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WBKC > SEC Filings for WBKC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for WOLVERINE BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WOLVERINE BANCORP, INC.


14-Nov-2012

Quarterly Report


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

General

Management's discussion and analysis of the financial condition and results of operations at and for three months and nine months ended September 30, 2012 and 2011 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

statements of our goals, intentions and expectations;

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

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

estimates of our risks and future costs and benefits.

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

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

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

competition among depository and other financial institutions;

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

adverse changes in the securities markets;

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

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

our ability to successfully integrate acquired entities, if any;

changes in consumer spending, borrowing and savings habits;

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

changes in our organization, compensation and benefit plans;


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

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

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

Critical Accounting Policies

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

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

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

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

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

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

Income Tax Accounting. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Under U.S. GAAP, a valuation allowance is required to be recognized if it is more likely than not that a deferred tax asset will not be realized. The determination as to whether we will be able to realize the deferred tax assets is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods, while negative evidence includes


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any cumulative losses in the current year and prior two years and general business and economic trends. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Any required valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.

We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact on our net income and the carrying value of our assets. We believe our tax liabilities and assets are properly recorded in the consolidated financial statements at September 30, 2012 and December 31, 2011 and no valuation allowance was necessary.

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

Total assets decreased $9.7 million, or 3.3%, to $284.0 million at September 30, 2012 from $293.7 million at December 31, 2011. The decrease resulted from a decrease of $21.2 million in interest-earning time deposits, offset in part by an increase of $5.1 million in cash and cash equivalents and an increase of $5.3 million in net loans.

Cash and cash equivalents increased $5.1 million, or 36.2%, to $19.2 million at September 30, 2012 from $14.1 million at December 31, 2011, and interest-earning time deposits decreased $21.1 million, or 100%, to $0 at September 30, 2012 from $21.1 million at December 31, 2011. The net increase in cash and cash equivalents and funds received from maturing interest-earning time deposits were used to pay down Federal Home Loan Bank advances, customer certificates of deposits and funding of loan originations.

Loans held for sale increased $3.8 million, or 576%, to $4.5 million at September 30, 3012 from $666,000 at December 31, 2011. This increase reflects the low rate environment that has facilitated a historically high volume of secondary market lending.

Net loans increased $5.3 million, or 2.2%, to $249.0 million at September 30, 2012 from $243.7 million at December 31, 2011. The loan portfolio increased primarily as a result of commercial real estate loans increasing $15.2 million or 17.0%, the undisbursed portion of loans decreasing by $3.3 million or 29.7% and the allowance for loan losses decreasing $3.1 million, or 32.6%. These were offset by construction loans decreasing $6.5 million, or 32.8%, one-to four-family residential real estate loans decreasing $7.3 million, or 10.7%, and home equity loans decreasing $3.1 million, or 22.5%. The decrease in one-to-four residential real estate loans and home equity loans are primarily due to borrower's refinancing in the current low interest rate environment.

The decrease in our allowance for loan losses was due to the March 31, 2012 charging off of $3.8 million of specific reserves on collateral-dependent impaired loans. These charge offs were considered confirmed losses and the majority of the charge offs were based on recent appraisal values or evaluations. The allowance for loan losses as a percentage of total loans decreased to 2.6% as of September 30, 2012, from 3.7% at December 31, 2011. Management believes, we feel we are adequately covered because of the aforementioned charge offs taken during the three months ended March 31, 2012.

Securities held to maturity, consisting of one municipal security at September 30, 2012 decreased $73,000, or 23.2%, to $242,000 from $315,000 at December 31, 2011 due to paydowns.


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Other real estate owned decreased $409,000, or 29.2%, to $991,000 at September 30, 2012, from $1.4 million at December 31, 2011. The decrease in other real estate owned resulted from sale proceeds of $809,000 and writedowns of $70,000, offset by new foreclosures of $312,000.

Other assets, consisting primarily of prepaid FDIC assessments and deferred federal taxes, decreased $2.4 million, or 42.1%, to $3.3 million at September 30, 2012, from $5.7 million at December 31, 2011. The decrease was primarily attributable to a net decrease in our deferred and accrued federal income taxes of $1.9 million which was primarily attributable to a refund of 2008 and 2009 federal income taxes resulting from our 2010 loss carryback.

