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, 2014
OR
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File 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
(Registrants 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 | ¨ (Do not check if smaller reporting company) | Smaller reporting company | x |
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 Registrants common stock, $0.01 per share, as of April 30, 2014, was 2,293,725
Wolverine Bancorp, Inc.
Form 10-Q
Page | ||||||
Part I. Financial Information | ||||||
Item 1. | Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013 |
1 | |||||
2 | ||||||
3 | ||||||
4 | ||||||
Notes to Condensed Consolidated Financial Statements (unaudited) |
5 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
29 | ||||
Item 3. | 34 | |||||
Item 4. | 35 | |||||
Part II. Other Information | ||||||
Item 1. | 35 | |||||
Item 1A. | 35 | |||||
Item 2. | 35 | |||||
Item 3. | 35 | |||||
Item 4. | 35 | |||||
Item 5. | 35 | |||||
Item 6. | 36 | |||||
37 |
Wolverine Bancorp, Inc.
Condensed Consolidated Balance Sheets
(Amounts in Thousands, except per share data)
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Unaudited) | ||||||||
Assets |
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Cash and due from banks |
$ | 473 | $ | 791 | ||||
Interest-earning demand deposits |
24,605 | 25,390 | ||||||
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Cash and cash equivalents |
25,078 | 26,181 | ||||||
Held to maturity securities |
57 | 123 | ||||||
Loans held for sale |
719 | 1,325 | ||||||
Loans, net of allowance for loan losses of $7,919 and $7,597 |
276,965 | 259,381 | ||||||
Premises and equipment, net |
1,508 | 1,569 | ||||||
Federal Home Loan Bank stock |
3,320 | 3,320 | ||||||
Other real estate owned |
913 | 872 | ||||||
Accrued interest receivable |
710 | 699 | ||||||
Other assets |
4,421 | 4,291 | ||||||
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Total assets |
$ | 313,691 | $ | 297,761 | ||||
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Liabilities and Stockholders Equity |
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Liabilities |
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Deposits |
$ | 198,594 | $ | 172,983 | ||||
Federal Home Loan Bank advances |
52,000 | 61,994 | ||||||
Interest payable and other liabilities |
2,470 | 2,459 | ||||||
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Total liabilities |
253,064 | 237,436 | ||||||
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Commitments and Contingencies |
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Stockholders Equity |
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Common Stock, $0.01 par value per share: |
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Authorized 100,000,000 shares |
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Issued and outstanding 2,293,725 and 2,297,725 at March 31, 2014 and December 31,2013 |
23 | 23 | ||||||
Additional paid-in capital |
18,950 | 18,952 | ||||||
Unearned employee stock ownership plan (ESOP) |
(1,666 | ) | (1,666 | ) | ||||
Retained earnings |
43,320 | 43,016 | ||||||
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Total stockholders equity |
60,627 | 60,325 | ||||||
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Total liabilities and stockholders equity |
$ | 313,691 | $ | 297,761 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Wolverine Bancorp, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Amounts in Thousands, except per share data)
Three months ended March 31, |
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2014 | 2013 | |||||||
(Unaudited) | ||||||||
Interest and Dividend Income |
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Loans |
$ | 3,360 | $ | 3,310 | ||||
Investment securities and other |
49 | 44 | ||||||
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Total interest and dividend income |
3,409 | 3,354 | ||||||
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Interest Expense |
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Deposits |
190 | 224 | ||||||
Borrowings |
531 | 582 | ||||||
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Total interest expense |
721 | 806 | ||||||
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Net Interest Income |
2,688 | 2,548 | ||||||
Provision for Loan Losses |
300 | 325 | ||||||
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Net Interest Income After Provision for Loan Losses |
2,388 | 2,223 | ||||||
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Noninterest Income |
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Service charges and fees |
51 | 54 | ||||||
Net gain on loan sales |
120 | 536 | ||||||
Net gain (loss) on sale of real estate owned |
(21 | ) | 94 | |||||
Other |
39 | 51 | ||||||
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Total noninterest income |
189 | 735 | ||||||
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Noninterest Expense |
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Salaries and employee benefits |
1,231 | 1,292 | ||||||
Net occupancy and equipment expense |
230 | 178 | ||||||
Information technology expense |
60 | 57 | ||||||
Federal deposit insurance corporation premiums |
53 | 58 | ||||||
Professional and services fees |
151 | 129 | ||||||
Other real estate owned expense |
19 | 18 | ||||||
Loan legal expense |
12 | 47 | ||||||
Advertising expense |
40 | 65 | ||||||
Michigan business tax |
51 | 47 | ||||||
Other |
266 | 268 | ||||||
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Total noninterest expense |
2,113 | 2,159 | ||||||
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Income Before Income Tax |
464 | 799 | ||||||
Provision for Income Taxes |
160 | 274 | ||||||
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Net Income and Comprehensive Income |
$ | 304 | $ | 525 | ||||
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Earnings Per Share: |
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Basic |
$ | 0.14 | $ | 0.23 | ||||
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Diluted |
$ | 0.14 | $ | 0.23 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Wolverine Bancorp, Inc.
