10-Q 1 t1501800_10q.htm FORM 10-Q

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2015

 

OR

 

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

 

For the transition period from _______________ to _______________

 

Commission File No. 000-55129

 

Edgewater Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   46-3687434
(State or other jurisdiction of   (I.R.S. Employer
in Company or organization)   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 August 7, 2015, there were issued and outstanding 667,898 shares of the Registrant’s Common Stock with a par value of $0.01 per share.

 

 

 

 
 

 

Edgewater Bancorp, Inc.

Form 10-Q

 

Index

 

    Page
  Part I. Financial Information  
     
Item 1. Condensed Consolidated Financial Statements 3
     
  Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014 3
     
  Condensed Consolidated Statements of Operations for the Three Months Ended and Six Months Ended June 30, 2015 and 2014 (unaudited) 4
     
  Condensed Consolidated Statements of Comprehensive  Income (Loss) for the Three Months Ended and Six Months Ended June 30, 2015 and 2014 (unaudited) 5
     
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2015 (unaudited)

6
     
  Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited) 7
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
     
Item 4. Controls and Procedures 46
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 46
     
Item 1A. Risk Factors 46
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
     
Item 3. Defaults upon Senior Securities 46
     
Item 4. Mine Safety Disclosures 47
     
Item 5. Other Information 47
     
Item 6. Exhibits 47
     
  Signature Page 48

 

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Part I. – Financial Information

Financial Statements

 

Edgewater Bancorp, Inc.

Condensed Consolidated Balance Sheets

   June 30,   December 31, 
   2015   2014 
   (Unaudited)     
Assets          
Cash and due from banks  $875,523   $763,968 
Interest-bearing demand deposits in banks   6,797,649    12,680,629 
Cash and cash equivalents   7,673,172    13,444,597 
           
Available-for-sale securities   11,827,163    12,718,065 
Loans held for sale   820,462    48,300 
Loans receivable, net of allowance for losses of $1,024,078 and $1,075,351, respectively   107,455,032    89,479,525 
Premises and equipment, net   3,780,815    3,912,291 
Federal Home Loan Bank (FHLB) stock   686,200    1,078,900 
Other real estate, net   556,000    467,000 
Interest receivable   303,978    302,777 
Mortgage servicing rights   415,980    432,105 
Other assets   484,703    460,562 
           
Total assets  $134,003,505   $122,344,122 
           
Liabilities and Stockholders' Equity          
           
Liabilities          
Deposits          
Noninterest bearing  $13,919,547   $11,730,674 
Interest-bearing   88,148,178    86,762,438 
Total deposits   102,067,725    98,493,112 
           
Federal Home Loan Bank advances   17,600,000    10,000,000 
Accrued and other liabilities   942,274    547,550 
Total liabilities   120,609,999    109,040,662 
           
Commitments and Contingencies          
           
Temporary Equity          
ESOP shares subject to mandatory redemption   33,034    22,193 
           
Stockholders' Equity          
Common Stock-shares authorized 7,000,000: shares issued and outstanding 667,898 at $.01 par value   6,679    6,679 
Paid-in-capital   4,683,434    4,683,434 
Retained earnings   8,650,063    8,607,914 
Accumulated other comprehensive income (loss)   20,296    (16,760)
Total equity   13,360,472    13,281,267 
           
Total liabilities and stockholders' equity  $134,003,505   $122,344,122 

 

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

 

3

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Operations

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited) 
Interest Income                    
Loans, including fees  $1,127,962   $970,729   $2,239,240   $1,936,628 
Debt securities                    
Taxable   29,453    38,035    59,865    80,258 
 Tax-exempt   11,675    12,171    23,847    24,351 
Federal Home Loan Bank stock   8,142    13,021    21,762    32,543 
Other   3,478    4,498    9,684    8,533 
Total interest income   1,180,710    1,038,454    2,354,398    2,082,313 
                     
Interest Expense                    
Deposits   98,120    92,265    196,633    204,199 
Federal Home Loan Bank advances   32,232    27,774    59,367    48,768 
Total interest expense   130,352    120,039    256,000    252,967 
                     
Net interest income   1,050,358    918,415    2,098,398    1,829,346 
                     
Provision for loan losses   15,000    -    15,000    - 
                     
Net Interest Income After Provision for Loan Losses   1,035,358    918,415    2,083,398    1,829,346 
                     
Noninterest income                    
Service charges, deposits   99,029    95,921    191,921    185,265 
Mortgage banking activities   103,096    38,482    204,393    81,658 
Other   27,741    17,480    62,874    72,592 
Total noninterest income   229,866    151,883    459,188    339,515 
                     
Noninterest expense                    
Salaries and employee benefits   668,183    616,043    1,307,345    1,256,633 
Occupancy and equipment   189,880    202,390    390,162    431,579 
Data processing   134,251    135,364    265,884    274,954 
(Gain) loss on sale of other real estate, net   -    (22,039)   4,000    (14,995)
Interchange   27,288    18,681    48,791    34,275 
Advertising   20,119    18,851    33,224    43,388 
FDIC insurance premiums   17,503    34,344    54,587    75,744 
Other real estate   7,814    18,277    13,343    27,129 
Professional fees   107,445    148,587    225,990    281,761 
Insurance   14,853    18,354    29,810    41,902 
Other   66,014    56,914    127,301    138,385 
Total noninterest expense   1,253,350    1,245,766    2,500,437    2,590,755 
                     
Net Income (Loss) Before Income Taxes   11,874    (175,468)   42,149    (421,894)
                     
Provision for Income Taxes   -    -    -    - 
                     
Net Income (Loss)  $11,874   $(175,468)  $42,149   $(421,894)
                     
