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Table Of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

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

 

For the quarterly period ended March 31, 2016

OR

[   ]

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

 

For the transition period from _______________ to ______________________

 

Commission File No. 001-35034

 

Wolverine Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

      Maryland       

      27-3939016  

 (State or other jurisdiction of

 (I.R.S. Employer

 incorporation or organization)

 Identification Number)

 

 

 5710 Eastman Avenue, Midland, Michigan

 48640

 (Address of Principal Executive Offices) 

 Zip Code

 

 

  (989) 631-4280   

(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          ☒

 (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  

 

The number of shares outstanding of the Registrant’s common stock, $0.01 per share, as of May 12, 2016, was 2,150,416.

 

 

Wolverine Bancorp, Inc.
Form 10-Q

 

Index 

 

 

 

Page

 

Part I. Financial Information

 

     

 Item 1.   

Condensed Consolidated Financial Statements

 

     

 

Condensed Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015

1

     

 

Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2016 and 2015 (unaudited) 

2

     

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (unaudited) 

3

     

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2016 (unaudited)

4

     

 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

     

 Item 2. 

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

31

 Item 3.

Quantitative and Qualitative Disclosures about Market Risk 

37

 Item 4.

Controls and Procedures 

38

     

 

 Part II. Other Information

 

     

 Item 1.

Legal Proceedings 

38

 Item 1A.

Risk Factors  

38

 Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

38

 Item 3.

Defaults upon Senior Securities 

37

 Item 4.

Mine Safety Disclosures 

37

 Item 5.

Other Information

37

 Item 6. 

Exhibits

38

  Signature Page   

  

 

Wolverine Bancorp, Inc.

Condensed Consolidated Balance Sheets

(Amounts in Thousands, except per share data)

 

 

Assets

 

March 31, 2016

   

December 31, 2015

 
   

(unaudited)

         

Cash and due from banks

  $ 415     $ 334  

Interest-earning demand deposits

    11,828       52,531  

Cash and cash equivalents

    12,243       52,865  

Interest-earning time deposits

    38,423       39,021  

Investment securities held to maturity

    498       500  

Loans held for sale

    1,203       581  

Loans, net of allowance for loan losses of $10,024 and $10,061

    323,552       314,613  

Premises and equipment, net

    1,244       1,285  

Federal Home Loan Bank stock

    2,700       2,700  

Other real estate owned

    197       130  

Accrued interest receivable

    929       967  

Other assets

    4,950       5,151  

Total assets

  $ 385,939     $ 417,813  
                 

Liabilities and Stockholders’ Equity

               

Liabilities

               

Deposits

  $ 274,410     $ 281,701  

Federal Home Loan Bank advances

    47,000       47,000  

Federal funds purchased

    -       24,000  

Interest payable and other liabilities

    3,075       4,632  

Total liabilities

    324,485       357,333  
                 

Commitments and Contingencies

               

Stockholders’ Equity

               

Common Stock, $0.01 par value per share:

               

Authorized – 100,000,000 shares

               

Issued and outstanding – 2,152,266 and 2,158,034 at March 31, 2016 and December 31, 2015

    22       22  

Unearned employee stock ownership plan (ESOP)

    (1,384 )     (1,410 )

Additional paid-in capital

    16,382       16,401  

Retained earnings

    46,434       45,467  

Total stockholders’ equity

    61,454       60,480  

Total liabilities and stockholders’ equity

  $ 385,939     $ 417,813  

 

 

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

 

 

Wolverine Bancorp, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(Amounts in Thousands, except per share data)

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 
   

(Unaudited)

 

Interest and Dividend Income

               

Loans

  $ 3,932     $ 3,615  

Investment securities and other

    129       62  

Total interest and dividend income

    4,061       3,677  
                 

Interest Expense

               

Deposits

    508       325  

Borrowings

    459       525  

Total interest expense

    967       850  
                 

Net Interest Income

    3,094       2,827  
                 

Provision for Loan Losses

    -       250  
                 

Net Interest Income After Provision for Loan Losses

    3,094       2,577  
                 

Noninterest Income

               

Service charges and fees

    80       67  

Net gain on loan sales

    96       176  

Net gain (loss) on sale of real estate owned

    27       (37 )

Other

    80       109  

Total noninterest income

    283       315  
                 

Noninterest Expense

               

Salaries and employee benefits

    1,090       1,028  

Net occupancy and equipment expense

    207       220  

Information technology expense

    62       57  

Federal deposit insurance corporation premiums

    54       46  

Professional and services fees

    94       107  

Other real estate owned expense

    24       12  

Loan legal expense

    81       64  

Advertising expense

    21       20  

Michigan business tax

    45       47  

Other

    209       214  

Total noninterest expense

    1,887       1,815  
                 

Income Before Income Tax

    1,490       1,077  
                 

Provision for Income Taxes

    523       338  
                 

Net Income and Comprehensive Income

  $ 967     $ 739  
                 

Earnings Per Share:

               

Basic

  $ 0.48     $ 0.36  

Diluted

  $ 0.47     $ 0.36  

 

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

 

  

 Wolverine Bancorp, Inc.

Condensed Consolidated Statement of Cash Flows

(Amounts in Thousands) 

 

   

Three months ended

 
   

March 31,

 
   

2016

   

2015

 

Operating Activities

 

(Unaudited)

 

Net income

  $ 967     $ 739  

Items not requiring (providing) cash

               

Depreciation

    57       61  

Provision for loan losses

    -       250  

Loss (gain) on other real estate owned

    (27 )     37  

Loans originated for sale

    (3,716 )     (5,928 )

Proceeds from loans sold

    3,186       5,714  

Net gain on sale of loans

    (96 )     (176 )

Share based compensation

    128       78  

Earned ESOP shares

    26       65  

Changes in

               

Interest receivable and other assets

    (196 )     (232 )

Interest payable and other liabilities

    (1,107 )     984  

Net cash provided by (used in) operating activities

    (778 )     1,592  
                 

Investing Activities

               

Net change in time deposits purchased

    598       -  

Purchase of held to maturity securities

    (498 )     (499 )

Proceeds from calls, maturities and pay-downs of held to maturity securities

    500       -  

Net change in loans

    (9,043 )     9,420  

Proceeds from sale of real estate owned

    37       87  

Purchase of FHLB stock

    -       (200 )

Net cash provided by (used in) investing activities

    (8,406 )     8,808  
                 
                 

Financing Activities

               

Net change in demand deposits, money market, checking and savings accounts

    1,833       901  

Net change in certificates of deposit

    (9,124 )     5,174  

Proceeds from Federal Home Loan Bank advances

    -       10,000  

Net change in Fed funds purchased

    (24,000 )     -  

Purchase of common stock

    (147 )     (1,390 )

Net cash provided by (used in) financing activities

    (31,438 )     14,685  
                 

Change in Cash and Cash Equivalents

    (40,622 )     25,085  
                 

Cash and Cash Equivalents, Beginning of Period

    52,865       29,686  
                 

Cash and Cash Equivalents, End of Period

  $ 12,243     $ 54,771  
                 

Supplemental Disclosures of Cash Flows Information

               

Interest paid

  $ 909     $ 815  

Income taxes paid

    895       175  

Loans transferred to real estate owned

    104       42  

 

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

 

 

Wolverine Bancorp, Inc.

