UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal ended December 31, 2016. |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _______________ to _______________. |
Commission file number: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) |
Registrant's telephone number, including area code:(989) 631-4280
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share | The NASDAQ Stock Market LLC |
(Title of each class to be registered) | (Name of each exchange on which each class is to be registered) |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
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 filing requirements for the past 90 days.
YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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 ☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
| (Do not check if a smaller reporting company) | Emerging growth company | ☐ | ||
|
| |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2016, as reported by the Nasdaq Stock Market, was approximately $44.5 million.
As of March 27, 2017, there were 2,106,153 issued and outstanding shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
TABLEOF CONTENTS
| EXPLANATORY NOTE | 1 | |
ITEM 8. | 2 | |
ITEM 15. | 2 | |
F-1 | ||
Wolverine Bancorp, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 31, 2017. The Company is re-filing Item 8 of Part II of the Form 10-K to include a revised audit report, which inadvertently included an incorrect date of issuance of March 30, 2017 in the previous filing. The Company is also revising the column heading on page F-50 to correct the date to 2016.
PART II
ITEM8. Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements are presented in this Annual Report on Form 10-K beginning at page F-1.
PART IV
ITEM15. Exhibits and Financial Statement Schedules
(a)(1) | Financial Statements |
The documents filed as a part of this Form 10-K are:
(A) | Report of Independent Registered Public Accounting Firm; |
(B) | Consolidated Balance Sheets - December 31, 2016 and 2015; |
(C) | Consolidated Statements of Income for the years ended December 31, 2016 and 2015; |
(D) | Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015; |
(E) | Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015; and |
(F) | Notes to Consolidated Financial Statements. |
(a)(2) | Financial Statement Schedules |
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(a)(3) | Exhibits |
3.1 | Articles of Incorporation of Wolverine Bancorp, Inc.* |
3.2 | Bylaws of Wolverine Bancorp, Inc.* |
4 | Form of Common Stock Certificate of Wolverine Bancorp, Inc.* |
10.1 | Employment Agreement of David H. Dunn** |
10.2 | Employment Agreement of Rick A. Rosinski** |
10.3 | 2002 Long Term Incentive Plan, as amended* |
10.4 | 2006 Long Term Incentive Plan, as amended for Dunn* |
10.5 | 2006 Long Term Incentive Plan, as amended for Rosinski* | |
| 10.6 | 2012 Equity Incentive Plan*** |
21 | Subsidiaries**** |
23 | Consent of Independent Auditor**** |
31.1 | Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | 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 |
| _______ | ___________________ | |
| * | Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-169432), initially filed September 16, 2010. | |
| ** | Incorporated by reference to the current Report on Form 8-K (file no. 001-35034) filed on July 8, 2011. | |
| *** | Incorporated by reference to the Proxy Statement filed on April 14, 2016. | |
| **** | Incorporated by reference to the Annual Report on Form 10-K (file no. 001-35034) filed on March 31, 2017. |
Wolverine Bancorp, Inc.
Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements
December 31, 2016 and 2015
Wolverine Bancorp, Inc.
December 31, 2016 and 2015
Contents
F-1 | |
Consolidated Financial Statements | |
F-2 | |
F-3 | |
F-4 | |
F-5 | |
F-6 |
Reportof Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Wolverine Bancorp, Inc.
Midland, Michigan
We have audited the accompanying consolidated balance sheets of Wolverine Bancorp, Inc. (Company) as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for the years then ended. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wolverine Bancorp, Inc. as of December 31, 2016, and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BKD, LLP
Indianapolis, Indiana
March 31, 2017
WolverineBancorp, Inc.
ConsolidatedBalance Sheets
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
December 31, 2016 | December 31, 2015 | |||||||
| Assets | ||||||||
Cash and due from banks | $ | 318 | $ | 334 | ||||
Interest-earning demand deposits | 103,316 | 52,531 | ||||||
Cash and cash equivalents | 103,634 | 52,865 | ||||||
Interest-earning time deposits | - | 39,021 | ||||||
Investment securities held to maturity | 499 | 500 | ||||||
Loans held for sale | 238 | 581 | ||||||
Loans, net of allowance for loan losses of$9,326 and $10,061 | 320,606 | 314,613 | ||||||
Premises and equipment, net | 1,127 | 1,285 | ||||||
Federal Home Loan Bank stock | 2,700 | 2,700 | ||||||
Other real estate owned | 86 | 130 | ||||||
Accrued interest receivable | 846 | 967 | ||||||
Other assets | 4,699 | 5,151 | ||||||
Total assets | $ | 434,435 | $ | 417,813 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | $ | 280,548 | $ | 281,701 | ||||
Federal Home Loan Bank advances | 60,000 | 47,000 | ||||||
Federal funds purchased | 27,000 | 24,000 | ||||||
Interest payable and other liabilities | 5,913 | 4,632 | ||||||
Total liabilities | 373,461 | 357,333 | ||||||
Commitments and Contingencies | ||||||||
Stockholders’ Equity | ||||||||
Common Stock, $0.01 par value per share: | ||||||||
Authorized – 100,000,000 sharesIssued and outstanding – 2,106,153 and 2,158,034at December 31, 2016 and December 31, 2015 | 21 | 22 | ||||||
Unearned employee stock ownership plan (ESOP) | (1,215 | ) | (1,410 | ) | ||||
Additional paid-in capital | 15,577 | 16,401 | ||||||
Retained earnings | 46,591 | 45,467 | ||||||
Total stockholders’ equity | 60,974 | 60,480 | ||||||
Total liabilities and stockholders’ equity | $ | 434,435 | $ | 417,813 | ||||
Wolverine Bancorp, Inc.
ConsolidatedStatements of Income and Comprehensive Income
Years Ended December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
2016 | 2015 | |||||||
Interest and Dividend Income | ||||||||
Loans | $ | 16,435 | $ | 15,372 | ||||
Investment securities and other | 384 | 244 | ||||||
Total interest and dividend income | 16,819 | 15,616 | ||||||
Interest Expense | ||||||||
Deposits | 2,033 | 1,451 | ||||||
Borrowings | 1,850 | 2,000 | ||||||
Total interest expense | 3,883 | 3,451 | ||||||
Net Interest Income | 12,936 | 12,165 | ||||||
Provision (Credit) for Loan Losses | (760 | ) | 800 | |||||
Net Interest Income After Provision for Loan Losses | 13,696 | 11,365 | ||||||
Noninterest Income | ||||||||
Service charges and fees | 260 | 297 | ||||||
Net gain on loan sales | 469 | 660 | ||||||
Net gain (loss) on sale of real estate owned | 32 | (116 | ) | |||||
Other | 296 | 382 | ||||||
Total noninterest income | 1,057 | 1,223 | ||||||
Noninterest Expense | ||||||||
Salaries and employee benefits | 4,953 | 4,541 | ||||||
Net occupancy and equipment expense | 818 | 811 | ||||||
Information technology expense | 240 | 236 | ||||||
Federal deposit insurance corporation premiums | 214 | 217 | ||||||
Professional and services fees | 584 | 398 | ||||||
Other real estate owned expense | 25 | 50 | ||||||
Loan legal expense (recovery) | (74 | ) | 322 | |||||
Advertising expense | 126 | 144 | ||||||
Michigan business tax | 195 | 186 | ||||||
Other | 915 | 953 | ||||||
Total noninterest expense | 7,996 | 7,858 | ||||||
Income Before Income Tax | 6,757 | 4,730 | ||||||
Provision for Income Taxes | 2,404 | 1,544 | ||||||
Net Income and Comprehensive Income | $ | 4,353 | $ | 3,186 | ||||
Earnings Per Share: | ||||||||
Basic | $ | 2.20 | $ | 1.57 | ||||
Diluted | $ | 2.16 | $ | 1.55 | ||||
Wolverine Bancorp, Inc.
