XNAS:WBKC Wolverine Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2012

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

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

5710 Eastman Avenue, Midland, Michigan   48640
(Address of Principal Executive Offices)   Zip Code

(989) 631-4280

(Registrant’s telephone number)

N/A

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    YES  x    NO  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨.

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

 

Large accelerated filer     ¨    Accelerated filer     ¨
Non-accelerated filer     ¨  (Do not check if smaller reporting company)    Smaller reporting company     x

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

The number of shares outstanding of the Registrant’s common stock, $0.01 per share, as of July 31, 2012, was 2,389,401.

 

 

 


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

Index

 

          Page  
Part I. Financial Information   
Item 1.   

Condensed Consolidated Financial Statements

  
  

Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

     1   
  

Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Six Months Ended June 30, 2012 and 2011 (unaudited)

     2   
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)

     3   
  

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 (unaudited)

     4   
  

Notes to Condensed Consolidated Financial Statements (unaudited)

     5   
Item 2.   

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

     27   
Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

     35   
Item 4.   

Controls and Procedures

     35   
Part II. Other Information   
Item 1.   

Legal Proceedings

     36   
Item 1A.   

Risk Factors

     36   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     36   
Item 3.   

Defaults upon Senior Securities

     36   
Item 4.   

Mine Safety Disclosures

     36   
Item 5.   

Other Information

     36   
Item 6.   

Exhibits

     36   
   Signature Page      37   


Table of Contents

Part I. Financial Information

Item 1. Financial Statements

Wolverine Bancorp, Inc.

Condensed Consolidated Balance Sheets

(Dollars in Thousands)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        
Assets     

Cash and due from banks

   $ 391      $ 454   

Interest-earning demand deposits

     23,279        13,669   
  

 

 

   

 

 

 

Cash and cash equivalents

     23,670        14,123   

Interest-earning time deposits

     3,486        21,146   

Held to maturity securities

     259        315   

Loans held for sale

     2,726        666   

Loans, net of allowance for loan losses of $6,500 and $9,503

     243,945        243,663   

Premises and equipment, net

     1,515        1,503   

Federal Home Loan Bank stock

     4,391        4,391   

Other real estate owned

     1,006        1,365   

Accrued interest receivable

     764        833   

Other assets

     5,454        5,677   
  

 

 

   

 

 

 

Total assets

   $ 287,216      $ 293,682   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities

    

Deposits

   $ 156,340      $ 161,364   

Federal Home Loan Bank advances

     61,893        65,860   

Interest payable and other liabilities

     3,317        1,481   
  

 

 

   

 

 

 

Total liabilities

     221,550        228,705   

Commitments and Contingencies

    

Stockholders’ Equity

    

Common Stock, $0.01 par value per share:

    

Issued and outstanding – 2,500,224 and 2,507,500 at June 30, 2012 and December 31, 2011

   $ 25      $ 25   

Additional paid-in capital

     23,693        23,806   

Unearned employee stock ownership plan (ESOP)

     (1,906     (1,906

Retained earnings

     43,854        43,052   
  

 

 

   

 

 

 

Total stockholders’ equity

     65,666        64,977   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 287,216      $ 293,682   
  

 

 

   

 

 

 

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

 

1


Table of Contents

Wolverine Bancorp, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(Dollars in Thousands, except per share data)

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 
     2012     2011      2012     2011  
     (Unaudited)      (Unaudited)  

Interest and Dividend Income

         

Loans

   $ 3,461      $ 3,518       $ 7,003      $ 7,015   

Investment securities and other

     60        81         155        186   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     3,521        3,599         7,158        7,201   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest Expense

         

Deposits

     334        464         698        973   

Borrowings

     640        840         1,322        1,650   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     974        1,304         2,020        2,623   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income

     2,547        2,295         5,138        4,578   

Provision for Loan Losses

     300        400         950        760   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income After Provision for Loan Losses

     2,247        1,895         4,188        3,818   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest Income

         

Service charges and fees

     48        64         122        122   

Net gain on loan sales

     431        80         775        216   

Gross income on real estate owned

     1        35         2        92   

Loan fees earned

     16        53         83        119   

Net gain (loss) on sale of real estate owned

     (31     20         (63     75   

Other

     43        45         86        117   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     508        297         1,005        741   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest Expense

         

Salaries and employee benefits

     1,088        870         2,168        1,722   

Net occupancy and equipment expense

     198        187         394        370   

Information technology expense

     58        67         119        118   

Federal deposit insurance corporation premiums

     70        72         142        142   

Professional and services fees

     121        134         277        288   

Other real estate owned expense

     72        148         144        546   

Loan legal expense

     22        31         55        76   

Other

     349        312         674        617   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     1,978        1,821         3,973        3,879   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income Before Income Tax

     777        371         1,220        680   

Provision for Income Taxes

     266        127         418        234   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income and Comprehensive Income

   $ 511      $ 244       $ 802      $ 446   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings Per Share:

         

Basic

   $ 0.22      $ 0.11       $ 0.35      $ 0.17   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.22      $ 0.11       $ 0.35      $ 0.17   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

2


Table of Contents

Wolverine Bancorp, Inc.

Condensed Consolidated Statement of Cash Flows

(Dollars in Thousands)

 

    

Six Months Ended

June 30,

 
     2012     2011  
     (Unaudited)  

Operating Activities

    

Net income

   $ 802      $ 446   

Items not requiring (providing) cash

    

Depreciation

     116        107   

Provision for loan losses

     950        760   

Amortization of Federal Home Loan Bank advance prepayment penalty

     33        33   

Deferred income taxes

     (326     135   

Loss (Gain) on other real estate owned

     63        253   

Loans originated for sale

     (40,781     (11,427

Proceeds from loans sold

     39,496        12,050   

Gain on sale of loans

     (775     (216

Gain on sale of premises or equipment

     (1     (31

Changes in

    

Interest receivable and other assets

     618        866   

Interest payable and other liabilities

     1,835        846   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,030        3,822   
  

 

 

   

 

 

 

Investing Activities

    

Net change in interest-bearing deposits

     17,660        (10,950

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

     57        73   

Net change in loans

     (1,455     (11,642

Proceeds from sale of premises and equipment

     23        64   

Proceeds from sale of real estate owned

     519        1,082   

Redemption of FHLB stock

     —          219   

Purchase of premises and equipment

     (150     (33
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     16,654        (21,187
  

 

 

   

 

 

 

Financing Activities

    

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

     2,302        2,083   

Net change in certificates of deposit

     (7,326     (9,525

Proceeds from stock conversion

     —          2,676   

Proceeds from Federal Home Loan Bank advances

     22,000        —     

Repayment of Federal Home Loan Bank advances

     (26,000     (5,000

Purchase of treasury stock

     (113     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (9,137     (9,766
  

 

 

   

 

 

 

Increase (Decrease) in Cash and Cash Equivalents

     9,547        (27,131

Cash and Cash Equivalents, Beginning of Period

     14,123        48,936   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 23,670      $ 21,805   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flows Information

    

Interest paid

   $ 2,068      $ 2,660   

Income taxes paid

     450        —     

Loans transferred to real estate owned

     222        953   

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

 

3


Table of Contents

Wolverine Bancorp, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(Dollars in Thousands, except share data)

 

    Common Stock     Additional  Paid-in
Capital
    Unearned ESOP
Shares
    Retained
Earnings
    Total
Stockholders’
Equity
 

Balances at January 1, 2012

  $ 25      $ 23,806      $ (1,906   $ 43,052      $ 64,977   

Net income

    —          —          —          802        802   

Purchase of 7,276 shares of common stock

    —          (113     —          —          (113
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2012

  $ 25      $ 23,693      $ (1,906   $ 43,854      $ 65,666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

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, 2011 has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the six month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto filed as part of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2012.