Condensed Consolidated Statement of Change in Stockholders’ Equity

(Amounts in Thousands, except share data)

(Unaudited)

 

   

Common Stock

   

Additional Paid-

in Capital

   

Unearned ESOP Shares

   

Retained

Earnings

   

Total

Stockholders'

Equity

 

Balances at January 1, 2016

  $ 22     $ 16,401     $ (1,410 )   $ 45,467     $ 60,480  

Net Income

    -       -       -       967       967  

Purchase of 5,700 shares of common stock

    -       (147 )     -       -       (147 )

Share based compensation expense

    -       87       -       -       87  

ESOP shares earned

    -       41       26       -       67  

Balances at March 31, 2016

  $ 22     $ 16,382     $ (1,384 )   $ 46,434     $ 61,454  

 

 

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

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Note 1:

Basis of Presentation

 

The unaudited condensed consolidated financial statements of Wolverine Bancorp, Inc. (the “Company”), the holding company of Wolverine Bank (the "Bank"), have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) believed necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of December 31, 2015 has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto filed as part of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2015.

 

 

Note 2:

Accounting Developments

 

FASB Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718)

 

The FASB issued ASU No. 2016-09 “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” This ASU requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company will be evaluating the impact of adopting this ASU.

 

 

FASB Accounting Standards Update No. 2016-05, Derivatives and Hedging (Topic 815)

 

The FASB issued ASU No. 2016-05 “Derivatives and Hedging (Topic 815).” This ASU applies to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. The ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria as identified in Topic 815 continue to be met. ASU 2016-05 will become effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

 

FASB Accounting Standards Updates No. 2016-02, Leases (Topic 842)

 

The FASB has issued this Update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification® and creating Topic 842, Leases.

 

The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of the following:

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

1.   A public business entity

 

2. A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over the-counter market

 

3. An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).

 

For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application of the amendments in this Update is permitted for all entities. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

 

FASB Accounting Standards Updates No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

 

The FASB has issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities.

 

The new guidance makes targeted improvements to existing U.S. GAAP by:

 

 

Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;

 

 

Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;

 

 

Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;

 

 

Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities;

 

 

Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and

 

 

Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

 

FASB Accounting Standards Update No. 2015-05, Intangibles – Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

 

The FASB issued ASU No. 2015-05 “Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 became effective for interim and annual periods beginning after December 15, 2015 and did not have a significant impact on the Company’s financial condition or results of operations.

 

 

FASB Accounting Standards Update No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting For Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

 

The FASB issued ASU No. 2014-12 “Compensation - Stock Compensation (Topic 718) - Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 became effective for interim and annual periods beginning after December 15, 2015 and did not have a significant impact on the Company’s financial condition or results of operations.

 

 

FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606)

 

The FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606).” This ASU clarifies that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. The Company is still evaluating the impact relating to adopting this standard.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

 

Note 3:

Securities

 

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

 

   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Approximate
Fair Value

 

Held to Maturity Securities:

                               

March 31, 2016

                               

Treasury bond

  $ 498     $ 2     $ --     $ 500  

 

 

The amortized cost and fair value of securities at March 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

   

March 31, 2016

 
   

Amortized
Cost

   

Fair
Value

 
                 

Within one year

  $ 498     $ 500  

One to five years

           

Five to ten years

           

After ten years

           
                 

Totals

  $ 498     $ 500  

 

There were no sales of securities during the three months ended March 31, 2016 and 2015.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

 

Note 4:

Loans and Allowance for Loan Losses

 

Categories of loans include:

  

 

   

March 31, 2016

   

December 31, 2015

 

Real Estate

               

One-to four-family

  $ 38,898     $ 39,719  

Home Equity

    5,073       5,459  

Commercial mortgage loans

               

Commercial real estate

    191,230       183,934  

Multifamily

    60,166       58,804  

Land

    12,863       12,543  

Construction

    11,804       14,785  

Commercial Non-mortgage

    17,742       14,826  

Consumer

    1,175       1,221  

Total loans

    338,951       331,291  
                 

Less

               

Net deferred loan costs, premiums and discounts

    574       567  

Undisbursed portion of loan

    4,801       6,050  

Allowance for loan losses

    10,024       10,061  

Net Loans

  $ 323,552     $ 314,613  

 

 

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

 

1-4 Family, Home Equity, and Consumer

 

With respect to residential loans that are secured by one-to four-family residences and are primarily owner-occupied, we generally establish a maximum loan-to-value ratio and require PMI if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to four-family residences, and consumer loans are typically secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties.

 

Home equity loans secured by second mortgages have greater risk than one- to four-family residential mortgage loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default on their loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loans, decreases in real estate values could adversely affect the value of property used as collateral for our loans.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Consumer and other loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

 

Commercial real estate and multifamily

 

Commercial real estate and multifamily loans generally have greater credit risk than the owner-occupied one- to four-family residential mortgage loans that we originate for retention in our loan portfolio. Repayment of these loans generally depends, in large part, on sufficient income from the property securing the loan or the borrower’s business to cover operating expenses and debt service. These types of loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Changes in economic conditions that are beyond the control of the borrower may affect the value of the security for the loan, the future cash flow of the affected property or business, or the marketability of a construction project with respect to loans originated for the acquisition and development of property. Additionally, due to declining property values in our primary market area and in Michigan, the loan to value ratios of many of our commercial real estate and multifamily loans have increased significantly from the loan to value ratios that were assigned to these loans at the time of origination.

 

Land

 

Land loans generally have greater credit risk than the owner-occupied one-to four-family residential mortgage loans that we originate for retention in our portfolio. Repayment of these loans generally depends, in large part, on the sale of the land. The sale of land can either take place when the land is undeveloped, or developed. Generally, other cash flow sources of the borrower are utilized to make additional payments on land loans. Changes in economic conditions that are beyond the control of the borrower may affect the value of the security for the loan, the future cash flow of the affected property or business, or the marketability of a construction project with respect to loans originated for the acquisition and development of property. Additionally, due to declining property values in our primary market area and in Michigan, the loan to value ratios of many of our land loans have increased significantly from the loan to value ratios that were assigned to these loans at the time of origination.