Condensed Consolidated Statement of Cash Flows
(Amounts in Thousands)
Three months ended March 31, |
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2014 | 2013 | |||||||
(Unaudited) | ||||||||
Operating Activities |
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Net income |
$ | 304 | $ | 525 | ||||
Items not requiring (providing) cash |
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Depreciation |
65 | 51 | ||||||
Provision for loan losses |
300 | 325 | ||||||
Amortization of Federal Home Loan Bank advance prepayment penalty |
6 | 17 | ||||||
(Gain) loss on other real estate owned |
21 | (94 | ) | |||||
Loans originated for sale |
(3,234 | ) | (17,174 | ) | ||||
Proceeds from loans sold |
3,960 | 18,009 | ||||||
Gain on sale of loans |
(120 | ) | (536 | ) | ||||
Share based compensation |
84 | 82 | ||||||
Changes in |
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Interest receivable and other assets |
(141 | ) | 277 | |||||
Interest payable and other liabilities |
11 | 339 | ||||||
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Net cash provided by operating activities |
1,256 | 1,821 | ||||||
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Investing Activities |
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Proceeds from calls, maturities and pay-downs of held to maturity securities |
66 | 69 | ||||||
Net change in loans |
(18,139 | ) | 2,592 | |||||
Proceeds from sale of real estate owned |
193 | 469 | ||||||
Purchase of premises and equipment |
(4 | ) | (31 | ) | ||||
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Net cash used (provided) by investing activities |
(17,884 | ) | 3,099 | |||||
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Financing Activities |
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Net change in demand deposits, money market, checking and savings accounts |
10,553 | 771 | ||||||
Net change in certificates of deposit |
15,058 | 3,381 | ||||||
Repayment of Federal Home Loan Bank advances |
(10,000 | ) | | |||||
Purchase of common stock |
(86 | ) | (100 | ) | ||||
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Net cash provided by financing activities |
15,525 | 4,052 | ||||||
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Decrease (Increase) in Cash and Cash Equivalents |
(1,103 | ) | 8,972 | |||||
Cash and Cash Equivalents, Beginning of Period |
26,181 | 16,552 | ||||||
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Cash and Cash Equivalents, End of Period |
$ | 25,078 | $ | 25,524 | ||||
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Supplemental Disclosures of Cash Flows Information |
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Interest paid |
$ | 711 | $ | 2,972 | ||||
Income taxes paid |
200 | | ||||||
Loans transferred to real estate owned |
255 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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 |
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Balances at January 1, 2014 |
$ | 23 | $ | 18,952 | $ | (1,666 | ) | $ | 43,016 | $ | 60,325 | |||||||||
Net income |
| | | 304 | 304 | |||||||||||||||
Purchase of 4,000 shares of common stock |
| (86 | ) | | | (86 | ) | |||||||||||||
Share based compensation expense |
| 84 | | | 84 | |||||||||||||||
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Balances at March 31, 2014 |
$ | 23 | $ | 18,950 | $ | (1,666 | ) | $ | 43,320 | $ | 60,627 | |||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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, 2013 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, 2014 is not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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 31, 2014.
Note 2: Accounting Developments
Financial Accounting Standards Board (FASB)
In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Companys consolidated financial statements.
In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Companys consolidated financial statements.
5
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 |
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Held to Maturity Securities: |
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March 31, 2014 |
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Municipal |
$ | 57 | $ | | $ | | $ | 57 | ||||||||
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December 31, 2013 |
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Municipal |
$ | 123 | $ | | $ | | $ | 123 | ||||||||
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The amortized cost and fair value of securities at March 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2014 | ||||||||
Amortized Cost |
Fair Value |
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Within one year |
$ | 57 | $ | 57 | ||||
One to five years |
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Five to ten years |
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After ten years |
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Totals |
$ | 57 | $ | 57 | ||||
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There were no sales of securities during the three months ended March 31, 2014 and 2013.
6
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, | December 31, | |||||||
2014 | 2013 | |||||||
Real Estate |
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One-to four-family |
$ | 51,159 | $ | 49,726 | ||||
Home equity |
6,997 | 7,912 | ||||||
Commercial mortgage loans |
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Commercial real estate |
145,645 | 126,154 | ||||||
Multifamily |
60,129 | 62,790 | ||||||
Land |
10,227 | 9,734 | ||||||
Construction |
22,737 | 8,669 | ||||||
Commercial Non-mortgage |
6,656 | 7,226 | ||||||
Consumer |
1,076 | 1,167 | ||||||
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Total loans |
304,626 | 273,378 | ||||||
Less |
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Net deferred loan fees, premiums and discounts |
554 | 467 | ||||||
Undisbursed portion of loans |
19,188 | 5,933 | ||||||
Allowance for loan losses |
7,919 | 7,597 | ||||||
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Net loans |
$ | 276,965 | $ | 259,381 | ||||
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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.
7
Wolverine Bancorp, Inc.
Form 10-Q
(Table Amounts in Thousands Except Per Share Amounts)
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 borrowers 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 borrowers 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
8