Note 2: Plan of Conversion and Change in Corporate Form

On January 19, 2011, the Bank converted to a stock savings bank structure and established the Company, as the parent holding company of the Bank. In connection with the conversion, 2,507,500 shares of the Company’s common stock were issued at $10.00 per share for total gross offering proceeds of $25.1 million. Expenses related to the offering were approximately $1.3 million. In addition, the Bank’s Board of Directors adopted an employee stock ownership plan (ESOP) which subscribed for 8% of the common stock sold in the offering, for a total of $2.0 million. The Company is incorporated under the laws of the State of Maryland and owns all of the outstanding common stock of the Bank.

The common stock began trading on the NASDAQ Capital Market on January 20, 2011 under the symbol “WBKC”.

In accordance with Office of Thrift Supervision (“OTS”) regulations, at the time of the completion of the Bank’s mutual to stock conversion, the Bank substantially restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders and supplemental eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s or and supplemental eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. We may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount. The initial liquidation account amount was $41.7 million.

 

5


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Note 3: Accounting Developments

The FASB has issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amendment allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is to be applied retrospectively. For public entities, the amendments were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU No. 2011-05 did not have a material impact on the Company’s financial statements.

The FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income for all periods presented. The ASU does not change the other requirements of FASB ASU No. 2011-05, Presentation of Comprehensive Income . Entities are still required to present reclassification adjustments within other comprehensive income either on the face of the statement that reports other comprehensive income or in the notes to the financial statements. The requirement to present comprehensive income in either a single continuous statement or two consecutive condensed statements remains for both annual and interim reporting. The deferral of the requirement for the presentation of reclassification adjustments is intended to be temporary until the FASB reconsiders the operational concerns and needs of financial statement users.

The Company adopted the amendments in this Update at the same time as ASU 2011-05, which became effective beginning in the interim period ended March 31, 2012. As the Company had no reclassifications adjustments within other comprehensive income, ASU No. 2011-12 had no impact on its financial statements.

 

6


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Note 4: Securities

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Approximate
Fair Value
 

Held to Maturity Securities:

           

June 30, 2012

           

Municipal

   $ 259       $ —         $ —         $ 259   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Municipal

   $ 315       $ —         $ —         $ 315   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of securities at June 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2012  
     Amortized
Cost
     Fair
Value
 

Within one year

   $ —         $ —     

One to five years

     —           —     

Five to ten years

     259         259   

After ten years

     —           —     
  

 

 

    

 

 

 

Totals

   $ 259       $ 259   
  

 

 

    

 

 

 

There were no sales of securities during the six months ended June 30, 2012 and 2011.

 

7


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Note 5: Loans and Allowance for Loan Losses

Categories of loans include:

 

     June 30,      December 31,  
     2012      2011  

Real Estate

     

One-to four-family

   $ 60,260       $ 68,287   

Home equity

     11,532         13,572   

Commercial mortgage loans

     

Commercial real estate

     96,552         89,463   

Multifamily

     52,863         51,411   

Land

     12,508         13,445   

Construction

     16,378         19,704   

Commercial Non-mortgage

     7,507         7,675   

Consumer

     1,157         1,247   
  

 

 

    

 

 

 

Total loans

     258,757         264,804   

Less

     

Net deferred loan fees, premiums and discounts

     432         440   

Undisbursed portion of loans

     7,880         11,198   

Allowance for loan losses

     6,500         9,503   
  

 

 

    

 

 

 

Net loans

   $ 243,945       $ 243,663   
  

 

 

    

 

 

 

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

1-4 Family, Home Equity, and Consumer

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

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

 

 

8


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Dollars in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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

Commercial real estate and multifamily

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

Land

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

Construction

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

.

 

9


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Dollars in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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

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

Commercial non-mortgage

Commercial non-mortgage loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial non-mortgage loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial non-mortgage loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

In determining the appropriate level of allowance for loan loss, we analyze various components of our portfolio. The following components are analyzed: all substandard loans on an individual basis; all loans that are designated special mention or closely monitored; loans not classified according to purpose or collateral type; and overdrawn deposit account balances.

 

10


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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

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

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 June 30, 2012, December 31, 2011 and June 30, 2011:

 

Loan Class    1-4
Family
    Home
Equity
    Commercial
Real Estate
    Multifamily     Land     Construction     Commercial
Non-

Mortgage
     Consumer     Total  

Year to date analysis as of June 30, 2012

                   

Allowance for loan losses:

                   

Balance, beginning of year

   $ 1,580      $ 290      $ 3,462      $ 1,933      $ 1,622      $ 423      $ 165       $ 28      $ 9,503   

Provision charged to expense

     (26     (16     216        583        178        (10     24         1        950   

Losses charged off

     (61     —          (1,253     (1,241     (1,486     (2     —           (2     (4,045

Recoveries

     21        16        —          52        —          —          —           3        92   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 1,514      $ 290      $ 2,425      $ 1,327      $ 314      $ 411      $ 189       $ 30      $ 6,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ —        $ —        $ 1      $ —        $ 299      $ —        $ —         $ —        $ 300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,514      $ 290      $ 2,424      $ 1,247      $ 15      $ 411      $ 189       $ 30      $ 6,200   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans:

                   

Ending Balance

   $ 60,260      $ 11,532      $ 96,552      $ 52,863      $ 12,508      $ 16,378      $ 7,507       $ 1,157      $ 258,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 2,428      $ 76      $ 6,536      $ 8,153      $ 6,559      $ —        $ 373       $ —        $ 24,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 57,832      $ 11,456      $ 90,016      $ 44,710      $ 5,949      $ 16,378      $ 7,134       $ 1,157      $ 234,632   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
Loan Class    1-4
Family
    Home
Equity
    Commercial
Real Estate
    Multifamily     Land     Construction     Commercial
Non-

Mortgage
     Consumer     Total  

Quarter to date analysis as of June 30, 2012

                   

Allowance for loan losses:

                   

