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EX-31.1 - EXHIBIT 31.1 - Wolverine Bancorp, Inc.ex31-1.htm
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

[X]

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

 

For the quarterly period ended March 31, 2017

OR

[ ]

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

 

For the transition period from _______________ to ______________________

 

Commission File No. 001-35034

 

Wolverine Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

27-3939016

 

 

(State or other jurisdiction of 

 

(I.R.S. Employer

 

 

incorporation or organization)

 

Identification Number)

 

     

 

5710 Eastman Avenue, Midland, Michigan 

 

48640

 

 

(Address of Principal Executive Offices) 

 

Zip Code

 

    

 

(989) 631-4280

 

 

(Registrant’s telephone number)

 

 

 

 

N/A

 

 

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

 

 

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

YES    X      NO        .

 

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

YES    X      NO        . 

 

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

 

Large accelerated filer

Accelerated filer

☐ 

Non-accelerated filer

Smaller reporting company

(Do not check if smaller reporting company)  

Emerging growth company

☐ 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period or complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES         NO    X   

 

The number of shares outstanding of the Registrant’s common stock, $0.01 per share, as of May 3, 2017, was 2,106,153.

 

 

Wolverine Bancorp, Inc.
Form 10-Q

 

Index 

 

  Page

 

Part I. Financial Information
     

Item 1.

Condensed Consolidated Financial Statements

 
     
  Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016   1
     
 

Condensed Consolidated Statements of Income and Comprehensive Income for the three months and three months ended March 31, 2017 and 2016 (unaudited)

  2
     
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)

  3
     
  Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2017 (unaudited)   4
     
 

Notes to Condensed Consolidated Interim Financial Statements (unaudited)

  5
     

Item 2.

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

35

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4.

Controls and Procedures

40

     

Part II. Other Information

     

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults upon Senior Securities

41

Item 4.

Mine Safety Disclosures

41

Item 5.

Other Information

41

Item 6.

Exhibits

42

  Signature Page   43

 

  

Wolverine Bancorp, Inc.

Condensed Consolidated Balance Sheets

(Amounts in Thousands, except per share data)

 

 

 

March 31, 2017

   

December 31, 2016

 
   

(unaudited)

         
Assets              
               

Cash and due from banks

  $ 403     $ 318  

Interest-earning demand deposits

    53,846       103,316  

Cash and cash equivalents

    54,249       103,634  

Investment securities held to maturity

    -       499  

Loans held for sale

    -       238  

Loans, net of allowance for loan losses of $8,734 and $9,326

    315,946       320,606  

Premises and equipment, net

    1,090       1,127  

Federal Home Loan Bank stock

    2,700       2,700  

Other real estate owned

    8       86  

Accrued interest receivable

    839       846  

Other assets

    4,493       4,699  

Total assets

  $ 379,325     $ 434,435  
                 

Liabilities and Stockholders’ Equity

               

Liabilities

               

Deposits

  $ 271,110     $ 280,548  

Federal Home Loan Bank advances

    42,000       60,000  

Federal funds purchased

    -       27,000  

Interest payable and other liabilities

    3,746       5,913  

Total liabilities

    316,856       373,461  
                 

Commitments and Contingencies

               

Stockholders’ Equity

               

Common Stock, $0.01 par value per share: Authorized – 100,000,000 shares Issued and outstanding – 2,106,153 and 2,106,153 at March 31, 2017 and December 31, 2016

    21       21  

Unearned employee stock ownership plan (ESOP)

    (1,190 )     (1,215 )

Additional paid-in capital

    15,715       15,577  

Retained earnings

    47,923       46,591  

Total stockholders’ equity

    62,469       60,974  

Total liabilities and stockholders’ equity

  $ 379,325     $ 434,435  

 

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

 

 

Wolverine Bancorp, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(Amounts in Thousands, except per share data)

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 
   

(Unaudited)

 

Interest and Dividend Income

               

Loans

  $ 4,006     $ 3,932  

Investment securities and other

    136       129  

Total interest and dividend income

    4,142       4,061  
                 

Interest Expense

               

Deposits

    555       508  

Borrowings

    435       459  

Total interest expense

    990       967  
                 

Net Interest Income

    3,152       3,094  
                 

Provision (Credit) for Loan Losses

    (600 )     -  
                 

Net Interest Income After Provision for Loan Losses

    3,752       3,094  
                 

Noninterest Income

               

Service charges and fees

    69       80  

Net gain on loan sales

    32       96  

Net gain on sale of real estate owned

    1       27  

Other

    68       80  

Total noninterest income

    170       283  
                 

Noninterest Expense

               

Salaries and employee benefits

    1,074       1,090  

Net occupancy and equipment expense

    191       207  

Information technology expense

    57       62  

Federal deposit insurance corporation premiums

    30       54  

Professional and services fees

    198       94  

Other real estate owned expense (recovery)

    (3 )     24  

Loan legal expense

    16       81  

Advertising expense

    31       21  

Michigan business tax

    45       45  

Other

    247       209  

Total noninterest expense

    1,886       1,887  
                 

Income Before Income Tax

    2,036       1,490  
                 

Provision for Income Taxes

    704       523  
                 

Net Income and Comprehensive Income

  $ 1,332     $ 967  
                 

Earnings Per Share:

               

Basic

  $ 0.67     $ 0.48  

Diluted

  $ 0.66     $ 0.47  

 

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

 

 

Wolverine Bancorp, Inc.

