estate properties, the largest has a carrying value of $202,100.

 

Deposits. Deposits increased by $2.5 million, or 2.2%, to $115.8 million at March 31, 2016 from $113.3 million at December 31, 2015. Interest-bearing deposits increased $1.8 million 1.8% to $101.2 million at March 31, 2016 from $99.4 million at December 31, 2015. Noninterest bearing increased $698,000 or 5.0% to $14.6 million at March 31, 2016 from $13.9 million at December 31, 2015.

 

Federal Home Loan Bank Advances and Other Liabilities. Federal Home Loan Bank advances decreased $2.0 million, or 25.0% to $6.0 million at March 31, 2016 from $8.0 million at December 31, 2015. Other liabilities, which include, interest and accounts payable, customer escrow balances, and accruals for items such as employee pension and medical plans, increased $80,000 or 11.9%, to $753,000 at March 31, 2016 from $672,000 at December 31, 2015.

 

Total Equity. Total equity decreased $22,000 or 0.2%, to $13.3 million at March 31, 2016. Retained earnings decreased $60,000 due to the net loss at March 31, 2016, as well as an increase of $38,000 in accumulated other comprehensive income (loss) 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, 2016 (unaudited)
Real estate loans:
One- to four-family residential			10			$	760				3			$	157				10			$	581				23			$	1,498
Commercial real estate			-				-				-				-				1				10				1				10
Construction and land			1				21				-				-				1				8				2				29
Total real estate			11				781				3				157				12				599				26				1,537
Commercial and industrial			-				-				-				-				-				-				-				-
Warehouse Line			-				-				-				-				-				-				-				-
Consumer loans:
Home equity loans and lines of credit			3				39				1				3				-				-				4				42
Other consumer			1				2				-				-				-				-				1				2
Total consumer			4				41				1				3				-				-				5				44
Total loans			15			$	822				4			$	160				12			$	599				31			$	1,581
At December 31, 2015
Real estate loans:
One- to four-family residential			14			$	1,125				4			$	312				10			$	555				28			$	1,992
Commercial real estate			1				10				-				-				-				-				1				10
Construction and land			-				-				1				23				2				10				3				33
Total real estate			15				1,135				5				335				12				565				32				2,035
Commercial and industrial			1				99				-				-				-				-				1				99
Warehouse Line			-				-				-				-				-				-				-				-
Consumer loans:
Home equity loans and lines of credit			3				72				3				10				1				8				7				90
Other consumer			-				-				1				3				-				-				1				3
Total consumer			3				72				4				13				1				8				8				93
Total loans			19			$	1,306				9			$	348				13			$	573				41			$	2,227

 

The decrease in delinquent loans at March 31, 2016 compared to December 31, 2015 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, 2016 and December 31, 2015 include approximately $2.4 million and $1.4 million of nonperforming loans, respectively. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $9,000 and $15,000 at March 31, 2016 and December 31, 2015, respectively.

 

 

		At March 31,				At December 31,
		2016				2015
		(Dollars in Thousands)
		(Unaudited)
Classifed assets:
Substandard loans (1)		$	2,407			$	1,356
Doubtful loans			-				-
Loss loans			-				-
Real estate owned and other			-				-
Real estate owned and other repossessed assets			227				262
Total classified assets		$	2,634			$	1,618

 

 

(1)

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

 

The increase in classified assets to $2.4 million at March 31, 2016 from $1.4 million at December 31, 2015. This increase was primarily due to the enhanced review of a larger commercial real estate relationship that resulted in being changed to a classified status and moved to nonperforming assets. The largest component of classified loans is commercial real estate loans which totaled $1.8 million, or 73.8% of our total classified loans, at March 31, 2016. Our largest classified loan relationship, was a commercial real estate relationship totaling $995,000 at March 31, 2016.

