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EX-99.2 - EX-99.2 - WCF Bancorp, Inc.d127679dex992.htm
EX-10.5 - EX-10.5 - WCF Bancorp, Inc.d127679dex105.htm
EX-99.7 - EX-99.7 - WCF Bancorp, Inc.d127679dex997.htm
EX-16 - EX-16 - WCF Bancorp, Inc.d127679dex16.htm
EX-8.1 - EX-8.1 - WCF Bancorp, Inc.d127679dex81.htm
EX-4 - EX-4 - WCF Bancorp, Inc.d127679dex4.htm
EX-99.6 - EX-99.6 - WCF Bancorp, Inc.d127679dex996.htm
EX-99.1 - EX-99.1 - WCF Bancorp, Inc.d127679dex991.htm
EX-23.3 - EX-23.3 - WCF Bancorp, Inc.d127679dex233.htm
EX-2 - EX-2 - WCF Bancorp, Inc.d127679dex2.htm
EX-3.1 - EX-3.1 - WCF Bancorp, Inc.d127679dex31.htm
EX-3.2 - EX-3.2 - WCF Bancorp, Inc.d127679dex32.htm
EX-23.2 - EX-23.2 - WCF Bancorp, Inc.d127679dex232.htm
EX-10.3 - EX-10.3 - WCF Bancorp, Inc.d127679dex103.htm
EX-10.1 - EX-10.1 - WCF Bancorp, Inc.d127679dex101.htm
EX-5 - EX-5 - WCF Bancorp, Inc.d127679dex5.htm
EX-1.1 - EX-1.1 - WCF Bancorp, Inc.d127679dex11.htm
EX-10.4 - EX-10.4 - WCF Bancorp, Inc.d127679dex104.htm
EX-10.2 - EX-10.2 - WCF Bancorp, Inc.d127679dex102.htm
EX-99.3 - EX-99.3 - WCF Bancorp, Inc.d127679dex993.htm
EX-21 - EX-21 - WCF Bancorp, Inc.d127679dex21.htm
Table of Contents

As filed with the Securities and Exchange Commission on March 10, 2016

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

WCF BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Iowa   6712   Being applied for

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

401 Fair Meadow Drive

Webster City, Iowa 50595

(515) 832-3071

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Stephen L. Mourlam

President and Chief Executive Officer

401 Fair Meadow Drive

Webster City, Iowa 50595

(515) 832-3071

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Eric Luse, Esq.

Steven Lanter, Esq.

Gregory Sobczak, Esq.

Luse Gorman, PC

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2000

 

Edward G. Olifer, Esq.

Erich M. Hellmold, Esq.

Kilpatrick Townsend & Stockton LLP

607 14th Street, NW, Suite 900

Washington, DC 20005-2018

(202) 508-5800

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  x

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered

 

Proposed

maximum

offering price

per share(1)

 

Proposed

maximum

aggregate

offering price (1)

  Amount of
registration fee

Common Stock, $0.01 par value per share

  2,563,224   $8.00   $20,505,792   $2,065

 

 

(1) Estimated solely for purposes of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


Table of Contents

PROSPECTUS

WCF BANCORP, INC.

(Proposed Holding Company for WCF Financial Bank)

Up to 1,868,750 Shares of Common Stock

(Subject to Increase to up to 2,149,063 Shares)

 

 

WCF Bancorp, Inc., an Iowa corporation, is offering up to 1,868,750 shares of common stock for sale at $8.00 per share on a best efforts basis in connection with the conversion of WCF Financial, M.H.C. from the mutual holding company to the stock holding company form of organization. The shares we are offering represent the ownership interest in Webster City Federal Bancorp, a federal corporation, currently owned by the mutual holding company, WCF Financial, M.H.C. In this prospectus, we refer to WCF Bancorp, Inc. as “WCF Bancorp.” Webster City Federal Bancorp’s common stock is currently quoted on the OTC Pink Marketplace (OTCPK) operated by the OTC Market Group under the symbol “WCFB,” and we expect the common stock of WCF Bancorp will also be quoted on the OTCPK under the symbol “WCFB.” We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

The shares of common stock are first being offered in a subscription offering to eligible depositors and borrowers and to tax-qualified employee benefit plans of WCF Financial Bank. Shares not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to residents of the communities served by WCF Financial Bank and then to existing stockholders of Webster City Federal Bancorp. Any shares of common stock not purchased in the subscription or community offerings may be offered to the public through a syndicate of broker-dealers, referred to in this prospectus as the syndicated offering. The syndicated offering may commence before the subscription and community offerings (including any extensions) have expired. However, no shares purchased in the subscription offering or the community offering will be issued until the completion of any syndicated offering.

We may sell up to 2,149,063 shares of common stock because of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 1,381,250 shares to complete the offering.

In addition to the shares we are selling in the offering, the shares of Webster City Federal Bancorp currently held by the public will be exchanged for shares of common stock of WCF Bancorp based on an exchange ratio that will result in existing public stockholders of Webster City Federal Bancorp owning approximately the same percentage of WCF Bancorp common stock as they owned in Webster City Federal Bancorp common stock immediately prior to the completion of the conversion. We will issue up to 360,140 shares in the exchange, which may be increased to up to 414,161 shares if we sell 2,149,063 shares of common stock in the offering.

The minimum order is 25 shares. The subscription offering will expire at 1:00 p.m., Central Time, on [expiration date]. The community offering, if held, will terminate at the same time. We may extend the expiration date of the subscription and/or community offerings without notice to you until [extension date], or longer if the Federal Reserve Board approves a later date. No single extension may exceed 90 days and the offering must be completed by [final extension date]. Once submitted, orders are irrevocable unless the subscription and community offerings are terminated or extended, with regulatory approval, beyond [extension date], or the number of shares of common stock to be sold is increased to more than 2,149,063 shares or decreased to less than 1,381,250 shares. If the subscription and community offerings are extended past [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold in the offering is increased to more than 2,149,063 shares or decreased to less than 1,381,250 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest. Funds received in the subscription and the community offerings will be held in a segregated account at WCF Financial Bank and will earn interest at [escrow interest rate]% per annum until completion or termination of the offering.

Keefe, Bruyette & Woods, Inc. will assist us in selling the shares on a best efforts basis in the subscription and community offerings, and will serve as sole manager for any syndicated offering. Keefe, Bruyette & Woods, Inc. is not required to purchase any shares of common stock that are sold in the offering.

 

 

OFFERING SUMMARY

Price: $8.00 per Share

 

 

 

     Minimum      Midpoint      Maximum      Adjusted Maximum  

Number of shares

     1,381,250         1,625,000         1,868,750         2,149,063   

Gross offering proceeds

   $  11,050,000       $  13,000,000       $  14,950,000       $ 17,192,504   

Estimated offering expenses, excluding selling agent and underwriters’ commissions

   $ 870,000       $ 870,000       $ 870,000       $ 870,000   

Selling agent and underwriters’ commissions (1)

   $ 330,000       $ 330,000       $ 330,000       $ 330,000   

Estimated net proceeds

   $ 9,850,000       $ 11,800,000       $ 13,750,000       $ 15,992,504   

Estimated net proceeds per share

   $ 7.13       $ 7.26       $ 7.36       $ 7.44   

 

(1) The amounts shown assume that all of the shares are sold in the subscription and community offerings, and excludes reimbursable expenses and conversion agent fees, which are included in estimated offering expenses. See “Pro Forma Data” and “The Conversion and Offering – Plan of Distribution; Selling Agent and Underwriter Compensation” for information regarding compensation to be received by Keefe, Bruyette & Woods, Inc. in the subscription and community offerings and the compensation to be received by Keefe, Bruyette & Woods, Inc. and the other broker-dealers that may participate in the syndicated offering. If all shares of common stock were sold in the syndicated offering, excluding insider purchases and shares purchased by our employee stock ownership plan for which no selling agent fee will be paid, the selling agent fees would be approximately $574,000, $681,000, $789,000 and $913,000 at the minimum, midpoint, maximum and adjusted maximum levels of the offering, respectively.