ConsolidatedStatements of Changes in Stockholders’ Equity
Years Ended December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Common Stock | Additional Paid-in Capital | Unearned ESOP Shares | Retained Earnings | Total Stockholders' Equity | ||||||||||||||||
Balances at January 1, 2015 | $ | 23 | $ | 18,640 | $ | (1,564 | ) | $ | 44,439 | $ | 61,538 | |||||||||
Net Income | - | - | - | 3,186 | 3,186 | |||||||||||||||
Purchase of 112,814 shares of common stock | (1 | ) | (2,795 | ) | - | - | (2,796 | ) | ||||||||||||
Share based compensation expense | - | 319 | - | - | 319 | |||||||||||||||
ESOP shares earned | - | 237 | 154 | - | 391 | |||||||||||||||
Dividends ($1.00 per share) | - | - | - | (2,158 | ) | (2,158 | ) | |||||||||||||
Balances at December 31, 2015 | 22 | 16,401 | (1,410 | ) | 45,467 | 60,480 | ||||||||||||||
Net Income | - | - | - | 4,353 | 4,353 | |||||||||||||||
Purchase of 57,557 shares of common stock | (1 | ) | (1,517 | ) | - | - | (1,518 | ) | ||||||||||||
Exercised options | - | 26 | - | - | 26 | |||||||||||||||
Share based compensation expense | - | 334 | - | - | 334 | |||||||||||||||
ESOP shares earned | - | 333 | 195 | - | 528 | |||||||||||||||
Dividends ($1.60 per share) | - | - | - | (3,229 | ) | (3,229 | ) | |||||||||||||
Balances at December 31, 2016 | $ | 21 | $ | 15,577 | $ | (1,215 | ) | $ | 46,591 | $ | 60,974 | |||||||||
Wolverine Bancorp, Inc.
ConsolidatedStatements of Cash Flows
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
2016 | 2015 | |||||||
Operating Activities | ||||||||
Net income | $ | 4,353 | $ | 3,186 | ||||
Items not requiring (providing) cash | ||||||||
Depreciation | 223 | 232 | ||||||
Provision (credit) for loan losses | (760 | ) | 800 | |||||
(Gain) loss on other real estate owned | (32 | ) | 116 | |||||
Loans originated for sale | (17,309 | ) | (20,073 | ) | ||||
Deferred income taxes | 348 | (215 | ) | |||||
Proceeds from loans sold | 18,121 | 20,722 | ||||||
Net gain on sale of loans | (469 | ) | (660 | ) | ||||
Share based compensation | 334 | 319 | ||||||
Earned ESOP shares | 528 | 391 | ||||||
Changes in | ||||||||
Interest receivable and other assets | 225 | 249 | ||||||
Interest payable and other liabilities | 210 | 429 | ||||||
Net cash provided by operating activities | 5,772 | 5,496 | ||||||
Investing Activities | ||||||||
Net change in interest-earning time deposits | 39,021 | (39,021 | ) | |||||
Purchase of held to maturity securities | (499 | ) | (500 | ) | ||||
Proceeds from calls, maturities and pay-downs of held to maturity securities | 500 | - | ||||||
Net change in loans | (5,425 | ) | (19,111 | ) | ||||
Proceeds from sale of real estate owned | 268 | 272 | ||||||
Purchase of FHLB stock | - | (200 | ) | |||||
Purchase of premises and equipment | (65 | ) | (133 | ) | ||||
Net cash provided by (used in) investing activities | 33,800 | (58,693 | ) | |||||
Financing Activities | ||||||||
Net change in demand deposits, money market,checking and savings accounts | 35,413 | 3,499 | ||||||
Net change in certificates of deposit | (36,566 | ) | 54,673 | |||||
Repayment of Federal Home Loan Bank advances | - | (13,000 | ) | |||||
Proceeds from Federal Home Loan Bank advances | 13,000 | 10,000 | ||||||
Net change in Fed funds purchased | 3,000 | 24,000 | ||||||
Proceeds from stock options exercised | 26 | - | ||||||
Purchase of common stock | (1,518 | ) | (2,796 | ) | ||||
Dividends paid | (2,158 | ) | - | |||||
Net cash provided by financing activities | 11,197 | 76,376 | ||||||
Change in Cash and Cash Equivalents | 50,769 | 23,179 | ||||||
Cash and Cash Equivalents, Beginning of Period | 52,865 | 29,686 | ||||||
Cash and Cash Equivalents, End of Period | $ | 103,634 | $ | 52,865 | ||||
Supplemental Disclosures of Cash Flows Information | ||||||||
Interest paid | $ | 3,937 | $ | 3,375 | ||||
Income taxes paid | 1,981 | 1,847 | ||||||
Loans transferred to real estate owned | 192 | 176 | ||||||
Dividends declared, not paid | 2,305 | 2,158 | ||||||
Wolverine Bancorp, Inc.
Notesto Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Wolverine Bank (the “Bank”), a wholly owned subsidiary of Wolverine Bancorp, Inc. (the “Company”), is a federally chartered savings bank primarily engaged in providing a full range of banking and financial services to individual and business customers in the Great Lakes Bay Region and beyond. The Company is subject to competition from other financial institutions. The Company is subject to the regulation of the Federal Reserve Board and the Bank is subject to the regulation of the Officer of the Comptroller of the Currency, and both undergo periodic examinations.
The Bank’s additional wholly owned subsidiaries, Wolserv Corporation, a Michigan corporation which has a membership interest in a title company, and Wolverine Commercial Holdings LLC, a Michigan LLC owned by Wolverine Bank which holds certain real estate, are included in the consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and financial instruments.
Cash Equivalents
We consider all liquid investments with original maturities of three months or less to be cash equivalents.
Securities
Held-to-maturity securities, which include any security for which we have the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on securities are determined on the specific-identification method.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on nonaccrual status at ninety days past due and interest is considered a loss, unless the loan is well-secured. Accrued interest for loans placed on nonaccrual status is reversed against interest income.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from our internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line and accelerated methods over the estimated useful lives of the assets ranging from 3 to 39 years.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula, carried at cost, and evaluated for impairment.
Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.
Earnings Per Common Share
Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the entity. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method.
Unvested share-based payment awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered to participate with common stock in undistributed earnings for purposes of computing EPS. Accordingly, the Company is required to calculate basic and diluted EPS using the two-class method. Restricted stock awards granted by the Company are considered participating securities. Calculations of EPS under the two-class method (i) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (ii) exclude from the denominator the dilutive impact of the participating securities.
Unearned ESOP shares, which are not vested, and unvested restricted stock awards are excluded from the computation of average shares outstanding.