 

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,
		2016				2015
		(Dollars in Thousands)
		(Unaudited)
Non-accrual loans:
Real estate loans:
One- to four-family residential		$	581			$	1,234
Commercial real estate			10				9
Construction and land			8				33
Total real estate			599				1,276
Commercial and industrial			-				-
Consumer loans:
Home equity loans and lines of credit			41				44
Other consumer			-				-
Total consumer			41				44
Total loans			640				1,320
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			640				1,320
Real estate owned and other repossessed assets:
Real estate loans:
One- to four-family residential			-				-
Commercial real estate			202				202
Construction and land			25				60
Total real estate			227				262
Commercial and industrial			-				-
Consumer loans:
Home equity loans and lines of credit			-				-
Other consumer			-				-
Total consumer			-				-
Total real estate owned before loans in redemption			227				262
Loans in redemption (1)			-				-
Total real estate owned and other repossessed assets			227				262
Total non-performing assets		$	867			$	1,582

 

(table continues on following page)

 

 

		At March 31,				At December 31,
		2016				2015
		(Dollars in Thousands)
		(Unaudited)
Troubled debt restructurings:
Real estate loans:
One- to four-family residential		$	1,374			$	957
Commercial real estate			270				273
Construction and land			-				-
Total real estate			1,644				1,230
Commercial and industrial			-				-
Consumer loans:
Home equity loans and lines of credit			76				79
Other consumer			-				-
Total consumer			76				79
Total loans		$	1,720			$	1,309
Total non-performing loans and troubled debt restructurings		$	2,360			$	2,629
Ratios:
Non-performing loans to total loans			0.59	%			1.22	%
Non-performing assets to total assets			0.64	%			1.17	%
Non-performing assets and troubled debt restructurings to total assets			1.74	%			1.94	%

 

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

 

Non-performing assets decreased to $867,000, or 0.64% of total assets, at March 31, 2016 from $1.6 million, or 1.17% of total assets, at December 31, 2015. Nonperforming one-to-four family real estate loans decreased $653,000 to $581,000, or 0.59% of total non-performing loans, at March 31, 2016 from $1.2 million, or 1.22% of total non-performing loans at December 31, 2015. Construction and land nonperforming loans decreased $25,000 to $8,000 on March 31, 2016 from $33,000 at December 31, 2015. Our largest non-performing loan relationship was a one-to-four family residential mortgage relationship totaling $167,000 at March 31, 2016.

 

Other Loans of Concern. At March 31, 2016, there were no loans designated by management as “special mention,” 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, 2016 and 2015

 

General. Net loss for the three months ended March 31, 2016 was $60,000, compared to net income of $30,000 for the three months ended March 31, 2015, a decrease of $90,000. The decrease in earnings was primarily due to increases in net interest income offset by decreases in other non-interest income, and increases in noninterest expense in salaries and benefits and loss on sale of other real estate owned. The decrease in non-interest income is a result of residential mortgage loan sales volume decreasing which resulted in a decrease in gains recorded of $23,000.

 

 

Interest Income. Interest income increased $54,000, or 4.6%, to $1.2 million for the three months ended March 31, 2016 from $1.2 million for the three months ended March 31, 2015. This increase was primarily attributable to a $57,000 increase in interest and fee income on loans receivable. The increase was due to volume increase in new loans. The average balance of loans during the three months ended March 31, 2016 increased $15.1 million to $106.5 million compared to $91.4 million for the three months ended March 31, 2015, and the average yield on loans decreased by 53 basis points to 4.40% for the three months ended March 31, 2016 from 4.93% for the three months ended March 31, 2015. The yield declined because $119,000 of interest was collected on a nonaccrual loan paid off during the first quarter ending March 31, 2015. The average balance of investment securities decreased $1.0 million to $11.6 million for the three months ended March 31, 2016 from $12.6 million for the three months ended March 31, 2015, while the average yield on investment securities increased by 8 basis point to 1.45% for the three months ended March 31, 2016 from 1.37% for the three months ended March 31, 2015, resulting in income on securities decreasing only $1,000.