Balance, beginning of year

   $ 1,590      $ 316      $ 2,250      $ 1,222      $ 278      $ 390      $ 184       $ 28      $ 6,258   

Provision charged to expense

     (77     (27     17        64        136        21        5         2        300   

Losses charged off

     —          —          —          —          (100     —          —           (1     (101

Recoveries

     1        —          —          41        —          —          —           1        43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 1,514      $ 290      $ 2,425      $ 1,327      $ 314      $ 411      $ 189       $ 30      $ 6,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

11


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Loan Class    1-4
Family
    Home
Equity
    Commercial
Real Estate
    Multifamily      Land     Construction      Commercial
Non-

Mortgage
    Consumer     Total  

Year to date analysis as of December 31, 2011

                    

Allowance for loan losses:

                    

Balance, beginning of year

   $ 2,079      $ 313      $ 3,914      $ 1,765       $ 1,036      $ 367       $ 269      $ 32      $ 9,775   

Provision charged to expense

     (166     138        328        168         973        56         (104     (8     1,385   

Losses charged off

     (335     (161     (785     —           (391     —           —          (3     (1,675

Recoveries

     2        —          5        —           4        —           —          7        18   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 1,580      $ 290      $ 3,462      $ 1,933       $ 1,622      $ 423       $ 165      $ 28      $ 9,503   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 111      $ —        $ 1,538      $ 829       $ 1,332      $ 2       $ —        $ —        $ 3,812   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,469      $ 290      $ 1,924      $ 1,104       $ 290      $ 421       $ 165      $ 28      $ 5,691   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Loans:

                    

Ending Balance

   $ 68,287      $ 13,572      $ 89,463      $ 51,411       $ 13,445      $ 19,704       $ 7,675      $ 1,247      $ 264,804   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 3,314      $ 327      $ 9,206      $ 9,854       $ 8,710      $ 174       $ 375      $ —        $ 31,960   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 64,973      $ 13,245      $ 80,257      $ 41,557       $ 4,735      $ 19,530       $ 7,300      $ 1,247      $ 232,844   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
Loan Class    1-4
Family
    Home
Equity
    Commercial
Real Estate
    Multifamily      Land     Construction      Commercial
Non-

Mortgage
    Consumer     Total  

Year to date analysis as of June 30, 2011

                    

Allowance for loan losses:

                    

Balance, beginning of year

   $ 2,079      $ 313      $ 3,914      $ 1,765       $ 1,036      $ 367       $ 269      $ 32      $ 9,775   

Provision charged to expense

     (71     24        58        129         648        22         (49     (1     760   

Losses charged off

     (39     —          (369     —           —          —           —          (1     (409

Recoveries

     2        —          5        —           1        —           —          4        12   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 1,971      $ 337      $ 3,608      $ 1,894       $ 1,685      $ 389       $ 220      $ 34      $ 10,138   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

12


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Loan Class    1-4
Family
    Home
Equity
     Commercial
Real Estate
    Multifamily     Land      Construction     Commercial
Non-
Mortgage
    Consumer      Total  

Quarter to date analysis as of June 30, 2011

                     

Allowance for loan losses:

                     

Balance, beginning of quarter

   $ 2,010      $ 311       $ 3,661      $ 1,913      $ 1,141       $ 405      $ 262      $ 29       $ 9,732   

Provision charged to expense

     (41     26         (55     (19     544         (16     (42     3         400   

Losses charged off

     —          —           (2     —          —           —          —          —           (2

Recoveries

     2        —           4        —          —           —          —          2         8   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 1,971      $ 337       $ 3,608      $ 1,894      $ 1,685       $ 389      $ 220      $ 34       $ 10,138   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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.

 

 

13


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

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 June 30, 2012 and December 31, 2011:

 

     1-4 Family      Home Equity      Commercial Real
Estate
     Multifamily  
     2012      2011      2012      2011      2012      2011      2012      2011  

Pass

   $ 54,357       $ 61,574       $ 11,452       $ 13,331       $ 69,611       $ 63,107       $ 34,792       $ 34,012   

Pass (Closely Monitored)

     3,190         3,387         —           —           11,282         9,136         8,208         5,581   

Special Mention

     658         508         4         35         9,479         8,512         5,457         6,043   

Substandard

     2,055         2,818         76         206         6,180         8,708         4,406         5,775   

Doubtful

     —           —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 60,260       $ 68,287       $ 11,532       $ 13,572       $ 96,552       $ 89,463       $ 52,863       $ 51,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Land      Construction      Commercial
Non-Mortgage
     Consumer      Total  
     2012      2011      2012      2011      2012      2011      2012      2011      2012      2011  

Pass

   $ 3,816       $ 3,043       $ 16,378       $ 19,410       $ 6,732       $ 7,034       $ 1,131       $ 1,242       $ 198,269       $ 202,753   

Pass (Closely Monitored)

     1,979         797         —           120         305         162         26         5         24,990         19,188   

Special Mention

     237         1,572         —           —           97         104         —           —           15,932         16,774   

Substandard

     6,476         8,033         —           174         373         375         —           —           19,566         26,089   

Doubtful

     —           —           —           —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,508       $ 13,445       $ 16,378       $ 19,704       $ 7,507       $ 7,675       $ 1,157       $ 1,247       $ 258,757       $ 264,804   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

The Closely Monitored asset quality rating encompasses assets that have been brought to the attention of management and may, if not corrected, warrant a more serious quality rating by management. These assets are usually in the first phase of a deficiency situation and may possess similar criteria as Special Mention assets. This grade includes “pass grade” 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.

 

 

14


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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

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

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

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

The following table is a summary of our past due and non-accrual loans as of June 30, 2012 and December 31, 2011:

 

As of June 30, 2012:    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

   $ 526       $ 95       $ 67       $ 688       $ 59,572       $ 60,260       $ —         $ 801   

Home Equity

     —           —           76         76         11,456         11,532         —           76   

Commercial Real Estate

     648         —           818         1,466         95,086         96,552         —           1,895   

Multifamily

     3,649         —           —           3,649         49,214         52,863         —           —     

Land

     984         —           4,972         5,956         6,552         12,508         —           6,465   

Construction

     —           —           —           —           16,378         16,378         —           —     

Commercial Non-Mortgage

     —           —           373         373         7,134         7,507         —           373   

Consumer

     —           —           —           —           1,157         1,157         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,807       $ 95       $ 6,306       $ 12,208       $ 246,549       $ 258,757       $ —         $ 9,610   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

15


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

As of December 31, 2011:    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

   $ 1,117       $ 83       $ 575       $ 1,775       $ 66,512       $ 68,287       $ —         $ 922   

Home Equity

     —           —           165         165         13,407         13,572         —           165   

Commercial Real Estate

     614         128         980         1,722         87,741         89,463         —           3,652   

Multifamily

     4,199         —           —           4,199         47,212         51,411         —           —     

Land

     —           —           906         906         12,539         13,445         —           7,833   