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 propertys eventual rental income, income from the borrowers 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 borrowers 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 borrowers ability to make repayment from the cash flow of the borrowers 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.
9
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, 2014, December 31, 2013 and March 31, 2013:
Loan Class | 1-4 Family |
Home Equity |
Commercial Real Estate |
Multifamily | Land | Construction | Commercial Non- Mortgage |
Consumer | Total | |||||||||||||||||||||||||||
Quarter to date analysis as of March 31, 2014 |
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Allowance for loan losses: |
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Balance, beginning of period |
$ | 1,354 | $ | 251 | $ | 2,861 | $ | 1,514 | $ | 1,145 | $ | 285 | $ | 157 | $ | 30 | $ | 7,597 | ||||||||||||||||||
Provision charged to expense |
(358 | ) | (103 | ) | 611 | (176 | ) | 270 | 105 | (31 | ) | (18 | ) | 300 | ||||||||||||||||||||||
Losses charged off |
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Recoveries |
10 | | 3 | | 7 | | | 2 | 22 | |||||||||||||||||||||||||||
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Balance, end of period |
$ | 1,006 | $ | 148 | $ | 3,475 | $ | 1,338 | $ | 1,422 | $ | 390 | $ | 126 | $ | 14 | $ | 7,919 | ||||||||||||||||||
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Ending Balance: individually evaluated for impairment |
$ | | $ | | $ | 345 | $ | 100 | $ | 850 | $ | | $ | | $ | | $ | 1,295 | ||||||||||||||||||
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Ending balance: collectively evaluated for impairment |
$ | 1,006 | $ | 148 | $ | 3,130 | $ | 1,238 | $ | 572 | $ | 390 | $ | 126 | $ | 14 | $ | 6,624 | ||||||||||||||||||
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Loans: |
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Ending Balance |
$ | 51,159 | $ | 6,997 | $ | 145,645 | $ | 60,129 | $ | 10,227 | $ | 22,737 | $ | 6,656 | $ | 1,076 | $ | 304,626 | ||||||||||||||||||
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|||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 1,695 | $ | 64 | $ | 10,161 | $ | 8,384 | $ | 4,094 | $ | | $ | 612 | $ | | $ | 25,010 | ||||||||||||||||||
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Ending Balance: collectively evaluated for impairment |
$ | 49,464 | $ | 6,933 | $ | 135,484 | $ | 51,745 | $ | 6,133 | $ | 22,737 | $ | 6,044 | $ | 1,076 | $ | 279,616 | ||||||||||||||||||
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10
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 December 31, 2013 |
||||||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Balance, beginning of year |
$ | 1,433 | $ | 266 | $ | 2,663 | $ | 1,497 | $ | 312 | $ | 302 | $ | 166 | $ | 32 | $ | 6,671 | ||||||||||||||||||
Provision charged to expense |
116 | (16 | ) | 98 | 17 | 651 | (17 | ) | (14 | ) | (5 | ) | 830 | |||||||||||||||||||||||
Losses charged off |
(210 | ) | | | | | | | (2 | ) | (212 | ) | ||||||||||||||||||||||||
Recoveries |
15 | 1 | 100 | | 182 | | 5 | 5 | 308 | |||||||||||||||||||||||||||
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Balance, end of year |
$ | 1,354 | $ | 251 | $ | 2,861 | $ | 1,514 | $ | 1,145 | $ | 285 | $ | 157 | $ | 30 | $ | 7,597 | ||||||||||||||||||
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Ending Balance: individually evaluated for impairment |
$ | | $ | | $ | 345 | $ | 100 | $ | 850 | $ | | $ | | $ | | $ | 1,295 | ||||||||||||||||||
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Ending balance: collectively evaluated for impairment |
$ | 1,354 | $ | 251 | $ | 2,516 | $ | 1,414 | $ | 295 | $ | 285 | $ | 157 | $ | 30 | $ | 6,302 | ||||||||||||||||||
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Loans: |
||||||||||||||||||||||||||||||||||||
Ending Balance |
$ | 49,726 | $ | 7,912 | $ | 126,154 | $ | 62,790 | $ | 9,734 | $ | 8,669 | $ | 7,226 | $ | 1,167 | $ | 273,378 | ||||||||||||||||||
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Ending Balance: individually evaluated for impairment |
$ | 2,494 | $ | | $ | 11,067 | $ | 8,462 | $ | 4,162 | | $ | 600 | $ | | $ | 26,785 | |||||||||||||||||||
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Ending Balance: collectively evaluated for impairment |
$ | 47,232 | $ | 7,912 | $ | 115,087 | $ | 54,328 | $ | 5,572 | $ | 8,669 | $ | 6,626 | $ | 1,167 | $ | 246,593 | ||||||||||||||||||
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11
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 | |||||||||||||||||||||||||||
Quarter to date analysis as of March 31, 2013 |
||||||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Balance, beginning of year |
$ | 1,433 | $ | 266 | $ | 2,663 | $ | 1,497 | $ | 312 | $ | 302 | $ | 166 | $ | 32 | $ | 6,671 | ||||||||||||||||||
Provision charged to expense |
21 | 26 | 193 | 158 | (47 | ) | 49 | (73 | ) | (2 | ) | 325 | ||||||||||||||||||||||||
Losses charged off |
(12 | ) | | | | | | | | (12 | ) | |||||||||||||||||||||||||
Recoveries |
3 | | | | | | | 2 | 5 | |||||||||||||||||||||||||||
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Balance, end of year |
$ | 1,445 | $ | 292 | $ | 2,856 | $ | 1,655 | $ | 265 | $ | 351 | $ | 93 | $ | 32 | $ | 6,989 | ||||||||||||||||||
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Ending Balance: individually evaluated for impairment |
$ | 9 | $ | | $ | 228 | $ | 48 | $ | 100 | $ | | $ | 15 | $ | | $ | 400 | ||||||||||||||||||
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Ending balance: collectively evaluated for impairment |
$ | 1,436 | $ | 292 | $ | 2,628 | $ | 1,607 | $ | 165 | $ | 351 | $ | 78 | $ | 32 | $ | 6,589 | ||||||||||||||||||
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Loans: |
||||||||||||||||||||||||||||||||||||
Ending Balance |
$ | 54,953 | $ | 11,129 | $ | 108,649 | $ | 62,945 | $ | 10,065 | $ | 13,369 | $ | 3,541 | $ | 1,195 | $ | 265,846 | ||||||||||||||||||
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Ending Balance: individually evaluated for impairment |
$ | 2,809 | $ | | $ | 10,955 | $ | 9,449 | $ | 4,693 | $ | 80 | $ | 837 | $ | | $ | 28,823 | ||||||||||||||||||
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Ending Balance: collectively evaluated for impairment |
$ | 52,144 | $ | 11,129 | $ | 97,694 | $ | 54,296 | $ | 5,372 | $ | 13,289 | $ | 2,704 | $ | 1,195 | $ | 237,823 | ||||||||||||||||||
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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 borrowers 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.