 

Interest Expense. Total interest expense increased $23,000, or 18.2%, to $149,000 for the three months ended March 31, 2016 from $126,000 for the three months ended March 31, 2015. Interest expense on deposit accounts increased $26,000, or 26.3%, to $125,000 for the three months ended March 31, 2016 from $99,000 for the three months ended March 31, 2015. An increase of 4 basis points in the average cost of interest-bearing deposits to 0.50% for the three months ended March 31, 2015 from 0.46% for the three months ended March 31, 2015, and there was an increase of $12.3 million, or 14.0%, in the average balance of deposits to $99.7 million for the three months ended March 31, 2016 from $87.4 million for the three months ended March 31, 2015. The increase in deposits is in demand deposit of $11.8 million and $884,000 in certificates of deposit for the three months ended March 31, 2016. This was offset partially by declines of $285,000 savings accounts and $69,000 in money market accounts for the three months ended March 31, 2016.

 

Interest expense on FHLB-Indianapolis advances decreased $3,000 to $24,000 for the three months ended March 31, 2016 from $27,000 for the three months ended March 31, 2015. The average balance of advances decreased by $2.9 million to $6.5 million for the three months ended March 31, 2016 from $9.4 million for the three months ended March 31, 2015. The average cost on the advances increased 29 basis points to 1.46% for the three months ended March 31, 2016 from 1.17% for the three months ended March 31, 2015 because shorter term advances have been paid off that had lower yields.

 

Net Interest Income. Net interest income increased $31,000, or 2.9%, to $1.1 million for the three months ended March 31, 2016 from $1.0 million for the three months ended March 31, 2015. The interest rate spread decreased to 3.30% for the three months ended March 31, 2016 from 3.55% for the three months ended March 31, 2015, and decreased our net interest margin to 3.39% for the three months ended March 31, 2016 from 3.65% for the three months ended March 31, 2015. The decrease in our interest rate spread and net interest margin reflected was offset by an increase in our interest earning assets over interest earning liabilities of $1.6 million for the three months ended March 31, 2016.

 

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, 2016 and $0 for the three months ended March 31, 2015. The allowance for loan losses was $1.1 million, or 0.99% of total loans, at March 31, 2016, compared to $1.1 million, or 1.12% of total loans, at March 31, 2015. Total nonperforming loans were $640,000 at March 31, 2016, compared to $1.7 million at March 31, 2015. As a percentage of nonperforming loans, the allowance for loan losses was 167.9.6% at March 31, 2016 compared to 62.0% at March 31, 2015. At March 31, 2016, $33,000 of the $640,000 in nonperforming loans were contractually current, compared to $576,000 of $1.7 million at March 31, 2015.

 

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, 2016 and March 31, 2015. 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 decreased $49,000, or 21.3%, to $180,000 for the three months ended March 31, 2016 from $229,000 for the three months ended March 31, 2015. The decrease was due to a decrease of $23,000 in income from mortgage banking activities, which includes gains on sale of loans and changes in the value of mortgage servicing rights. Gains on sale of loans decreased as originations, particularly on new home purchases, decreased during the period. Also, the other non-interest income category decreased by $14,000 because other real estate property rent being collected has been discontinued since the property has been sold.

 