Deposits decreased by $9.0 million, or 5.6%, to $152.4 million at September 30, 2012 from $161.4 million at December 31, 2011. Certificates of deposit decreased $9.7 million, or 13.6%, to $61.9 million at September 30, 2012 from $71.6 million at December 31, 2011. Our core deposits (consisting of interest-bearing and noninterest-bearing checking accounts, money market accounts and savings accounts) remained at $89.8 million.

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

Interest payable and other liabilities, consisting mainly of liabilities for checks and money orders and accrued expenses, increased $2.8 million, or 187.0% to $4.3 million at September 30, 2012, from $1.5 million at December 31, 2011. The increase was primarily due to increased month-end activity in our liability for checks and money orders of $1.9 million and a $422,000 increase in borrowers' prepaid taxes and insurances.

Total stockholders' equity increased $709,000, or 1.1%, to $65.7 million at September 30, 2012 from $65.0 million at December 31, 2011 primarily due to net income of $1.2 million. This was offset by purchases of 30,618 shares of Wolverine Bancorp, Inc. common stock, totaling $509,000 pursuant to our announced stock repurchase program which was approved by our Board of Directors on February 14, 2012.

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

General. We recorded net income of $380,000 for the three months ended September 30, 2012 compared to net income of $406,000 for the three months ended September 30, 2011. The decrease in our net income is primarily due to an increase in our provision for loan losses of $150,000 to $475,000 for the three months ended September 30, 2012 from $325,000 for the three months ended September 30, 2011 and an increase of $356,000 in non-interest expense offset in part by a $491,000 increase of gain on sale of loans.

Interest and Dividend Income. Interest and dividend income decreased by $137,000, or 3.8%, to $3.5 million for the three months ended September 30, 2012, as the average balance of interest-earning assets decreased $13.0 million to $277.7 million for the three months ended September 30, 2012 from $290.7 million for the three months ended September 30, 2011. The decrease in the average balance of interest-earning assets was partially offset by an increase in the average yield on interest-earning assets of 3 basis points to 5.01% during the 2012 period from 4.98% during the 2011 period.

The biggest component of the decrease in average interest-earning assets was in other interest-earning assets, consisting of interest-earning overnight funds and time deposits, which decreased $19.0 million, or 44.9%, to $23.3 million for the three months ended September 30, 2012 from $42.4 million for the three months ended September 30, 2011. The average yield on these assets decreased 22 basis points from 0.46% to 0.24%. The decrease in the average balance resulted in a $35,000 decrease in interest income from other interest-earning assets to $14,000 for the three months ended September 30, 2012 from $49,000 for the three months ended September 30, 2011.

Average net loans increased $6.1 million, or 2.5%, to $249.7 million for the three months ended September 30, 2012 from $243.6 million for the three months ended September 30, 2011. Interest income


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on loans decreased slightly by $106,000, or 3%, to $3.4 million for the three months ended September 30, 2012, as the average yield on loans decreased 31 basis points to 5.50% for the three months ended September 30, 2012 from 5.81% for the three months ended September 30, 2011 reflecting the lower market interest rate environment.

Interest Expense. Interest expense decreased $361,000, or 29.1%, to $880,000 for the three months ended September 30, 2012 from $1.2 million for the three months ended September 30, 2011, as the average balance of interest-bearing liabilities decreased $17.7 million, or 7.6%, to $215.9 million for the three months ended September 30, 2012 from $233.6 million for the three months ended September 30, 2011, and the average rate we paid on these liabilities decreased 50 basis points to 1.63% from 2.13%. The biggest component of the decrease was interest expense on Federal Home Loan Bank advances which decreased $211,000, or 26.2%, to $594,000 for the three months ended September 30, 2012 from $805,000 for the three months ended September 30, 2011. This resulted from a $8.6 million decrease in the average balance of Federal Home Loan Bank advances to $61.9 million for the three months ended September 30, 2012 from $70.5 million for the three months ended September 30, 2011 as management determined not to renew maturing advances, and a 73 basis point decrease in the average rate paid on borrowings from 4.57% for the three months ended September 30, 2011 to 3.84% for the three months ended September 30, 2012.