12
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, 2014 and December 31, 2013:
1-4 Family | Home Equity | Commercial Real Estate |
Multifamily | |||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Pass |
$ | 47,690 | $ | 45,735 | $ | 6,997 | $ | 7,806 | $ | 127,673 | $ | 107,825 | $ | 46,419 | $ | 48,808 | ||||||||||||||||
Pass (Closely Monitored) |
1,706 | 1,827 | | 106 | 4,203 | 4,081 | 8,947 | 9,170 | ||||||||||||||||||||||||
Special Mention |
721 | 818 | | | 4,677 | 4,992 | | | ||||||||||||||||||||||||
Substandard |
1,042 | 1,346 | | | 9,092 | 9,256 | 4,763 | 4,812 | ||||||||||||||||||||||||
Doubtful |
| | | | | | | | ||||||||||||||||||||||||
Loss |
| | | | | | | | ||||||||||||||||||||||||
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$ | 51,159 | $ | 49,726 | $ | 6,997 | $ | 7,912 | $ | 145,645 | $ | 126,154 | $ | 60,129 | $ | 62,790 | |||||||||||||||||
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Land | Construction | Commercial Non-Mortgage |
Consumer | Total | ||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||||
Pass |
$ | 4,501 | $ | 3,742 | $ | 22,737 | $ | 8,669 | $ | 5,903 | $ | 6,540 | $ | 1,076 | $ | 1,167 | $ | 262,996 | $ | 230,292 | ||||||||||||||||||||
Pass (Closely Monitored) |
1,675 | 1,830 | | | 141 | 55 | | | 16,672 | 17,069 | ||||||||||||||||||||||||||||||
Special Mention |
| 43 | | | 32 | 36 | | | 5,430 | 5,889 | ||||||||||||||||||||||||||||||
Substandard |
4,051 | 4,119 | | | 580 | 595 | | | 19,528 | 20,128 | ||||||||||||||||||||||||||||||
Doubtful |
| | | | | | | | | | ||||||||||||||||||||||||||||||
Loss |
| | | | | | | | | | ||||||||||||||||||||||||||||||
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$ | 10,227 | $ | 9,734 | $ | 22,737 | $ | 8,669 | $ | 6,656 | $ | 7,226 | $ | 1,076 | $ | 1,167 | $ | 304,626 | $ | 273,378 | |||||||||||||||||||||
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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.
13
Wolverine Bancorp, Inc.
Form 10-Q
(Table Amounts in Thousands Except Per Share Amounts)
Notes to Condensed Consolidated Interim Financial Statements (Unaudited)
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.
The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institutions 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.
14
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 is a summary of our past due and non-accrual loans as of March 31, 2014 and December 31, 2013:
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 |
$ | 242 | $ | | $ | | $ | 242 | $ | 50,917 | $ | 51,159 | $ | | $ | | ||||||||||||||||
Home Equity |
| | | | 6,997 | 6,997 | | | ||||||||||||||||||||||||
Commercial Real Estate |
| | | | 145,645 | 145,645 | | 713 | ||||||||||||||||||||||||
Multifamily |
| | | | 60,129 | 60,129 | | | ||||||||||||||||||||||||
Land |
50 | | 4,023 | 4,073 | 6,154 | 10,227 | | 4,017 | ||||||||||||||||||||||||
Construction |
| | | | 22,737 | 22,737 | | | ||||||||||||||||||||||||
Commercial Non-Mortgage |
| | 32 | 32 | 6,624 | 6,656 | | 143 | ||||||||||||||||||||||||
Consumer |
| | | | 1,076 | 1,076 | | | ||||||||||||||||||||||||
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Total |
$ | 292 | $ | | $ | 4,055 | $ | 4,347 | $ | 300,279 | $ | 304,626 | $ | | $ | 4,873 | ||||||||||||||||
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As of December 31, 2013: | 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 |
$ | 217 | $ | | $ | 254 | $ | 471 | $ | 49,255 | $ | 49,726 | $ | | $ | 254 | ||||||||||||||||
Home Equity |
| | | | 7,912 | 7,912 | | | ||||||||||||||||||||||||
Commercial Real Estate |
716 | 667 | 49 | 1,432 | 124,722 | 126,154 | | 779 | ||||||||||||||||||||||||
Multifamily |
| | 1,363 | 1,363 | 61,427 | 62,790 | 1,363 | | ||||||||||||||||||||||||
Land |
| | 4,068 | 4,068 | 5,666 | 9,734 | 27 | 4,041 | ||||||||||||||||||||||||
Construction |
| | | | 8,669 | 8,669 | | | ||||||||||||||||||||||||
Commercial Non-Mortgage |
| | 36 | 36 | 7,190 | 7,226 | | 157 | ||||||||||||||||||||||||
Consumer |
| | | | 1,167 | 1,167 | | | ||||||||||||||||||||||||
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Total |
$ | 933 | $ | 667 | $ | 5,770 | $ | 7,370 | $ | 266,008 | $ | 273,378 | $ | 1,390 | $ | 5,231 | ||||||||||||||||
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15
Wolverine Bancorp, Inc.
Form 10-Q
(Table Amounts in Thousands Except Per Share Amounts)
Notes to Condensed Consolidated Interim Financial Statements (Unaudited)
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.