Non-Interest Expense. Non-interest expense increased $72,000, or 5.8%, to $1.3 million for the three months ended March 31, 2016 from $1.2 million for the three months ended March 31, 2015. The increase primarily reflected an increase of $50,000 in salaries and benefits and $12,500 in loss on sale of other real estate. 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,
		2016												2015
		(Dollars in thousands)
		Average												Average
		Outstanding								Yield/Rate				Outstanding								Yield/Rate
		Balance				Interest				(1)				Balance				Interest				(1)
	(Dollars in thousands)
Interest-earning assets:
Loans		$	106,526			$	1,168				4.40	%		$	91,442			$	1,111				4.93	%
Investment securities			11,550				42				1.45				12,607				43				1.37
Other interest-earning assets (2)			9,544				18				0.75				12,532				20				0.64
Total interst-earning assets			127,620				1,228				3.86				116,581				1,174				4.08
Noninterest-earning assets			7,072												6,666
Allowance for loan losses			(1,073	)											(1,071	)
Total assets		$	133,619											$	122,176
Interest-earning liabilities:
Demand deposits		$	37,489				44				0.47	%		$	25,733				24				0.38	%
Money market accounts			20,527				15				0.29				20,596				15				0.29
Savings accounts			13,691				5				0.16				13,976				7				0.20
Certificates of deposit			28,011				61				0.88				27,127				53				0.79
Total deposits			99,718				125				0.50				87,432				99				0.46
FHLB-Indianapolis advances			6,527				24				1.46				9,378				27				1.17
Total interest-bearing liabilities			106,245				149				0.56				96,810				126				0.53
Noninterest-bearing demand deposits			13,898												12,438
Other noninterest-bearing liabilities			733												662
Total liabilities			120,876												109,910
Equity			12,743												12,266
Total liabilities and equity		$	133,619											$	122,176
Net interest income						$	1,079											$	1,048
Net interest spread (3)											3.30	%											3.55	%
Net interest-earning assets (4)		$	21,375											$	19,771
Net interest margin (5)											3.39	%											3.65	%
Average interest-earning assets to interest-bearing liabilities											120.12	%											120.42	%

 

(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, 2016, we had the capacity to borrow approximately $13.5 million from the FHLB-Indianapolis and an additional $2.0 million on a line of credit with the FHLB-Indianapolis Great Lakes Banker Bank and United Bankers Bank. At March 31, 2016 and December 31, 2015, we had $6.0 million and $8.0 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 $438,000 and $506,000 for the three months ended March 31, 2016 and 2015, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations, offset by principal collections on loan, purchase of securities, proceeds from maturing and callable securities and pay downs of securities was $1.1 million and $5.2 million for the three months ended March 31, 2016 and 2015, respectively. During the three months ended March 31, 2016 and 2015, respectively. Net cash provided by financing activities was $486,000 and $1.4 million, which consisted primarily of the activity in deposit accounts, the Federal Home Loan Bank advances.

 

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, 2016, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $12.6 million, or 9.48% of adjusted total assets, which is above the required level of $5.3 million, or 4.00%; the common equity tier 1 capital ratio of $12.6 million, or 13.91 %, which is above the required level of $4.0 million or 4.5%; the tier 1 capital ratio of $12.6 million or 13.91%, which is above the required level of $5.4 million or 6.0%, and the total capital ratio of $13.7 million, or 15.09% of risk-weighted assets, which is above the required level of $7.3 million, or 8.0%. We opted-out of the accumulated other comprehensive income (AOCI) capital rule that went into effect on January 1, 2015. Implementation of the deductions and other adjustment to Common Equity Tier 1 (CET1) began on January 1, 2015, and will phase in over a four-year period (beginning at 40% on January 1, 2015, and an additional 20% per year thereafter). Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. The implementation of the capital conservation buffer begins on January 1, 2016, at the 0.625% level and will phase in over a four-year period (increasing by that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019). At December 31, 2015, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $12.6 million, or 9.42% of adjusted total assets, which is above the required level of $6.7 million, or 5.00%; and total risk-based capital of $13.7 million, or 15.37% of risk-weighted assets, which is above the required level of $8.9 million, or 10.00%. Accordingly, the Bank was categorized as well capitalized at March 31, 2016 and December 31, 2015. 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, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2016, 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

 

Edgewater Bank withdrew its applications to become a bank chartered by the State of Michigan.  Edgewater Bancorp withdrew its related application to become a bank holding company eligible to own a bank chartered by the State of Michigan.   Edgewater Bank remains a federally chartered stock savings association and Edgewater Bancorp remains its holding company

 

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, 2016	/s/ Richard E. Dyer
	Richard E. Dyer
	President and Chief Executive Officer
Date:  May 13, 2016	/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., incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (file no. 333-191125), initially filed by Edgewater Bancorp, Inc. on September 12, 2013.

3.2

Bylaws of Edgewater Bancorp, Inc., incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (file no. 333-191125), initially filed by Edgewater Bancorp, Inc. on September 12, 2013.

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, 2016, 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*

 

*

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