Condensed Consolidated Statement of Cash Flows

(Amounts in Thousands, except share data)

(Unaudited)

 

   

Three months ended

 
   

March 31,

 
   

2017

   

2016

 

 

 

(Unaudited)

 
Operating Activities                

Net income

  $ 1,332     $ 967  

Items not requiring (providing) cash

               

Depreciation

    50       57  

Provision (credit) for loan losses

    (600 )     -  

Loss (gain) on other real estate owned

    1       (27 )

Loans originated for sale

    (1,420 )     (3,716 )

Proceeds from loans sold

    1,690       3,186  

Net gain on sale of loans

    (32 )     (96 )

Share based compensation

    80       128  

Earned ESOP shares

    83       26  

Changes in

               

Interest receivable and other assets

    213       (196 )

Interest payable and other liabilities

    1,062       (1,107 )

Net cash provided by (used) in operating activities

    2,457       (778 )
                 

Investing Activities

               

Net change in interest-bearing time deposits

    -       598  

Purchase of held to maturity securities

    -       (498 )

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

    499       500  

Net change in loans

    5,260       (9,043 )

Proceeds from sale of real estate owned

    79       37  

Purchase of premises and equipment

    (13 )     -  

Net cash provided by (used in) investing activities

    5,825       (8,406 )
                 
                 

Financing Activities

               

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

    (7,888 )     1,833  

Net change in certificates of deposit

    (1,550 )     (9,124 )

Repayment of Federal Home Loan Bank advances

    (18,000 )     -  

Net change in Fed funds purchased

    (27,000 )     (24,000 )

Purchase of common stock

    -       (147 )

Dividends paid

    (3,229 )     -  

Net cash used in financing activities

    (57,667 )     (31,438 )
                 

Change in Cash and Cash Equivalents

    (49,385 )     (40,622 )
                 

Cash and Cash Equivalents, Beginning of Period

    103,634       52,865  
                 

Cash and Cash Equivalents, End of Period

  $ 54,249     $ 12,243  
                 

Supplemental Disclosures of Cash Flows Information

               

Interest paid

  $ 902     $ 909  

Income taxes paid

    -       895  

Loans transferred to real estate owned

    -       104  

 

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

 

 

Wolverine Bancorp, Inc.

Condensed Consolidated Statement of Change in Stockholders’ Equity

(Amounts in Thousands, except share data)

(Unaudited)

 

   

Common Stock

   

Additional Paid-in Capital

   

Unearned ESOP Shares

   

Retained Earnings

   

Total Stockholders' Equity

 

Balances at January 1, 2017

  $ 21     $ 15,577     $ (1,215 )   $ 46,591     $ 60,974  

Net income

    -       -       -       1,332       1,332  

Share based compensation expense

    -       80       -       -       80  
ESOP shares earned     -       58       25       -       83  

Balances at March 31, 2017

  $ 21     $ 15,715     $ (1,190 )   $ 47,923     $ 62,469  

 

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

 

 

 Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Note 1:     Basis of Presentation

 

The unaudited condensed consolidated financial statements of Wolverine Bancorp, Inc. (the “Company”), the holding company of Wolverine Bank (the "Bank"), have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) believed necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of December 31, 2016 has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three and nine month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto filed as part of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2017.

 

Note 2:     Accounting Developments

 

FASB Accounting Standards Updates No. 2017-08, Receivable – Nonrefundable Fees and Other Costs (Subtopic 310-20)

 

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.  The guidance provides amendments to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. These amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

 

The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

  

FASB Accounting Standards Updates No. 2017-04, Intangibles – Goodwill and Other (Topic 350)

 

The FASB has issued Accounting Standards Update (ASU) No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

 

The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition.

 

The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

FASB Accounting Standards Updates No. 2017-01, Business Combinations (Topic 805)

 

The FASB has issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.

 

The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

 

FASB ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)

 

The FASB has issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230). This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flow. In November 2016, the FASB issued ASU No. 2016-18, which gave clarification on how restricted cash was to be presented in the cash flow statement.

 

The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

FASB ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

 

The FASB has issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

 

Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.

 

The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.

 

In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

 

For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will be evaluating the impact of adopting this ASU and has not determined the anticipated impact on the consolidated financial statements.

 

FASB ASU No. 2016-09, Compensation—Stock Compensation (Topic 718)

 

The FASB issued ASU No. 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

 

The ASU is intended to improve the accounting for employee shared-base payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. The amendments in this update became effective on January 1, 2017 and did not have a material impact on the consolidated financial statements.

 

FASB ASU No. 2016-08, 2016-10, 2016-12, Revenue from Contracts with Customers (Topic 606)

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications.

 

For public business entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods with that reporting period, as deferred by ASU 2015-14. Early application is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within the reporting period.

 

All other entities should apply the guidance to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early application is permitted for all other entities as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in Update 2014-09. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

FASB ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323)

 

The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.

 

The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.

 

The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.

 

The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. Adoption of the ASU did not have a significant effect on the Company’s consolidated financial statements.

 

FASB ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments

 

The FASB has issued Accounting Standards Update (ASU) No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations and Existing Hedge Accounting Relationships. The amendments apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument.

 

The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

This standard will be effective for pubic business entities for fiscal year beginning after December 15, 2016 including interim periods within those fiscal years. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early application is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Adoption of the ASU did not have a significant effect on the Company’s consolidated financial statements.

 

FASB ASU No. 2016-02 – Leases (Topic 842)

 

The FASB has issued Accounting Standards Update (ASU) No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

 

●     A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

 

●     A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.