16
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, 2014:
Recorded Balance |
Unpaid Principal Balance |
Specific Allowance |
QTD Average Balance |
QTD Interest Income |
||||||||||||||||
Loans without a specific valuation allowance |
|
|||||||||||||||||||
1-4 Family |
$ | 1,514 | $ | 1,651 | $ | | $ | 1,733 | $ | 22 | ||||||||||
Home Equity |
64 | 64 | | 64 | 1 | |||||||||||||||
Commercial Real Estate |
6,226 | 8,255 | | 6,652 | 65 | |||||||||||||||
Multifamily |
7,033 | 7,847 | | 7,066 | 81 | |||||||||||||||
Land |
707 | 1,645 | | 711 | 1 | |||||||||||||||
Construction |
| 2 | | | | |||||||||||||||
Commercial Non-Mortgage |
257 | 257 | | 242 | 3 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Loans with a specific valuation allowance |
||||||||||||||||||||
1-4 Family |
181 | 181 | | 181 | 3 | |||||||||||||||
Home Equity |
| | | | | |||||||||||||||
Commercial Real Estate |
3,935 | 3,946 | 345 | 3,962 | 63 | |||||||||||||||
Multifamily |
1,351 | 1,351 | 100 | 1,357 | 20 | |||||||||||||||
Land |
3,387 | 4,704 | 850 | 3,417 | | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Commercial Non-Mortgage |
355 | 355 | | 365 | 4 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Total |
||||||||||||||||||||
1-4 Family |
$ | 1,695 | $ | 1,832 | $ | | $ | 1,914 | $ | 25 | ||||||||||
Home Equity |
64 | 64 | | 64 | 1 | |||||||||||||||
Commercial Real Estate |
10,161 | 12,201 | 345 | 10,614 | 128 | |||||||||||||||
Multifamily |
8,384 | 9,198 | 100 | 8,423 | 101 | |||||||||||||||
Land |
4,094 | 6,349 | 850 | 4,128 | 1 | |||||||||||||||
Construction |
| 2 | | | | |||||||||||||||
Commercial Non-Mortgage |
612 | 612 | | 607 | 7 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
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|
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Total |
$ | 25,010 | $ | 30,258 | $ | 1,295 | $ | 25,750 | $ | 263 | ||||||||||
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17
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, 2013:
Recorded Balance |
Unpaid Principal Balance |
Specific Allowance |
YTD Average Balance |
YTD Interest Income |
||||||||||||||||
Loans without a specific valuation allowance |
| |||||||||||||||||||
1-4 Family |
$ | 2,494 | $ | 2,712 | $ | | $ | 2,668 | $ | 225 | ||||||||||
Home Equity |
| | | | | |||||||||||||||
Commercial Real Estate |
7,128 | 9,152 | | 7,630 | 315 | |||||||||||||||
Multifamily |
7,099 | 7,914 | | 7,325 | 409 | |||||||||||||||
Land |
742 | 1,672 | | 913 | 48 | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Commercial Non-Mortgage |
600 | 600 | | 726 | 30 | |||||||||||||||
Consumer |
| | | 4 | | |||||||||||||||
Loans with a specific valuation allowance |
||||||||||||||||||||
1-4 Family |
| | | | | |||||||||||||||
Home Equity |
| | | | ||||||||||||||||
Commercial Real Estate |
3,939 | 3,939 | 345 | 2,843 | 218 | |||||||||||||||
Multifamily |
1,363 | 1,363 | 100 | 1,100 | 33 | |||||||||||||||
Land |
3,420 | 4,730 | 850 | 3,641 | | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Commercial Non-Mortgage |
| | | | | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Totals |
||||||||||||||||||||
1-4 Family |
$ | 2,494 | $ | 2,712 | $ | | $ | 2,668 | $ | 225 | ||||||||||
Home Equity |
| | | | | |||||||||||||||
Commercial Real Estate |
11,067 | 13,091 | 345 | 10,473 | 533 | |||||||||||||||
Multifamily |
8,462 | 9,277 | 100 | 8,425 | 442 | |||||||||||||||
Land |
4,162 | 6,402 | 850 | 4,554 | 48 | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Commercial Non-Mortgage |
600 | 600 | | 726 | 30 | |||||||||||||||
Consumer |
| | | 4 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 26,785 | $ | 32,082 | $ | 1,295 | $ | 26,850 | $ | 1,278 | ||||||||||
|
|
|
|
|
|
|
|
|
|
18
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, 2013:
Recorded Balance |
Unpaid Principal Balance |
Specific Allowance |
QTD Average Balance |
QTD Interest Income |
||||||||||||||||
Loans without a specific valuation allowance |
|
|||||||||||||||||||
1-4 Family |
$ | 2,629 | $ | 2,838 | $ | | $ | 2,823 | $ | 130 | ||||||||||
Home Equity |
| | | | | |||||||||||||||
Commercial Real Estate |
6,822 | 9,065 | | 6,912 | 65 | |||||||||||||||
Multifamily |
8,609 | 9,423 | | 9,615 | 88 | |||||||||||||||
Land |
1,866 | 3,156 | | 5,873 | 83 | |||||||||||||||
Construction |
80 | 82 | | 28 | | |||||||||||||||
Commercial Non-Mortgage |
277 | 372 | | 277 | 3 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Loans with a specific valuation allowance |
||||||||||||||||||||
1-4 Family |
180 | 181 | 9 | 182 | | |||||||||||||||
Home Equity |
| | | | | |||||||||||||||
Commercial Real Estate |
4,133 | 4,133 | 228 | 3,766 | 20 | |||||||||||||||
Multifamily |
840 | 840 | 48 | 843 | | |||||||||||||||
Land |
2,827 | 4,724 | 100 | 1,947 | 50 | |||||||||||||||
Construction |
| | | | | |||||||||||||||
Commercial Non-Mortgage |
560 | 559 | 15 | 560 | 6 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Total |
||||||||||||||||||||
1-4 Family |
$ | 2,809 | $ | 3,019 | $ | 9 | $ | 3,005 | $ | 130 | ||||||||||
Home Equity |
| | | | | |||||||||||||||
Commercial Real Estate |
10,955 | 13,198 | 228 | 10,678 | 85 | |||||||||||||||
Multifamily |
9,449 | 10,263 | 48 | 10,458 | 88 | |||||||||||||||
Land |
4,693 | 7,880 | 100 | 7,820 | 133 | |||||||||||||||
Construction |
80 | 82 | | 28 | | |||||||||||||||
Commercial Non-Mortgage |
837 | 931 | 15 | 837 | 9 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 28,823 | $ | 35,373 | $ | 400 | $ | 32,826 | $ | 445 | ||||||||||
|
|
|
|
|
|
|
|
|
|
19
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 borrowers 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 borrowers 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 entitys 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 individuals 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.
20
Wolverine Bancorp, Inc.
Form 10-Q
(Table Amounts in Thousands Except Per Share Amounts)
Notes to Condensed Consolidated Interim Financial Statements (Unaudited)
There were no loans that were restructured as TDRs during the three months ended March 31, 2014.
The following table summarizes the loans that were restructured as TDRs during the three months ended March 31, 2013:
Three months ended | ||||||||||||
March 31, 2013 | ||||||||||||
Balance | Balance | |||||||||||
prior to | after | |||||||||||
Count | TDR | TDR | ||||||||||
(Dollars in thousands) | ||||||||||||
Commercial real estate |
2 | 139 | 145 | |||||||||
|
|
|
|
|
|
|||||||
Total loans |
2 | $ | 139 | $ | 145 | |||||||
|
|
|
|
|
|
We had no TDRs that had payment defaults during the three months ended March 2014 and 2013. 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.
21
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 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
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2014 and December 31, 2013.