Basic and Diluted Earnings (Loss) Per Share  $0.02   $(0.29)  $0.07   $(0.75)

 

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

 

4

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited) 
                 
Net Income (Loss)  $11,874   $(175,468)  $42,149   $(421,894)
                     
Other Comprehensive Income (Loss)                    
                     
Net change in unrealized gains (losses) on investment securities available-for-sale   (16,269)   35,066    37,056    91,473 
                     
Less: reclassification adjustment for realized gains (losses) included in net income (loss)   -    -    -    - 
                     
Other comprehensive income (loss) before income tax   (16,269)   35,066    37,056    91,473 
                     
Tax expense (benefit), net of deferred tax asset valuation impact of ($5,531), $11,922, $12,599 and $31,101, respectively   -    -    -    - 
                     
Comprehensive Income (Loss)  $(4,395)  $(140,402)  $79,205   $(330,421)

 

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

 

5

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

 

   (Unaudited) 
                   Accumulated     
                   Other     
       Common   Paid-in   Retained   Comprehensive     
   Shares   Stock   Capital   Earnings   Income (Loss)   Total 
                         
Balance at January 1, 2015   667,898   $6,679   $4,683,434   $8,607,914   $(16,760)  $13,281,267 
Net income   -    -    -    42,149    -    42,149 
Other comprehensive income  -    -    -    -    37,056    37,056 
                               
Balance at June 30, 2015   667,898   $6,679   $4,683,434   $8,650,063   $20,296   $13,360,472 

 

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

 

6

 

Edgewater Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

 

   Six Months Ended June 30, 
   2015   2014 
   (Unaudited) 
Operating activities:          
Net income (loss)  $42,149   $(421,894)
Items not requiring cash:          
Depreciation   214,293    237,123 
Provision for loan losses   15,000    - 
Amortization of premiums on securities   50,453    62,541 
Change in fair value of mortgage servicing rights   14,023    11,892 
(Gain) loss on sale of other real estate   4,000    (14,995)
ESOP shares earned   10,841    11,151 
Amortization of mortgage servicing rights   58,495    52,116 
Loans originated for sale   (7,449,115)   (2,515,531)
Proceeds from loans sold   6,745,999    1,771,362 
Gain on sale of loans   (125,439)   (32,264)
Loss (gain) on sale of premises and equipment   -    1,215 
Net change in:          
Interest receivable and other assets   (25,343)   132,022 
Interest payable and other liabilities   394,724    308,635 
Net cash used in operating activities   (49,920)   (396,627)
           
Investing activities:          
Proceeds from calls and maturities of available-for-sale securities   877,505    2,207,459 
Proceeds from sale of FHLB Stock   392,700    2,207,459 
Net change in loans   (18,089,507)   (526,599)
Proceeds from sale of other real estate   6,000    362,792 
Payment for sale of branch, net   -    (13,112,513)
Proceeds from sale of premises and equipment   -    6,538 
Purchases of premises and equipment   (82,817)   (39,623)
Net cash used in investing activities   (16,896,119)   (8,894,487)
           
Financing activities:          
Proceeds from stock conversion   -    2,368,033 
Net change in deposits   3,574,614    (1,571,993)
Proceeds from Federal Home Loan Bank advances   11,100,000    10,000,000 
Repayment of Federal Home Loan Bank advances   (3,500,000)   - 
Net cash provided by financing activities   11,174,614    10,796,040 
           
Net Change in Cash and Cash Equivalents   (5,771,425)   1,504,926 
           
Cash and Cash Equivalents, Beginning of Period   13,444,597    10,322,076 
           
Cash and Cash Equivalents, End of Period  $7,673,172   $11,827,002 
           
Additional Cash Flows Information:          
Interest paid  $216,948   $217,341 
Loans transferred to other real estate   99,000    207,000 
Capitalization of mortgage serving rights   56,393    14,942 

 

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Edgewater Bancorp, Inc.

Form 10-Q

 

Notes to Condensed Consolidated Financial Statements

 

Note 1: Nature of Operation and Conversion

 

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

 

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

 

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

 

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

 

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

 

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

 

Note 2: Basis of Presentation

 

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

 

8

 

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

 

Note 3: Principles of Consolidation

 

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

 

Note 4: Securities

 

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

 

   June 30, 2015 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Unaudited) 
Available-for-sale securities:                    
U.S. Government and federal agency  $4,978,004   $8,121   $29,064   $4,957,061 
State and political subdivisions   3,057,702    17,001    4,893    3,069,810 
Mortgage-backed-Government Sponsored Enterprise (GSE)-residential   2,937,483    27,333    9,604    2,955,212 
Collateralized mortgage obligations-GSE   833,678    11,402    -    845,080 
                     
Total available-for-sale securities  $11,806,867   $63,857   $43,561   $11,827,163 

 

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

 

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

 

   June 30, 2015   December 31, 2014 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (Unaudited)     
                 
Within one year  $1,501,778   $1,512,796   $795,000   $795,723 
After one through five years   6,533,928    6,514,075    7,562,445    7,505,192 
    8,035,706    8,026,871    8,357,445    8,300,915 
Mortgage-backed - GSE residential   2,937,483    2,955,212    3,357,163    3,384,002 
Collateralized debt obligations   833,678    845,080    1,020,217    1,033,148 
                     
   $11,806,867   $11,827,163   $12,734,825   $12,718,065 

 

The carrying value of investment securities pledged as collateral, to secure public deposits and for other purposes was $295,617 at June 30, 2015 (unaudited) and $345,931 at December 31, 2014.

 

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

 

Certain investments in debt securities have fair values at an amount less than their historical cost. Total fair value of these investments at June 30, 2015 (unaudited) and December 31, 2014 was $5,542,768 and $6,066,781, which is approximately 47% and 48%, respectively, of the Company’s investment portfolio. These declines primarily resulted from changes in market interest rates since the securities were purchased.