This investment involves a degree of risk, including the possible loss of principal.

Please read “Risk Factors” beginning on page 18.

  These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. None of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

Keefe, Bruyette & Woods

        A Stifel Company

For assistance, please contact the Stock Information Center at [Stock Center number].

The date of this prospectus is [Prospectus date].


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

RISK FACTORS

     18   

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     32   

FORWARD-LOOKING STATEMENTS

     34   

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

     36   

OUR DIVIDEND POLICY

     37   

MARKET FOR THE COMMON STOCK

     38   

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

     40   

CAPITALIZATION

     41   

PRO FORMA DATA

     43   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     48   

BUSINESS OF WCF BANCORP

     60   

BUSINESS OF WEBSTER CITY FEDERAL BANCORP AND WCF FINANCIAL BANK

     60   

SUPERVISION AND REGULATION

     78   

TAXATION

     89   

MANAGEMENT

     91   

BENEFICIAL OWNERSHIP OF COMMON STOCK

     99   

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

     100   

THE CONVERSION AND OFFERING

     101   

COMPARISON OF STOCKHOLDERS’ RIGHTS FOR EXISTING STOCKHOLDERS OF WEBSTER CITY FEDERAL BANCORP

     127   

RESTRICTIONS ON ACQUISITION OF WCF BANCORP

     133   

DESCRIPTION OF CAPITAL STOCK OF WCF BANCORP FOLLOWING THE CONVERSION

     138   

TRANSFER AGENT

     139   

CHANGE IN ACCOUNTANTS

     139   

EXPERTS

     140   

LEGAL AND TAX MATTERS

     140   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     140   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

i


Table of Contents

SUMMARY

The following summary explains the significant aspects of the conversion, the offering and the exchange of existing shares of Webster City Federal Bancorp common stock for shares of WCF Bancorp common stock. It may not contain all of the information that is important to you. Before making an investment decision, you should read this entire document carefully, including the consolidated financial statements and the notes thereto, and the section entitled “Risk Factors.”

Our Organizational Structure and the Proposed Conversion

In August 1994 we reorganized into a mutual holding company structure, and since July 1999 we have operated in a two-tiered mutual holding company structure. Webster City Federal Bancorp is a federal corporation and the parent stock holding company of WCF Financial Bank. At December 31, 2015, Webster City Federal Bancorp had consolidated assets of $112.9 million, deposits of $88.1 million and stockholders’ equity of $14.6 million. WCF Financial, M.H.C. is a federal mutual corporation and is the parent mutual holding company of Webster City Federal Bancorp. At December 31, 2015, Webster City Federal Bancorp had 3,019,005 shares of common stock outstanding, of which 522,476 shares, or 17.3%, were owned by the public, and the remaining 2,496,529 shares were held by WCF Financial, M.H.C.

Pursuant to the terms of the plan of conversion and reorganization (“plan of conversion”), we are converting from the mutual holding company corporate structure to the fully public stock holding company corporate structure. Upon completion of the conversion, WCF Financial, M.H.C. and Webster City Federal Bancorp will cease to exist, and WCF Bancorp will become the successor corporation to Webster City Federal Bancorp. The shares of WCF Bancorp being offered represent the majority ownership interest in Webster City Federal Bancorp currently held by WCF Financial, M.H.C. Public stockholders of Webster City Federal Bancorp will receive shares of common stock of WCF Bancorp in exchange for their shares of Webster City Federal Bancorp at an exchange ratio intended to preserve the same aggregate ownership interest in WCF Bancorp as they had in Webster City Federal Bancorp, adjusted downward to reflect certain assets held by WCF Financial, M.H.C., without giving effect to new shares purchased in the offering or cash paid in lieu of any fractional shares. WCF Financial, M.H.C.’s shares of Webster City Federal Bancorp will be cancelled.

 



 

1


Table of Contents

The following diagram shows our current organizational structure, reflecting ownership percentages as of December 31, 2015:

 

LOGO

After the conversion and offering are completed, we will be organized as a fully public stock holding company, with the stock of WCF Bancorp held as follows:

 

LOGO

Our Business

Our business operations are conducted through our wholly owned subsidiary, WCF Financial Bank. WCF Financial Bank is a community bank that was chartered and began operations in 1934, and has operated in Webster City, Iowa continuously since this date. In January 2014 we completed our acquisition of Independence Federal Bank for Savings (“Independence Bank”).

 



 

2


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We conduct our business from two full-service offices located in Hamilton and Buchanan Counties, Iowa. Our business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in real estate loans secured by one- to four-family residences. To a lesser extent, we also originate consumer loans and non owner-occupied one- to four-family residential real estate loans. On a limited basis we have also originated commercial real estate loans, but have deemphasized the origination, and intend to continue to deemphasize the origination, of this type of lending. We also invest in investment securities. Our primary lending area is broader than our primary deposit market area and includes north central and northeastern Iowa. Our revenues are derived principally from interest on loans and securities, and from loan origination and servicing fees. Our primary sources of funds are deposits, principal and interest payments on loans and securities and advances from the Federal Home Loan Bank of Des Moines (the “FHLB”).

As a federal savings bank, WCF Financial Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency (the “OCC”).

WCF Bancorp is a newly formed Iowa corporation. Following the completion of the conversion and offering, WCF Bancorp will be the holding company for WCF Financial Bank and will succeed Webster City Federal Bancorp as the publicly traded holding company of WCF Financial Bank. As a savings and loan holding company, WCF Bancorp will be subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Our executive offices are located at 401 Fair Meadow Drive, Webster City, Iowa 50595 and our telephone number is (515) 832-3071. Our website address is www.wcfbank.com. Information on this website is not and should not be considered a part of this prospectus.

Business Strategy

Our goal is to build stockholder value by operating a well-capitalized and profitable financial institution that delivers a superior banking experience to our customers. We have sought to accomplish this objective by adopting a business strategy designed to maintain a strong capital position and high asset quality.

Our current principal business strategies are:

 

    Continuing to emphasize the origination of one- to four-family residential real estate loans. We will continue to emphasize the origination of one- to four-family residential real estate loans in our market area. At December 31, 2015, $46.5 million, or 80.1% of our total loan portfolio, consisted of owner-occupied one- to four-family residential real estate loans, compared to $45.7 million, or 82.1% of our total loan portfolio, at December 31, 2014. We will continue to originate these types of loans because it is a strong recurring source of interest income.

 

    Continuing to increase the origination of consumer loans. We plan to continue to increase the origination of consumer loans, including our direct automobile loans. Our consumer loans increased $1.5 million during 2015 to $4.5 million at December 31, 2015 from $3.1 million at December 31, 2014. Our consumer loans generally carry higher interest rates and shorter maturities than our one- to four-family residential real estate loans, thereby increasing our interest income and reducing our interest rate risk. In addition, we will attempt to expand our relationships with our consumer loan borrowers with the goal of increasing our non-interest income.

 



 

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    Applying disciplined underwriting practices to maintain the quality of our loan portfolio. We believe that strong asset quality is a key to long-term financial success. Our goal is to maintain strong asset quality with moderate credit risk. We seek to accomplish this by applying conservative underwriting standards and by pursuing diligent monitoring and collection efforts. At December 31, 2015, our nonperforming loans (loans which are 90 or more days delinquent and loans which are less than 90 days delinquent but classified as nonaccrual) were 1.38% of our total net loan portfolio.

 

    Enhancing core earnings by increasing lower-cost transaction and savings accounts. Demand, checking and money market accounts are a lower-cost source of funds than time deposits, and we have made a concerted effort to increase lower-cost transaction deposit accounts and reduce time deposits. Our ratio of core deposits (which we define as all deposit accounts except for certificate of deposit accounts) to total deposits has increased to 47.5% at December 31, 2015 from 44.0% at December 31, 2014. We plan to continue to market our core transaction accounts (primarily checking accounts), by emphasizing our high quality service and competitive pricing of these products. Additionally, we believe our implementation of additional products and improved technological services such as remote deposit capture will increase our core deposits.