 

Construction

 

Construction loans include those for one- to four-family residential properties and commercial properties, including multifamily loans and commercial “mixed-use” buildings and homes built by developers on speculation. With respect to construction loans for one- to four-family residential properties and which are primarily owner-occupied, we generally establish a maximum loan-to-value ratio and require PMI if that ratio is exceeded.  These are generally “interest-only” loans during the construction period which typically does not exceed nine months. Construction loans for commercial real estate are made in accordance with a schedule reflecting the cost of construction, and are generally limited to a 75% loan-to-completed appraised value ratio.  For all construction loans, we generally require that a commitment for permanent financing be in place prior to closing the construction loan

 

  

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Repayment of one-to four-family residential property loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment of commercial property loans and homes built by developers on speculation is normally expected from the property’s eventual rental income, income from the borrower’s operations, the personal resources of the guarantor, or the sale of the subject property. Generally, before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state-licensed appraiser. We generally review and inspect properties before disbursement of funds during the term of the construction loan.

 

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

 

Commercial non-mortgage

 

Commercial non-mortgage loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial non-mortgage loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.

 

As a result, the availability of funds for the repayment of commercial non-mortgage loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In determining the appropriate level of allowance for loan loss, we analyze various components of our portfolio. The following components are analyzed: all substandard loans on an individual basis; all loans that are designated special mention or closely monitored; loans not classified according to purpose or collateral type; and overdrawn deposit account balances.

 

We also factor in historical loss experience and qualitative considerations, including trends in charge offs and recoveries; trends in delinquencies and impaired/classified loans; effects of credit concentrations; changes in underwriting standards and loan review system; experience in lending staff; current industry conditions; and current market conditions.

 

In instances where risk and loss exposure is clearly identified with a particular asset, the asset or a portion of the asset will be charged off.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2016, December 31, 2015 and March 31, 2015:

 

Loan Class

 

1-4 Family

   

Home Equity

   

Commercial Real Estate

   

Multifamily

   

Land

   

Construction

   

Commercial Non-Mortgage

   

Consumer

   

Total

 

Year to date analysis as of March 31, 2016

                         

Allowance for loan losses:

                                                                 

Balance, beginning of period

  $ 948     $ 108     $ 4,913     $ 1,515     $ 1,605     $ 604     $ 344     $ 24     $ 10,061  

Provision charged to expense

    23       (9 )     (115 )     (106 )     28       132       48       (1 )     -  

Losses charged off

    (66 )     -       -       -       -       -       -       -       (66 )

Recoveries

    4       -       24       -       1       -       -       -       29  

Balance, end of period

  $ 909     $ 99     $ 4,822     $ 1,409     $ 1,634     $ 736     $ 392     $ 23     $ 10,024  

Ending Balance: individually evaluated for impairment

  $ -     $ -     $ -     $ 100     $ 850     $ -     $ -     $ -     $ 950  

Ending balance: collectively evaluated for impairment

  $ 909     $ 99     $ 4,822     $ 1,309     $ 784     $ 736     $ 392     $ 23     $ 9,074  

Loans:

                                                                       

Ending Balance

  $ 38,898     $ 5,073     $ 191,230     $ 60,166     $ 12,863     $ 11,804     $ 17,742     $ 1,175     $ 338,951  

Ending Balance: individually evaluated for impairment

  $ 1,241     $ -     $ 9,211     $ 7,493     $ 1,769     $ -     $ -     $ -     $ 19,714  

Ending balance: collectively evaluated for impairment

  $ 37,657     $ 5,073     $ 182,019     $ 52,673     $ 11,094     $ 11,804     $ 17,742     $ 1,175     $ 319,237  

 

 

 

Loan Class

 

1-4 Family

   

Home Equity

   

Commercial Real Estate

   

Multifamily

   

Land

   

Construction

   

Commercial Non-Mortgage

   

Consumer

   

Total

 

Year to date analysis as of December 31, 2015

                         

Allowance for loan losses:

                                                                 

Balance, beginning of period

  $ 881     $ 100     $ 3,573     $ 1,391     $ 1,205     $ 539     $ 269     $ 18     $ 7,976  

Provision charged to expense

    79       8       72       124       374       65       75       3       800  

Losses charged off

    (45 )     -       -       -       -       -       -       (1 )     (46 )

Recoveries

    33       -       1,268       -       26       -       -       4       1,331  

Balance, end of period

  $ 948     $ 108     $ 4,913     $ 1,515     $ 1,605     $ 604     $ 344     $ 24     $ 10,061  

Ending Balance: individually evaluated for impairment

  $ -     $ -     $ 200     $ 100     $ 850     $ -     $ -     $ -     $ 1,150  

Ending balance: collectively evaluated for impairment

  $ 948     $ 108     $ 4,713     $ 1,415     $ 755     $ 604     $ 344     $ 24     $ 8,911  

Loans:

                                                                       

Ending Balance

  $ 39,719     $ 5,459     $ 183,934     $ 58,804     $ 12,543     $ 14,785     $ 14,826     $ 1,221     $ 331,291  

Ending Balance: individually evaluated for impairment

  $ 1,504     $ -     $ 12,280     $ 7,877     $ 1,883     $ -     $ 295     $ -     $ 23,839  

Ending balance: collectively evaluated for impairment

  $ 38,215     $ 5,459     $ 171,654     $ 50,927     $ 10,660     $ 14,785     $ 14,531     $ 1,221     $ 307,452  

 

  

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

Loan Class

 

1-4 Family

   

Home Equity

   

Commercial Real Estate

   

Multifamily

   

Land

   

Construction

   

Commercial Non-Mortgage

   

Consumer

   

Total

 

Year to date analysis as of March 31, 2015

                                         

Allowance for loan losses:

                                                                 

Balance, beginning of period

  $ 881     $ 100     $ 3,573     $ 1,391     $ 1,205     $ 539     $ 269     $ 18     $ 7,976  

Provision charged to expense

    22       (9 )     131       (90 )     156       78       (40 )     2       250  

Losses charged off

    (45 )     -       -       -       -       -       -       (1 )     (46 )

Recoveries

    16       -       39       -       -       -       -       -       55  

Balance, end of period

  $ 874     $ 91     $ 3,743     $ 1,301     $ 1,362     $ 617     $ 229     $ 19     $ 8,236  

Ending Balance: individually evaluated for impairment

  $ -     $ -     $ 200     $ 100     $ 850     $ -     $ -     $ -     $ 1,150  

Ending balance: collectively evaluated for impairment

  $ 874     $ 91     $ 3,543     $ 1,201     $ 512     $ 617     $ 229     $ 19     $ 7,086  

Loans:

                                                                       

Ending Balance

  $ 42,337     $ 5,999     $ 155,700     $ 59,374     $ 10,149     $ 20,847     $ 12,073     $ 1,272     $ 307,751  

Ending Balance: individually evaluated for impairment

  $ 1,775     $ 60     $ 13,840     $ 8,125     $ 2,918     $ -     $ 325     $ -     $ 27,043  

Ending balance: collectively evaluated for impairment

  $ 40,562     $ 5,939     $ 141,860     $ 51,249     $ 7,231     $ 20,847     $ 11,748     $ 1,272     $ 280,708  

 

 

 

Consistent with regulatory guidance, charge offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. Our policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

 

For all loan portfolio segments except one-to-four family residential loans and consumer loans, we promptly charge 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.