22
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 | ||||||||||||||||
Fair Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
March 31, 2014 |
||||||||||||||||
Collateral-dependent Impaired loans |
$ | | $ | | $ | | $ | | ||||||||
December 31, 2013 |
||||||||||||||||
Collateral-dependent Impaired loans |
$ | 7,681 | $ | | $ | | $ | 7,681 |
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.
Unobservable (Level 3) inputs
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than good will at March 31, 2014 and December 31, 2013.
Collateral-dependent Impaired Loans | ||||||||||||
Fair Value | Valuation Technique |
Unobservable Inputs |
Range (Weighted Average) |
|||||||||
As of March 31, 2014 Collateral-dependent impaired loans |
$ | | Market comparable properties |
Marketability discount |
| |||||||
December 31, 2013 Collateral-dependent impaired loans |
$ | 7,681 | Market comparable properties |
Marketability discount |
9%-46% (34 | %) |
23
Wolverine Bancorp, Inc.
Form 10-Q
(Table Amounts in Thousands Except Per Share Amounts)
Notes to Condensed Consolidated Interim Financial Statements (Unaudited)
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 of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Because no market exists for certain of these 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 | ||||||||||||||||
Carrying Amount |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
As of March 31, 2014 |
||||||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 25,078 | $ | 25,078 | $ | | $ | | ||||||||
Held to maturity securities |
57 | | 57 | | ||||||||||||
Loans held for sale |
719 | | 722 | | ||||||||||||
Loans, net of allowance for loan losses |
285,219 | | | 288,660 | ||||||||||||
Federal Home Loan Bank stock |
3,320 | | 3,320 | | ||||||||||||
Interest receivable |
710 | | 710 | | ||||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
198,594 | 109,674 | | 89,643 | ||||||||||||
Federal Home Loan Bank advances |
52,000 | | 52,553 | | ||||||||||||
Interest payable |
148 | | 148 | |
24
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 | ||||||||||||||||
Carrying Amount |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
As of December 31, 2013 |
||||||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 26,181 | $ | 26,181 | $ | | $ | | ||||||||
Held to maturity securities |
123 | | 123 | | ||||||||||||
Loans held for sale |
1,325 | | 1,330 | | ||||||||||||
Loans, net of allowance for loan losses |
276,965 | | | 280,407 | ||||||||||||
Federal Home Loan Bank stock |
3,320 | | 3,320 | | ||||||||||||
Interest receivable |
699 | | 699 | | ||||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
$ | 172,983 | $ | 99,121 | $ | | $ | 74,339 | ||||||||
Federal Home Loan Bank advances |
61,994 | | 60,653 | | ||||||||||||
Interest payable |
138 | | 138 | |
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, Federal Home Loan Bank Stock, 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 is estimated using quoted market prices from the secondary market.
25
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.
26
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 three months ended March 31, 2014 and 2013 is as follows (dollars in thousands, except per share data):
Three months ended March 31, 2014 |
Three months ended March 31, 2013 |
|||||||
Net income |
$ | 304 | $ | 525 | ||||
Income allocated to participating securities |
(9 | ) | (17 | ) | ||||
|
|
|
|
|||||
Income attributable to common shareholders |
295 | 508 | ||||||
|
|
|
|
|||||
Weighted average shares outstanding (in thousands) |
2,295 | 2,455 | ||||||
Less: average unearned ESOP and unvested restricted stock |
(226 | ) | (254 | ) | ||||
|
|
|
|
|||||
Average Shares |
2,069 | 2,201 | ||||||
Effect of diluted based awards |
14 | | ||||||
|
|
|
|
|||||
Average common and common-equivalent shares for diluted EPS (in thousands) |
2,083 | 2,201 | ||||||
|
|
|
|
|||||
Basic EPS |
$ | .14 | $ | .23 | ||||
Diluted EPS |
$ | .14 | $ | .23 |
27
Wolverine Bancorp, Inc.
Form 10-Q
(Table Amounts in Thousands Except Per Share Amounts)
Notes to Condensed Consolidated Interim Financial Statements (Unaudited)
Note 7: Share-Based Compensation
In May 2013, the Companys stockholders approved the Wolverine Bancorp, Inc. 2013 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 Companys 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 managements 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 Companys common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 351,050. Total share-based compensation expense for the three months ended March 31, 2014 and 2013 was $84 and $82 respectively.
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, 2014 |
129,080 | $ | 17.30 | 9 | $ | 516 | ||||||||||
Granted |
| | | | ||||||||||||
Exercised |
(2,507 | ) | 17.30 | | | |||||||||||
Forfeited |
(1,968 | ) | 17.50 | | | |||||||||||
Expired |
| | | | ||||||||||||
Options outstanding at March 31, 2014 |
124,605 | $ | 17.30 | 9 | $ | 536 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Exercisable at March 31, 2014 |
25,315 | $ | 17.30 | 9 | $ | 109 | ||||||||||
|
|
|
|
|
|
|
|
As of March 31, 2014, the Company had $220,000 of unrecognized compensation expense related to stock options. Stock option expense for the three months ended March 31, 2014 and 2013 was $20 and $19 respectively.
28
Wolverine Bancorp, Inc.
Form 10-Q
(Table Amounts in Thousands Except Per Share Amounts)
Notes to Condensed Consolidated Interim Financial Statements (Unaudited)
Restricted Stock Awards
Restricted stock awards are accounted for as fixed grants using the fair value of the Companys 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:
Service- Based Restricted stock awards |
Weighted average grant date fair value |
|||||||
Non-vested at January 1, 2014 |
59,723 | $ | 17.33 | |||||
Granted |
| | ||||||
Vested |
| | ||||||
Forfeited |
| | ||||||
|
|
|
|
|||||
Non-vested at March 31, 2014 |
59,723 | $ | 17.33 | |||||
|
|
|
|
As of March 31, 2014, the Company had $872 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, 2014 and 2013 was $64 and $63 respectively.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
Managements discussion and analysis of the financial condition at March 31, 2014 and the results of operations for the three months ended March 31, 2014 and 2013 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.