Interest expense on certificates of deposits decreased $130,000 or 36.8%, to $223,000 for the three months ended September 30, 2012 from $353,000 for the three months ended September 30, 2011 resulting primarily from a $13.8 million decrease in the average balance of certificates of deposits to $62.2 million for the 2012 period, from $76.0 million for the 2011 period. The decrease in the balance of certificates of deposits was primarily due to customer withdrawals resulting from a decrease in rates paid on these deposits in the continuing low interest rate environment. Additionally, the yield on certificates of deposit decreased 42 basis points to 1.44% for the 2012 period from 1.86% for the 2011 period.

The average balance of our core deposits, consisting of checking accounts, money market accounts and savings accounts, increased $4.8 million, or 5.5%, to $91.8 million for the three months ended September 30, 2012 from $87.0 million for the three months ended September 30, 2011. However, the interest on core deposits decreased $20,000 to $63,000 for the 2012 period from $83,000 for the 2011 period, as the yield on these deposits for the three months ended September 30, 2012 decreased 11 basis points, or 28.2%, to 0.27% from 0.38% for the three months ended September 30, 2011.

Interest expense on borrowed funds, consisting entirely of Federal Home Loan Bank advances, decreased $211,000, or 26.2%, to $594,000 for the three months ended September 30, 2012 from $805,000 for the three months ended September 30, 2011, as the average balance of our borrowings decreased $8.6 million and the average rate paid on these borrowings decreased 73 basis points to 3.84% from 4.57%. The decrease in the rate was due to two restructures of outstanding advances. First, in the third quarter of 2011, we restructured $18.0 million of outstanding advances under the Federal Home Loan Bank of Indianapolis' 'blend and extend' program, with a rate of 3.78% and a weighted average remaining maturity of 19 months to 2.69% with a weighted average remaining maturity of 62 months. In addition, in the second quarter of 2012, we restructured $22.0 million of outstanding advances under the aforementioned program, with a rate of 5.51% with a weighted average remaining maturity of 4 years to 4.22% with a weighted average remaining maturity of 9 years.

Net Interest Income. Net interest income increased $224,000, or 9.4%, to $2.6 million for the three months ended September 30, 2012 from $2.4 million for the three months ended September 30, 2011, as our average net interest-earning assets increased to $61.8 million from $57.1 million, our net interest rate spread increased 53 basis points to 3.38% from 2.85% and our net interest margin increased 47 basis points to 3.63% from 3.17%. The increases in our net interest rate spread and net interest margin reflected the restructuring of FHLB advances; paying off of our maturing, higher interest rate FHLB advances; and runoff of higher interest rate certificates of deposit, offset by our ongoing interest rate risk strategy of selling in the secondary market long-term, fixed-rate one- to four-family residential mortgage loans during the current low interest rate environment, and an increase in our average net loans.


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Provision for Loan Losses. Based on our analysis of the factors described in "Critical Accounting Policies - Allowance for Loan Losses," in our Annual Report on Form 10-K for 2011, we recorded a provision for loan losses of $475,000 for the three months ended September 30, 2012 and a provision for loan losses of $325,000 for the three months ended September 30, 2011. We have continued with additional provisions in 2012 because of elevated levels of non-performing assets, delinquencies and classified assets, as well as continued concerns about the Michigan economy, elevated levels of unemployment, and some declining collateral values. At September 30, 2012, non-performing loans totaled $11.1 million, or 4.4% of total loans, as compared to $15.3 million, or 6.3% of total loans, at September 30, 2011. The large decrease in non-performing loans is significantly due to the aforementioned charging off of the specific reserves which took place during the three months ended March 31, 2012 and a $600,000 charge-off relating to one relationship recorded in September 2012.

The allowance for loan losses to total loans receivable decreased to 2.6% at September 30, 2012 from 3.9% at September 30, 2011. This ratio was at 3.7% at December 31, 2011. The decrease in our allowance for loan losses was primarily due to the charge off and elimination of all previously established specific valuation allowances, which totaled $3.8 million. We are not required to maintain an allowance for loan losses on these loans as the loan balance has already been written down to the estimated collateral values on our collateral dependent impaired loans. Therefore, the ratio of the allowance for loan losses to total loans and the ratio of the allowance for loan losses to non-performing loans has been adversely affected by these charge offs. Correspondingly, the amount of non-performing loans decreased from $16.0 million as of December 31, 2011 to $11.1 million as of September 30, 2012 primarily as a result of these charge offs.