 

We charge off one-to-four family residential and consumer loans, or portions thereof, when we reasonably determine the amount of the loss. We adhere to timeframes established by applicable regulatory guidance which provides for the charge off of one-to-four family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which we can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

The following table presents the credit risk profile of our loan portfolio based on rating category and payment activity as of March 31, 2016 and December 31, 2015:

 

   

1-4 Family

   

Home Equity

   

Commercial Real Estate

   

Multifamily

 
   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

 

Pass

  $ 36,346     $ 36,941     $ 5,073     $ 5,459     $ 160,878     $ 150,122     $ 48,040     $ 46,230  

Pass (Closely Monitored)

    1,184       1,437       -       -       19,865       21,156       8,050       8,142  

Special Mention

    300       225       -       -       1,689       751       -       -  

Substandard

    1,068       1,116       -       -       8,798       11,905       4,076       4,432  

Doubtful

    -       -       -       -       -       -       -       -  

Loss

    -       -       -       -       -       -       -       -  
    $ 38,898     $ 39,719     $ 5,073     $ 5,459     $ 191,230     $ 183,934     $ 60,166     $ 58,804  

 

 

        Land     Construction     Commercial Non-Mortgage     Consumer     Total  
       

2016

   

2015

   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

 

Pass

  $ 10,112     $ 9,462     $ 11,804     $ 14,785     $ 13,272     $ 9,626     $ 1,175     $ 1,221     $ 286,700     $ 273,846  

Pass (Closely Monitored)

    1,023       1,239       -       -       293       4,904       -       -       30,415       36,878  

Special Mention

    -       -       -       -       4,177       -       -       -       6,166       976  

Substandard

    1,728       1,842       -       -       -       296       -       -       15,670       19,591  

Doubtful

    -       -       -       -       -       -       -       -       -       -  

Loss

    -       -       -       -       -       -       -       -       -       -  
        $ 12,863     $ 12,543     $ 11,804     $ 14,785     $ 17,742     $ 14,826     $ 1,175     $ 1,221     $ 338,951     $ 331,291  

 

 


We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis is performed during the loan approval process and is updated as circumstances warrant.

 

The Pass asset quality rating encompasses assets that have performed as expected. These assets generally do not have delinquency or servicing issues. Loans assigned this rating include loans to borrowers possessing solid credit quality with acceptable risk.  Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality, stability of the industry or specific market area and quality/coverage of collateral.  These borrowers generally have a history of consistent earnings and reasonable leverage.   

 

 

The Closely Monitored asset quality rating encompasses assets that have been brought to the attention of management and may, if not corrected, warrant a more serious quality rating by management. These assets are usually in the first phase of a deficiency situation and may possess similar criteria as Special Mention assets. This grade includes loans to borrowers which require special monitoring because of deteriorating financial results, declining credit ratings, decreasing cash flow, increasing leverage, marginal collateral coverage or industry stress that has resulted or may result in a changing overall risk profile.

 

 
Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation.  Weaknesses are considered potential at this state and are not yet fully defined.

 

The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness(es) based upon objective evidence; assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain.  Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss.  Collateral coverage may be marginal and the accrual of interest has been suspended.

 

The Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as Substandard.  In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets of the Bank is not warranted. A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future.

 

The following table is a summary of our past due and non-accrual loans as of March 31, 2016 and December 31, 2015:

 

 

 

As of March 31, 2016

 

30-59 Days

Past Due

   

60-89 Days

Past Due

   

Greater

than 90

Days

   

Total Past

Due

   

Current

   

Total

Loans

Receivable

   

Total

Loans >90

Days &

Accruing

   

Total

Nonaccrual

 

1-4 Family

  $ 19     $ 43     $ 147     $ 209     $ 38,689     $ 38,898     $ -     $ 147  

Home Equity

    -       -       -       -       5,073       5,073       -       -  

Commercial Real Estate

    138       381       675       1,194       190,036       191,230       -       5,362  

Multifamily

    -       -       -       -       60,166       60,166       -       977  

Land

    -       -       1,728       1,728       11,135       12,863       -       1,728  

Construction

    -       -       -       -       11,804       11,804       -       -  

Commercial Non-Mortgage

    -       -       -       -       17,742       17,742       -       -  

Consumer

    -       -       -       -       1,175       1,175       -       -  

Total

  $ 157     $ 424     $ 2,550     $ 3,131     $ 335,820     $ 338,951     $ -     $ 8,214  

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

As of December 31, 2015

 

30-59 Days

Past Due

   

60-89 Days

Past Due

   

Greater than

90 Days

   

Total Past Due

   

Current

   

Total Loans Receivable

   

Total Loans

>90 Days & Accruing

   

Total

Nonaccrual

 

1-4 Family

  $ 151     $ 152     $ -     $ 303     $ 39,416     $ 39,719     $ -     $ 99  

Home Equity

    -       -       -       -       5,459       5,459       -       -  

Commercial Real Estate

    6       1,011       -       1,017       182,917       183,934       -       5,188  

Multifamily

    1,291       -       -       1,291       57,513       58,804       -       -  

Land

    -       -       1,842       1,842       10,701       12,543       -       1,842  

Construction

    -       -       -       -       14,785       14,785       -       -  

Commercial Non-Mortgage

    -       -       -       -       14,826       14,826       -       -  

Consumer

    -       -       -       -       1,221       1,221       -       -  

Total

  $ 1,448     $ 1,163     $ 1,842     $ 4,453     $ 326,838     $ 331,291     $ -     $ 7,129  

 

 

 

Nonaccrual Loan and Past Due Loans. The accrual of interest is discontinued on all loan classes at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

 

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. We generally require a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

 

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 we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)


The following table presents impaired loans at March 31, 2016:

 

 

 

           

Unpaid

                         
   

Recorded

   

Principal

   

Specific

   

YTD Average

   

YTD Interest

 
   

Balance

   

Balance

   

Allowance

   

Balance

   

Income

 
                                         

Loans without a specific valuation allowance:

                                 

1-4 Family

  $ 1,241     $ 1,369     $ -     $ 1,342     $ 9  

Home Equity

    -       -       -       -       -  

Commercial real estate

    9,211       11,177       -       9,561       47  

Multi Family

    6,516       7,330       -       6,551       76  

Land

    41       95       -       41       1  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       148       -  

Consumer

    -       -       -       -       -  

Loans with a specific valuation allowance:

                                 

1-4 Family

  $ -     $ -     $ -     $ 30     $ -  

Home Equity

    -       -       -       -       -  

Commercial real estate

    -       -       -       1,184       -  

Multi Family

    977       997       100       1,134       17  

Land

    1,728       3,575       850       1,785       -  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Totals

                                       

1-4 Family

  $ 1,241     $ 1,369     $ -     $ 1,372     $ 9  

Home Equity

    -       -       -       -       -  

Commercial real estate

    9,211       11,177       -       10,745       47  

Multi Family

    7,493       8,327       100       7,685       93  

Land

    1,769       3,670       850       1,826       1  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       148       -  