 

The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.

 

This standard will be effective for pubic business entities for fiscal year beginning after December 15, 2018 including interim periods within those fiscal years. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.

 

Early application is permitted for all public business entities and all nonpublic business entities upon issuance.

 

Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

 

  

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.

 

Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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

 

ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

Note 3:     Securities

 

There were no held to maturity securities as of the three months ended March 31, 2017.

 

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

 

   

Amortized
Cost

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   


Fair Value

 

Held to Maturity Securities:

                               
                                 

March 31, 2017

                               

Treasury bond

  $ --     $ --     $ --     $ --  

December 31, 2016

                               

Treasury bond

  $ 499     $ 1     $ --     $ 500  

 

There were no sales of securities during the three months ended March 31, 2017 and 2016. 

 

 

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, 2017

   

December 31, 2016

 

Real Estate

               

One-to four-family

  $ 35,257     $ 35,389  

Home equity

    3,269       4,031  

Commercial mortgage loans

               

Commercial real estate

    198,855       195,924  

Multifamily

    54,286       54,827  

Land

    11,351       11,547  

Construction

    12,428       13,475  

Commercial non-mortgage

    14,931       20,047  

Consumer

    1,084       1,074  

Total loans

    331,461       336,314  
                 

Less

               

Net deferred loan costs, premiums and discounts

    553       563  

Undisbursed portion of loan

    6,228       5,819  

Allowance for loan losses

    8,734       9,326  
                 

Net Loans

  $ 315,946     $ 320,606  

 

 

 

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.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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.

 

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

 

Commercial real estate and multifamily

 

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

 

Land

 

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

 

Construction

 

Construction loans include those for one- to four-family residential properties and commercial properties, including multifamily loans and commercial “mixed-use” buildings and homes built by developers on speculation. With respect to construction loans for one- to four-family residential properties and which are primarily owner-occupied, we generally establish a maximum loan-to-value ratio and require PMI if that ratio is exceeded.  These are generally “interest-only” loans during the construction period which typically does not exceed three months.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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

 

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

 

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

 

Commercial non-mortgage

 

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

 

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

 

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

 

 

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, 2017, December 31, 2016 and March 31, 2016: 

 

Loan Class

 

1-4 Family

   

Home Equity

   

Commercial Real Estate

   

Multifamily

   

Land

   

Construction

   

Commercial Non-Mortgage

   

Consumer

   

Total

 
Year to date analysis as of March 31, 2017                                                                        
Allowance for loan losses:                                                                        

Balance, beginning of period

  $ 798     $ 49     $ 5,422     $ 1,084     $ 1,142     $ 294     $ 524     $ 13     $ 9,326  

Provision (credit) charged to expense

    (52 )     (9 )     448       (212 )     (602 )     (24 )     (149 )     -       (600 )

Losses charged off

    -       -       -       -       -       -       -       -       -  

Recoveries

    7       -       -       -       -       -       -       1       8  

Balance, end of period

  $ 753     $ 40     $ 5,870     $ 872     $ 540     $ 270     $ 375     $ 14     $ 8,734  

Ending Balance: individually evaluated for impairment

  $ 19     $ -     $ 478     $ -     $ 250     $ -     $ 203     $ -     $ 950  

Ending balance: collectively evaluated for impairment

  $ 734     $ 40     $ 5,392     $ 872     $ 290     $ 270     $ 172     $ 14     $ 7,784  

Loans:

                                                                       

Ending Balance

  $ 35,257     $ 3,269     $ 198,855     $ 54,286     $ 11,351     $ 12,428     $ 14,931     $ 1,084     $ 331,461  
                                                                         

Ending Balance: individually evaluated for impairment

  $ 1,607     $ -     $ 8,164     $ 6,240     $ 677     $ -     $ 2,527     $ -     $ 19,215  

Ending balance: collectively evaluated for impairment

  $ 33,650     $ 3,269     $ 190,691     $ 48,046     $ 10,674     $ 12,428     $ 12,404     $ 1,084     $ 312,246  

  

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements

 

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, 2016

                                                                       

Allowance for loan losses:

                                                                       

Balance, beginning of period

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

Provision (credit) charged to expense

    (137 )     (59 )     555       (431 )     (544 )     (310 )     180       (14 )     (760 )

Losses charged off

    (67 )     -       (85 )     -       -       -       -       (1 )     (153 )

Recoveries

    54       -       39       -       81       -       -       4       178  

Balance, end of period

  $ 798     $ 49     $ 5,422     $ 1,084     $ 1,142     $ 294     $ 524     $ 13     $ 9,326  

Ending Balance: individually evaluated for impairment

  $ -     $ -     $ 235     $ -     $ 550     $ -     $ -     $ -     $ 785  

Ending balance: collectively evaluated for impairment

  $ 798     $ 49     $ 5,187     $ 1,084     $ 592     $ 294     $ 524     $ 13     $ 8,541  

Loans:

                                                                       

Ending Balance

  $ 35,389     $ 4,031     $ 195,924     $ 54,827     $ 11,547     $ 13,475     $ 20,047     $ 1,074     $ 336,314  

Ending Balance: individually evaluated for impairment

  $ 1,500     $ -     $ 8,103     $ 6,311     $ 1,061     $ -     $ -     $ -     $ 16,975  

Ending balance: collectively evaluated for impairment

  $ 33,889     $ 4,031     $ 187,821     $ 48,516     $ 10,486     $ 13,475     $ 20,047     $ 1,074     $ 319,339  

 

 

Loan Class

 