 

    Managing interest rate risk. We intend to continue to manage our interest rate risk by maintaining our strategy of selling conforming, fixed-rate, one- to four-family residential real estate loans with terms of more than 20 years and increasing our originations of shorter-term consumer loans.

 

    Growing our business by expanding our branch network. As opportunities arise and conditions permit, we will consider opportunities to expand our branch network through whole-bank or branch acquisitions, de novo branching or both. Although we do not currently have any agreements or understandings regarding specific acquisitions or de novo branching opportunities, our strategy is to grow our business within our consolidating market environment.

Reasons for the Conversion and Offering

Our primary reasons for converting to the fully public stock form of ownership and undertaking the stock offering are to:

 

    Transition us to a more familiar and flexible holding company structure. The stock holding company structure is a more familiar form of organization, and will give us greater flexibility to access the capital markets through possible future equity and debt offerings, although we have no current plans, agreements or understandings regarding any additional securities offerings.

 

   

Eliminate some of the uncertainties associated with the mutual holding company structure under financial reform legislation and regulations. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act“) the Federal Reserve Board became the federal regulator of all savings and loan holding companies and mutual holding companies, which has resulted in changes in regulations applicable to WCF Financial, M.H.C. and Webster City Federal Bancorp. Among other things, these changes have adversely affected our ability to pay cash dividends to our stockholders by

 



 

4


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making it significantly more difficult for WCF Financial, M.H.C. to waive any dividends declared by Webster City Federal Bancorp. The conversion will eliminate our mutual holding company structure and will enhance our ability to pay dividends to our stockholders, subject to the customary legal, regulatory and financial considerations applicable to all savings and loan holding companies. See “Our Dividend Policy.” It also will eliminate the risk that the Federal Reserve Board will amend existing regulations applicable to the conversion process in a manner disadvantageous to our public stockholders or depositors.

 

    Improve the trading liquidity of our shares of common stock. The larger number of shares that will be outstanding after completion of the conversion and offering is expected to result in a more liquid and active market for WCF Bancorp common stock. A more liquid market should make it easier for our stockholders to buy and sell our common stock and will give us greater flexibility in implementing capital management strategies.

 

    Enhance our regulatory capital position. A strong capital position is essential to achieving our long-term objective of building stockholder value. While WCF Financial Bank exceeds all regulatory capital requirements, the proceeds from the offering will greatly strengthen our capital position and enable us to support our planned growth. Minimum regulatory capital requirements have also increased under recently adopted regulations. Compliance with these new requirements will be essential to the continued implementation of our business strategy.

 

    Facilitate future mergers and acquisitions. Although we do not currently have any understandings or agreements regarding any specific acquisition transaction, the stock holding company structure will give us greater flexibility to structure, and make us a more attractive and competitive bidder for, mergers and acquisitions of other financial institutions or business lines as opportunities arise. The additional capital raised in the offering also will enable us to consider larger merger transactions. In addition, although we intend to remain an independent financial institution, the stock holding company structure may make us a more attractive acquisition candidate for other institutions. Applicable regulations prohibit the acquisition of WCF Bancorp for three years following completion of the conversion, and also prohibit anyone from acquiring or offering to acquire more than 10% of our stock without regulatory approval.

Terms of the Offering

We are offering between 1,381,250 and 1,868,750 shares of common stock to eligible depositors and borrowers of WCF Financial Bank, to our tax-qualified employee benefit plans and, to the extent shares remain available, in a community offering to the general public, with a preference given first to natural persons (including trusts of natural persons) residing in Hamilton and Buchanan Counties, Iowa, and then to existing public stockholders of Webster City Federal Bancorp as of [voting record date]. If necessary, we will also offer shares to the general public in a syndicated offering. The number of shares of common stock to be sold may be increased to up to 2,149,063 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock to be offered is increased to more than 2,149,063 shares or decreased to fewer than 1,381,250 shares, or the subscription and community offerings are extended beyond [extension date], subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the

 



 

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subscription and community offerings are extended past [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, your order will be cancelled and we will promptly return your funds with interest at [escrow interest rate]% per annum or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 2,149,063 shares or decreased to less than 1,381,250 shares, all subscribers’ stock orders will be canceled, their withdrawal authorizations will be canceled and funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest at [escrow interest rate]% per annum. We will then resolicit subscribers, giving them an opportunity to place new orders within a specified period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of any syndicated offering.

The purchase price of each share of common stock offered for sale in the offering is $8.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, the community offering or a syndicated offering. Investors will not be charged a commission to purchase shares of common stock in the offering. Keefe, Bruyette & Woods, Inc., our marketing agent in the offering, will use its best efforts to assist us in selling shares of our common stock in the offering but is not obligated to purchase any shares of common stock in the offering.

How We Determined the Offering Range, the Exchange Ratio and the $8.00 Per Share Stock Price

The amount of common stock we are offering for sale and the exchange ratio for the exchange of shares of WCF Bancorp for shares of Webster City Federal Bancorp are based on an independent appraisal of the estimated market value of WCF Bancorp, assuming the offering has been completed. RP Financial, LC., our independent appraiser, has estimated that, as of February 26, 2016, this market value was $15.5 million. Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $13.2 million and a maximum of $17.8 million. Based on this valuation range, the 82.7% ownership interest of WCF Financial, M.H.C. in Webster City Federal Bancorp as of December 31, 2015 being sold in the offering, certain assets held by WCF Financial, M.H.C. and the $8.00 per share price, the number of shares of common stock being offered for sale by WCF Bancorp ranges from 1,381,250 shares to 1,868,750 shares, for gross offering proceeds ranging from $11.05 million at the minimum of the offering range to $14.95 million at the maximum of the offering range. The purchase price of $8.00 per share was determined by us, taking into account, among other factors, the market price of our common stock prior to adoption of the plan of conversion, the requirement under federal regulations that the common stock be offered in a manner that will achieve the widest distribution of the common stock, and desired liquidity in the common stock after the offering. The exchange ratio ranges from 0.5095 shares at the minimum of the offering range to 0.6893 shares at the maximum of the offering range, and will generally preserve the existing percentage ownership of public stockholders. RP Financial, LC. will update its appraisal before we complete the conversion and offering. If, as a result of demand for the shares or changes in market conditions, RP Financial, LC. determines that our estimated pro forma market value has increased, we may sell up to 2,149,063 shares without further notice to you. If our pro forma market value at that time is either below $13.2 million or above $20.5 million, then, after consulting with the Federal Reserve Board, we may: terminate the offering and promptly return all funds with interest; set a new offering range and give all subscribers the opportunity to place a new order; or take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

 



 

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The appraisal is based in part on Webster City Federal Bancorp’s financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of 12 publicly traded savings and loan holding companies that RP Financial, LC. considers comparable to Webster City Federal Bancorp. The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market.

 

Company Name

   Ticker
    Symbol    
  

Headquarters

   Total
Assets as of
    December 31,    
2015
 
               (In millions)  

Central Federal Corporation (1)

   CFBK   

Worthington, OH

   $     331   

Equitable Financial Corp.

   EQFN   

Grand Island, NE

     223   

First Capital, Inc.

   FCAP   

Corydon, IN

     716   

HMN Financial, Inc.

   HMNF   

Rochester, MN

     643   

IF Bancorp, Inc.

   IROQ   

Watseka, IL

     560   

Jacksonville Bancorp, Inc.

   JXSB   

Jacksonville, IL

     309   

La Porte Bancorp, Inc.

   LPSB   

La Porte, IN

     543   

Poage Bancshares, Inc. (1)

   PBSK   

Ashland, KY

     425   

United Community Bancorp

   UCBA   

Lawrenceburg, IN

     510   

Wayne Savings Bancshares, Inc. (1)

   WAYN   

Wooster, OH

     424   

Westbury Bancorp, Inc.