Construction

     —           —           —           —           19,704         19,704         —           2   

Commercial Non-Mortgage

     —           —           375         375         7,300         7,675         —           375   

Consumer

     —           —           —           —           1,247         1,247         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,930       $ 211       $ 3,001       $ 9,142       $ 255,662       $ 264,804       $ —         $ 12,949   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

 

 

16


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

The following tables present impaired loans for the period ended June 30, 2012:

 

As of June 30, 2012    Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     QTD
Average
Balance
     YTD
Average
Balance
     QTD
Interest
Income
     YTD
Interest
Income
 

Loans without a specific valuation allowance

  

1-4 Family

   $ 2,428       $ 2,558       $ —         $ 2,508       $ 2,641       $ 36       $ 64   

Home Equity

     76         76         —           148         231         1         3   

Commercial Real Estate

     6,487         8,862         —           8,562         8,505         106         195   

Multifamily

     8,153         8,973         —           9,333         9,580         141         282   

Land

     1,587         2,399         —           3,931         3,684         32         60   

Construction

     —           —           —           2         60         —           —     

Commercial Non-Mortgage

     373         373         —           373         374         3         6   

Consumer

     —           —           —           —           —           —           —     

Loans with a specific valuation allowance

                    

1-4 Family

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Home Equity

     —           —           —           —           —           —           —     

Commercial Real Estate

     49         60         1         49         49         —           1   

Multifamily

     —           —           —           —           —           —           —     

Land

     4,972         6,392         299         5,257         5,571         72         146   

Construction

     —           —           —           —           —           —           —     

Commercial Non-Mortgage

     —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —     

Total

        

1-4 Family

   $ 2,428       $ 2,558       $ —         $ 2,508       $ 2,641       $ 36       $ 64   

Home Equity

     76         76         —           148         231         1         3   

Commercial Real Estate

     6,536         8,822         1         8,611         8,554         106         196   

Multifamily

     8,153         8,973         —           9,333         9,580         141         282   

Land

     6,559         8,791         299         9,188         9,255         104         206   

Construction

     —           —           —           2         60         —           —     

Commercial Non-Mortgage

     373         373         —           373         374         3         6   

Consumer

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,125       $ 29,593       $ 300       $ 30,163       $ 30,695       $ 391       $ 757   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

The following tables present impaired loans for the period ended December 31, 2011:

 

As of December 31, 2011    Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     YTD
Average Balance
     YTD
Interest
Income
 

Loans without a specific valuation allowance

              

1-4 Family

   $ 1,921       $ 1,963       $ —         $ 1,777       $ 114   

Home Equity

     327         432         —           190         22   

Commercial Real Estate

     3,018         3,046         —           2,560         157   

Multifamily

     290         290         —           131         5   

Land

     —           —           —           85         —     

Construction

     172         172         —           73         5   

Commercial Non-Mortgage

     375         375         —           293         11   

Consumer

     —           —           —           —           —     

Loans with a specific valuation allowance

              

1-4 Family

   $ 1,393       $ 1,423       $ 111       $ 1,249       $ 51   

Home Equity

     —           —           —           72         —     

Commercial Real Estate

     6,188         6,653         1,538         5,975         334   

Multifamily

     9,564         9,565         829         9,391         538   

Land

     8,710         9,386         1,332         8,180         377   

Construction

     2         2         2         112         —     

Commercial Non-Mortgage

     —           —           —           —           —     

Consumer

     —           —           —           —           —     

Total

              

1-4 Family

   $ 3,314       $ 3,386       $ 111       $ 3,026       $ 165   

Home Equity

     327         432         —           262         22   

Commercial Real Estate

     9,206         9,699         1,538         8,535         491   

Multifamily

     9,854         9,855         829         9,522         543   

Land

     8,710         9,386         1,332         8,265         377   

Construction

     174         174         2         185         5   

Commercial Non-Mortgage

     375         375         —           293         11   

Consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,960       $ 33,307       $ 3,812       $ 30,088       $ 1,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

The following tables present impaired loans for the period ended June 30, 2011:

 

As of June 30, 2011    QTD
Average
Balance
     YTD
Average
Balance
     QTD
Interest
Income
     YTD
Interest
Income
 

Loans without a specific valuation allowance

           

1-4 Family

   $ 1,768       $ 1,777       $ 21       $ 43   

Home Equity

     129         145         2         4   

Commercial Real Estate

     2,144         1,072         33         63   

Multifamily

     —           —           —           —     

Land

     15         83         —           —     

Construction

     —           35         —           —     

Commercial Non-Mortgage

     126         63         3         6   

Consumer

     —           —           —           —     

Loans with a specific valuation allowance

           

1-4 Family

   $ 1,312       $ 1,222       $ 29       $ 39   

Home Equity

     120         93         1         2   

Commercial Real Estate

     5,409         5,810         55         99   

Multifamily

     9,743         9,424         148         238   

Land

     8,218         8,006         104         181   

Construction

     92         127         1         2   

Commercial Non-Mortgage

     —           —           —           —     

Consumer

     —           —           —           —     

Total

           

1-4 Family

   $ 3,080       $ 2,999       $ 50       $ 82   

Home Equity

     249         238         3         7   

Commercial Real Estate

     7,553         6,882         88         161   

Multifamily

     9,743         9,424         148         238   

Land

     8,233         8,089         104         181   

Construction

     92         162         1         2   

Commercial Non-Mortgage

     126         63         3         6   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,076       $ 27,857       $ 397       $ 677   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

19


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Dollars in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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.

 

20


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Effective July 1, 2011, we adopted the provisions of Accounting Standards Update (ASU) No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. As a result of adopting the provisions of ASU 2011-02, we reassessed all loan modifications occurring since January 1, 2011 for identification as TDRs.

The following table summarizes the loans that have been restructured as TDRs during the three months ended June 30, 2012:

 

     Three Months Ended
June 30, 2012
     Six Months Ended
June 30, 2012
 
     Count      Balance
prior to
TDR
     Balance
after
TDR
     Count      Balance
prior to
TDR
     Balance
after
TDR
 
     (Dollars in thousands)  

Commercial real estate

     1         98         101         3         237         246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     1       $ 98       $ 101         3       $ 237       $ 246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We had no TDRs that had payment defaults during 2012. 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. During the three months ended June 30, 2012, management predominantly utilized rate reductions and lower monthly payments, either from a longer amortization period or interest only repayment schedule, because these concessions provide needed payment relief without risking the loss of principal. Management will also agree to a forbearance agreement when it is deemed appropriate to avoid foreclosure.

 

21


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Dollars in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Note 6: Disclosures About Fair Value of Assets and Liabilities

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

 

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

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

Transfers between Levels

There were no transfers between Levels 1, 2 and 3 during the three months ended June 30, 2012.

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 June 30, 2012 and December 31, 2011.