Consumer

    -       -       -       -       -  

Total

  $ 19,714     $ 24,543     $ 950     $ 21,776     $ 150  

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

The following table presents impaired loans at December 31, 2015:

 

 

 

           

Unpaid

                         
   

Recorded

   

Principal

   

Specific

   

YTD Average

   

YTD Interest

 
   

Balance

   

Balance

   

Allowance

   

Balance

   

Income

 
                                         

Loans without a specific valuation allowance:

                                 

1-4 Family

  $ 1,504     $ 1,633     $ -     $ 1,791     $ 80  

Home Equity

    -       -       -       15       -  

Commercial real estate

    9,912       11,820       -       10,508       289  

Multi Family

    6,586       7,400       -       6,685       359  

Land

    41       96       -       371       22  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    295       295       -       311       22  

Consumer

    -       -       -       -       -  

Loans with a specific valuation allowance:

                                 

1-4 Family

  $ -     $ -     $ -     $ -     $ -  

Home Equity

    -       -       -       -       -  

Commercial real estate

    2,368       2,368       200       2,499       175  

Multi Family

    1,291       1,291       100       1,319       77  

Land

    1,842       3,640       850       2,115       -  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Totals

                                       

1-4 Family

  $ 1,504     $ 1,633     $ -     $ 1,791     $ 80  

Home Equity

    -       -       -       15       -  

Commercial real estate

    12,280       14,188       200       13,007       464  

Multi Family

    7,877       8,691       100       8,004       436  

Land

    1,883       3,736       850       2,486       22  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    295       295       -       311       22  

Consumer

    -       -       -       -       -  

Total

  $ 23,839     $ 28,543     $ 1,150     $ 25,614     $ 1,024  

 

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

The following table presents impaired loans at March 31, 2015:

 

 

           

Unpaid

                         
   

Recorded

   

Principal

   

Specific

   

YTD Average

   

YTD Interest

 
   

Balance

   

Balance

   

Allowance

   

Balance

   

Income

 
                                         

Loans without a specific valuation allowance:

                                 

1-4 Family

  $ 1,598     $ 1,773     $ -     $ 1,525     $ 20  

Home Equity

    60       60       -       62       -  

Commercial real estate

    11,250       14,118       -       11,314       69  

Multi Family

    6,782       7,597       -       6,814       81  

Land

    510       791       -       517       7  

Construction

    -       -       -       2,674       -  

Commercial Non-Mortgage

    -       -       -       10       -  

Consumer

    -       -       -       -       -  

Loans with a specific valuation allowance:

                                 

1-4 Family

  $ 177     $ 177     $ -     $ 178     $ 3  

Home Equity

    -       -       -       -       -  

Commercial real estate

    2,590       2,590       200       2,758       48  

Multi Family

    1,343       1,343       100       1,344       20  

Land

    2,408       3,937       850       2,554       1  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    325       325       -       329       6  

Consumer

    -       -       -       -       -  

Totals

                                       

1-4 Family

  $ 1,775     $ 1,950     $ -     $ 1,703     $ 23  

Home Equity

    60       60       -       62       -  

Commercial real estate

    13,840       16,708       200       14,072       117  

Multi Family

    8,125       8,940       100       8,158       101  

Land

    2,918       4,728       850       3,071       8  

Construction

    -       -       -       2,674       -  

Commercial Non-Mortgage

    325       325       -       339       6  

Consumer

    -       -       -       -       -  

Total

  $ 27,043     $ 32,711     $ 1,150     $ 30,079     $ 255  

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assumed, in which case interest is recognized on a cash basis and is reasonable compared to interest income noted above.

 

Troubled Debt Restructuring (TDR)

 

We may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that we would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring. We may modify loans through rate reductions, short-term extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

 

We identify loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

 

For one-to-four family residential and home equity lines of credit, a restructure often occurs with past due loans and may be offered as an alternative to foreclosure. There are other situations where borrowers, who are not past due, experience a sudden job loss, become over-extended with credit obligations, or other problems, have indicated that they will be unable to make the required monthly payment and request payment relief.

 

When considering a loan restructure, management will determine if: (i) the financial distress is short or long term; (ii) loan concessions are necessary; and (iii) the restructure is a viable solution.

 

When a loan is restructured, the new terms often require a reduced monthly debt service payment. No TDRs that were on non-accrual status at the time the concessions were granted have been returned to accrual status. For commercial loans, management completes an analysis of the operating entity’s ability to repay the debt. If the operating entity is capable of servicing the new debt service requirements and the underlying collateral value is believed to be sufficient to repay the debt in the event of a future default, the new loan can be placed on accrual status after six months of performance with the new loan terms. To date, there have been no commercial loans restructured and immediately placed on accrual status after the execution of the TDR.

 

For retail loans, an analysis of the individual’s ability to service the new required payments is performed. If the borrower is capable of servicing the newly restructured debt and the underlying collateral value is believed to be sufficient to repay the debt in the event of a future default, the new loan can be placed on accrual status after six months of performance to the new loan terms. The reason for the TDR is also considered, such as paying past due real estate taxes or payments caused by a temporary job loss, when determining whether a retail TDR loan could be returned to accrual status. Retail TDRs remain on nonaccrual status until sufficient payments have been made to bring the past due principal and interest current and/or after six months of performance to the new loan terms at which point the loan could be transferred to accrual status.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

The following table summarizes the loans that were restructured as TDRs during the three months ended March 31, 2016:

 

   

Three Months Ended

 
   

March 31, 2016

 
   

Count

   

Balance

prior to

TDR

   

Balance

after

TDR

 
                         

Commercial Real Estate

    1     $ 996     $ 996  

 

 

The commercial real estate TDR in 2016 was modified with a forbearance agreement and maturity extension.

 

We had one one-to-four family TDR for $202 that had payment defaults during the three months ended March 31, 2016. Default occurs when a TDR is 90 days or more past due, transferred to nonaccrual status, or transferred to other real estate owned within twelve months of restructuring.

 

Management monitors the TDRs based on the type of modification or concession granted to the borrower. These types of modifications may include rate reductions, payment/term extensions, forgiveness of principal, forbearance, and other applicable actions. Management predominantly utilizes rate reductions and lower monthly payments, either from a longer amortization period or interest only repayment schedule, because these concessions provide needed payment relief without risking the loss of principal. Management will also agree to a forbearance agreement when it is deemed appropriate to avoid foreclosure.

 

 

 

There were no loans that were restructured as TDRs during the three months ended March 31, 2015.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

Note 5:

Disclosures About Fair Value of Assets and Liabilities

 

ASC Topic 820, Fair Value Measurements, defines fair value as 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. Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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 that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets under the valuation hierarchy. We have no assets or liabilities measured at fair value on a recurring basis and no liabilities measured at fair value on a nonrecurring basis.

 

Nonrecurring Measurements

 

There were no assets requiring fair value measurement on a nonrecurring basis during the three months ended March 31, 2016 and December 31, 2015.