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

Noninterest Income. Noninterest income increased by $250,000, or 56.7%, to $691,000 for the three months ended September 30, 2012 from $441,000 for the three months ended September 30, 2011. The increase was primarily attributable to an increase of $491,000 in net gain on loan sales. This was offset by decreases in loan fees earned which are now netted against the fees paid to our mortgage loan processing provider that was engaged in 2012. Additionally, miscellaneous income decreased from the prior year period due to a $165,000 settlement of an insurance claim made under our financial institution bond received in 2011. The settlement relates to an expense we incurred in connection with an external wire transfer in June 2010.

Noninterest Expense.Noninterest expense increased by $356,000, or 19.0%, to $2.2 million for the three months ended September 30, 2012 from $1.9 million for the three months ended September 30, 2011. The increase was primarily due to an increase of $412,000 or 44.9% in salaries and employee benefits expense due to increased staff and new positions. This was offset by a decrease of $27,000 in professional and service fees.

Income Tax Expense. We recorded $204,000 of income tax expense for the three months ended September 30, 2012 compared to $210,000 of income tax expense for the 2011 quarter. Our effective tax rate was 34.9% for the three months ended September 30, 2012 and 34.1% the three months ended September 30, 2011.

Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011

General. We recorded net income of $1.2 million for the nine months ended September 30, 2012 compared to net income of $851,000 for the nine months ended September 30, 2011. Net interest income increased $785,000 to $7.7 million for the nine months ended September 30, 2012 from $7.0 million for the nine months ended September 30, 2011, and other noninterest income increased $514,000 to $1.7 million for the nine months ended September 30, 2012 from $1.2 million for the year earlier period.


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Interest and Dividend Income. Interest and dividend income decreased by $180,000, or 1.7%, to $10.6 million for the nine months ended September 30, 2012 from $10.8 million for the nine months ended September 30, 2011, as the average balance of interest-earning assets decreased $16.6 million to $279.0 million for the nine months ended September 30, 2012 from $295.6 million for the nine months ended September 30, 2011, and the average yield on interest-earning assets increased 20 basis points to 5.08% during the 2012 period from 4.88% during the 2011 period. The increase in our average yield on interest-earning assets was due primarily to an increase in net loans and a decrease in lower-yielding other interest-earning assets.

The biggest component decrease in average interest-earning assets was in the other interest-earning assets category, consisting of interest-earning overnight funds and time deposits, which decreased $23.1 million, or 46.0%, to $27.1 million for the nine months ended September 30, 2012 from $50.3 million for the nine months ended September 30, 2011. The average yield on these investments decreased 2 basis points from 0.45% to 0.43%. This was offset by the increase in average net loans of $6.8 million or 2.8%, to $247.2 million for the nine months ended September 30, 2012 from $240.5 million for the nine months ended September 30, 2011.

Interest income on loans decreased by $118,000, or 1.1%, to $10.4 million for the nine months ended September 30, 2012 from $10.6 million for the nine months ended September 30, 2011, as the average yield on loans decreased 22 basis points to 5.63% for the nine months ended September 30, 2012 from 5.85% for the nine months ended September 30, 2011 reflecting the lower market interest rate environment, and the average balance of loans increased $6.8 million, or 2.8%, to $247.2 million for the nine months ended September 30, 2012 from $240.5 million for the nine months ended September 30, 2011.

Interest income on investment securities and other interest-earning assets, and dividends on FHLB of Indianapolis stock, decreased $62,000, or 23.3%, to $204,000 for the nine months ended September 30, 2012 from $266,000 for the nine months ended September 30, 2011. This decrease was primarily attributable to a decrease in the average balance of other interest-earning assets, consisting of interest-earning overnight funds, and time deposits and a decrease in the weighted average yield paid on these interest-earning assets. The average for the nine months ended September 30, 2011 of other interest-earning assets was . . .

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