 

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

 

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

 

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Investment securities with unrealized losses were as follows:

 

   June 30, 2015 
   Less than 12 Months   12 Months or Longer   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
   (Unaudited) 
Available-for-sale securities:                              
U.S. Government and federal agency  $-   $-   $3,521,872   $29,064   $3,521,872   $29,064 
State and political subdivisions   399,992    8    495,115    4,885    895,107    4,893 
Mortgage-backed -GSE residential   1,125,789    9,604    -    -    1,125,789    9,604 
                               
   $1,525,781   $9,612   $4,016,987   $33,949   $5,542,768   $43,561 

 

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

 

The unrealized losses on the Company’s investments in direct obligations of U.S. Government and federal agencies, state and political 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 June 30, 2015, and December 31, 2014.

 

Note 5: Loans and Allowance

 

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

 

Loans Receivable

 

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

 

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

 

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

 

11

 

nonaccrual policy during the six month-end periods ended June 30, 2015 (unaudited) and June 30, 2014 (unaudited).

 

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

 

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

 

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

 

Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

12

 

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

 

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

 

Categories of loans receivable include:

 

   June 30   December 31, 
   2015   2014 
   (Unaudited)     
Real estate loans:          
Residential 1-4 family  $46,461,293   $45,353,599 
Commercial   33,685,444    27,908,662 
Construction and land   2,201,250    1,523,281 
Total real estate   82,347,987    74,785,542 
Commercial and industrial   6,194,559    5,536,805 
Warehouse Line   10,000,000    - 
Consumer loans:          
Home equity loans and lines of credit   9,043,695    9,331,608 
Other consumer loans   884,558    883,864 
Total consumer   9,928,253    10,215,472 
Gross loans   108,470,799    90,537,819 
Less          
Net deferred loan fees   (8,311)   (17,057)
Allowance for loan losses   1,024,078    1,075,351 
Net loans  $107,455,032   $89,479,525 

 

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

 

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

 

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

 

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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 June 30, 2015:                        
Balance, beginning of period  $207,083   $520,099   $226,716   $28,812   $88,377   $1,071,087 
Provision (credit) for loan losses   (14,707)   15,110    2,868    26,176    (14,447)   15,000 
Loans charged to the allowance   -    (56,651)   -    -    (18,657)   (75,308)
Recoveries of loans previously charged off   12,700    599    -    -    -    13,299 
                               
Balance, end of period  $205,076   $479,157   $229,584   $54,988   $55,273   $1,024,078 
                               
Six Months Ended June 30, 2015:                              
Balance, beginning of period  $222,618   $503,621   $248,388   $-   $100,724   $1,075,351 
Provision (credit) for loan losses   (30,242)   35,852    (18,804)   54,988    (26,794)   15,000 
Loans charged to the allowance   -    (62,015)   -    -    (18,657)   (80,672)
Recoveries of loans previously charged off   12,700    1,699    -    -    -    14,399 
                               
Balance, end of period  $205,076   $479,157   $229,584   $54,988   $55,273   $1,024,078 

 

14

 

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

 

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

 

   Residential   Commercial   Commercial   Warehouse         
   1-4 Family   Real Estate   and Industrial   Line   Consumer   Total 
  (Unaudited) 
At June 30, 2015:    
Allowance:                              
Balance, end of period  $205,076   $479,157   $229,584   $54,988   $55,273   $1,024,078 
Ending balance: individually evaluated for impairment  $19,095   $1,006   $-   $-   $261   $20,362 
Ending balance: collectively evaluated for impairment  $185,981   $478,151   $229,584   $54,988   $55,012   $1,003,716 
Loans:                              
Ending balance  $46,461,293   $35,886,694   $6,194,559   $10,000,000   $9,928,253   $108,470,799 
Ending balance individually evaluated for impairment  $2,320,646   $387,503   $-   $-   $192,836   $2,900,985 
Ending balance collectively evaluated for impairment  $44,140,647   $35,499,191   $6,194,559   $10,000,000   $9,735,417   $105,569,814 

 

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

 

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Internal Risk Categories

 

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

 

RISK RATING 1 – EXCELLENT

 

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

 

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

 

RISK RATING 2 – STRONG

 

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

 

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

 

RISK RATING 3 – ACCEPTABLE

 

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

 

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

 

RISK RATING 4 – WATCH

 

General: Loans in this category are considered to be acceptable credit quality, but contain greater credit risk than Risk Rating 3 loans due to weak balance sheets, marginal earnings or cash flow,

 

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lack of financial information, weakening markets, insufficient or questionable collateral coverage, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that potential weaknesses do not emerge. The level of risk in a Watch loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

 

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

 

RISK RATING 5 – SPECIAL MENTION

 

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

 

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

 

RISK RATING 6 – SUBSTANDARD

 

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

 

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

 

17

 

RISK RATING 7 – DOUBTFUL

 

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

 

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

 

RISK RATING 8 – LOSS

 

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

 

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

 

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

 

   Residential   Commercial   Construction   Commercial   Warehouse             
   1-4 Family   Real Estate   and Land   and Industrial   Line   Home Equity   Consumer   Total 
   (Unaudited) 
                                 
Pass (1-4)  $45,893,473   $31,109,724   $2,165,115   $6,194,559   $10,000,000   $8,982,135   $884,558   $105,229,564 
Special Mention (5)   -    1,191,303    -    -    -    -    -    1,191,303 
Substandard (6)   567,820    1,384,417    36,135    -    -    61,560    -    2,049,932 
Doubtful (7)   -    -    -    -    -    -    -    - 
Loss (8)   -    -    -    -    -    -    -    - 
                                         