 

            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)
 

June 30, 2012

           

Impaired loans

   $ 5,948       $ —         $ —         $ 5,948   

December 31, 2011

           

Impaired loans

   $ 9,587       $ —         $ —         $ 9,587   

 

22


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Collateral-dependent Impaired Loans, Net of ALLL

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

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

Unobservable (Level 3) inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than good will.

 

     Fair Value at
June 30, 2012
     Valuation
Technique
   Unobservable
Inputs
   Range (Weighted
Average)
 

Collateral-dependent impaired loans

   $ 5,948       Market
comparable
properties
   Marketability
discount
    
 
21
 
% - 41% 
(27%) 

 

23


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2012.

 

          Fair Value Measurements Using  
     Carrying
Amount
   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Financial assets

     

Cash and cash equivalents

   $23,670    $ 23,670       $ —         $ —     

Interest-earning time deposits

   3,486      3,486         —           —     

Held to maturity securities

   259      —           259         —     

Loans held for sale

   2,726      —           2,777         —     

Loans, net of allowance for loan losses

   243,945      —           —           247,304   

Federal Home Loan Bank stock

   4,391      —           4,391         —     

Interest receivable

   764      —           764         —     

Financial liabilities

           

Deposits

   156,340      92,050         —           64,651   

Federal Home Loan Bank advances

   61,893      —           70,152         —     

Interest payable

   177      —           177         —     

 

24


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

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

 

     December 31, 2011  
     Carrying
Amount
     Fair
Value
 

Financial assets

     

Cash and cash equivalents

   $ 14,123       $ 14,123   

Interest-earning time deposits

     21,146         21,146   

Held to maturity securities

     315         315   

Loans held for sale

     666         674   

Loans, net of allowance for loan losses

     243,663         245,377   

Federal Home Loan Bank stock

     4,391         4,391   

Interest receivable

     833         833   

Financial liabilities

     

Deposits

     161,364         164,968   

Federal Home Loan Bank advances

     65,860         74,229   

Interest payable

     226         226   

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, Interest Receivable, Stock Conversion Related Liabilities and Interest Payable

The carrying amount approximates fair value.

Held to Maturity Securities

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

Loans Held for Sale

Fair value is estimated using quoted market prices from the secondary market.

 

25


Table of Contents

Wolverine Bancorp, Inc.

Form 10-Q

(Table Amounts in Thousands)

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

 

Loans

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

Deposits

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

Federal Home Loan Bank Advances

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

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

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

Note 7: Earnings Per Share

 

     Three Months Ended     Six Months Ended  
     June 30, 2012     June 30, 2012  

Basic and diluted

    

Earnings:

    

Net Income

   $ 511      $ 802   
  

 

 

   

 

 

 

Shares:

    

Weighted average common shares outstanding

     2,501        2,501   

Less: Average unallocated ESOP shares

     (188     (188
  

 

 

   

 

 

 

Average shares

     2,313        2,313   
  

 

 

   

 

 

 

Net income per common share, basic and diluted

   $ 0.22      $ 0.35   
  

 

 

   

 

 

 

 

26


Table of Contents

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

General

Management’s discussion and analysis of the financial condition and results of operations at and for three months and six months ended June 30, 2012 and 2011 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.

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;

 

27


Table of Contents
   

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. See also “Business of Wolverine Bank—Allowance for Loan Losses.”

Income Tax Accounting. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense

 

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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 June 30, 2012 and December 31, 2011 and no valuation allowance was necessary.

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

Total assets decreased $6.5 million, or 2.2%, to $287.2 million at June 30, 2012 from $293.7 million at December 31, 2011. The decrease was primarily the result of paying off maturing Federal Home Loan Bank advances, a decrease in customer deposits, and a reduction in interest bearing time deposits.

Cash and cash equivalents increased $9.6 million, or 68.1%, to $23.7 million at June 30, 2012 from $14.1 million at December 31, 2011, and interest-earning time deposits decreased $17.7 million, or 83.4%, to $3.5 million at June 30, 2012 from $21.1 million at December 31, 2011. The net increase in cash and cash equivalents was primarily the result of funds received from the maturing of interest-earning time deposits which were used to pay down Federal Home Loan Bank advances and customer certificates of deposits.

Net loans increased $282,000, or 0.2%, to $243.9 million at June 30, 2012 from $243.7 million at December 31, 2011 as our construction loans decreased $3.3 million, or 16.9%, one-to four-family residential real estate loans decreased $8.0 million, or 11.8%, and our home equity loans decreased $2.0 million, or 15.0%. These were offset by an increase in our commercial real estate loans of $7.1 million, or 7.9% and decreases in our undisbursed loan funds and allowance for loan losses of $3.3 million, or 29.6%, and $3.0 million, or 31.6%, respectively.

The decrease in our allowance for loan losses was due to the March 31, 2012 charging off of $3.8 million of specific reserves on collateral-dependent impaired loans. These charge offs were considered confirmed losses and the majority of the charge offs were based on recent appraisal values or evaluations. The allowance for loan losses as a percentage of total loans decreased to 2.5% as of June 30, 2012, from 3.7% at December 31, 2011. However, we feel we are adequately covered because of the aforementioned charge offs taken during the three months ended March 31, 2012.

Securities held to maturity, consisting of one municipal security at June 30, 2012 decreased $56,000, or 17.8%, to $259,000 from $315,000 at December 31, 2011 due to paydowns.

 

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Other real estate owned decreased $360,000, or 28.6%, to $1.0 million at June 30, 2012, from $1.4 million at December 31, 2011. The decrease in other real estate owned resulted from sales of $537,000 and write-downs of $45,000, offset by new foreclosures of $222,000.

Other assets, consisting primarily of prepaid FDIC assessments and deferred federal taxes, decreased $223,000, or 3.5%, to $5.5 million at June 30, 2012, from $5.7 million at December 31, 2011. The decrease was primarily attributable to a net decrease in our deferred and accrued federal income taxes of $418,000.

Deposits decreased by $5.1 million, or 3.2%, to $156.3 million at June 30, 2012 from $161.4 million at December 31, 2011. Certificates of deposit decreased $7.3 million, or 10.2%, to $64.3 million at June 30, 2012 from $71.6 million at December 31, 2011. Our core deposits (consisting of interest-bearing and noninterest-bearing checking accounts, money market accounts and savings accounts) increased by $2.2 million, or 2.4%, to $92.0 million at June 30, 2012 from $89.8 million at December 31, 2011. The increase in our core deposits resulted primarily from continuing to build relationships with our existing customers as well as our marketing efforts for new customers.

Federal Home Loan Bank advances decreased $4.0 million to $61.9 million at June 30, 2012 from $65.9 million at December 31, 2011 as a result of paying off maturing advances.

Interest payable and other liabilities, consisting mainly of liabilities for checks and money orders and accrued expenses, increased $1.8 million, or 120.0% to $3.3 million at June 30, 2012, from $1.5 million at December 31, 2011. The increase was primarily due to a $641,000 increase in our liability for checks and money orders and a $1.0 million increase in borrowers’ prepaid taxes and insurances.