1-4 Family

   

Home Equity

   

Commercial Real Estate

   

Multifamily

   

Land

   

Construction

   

Commercial Non-Mortgage

   

Consumer

   

Total

 

Year to date analysis as of March 31, 2016

                                                                       

Allowance for loan losses:

                                                                       

Balance, beginning of period

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

Provision (credit) charged to expense

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

Losses charged off

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

Recoveries

    4       -       24       -       1       -       -       -       29  

Balance, end of period

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

Ending Balance: individually evaluated for impairment

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

Ending balance: collectively evaluated for impairment

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

Loans:

                                                                       

Ending Balance

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

Ending Balance: individually evaluated for impairment

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

Ending balance: collectively evaluated for impairment

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

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

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

 

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

 

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

 

  

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

The following table presents the credit risk profile of our loan portfolio based on rating category and payment activity as of March 31, 2017 and December 31, 2016:

 

   

1-4 Family

   

Home Equity

   

Commercial Real Estate

 
   

2017

   

2016

   

2017

   

2016

   

2017

   

2016

 

Pass

  $ 33,665     $ 33,787     $ 3,269     $ 4,031     $ 177,012     $ 173,375  

Pass (Closely Monitored)

    515       490       -       -       14,366       14,349  

Special Mention

    240       241       -       -       2,124       2,630  

Substandard

    837       871       -       -       5,353       5,570  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  
    $ 35,257     $ 35,389     $ 3,269     $ 4,031     $ 198,855     $ 195,924  

 

 

   

Multifamily

   

Land

   

Construction

 
   

2017

   

2016

   

2017

   

2016

   

2017

   

2016

 

Pass

  $ 51,084     $ 48,241     $ 9,791     $ 9,631     $ 12,428     $ 13,475  

Pass (Closely Monitored)

    3,202       6,586       883       855       -       -  

Special Mention

    -       -       -       -       -       -  

Substandard

    -       -       677       1,061       -       -  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  
    $ 54,286     $ 54,827     $ 11,351     $ 11,547     $ 12,428     $ 13,475  

 

 

   

Commercial Non-Mortgage

   

Consumer

   

Total

 
   

2017

   

2016

   

2017

   

2016

   

2017

   

2016

 

Pass

  $ 11,741     $ 16,500     $ 1,084     $ 1,074     $ 300,074     $ 300,114  

Pass (Closely Monitored)

    663       658       -       -       19,629       22,938  

Special Mention

    2,527       2,889       -       -       4,891       5,760  

Substandard

    -       -       -       -       6,867       7,502  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  
    $ 14,931     $ 20,047     $ 1,084     $ 1,074     $ 331,461     $ 336,314  

 

 

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.   

 

 

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

 

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

 

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

 

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

 

 

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, 2017 and December 31, 2016:

 

As of March 31, 2017

 

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

  $ 11     $ 43     $ 286     $ 340     $ 34,917     $ 35,257     $ -     $ 286  

Home Equity

    -       -       -       -       3,269       3,269       -       -  

Commercial Real Estate

    261       642       105       1,008       197,847       198,855       -       4,002  

Multifamily

    -       -       -       -       54,286       54,286       -       -  

Land

    -       -       677       677       10,674       11,351       -       677  

Construction

    -       -       -       -       12,428       12,428       -       -  

Commercial Non-Mortgage

    -       -       -       -       14,931       14,931       -       -  

Consumer

    -       -       -       -       1,084       1,084       -       -  

Total

  $ 272     $ 685     $ 1,068     $ 2,025     $ 329,436     $ 331,461     $ -     $ 4,965  

 

 

 

As of December 31, 2016

 

30-59 Days Past Due

   

60-89 Days Past Due

   

Greater than 90 Days

   

Total Past Due

   

Current

   

Total Loans Receivable

   

Total Loans >90 Days & Accruing

   

Total Nonaccrual

 

1-4 Family

  $ 165     $ 94     $ 137     $ 396     $ 34,993     $ 35,389     $ -     $ 137  

Home Equity

    -       -       -       -       4,031       4,031       -       -  

Commercial Real Estate

    -       648       100       748       195,176       195,924       -       4,872  

Multifamily

    -       -       -       -       54,827       54,827       -       -  

Land

    -       -       1,061       1,061       10,486       11,547       -       1,061  

Construction

    -       -       -       -       13,475       13,475       -       -  

Commercial Non-Mortgage

    -       -       -       -       20,047       20,047       -       -  

Consumer

    -       -       -       -       1,074       1,074       -       -  

Total

  $ 165     $ 742     $ 1,298     $ 2,205     $ 334,109     $ 336,314     $ -     $ 6,070  

 

 

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.

 

  

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements

 

 

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.