Total  $46,461,293   $33,685,444   $2,201,250   $6,194,559   $10,000,000   $9,043,695   $884,558   $108,470,799 

 

18

 

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

 

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

 

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

 

                           Total Loans > 
   30-59 Days   60-89 Days   Greater Than   Total       Total   90 Days & 
   Past Due   Past Due   90 Days   Past Due   Current   Loans   Accruimg 
   (Unaudited) 
     
Residential 1-4 family  $212,351   $455,360   $567,820   $1,235,531   $45,225,762   $46,461,293   $- 
Commercial real estate   -    -    -    -    33,685,444    33,685,444    - 
Construction and land   -    2,231    36,135    38,366    2,162,884    2,201,250    - 
Commercial and industrial   -    -    -    -    6,194,559    6,194,559    - 
Warehouse Line   -    -    -    -    10,000,000    10,000,000    - 
Home equity   65,350    9,229    61,560    136,139    8,907,556    9,043,695    - 
Other consumer   -    -    -    -    884,558    884,558    - 
                                    
   $277,701   $466,820   $665,515   $1,410,036   $107,060,763   $108,470,799   $- 

 

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

 

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

 

19

 

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

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)     
         
Residential 1-4 family  $1,489,541   $1,397,529 
Commercial real estate   10,582    729,032 
Construction and land   38,366    49,789 
Commercial and industrial   -    - 
Warehouse Line   -    - 
Home equity   112,611    76,937 
Other consumer   -    - 
           
   $1,651,100   $2,253,287 

 

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

 

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

 

   Residential   Commercial   Construction   Commercial   Warehouse         
   1-4 Family   Real Estate   and Land   and Industrial   Line   Home Equity   Total 
   (Unaudited) 
Impaired loans without a specific allowance:                                   
Recorded investment  $548,445   $278,492   $60,063   $-   $-   $140,736   $1,027,736 
Unpaid principal balance   608,815    278,492    60,063    -    -    140,736    1,088,106 
                                    
Impaired loans with a specific allowance:                                   
Recorded investment   1,772,201    10,582    38,366    -    -    52,100    1,873,249 
Unpaid principal balance   1,826,595    11,786    41,365    -    -    52,379    1,932,125 
Specific allowance   19,095    105    901    -    -    261    20,362 
                                    
Total impaired loans:                                   
Recorded investment   2,320,646    289,074    98,429    -    -    192,836    2,900,985 
Unpaid principal balance   2,435,410    290,278    101,428    -    -    193,115    3,020,231 
Specific allowance   19,095    105    901    -    -    261    20,362 

 

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

 

   Residential   Commercial   Construction   Commercial   Warehouse         
   1-4 Family   Real Estate   and Land   and Industrial   Line   Home Equity   Total 
   (Unaudited) 
                             
Average recorded investment in impaired loans for the three months ended June 30, 2015  $1,885,667   $291,218   $121,337   $-   $-   $131,217   $2,429,439 
Average recorded investment in impaired loans for the three months ended June 30, 2014   2,304,116    1,281,992    165,551    -    -    239,047    3,990,706 

 

   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 six months ended June 30, 2015  $2,007,269   $293,591   $137,998   $-   $-   $138,206   $2,577,064 
Average recorded investment in impaired loans for the six months ended June 30, 2014   2,326,988    1,300,422    167,047    -    -    -    3,794,457 

 

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

 

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

 

Interest income of $10,824, $21,520, $20,815, $38,212 and $61,499 was recognized on impaired loans for the three and six months ended June 30, 2015 (unaudited) and June 30, 2014 (unaudited) and for year-end December 31, 2014, respectively.

 

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

 

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There were no newly classified troubled debt restructured loans for three months ended June 30, 2015 and June 30, 2014.

 

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

 

Newly classified troubled debt restructurings:

 

   Six Months Ended June 30, 2015   Six Months Ended June 30, 2014 
       Pre-   Post       Pre-   Post 
       Modification   Modification       Modification   Modification 
   Number   Recorded   Recorded   Number   Recorded   Recorded 
   of Loans   Balance   Balance   of Loans   Balance   Balance 
   (Unaudited) 
                              
Residential 1-4 family   -   $-   $-    1   $61,000   $61,000 
Commercial real estate   -    -    -    -    -    - 
Construction and land   -    -    -    -    -    - 
Commercial and industrial   -    -    -    -    -    - 
Warehouse Line   -    -    -    -    -    - 
Home equity   -    -    -    -    -    - 
Other consumer   -    -    -    -    -    - 
                               
    -   $-   $-    1   $61,000   $61,000 

 

The troubled debt restructurings described above increased the allowance for loan losses by $0 and $178 for the three months ended June 30, 2015 and 2014, respectively and resulted in charge offs of $0 and $19,937 for the six months ended June 30, 2015 and 2014, respectively.

 

Newly restructured loans by type of modification:

 

   Interest           Total 
   Only   Term   Combination   Modification 
   (Unaudited) 
Six Months Ended June 30, 2015:                    
                     
Residential 1-4 family  $-   $-   $-   $- 
Commercial real estate   -    -    -    - 
Construction and land   -    -    -    - 
Commercial and industrial   -    -    -    - 
Warehouse Line   -    -    -    - 
Home equity   -    -    -    - 
Other consumer   -    -    -    - 
                     
   $-   $-   $-   $- 

 

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

 

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

 

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

 

Note 6: Disclosures about Fair Value of Assets and Liabilities

 

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

 

  Level 1 Quoted prices in active markets for identical assets or liabilities.
     
  Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
  Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.