Total stockholders’ equity increased $689,000, or 1.1%, to $65.7 million at June 30, 2012 from $65.0 million at December 31, 2011 primarily due to net income of $802,000. This was offset by purchases of 7,276 shares of Wolverine Bancorp, Inc. common stock, totaling $113,000 pursuant to our announced stock repurchase program which was approved by our Board of Directors on February 14, 2012.

Comparison of Operating Results for the Three Months Ended June 30, 2012 and 2011

General. We recorded net income of $511,000 for the three months ended June 30, 2012 compared to net income of $244,000 for the three months ended June 30, 2011. The increase in our net income is primarily due to an increase in our net interest income of $252,000 to $2.5 million for the three months ended June 30, 2012 from $2.3 million for the three months ended June 30, 2011. In addition to this, we had an increase in our net gains on loans sales of $351,000 and a decrease in our provision for loan loss expense of $100,000. These were offset by an increase in our salaries and employee benefits of $218,000.

Interest and Dividend Income. Interest and dividend income decreased slightly by $78,000, or 2.2%, to $3.5 million for the three months ended June 30, 2012, as the average balance of interest-earning assets decreased $19.9 million to $277.4 million for the three months ended June 30, 2012 from $297.3 million for the three months ended June 30, 2011 which was partially offset by an increase in the average yield on interest-earning assets of 24 basis points to 5.08% during the 2012 period from 4.84% during the 2011 period. The increase in our average yield on interest-earning assets was due primarily to an increase in net loans and a decrease in lower yielding other interest-earning assets.

The biggest component of the decrease in average interest-earning assets was in other interest-earning assets, consisting of interest-earning overnight funds and time deposits, which decreased $26.5 million, or 51.9%, to $24.6 million for the three months ended June 30, 2012 from $51.1 million for the three months ended June 30, 2011. Although the average yield on this investment type increased 2 basis points from 0.39% to 0.41%, the decrease in the average balance resulted in a $25,000 decrease in interest income from other interest-earning assets to $25,000 for the three months ended June 30, 2012 from $50,000 for the three months ended June 30, 2011.

 

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Average net loans increased $6.8 million, or 2.8%, to $248.1 million for the three months ended June 30, 2012 from $241.3 million for the three months ended June 30, 2011. Interest income on loans decreased slightly by $57,000, or 1.6%, to $3.5 million for the three months ended June 30, 2012, as the average yield on loans decreased 25 basis points to 5.58% for the three months ended June 30, 2012 from 5.83% for the three months ended June 30, 2011 reflecting the lower market interest rate environment.

Interest Expense. Interest expense decreased $330,000, or 25.3%, to $974,000 for the three months ended June 30, 2012 from $1.3 million for the three months ended June 30, 2011, as the average balance of interest-bearing liabilities decreased $23.4 million, or 9.7%, to $218.0 million for the three months ended June 30, 2012 from $241.4 million for the three months ended June 30, 2011, and the average rate we paid on these liabilities decreased 37 basis points to 1.79% from 2.16%. The biggest component of the decrease was interest expense on Federal Home Loan Bank advances which decreased $200,000, or 23.9%, to $640,000 for the three months ended June 30, 2012 from $840,000 for the three months ended June 30, 2011. This resulted from a $9.9 million decrease in the average balance of Federal Home Loan Bank advances to $61.9 million for the three months ended June 30, 2012 from $71.8 million for the three months ended June 30, 2011 and a 55 basis point decrease in the average rate paid on borrowing from 4.68% for the three months ended June 30, 2011 to 4.13% for the three months ended June 30, 2012. The decrease in the average balance of these borrowings was due to our strategy of not renewing our maturing advances and paying them off when they come due.

Interest expense on certificates of deposits decreased $108,000 or 28.8% to $267,000 for the three months ended June 30, 2012 from $375,000 for the three months ended June 30, 2011. This is primarily due to a decrease in the average balance of certificates of deposits of $13.8 million to $65.4 million for the 2012 period, from $79.2 million for the 2011 period. The decrease in the balance of certificates of deposits was primarily due to a decrease in rates paid on these deposits in the continuing low interest rate environment. Additionally, the yield on certificates of deposit decreased 27 basis points to 1.63% for the 2012 period from 1.90% for the 2011 period.

The average balance of our core deposits, consisting of checking accounts, money market accounts and savings accounts, increased $305,000, or 0.3%, to $90.7 million for the three months ended June 30, 2012 from $90.4 million for the three months ended June 30, 2011. However, the interest on core deposits decreased $22,000 to $67,000 for the 2012 period from $89,000 for the 2011 period, as the yield on these deposits for the three months ended June 30, 2012 decreased 9 basis points, or 24.7%, to 0.30% from 0.39% for the three months ended June 30, 2011.

Interest expense on borrowed funds, consisting entirely of Federal Home Loan Bank advances, decreased $200,000, or 23.9%, to $640,000 for the three months ended June 30, 2012 from $840,000 for the three months ended June 30, 2011, as our average balance of our borrowings decreased $9.9 million and the average rate paid decreased 55 basis points to 4.13% from 4.68%. The decrease in the rate is due to two restructures of outstanding advances. First, in the third quarter of 2011, we restructured $18.0 million of outstanding advances under the Federal Home Loan Bank of Indianapolis’ ‘blend and extend’ program, costing 3.78% with a weighted average remaining maturity of 19 months to 2.69% with a weighted average remaining maturity of 62 months. In addition, in the second quarter of 2012, we restructured $22.0 million of outstanding advances under the aforementioned program, costing 5.51% with a weighted average remaining maturity of 4 years to 4.22% with a weighted average remaining maturity of 9 years.

Net Interest Income. Net interest income increased $252,000, or 11.0%, to $2.5 million for the three months ended June 30, 2012 from $2.3 million for the three months ended June 30, 2011, as our average net interest-earning assets increased to $59.4 million from $55.9 million, our net interest rate

 

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spread increased 61 basis points to 3.29% from 2.68% and our net interest margin increased 57 basis points to 3.55% from 2.98%. The increases in our net interest rate spread and net interest margin reflected the restructuring of FHLB advances; paying off of our maturing, higher interest rate FHLB advances; and managing the maturities of higher interest rate certificates of deposit, offset by our ongoing interest rate risk strategy of selling in the secondary market long-term, fixed-rate one- to four-family residential mortgage loans during the current low interest rate environment, and an increase in our average net loans.

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies — Allowance for Loan Losses,” in our Annual Report on Form 10-K for 2011, we recorded a provision for loan losses of $300,000 for the three months ended June 30, 2012 and a provision for loan losses of $400,000 for the three months ended June 30, 2011. We have continued with additional provisions in 2012 because of elevated levels of non-performing assets, delinquencies and classified assets, as well as continued concerns about the Michigan economy, elevated levels of unemployment, and some declining collateral values. At June 30, 2012, non-performing loans totaled $11.2 million, or 4.6% of total loans, as compared to $14.6 million, or 6.0% of total loans, at June 30, 2011. The large decrease in non-performing loans is significantly due to the aforementioned charging off of the specific reserves which took place during the three months ended March 31, 2012.