Income Taxes
We account for income taxes in accordance with income tax accounting guidance (ASC 740,Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
We recognize interest and penalties on income taxes as a component of income tax expense.
We file consolidated income tax returns with our subsidiaries.
Recently Issued Accounting Standards
FASB Accounting Standards Updates No. 2017-04, Intangibles – Goodwill and Other (Topic 350)
The FASB has issued Accounting Standards Update (ASU) No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.
The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.
FASB Accounting Standards Updates No. 2017-01, Business Combinations (Topic 805)
The FASB has issued Accounting Standards Update (ASU) No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.
The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
FASB ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
The FASB has issued Accounting Standards Update (ASU) No. 2016-15,Statement of Cash Flows (Topic 230). This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flow. In November 2016, the FASB issued ASU No. 2016-18, which gave clarification on how restricted cash was to be presented in the cash flow statement.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
FASB ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The FASB has issued Accounting Standards Update (ASU) No. 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.
The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.
Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.
The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.
In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will be evaluating the impact of adopting this ASU and has not determined the anticipated impact on the consolidated financial statements.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
FASB ASU No. 2016-09, Compensation—Stock Compensation (Topic 718)
The FASB issued ASU No. 2016-09,Compensation–Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting.
The ASU is intended to improve the accounting for employee shared-base payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The amendments in this update became effective on January 1, 2017 and did not have a material impact on the consolidated financial statements.
For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. The amendments in this update became effective on January 1, 2017 and did not have a material impact on the consolidated financial statements.
FASB ASU No. 2016-08, 2016-10, 2016-12, Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications.
For public business entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods with that reporting period, as deferred by ASU 2015-14. Early application is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within the reporting period.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
All other entities should apply the guidance to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early application is permitted for all other entities as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in Update 2014-09. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
FASB ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323)
The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.
The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.
The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.
The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
FASB ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
The FASB has issued Accounting Standards Update (ASU) No. 2016-05,Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations and Existing Hedge Accounting Relationships. The amendments apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.
This standard will be effective for pubic business entities for fiscal year beginning after December 15, 2016 including interim periods within those fiscal years. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early application is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
FASB ASU No. 2016-02 – Leases (Topic 842)
The FASB has issued Accounting Standards Update (ASU) No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
● A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
● A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606,
Revenue from Contracts with Customers.
The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.
This standard will be effective for pubic business entities for fiscal year beginning after December 15, 2018 including interim periods within those fiscal years. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Early application is permitted for all public business entities and all nonpublic business entities upon issuance.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
FASB Accounting Standards Updates No. 2016-01,Financial Instruments – Overall (Subtopic 825-10):Recognition and Measurement of Financial Assets and Financial Liabilities
The FASB has issued Accounting Standards Update (ASU) No. 2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities.
The new guidance makes targeted improvements to existing U.S. GAAP by:
● | Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; |
● | Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; |
● | Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; |
● | Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; |
● | Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and |
● | Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. |
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost. Adoption of the
ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
| Note 2: | Restriction on Cash and Due From Banks |
We are required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2016 was $459.
At December 31, 2016, the Company’s cash accounts exceeded federally insured limits by approximately $391. Additionally, the Company had approximately $1,733 and $98,665 on deposit with the Federal Home Loan Bank of Indianapolis and Federal Reserve Bank of Chicago, as of December 31, 2016, which are not federally insured.
| Note 3: | Securities |
The amortized cost and approximate fair values of securities are as follows:
Amortized | Gross | Gross | Approximate | |||||||||||||
Held to Maturity Securities: | ||||||||||||||||
December 31, 2016 | ||||||||||||||||
Treasury bond | $ | 499 | $ | 1 | $ | – | $ | 500 | ||||||||
December 31, 2015 | ||||||||||||||||
Treasury bond | $ | 500 | $ | – | $ | – | $ | 500 | ||||||||
The treasury bond held at December 31, 2016 matured on January 5th, 2017.
There were no sales of securities during 2016 or 2015.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Note 4: Loans and Allowance for Loan Losses
Categories of loans include:
December 31, 2016 | December 31, 2015 | |||||||
Real Estate | ||||||||
One-to four-family | $ | 35,389 | $ | 39,719 | ||||
Home equity | 4,031 | 5,459 | ||||||
Commercial mortgage loans | ||||||||
Commercial real estate | 195,924 | 183,934 | ||||||
Multifamily | 54,827 | 58,804 | ||||||
Land | 11,547 | 12,543 | ||||||
Construction | 13,475 | 14,785 | ||||||
Commercial non-mortgage | 20,047 | 14,826 | ||||||
Consumer | 1,074 | 1,221 | ||||||
Total loans | 336,314 | 331,291 | ||||||
Less | ||||||||
Net deferred loan costs, premiums and discounts | 563 | 567 | ||||||
Undisbursed portion of loan | 5,819 | 6,050 | ||||||
Allowance for loan losses | 9,326 | 10,061 | ||||||
Net Loans | $ | 320,606 | $ | 314,613 | ||||
The risk characteristics of each loan portfolio segment are as follows:
1-4 Family, Home Equity, and Consumer
With respect to residential loans that are secured by 1-4 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 1-4 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.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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.
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 multi-family
Commercial real estate and multi-family 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 multi-family 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.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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. Construction loans for one-to-four family residential properties are originated with a maximum loan to value ratio of 70% and 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 70% loan-to-completed appraised value ratio. For all construction loans, we generally require that a commitment for permanent financing be in place prior to closing the construction loan.
Repayment of one-to four-family residential property loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.Repayment of commercial property loans and homes built by developers on speculation is normally expected from the property’s eventual rental income, income from the borrower’s operations, the personal resources of the guarantor, or the sale of the subject property. Generally, before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state-licensed appraiser. We 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.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Commercial non-mortgage
Commercial non-mortgage loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s
ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial non-mortgage loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial non-mortgage loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
In determining the appropriate level of allowance for loan loss, we analyze various components of our portfolio. The following components are analyzed: all substandard loans on an individual basis; all loans that are designated special mention or closely monitored; loans not classified according to purpose or collateral type; and overdrawn deposit account balances. We also factor in historical loss experience and qualitative considerations, including trends in charge offs and recoveries; trends in delinquencies and impaired/classified loans; effects of credit concentrations; changes in underwriting standards and loan review system; experience in lending staff; current industry conditions; current market conditions; and change in regional employment conditions.