   WBB   

West Bend, WI

     671   

Wolverine Bancorp, Inc. (1)

   WBKC   

Midland, MI

     344   

 

(1) Asset size is as of September 30, 2015.

The following table presents a summary of selected pricing ratios for WCF Bancorp (on a pro forma basis) as of and for the twelve months ended December 31, 2015, and for the peer group companies based on earnings and other information as of and for the twelve months ended December 31, 2015, or the latest date available, with stock prices as of February 26, 2016, as reflected in the appraisal report. Compared to the average pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 34.3% on a price-to-book value basis, a discount of 37.4% on a price-to-tangible book value basis, and a premium of 86.7% on a price-to-earnings basis.

 

        Price-to-earnings    
multiple (1)
        Price-to-book    
value ratio
        Price-to-tangibl    
ebook value ratio
 

WCF Bancorp (on a pro forma basis, assuming completion of the conversion)

     

Adjusted Maximum

    52.14x        69.44     69.63

Maximum

    45.42x        64.72     64.88

Midpoint

    39.56x        60.02     60.20

Minimum

    33.67x        54.64     54.83

Valuation of peer group companies, all of which are fully converted (on an historical basis)

     

Averages

    21.19x        91.36     96.12

Medians

    20.33x        90.28     92.16

 

(1) Price-to-earnings multiples calculated by RP Financial, LC. in the independent appraisal are based on an estimate of “core” or recurring earnings. These ratios are different than those presented in “Pro Forma Data.”

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $8.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were used by RP Financial, LC. to

 



 

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estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering – Stock Pricing and Number of Shares to be Issued.”

Effect of WCF Financial, M.H.C.’s Assets on Minority Stock Ownership

In the exchange, the public stockholders of Webster City Federal Bancorp will receive shares of common stock of WCF Bancorp in exchange for their shares of common stock of Webster City Federal Bancorp pursuant to an exchange ratio that is designed to provide, subject to adjustment, existing public stockholders with the same ownership percentage of the common stock of WCF Bancorp after the conversion as their ownership percentage in Webster City Federal Bancorp immediately prior to the conversion, without giving effect to new shares purchased in the offering or cash paid in lieu of any fractional shares. However, the exchange ratio will be adjusted downward to reflect assets held by WCF Financial, M.H.C. (other than shares of stock of Webster City Federal Bancorp) at the completion of the conversion, which assets consist primarily of cash. WCF Financial, M.H.C. had net assets of $779,000 as of December 31, 2015, not including Webster City Federal Bancorp common stock. This adjustment would decrease Webster City Federal Bancorp’s public stockholders’ ownership interest in WCF Bancorp from 17.3% to 16.2%, and would increase the ownership interest of persons who purchase stock in the offering from 82.7% (the amount of Webster City Federal Bancorp’s outstanding common stock held by WCF Financial, M.H.C.) to 83.8%.

The Exchange of Existing Shares of Webster City Federal Bancorp Common Stock

If you are a stockholder of Webster City Federal Bancorp at the completion of the conversion, your shares will be exchanged for shares of common stock of WCF Bancorp. The number of shares of common stock you will receive will be based on the exchange ratio, which will depend upon our final appraised value and the percentage of outstanding shares of Webster City Federal Bancorp common stock owned by public stockholders immediately prior to the completion of the conversion. The following table shows how the exchange ratio will adjust, based on the appraised value of WCF Bancorp as of February 26, 2016, assuming public stockholders of Webster City Federal Bancorp own 17.3% of Webster City Federal Bancorp common stock and WCF Financial, M.H.C. had net assets of $779,000 immediately prior to the completion of the conversion. The net assets figure assumes that WCF Financial, M.H.C. receives one quarterly dividend of $0.05 per share from Webster City Federal Bancorp prior to the closing of the conversion. The table also shows the number of shares of WCF Bancorp common stock a hypothetical owner of Webster City Federal Bancorp common stock would receive in exchange for 100 shares of Webster City Federal Bancorp common stock owned at the completion of the conversion, depending on the number of shares of common stock issued in the offering.

 



 

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    Shares to be Sold
in This Offering
    Shares
of WCF
Bancorp to be
Issued for
Shares of
Webster City
Federal Bancorp
    Total
Shares of
Common
Stock to be
Issued in
Exchange

and
Offering
    Exchange
Ratio
    Equivalent
Value of
Shares

Based
Upon

Offering
Price (1)
    Equivalent
Pro
Forma
Tangible
Book
Value Per
Exchanged
Share (2)
    Shares
to be
Received
for 100
Existing
Shares (3)
 
    Amount     Percent     Amount     Percent            

Minimum

    1,381,250        83.8     266,190        16.2     1,647,440        0.5095      $ 4.08      $ 7.43        50   

Midpoint

    1,625,000        83.8     313,165        16.2     1,938,165        0.5994        4.80        7.97        59   

Maximum

    1,868,750        83.8     360,140        16.2     2,228,890        0.6893        5.51        8.50        68   

Adjusted Maximum

    2,149,063        83.8     414,161        16.2     2,563,224        0.7927        6.34        9.11        79   

 

(1) Represents the value of shares of WCF Bancorp common stock to be received in the conversion by a holder of one share of Webster City Federal Bancorp, pursuant to the exchange ratio, based upon the $8.00 per share purchase price.
(2) Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio.
(3) Cash will be paid in lieu of fractional shares.

No fractional shares of WCF Bancorp common stock will be issued to any public stockholder of Webster City Federal Bancorp. For each fractional share that otherwise would be issued, WCF Bancorp will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder otherwise would be entitled by the $8.00 per share offering price.

How We Intend to Use the Proceeds From the Offering

We intend to invest at least 50% of the net proceeds from the stock offering in WCF Financial Bank, fund the loan to our employee stock ownership plan to finance its purchase of shares of common stock in the stock offering and retain the remainder of the net proceeds from the offering at WCF Bancorp. Therefore, assuming we sell 1,625,000 shares of common stock in the stock offering at the midpoint of the offering range, and we have net proceeds of $11.8 million, we intend to invest $5.9 million in WCF Financial Bank, loan $1.04 million to our employee stock ownership plan to fund its purchase of shares of common stock, and retain the remaining $4.9 million of the net proceeds at WCF Bancorp.

WCF Bancorp may use the funds it retains for investment, to pay cash dividends, to repurchase shares of common stock, to acquire other financial institutions or financial services companies and for other general corporate purposes. WCF Financial Bank may use the proceeds it receives to support increased lending, enhance existing products or services, support the development of new products and services, or expand its branch network by establishing or acquiring new branches or by acquiring other financial institutions or financial services companies. We do not currently have any agreements or understandings regarding any acquisition transactions.

Please see the section of this prospectus entitled “How We Intend to Use the Proceeds from the Offering” for more information on the proposed use of the proceeds from the offering.

 



 

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Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock in a subscription offering in the following descending order of priority:

 

  (i) To depositors with accounts at WCF Financial Bank with aggregate balances of at least $50 at the close of business on December 31, 2014.

 

  (ii) To our tax-qualified employee benefit plans (including WCF Financial Bank’s employee stock ownership plan), which may subscribe for, in the aggregate, up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase 8.0% of the shares of common stock sold in the stock offering.

 

  (iii) To depositors with accounts at WCF Financial Bank with aggregate balances of at least $50 at the close of business on [supplemental eligibility record date].

 

  (iv) To depositors of WCF Financial Bank at the close of business on [voting record date] and borrowers of WCF Financial Bank as of August 12, 1994 whose borrowings remained outstanding as of [voting record date].