 

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Recurring Measurements

 

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

 

   June 30, 2015 
   Fair Value Measurements Using 
       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair   Assets   Inputs   Inputs 
Assets  Value   (Level 1)   (Level 2)   (Level 3) 
   (Unaudited) 
Available-for-sale securities:                    
U.S. Government and federal agency  $4,957,061   $-   $4,957,061   $- 
State and political subdivisions   3,069,810    -    3,069,810    - 
Mortgage-backed - GSE residential   2,955,212         2,955,212      
Collateralized mortgage obligations-GSE   845,080    -    845,080    - 
Mortgage servicing rights   100,170    -    -    100,170 

 

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

 

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

 

Available-for-Sale Securities

 

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

 

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

 

Mortgage Servicing Rights

 

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

 

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

 

Level 3 Reconciliation

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   2015   2014 
   (Unaudited) 
                 
Balance, beginning of period  $108,754   $138,288   $114,193   $148,171 
Total changes in fair value included in earnings   (8,584)   (2,006)   (14,023)   (11,889)
                     
Balance, end of period  $100,170   $136,282   $100,170   $136,282 

 

Nonrecurring Measurements

 

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

 

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   Fair Value Measurements Using 
       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Fair   Assets   Inputs   Inputs 
Assets  Value   (Level 1)   (Level 2)   (Level 3) 
     
June 30, 2015 (Unaudited)                    
                     
Other real estate owned  $90,000   $-   $-   $90,000 
Collateral-dependent impaired loans, Net of ALLL  $1,852,887    -    -    1,852,887 
                     
                     
December 31, 2014                    
                     
Other real estate owned  $190,000   $-   $-   $190,000 
Collateral-dependent impaired loans, Net of ALLL   1,441,487    -    -    1,441,487 

 

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

 

Other Real Estate Owned

 

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

 

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

 

Collateral-dependent Impaired Loans, Net of ALLL

 

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

 

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

 

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Unobservable (Level 3) Inputs

 

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

 

       Valuation     Weighted
   Fair Value   Technique  Unobservable Inputs  Average
              
At June 30, 2015 (Unaudited):              
               
Other real estate owned  $90,000   Market comparable properties  Comparability adjustment (%)  Not available
               
Collateral-dependent impaired loans  $1,852,887   Market comparable properties  Marketability discount  10% - 15% (12%)
               
Mortgage servicing rights   100,170   Discounted cash flow  Constant prepayment rate  7.50%-18% (12.8%)
          Probability of default  1% - 8% (2.2%)
           Discount rate  5.8% - 14% (9.6%)
               
At December 31, 2014              
               
Other real estate owned  $190,000   Market comparable properties  Comparability adjustment (%)  Not available
               
Collateral-dependent impaired loans   1,441,487   Market comparable properties  Marketability discount  10% - 15% (12%)
               
Mortgage servicing rights   114,193   Discounted cash flow  Constant prepayment rate  8.50%-16% (11.2%)
          Probability of default  1% - 8% (2.1%)
           Discount rate  7.6% - 13% (10.4%)

 

Fair Value of Financial Instruments

 

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

 

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   Fair Value Measurements Using 
       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Carrying   Assets   Inputs   Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 
   (Unaudited) 
At June 30, 2015:                
Financial assets:                    
Cash and cash equivalents  $7,673,172   $7,673,172   $-   $- 
FHLB Stock   686,200    -    686,200    - 
Loans held for sale   820,462    -    820,462      
Loans , net of alloance for loan losses   107,455,032    -    -    108,553,000 
Accrued interest receivable   303,978    -    303,978    - 
Mortgage servicing rights   315,810    -    -    555,532 
                     
Financial liabilities:                    
Deposits   102,067,725    13,919,547    88,231,178    - 
FHLB advances   17,600,000    -    17,720,000    - 
Accrued interest payable   45,308    -    45,308    - 

 

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

 

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

 

Cash and Cash Equivalents and Federal Home Loan Bank Stock

 

The carrying amount approximates fair value.

 

Loans Held for Sale

 

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

 

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,

 

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

 

Accrued Interest Receivable and Payable

 

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

 

Deposits

 

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

 

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

 

Federal Home Loan Bank Advances

 

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

 

Note 7: Accounting Developments

 

Financial Accounting Standards Board (“FASB”)

 

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

 

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

 

29

 

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

 

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

 

Note 8: Earnings Per Share

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2015 
   (Unaudited)   (Unaudited) 
         
Net Income  $11,874   $42,149 
           
Shares outstanding for basic EPS:          
           
Average shares outstanding   667,898    667,898 
Less: Average unearned ESOP shares   50,576    50,841 
    617,322    617,057 
Additional dilutive shares   -    - 
           
Shares outstanding for basic and diluted EPS   617,322    617,057 
           
Basic and diluted earnings per share  $0.02   $0.07 

 

30

 

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

 

General

 

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

 

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

 

·statements of our goals, intentions and expectations;

 

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

 

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

 

·estimates of our risks and future costs and benefits.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·competition among depository and other financial institutions;

 

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

 

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

 

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

 

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

 

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

 

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

 

·changes in consumer spending, borrowing and savings habits;

 

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

 

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

 

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

 

·changes in the level of government support of housing finance;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Critical Accounting Policies

 

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

 

Branch Sale

 

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

 

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

 

Total Assets. Total assets increased by $11.7 million, or 9.5%, to $134.0 million at June 30, 2015 from $122.3 million at December 31, 2014. The increase was primarily the result of increases in loans and loans held for sale loans of $18.0 million and $772,000, respectively. This is partially offset by decreases in cash and cash equivalents of $5.8 million.