 

Collateral-dependent Impaired Loans

 

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 an 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 or subsequently as deemed necessary and approved by management. Appraisals are reviewed for accuracy and consistency by the Credit Analysis department. Typically, appraisers are selected from the list of approved appraisers maintained by the Underwriting department. The appraised values may be reduced by discounts to consider a lack of marketability or 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 Credit Analysis department and approved by management.

 

There were no collateral-dependent impaired loans during the three months ended March 31, 2016 and December 31, 2015.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Unobservable (Level 3) inputs

 

There were no assets requiring quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than good will at March 31, 2016 and December 31, 2015.

 

Fair Value of Financial Instruments

 

The following table presents estimated fair values of our financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value at the individual dates. The fair values of certain instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Because no market exists for certain financial instruments and because management does not intend to sell these financial instruments, we do not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

 

           

Fair Value Measurements Using

 

As of March 31, 2016

 

Carrying Amount

   

Quoted Prices in Active Markets for Identical Assets (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Financial Assets

                               

Cash and cash equivalents

  $ 12,243     $ 12,243     $ -     $ -  

Interest-earning time deposits

    38,423       38,423       -       -  

Held to maturity securities

    498       -       500       -  

Loans held for sale

    1,203       -       1,208       -  

Loans, net of allowance for loan losses

    323,552       -       -       327,190  

Federal Home Loan Bank stock

    2,700       -       2,887       -  

Interest receivable

    929       -       929       -  
                                 

Financial liabilities

                               

Deposits

  $ 274,410     $ 109,455     $ -     $ 167,103  

Federal Home Loan Bank advances

    47,000       -       46,385       -  

Interest payable

    290       -       290       -  

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

           

Fair Value Measurements Using

 

As of December 31, 2015

 

Carrying Amount

   

Quoted Prices in Active Markets for Identical Assets (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Financial Assets

                               

Cash and cash equivalents

  $ 52,865     $ 52,865     $ -     $ -  

Interest-earning time deposits

    39,021       39,021       -       -  

Held to maturity securities

    500       -       500       -  

Loans held for sale

    581       -       583       -  

Loans, net of allowance for loan losses

    314,613       -       -       318,525  

Federal Home Loan Bank stock

    2,700       -       2,700       -  

Interest receivable

    967       -       967       -  
                                 

Financial liabilities

                               

Deposits

  $ 281,701     $ 117,916     $ -     $ 165,657  

Federal Home Loan Bank advances

    47,000       -       46,390       -  

Federal funds purchased

    24,000       -       24,000       -  

Interest payable

    233       -       233       -  

 

 

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

 

Cash and Cash Equivalents, Interest-Earning Time Deposits, Federal Home Loan Bank Stock, Federal Funds Purchased, Interest Receivable, and Interest Payable

 

The carrying amount approximates fair value.

 

Held to Maturity Securities

 

Fair values equal quoted market prices, if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities.

 

Loans Held for Sale

 

Fair value of loans held for sale is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar remaining maturities.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Loans

 

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

 

Deposits

 

Deposits include demand deposits, savings accounts, checking accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

 

Federal Home Loan Bank Advances

 

Rates currently available to us for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

 

Commitments to Originate Loans, Letters of Credit and Lines of Credit

 

Loan commitments and letters-of-credit generally have short-term, variable rate features and contain clauses which limit our exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.

 

 

Note 6:

Earnings Per Share (In thousands except per share amounts)

 

Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the entity. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method.

 

Unvested share-based payment awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered to participate with common stock in undistributed earnings for purposes of computing EPS. Accordingly, the Company is required to calculate basic and diluted EPS using the two-class method. Restricted stock awards granted by the Company are considered participating securities. Calculations of EPS under the two-class method (i) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (ii) exclude from the denominator the dilutive impact of the participating securities.

 

Unearned ESOP shares which are not vested and unvested restricted stock awards are excluded from the computation of average shares outstanding.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

Earnings per share analysis for the three months ended March 31, 2016 and 2015 is as follows (dollars in thousands, except per share data):

 

 

 

   

Three months

ended March 31,

2016

   

Three months

ended March 31,

2015

 

Net Income

  $ 967     $ 739  

Dividends and undistributed earnings allocated to participating securities

    (17 )     (15 )

Income attributable to common shareholders

    950       725  
                 

Weighted average shares outstanding (in thousands)

    2,154       2,220  

Less: average unearned ESOP and unvested restricted stock

    (177 )     (195 )

Average Shares

    1,977       2,025  

Effect of dilutive based awards

    32       18  

Average common and common-equivalent shares for diluted EPS (in thousands)

    2,009       2,043  
                 

Basic EPS

  $ 0.48     $ 0.36  

Diluted EPS

  $ 0.47     $ 0.36  

 

 

Note 7:

Share-Based Compensation

 

In May 2012, the Company’s stockholders approved the Wolverine Bancorp, Inc. 2012 Equity Incentive Plan (“Plan”) which provides for awards of stock options and restricted stock to key officers and outside directors. The cost of the Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on management’s judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate. The cost of the awards are being recognized on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards.

 

Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the Plan is 351,050. Total shared-based compensation expense for the three months ended March 31, 2016 and 2015 was $87 and $78 respectively.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

(Dollars in Thousands)

 

Stock Options 

 

The table below presents the stock option activity for the period shown:

 

 

   

Options

   

Weighted

average exercise

price

   

Remaining

contractual life

(years)

   

Aggregate

intrinsic value

 

Options outstanding at January 1, 2016

    128,949     $ 17.91       7     $ 1,123  

Granted

    --       --       --       --  

Exercised

    --       --       --       --  

Forfeited

    --       --       --       --  

Expired

    --       --       --       --  

Options outstanding at March 31, 2016

    128,949     $ 17.91       7     $ 1,123  

Exercisable at March 31, 2016

    71,912     $ 17.33       7     $ 669  

 

 

 

As of March 31, 2016, the Company had $109 of unrecognized compensation expense related to stock options. Stock option expense for the three months ended March 31, 2016 and 2015 was $16 and $15 respectively.

 

Restricted Stock Awards

 

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.

 

The table below presents the restricted stock award activity for the period shown:

 

 

 

As of March 31, 2016, the Company had $527 of unrecognized compensation expense related to restricted stock awards. The cost of the restricted stock awards will be amortized in monthly installments over the five-year vesting period. Restricted stock expense for three months ended March 31, 2016 and 2015 was $71 and $63 respectively.