In instances where risk and loss exposure is clearly identified with a particular asset, a specific valuation allowance will be established or the asset or a portion of the asset will be charged off.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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 December 31, 2016 and 2015:
Loan Class | 1-4 Family | Home Equity | Commercial Real Estate | Multifamily | Land | Construction | Commercial Non-Mortgage | Consumer | Total | |||||||||||||||||||||||||||
| Year to date analysis as of December 31, 2016 | ||||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 948 | $ | 108 | $ | 4,913 | $ | 1,515 | $ | 1,605 | $ | 604 | $ | 344 | $ | 24 | $ | 10,061 | ||||||||||||||||||
Provision charged to expense | (137 | ) | (59 | ) | 555 | (431 | ) | (544 | ) | (310 | ) | 180 | (14 | ) | (760 | ) | ||||||||||||||||||||
Losses charged off | (67 | ) | - | (85 | ) | - | - | - | - | (1 | ) | (153 | ) | |||||||||||||||||||||||
Recoveries | 54 | - | 39 | - | 81 | - | - | 4 | 178 | |||||||||||||||||||||||||||
Balance, end of period | $ | 798 | $ | 49 | $ | 5,422 | $ | 1,084 | $ | 1,142 | $ | 294 | $ | 524 | $ | 13 | $ | 9,326 | ||||||||||||||||||
Ending Balance: individually evaluated for impairment | $ | - | $ | - | $ | 235 | $ | - | $ | 550 | $ | - | $ | - | $ | - | $ | 785 | ||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 798 | $ | 49 | $ | 5,187 | $ | 1,084 | $ | 592 | $ | 294 | $ | 524 | $ | 13 | $ | 8,541 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||
Ending Balance | $ | 35,389 | $ | 4,031 | $ | 195,924 | $ | 54,827 | $ | 11,547 | $ | 13,475 | $ | 20,047 | $ | 1,074 | $ | 336,314 | ||||||||||||||||||
Ending Balance: individually evaluated for impairment | $ | 1,500 | $ | - | $ | 8,103 | $ | 6,311 | $ | 1,061 | $ | - | $ | - | $ | - | $ | 16,975 | ||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 33,889 | $ | 4,031 | $ | 187,821 | $ | 48,516 | $ | 10,486 | $ | 13,475 | $ | 20,047 | $ | 1,074 | $ | 319,339 | ||||||||||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Loan Class | 1-4 Family | Home Equity | Commercial Real Estate | Multifamily | Land | Construction | Commercial Non-Mortgage | Consumer | Total | |||||||||||||||||||||||||||
| Year to date analysis as of December 31, 2015 | ||||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 881 | $ | 100 | $ | 3,573 | $ | 1,391 | $ | 1,205 | $ | 539 | $ | 269 | $ | 18 | $ | 7,976 | ||||||||||||||||||
Provision (credit) charged to expense | 79 | 8 | 72 | 124 | 374 | 65 | 75 | 3 | 800 | |||||||||||||||||||||||||||
Losses charged off | (45 | ) | - | - | - | - | - | - | (1 | ) | (46 | ) | ||||||||||||||||||||||||
Recoveries | 33 | - | 1,268 | - | 26 | - | - | 4 | 1,331 | |||||||||||||||||||||||||||
Balance, end of period | $ | 948 | $ | 108 | $ | 4,913 | $ | 1,515 | $ | 1,605 | $ | 604 | $ | 344 | $ | 24 | $ | 10,061 | ||||||||||||||||||
Ending Balance: individually evaluated for impairment | $ | - | $ | - | $ | 200 | $ | 100 | $ | 850 | $ | - | $ | - | $ | - | $ | 1,150 | ||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 948 | $ | 108 | $ | 4,713 | $ | 1,415 | $ | 755 | $ | 604 | $ | 344 | $ | 24 | $ | 8,911 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||
Ending Balance | $ | 39,719 | $ | 5,459 | $ | 183,934 | $ | 58,804 | $ | 12,543 | $ | 14,785 | $ | 14,826 | $ | 1,221 | $ | 331,291 | ||||||||||||||||||
Ending Balance: individually evaluated for impairment | $ | 1,504 | $ | - | $ | 12,280 | $ | 7,877 | $ | 1,883 | $ | - | $ | 295 | $ | - | $ | 23,839 | ||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 38,215 | $ | 5,459 | $ | 171,654 | $ | 50,927 | $ | 10,660 | $ | 14,785 | $ | 14,531 | $ | 1,221 | $ | 307,452 | ||||||||||||||||||
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.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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.
The following table presents the credit risk profile of our loan portfolio based on rating category and payment activity as of December 31, 2016 and 2015:
1-4 Family | Home Equity | Commercial Real Estate | Multifamily | |||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||
Pass | $ | 33,787 | $ | 36,941 | $ | 4,031 | $ | 5,459 | $ | 173,375 | $ | 150,122 | $ | 48,241 | $ | 46,230 | ||||||||||||||||
Pass (Closely Monitored) | 490 | 1,437 | - | - | 14,349 | 21,156 | 6,586 | 8,142 | ||||||||||||||||||||||||
Special Mention | 241 | 225 | - | - | 2,630 | 751 | - | - | ||||||||||||||||||||||||
Substandard | 871 | 1,116 | - | - | 5,570 | 11,905 | - | 4,432 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| $ | 35,389 | $ | 39,719 | $ | 4,031 | $ | 5,459 | $ | 195,924 | $ | 183,934 | $ | 54,827 | $ | 58,804 | |||||||||||||||||
Land | Construction | Commercial Non-Mortgage | Consumer | Total | ||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||||
Pass | $ | 9,631 | $ | 9,462 | $ | 13,475 | $ | 14,785 | $ | 16,500 | $ | 9,626 | $ | 1,074 | $ | 1,221 | $ | 300,114 | $ | 273,846 | ||||||||||||||||||||
Pass (Closely Monitored) | 855 | 1,239 | - | - | 658 | 4,904 | - | - | 22,938 | 36,878 | ||||||||||||||||||||||||||||||
Special Mention | - | - | - | - | 2,889 | - | - | - | 5,760 | 976 | ||||||||||||||||||||||||||||||
Substandard | 1,061 | 1,842 | - | - | - | 296 | - | - | 7,502 | 19,591 | ||||||||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| $ | 11,547 | $ | 12,543 | $ | 13,475 | $ | 14,785 | $ | 20,047 | $ | 14,826 | $ | 1,074 | $ | 1,221 | $ | 336,314 | $ | 331,291 | |||||||||||||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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.
The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation. Weaknesses are considered potential at this state and are not yet fully defined.
The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness(es) based upon objective evidence; assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss. Collateral coverage may be marginal and the accrual of interest has been suspended.
The Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as Substandard. In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets of the bank is not warranted. A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
The following table is a summary of our past due and non-accrual loans as of December 31, 2016 and 2015:
As of December 31, 2016 | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Loans Receivable | Total Loans >90 Days & Accruing | Total Nonaccrual | ||||||||||||||||||||||||
1-4 Family | $ | 165 | $ | 94 | $ | 137 | $ | 396 | $ | 34,993 | $ | 35,389 | $ | - | $ | 137 | ||||||||||||||||
Home Equity | - | - | - | - | 4,031 | 4,031 | - | - | ||||||||||||||||||||||||
Commercial Real Estate | - | 648 | 100 | 748 | 195,176 | 195,924 | - | 4,872 | ||||||||||||||||||||||||
Multifamily | - | - | - | - | 54,827 | 54,827 | - | - | ||||||||||||||||||||||||
Land | - | - | 1,061 | 1,061 | 10,486 | 11,547 | - | 1,061 | ||||||||||||||||||||||||
Construction | - | - | - | - | 13,475 | 13,475 | - | - | ||||||||||||||||||||||||
Commercial Non-Mortgage | - | - | - | - | 20,047 | 20,047 | - | - | ||||||||||||||||||||||||
Consumer | - | - | - | - | 1,074 | 1,074 | - | - | ||||||||||||||||||||||||
Total | $ | 165 | $ | 742 | $ | 1,298 | $ | 2,205 | $ | 334,109 | $ | 336,314 | $ | - | $ | 6,070 | ||||||||||||||||
As of December 31, 2015 | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Loans Receivable | Total Loans >90 Days & Accruing | Total Nonaccrual | ||||||||||||||||||||||||
1-4 Family | $ | 151 | $ | 152 | $ | - | $ | 303 | $ | 39,416 | $ | 39,719 | $ | - | $ | 99 | ||||||||||||||||
Home Equity | - | - | - | - | 5,459 | 5,459 | - | - | ||||||||||||||||||||||||
Commercial Real Estate | 6 | 1,011 | - | 1,017 | 182,917 | 183,934 | - | 5,188 | ||||||||||||||||||||||||
Multifamily | 1,291 | - | - | 1,291 | 57,513 | 58,804 | - | - | ||||||||||||||||||||||||
Land | - | - | 1,842 | 1,842 | 10,701 | 12,543 | - | 1,842 | ||||||||||||||||||||||||
Construction | - | - | - | - | 14,785 | 14,785 | - | - | ||||||||||||||||||||||||
Commercial Non-Mortgage | - | - | - | - | 14,826 | 14,826 | - | - | ||||||||||||||||||||||||
Consumer | - | - | - | - | 1,221 | 1,221 | - | - | ||||||||||||||||||||||||
Total | $ | 1,448 | $ | 1,163 | $ | 1,842 | $ | 4,453 | $ | 326,838 | $ | 331,291 | $ | - | $ | 7,129 | ||||||||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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 nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
The following table present impaired loans for the year ended December 31, 2016:
Unpaid | ||||||||||||||||||||
Recorded | Principal | Specific | YTD Average | YTD Interest | ||||||||||||||||
Balance | Balance | Allowance | Balance | Income | ||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||||||
1-4 Family | $ | 1,500 | $ | 1,620 | $ | - | $ | 1,311 | $ | 70 | ||||||||||
Home Equity | - | - | - | - | - | |||||||||||||||
Commercial real estate | 7,494 | 9,669 | - | 8,296 | 426 | |||||||||||||||
Multi Family | 6,311 | 7,125 | - | 6,884 | 402 | |||||||||||||||
Land | - | - | - | 24 | - | |||||||||||||||
Construction | - | - | - | - | - | |||||||||||||||
Commercial Non-Mortgage | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||||||
1-4 Family | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Home Equity | - | - | - | - | - | |||||||||||||||
Commercial real estate | 609 | 695 | 235 | 385 | 41 | |||||||||||||||
Multi Family | - | - | - | - | - | |||||||||||||||
Land | 1,061 | 3,158 | 550 | 1,832 | 123 | |||||||||||||||
Construction | - | - | - | - | - | |||||||||||||||
Commercial Non-Mortgage | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Totals | ||||||||||||||||||||
1-4 Family | $ | 1,500 | $ | 1,620 | $ | - | $ | 1,311 | $ | 70 | ||||||||||
Home Equity | - | - | - | - | - | |||||||||||||||
Commercial real estate | 8,103 | 10,364 | 235 | 8,681 | 467 | |||||||||||||||
Multi Family | 6,311 | 7,125 | - | 6,884 | 402 | |||||||||||||||
Land | 1,061 | 3,158 | 550 | 1,856 | 123 | |||||||||||||||
Construction | - | - | - | - | - | |||||||||||||||
Commercial Non-Mortgage | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total | $ | 16,975 | $ | 22,267 | $ | 785 | $ | 18,733 | $ | 1,062 | ||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
The following table present impaired loans for the year ended December 31, 2015:
Unpaid | ||||||||||||||||||||
Recorded | Principal | Specific | YTD Average | YTD Interest | ||||||||||||||||
Balance | Balance | Allowance | Balance | Income | ||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||||||
1-4 Family | $ | 1,504 | $ | 1,633 | $ | - | $ | 1,791 | $ | 80 | ||||||||||
Home Equity | - | - | - | 15 | - | |||||||||||||||
Commercial real estate | 9,912 | 11,820 | - | 10,508 | 289 | |||||||||||||||
Multi Family | 6,586 | 7,400 | - | 6,685 | 359 | |||||||||||||||
Land | 41 | 96 | - | 371 | 22 | |||||||||||||||
Construction | - | - | - | - | - | |||||||||||||||
Commercial Non-Mortgage | 295 | 295 | - | 311 | 22 | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||||||
1-4 Family | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Home Equity | - | - | - | - | - | |||||||||||||||
Commercial real estate | 2,368 | 2,368 | 200 | 2,499 | 175 | |||||||||||||||
Multi Family | 1,291 | 1,291 | 100 | 1,319 | 77 | |||||||||||||||
Land | 1,842 | 3,640 | 850 | 2,115 | - | |||||||||||||||
Construction | - | - | - | - | - | |||||||||||||||
Commercial Non-Mortgage | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Totals | ||||||||||||||||||||
1-4 Family | $ | 1,504 | $ | 1,633 | $ | - | $ | 1,791 | $ | 80 | ||||||||||
Home Equity | - | - | - | 15 | - | |||||||||||||||
Commercial real estate | 12,280 | 14,188 | 200 | 13,007 | 464 | |||||||||||||||
Multi Family | 7,877 | 8,691 | 100 | 8,004 | 436 | |||||||||||||||
Land | 1,883 | 3,736 | 850 | 2,486 | 22 | |||||||||||||||
Construction | - | - | - | - | - | |||||||||||||||
Commercial Non-Mortgage | 295 | 295 | - | 311 | 22 | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total | $ | 23,839 | $ | 28,543 | $ | 1,150 | $ | 25,614 | $ | 1,024 | ||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
We have entered into transactions with certain executive officers, directors and their affiliates (related parties). In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.
Loans to related parties totaled $8,083 and $7,248 at December 31, 2016 and 2015, respectively. The increase was due to $3,148 in new loans and refinances and $2,313 in payoffs and repayments.
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
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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.
The following tables summarize the loans that have been restructured as TDRs during the twelve months ended December 31, 2016 and 2015:
Twelve Months Ended | ||||||||||||
December 31, 2016 | ||||||||||||
Count | Balance prior to TDR | Balance after | ||||||||||
(Amounts in Thousands, except per share data) | ||||||||||||
Commercial real estate | 2 | $ | 826 | $ | 826 | |||||||
Total | 2 | $ | 826 | $ | 826 | |||||||
Twelve Months Ended | ||||||||||||
December 31, 2015 | ||||||||||||
Count | Balance prior to TDR | Balance after | ||||||||||
(Amounts in Thousands, except per share data) | ||||||||||||
Commercial real estate | 3 | $ | 817 | $ | 817 | |||||||
Total | 3 | $ | 817 | $ | 817 | |||||||
The TDRs described above for the twelve months ended December 31, 2016 did not have a material impact on the allowance for loan losses or a material charge-off.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
A default on a TDR occurs when a TDR is 90 days or more past due, transferred to nonaccrual status, or transferred to other real estate owned. The Company did not have any TDR loans default during the past 12 months. The Company had no TDR loans that defaulted in 2016.