Shares of common stock not purchased in the subscription offering will be offered for sale to the general public in a community offering, with a preference given first to natural persons (including trusts of natural persons) residing in Hamilton and Buchanan Counties, Iowa, and then to Webster City Federal Bancorp’s public stockholders as of [voting record date]. The community offering may begin concurrently with, during or promptly after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering and the community offering in a syndicated offering. Keefe, Bruyette & Woods, Inc. will act as sole manager for the syndicated offering. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated offering, and our interpretation of the terms and conditions of the plan of conversion will be final. Any determination to accept or reject stock orders in the community offering or syndicated offering will be based on the facts and circumstances available to management at the time of the determination.

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. A detailed description of the subscription offering, the community offering and the syndicated offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25 shares ($200).

Generally, no individual may purchase more than 25,000 shares ($200,000) of common stock. Additionally, if any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 25,000 shares ($200,000) of common stock:

 

    your spouse or relatives of you or your spouse living in your house;

 

    most companies, trusts or other entities in which you are a senior officer, partner, trustee or have a substantial beneficial interest; or

 



 

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    other persons who may be your associates or persons acting in concert with you.

Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying deposit accounts registered to the same address will be subject to the overall purchase limitation of 25,000 shares ($200,000).

In addition to the above purchase limitations, there is an ownership limitation for current stockholders of Webster City Federal Bancorp other than our employee stock ownership plan. Shares of common stock that you purchase in the offering individually and together with persons described above, plus any shares you and they receive in exchange for existing shares of Webster City Federal Bancorp common stock, may not exceed 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and offering. If, based on your current ownership level, you will own more than 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and offering following the exchange of your shares of Webster City Federal Bancorp common stock, you will be ineligible to purchase any new shares in the offering. You will be required to obtain regulatory approval or non-objection prior to acquiring 10% or more of WCF Bancorp’s common stock.

Subject to regulatory approval, we may increase or decrease the purchase and ownership limitations at any time. See the detailed description of the purchase limitations in “The Conversion and Offering – Additional Limitations on Common Stock Purchases.”

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

In the subscription offering and community offering, you may pay for your shares only by:

 

  (i) personal check, bank check or money order made payable directly to WCF Bancorp, Inc.; or

 

  (ii) authorizing us to withdraw available funds (without any early withdrawal penalty) from your WCF Financial Bank deposit account(s), other than checking accounts or individual retirement accounts (“IRAs”).

WCF Financial Bank is not permitted to lend funds to anyone to purchase shares of common stock in the offering. Additionally, you may not use a WCF Financial Bank line of credit check or any type of third party check to pay for shares of common stock. Please do not submit cash. No wire transfer will be accepted. You may not designate withdrawal from WCF Financial Bank’s accounts with check-writing privileges; instead, please submit a check. You may not authorize direct withdrawal from a WCF Financial Bank individual retirement account, or IRA. See “ – Using Individual Retirement Account Funds to Purchase Shares of Common Stock.”

You may subscribe for shares of common stock in the subscription and community offerings by delivering a signed and completed original stock order form, together with full payment payable to WCF Bancorp, Inc. or authorization to withdraw funds from one or more of your WCF Financial Bank deposit accounts, provided that the stock order form is received before 1:00 p.m., Central Time, on [expiration date], which is the end of the subscription offering period. You may submit your stock order form and payment by mail using the stock order reply envelope provided or by overnight delivery to the address listed on the stock order form, or by delivering it in person to our main office, located at 401 Fair Meadow Drive, Webster City, Iowa. Hand-delivered stock order forms will be accepted only at this location. We will not accept stock order forms at our other office. Please do not mail stock order forms to WCF Financial Bank’s offices.

 



 

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Please see “The Conversion and Offering – Procedure for Purchasing Shares in the Subscription and Community Offerings – Payment for Shares” for a complete description of how to purchase shares in the subscription and community offerings.

Using Individual Retirement Account Funds to Purchase Shares of Common Stock

You may be able to subscribe for shares of common stock using funds in your individual retirement account, or IRA. If you wish to use some or all of the funds in your WCF Financial Bank individual retirement account, the applicable funds must be transferred to a self-directed account maintained by an independent trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [expiration date] offering deadline, for assistance with purchases using your individual retirement account or other retirement account you may have at WCF Financial Bank or elsewhere. Whether you may use such funds to purchase shares in the stock offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

See “The Conversion and Offering – Procedure for Purchasing Shares in the Subscription and Community Offerings – Payment for Shares” and “– Using Individual Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares of common stock in the stock offering.

Market for Common Stock

Existing publicly held shares of Webster City Federal Bancorp’s common stock are quoted on the OTC Pink Marketplace operated by the OTC Markets Group Inc. under the symbol “WCFB.” Upon completion of the conversion, the shares of common stock of WCF Bancorp will be exchanged for the existing shares of Webster City Federal Bancorp, and we expect the shares of WCF Bancorp common stock to continue to be quoted on the OTC Pink Marketplace under the symbol “WCFB.” As of [voting record date], Webster City Federal Bancorp had approximately ____ registered market makers in its common stock. Keefe, Bruyette & Woods, Inc. has advised us that it intends to make a market in our common stock following the offering, but is under no obligation to do so.

Our Dividend Policy

Webster City Federal Bancorp currently pays a quarterly dividend of $0.05 per share, or $0.20 per share on an annualized basis. Following completion of the stock offering, WCF Bancorp’s board of directors will have the authority to declare dividends on shares of its common stock, subject to statutory and regulatory requirements. After the completion of the conversion, we intend to continue to pay cash dividends on a quarterly basis. Initially, we expect the quarterly dividends to be $0.05 per share, which equals $0.20 per share on an annualized basis and an annual yield of 2.5% based on the offering price of $8.00 per share. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future. Any determination to pay dividends on our common stock will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant. Our ability to pay dividends to stockholders may depend, in part, upon capital distributions we receive from WCF Financial Bank.

 



 

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For information regarding our proposed dividend policy, see “Our Dividend Policy.” For information regarding our recent dividend payment history, see “Selected Consolidated Financial and Other Data” and “Market for the Common Stock.”

Purchases by Directors and Executive Officers

We expect our directors and executive officers, together with their associates, to subscribe for 9,425 shares of common stock in the offering, representing less than 1.0% of the shares to be sold at the minimum of the offering range. The purchase price paid by them will be the same $8.00 per share price paid by all other persons who purchase shares of common stock in the offering. Following the conversion, our directors and executive officers, together with their associates, are expected to beneficially own 16,888 shares of common stock, or 1.0% of our total outstanding shares of common stock at the minimum of the offering range, which includes shares they currently own that will be exchanged for shares of WCF Bancorp.

See “Subscriptions by Directors and Executive Officers” for more information on the proposed purchases of shares of common stock by our directors and executive officers.

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

The deadline for purchasing shares of common stock in the subscription and community offerings is 1:00 p.m., Central Time, on [expiration date], unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time.

Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 1:00 p.m., Central Time, on [expiration date], whether or not we have been able to locate each person entitled to subscription rights.

See “The Conversion and Offering – Procedure for Purchasing Shares in the Subscription and Community Offerings – Expiration Date” for a complete description of the deadline for purchasing shares in the stock offering.

You May Not Sell or Transfer Your Subscription Rights

Federal regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe you have sold or transferred your subscription rights. On the order form, you cannot add the names of others for joint stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you do. Doing so may jeopardize your subscription rights. You may only add those who were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all deposit and loan accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation if there is an oversubscription.

 



 

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Delivery of Shares of Common Stock    

All shares of common stock sold will be issued in book entry form by our transfer agent. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering or the next business day. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described below in “ – Conditions to Completion of the Conversion.” Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they purchased in the offering, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

Conditions to Completion of the Conversion

We cannot complete the conversion and offering unless:

 

    The plan of conversion is approved by a majority of votes eligible to be cast by members of WCF Financial, M.H.C. (depositors and eligible borrowers of WCF Financial Bank) as of [voting record date];

 

    The plan of conversion is approved by Webster City Federal Bancorp stockholders holding at least two-thirds of the outstanding shares of common stock of Webster City Federal Bancorp as of [voting record date], including shares held by WCF Financial, M.H.C.;

 

    The plan of conversion is approved by Webster City Federal Bancorp stockholders holding a majority of the outstanding shares of common stock of Webster City Federal Bancorp as of [voting record date], excluding shares held by WCF Financial, M.H.C.;

 

    We sell at least the minimum number of shares of common stock offered in the offering; and

 

    We receive approval for the conversion and offering from the Federal Reserve Board.