The following table presents impaired loans at March 31, 2017:

 

 

           

Unpaid

                         
   

Recorded

   

Principal

   

Specific

   

YTD Average

   

YTD Interest

 
   

Balance

   

Balance

   

Allowance

   

Balance

   

Income

 
                                         

Loans without a specific valuation allowance:

                                       

1-4 Family

  $ 1,367     $ 1,489     $ -     $ 1,208     $ 10  

Home Equity

    -       -       -       -       -  

Commercial real estate

    6,076       8,181       -       6,654       39  

Multi Family

    6,240       7,055       -       6,276       75  

Land

    -       -       -       -       -  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Loans with a specific valuation allowance:

                                       

1-4 Family

  $ 240     $ 240     $ 19     $ 120     $ 2  

Home Equity

    -       -       -       -       -  

Commercial real estate

    2,088       2,179       478       1,349       8  

Multi Family

    -       -       -       -       -  

Land

    677       2,815       250       869       -  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    2,527       2,527       203       1,265       35  

Consumer

    -       -       -       -       -  

Totals

                                       

1-4 Family

  $ 1,607     $ 1,729     $ 19     $ 1,328     $ 12  

Home Equity

    -       -       -       -       -  

Commercial real estate

    8,164       10,360       478       8,003       47  

Multi Family

    6,240       7,055       -       6,276       75  

Land

    677       2,815       250       869       -  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    2,527       2,527       203       1,265       35  

Consumer

    -       -       -       -       -  

Total

  $ 19,215     $ 24,486     $ 950     $ 17,741     $ 169  

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements

 

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

 

 

           

Unpaid

                         
   

Recorded

   

Principal

   

Specific

   

YTD Average

   

YTD Interest

 
   

Balance

   

Balance

   

Allowance

   

Balance

   

Income

 
                                         

Loans without a specific valuation allowance:

                                       

1-4 Family

  $ 1,500     $ 1,620     $ -     $ 1,311     $ 70  

Home Equity

    -       -       -       -       -  

Commercial real estate

    7,494       9,669       -       8,296       426  

Multi Family

    6,311       7,125       -       6,884       402  

Land

    -       -       -       24       -  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Loans with a specific valuation allowance:

                                       

1-4 Family

  $ -     $ -     $ -     $ -     $ -  

Home Equity

    -       -       -       -       -  

Commercial real estate

    609       695       235       385       41  

Multi Family

    -       -       -       -       -  

Land

    1,061       3,158       550       1,832       123  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Totals

                                       

1-4 Family

  $ 1,500     $ 1,620     $ -     $ 1,311     $ 70  

Home Equity

    -       -       -       -       -  

Commercial real estate

    8,103       10,364       235       8,681       467  

Multi Family

    6,311       7,125       -       6,884       402  

Land

    1,061       3,158       550       1,856       123  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Total

  $ 16,975     $ 22,267     $ 785     $ 18,773     $ 1,062  

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

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

 

           

Unpaid

                         
   

Recorded

   

Principal

   

Specific

   

YTD Average

   

YTD Interest

 
   

Balance

   

Balance

   

Allowance

   

Balance

   

Income

 
                                         

Loans without a specific valuation allowance:

                                       

1-4 Family

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

Home Equity

    -       -       -       -       -  

Commercial real estate

    9,211       11,177       -       9,561       47  

Multi Family

    6,516       7,330       -       6,551       76  

Land

    41       95       -       41       1  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       148       -  

Consumer

    -       -       -       -       -  

Loans with a specific valuation allowance:

                                       

1-4 Family

  $ -     $ -     $ -     $ 30     $ -  

Home Equity

    -       -       -       -       -  

Commercial real estate

    -       -       -       1,184       -  

Multi Family

    977       997       100       1,134       17  

Land

    1,728       3,575       850       1,785       -  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       -       -  

Consumer

    -       -       -       -       -  

Totals

                                       

1-4 Family

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

Home Equity

    -       -       -       -       -  

Commercial real estate

    9,211       11,177       -       10,745       47  

Multi Family

    7,493       8,327       100       7,685       93  

Land

    1,769       3,670       850       1,826       1  

Construction

    -       -       -       -       -  

Commercial Non-Mortgage

    -       -       -       148       -  

Consumer

    -       -       -       -       -  

Total

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

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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

 

Troubled Debt Restructuring (TDR)

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

There were no loans that were restructured as TDRs during the three months ended March 31, 2017.

 

There were no TDRs that had payment defaults during the three months ended March 31, 2017. 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.

 

The following table summarizes the loans that were restructured as TDRs during the three months ended March 31, 2017 and March 31, 2016:

 

   

Three months ended

 
   

March 31, 2017

 
           

Balance

   

Balance

 
           

prior to

   

after

 
   

Count

   

TDR

   

TDR

 
   

(Dollars in thousands)

 

Total loans

    --     $ --     $ --  

 

 

   

Three months ended

 
   

March 31, 2016

 
           

Balance

   

Balance

 
           

prior to

   

after

 
   

Count

   

TDR

   

TDR

 
   

(Dollars in thousands)

 

Commercial real estate

    1       996       996  

Total loans

    1     $ 996     $ 996  

 

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

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

 

Note 5:     Disclosures About Fair Value of Assets and Liabilities

 

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

 

Level 1

Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2

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

 

 

Level 3

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

 

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

 

Recurring and 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, 2017 and December 31, 2016.

 

           

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, 2017

                               

Collateral-dependent Impaired loans

  $ 3,828     $ --     $ --     $ 3,828  

December 31, 2016

                               

Collateral-dependent Impaired loans

  $ 885     $ --     $ --     $ 885  

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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 goodwill at March 31, 2017 and December 31, 2016.