Managements 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, 2013 (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; |
29
| 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
30
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. See also Business of Wolverine BankAllowance for Loan Losses.
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, 2014 and December 31, 2013 and no valuation allowance was necessary.
31
Comparison of Financial Condition at March 31, 2014 and December 31, 2013
Total assets increased $16.0 million, or 5.3%, to $313.7 million at March 31, 2014 from $297.7 million at December 31, 2013. The increase was primarily a result of a $17.6 million increase in net loans.
Loans held for sale decreased $606,000, or 45.7%, to $719,000 at March 31, 2014 from $1.3 million at December 31, 2013.
Net loans increased $17.6 million, or 6.8%, to $277.0 million at March 31, 2014 from $259.4 million at December 31, 2013. Commercial real estate loans increased $19.5 million, or 15.5%, and construction loans increased $14.1 million, or 162.3%, partially offset by a decrease of $2.7 million, or 4.2%, in multifamily loans.
The undisbursed portion of loans increased $13.3 million to $19.2 million at March 31, 2014 from $5.9 million at December 31, 2013 due primarily to a net increase in undisbursed construction loans of $11.4 million.
Securities held to maturity, consisting of one municipal security at March 31, 2014, decreased $66,000, or 53.7%, to $57,000 from $123,000 at December 31, 2013 due to a principal paydown.
Other real estate owned increased $41,000, or 4.7%, to $913,000 at March 31, 2014, from $872,000 at December 31, 2013 resulting from one loan transferred to REO totaling $255,000 and four sales totaling $193,000.
Other assets, consisting primarily of net deferred and accrued federal taxes, increased $130,000, or 3.0%, to $4.4 million at March 31, 2014, from $4.3 million at December 31, 2013 primarily due to a $46,000 increase in prepaid service maintenance contracts and a $62,000 increase in prepaid bond and insurance premiums.
Deposits increased $25.6 million to $198.6 million at March 31, 2014 from $173.0 million at December 31, 2013 primarily to fund new loan growth. Core deposits (consisting of interest-bearing and noninterest-bearing checking accounts, money market accounts and savings accounts) increased $10.6 million. Certificates of deposit increased $15.0 million, or 20.4%, to $88.9 million at March 31, 2014 from $73.9 million at December 31, 2013.
Federal Home Loan Bank advances decreased $10.0 million from $62.0 million at December 31, 2013 to $52.0 million at March 31, 2014 due to the payoff of a $10.0 million advance at maturity.
Interest payable and other liabilities, consisting primarily of liabilities for checks and money orders and accrued expenses remained constant at $2.5 million from December 31, 2013 to March 31, 2014.
Total stockholders equity increased $302,000, or 0.5%, to $60.6 million at March 31, 2014 from $60.3 million at December 31, 2013 primarily due to net income of $304,000.
Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013
General. We recorded net income of $304,000 for the three months ended March 31, 2014 compared to net income of $525,000 for the three months ended March 31, 2013 primarily due to decreases in net gains on loan sales and other real estate owned. Gain on loan sales decreased $416,000 to $120,000 for the three months ended March 31, 2014 from $536,000 for the three months ended March 31, 2013. Net gains on the sale of other real estate owned decreased $115,000 from a gain of $94,000 for the three months ended March 31, 2013 to a loss of $21,000 for the three months ended March 31, 2014. This was partially offset by an increase of $165,000 in net interest income after provision and a decrease of $56,000 in non-interest expense.
32
We have experienced significant declines in residential mortgage originations primarily due to decreased refinance activity, a slow residential real estate market purchase, and higher interest rates as compared to 2012 and early 2013. To offset the decline in mortgage activity, management embarked on several cost savings measures in late 2013 and the beginning of the first quarter. This included a reorganization of bank personnel and a redesign of operational processes aimed at reallocating resources to areas of need and creating efficiencies that will not only reduce operational costs, but also reduce loan processing time. Although the full impact of these measures has not been realized in the first quarter, management estimates annualized savings of approximately $745,000 of salaries and benefits.
Interest and Dividend Income. Interest and dividend income increased $55,000, or 1.6%, to $3.4 million for the three months ended March 31, 2014. Average balances increased $16.0 million in interest-earning assets to $294.5 million for the three months ended March 31, 2014 from $278.5 million for the three months ended March 31, 2013. This was partially offset by a decrease of 19 basis points in the average yield on earning assets to 4.63% during the 2014 period from 4.82% during the 2013 period as a result of a low-interest rate environment.
Average net loans increased $17.9 million, or 7.1%, to $269.9 million for the three months ended March 31, 2014 from $252.0 million for the three months ended March 31, 2013. As a result, interest income on loans increased $50,000, or 1.5%, to $3.4 million for the three months ended March 31, 2014. This was partially offset by the average yield on loans decreasing 27 basis points to 4.98% for the three months ended March 31, 2014 from 5.25% for the three months ended March 31, 2013. The decrease in average yield on loans was attributable to a continuing low interest rate environment.
Income from dividends and municipal bonds increased $5,000 to $49,000 for the period ended March 31, 2014 from $44,000 for the three months ended March 31, 2013 due primarily to an increase in dividends received from the Federal Home Loan Bank of Indianapolis.
Interest Expense. Interest expense decreased $85,000, or 10.5%, to $721,000 for the three months ended March 31, 2014 from $806,000 for the three months ended March 31, 2013. The decrease in interest expense was primarily due to borrowed funds, which decreased $51,000 to $531,000 for the three months ended March 31, 2014 from $582,000 for the three months ended March 31, 2013, due to the payoff of a $10.0 million maturing advance.
Average interest-bearing liabilities increased $18.2 million, or 8.2%, to $239.4 million for the three months ended March 31, 2014 from $221.2 million for the three months ended March 31, 2013. The average rate paid on these liabilities decreased 26 basis points to 1.20% from 1.46%. Interest expense on certificates of deposit decreased $33,000, or 20.0%, to $133,000 for the three months ended March 31, 2014 from $166,000 for the three months ended March 31, 2013. The average balance of certificates of deposits increased to $81.5 million for the three months ended March 31, 2014, from $64.0 million for the three months ended March 31, 2013. Additionally, the rate on certificates of deposit decreased 39 basis points to 0.65% for the three months ended March 31, 2014 from 1.04% for the three months ended March 31, 2013 reflecting the continuing low interest rate environment.