WCF Financial, M.H.C. intends to vote its shares in favor of the plan of conversion. At [voting record date], WCF Financial, M.H.C. owned 82.7% of the outstanding shares of common stock of Webster City Federal Bancorp. The directors and executive officers of Webster City Federal Bancorp and their affiliates owned 14,652 shares of Webster City Federal Bancorp, or less than 1.0% of the outstanding shares of common stock and 2.8% of the outstanding shares of common stock, excluding shares held by WCF Financial, M.H.C. They intend to vote those shares in favor of the plan of conversion.

 



 

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Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 1,381,250 shares of common stock, we may take several steps to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

  (i) increase the purchase and ownership limitations; and/or

 

  (ii) seek regulatory approval to extend the offering beyond [extension date], so long as we resolicit subscribers who previously submitted subscriptions in the offering.

If we extend the offering past [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will cancel your stock order and promptly return your funds with interest for funds received in the subscription and community offering or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount and so indicated on their subscription order form will be, and, in our sole discretion, some other large purchasers may be, given the opportunity to increase their subscriptions up to the then-applicable limit.

Possible Change in the Offering Range

RP Financial, LC. will update its appraisal before we complete the offering. If, as a result of demand for the shares or changes in market conditions, RP Financial, LC. determines that our pro forma market value has increased, we may sell up to 2,149,063 shares in the offering without further notice to you. If our pro forma market value at that time is either below $13.2 million or above $20.5 million, then, after consulting with the Federal Reserve Board, we may:

 

    terminate the stock offering and promptly return all funds (with interest paid on funds received in the subscription and community offerings);

 

    set a new offering range; or

 

    take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

If we set a new offering range, we will promptly return funds, with interest at [escrow interest rate]% per annum for funds processed for purchases in the subscription and community offerings, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. We will then resolicit subscribers, allowing them to place a new stock order within a specified period of time.

Possible Termination of the Offering

We may terminate the offering at any time prior to the special meetings of members of WCF Financial, M.H.C. and of stockholders of Webster City Federal Bancorp that have been called to vote on the conversion, and at any time after these approvals with regulatory approval. If we terminate the offering, we will promptly return your funds with interest at [escrow interest rate]% per annum, and we will cancel deposit account withdrawal authorizations.

 



 

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Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion

We expect our employee stock ownership plan, which is a tax-qualified retirement plan for the benefit of WCF Financial Bank employees which we are implementing in connection with the conversion, to purchase 8% of the shares of common stock that we sell in the offering. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan’s subscription order will not be filled and the employee stock ownership plan may elect to purchase shares in the open market following the completion of the conversion, subject to the approval of the Federal Reserve Board.

We intend to implement a stock-based benefit plan no earlier than six months after completion of the conversion. Stockholder approval of this plan would be required. We have not determined whether we would adopt the plan within or after 12 months following the completion of the conversion. If we implement a stock-based benefit plan within 12 months following the completion of the conversion, the stock-based benefit plan would be limited to reserving a number of shares (i) up to 4% of the shares of common stock sold in the offering for awards of restricted stock to key employees and directors, at no cost to the recipients, and (ii) up to 10% of the shares of common stock sold in the offering for issuance pursuant to the exercise of stock options by key employees and directors. If the stock-based benefit plan is adopted more than 12 months after the completion of the conversion, it would not be subject to the percentage limitations set forth above. We have not yet determined the number of shares that would be reserved for issuance under the plan. For a description of our current stock-based benefit plan, see “Management – Stock Benefit Plan – Stock-Based Incentive Plan.”

The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that are available under a stock-based benefit plan if such plans reserve a number of shares of common stock equal to 4% and 10% of the shares sold in the offering for restricted stock awards and stock options, respectively. The table shows the dilution to stockholders if all such shares are issued from authorized but unissued shares, instead of shares purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all qualifying employees.

 



 

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     Number of Shares to be Granted or
Purchased
    Dilution
Resulting
From
Issuance of
Shares for
Stock-Based
Benefit  Plans
    Value of Grants (In
Thousands) (1)
 
   At
Minimum of
Offering
Range
     At
Adjusted
Maximum
of Offering
Range
     As a
Percentage
of Common
Stock
Outstanding
Upon
Completion
of the
Offering
         
             At
Minimum of
Offering
Range
     At
Adjusted
Maximum of
Offering
Range
 

Employee stock ownership plan

     110,500         171,925         8.0     N/A  (2)    $ 884,000       $ 1,375,400   

Restricted stock awards

     55,250         85,963         4.0        3.24     442,000         687,704   

Stock options

     138,125         214,906         10.0        7.74     145,031         225,651   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

 

Total

     303,875         472,794         22.0     10.50   $ 1,471,031       $ 2,288,755   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

 

 

(1) The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value for stock awards is assumed to be the same as the offering price of $8.00 per share. The fair value of stock options has been estimated at $1.05 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $8.00; an expected option term of 10 years; a dividend yield of 2.5%; a risk-free rate of return of 2.27%; and expected volatility of 14.13%. The actual value of option grants will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.
(2) No dilution is reflected for the employee stock ownership plan because such shares are assumed to be purchased in the stock offering.

We may fund our stock-based benefit plan through open market purchases, as opposed to new issuances of stock.

Tax Consequences

WCF Financial, M.H.C., Webster City Federal Bancorp, WCF Financial Bank and WCF Bancorp have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion, and have received an opinion of RSM US LLP regarding the material Iowa tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to WCF Financial, M.H.C., Webster City Federal Bancorp, WCF Financial Bank, WCF Bancorp, persons eligible to subscribe in the subscription offering, or existing stockholders of Webster City Federal Bancorp (except for cash paid for fractional shares). Existing stockholders of Webster City Federal Bancorp who receive cash in lieu of fractional shares of WCF Bancorp will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

How You Can Obtain Additional Information – Stock Information Center

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call our Stock Information Center. The telephone number is [Stock Center number]. The Stock Information Center is open Monday through Friday between 9:00 a.m. and 3:00 p.m., Central Time. The Stock Information Center will be closed on bank holidays.

 



 

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RISK FACTORS

You should consider carefully the following risk factors in evaluating an investment in the shares of common stock.

Risks Related to Our Business

We are not in a growth market area, and adverse economic conditions, especially those affecting our market area, could adversely affect our financial condition and results of operations.

Our success depends primarily on the general economic conditions in our market area which consists primarily of north central and northeastern Iowa. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in this area. At December 31, 2015, 100% of our loans were secured by real estate or business operations located in Iowa. The local economic conditions in our market area, therefore, have a significant impact on our lending, the ability of the borrowers to repay their loans and the value of the collateral securing loans.

Our market area is sparsely populated, largely rural and agricultural and has experienced a population decline. It also has limited industrial development compared to more urban and suburban areas. The total populations for Hamilton and Buchanan County, according to the United States Census Bureau in 2015, were approximately 15,000 and 21,000, respectively. According to SNL Financial, the population in Buchanan County has increased 0.40% between the years 2010 to 2015, while the population in Hamilton County has decreased 4.82% between the years 2010 to 2015.

A deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

    demand for our products and services may decline;

 

    loan delinquencies, problem assets and foreclosures may increase;

 

    collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

 

    the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact our local economy which would negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

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Our small asset size makes it more difficult for us to compete.