The allowance for loan losses to total loans receivable decreased to 2.6% at June 30, 2012 from 4.0% at June 30, 2011. This ratio was at 3.7% at December 31, 2011. The decrease in our allowance for loan losses was primarily due to the charge off and elimination of all previously established specific valuation allowances, which totaled $3.8 million. We are not required to maintain an allowance for loan losses on these loans as the loan balance has already been written down to the estimated collateral values on our collateral dependent impaired loans. Therefore, the ratio of the allowance for loan losses to total loans and the ratio of the allowance for loan losses to non-performing loans has been adversely affected by these charge offs. Correspondingly, the amount of non-performing loans decreased from $16.0 million as of December 31, 2011 to $11.8 million as of March 31, 2012 primarily as a result of these charge offs.

All loans rated substandard are reviewed for impairment at least quarterly. Overall, management continues to focus on resolving non-performing assets and improving asset quality. In addition to our collections department personnel in working out loans, we continue to involve business development officers and, on significant assets, underwriters and senior management.

Noninterest Income. Noninterest income increased by $211,000, or 71.0%, to $508,000 for the three months ended June 30, 2012 from $297,000 for the three months ended June 30, 2011. The increase was primarily attributable to an increase of $351,000 in gain on sale of mortgage loans. This was offset by decreases in gross rental income on other real estate owned and net gain on other real estate owned of $34,000 and $51,000, respectively. These decreases were due to a decreased number of foreclosed rental properties and writedowns on current other real estate owned properties. There was also a decrease of $37,000 in loan fees earned. This is attributable to fees paid for mortgage loan processing services that are netted against loan fees earned.

Noninterest Expense. Noninterest expense increased by $157,000, or 8.6%, to $2.0 million for the three months ended June 30, 2012 from $1.8 million for the three months ended June 30, 2011. The increase was primarily due to an increase of $218,000 or 25.1% in salaries and employee benefits expense due to increased staff and new positions. This was offset by a decrease of $76,000 in other real estate owned expenses.

Income Tax Expense. We recorded $266,000 of income tax expense for the three months ended June 30, 2012 compared to $127,000 of income tax expense for the 2011 quarter. The income tax expense was a result of increased income before income tax expense of $776,000 during the three months ended June 30, 2012 as compared to $371,000 for the three months ended June 30, 2011. Our effective tax rate was 34.3% for both the three months ended June 30, 2012 and the three months ended June 30, 2011.

 

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Comparison of Operating Results for the Six Months Ended June 30, 2012 and 2011

General. We recorded net income of $802,000 for the six months ended June 30, 2012 compared to net income of $446,000 for the six months ended June 30, 2011. Net interest income increased $560,000 to $5.1 million for the six months ended June 30, 2012 from $4.6 million for the six months ended June 30, 2011, and other noninterest income increased $264,000 to $1.0 million for the six months ended June 30, 2012 from $741,000 for the year earlier period.

Interest and Dividend Income. Interest and dividend income decreased slightly by $43,000, or 0.6%, to $7.1 million for the six months ended June 30, 2012 from $7.2 million for the six months ended June 30, 2011, as the average balance of interest-earning assets decreased $18.4 million to $279.6 million for the six months ended June 30, 2012 from $298.0 million for the six months ended June 30, 2011, and the average yield on interest-earning assets increased 29 basis points to 5.12% during the 2012 period from 4.83% during the 2011 period. The increase in our average yield on interest-earning assets was due primarily to an increase in net loans and a decrease in lower yielding other interest-earning assets.

The biggest component decrease in average interest-earning assets was in the other interest-earning assets category, consisting of interest-earning overnight funds and time deposits, which decreased $25.2 million, or 46.5% to $29.0 million for the six months ended June 30, 2012 from $54.2 million for the six months ended June 30, 2011. The average yield on these investments increased 6 basis points from 0.45% to 0.51%, resulting in a $49,000 decrease in interest income from other interest-earning assets to $73,000 for the six months ended June 30, 2012 from $122,000 for the six months ended June 30, 2011. This was offset by the increase in average net loans of $7.1 million or 3.0%, to $246.0 million for the six months ended June 30, 2012 from $238.9 million for the six months ended June 30, 2011.

Interest income on loans decreased slightly by $12,000, or 0.2%, to $7.0 million for the six months ended June 30, 2012 from $7.0 million for the six months ended June 30, 2011, as the average yield on loans decreased 18 basis points to 5.69% for the six months ended June 30, 2012 from 5.87% for the six months ended June 30, 2011 reflecting the lower market interest rate environment, and the average balance of loans increased $7.0 million, or 3.0%, to $245.9 million for the six months ended June 30, 2012 from $238.9 million for the six months ended June 30, 2011.

Interest income on investment securities and other interest-earning assets, and dividends on FHLB of Indianapolis stock decreased $31,000, or 16.4%, to $155,000 for the six months ended June 30, 2012 from $186,000 for the six months ended June 30, 2011. This decrease was primarily attributable to a decrease in the average balance of other interest-earning assets, consisting of interest-earning overnight funds, and time deposits and a decrease in the weighted average yield paid on these interest-earning assets. The average balance as of June 30, 2011 of other interest-earning assets was $59.1 million, compared to the average balance for the six months ended June 30, 2012 of $33.7 million. This decrease of $25.4 million represents a decrease of 42.9%. This shift in asset mix caused the weighted average yield paid on these interest-earning assets to increase 29 basis points to 0.92% for the 2012 period from 0.63% for the 2011 period.

Interest Expense. Interest expense decreased $603,000, or 23.0%, to $2.0 million for the six months ended June 30, 2012 from $2.6 million for the six months ended June 30, 2011, as the average balance of interest-bearing liabilities decreased $22.0 million, or 9.1%, to $220.7 million for the six months ended June 30, 2012 from $242.7 million for the six months ended June 30, 2011. The average rate we paid on these liabilities decreased 33 basis points to 1.83% from 2.16%. The biggest component of the decrease was interest expense on Federal Home Loan Bank advances which decreased $328,000, or 19.9%, to $1.3 million for the six months ended June 30, 2012 from $1.7 million for the six months ended June 30, 2011. This resulted from an $9.3 million decrease in the average balance of Federal Home Loan Bank advances to $62.5 million for the six

 

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months ended June 30, 2012 from $71.8 million for the six months ended June 30, 2011 and a 37 basis point decrease in the average rate paid on borrowing from 4.60% for the six months ended June 30, 2011 to 4.23% for the six months ended June 30, 2012. The decrease in the average balance of these borrowings was due to our strategy of not renewing our maturing advances and paying them off when they come due. Additionally, the impact of restructuring our advances decreased the average yield from the 2011 period to the 2012 period.