The following tables summarize the loans that have been restructured as TDRs based on the type of modification or concession granted to the borrower during the twelve months ending December 31, 2016 and 2015:
As of December 31, 2016 | Payment Extension | Rate Reduction | Combination | Totals | ||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | |||||||||||||||||||||||
Commercial Real Estate | 2 | 826 | - | - | - | - | 826 | |||||||||||||||||||||
Total | 2 | $ | 826 | - | $ | - | - | $ | - | $ | 826 | |||||||||||||||||
As of December 31, 2015 | Payment Extension | Rate Reduction | Combination | Totals | ||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | |||||||||||||||||||||||
Commercial Real Estate | - | - | - | - | 3 | 817 | 817 | |||||||||||||||||||||
Total | - | $ | - | - | $ | - | 3 | $ | 817 | $ | 817 | |||||||||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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 year ended December 31, 2016 and 2015, 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.
Note 5: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are as follows:
2016 | 2015 | |||||||
Land | $ | 514 | $ | 514 | ||||
Buildings and improvements | 3,156 | 3,146 | ||||||
Furniture, fixtures, and equipment | 3,021 | 3,308 | ||||||
| 6,691 | 6,968 | |||||||
Less accumulated depreciation | (5,564 | ) | (5,683 | ) | ||||
Net premises and equipment | $ | 1,127 | $ | 1,285 | ||||
Note 6: Deposits
Deposits at year-end are summarized as follows:
2016 | 2015 | |||||||
Savings accounts | $ | 13,923 | $ | 13,626 | ||||
Checking accounts | 34,608 | 33,934 | ||||||
Money market accounts | 104,798 | 70,356 | ||||||
Certificates of deposit | 127,219 | 163,785 | ||||||
Total Deposits | $ | 280,548 | $ | 281,701 | ||||
Brokered certificates of deposit totaled $20,955 and $43,612 at December 31, 2016 and 2015.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
At December 31, 2016, scheduled maturities of certificates of deposit are as follows:
2017 | 75,405 | |||
2018 | 23,134 | |||
2019 | 17,749 | |||
2020 | 10,143 | |||
2021 | 676 | |||
Thereafter | 112 | |||
Total | 127,219 |
Time deposits of $250 or more were $33,402 and $39,061 at December 31, 2016 and 2015.
Note 7: Federal Home Loan Bank Advances
Federal Home Loan Bank advances totaled $60,000 and $47,000 at December 31, 2016 and 2015. At December 31, 2016, the advances are at fixed rates and bear interest at rates ranging from 0.90% to 5.25% and are secured by loans under a blanket collateral agreement as well as specific deposits at the Federal Home Loan Bank totaling $148,999. Advances are subject to restrictions or penalties in the event of prepayment.
Aggregate annual maturities of our Federal Home Loan Bank advances at December 31, 2016, are:
2017 | $ | 23,000,000 | ||
2018 | 5,000,000 | |||
2019 | - | |||
2020 | 10,000,000 | |||
2021 | - | |||
Thereafter | 22,000,000 | |||
Total | $ | 60,000,000 |
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Note 8: Income Taxes
The provision for income taxes includes these components:
2016 | 2015 | |||||||
Taxes currently payable | $ | 2,056 | $ | 1,759 | ||||
Deferred income taxes | 348 | (215 | ) | |||||
Income tax expense | $ | 2,404 | $ | 1,544 | ||||
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:
2016 | 2015 | |||||||
Computed at the statutory rate (34%) | $ | 2,297 | $ | 1,608 | ||||
Increase (decrease) resulting fromTax exempt interest | (49 | ) | (49 | ) | ||||
Other | (156 | ) | (15 | ) | ||||
Actual tax expense | $ | 2,404 | $ | 1,544 | ||||
The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets were:
2016 | 2015 | |||||||
Deferred tax asset | ||||||||
Allowance for loan losses | $ | 2,725 | $ | 2,984 | ||||
Depreciation | 142 | 134 | ||||||
Deferred loan fees | 195 | 195 | ||||||
Deferred compensation | 186 | 197 | ||||||
Real estate owned | 3 | 27 | ||||||
Other | - | 62 | ||||||
| 3,251 | 3,599 | |||||||
Deferred tax liabilities | ||||||||
FHLB stock dividends | 31 | 31 | ||||||
Net deferred tax asset | $ | 3,220 | $ | 3,568 | ||||
Retained earnings at December 31, 2016 include approximately $2,019 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The deferred income tax liabilities on the preceding amounts that would have been recorded if they were expected to reverse into taxable income in the foreseeable future were approximately $686 at December 31, 2016.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
ASC Topic 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides b on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company did not identify any uncertain tax positions that it believes should be recognized in the consolidated financial statements.
Note 9: Regulatory Matters
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Basel III Capital Rules
In July 2013, the three federal bank regulatory agencies jointly published final rules (the Basel IIICapital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as“Basel III” for strengthening international capital standards as well as certain provisions of theDodd-Frank Act. These rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, compared to the current U.S. risk-basedcapital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. These rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach.
The Basel III Capital Rules were effective for the Bank on January 1, 2015 (subject to a four-year phase-in period). The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (CET1), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations. Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015, will be as follows:
4.5% CET1 to risk-weighted assets
6.0% Tier 1 capital to risk-weighted assets
8.0% Total capital to risk-weighted assets
4.0% Minimum leverage ratio
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015, and will phase in over a four-year period (beginning at 40% on January 1, 2015, and an additional 20% per year thereafter). Under the new rule, in order to avoid limitations on capital distributions,including dividend payments and certain discretionary bonus payments to executive officers, abanking organization must hold a capital conservation buffer composed of CET1 capital above itsminimum risk-based capital requirements. The implementation of the capital conservation bufferbegan on January 1, 2016, at the 0.625% level and will phase in over a four-year period (increasing by that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019).
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of December 31, 2016 and 2015, that we meet all capital adequacy requirements to which we are subject including the capital conservation buffer.
Our actual capital amounts and ratios are also presented in the table.
Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2016 | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | 63,829 | 22.02 | % | 23,188 | 8.0 | % | 28,985 | 10.0 | % | |||||||||||||||
Tier I capital (to risk-weighted assets) | 60,131 | 20.75 | 17,391 | 6.0 | 23,188 | 8.0 | ||||||||||||||||||
Common equity tier 1 capital (to risk-weighted assets) | 60,131 | 20.75 | 16,650 | 4.5 | 24,050 | 6.5 | ||||||||||||||||||
Tier I capital (to adjusted total assets) | 60,131 | 16.25 | 14,800 | 4.0 | 18,500 | 5.0 | ||||||||||||||||||
As of December 31, 2015 | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | 61,810 | 20.7 | % | 23,848 | 8.0 | % | 29,810 | 10.0 | % | |||||||||||||||
Tier I capital (to risk-weighted assets) | 57,990 | 19.45 | 17,886 | 6.0 | 23,848 | 8.0 | ||||||||||||||||||
Common equity tier 1 capital (to risk-weighted assets) | 57,990 | 19.45 | 16,172 | 4.5 | 23,360 | 6.5 | ||||||||||||||||||
Tier I capital (to adjusted total assets) | 57,990 | 16.14 | 14,375 | 4.0 | 17,969 | 5.0 | ||||||||||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
DividendRestriction
The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2016 the bank may not make a dividend declaration without prior regulatory approval.