 

 

   

Service-Based Restricted stock awards

   

Weighted average grant date fair value

 

Non-vested at January 1, 2016

    36,534     $ 19.15  

Granted

    -       -  

Vested

    -       -  

Forfeited

    78       18.82  

Non-vested at March 31, 2016

    36,456     $ 19.15  

 

 

 

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

 

General 

 

Management’s discussion and analysis of the financial condition at March 31, 2016 and the results of operations for the three months ended March 31, 2016 and 2015 is intended to assist in understanding our financial condition and results of operations. 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.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is designed to provide a narrative on our financial condition, results of operations, liquidity, critical accounting policies, off-balance sheet arrangements and the future impact of accounting standards. It is useful to read our MD&A in conjunction with the consolidated financial statements contained in Part I in this Quarterly Report on Form 10-Q (this "Form 10-Q"), our Annual Report on Form 10-K for the year ended December 31, 2015 (the “Form 10-K”), and our other reports on Forms 10-Q and current reports on Forms 8-K and other publicly available information

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” 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:

 

 

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

 

competition among depository and other financial institutions;

 

 

changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

 

adverse changes in the securities markets;

 

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

 

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

 

 

our ability to successfully integrate acquired entities, if any;

 

 

 

changes in consumer spending, borrowing and savings habits;

 

 

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 organization, compensation and benefit plans;

 

 

changes in our financial condition or results of operations that reduce capital; and

 

 

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

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Critical Accounting Policies

 

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies.

 

Allowance for Loan Losses. We believe that the allowance for loan losses and related provision for loan losses are particularly susceptible to change in the near term, due to changes in credit quality which are evidenced by trends in charge offs and in the volume and severity of past due loans. In addition, our portfolio is comprised of a substantial amount of commercial real estate loans which generally have greater credit risk than one- to four-family residential mortgage and consumer loans because these loans generally have larger principal balances and are non-homogenous.

 

The allowance for loan losses is maintained at a level to cover probable credit losses inherent in the loan portfolio at the balance sheet date. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. The estimate of our credit losses is applied to two general categories of loans:

 

 

loans that we evaluate individually for impairment under ASC 310-10, “Receivables;” and

 

 

groups of loans with similar risk characteristics that we evaluate collectively for impairment under ASC 450-20, “Loss Contingencies.”

 

The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and estimated value of any underlying collateral. This evaluation is inherently subjective as it requires estimates that are subject to significant revision as more information becomes available. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

 

 

Income Tax Accounting. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Under U.S. GAAP, a valuation allowance is required to be recognized if it is more likely than not that a deferred tax asset will not be realized. The determination as to whether we will be able to realize the deferred tax assets is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Any required valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.

 

We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact on our net income and the carrying value of our assets. We believe our tax liabilities and assets are properly recorded in the consolidated financial statements at March 31, 2016 and December 31, 2015 and no valuation allowance was necessary.

 

 

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

 

Total assets decreased $31.9 million, or 7.6%, to $385.9 million at March 31, 2016 from $417.8 million at December 31, 2015. The decrease was primarily the result of a decrease of $40.6 million in cash and cash equivalents, of which $24 million was Federal Funds purchased, offset by an increase of $8.9 million in loans.

 

Loans held for sale increased $622,000 to $1.2 million at March 31, 2016 from $581,000 at December 31, 2015.

 

Net loans increased $8.9 million, or 2.8%, to $323.6 million at March 31, 2016 from $314.6 million at December 31, 2015. Commercial real estate loans increased $7.3 million, or 4.0%, multi-family loans increased $1.4 million, or 2.3%, and commercial non-mortgage loans increased $2.9 million, or 19.7%, partially offset by a decrease of $3.0 million, or 20.2%, in construction loans.

 

The undisbursed portion of loans decreased $1.3 million to $4.8 million at March 31, 2016 from $6.1 million at December 31, 2015 due primarily to a net decrease in undisbursed construction loans of $1.2 million.

 

Other real estate owned increased $67,000, or 51.5%, to $197,000 at March 31, 2016, from $130,000 at December 31, 2015 resulting from two loans transferred to real estate owned totaling $104,000, offset by sales of $37,000.

 

 

Other assets, consisting primarily of net deferred and accrued federal taxes, decreased $201,000 to $5.0 million at March 31, 2016 from $5.2 million at December 31, 2015.

 

Deposits decreased $7.3 million to $274.4 million at March 31, 2016 from $281.7 million at December 31, 2015. Core deposits (consisting of interest-bearing and noninterest-bearing checking accounts, money market accounts and savings accounts) decreased $8.9 million. Certificates of deposit increased $1.6 million, or 1.0%, to $165.4 million at March 31, 2016 from $163.8 million at December 31, 2015.

 

Federal Home Loan Bank advances remained unchanged at $47 million at March 31, 2016 from December 31, 2015.

 

Interest payable and other liabilities, consisting primarily of liabilities for checks and money orders, and accrued expenses, decreased $1.6 million, or 34.7%, to $3.0 million at March 31, 2016 from $4.6 million primarily due to a $2.1 million dividend payout.

 

Federal Funds purchased decreased $24 million, or 100.0%, to $0 at March 31, 2016 from $24 million at December 31, 2015.

 

Total stockholders’ equity increased $974,000, or 1.6%, to $61.5 million at March 31, 2016 from $60.5 million at December 31, 2015, primarily due to net income of $967,000.

 

 

Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015

 

General. We recorded net income of $967,000 for the three months ended March 31, 2016 compared to net income of $739,000 for the three months ended March 31, 2015 primarily due to an increase in interest income on loans of $317,000 to $3.9 million for the three months ended March 31, 2016 from $3.6 million for the three months ended March 31, 2015.

 

Interest and Dividend Income. Interest and dividend income increased $384,000, or 10.4%, to $4.1 million for the three months ended March 31, 2016. Average balances of interest-earnings assets increased $35.2 million to $381.0 million for the three months ended March 31, 2016 from $345.8 million for the three months ended March 31, 2015, and the average yield on interest-earning assets increased one basis point to 4.26% during the 2016 period from 4.25% during the 2015 period reflecting higher market interest rates.

 

Interest income on loans increased $317,000, or 8.8%, to $3.9 million for the three months ended March 31, 2016 from $3.6 million for the three months ended March 31, 2015 as average net loans increased $31.5 million, or 8.8%, to $321.9 million for the three months ended March 31, 2016 from $290.4 million for the three months ended March 31, 2015, offset in part by a decrease of nine basis points in the average yield to 4.89% during the 2016 period versus 4.98% during the 2015 period.

 

Income from dividends and investment securities increased $67,000 to $129,000 for the quarter ended March 31, 2016 from $62,000 for the quarter ended March 31, 2015.

 

Interest Expense. Interest expense increased $117,000, or 13.8%, to $967,000 for the three months ended March 31, 2016 from $850,000 for the three months ended March 31, 2015. Interest expense on deposits increased $183,000 to $508,000 during the 2016 period from $325,000 during the 2015 period. Interest expense on borrowed funds decreased $66,000 to $459,000 for the three months ended March 31, 2016 from $525,000 for the three months ended March 31, 2015.