The average balance of our core deposits, consisting of checking accounts, money market accounts and savings accounts, increased $1.0 million, or 1.2%, to $91.4 million for the six months ended June 30, 2012 from $90.4 million for the six months ended June 30, 2011. Also, the interest on core deposits decreased $46,000 to $140,000 for the 2012 period from $187,000 for the 2011 period.

Interest expense on certificates of deposits decreased $228,000 or 29.1% to $557,000 for the six months ended June 30, 2012 from $786,000 for the six months ended June 30, 2011. This is primarily due to a decrease in the average balance of certificates of deposits of $13.8 million to $66.7 million for the 2012 period, from $80.5 million for the 2011 period. The decrease in the balance of certificates of deposits was primarily due to a decrease in interest rates. Also the yield on certificates of deposit decreased 28 basis points to 1.67% for the 2012 period from 1.95% for the 2011 period.

Net Interest Income. Net interest income increased $560,000, or 12.2%, to $5.1 million for the six months ended June 30, 2012 from $4.6 million for the six months ended June 30, 2011, as our net interest-earning assets increased to $59.0 million from $55.4 million, our net interest rate spread increased 62 basis points to 3.29% from 2.67% and our net interest margin increased 60 basis points to 3.56% from 2.96%. The increases in our net interest rate spread and net interest margin reflected the restructuring of FHLB advances; paying off of our maturing, higher interest rate FHLB advances; and managing the maturities of higher interest rate certificates of deposit, offset by our ongoing interest rate risk strategy of selling in the secondary market long-term, fixed-rate one- to four-family residential mortgage loans during the current low interest rate environment.

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies — Allowance for Loan Losses,” in the December 31, 2011 10-K, we recorded a provision for loan losses of $950,000 for the six months ended June 30, 2012 and a provision for loan losses of $760,000 for the six months ended June 30, 2011. We have continued with additional provisions in 2012 because of elevated levels of non-performing assets, delinquencies and classified assets, as well as continued concerns about the Michigan economy, elevated levels of unemployment, and some declining collateral values.

The allowance for loan losses as a percentage of non-performing loans decreased to 57.8% at June 30, 2012 from 69.2% at June 30, 2011. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2012 and 2011.

Noninterest Income. Noninterest income increased by $264,000, or 35.6%, to $1.0 million for the six months ended June 30, 2012 from $741,000 for the six months ended June 30, 2011. The increase was primarily attributable to an increase of $559,000 in gain on sale of mortgage loans. This was offset by decreases in gross rental income on other real estate owned and net gain on other real estate owned of $90,000 and $138,000, respectively. These decreases were due to a decreased number of foreclosed rental properties and writedowns on current other real estate owned properties.

Noninterest Expense. Noninterest expense increased by $94,000, or 2.4%, to $4.0 million for the six months ended June 30, 2012 from $3.9 million for the six months ended June 30, 2011. The increase was primarily due to an increase of $446,000 or 25.9% in salaries and employee benefits expense due to increased staff and new positions. This was offset by a decrease of $402,000 in other real estate owned expenses due to a decrease in foreclosed properties.

Income Tax Expense. We recorded a $418,000 income tax expense for the six months ended June 30, 2012 compared to a $234,000 income tax expense for the 2011 period, reflecting the income of $1.2 million before income tax expense during the six months ended June 30, 2012 versus income before

 

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income tax of $680,000 for the six months ended June 30, 2011. Our effective tax expense rate was 34.3% for the six months ended June 30, 2012 compared to an effective tax expense rate of 34.4% for the six months ended June 30, 2011.

Asset Quality

Other real estate owned totaled $1.0 million, or 0.35% of total assets, at June 30, 2012 as compared to $2.0 million, or 0.7% of total assets, at June 30, 2011. The largest relationship as of June 30, 2012 was $215,000, or 21.4% of other real estate owned, which consisted of two single family homes. This relationship was also the largest other real estate owned relationship at December 31, 2011.

Non-performing assets, which includes non-performing loans, other real estate owned and troubled debt restructurings, totaled $12.3 million, or 4.6% of total assets, at June 31, 2012 as compared to $16.6 million, or 5.4% of total assets, at June 30, 2011.

The largest substandard relationship as of June 30, 2012 has a total balance of $4.3 million. Of the $19.6 million loans rated substandard, approximately $9.3 million are performing.

At June 30, 2012, we had 7 loans, totaling $3.5 million, for which we had temporarily extended the maturities while working on the loan renewal process. During the renewal process, the borrowers continue repayment according to the original loan terms which are at market interest rates. The largest loan had an outstanding principal balance of $3.0 million and was intended to be paid off. The renewal loan has since been approved as a short-term renewal and is expected to close in the period ending September 30, 2012. Of the remaining loans, one was classified as substandard, totaling $106,000. At June 30, 2012, none of these loans was considered a troubled debt restructuring, and all of these loans were considered performing at June 30, 2012.

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, 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 June 30, 2012. 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 June 30, 2012, there have been 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.

 

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Part II – Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

 

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

 

  (b) Not applicable.

 

  (c) The following table presents for the periods indicated a summary of the purchases made by or on behalf of Wolverine Bancorp, Inc. of shares of its common stock.

 

                   Total Number of      Maximum Number of  
     Total             Shares Purchased as      Shares that May Yet  
     Number of      Average Price      Part of Publicly      Be Purchased Under  
     Shares      Paid      Announced Plans or      the Plans or  

Period

   Purchased      per Share      Programs      Programs (1)  

April 1, 2012 through April 30, 2012

     3,285       $ 15.50         3,285         118,899   

May 1, 2012 through May 31, 2012

     —         $ —           —           118,899   

June 1, 2012 through June 30, 2012

     800       $ 15.60         800         118,099   
  

 

 

       

 

 

    
     4,085            4,085      
  

 

 

       

 

 

    

 

(1)

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

  31.1

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

  31.2

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

  32

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

101

   INS XBRL Instance

101

   SCH XBRL Taxonomy Extension Schema

101

   CAL XBRL Taxonomy Extension Calculation

101

   DEF XBRL Taxonomy Extension Definition

101

   LAB XBRL Taxonomy Extension Label

101

   PRE XBRL Taxonomy Extension Presentation

 

36


Table of Contents

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: August 14, 2012  

/s/ David H. Dunn

  David H. Dunn
  President and Chief Executive Officer
Date: August 14, 2012  

/s/ Rick A. Rosinski

  Rick A. Rosinski
  Chief Operating Officer and Treasurer

 

37

XNAS:WBKC Wolverine Bancorp Inc Quarterly Report 10-Q Filling

Wolverine Bancorp Inc XNAS:WBKC Stock - Get Quarterly Report SEC Filing of Wolverine Bancorp Inc XNAS:WBKC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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