 

Net Loans. Net loans increased by $18.0 million, or 20.1%, to $107.5 million at June 30, 2015 from $89.5 million at December 31, 2014. During the six months ended June 30, 2015, one-to- four family residential real estate loans increased $1.1 million, or 2.4%, to $46.5 million at June 30, 2015 from $45.4 million at December 31, 2014; commercial real estate loans increased $5.8 million or 20.7%, to $33.7 million from $27.9 million; construction and land loans increased $678,000, or 44.5%, to $2.2 million from $1.5 million; commercial and industrial loans increased $658,000, or 11.9%, to $6.2 million to from $5.5 million; warehouse line increased $10.0 million or 100% from $0 at December 31, 2014 and consumer loans, including home equity loans and lines of credit, decreased $287,000, or 2.8%, to $9.9 million from $10.2 million. The increase in commercial real estate is the result of new customer relationships being established. The increase in construction and land is due to residential home construction beginning during the first six months. The increase in the warehouse line is due to the new volume received through a participation with another financial institution. These are 1-4 family residential loans that are held in the portfolio until they are funded by a third-party. The decreases in the remaining loan classes reflect repayments in excess of originations, and loan sales of refinanced loans.

 

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Investment Securities. Investment securities available for sale decreased $891,000, or 7.0%, to $11.8 million at June 30, 2015. Mortgage-backed securities including collateralized mortgage obligations, decreased $429,000, or 12.7%, to $3.0 million at June 30, 2015 from $3.4 million at December 31, 2014, and states and political subdivision securities decreased $291,000, or 8.7%, to $3.1 million at June 30, 2015 from $3.4 million at December 31, 2014. U.S. government and federal agency securities increased $17,000, or 0.4%, to $5.0 million at June 30, 2015 from $4.9 million at December 31, 2014. There were no securities purchased during the second quarter of 2015. Net unrealized gains on securities recognized in accumulated other comprehensive income increased by $37,056 to an unrealized gain of $20,296 at June 30, 2015 compared to an unrealized loss of $16,700 at December 31, 2014. At June 30, 2015, investment securities classified as available-for-sale consisted entirely of government-sponsored mortgage-backed securities, government-sponsored debentures, state and political subdivision securities, and U.S. government and agency securities with a focus on suitable government-sponsored securities to augment risk-based capital.

 

Real Estate Owned and Other Repossessed Assets. Real estate owned and held for sale increased $89,000, or 19.1% to $556,000 at June 30, 2015 from $467,000 at December 31, 2014, as we sold $10,000 of foreclosed properties, there was one foreclosed non-performing loan for $99,000, no recorded valuation adjustments and $4,000 in net loss on sales during the six months ended June 30, 2015. At June 30, 2015 our real estate owned included one land development property, one residential lot and two commercial real estate properties, the largest has a carrying value of $207,000.

 

Deposits. Deposits increased by $3.6 million, or 3.6%, to $102.1 million at June 30, 2015. Noninterest bearing increased $2.2 million or 18.7%, and interest-bearing deposits increased $1.4 million or 1.6% to $88.1 million at June 30, 2015 from $86.8 million at December 31, 2014.

 

Federal Home Loan Bank Advances and Other Liabilities. Federal Home Loan Bank advances increased $7.6 million, or 76.0% to $17.6 million at June 30, 2015 from $10 million at December 31, 2014. The $7.6 million increase, for the six months ended June 30, 2015, was due to increased loan growth. We partially funded the sale of the Decatur branch with $10.0 million in Federal Home Loan Bank advances during the first quarter of 2014. Other liabilities, which include, interest and accounts payable, customer escrow balances, and accruals for items such as employee pension and medical plans, increased $395,000 or 72.0%, to $942,000 at June 30, 2015 from $548,000 at December 31, 2014.

 

Total Equity. Total equity increased $79,205 or 0.6%, to $13.4 million at June 30, 2015. Retained earnings increased $42,149 due to net income at June 30, 2015, as well as an increase of $37,056 in accumulated other comprehensive income due to unrecognized gains on investment securities.

 

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Delinquencies, Classified Assets and Non-Performing Assets

 

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

 

   Loans Delinquent For         
   30-59 Days   60-89 Days   90 Days and Over   Total 
   Number   Amount   Number   Amount   Number   Amount   Number   Amount 
   (Dollars in thousands) 
At June 30, 2015 (unaudited)                                
Real estate loans:                                        
One- to four-family residential   5   $213    8   $455    6   $568    19   $1,236 
Commercial real estate   -    -    -    -    -    -    -    - 
Construction and land   -    -    1    2    2    36    3    38 
Total real estate   5    213    9    457    8    604    22    1,274 
Commercial and industrial   -    -    -    -    -    -    -    - 
Warehouse Line   -    -    -    -    -    -    -    - 
Consumer loans:   -    -    -    -    -    -    -    - 
Home equity loans and lines of credit   4    65    1    9    1    62    6    136 
Other consumer   -    -    -    -    -    -    -    - 
Total consumer   4    65    1    9    1    62    6    136 
Total loans   9   $278    10   $466    9   $666    28   $1,410 
                                         
At December 31, 2014                                        
Real estate loans:                                        
One- to four-family residential   14   $1,148    5   $558    11   $735    30   $2,441 
Commercial real estate   1    12    -    -    -    -    1    12 
Construction and land   1    28    -    -    2    22    3    50 
Total real estate   16    1,188    5    558    13    757    34    2,503 
Commercial and industrial   -    -    -    -    -    -    -    - 
Consumer loans:                                        
Home equity loans and lines of credit   6    54    2    25    1    10    9    89 
Other consumer   -    -    1    6    -    -    1    6 
Total consumer   6    54    3    31    1    10    10    95 
Total loans   22   $1,242    8   $589    14   $767    44   $2,598 

 

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

 

Classified Assets. The following table sets forth our amounts of classified assets as of the dates indicated. Amounts shown at June 30, 2015 and December 31, 2014 include approximately $1.7 million and $2.9 million of nonperforming loans, respectively. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $20,000 and $17,502 at June 30, 2015 and December 31, 2014, respectively.