Our small asset size makes it more difficult to compete with other financial institutions which are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds (our net interest income), our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. In addition, our smaller customer base makes it difficult to generate meaningful non-interest income from such activities as securities and insurance brokerage. As a smaller institution, we are also disproportionately affected by the ongoing higher costs of compliance with new banking and other regulations. Finally, our small size makes it difficult to attract and retain banking professionals with strong community relationships and significant knowledge of our markets difficult.

We are subject to specific market risks due to the dependence by many of our customers on an agriculture economy.

Our lending activities are concentrated in the north central Iowa County of Hamilton, the northeastern Iowa County of Buchanan and their contiguous counties, which are largely rural and agricultural. We do not originate agriculture loans, however, a substantial number of our customers are dependent upon the agricultural economy in our market area, which includes numerous risks that are inherently volatile and impossible to predict or control. These risks include weather-related risks, the value of farm land, market prices for crops and other agricultural products, federal and state regulation of farming, and the presence of diseases and other external factors which may affect any of the foregoing. A downturn in the agricultural economy in our market area would likely have a negative effect on many of our customers and could impact their ability to make timely repayments of their existing loans.

We rely on our management team for the successful implementation of our business strategy.

Our future success will be largely due to the efforts of our senior management team, including Stephen L. Mourlam, our President and Chief Executive Officer who has 37 years of financial institution work experience, and Kyle R. Swon, our Senior Vice President who has 29 years of financial institution work experience. Because we are a small community savings bank with a small management team, each member of our senior management team has more responsibility than his or her counterpart typically would have at a larger institution with more employees, and we have fewer management-level personnel who are in a position to assume the responsibilities of our senior management team. Accordingly, the loss of services of either of these individuals may have a material adverse effect on our ability to implement our business plan.

A continuation of the historically low interest rate environment may adversely affect our net interest income and profitability.

In recent years the Federal Reserve Board’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market interest rates on the loans we have originated and the yields on securities we have purchased have been at historically low levels for several years. The average yield on our interest-earning assets was 3.58% and 3.70% for the years ended December 31, 2015 and 2014, respectively. Our ability to lower our interest expense is limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease. A continuation of a low interest rate environment will likely continue to adversely affect our net interest income, which would likely have an adverse effect on our profitability.

 

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Our emphasis on one- to four-family residential real estate loans exposes us to increased credit risks. Declines in property values can increase the loan-to-value ratios on our residential mortgage loan portfolio, which could expose us to greater risk of loss.

At December 31, 2015, $46.5 million, or 80.1% of our loan portfolio, was secured by owner-occupied, one- to four-family residential real estate loans. Declines in real estate values in our market area could cause some of these mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

Residential loans with high combined loan-to-value ratios are more sensitive to declining property values than those with lower combined loan-to-value ratios and, therefore, may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses.

We expect to continue to increase our originations of consumer loans, including automobile loans, and such loans generally carry greater risk than loans secured by owner-occupied, one- to four-family real estate, and these risks will increase as we continue to increase originations of these types of loans.

At December 31, 2015, our consumer loans totaled $4.5 million, or 7.8% of our total loan portfolio, of which $2.7 million, or 60.0%, were automobile loans. At that date, we had consumer loans delinquent 60 days or more of $72,000, or 6.4% of total delinquent loans 60 days or more past due. Consumer loans generally have greater risk of loss or default than one- to four-family residential real estate loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles, or loans that are unsecured. In these cases, we face the risk that any collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Thus, the recovery and sale of such property could be insufficient to compensate us for the principal outstanding on these loans. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans. As we increase our originations of consumer loans, it may become necessary to increase our provision for loan losses in the event our losses on these loans increase, which would reduce our profits.

We are a community bank and our ability to maintain our reputation is critical to the success of our business. The failure to do so may adversely affect our performance.

We are a community bank and our reputation is one of the most valuable assets of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers or otherwise, our business and operating results may be materially adversely affected.

 

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We participate in a defined benefit pension plan for the benefit of certain of our employees. If we were to terminate this plan, we could incur a substantial expense in connection with the termination.

We participate in a defined benefit pension plan for the benefit of our employees who were employees prior to November 1, 2008. In the future we may choose to terminate or withdraw from the plan, and the expense that would be incurred in connection with such a termination would be primarily dependent upon the value of the plan’s assets at the time of termination, general market interest rates and any additional expense imposed on termination. Based on the value of the plan’s assets and market interest rates at December 31, 2015, the approximate cost to terminate or withdraw from the plan would be $1.2 million. If we choose to terminate the plan in the future, we could incur a substantial expense.

Competition within our market area may limit our growth and profitability.

Competition in the banking and financial services industry is strong. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates on more attractive terms than loans that we offer, and we expect this competition to continue in the foreseeable future. Competition also makes it more difficult and costly to attract and retain qualified employees. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest-earning assets. For additional information see “Business of WCF Financial Bank – Competition.”

Future changes in interest rates may reduce our profits.

Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:

 

    the interest income we earn on our interest-earning assets, such as loans and securities; and

 

    the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest paid on our liabilities. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at lower interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk.”

 

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In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities.

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, such changes can still have a material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.

At December 31, 2015, our “economic value of equity” analysis prepared by our third party consultant indicates that value of our equity would decrease by $2.2 million, or 12.2%, if there was an instantaneous 200 basis point increase in market interest rates. However, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk.”

We could record future losses on our investment securities portfolio.

A number of factors could cause us to conclude that an unrealized loss that exists with respect to our securities constitutes an impairment that is other-than-temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value.

A significant percentage of our assets is invested in securities and cash and cash equivalents, which typically have a lower yield than our loan portfolio.

Our results of operations depend substantially on our net interest income. At December 31, 2015, 42.8% of our assets was invested in investment securities, time deposits in other financial institutions and cash and cash equivalents. These investments yield substantially less than the loans we hold in our portfolio. While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest income, we may not be able to increase originations of loans that are acceptable to us.

Our cost of operations is high relative to our revenues.

Our non-interest expense totaled $3.1 million and $2.8 million for the years ended December 31, 2015 and 2014, respectively. We continue to analyze our expenses and achieve efficiencies where available. Although we strive to generate increases in both net interest income and non-interest income, our efficiency ratio remains high as a result of operating expenses. Our efficiency ratio totaled 83.7% and 83.2% for the years ended December 31, 2015 and 2014, respectively.

 

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If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Our allowance for loan losses was 0.9% of total loans and 64.0% of non-performing loans at December 31, 2015. Material additions to our allowance would materially decrease our net income.

In addition, the OCC periodically reviews our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by bank regulatory authorities may have a material adverse effect on our financial condition and results of operations.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

Webster City Federal Bancorp and WCF Financial Bank are subject to extensive regulation, supervision and examination by the Federal Reserve Board and the OCC. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of federal deposit insurance funds and the depositors and borrowers of WCF Financial Bank, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations affect the way financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations, as could our interpretation of such changes.

The Dodd-Frank Act has significantly changed the bank regulatory structure, and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have been given significant discretion in drafting the implementing rules and regulations, some of which are not in final form. Consequently, the full impact of the Dodd-Frank Act may not be known for years.

 

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The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets continue to be examined for compliance with consumer laws by their primary bank regulators. The Dodd-Frank Act also weakened the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

The Dodd-Frank Act requires minimum leverage (Tier 1) and risk-based capital requirements for bank holding companies and savings and loan holding companies that are no less than those applicable to banks, which limits our ability to borrow at the holding company level and invest the proceeds from such borrowings in WCF Financial Bank, and excludes certain instruments that previously were eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.

The full impact of the Dodd-Frank Act on our business may not be known until all regulations affecting community banks under the statute are implemented. As a result, at this time we do not know the full extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with the Dodd-Frank Act and its implementing regulations and policies has already resulted in changes to our business and operations, as well as additional costs, and diverted management’s time from other business activities, which adversely affects our financial condition and results of operations.