 

   

Collateral-dependent Impaired Loans

 
   

Fair Value

 

Valuation

Technique

Unobservable

Inputs

 

Range (Weighted

Average)

 

As of March 31, 2017

                       

Collateral-dependent impaired loans

  $ 3,828  

Market comparable properties

Marketability discount

  0 - 17% (16%)  

December 31, 2016

                       

Collateral-dependent impaired loans

  $ 885  

Market comparable properties

Marketability discount

  3 - 13% (6%)  

 

 

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 instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Because no market exists for certain financial instruments and because management does not intend to sell these financial instruments, we do not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

 

           

Fair Value Measurements Using

 

As of March 31, 2017

 

Carrying Amount

   

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

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Financial Assets

                               

Cash and cash equivalents

  $ 54,249     $ 54,249     $ -     $ -  

Loans, net of allowance for loan losses

    315,946       -       -       318,922  

Federal Home Loan Bank stock

    2,700       -       2,700       -  

Interest receivable

    839       -       839       -  
                                 

Financial liabilities

                               

Deposits

  $ 271,110     $ 147,473     $ -     $ 124,724  

Federal Home Loan Bank advances

    42,000       -       41,369       -  

Interest payable

    252       -       252       -  

 

  

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

  

           

Fair Value Measurements Using

 

As of December 31, 2016

 

Carrying Amount

   

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

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Financial Assets

                               

Cash and cash equivalents

  $ 103,634     $ 103,634     $ -     $ -  

Interest-earning time deposits

    -       -       -       -  

Held to maturity securities

    499       -       500       -  

Loans held for sale

    238       -       239       -  

Loans, net of allowance for loan losses

    320,606       -       -       323,601  

Federal Home Loan Bank stock

    2,700       -       2,700       -  

Interest receivable

    846       -       846       -  
                                 

Financial liabilities

                               

Deposits

  $ 280,548     $ 153,290     $ -     $ 128,655  

Federal Home Loan Bank advances

    60,000       -       59,187       -  

Federal funds purchased

    27,000       -       27,000       -  

Interest payable

    249       -       249       -  

 

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

 

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

 

The carrying amount approximates fair value.

 

Held to Maturity Securities

 

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

 

Loans Held for Sale

 

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

 

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.

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Deposits

 

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

 

Federal Home Loan Bank Advances

 

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

 

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

 

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

 

 

Note 6:     Earnings Per Share (In thousands except per share amounts)

 

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

 

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

 

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

 

 

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands Except Per Share Amounts)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Earnings per share analysis for the three months ended March 31, 2017 and 2016 is as follows (dollars in thousands, except per share data):

 

 

   

Three month ended

March 31,

   

Three month ended

March 31,

 
   

2017

   

2016

 

Net Income

  $ 1,332     $ 967  

Dividends and undistributed earnings allocated to participating securities

    (13 )     (17 )

Income attributable to common shareholders

    1,319       950  
                 

Weighted average shares outstanding (in thousands)

    2,106       2,154  
                 

Less: average unearned ESOP and unvested restricted stock

    (148 )     (177 )

Average Shares

    1,958       1,977  

Effect of dilutive based awards

    54       32  
                 

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

    2,012       2,009  
                 

Basic EPS

  $ 0.67     $ 0.48  

Diluted EPS

  $ 0.66     $ 0.47  

 

  

Wolverine Bancorp, Inc.

Form 10-Q

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

(Dollars in Thousands)

 

Note 7:     Share-Based Compensation

 

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

 

Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the Plan is 351,050. Total shared-based compensation expense for the three months ended March 31, 2017 and 2016 was $80 and $87, 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, 2017

    181,585     $ 20.76       7     $ 1,956  

Granted

    --       --       --       --  

Exercised

    --       --       --       --  

Forfeited

    --       --       --       --  

Expired

    --       --       --       --  

Options outstanding at March 31, 2017

    181,585     $ 20.76       7     $ 2,146  

Exercisable at March 31, 2017

    92,748     $ 17.44       5     $ 1,404  

 

 

As of March 31, 2017, the Company had $156 of unrecognized compensation expense related to stock options. Stock option expense for the three months ended March 31, 2017 and 2016 was $17 and $16, respectively.

 

  

Wolverine Bancorp, Inc.

Form 10-Q

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

(Dollars in Thousands)

 

Restricted Stock Awards

 

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

 

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

 

  

   

Service-Based Restricted stock awards

   

Weighted average grant date fair value

 

Non-vested at January 1, 2017

    26,572     $ 22.38  

Granted

    -       -  

Vested

    -       -  

Forfeited

    -       -  

Non-vested at March 31, 2017

    26,572       22.38  

 

 

As of March 31, 2017, the Company had $448 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 the three months ended March 31, 2017 and 2016 was $63 and $71, respectively.

 

  

Wolverine Bancorp, Inc.

Form 10-Q

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

(Dollars in Thousands)

 

 

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

 

General 

 

Management’s discussion and analysis of the financial condition at March 31, 2017 and the results of operations for the three and three months ended March 31, 2017 and 2016 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is designed to provide a narrative on our financial condition, results of operations, liquidity, critical accounting policies, off-balance sheet arrangements and the future impact of accounting standards. It is useful to read our MD&A in conjunction with the consolidated financial statements contained in Part I in this Quarterly Report on Form 10-Q (this "Form 10-Q"), our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”), and our other reports on Forms 10-Q and current reports on Forms 8-K and other publicly available information.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

 

statements of our goals, intentions and expectations;

 

 

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

 

 

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

 

 

estimates of our risks and future costs and benefits.

 

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

 

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

 

 

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

 

 

competition among depository and other financial institutions;

 

 

 

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

 

 

adverse changes in the securities markets;

 

 

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

 

 

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

 

 

our ability to successfully integrate acquired entities, if any;

 

 

changes in consumer spending, borrowing and savings habits;

 

 

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

 

 

changes in our organization, compensation and benefit plans;

 

 

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

 

 

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

 

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

 

Critical Accounting Policies

 

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

 

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

 

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

 

 

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

 

 

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

 

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

 

 

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

 

We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact on our net income and the carrying value of our assets. We believe our tax liabilities and assets are properly recorded in the consolidated financial statements at March 31, 2017 and December 31, 2016 and no valuation allowance was necessary.