 

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   At June 30,   At December 31, 
   2015   2014 
   (Dollars in thousands) 
   (Unaudited)     
Classifed assets:          
Substandard loans (1)  $2,050   $2,887 
Doubtful loans   -    - 
Loss loans   -    - 
Real estate owned and other        - 
Real estate owned and other repossessed assets (2)   556    467 
Total classified assets  $2,606   $3,354 

 

 

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

 

The decrease in classified assets to $2.6 million at June 30, 2015 from $3.4 million at December 31, 2014 is the continuation of a trend of declining classified assets that has been ongoing since 2009. This decrease was primarily due to the enhanced review of our nonperforming assets, which resulted in charge-offs of $81,000 and losses on sales of real estate owned as well as loans paying off. The largest component of classified loans is commercial real estate loans which totaled $1.4 million, or 67.5% of our total classified loans, at June 30, 2015. Our largest classified loan relationship, was a commercial real estate relationship totaling $585,000 at June 30, 2015.

 

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

 

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   At June 30,   At December 31, 
   2015   2014 
   (Dollars in thousands) 
   (Unaudited)     
         
Non-accrual loans:          
Real estate loans:          
One- to four-family residential  $1,490   $1,811 
Commercial real estate   11    729 
Construction and land   38    207 
Total real estate   1,539    2,747 
Commercial and industrial   -    - 
Warehouse line   -    - 
Consumer loans:          
Home equity loans and lines of credit   113    151 
Other consumer   -    - 
Total consumer   113    151 
Total loans   1,652    2,898 
           
Loans 90 days or more past due and still accruing:          
Real estate loans:          
One- to four-family residential   -    - 
Commercial real estate   -    - 
Construction and land   -    - 
Total real estate   -    - 
Commercial and industrial   -    - 
Warehouse line   -    - 
Consumer loans:          
Home equity loans and lines of credit   -    - 
Other consumer   -    - 
Total consumer   -    - 
Total loans   -    - 
           
Total non-performing loans   1,652    2,898 
           
Real estate owned and other repossessed assets:          
Real estate loans:          
One- to four-family residential   -    - 
Commercial real estate   397    397 
Construction and land   159    70 
Total real estate   556    467 
Commercial and industrial   -    - 
Consumer loans:          
Home equity loans and lines of credit   -    - 
Other consumer   -    - 
Total consumer   -    - 
Total real estate owned before loans in redemption   556    467 
Loans in redemption (1)   -    - 
Total real estate owned and other repossessed assets   556    467 
           
Total non-performing assets  $2,208   $3,365 

 

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   At June 30,   At December 31, 
   2015   2014 
   (Dollars in thousands) 
   (Unaudited)     
Troubled debt restructurings:          
Real estate loans:          
One- to four-family residential  $973   $916 
Commercial real estate   278    286 
Construction and land   60    134 
Total real estate   1,311    1,336 
Commercial and industrial   -    - 
Consumer loans:          
Home equity loans and lines of credit   79    2 
Other consumer   -    - 
Total consumer   79    2 
Total loans  $1,390   $1,338 
           
Total non-performing loans and troubled debt restructurings  $3,042   $4,236 
           
Ratios:          
Non-performing loans to total loans   1.52%   3.20%
Non-performing assets to total assets   1.65%   2.75%
Non-performing assets and troubled debt restructurings to total assets   2.27%   3.46%

 

 

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

 

Non-performing assets decreased to $2.2 million, or 1.65% of total assets, at June 30, 2015 from $3.4 million, or 2.75% of total assets, at December 31, 2014. Nonperforming commercial real estate loans decreased $718,000 to $11,000, or 0.7% of total non-performing loans, at June 30, 2015 from $729,000, or 25.2% of total non-performing loans at December 31, 2014. One-to four- family residential nonperforming loans decreased $321,000 to $1.5 million on June 30, 2015 from $1.8 million at December 31, 2014. Our largest non-performing loan relationship was a one-to-four family residential mortgage relationship totaling $245,000 at June 30, 2015.

 

Other Loans of Concern. At June 30, 2015, there were $1.2 million of loans designated by management as “special mention,” of which $1.1 million is related to one commercial real estate relationship at June 30, 2015 where there is information about possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

 

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

 

General. Net income for the three months ended June 30, 2015 was $12,000, compared to net loss of $175,000 for the three months ended June 30, 2014, an increase of $187,000. The increase in earnings was primarily due to increases in net interest income, other non-interest income, and decreases in professional fees and FDIC insurance premiums. The increase in non-interest income is a result of residential mortgage loan sales volume increasing due to rate decreases which resulted in an increase in

 

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gains booked of $65,000. We also have a decline in occupancy and equipment expense due to the Decatur branch sale that occurred on January 24, 2014.

 

Interest Income. Interest income increased $142,000, or 13.7%, to $1.2 million for the three months ended June 30, 2015 from $1.0 million for the three months ended June 30, 2014. This increase was primarily attributable to a $157,000 increase in interest and fee income on loans receivable. The average balance of loans during the three months ended June 30, 2015 increased $15.3 million to $102.7 million compared to $87.3 million for the three months ended June 30, 2014, and the average yield on loans decreased by 5 basis points to 4.41% for the three months ended June 30, 2015 from 4.46% for the three months ended June 30, 2014. The average balance of investment securities decreased $2.2 million to $12.1 million for the three months ended June 30, 2015 from $14.3 million for the three months ended June 30, 2014, while the average yield on investment securities decreased by 5 basis point to 1.36% for the three months ended June 30, 2015 from 1.41% for the three months ended June 30, 2014, resulting in income on securities decreasing.