 

Average interest-bearing liabilities increased $34.4 million, or 11.9%, to $324.5 million for the three months ended March 31, 2016 from $290.1 million for the three months ended March 31, 2015. The average rate paid on these liabilities increased two basis points to 1.19% during the 2016 period from 1.17% during the 2015 period. Interest expense on certificates of deposit increased $181,000, or 70.7%, to $437,000 for the three months ended March 31, 2016 from $256,000 for the three months ended March 31, 2015. The average balance of certificates of deposits increased to $165.3 million for the three months ended March 31, 2016, from $110.5 million for the three months ended March 31, 2015. Additionally, the rate on certificates of deposit increased 13 basis points to 1.06% for the three months ended March 31, 2016 from 0.93% for the three months ended March 31, 2015 primarily due to increased market interest rate environment.

 

 

The average balance of core deposits, consisting of checking accounts, money market accounts and savings accounts, decreased $7.4 million, or 6.6%, to $112.3 million for the three months ended March 31, 2016 from $119.7 million for the three months ended March 31, 2015. The interest on core deposits increased $1,000 to $71,000 for the three months ended March 31, 2016 from $70,000 for three months ended March 31, 2015. The rate on core deposits for the three months ended March 31, 2016 increased two basis points to 0.25% from 0.23% for the three months ended March 31, 2015.

 

Net Interest Income. Net interest income increased $267,000 to $3.1 million for the three months ended March 31, 2016 from $2.8 million for the three months ended March 31, 2015, as our average net loans increased to $321.9 million from $290.4 million. Changes in net interest income are influenced by a variety of factors, including changes in the level and mix of interest-earning assets and interest-bearing liabilities, the level and direction of interest rates, the difference between short-term and long-term interest rates and the general strength of the economy.

 

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies — Allowance for Loan Losses,” we did not record a provision for loan losses for the three months ended March 31, 2016 and a provision for loan losses of $250,000 for the three months ended March 31, 2015. At March 31, 2016, non-performing loans totaled $7.4 million, or 2.3% of total loans, as compared to $7.3 million, or 2.3% of total loans, at December 31, 2015. The allowance for loan losses to total loans receivable was 3.0% at March 31, 2016 and December 31, 2015. All loans rated substandard are reviewed for impairment at least quarterly. Overall, management continues to focus on resolving non-performing assets and improving asset quality. In addition to our collections department personnel in working out loans, we continue to involve business development officers and, on significant assets, underwriters and senior management.

 

Noninterest Income. Noninterest income decreased $32,000, or 10.2%, to $283,000 for the three months ended March 31, 2016 from $315,000 for the three months ended March 31, 2015. This was primarily due to a decrease of $80,000 in net gain on loan sales, partially offset by an increase of $62,000 in net gain on sale of real estate owned.

 

Noninterest Expense. Noninterest expense increased $72,000, or 4.0%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. This was primarily due to an increase of $62,000 in salaries and employee benefits, an increase in loan legal expense of $17,000, an increase of $12,000 for other real estate owned expense, offset in part by a $13,000 decrease in net occupancy and equipment expense.

 

Income Tax Expense. We recorded $523,000 of income tax expense for the three months ended March 31, 2016 compared to $338,000 of income tax expense for the three months ended March 31, 2015. Our effective tax rate was 35.1% for the three months ended March 31, 2016 and 31.4% for the three months ended March 31, 2015.

 

Asset Quality

 

Other real estate owned totaled $197,000, or 0.1% of total assets, at March 31, 2016 compared to $130,000, or 0.1% of total assets, at December 31, 2015. The largest relationship as of March 31, 2016 was $79,000, or 40.1% of other real estate owned, which consisted of land.

 

Non-performing assets, which includes non-performing loans, other real estate owned and troubled debt restructurings, totaled $7.6 million, or 2.0% of total assets, at March 31, 2016 compared to $7.5 million, or 1.8% of total assets, at December 31, 2015.

 

 

Our largest substandard and non-performing relationship as of March 31, 2016 has a balance of $3.3 million. Of the $19.6 million loans rated substandard, approximately $12.2 million are performing.

 

New Capital Requirements

 

As of January 1, 2015, the Company has adopted new minimum risk-based capital and leverage ratios and refines the definition of what constitutes as “capital” for purposes of calculating these ratios based on rules effective January 1, 2015. The new minimum capital requirements include: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based asset capital ratio of 6% (increased from 4%); a “capital conservation buffer” of 2.5%, and resulting in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7%, (ii) a Tier 1 risk-based asset capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until January 2019. These changes had no significant impact on the Company.

 

Item 3.          Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable, as the Registrant is a smaller reporting company.

 

Item 4.     Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Operating Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2016. Based on that evaluation, our management, including the Chief Executive Officer and the Chief Operating Officer and Treasurer, concluded that our disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2016, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Part II – Other Information

 

Item 1. Legal Proceedings 

 

 

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

 

Item 1A.     Risk Factors

 

Not applicable, as the Registrant is a smaller reporting company.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

 

(a)

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

 

 

(b)

Not applicable.

 

 

(c)

The following table presents for the periods indicated a summary of the purchases made by or on behalf of the company of shares of its common stock.

Period

 

Total Number of Shares Purchased

   

Average Price

Paid per Share

   

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Program

   

Maximum Number

of Shares that May

Yet Be Purchased

Under the Plans or

Programs(1), (2), (3), (4), (5)

 

January 1, 2016 through January 31, 2016

    --     $ --       --       158,895  

February 1, 2016 through February 29, 2016

    5,700     $ 25.75       5,700       153,195  

March 1, 2016 through March 31, 2016

    --     $ --       --       153,195  
      5,700               5,700          

 

(1)

The Company’s board of directors approved a stock repurchase program on February 14, 2012 for the repurchase of 125,375 shares of common stock.

 

(2)

The Company’s board of directors approved a stock repurchase program December 10, 2012 for the repurchase of 122,954 shares of common stock.

 

(3)

The Company’s board of directors approved a stock repurchase program on December 9, 2013 for the repurchase of 119,167 shares of common stock.

 

(4)

The Company’s board of directors approved a stock repurchase program on March 3, 2015 for the repurchase of 110,664 shares of common stock.

 

(5)

The Company’s board of directors approved a stock repurchase program on December 14, 2015 for the repurchase of 107,647 shares of common stock.

 

 

Item 3. Defaults Upon Senior Securities 

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits 

 

 

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101

INS XBRL Instance

 

 

101

SCH XBRL Taxonomy Extension Schema

 

 

101

CAL XBRL Taxonomy Extension Calculation

 

 

101

DEF XBRL Taxonomy Extension Definition

 

 

101

LAB XBRL Taxonomy Extension Label

 

 

101

PRE XBRL Taxonomy Extension Presentation

 

 

 

SIGNATURES

 

 

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

 

 

 

 

    WOLVERINE BANCORP, INC.  

 

 

 

 

 

 

 

 

Date:     May 13, 2016

 

/s/ David H. Dunn

 

 

 

David H. Dunn

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 Date:     May 13, 2016 

 

/s/ Rick A. Rosinski

 

 

 

Rick A. Rosinski

 

 

 

Chief Operating Officer and Treasurer