 

Comparison of Financial Condition at March 31, 2017 and December 31, 2016 

  

Total assets decreased $55.1 million, or 12.7%, to $379.3 million at March 31, 2017 from $434.4 million at December 31, 2016. The decrease was primarily the result of a decrease of $49.5 million in interest-earning demand deposits due to the payoff in early January 2017 of $27.0 million of federal funds purchased and the payoff of $13.0 million variable-rate advances that originated in December 2016 and a decrease of $4.7 million in loans receivable.

 

Loans held for sale decreased $238,000 to $0 at March 31, 2017 from $238,000 at December 31, 2016.

  

Net loans decreased $4.7 million, or 1.5%, to $316.0 million at March 31, 2017 from $320.6 million at December 31, 2016. Commercial non-mortgage loans decreased $5.1 million, or 25.5%, and construction loans decreased $1.0 million, or 7.8%, partially offset by an increase in commercial real estate loans of $2.9 million, or 1.5%.

 

  

The undisbursed portion of loans increased $400,000 to $6.2 million at March 31, 2017 from $5.8 million at December 31, 2016.

 

Other real estate owned decreased $78,000, or 93.0%, to $8,000 at March 31, 2017, from $86,000 at December 31, 2016 resulting from net sales of $78,000.

 

Other assets, consisting primarily of net deferred and accrued federal taxes, decreased $206,000 to $4.5 million at March 31, 2017 from $4.7 million at December 31, 2016.

 

Deposits decreased $9.4 million to $271.1 million at March 31, 2017 from $280.5 million at December 31, 2016. Core deposits (consisting of interest-bearing and noninterest-bearing checking accounts, money market accounts and savings accounts) decreased $9.1 million, primarily due to money market and checking accounts. Certificates of deposit decreased $3.6 million, or 2.8%, to $123.6 million at March 31, 2017 from $127.2 million at December 31, 2016, primarily due to maturities that were not renewed.

 

Federal Home Loan Bank advances decreased $18.0 million to $42.0 million at March 31, 2017 from $60.0 million at December 31, 2016 due to the payoff of $13.0 million variable rate advances in early January and other scheduled maturities.

 

Federal Funds purchased decreased $27.0 million, or 100.0%, to $0 at March 31, 2017 from $27.0 million at December 31, 2016 due to the payoff in early January.

 

Interest payable and other liabilities, consisting primarily of liabilities for checks and money orders, and accrued expenses, decreased $2.1 million from $5.9 million at December 31, 2016 to $3.7 million at March 31, 2017 million primarily due to a $3.2 million decrease in dividends payable offset in part by a $0.9 million increase in borrower’s prepaid taxes and insurances.

 

Total stockholders’ equity increased $1.5 million, or 2.0%, to $62.5 million at March 31, 2017 from $61.0 million at December 31, 2016, primarily due to net income of $1.3 million.

 

Comparison of Operating Results for the Three Months ended March 31, 2017 and 2016

 

General. We recorded net income of $1.3 million for the three months ended March 31, 2017 compared to net income of $967,000 for the three months ended March 31, 2016. The increase was primarily related to a decrease in provision for loan losses of $600,000 due to a negative provision for the three months ended March 31, 2017 from an expense of $0 for the three months ended March 31, 2016. This was offset in part by an increase in professional and service fees of $104,000 to an expense of $198,000 for the three months ended March 31, 2017 from an expense of $94,000 for the three months ended March 31, 2016. There was also a $64,000 decrease in net gain on loan sales from $96,000 for the three months ended March 31, 2016 to $32,000 for the three months ended March 31, 2017.

 

Interest and Dividend Income. Interest and dividend income increased $81,000, or 2.0%, to $4.1 million for the three months ended March 31, 2017. Average balances of interest-earnings assets decreased $12.1 million to $368.9 million for the three months ended March 31, 2017 from $381.0 million for the three months ended March 31, 2016, and the average yield on interest-earning assets increased 23 basis points to 4.49% during the 2017 period from 4.26% during the 2016 period.

 

Interest income on loans increased $74,000, or 1.9%, to $4.0 million for the three months ended March 31, 2017 from $3.9 million for the three months ended March 31, 2016. This increase was in part due to $30,000 in loan interest income related to one-time prepayment penalties. There was an increase of 18 basis points in the average yield to 5.07% during the 2017 period versus 4.89% during the 2016 period, and average net loans decreased $5.9 million, or 1.8%, to $316.0 million for the three months ended March 31, 2017 from $321.9 million for the three months ended March 31, 2016.

 

 

Income from dividends and investment securities increased $7,000 to $136,000 for the quarter ended March 31, 2017 from $129,000 for the quarter ended March 31, 2016.

 

Interest Expense. Interest expense increased $23,000, or 2.4%, to $990,000 for the three months ended March 31, 2017 from $967,000 for the three months ended March 31, 2016. Interest expense on deposits increased $47,000 to $555,000 during the 2017 period from $508,000 during the 2016 period. Interest expense on borrowed funds decreased $24,000 to $435,000 for the three months ended March 31, 2017 from $459,000 for the three months ended March 31, 2016. 