 

Interest Expense. Total interest expense increased $11,000, or 8.6%, to $130,000 for the three months ended June 30, 2015 from $120,000 for the three months ended June 30, 2014. Interest expense on deposit accounts increased $6,000, or 6.4%, to $98,000 for the three months ended June 30, 2015 from $92,000 for the three months ended June 30, 2014. The increase was a result of $5.1 million, or 6.2%, in the average balance on deposits to $87.3 million for the three months ended June 30, 2015 from $82.2 million for the three months ended June 30, 2014. The average cost of interest-bearing deposits was 0.45% for the three months ended June 30, 2015 and 0.45% for the three months ended June 30, 2014, reflecting the current interest rate environment. The increase in deposits is in demand deposits of $8.1 million and $1.2 million in savings for the three months ended June 30, 2015. This was offset partially by declines of $3.6 million in money market accounts and $569,000 in certificates of deposit for the three months ended June 30, 2015.

 

Interest expense on FHLB-Indianapolis advances increased $4,000 to $32,000 for the three months ended June 30, 2015 from $28,000 for the three months ended June 30, 2014. The average balance of advances increased by $4.1 million to $14.1 million for the three months ended June 30, 2015 from $10.0 million for the three months ended June 30, 2014. Borrowings increased $7.1 million to fund the loan growth activity for the three months ended June 30, 2015. Borrowing increased $10.0 million to fund the Decatur branch sale on January 24, 2014 for the three months ended June 30, 2014. The average cost on the advances decreased 0.20% basis points to 0.91% for the three months ended June 30, 2015 from 1.11% for the three months ended June 30, 2014.

 

Net Interest Income. Net interest income increased $132,000, or 14.4%, to $1.1 million for the three months ended June 30, 2015 from $918,000 for the three months ended June 30, 2014. The increase reflected an increase in our interest rate spread to 3.36% for the three months ended June 30, 2015 from 3.24% for the three months ended June 30, 2014, and an increase in our net interest margin to 3.45% for the three months ended June 30, 2015 from 3.33% for the three months ended June 30, 2014. The increase in our interest rate spread and net interest margin reflected primarily the increase in interest income in net loans and a flat yield paid on deposits.

 

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we recorded a provision for loan losses of $15,000 for the three months ended June 30, 2015 and $0 for the three months ended June 30, 2014. The additional provision for loan losses was needed because of the increase in outstanding loan balances during the three months ended June 30, 2015. The allowance for loan losses was $1.0 million, or .94% of total loans, at June 30, 2015, compared to $1.1 million, or 1.24% of total loans, at June 30, 2014. Total nonperforming loans were $1.6 million at June 30, 2015, compared to $2.5 million at June 30, 2014. As a percentage of nonperforming loans, the allowance for loan losses was 62.0% at June 30, 2015 compared to 43.8% at June 30, 2014. At June 30, 2015, $584,000 of the $1.6 million in nonperforming loans were contractually current, compared to $1.5 million of $2.5 million at June 30, 2014.

 

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

 

Non-Interest Income. Non-interest income increased $78,000, or 51.3%, to $230,000 for the three months ended June 30, 2015 from $152,000 for the three months ended June 30, 2014. The increase was primarily due to an increase of $65,000 in income from mortgage banking activities, which includes gains on sale of loans and changes in the value of mortgage servicing rights. Gains on sale of loans increased as originations, particularly on new home purchases, increased during the period.

 

Non-Interest Expense. Non-interest expense increased $8,000, or 0.6%, to $1.3 million for the three months ended June 30, 2015 from $1.2 million for the three months ended June 30, 2014. The increase is primarily reflected an increase in salaries and employee benefit cost of $52,000. Occupancy and equipment decreased as a result of the Decatur branch sale on January 24, 2014. Professional fees declined $41,000 due to the leveling off of expenses associated with becoming a public company as well as legal expenses associated with non-performing loans. At this time, we do not expect any reductions in non-interest expenses related to our participation in the defined benefit plan because of the continued participation in the plan.

 

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

 

   For the Three Months Ended June 30, 
   2015   2014 
   (Dollars in thousands) 
   Average           Average         
   Outstanding       Yield/Rate   Outstanding       Yield/Rate 
   Balance   Interest   (1)   Balance   Interest   (1) 
  (Dollars in thousands) 
Interest-earning assets:                              
Loans  $102,664   $1,128    4.41%  $87,315   $971    4.46%
Investment securities   12,136    41    1.36    14,295    50    1.41 
Other interest-earning assets (2)   7,313    12    0.66    9,185    18    0.77 
Total interst-earning assets   122,113    1,181    3.88    110,795    1,039    3.76 
Noninterest-earning assets   7,063              7,257           
Allowance for loan losses   (1,060)             (1,122)          
Total assets  $128,116             $116,930           
                               
Interest-earning liabilities:                              
Demand deposits  $24,544    22    0.36%  $16,452    8    0.19%
Money market accounts   20,375    15    0.30    23,934    17    0.29 
Savings accounts   14,386    7    0.32    13,233    6    0.18 
Certificates of deposit   28,026    55    0.79    28,595    61    0.86 
Total deposits   87,331    99    0.45    82,214    92    0.45 
                               
FHLB-Indianapolis advances   14,140    32    0.91    10,000    28    1.11 
Total interest-bearing liabilities   101,471    131    0.52    92,214    120    0.52 
                               
Noninterest-bearing demand deposits   13,682              12,788           
Other noninterest-bearing liabilities   885              778           
Total liabilities   116,038              105,780           
Equity   12,078              11,150