The average balance of core deposits, consisting of checking accounts, money market accounts and savings accounts, increased $10.7 million, or 11.2%, to $105.9 million for the three months ended March 31, 2014 from $95.2 million for the three months ended March 31, 2013. The interest on core deposits remained constant at $58,000 for the three months ended March 31, 2014 and three months ended March 31, 2013. The rate on core deposits for the three months ended March 31, 2014 decreased two basis points to 0.22% from 0.24% for the three months ended March 31, 2013.
Net Interest Income. Net interest income increased $140,000, or 5.5%, to $2.7 million for the three months ended March 31, 2014 from $2.5 million for the three months ended March 31, 2013, as our average net interest-earning assets increased to $55.1 million from $57.4 million, and net interest rate spread increased two basis points to 3.43% from 3.36%. 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.
33
Provision for Loan Losses. Based on our analysis of the factors described in Critical Accounting Policies Allowance for Loan Losses, in our Annual Report on Form 10-K for 2013, we recorded a provision for loan losses of $300,000 for the three months ended March 31, 2014 and a provision for loan losses of $325,000 for the three months ended March 31, 2013. We have continued with additional provisions in 2014 primarily due to additional growth in loans. However, management is still concerned with elevated levels of non-performing assets, delinquencies and classified assets as well the Michigan economy, elevated levels of unemployment, and some declining collateral values. At March 31, 2014, non-performing loans totaled $5.8 million, or 2.2% of total loans, as compared to $10.3 million, or 4.1% of total loans, at March 31, 2013. The allowance for loan losses to total loans receivable remained constant at 2.6% for the periods ended March 31, 2014 and 2013.
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 $546,000, or 74.3%, to $189,000 for the three months ended March 31, 2014 from $735,000 for the three months ended March 31, 2013. The decrease was primarily due to net gains on loan sales, which decrease $416,000 due to a decline in mortgage activity.
Noninterest Expense. Noninterest expense decreased $56,000, or 2.1% for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. This was due to a decrease of $61,000 in salaries and employee benefits and a $35,000 decrease in loan legal expense. This was offset by an increase in net occupancy and equipment expense of $52,000, or 29.0%, to $230,000 for the three months ended March 31, 2014 from $178,000 for the three months ended March 31, 2013.
Income Tax Expense. We recorded $160,000 of income tax expense for the three months ended March 31, 2014 compared to $274,000 of income tax expense for the three months ended March 31, 2013. Our effective tax rate was 34.5% for the three months ended March 31, 2014 and 34.3% for the three months ended March 31, 2013.
Asset Quality
Other real estate owned totaled $913,000, or 0.3% of total assets, at March 31, 2014 compared to $872,000, or 0.3% of total assets at December 31, 2013. The largest relationship as of March 31, 2014 was $429,000, or 47.0% of other real estate owned, which consisted of an office building and vacant lots.
Non-performing assets, which includes non-performing loans, other real estate owned and troubled debt restructurings, totaled $6.7 million, or 2.1% of total assets, at March 31, 2014 compared to $7.1 million, or 2.4% of total assets, at December 31, 2013. We believe that the decreases in nonperforming assets are a sign of improvement in the credit quality of our loan portfolio. However, our level of nonperforming assets has remained elevated, compared to historical levels, due to the unfavorable economic climate within the State of Michigan.
Our largest substandard relationship as of March 31, 2014 has a total balance of $3.4 million. Of the $19.5 million loans rated substandard, approximately $14.8 million are performing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable, as the Registrant is a smaller reporting company.
34
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, 2014. 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, 2014, 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.
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.
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 Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)(2) |
||||||||||||
January 1, 2014 through January 31, 2014 |
3,500 | $ | 21.50 | 3,500 | 79,855 | |||||||||||
February 1, 2014 through February 28, 2014 |
500 | $ | 21.50 | 500 | 79,355 | |||||||||||
March 1, 2014 through March 31, 2014 |
| $ | | | 79,355 | |||||||||||
|
|
|
|
|||||||||||||
4,000 | 4,000 | |||||||||||||||
|
|
|
|
(1) | The Companys board of directors approved a stock repurchase program on December 10, 2012 for the repurchase of 122,954 shares of common stock. |
(2) | The Companys board of directors approved a stock repurchase program on December 9, 2013 for the repurchase of 119,167 shares of common stock. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
35
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 Suthe 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 |
36
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 14, 2014 | /s/ David H. Dunn | |||||
David H. Dunn | ||||||
President and Chief Executive Officer |
Date: May 14, 2014 | /s/ Rick A. Rosinski | |||||
Rick A. Rosinski | ||||||
Chief Operating Officer and Treasurer |
37
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David H. Dunn, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Wolverine Bancorp, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on the Banks most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 14, 2014 | /s/ David H. Dunn | |||||
David H. Dunn | ||||||
President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Rick A. Rosinski, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Wolverine Bancorp, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent financial quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on the Banks most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 14, 2014 | /s/ Rick A. Rosinski | |||||
Rick A. Rosinski | ||||||
Chief Operating Officer and Treasurer |
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
David H. Dunn, President and Chief Executive Officer of Wolverine Bancorp, Inc., (the Company) and Rick A. Rosinski, Chief Operating Officer and Treasurer of the Company, each certify in his capacity as an officer of the Company that he has reviewed the quarterly report on Form 10-Q for the quarter ended March 31, 2014 (the Report) and that to the best of his knowledge:
1. | the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 14, 2014 | /s/ David H. Dunn | |||||
David H. Dunn | ||||||
President and Chief Executive Officer | ||||||
Date: May 14, 2014 | /s/ Rick A. Rosinski | |||||
Rick A. Rosinski | ||||||
Chief Operating Officer and Treasurer |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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