Note 10: Employee Benefits
We have a retirement savings 401(k) plan covering substantially all employees. Employees may contribute up to 100% of their compensation with us matching 100% of the employee’s contribution on the first 3% of the employee’s compensation and 50% of the employee’s contributions that exceed 3% but does not exceed 5%. Additionally, we can make discretionary contributions to our 401 (k) plan. Employer contributions charged to expense for the years ended 2016 and 2015 were $83 and $75 respectively.
Employee Stock Ownership Plan (ESOP)
As part of the conversion, we established an ESOP covering substantially all of our employees. The ESOP acquired 200,600 shares of WBKC common stock at $10.00 per share in the conversion with funds provided by a loan from the Company. Accordingly, $2,006 of common stock acquired by the ESOP reduced stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by our Board of Directors, are made to the ESOP. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares are used to repay the loan.
ESOP expense for the years ended December 31, 2016 and 2015 was $555 and $391, respectively.
The ESOP shares as of December 31 were as follows:
2016 | 2015 | |||||||
Allocated shares | 73,220 | 55,665 | ||||||
Unearned shares | 121,755 | 141,255 | ||||||
Total ESOP shares | 194,975 | 196,920 | ||||||
Fair value of unearned shares at December 31 | $ | 3,847 | $ | 3,763 | ||||
We are obligated at the option of each beneficiary to repurchase shares of the ESOP upon the beneficiary’s termination or after retirement. At December 31, 2016 and 2015, the fair value of the 73,220 and 55,665 allocated shares held by the ESOP was $2,314 and $1,483.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Note 11: 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.
Impaired Loans (Collateral Dependent)
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value.
Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
The following table presents the fair value measurements of assets 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 December 31, 2016 and 2015:
Fair Value Measurements Using | ||||||||||||||||
Fair | Quoted Prices | Significant | Significant | |||||||||||||
December 31, 2016 | ||||||||||||||||
Collateral-dependentImpaired loans | $ | 885 | $ | – | $ | – | $ | 885 | ||||||||
Unobservable (Level 3) inputs
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.
Fair Value at December 31, 2016 | Valuation Technique | Unobservable Inputs | Range | |||||||||||
December 31, 2016 | ||||||||||||||
Collateral-dependent Impaired loans | $ | 885 | Market comparable properties | Marketability discount | 3% | - | 13% | (6%) | ||||||
There were no collateral-dependent impaired loans in the year ended December 31, 2015.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
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 December 31, 2016.
Fair Value Measurements Using | ||||||||||||||||
As of December 31, 2016 | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Financial Assets | ||||||||||||||||
Cash and cash equivalents | $ | 103,634 | $ | 103,634 | $ | - | $ | - | ||||||||
Held to maturity securities | 499 | - | 500 | - | ||||||||||||
Loans held for sale | 238 | - | 239 | - | ||||||||||||
Loans, net of allowance for loan losses | 320,606 | - | - | 323,601 | ||||||||||||
Federal Home Loan Bank stock | 2,700 | - | 2,700 | - | ||||||||||||
Interest receivable | 846 | - | 846 | - | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | $ | 280,548 | $ | 153,290 | $ | - | $ | 128,655 | ||||||||
Federal Home Loan Bank advances | 60,000 | - | 59,187 | - | ||||||||||||
Federal funds purchased | 27,000 | - | 27,000 | - | ||||||||||||
Interest payable | 249 | - | 249 | - | ||||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Fair Value Measurements Using | ||||||||||||||||
As of December 31, 2015 | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Financial Assets | ||||||||||||||||
Cash and cash equivalents | $ | 52,865 | $ | 52,865 | $ | - | $ | - | ||||||||
Interest-earning time deposits | 39,021 | 39,021 | - | - | ||||||||||||
Held to maturity securities | 500 | - | 500 | - | ||||||||||||
Loans held for sale | 581 | - | 583 | - | ||||||||||||
Loans, net of allowance for loan losses | 314,613 | - | - | 318,525 | ||||||||||||
Federal Home Loan Bank stock | 2,700 | - | 2,700 | - | ||||||||||||
Interest receivable | 967 | - | 967 | - | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | $ | 281,701 | $ | 117,916 | $ | - | $ | 165,657 | ||||||||
Federal Home Loan Bank advances | 47,000 | - | 46,390 | - | ||||||||||||
Federal funds purchased | 24,000 | - | 24,000 | - | ||||||||||||
Interest payable | 233 | - | 233 | - | ||||||||||||
The following methods and assumptions were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.
Cash and Cash Equivalents, Federal Home Loan Bank Stock, Federal Funds Purchased, Interest Receivable, and Interest Payable
The carrying amount approximates fair value.
Held to Maturity Securities
Fair values equal quoted market prices, if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities.
Loans and Loans held for sale
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Deposits
Deposits include demand deposits, savings accounts, NOW 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 the Company 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 the Company’s 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 12: Commitments and Contingent Liabilities
Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
At year-end, these financial instruments are summarized as follows:
2016 | 2015 | |||||||
Commitments to extend credit | $ | 6,111 | $ | 7,133 | ||||
Unused portions of lines of credit | 6,268 | 6,778 | ||||||
Standby letters of credit | 787 | 990 | ||||||
Commitments to make loans generally expire within thirty to ninety days, while unused lines of credit expire at the maturity date of the individual loans.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Note 13: Earnings Per Share (In thousands except per share amounts)
Years ended December 31 | 2016 | 2015 | ||||||
Net Income | $ | 4,353 | $ | 3,186 | ||||
Dividends and undistributed earnings allocated to participating securities | (47 | ) | (50 | ) | ||||
Income attributable to common shareholders | 4,306 | 3,136 | ||||||
Weighted average shares outstanding (in thousands) | 2,132 | 2,200 | ||||||
Less: average unearned ESOP and unvested restricted stock | (171 | ) | (203 | ) | ||||
Average Shares | 1,961 | 1,997 | ||||||
Effect of dilutive based awards | 32 | 25 | ||||||
Average common and common-equivalent shares for diluted EPS (in thousands) | 1,993 | 2,022 | ||||||
Basic EPS | $ | 2.20 | $ | 1.57 | ||||
Diluted EPS | $ | 2.16 | $ | 1.55 | ||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Note 14: Share Based Compensation
In May 2012, the Company’s stockholders approved the Wolverine Bancorp, Inc. 2012 Equity Incentive Plan (“Plan”) which provides for awards of stock options and restricted stock to key officers and outside directors. The cost of the Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on management’s judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate. The cost of the awards are being recognized on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards.
Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan are authorized but unissued shares. The maximum number of shares authorized under the Plan is 351,050. Total share-based compensation expense pursuant to the Plan for the years ended December 31, 2016 and 2015 was $334 and $319, respectively.