 

Average interest-bearing liabilities decreased $14.0 million, or 4.3%, to $310.5 million for the three months ended March 31, 2017 from $324.5 million for the three months ended March 31, 2016. The average rate paid on these liabilities increased 9 basis points to 1.28% during the 2017 period from 1.19% during the 2016 period. Interest expense on certificates of deposit decreased $47,000, or 10.8%, to $390,000 for the three months ended March 31, 2017 from $437,000 for the three months ended March 31, 2016. The average balance of certificates of deposits decreased to $124.7 million for the 2017 quarter, from $165.3 million for the 2016 quarter, while the rate on certificates of deposit increased 19 basis points to 1.25% for the three months ended March 31, 2017 from 1.06% for the three months ended March 31, 2016 primarily due to the increase in the overall market interest rate.

 

The average balance of core deposits, consisting of checking accounts, money market accounts and savings accounts, increased $28.1 million, or 25.0%, to $140.4 million for the three months ended March 31, 2017 from $112.3 million for the three months ended March 31, 2016. The interest paid on core deposits increased $94,000 to $165,000 for the three months ended March 31, 2017 from $71,000 for three months ended March 31, 2016. The rate on core deposits for the three months ended March 31, 2017 increased 22 basis points to 0.47% from 0.25% for the three months ended March 31, 2016 primarily due to the increase in the overall market interest rate.

 

Net Interest Income. Net interest income increased $56,000 to $3.2 million for the three months ended March 31, 2017 from $3.1 million for the three months ended March 31, 2016. Changes in net interest income are influenced by a variety of factors, including changes in the level and mix of interest-earning assets and interest-bearing liabilities, the level and direction of interest rates, the difference between short-term and long-term interest rates and the general strength of the economy.

 

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies — Allowance for Loan Losses,” we recorded a negative provision for loan losses of $600,000 for the three months ended March 31, 2017 and we did not record a provision for loan losses for the three months ended March 31, 2016. The negative provision in the 2017 quarter was primarily due to a decrease of $300,000 in specific allocations related to one commercial relationship and changes in quarterly factors used to calculate the allowance for loan losses and improved loan quality. At March 31, 2017, non-performing loans totaled $5.0 million, or 1.5% of total loans, as compared to $7.4 million, or 2.3% of total loans, at March 31, 2016. The allowance for loan losses to total loans receivable was 2.7% at March 31, 2017 and 3.0% at March 31, 2016. We have a negative provision expense in 2017 primarily because of continued economic improvement, stabilized levels of non-performing assets, and stabilized delinquencies. All loans rated Substandard are reviewed for impairment at least in the quarter in which the loan was downgraded to Substandard. All loans deemed impaired are reviewed for additional impairment at least each quarter. 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 $113,000, or 40.0%, to $170,000 for the three months ended March 31, 2017 from $283,000 for the three months ended March 31, 2016. The decrease was primarily attributable to a decrease of $64,000 in the net gain on loan sales, a $26,000 decrease in the net gain on the sale of other real estate owned, and a $11,000 decrease in service charges and fees.

 

 

Noninterest Expense. Noninterest expense decreased $1,000 for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. This was primarily due to a $65,000 decrease in loan legal expense, a $27,000 decrease in other real estate owned expense, and a $16,000 decrease in occupancy and equipment expense. This was offset in part by an increase of $104,000 in professional and service fees.  

 

Income Tax Expense. We recorded $704,000 of income tax expense for the three months ended March 31, 2017 compared to $523,000 of income tax expense for the three months ended March 31, 2016. Our effective tax rate was 34.5% for the three months ended March 31, 2017 and 35.1% for the three months ended March 31, 2016.

 

 

Asset Quality

 

Other real estate owned totaled $8,000, or 0.0% of total assets, at March 31, 2017 compared to $86,000, or 0.2% of total assets, at December 31, 2016. The largest relationship as of March 31, 2017 was $8,000, which consisted of land.

 

Non-performing assets, which includes non-performing loans, other real estate owned and troubled debt restructurings, totaled $5.0 million, or 1.3% of total assets, at March 31, 2017 compared to $6.5 million, or 1.5% of total assets, at December 31, 2016.  

 

Our largest substandard and non-performing relationship as of March 31, 2017 has a balance of $2.9 million. Of the $6.9 million loans rated substandard, approximately $1.8 million are performing.

  

New Capital Requirements

 

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

 

Item 3.            Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4.       Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Operating Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2017. 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, 2017, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

 

Part II – Other Information

 

Item 1. Legal Proceedings 

 

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

 

Item 1A.     Risk Factors

 

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

 

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

 

 

(a)

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

 

 

(b)

Not applicable.

 

 

(c)

The Company did not repurchase any shares of its common stock during the quarter ended March 31, 2017.

 

Item 3. Defaults Upon Senior Securities 

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 
41 

Table of Contents
 

 

Item 6. Exhibits 

 

 

31.1

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

 

 

31.2

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

  

 

32

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

 

 

101

INS XBRL Instance

 

 

101

SCH XBRL Taxonomy Extension Schema

 

 

101

CAL XBRL Taxonomy Extension Calculation

 

 

101

DEF XBRL Taxonomy Extension Definition

 

 

101

LAB XBRL Taxonomy Extension Label

 

 

101

PRE XBRL Taxonomy Extension Presentation

 

 

SIGNATURES

 

 

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

 

 

WOLVERINE BANCORP, INC.

 

 

 

 

 

 

 

Date:     May 12, 2017

/s/ David H. Dunn

 

 

David H. Dunn

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date:     May 12, 2017

/s/ Rick A. Rosinski

 

 

Rick A. Rosinski

 

 

Chief Operating Officer and Treasurer

 

 

 

43