Stock Options
The table below presents the stock option activity for the period shown:
Options | Weighted average exercise price | Remaining contractual life (years) | Aggregate intrinsic value | |||||||||||||
Options outstanding at January 1, 2016 | 128,949 | $ | 17.91 | 7 | $ | 1,123 | ||||||||||
Granted | 60,000 | 26.66 | 10 | -- | ||||||||||||
Exercised | (1,503 | ) | 17.30 | -- | -- | |||||||||||
Forfeited | (3,888 | ) | 19.58 | -- | -- | |||||||||||
Expired | (1,973 | ) | 18.42 | -- | -- | |||||||||||
Options outstanding at December 31, 2016 | 181,585 | $ | 20.76 | 7 | $ | 1,956 | ||||||||||
Exercisable at December 31, 2016 | 92,748 | $ | 17.44 | 6 | $ | 1,305 | ||||||||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
The fair value of the Company’s stock options granted on September 9, 2016 was determined using the Black-Scholes option pricing formula. The following assumptions were used in the formula:
Expected volatility | 17.80 | % | ||
Risk-free interest rate | 1.59 | % | ||
Expected dividend yield | 5.00 | % | ||
Expected life (in years) | 7.50 | |||
Exercise price for the stock options | $ | 26.75 | ||
Grant date fair value | $ | 1.91 |
The fair value of the Company’s stock options granted on December 15, 2016 was determined using the Black-Scholes option pricing formula. The following assumptions were used in the formula:
Expected volatility | 18.10 | % | ||
Risk-free interest rate | 2.51 | % | ||
Expected dividend yield | 5.00 | % | ||
Expected life (in years) | 7.50 | |||
Exercise price for the stock options | $ | 26.03 | ||
Grant date fair value | $ | 2.58 |
Expected volatility — Based on the historical volatility of share price.
Risk-free interest rate — Based on the U.S. Treasury yield curve and expected life of the options at the time of grant.
Expected dividend yield — The Company currently has a Cash Dividend Policy whereby the Company expects to pay a cash dividend to shareholders on an annual basis. The expected dividend yield was estimated for the portion of the life of the options that the Company expects to pay a dividend.
Expected life — Based on an average of the five year vesting period and the ten year contractual term of the stock option plan.
Exercise price for the stock options — Based on the closing price of the Company’s stock on the date of grant.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
As of December 31, 2016, the Bank had $179 of unrecognized compensation expense related to stock options. The cost is expected to be recognized over a weighted-average period of 8.96 years. The total fair value of options vested in the year ended December 31, 2016 was $768. Stock option expense for the years ended December 31, 2016 and 2015 was $62 and $62, respectively.
Restricted Stock Awards
Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.
The table below presents the restricted stock award activity for the period shown:
Service-Based Restricted stock awards | Weighted average grant date fair value | |||||||
Non-vested at January 1, 2016 | 36,534 | $ | 19.16 | |||||
Granted | �� | 7,500 | 28.61 | |||||
Vested | (14,745 | ) | 18.14 | |||||
Forfeited | (2,717 | ) | 19.02 | |||||
Non-vested at December 31, 2016 | 26,572 | 22.38 | ||||||
As of December 31, 2016, the Company had $505 of unrecognized compensation expense related to restricted stock awards. The cost of the restricted stock awards will be amortized in monthly installments over the five-year vesting period. Restricted stock expense for the years ended December 31, 2016 and 2015 were $272 and $257, respectively.
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Note 15: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
Condensed Balance Sheets
December 31, | December 31, | |||||||
Assets | 2016 | 2015 | ||||||
Cash and cash equivalents | $ | 3,190 | $ | 2,386 | ||||
Investment in subsidiary | 61,127 | 60,073 | ||||||
Other assets | 205 | 199 | ||||||
Total assets | $ | 64,522 | $ | 62,658 | ||||
Liabilities - Other | $ | 3,548 | $ | 2,178 | ||||
Stockholders' Equity | 60,974 | 60,480 | ||||||
Total liabilities and stockholders' equity | $ | 64,522 | $ | 62,658 | ||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Condensed Statements of Income and Comprehensive Income
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
Income - Dividends from subsidiary | $ | 4,500 | $ | 4,500 | ||||
Expense | 344 | 260 | ||||||
Income Before Income Tax and Equity in Undistributed Income (Distribution in Excess of Income) of Subsidiaries | 4,156 | 4,240 | ||||||
Income Tax Benefit | 5 | 73 | ||||||
Income (Loss) Before Equity in Undistributed Income (Distribution in Excess of Income) of Subsidiaries | 4,161 | 4,313 | ||||||
Equity in Undistributed Income (Distribution in Excess of Income) of Subsidiaries | 192 | (1,127 | ) | |||||
Net Income and Comprehensive Income | $ | 4,353 | $ | 3,186 | ||||
Wolverine Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts in Thousands, except per share data)
Condensed Statements of Cash Flows
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
Operating Activities | ||||||||
Net income | $ | 4,353 | $ | 3,186 | ||||
Items not requiring (providing) cash: | ||||||||
(Equity in undistributed income) distributions in excess of income of subsidiaries | (192 | ) | 1,127 | |||||
Change in other assets | (6 | ) | (74 | ) | ||||
Change in other liabilities | 299 | (47 | ) | |||||
Net cash provided by operating activities | 4,454 | 4,192 | ||||||
Financing Activities | ||||||||
Purchase of common stock | (1,518 | ) | (2,796 | ) | ||||
Dividends paid | (2,158 | ) | - | |||||
Proceeds from stock options exercised | 26 | - | ||||||
Net cash used in financing activities | (3,650 | ) | (2,796 | ) | ||||
Net Change in Cash and Cash Equivalents | 804 | 1,396 | ||||||
Cash and Cash Equivalents, Beginning of Period | 2,386 | 990 | ||||||
Cash and Cash Equivalents, End of Period | $ | 3,190 | $ | 2,386 | ||||
Supplemental Disclosures of Cash Flows Information | ||||||||
Dividends Declared, not paid | $ | 3,229 | $ | 2,158 |
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| Wolverine Bancorp, Inc. | |
Date: July 27, 2017 | By: | /s/ David H. Dunn | |
|
| David H. Dunn President and Chief Executive Officer (Duly Authorized Representative) |
EXHIBIT INDEX
3.1 | Articles of Incorporation of Wolverine Bancorp, Inc.* |
3.2 | Bylaws of Wolverine Bancorp, Inc.* |
4 | Form of Common Stock Certificate of Wolverine Bancorp, Inc.* |
10.1 | Amended and Restated Employment Agreement of David H. Dunn** |
10.2 | Amended and Restated Employment Agreement of Rick A. Rosinski** |
10.3 | 2002 Long Term Incentive Plan, as amended* |
10.4 | 2006 Long Term Incentive Plan, as amended for Dunn* |
10.5 | 2006 Long Term Incentive Plan, as amended for Rosinski* |
| 10.6 | 2012 Equity Incentive Plan*** |
21 | Subsidiaries**** |
23 | Consent of Independent Auditor**** |
31.1 | Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | 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 |
* | Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-169432), initially filed with the SEC on September 16, 2010. |
** | Incorporated by reference to the Current Report on Form 8-K filed with the SEC on July 8, 2011. |
| *** | Incorporated by reference to the Proxy Statement filed on April 16, 2012. |
| **** | Incorporated by reference to the Annual Report on Form 10-K (file no. 001-35034) filed on March 31, 2017. |