We have become subject to more stringent capital requirements, which will adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

In July 2013, the federal banking agencies approved a final rule implementing the regulatory capital reforms from the Basel Committee on Banking Supervision (“Basel III”) and changes required by the Dodd-Frank Act.

The final rule includes new minimum risk-based capital and leverage ratios, which were effective for us on January 1, 2015, and refines the definition of what constitutes “capital” for calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for calculating regulatory capital requirements unless a one-time opt-out is exercised. WCF Financial Bank has elected to opt out of the requirement under the final rule to include certain “available-for-sale” securities holdings for calculating its regulatory capital requirements. The final rule also establishes a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement began to be phased in effective January 1, 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

 

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We have analyzed the effects of these new capital requirements, and we believe that, upon completion of the offering, we would meet all of these new requirements, including the full 2.5% capital conservation buffer, as if these new requirements had been in full effect as of December 31, 2015.

The application of more stringent capital requirements likely will result in lower returns on equity, and could require raising additional capital in the future, or result in regulatory actions if we are unable to comply with capital requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, change our business models, and/or increase our holdings of liquid assets. The implementation of changes to: asset risk weightings for risk-based capital calculations; items included or deducted in calculating regulatory capital and/or additional capital conservation buffers, could result in management modifying our business strategy, and could limit our ability to make distributions, including paying dividends or repurchasing our shares. See “Supervision and Regulation – Federal Bank Regulation – Capital Requirements.”

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

As a result of the completion of the conversion and offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

 

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We are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified by the JOBS Act. We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002, including the additional level of review of our internal control over financial reporting, that may occur when outside auditors attest to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important.

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. Taking advantage of any of these exemptions may adversely affect the value and trading price of our common stock.

Proposed and final regulations could restrict our ability to originate and sell loans.

The Consumer Financial Protection Bureau has issued a rule intended to clarify how lenders can avoid legal liability under the Dodd-Frank Act, which holds lenders accountable for ensuring a borrower’s ability to repay a mortgage. Under the rule, loans that meet the “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the rule, a “qualified mortgage” loan must not contain certain specified features, including:

 

    excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

 

    interest-only payments;

 

    negative amortization; and

 

    terms of longer than 30 years.

Also, to qualify as a “qualified mortgage,” a loan must be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify a borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.

 

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In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies have issued a final rule to implement this requirement. The final rule provides that the definition of “qualified residential mortgage” includes loans that meet the definition of qualified mortgage issued by the Consumer Financial Protection Bureau.

The final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans. Similarly, the Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, which could limit our growth or profitability.

We could be adversely affected by failure in our internal controls.

A failure in our internal controls could have a significant negative impact not only on our earnings, but also on the perception that customers, regulators and investors may have of us. We continue to devote a significant amount of effort, time and resources to continually strengthening our controls and ensuring compliance with complex accounting standards and banking regulations.

Cyber-attacks or other security breaches could adversely affect our operations, net income or reputation.

We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf.

Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions, could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs or cause losses.

If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss.

Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. As information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.

 

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Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

Risks Related to the Offering

The future price of the shares of common stock may be less than the $8.00 purchase price per share in the offering.

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $8.00 purchase price in the offering. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, investor perceptions of WCF Bancorp and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.

We intend to invest between $4.9 million and $6.9 million of the net proceeds of the offering (or $8.0 million at the adjusted maximum of the offering range) in WCF Financial Bank. We may use the remaining net proceeds to invest in short-term investments and for general corporate purposes, including repurchasing shares of our common stock and paying dividends. We also expect to use a portion of the net proceeds we retain to fund a loan to our employee stock ownership plan to purchase shares of

 

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common stock in the offering. WCF Financial Bank may use the net proceeds it receives to fund new loans, expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, with the exception of funding the loan to the employee stock ownership plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and when we apply or reinvest such proceeds. Also, certain of these uses, such as opening new branches or acquiring other financial institutions, may require the approval of the OCC or the Federal Reserve Board. We have not established a timetable for investing the net proceeds, and we cannot predict how long we will require to invest the net proceeds. Our failure to reinvest these funds effectively would reduce our profitability and may adversely affect the value of our common stock.

Our return on equity will be low following the stock offering. This could negatively affect the trading price of our shares of common stock.

Net income divided by average stockholders’ equity, known as “return on equity,” is a ratio many investors use to compare the performance of financial institutions. Our return on equity will be low until we are able to leverage the additional capital we receive from the stock offering. Our return on equity also will be negatively affected by added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to adopt, and may be negatively affected by higher minimum regulatory capital requirements. Until we can increase our net interest income and non-interest income and leverage the capital raised in the stock offering, we expect our return on equity to be low, which may reduce the market price of our shares of common stock.

There is currently a limited public market for our common stock and it is unlikely that an active, liquid market for our common stock will develop after completion of the offering.

Our common stock currently trades in the over-the-counter market and an active market for the common stock has yet to develop. Our common stock will continue to trade in the over-the-counter market after the completion of the offering. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. Accordingly, an active, liquid trading market for our common stock is unlikely to develop and shareholders may not be able to sell their shares of our common stock at the volume, prices and times desired. We cannot predict the extent to which investor interest will lead to a more active trading market in our common stock. The lack of an established market or an active market for our common stock after this offering could have a material adverse effect on the value and liquidity of an investment in our common stock.

Our stock-based benefit plan will increase our expenses and reduce our income.

We intend to adopt a stock-based benefit plan after the conversion, subject to stockholder approval, which will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants under the plan. The actual amount of this stock-related compensation and benefit expense will depend on the number of options and stock awards granted under the plan, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time. If we adopt a stock-based benefit plan within 12 months following the conversion, the shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plan would be limited to 4% and 10%, respectively, of the shares of our common stock sold in the stock offering. If we adopt a stock-based benefit plan more than 12 months after the completion of the conversion, we may award restricted shares of common stock or grant options in excess of these amounts, which would further increase costs.

 

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In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for shares purchased in the offering and for our stock-based benefit plan has been estimated to be approximately $55,000 after tax at the adjusted maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $8.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our proposed stock-based benefit plan, see “Management – Benefits to be Considered Following Completion of the Conversion.”

The implementation of a stock-based benefit plan may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.

We intend to adopt a stock-based benefit plan following completion of the conversion and stock offering. This plan may be funded either through open market purchases of our common stock or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of our common stock to fund this plan will be subject to many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is to fund the stock-based benefit plan through open market purchases, stockholders would experience a 10.5% dilution in ownership interest if newly issued shares of our common stock are used to fund stock options and shares of restricted common stock in amounts equal to 10% and 4%, respectively, of the shares sold in the offering, and all such stock options are exercised. Such dilution would also reduce earnings per share. If we adopt the plan more than 12 months following the conversion, the stock-based benefit plan would not be subject to these limitations and stockholders could experience greater dilution.

Although the implementation of a stock-based benefit plan would be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

Various factors may make takeover attempts more difficult to achieve.

Certain provisions of our articles of incorporation and bylaws and state and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of WCF Bancorp without our board of directors’ approval. Under regulations applicable to the conversion, for a period of three years following completion of the conversion, no person may offer to acquire or acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Historically, the Federal Reserve Board (and the Office of Thrift Supervision as its predecessor agency regulating savings and loan holding companies) have not approved acquisitions of 10% or more of a converted savings institution’s common stock for a period of three years following a conversion. Moreover, under federal law, subject to certain exemptions, a person, entity or group must obtain the prior approval of the Federal Reserve Board before acquiring control of a savings and loan holding company. There also are provisions in our articles of incorporation and bylaws that may be used to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of our outstanding shares of common stock. Furthermore, shares of restricted stock and stock options that we may grant to employees and directors, stock ownership by our management and directors

 

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and other factors may make it more difficult for companies or persons to acquire control of WCF Bancorp without the consent of our board of directors. Taken as a whole, these statutory provisions and provisions in our articles of incorporation and bylaws could result in our being less attractive to a potential acquirer and thus could adversely affect the market price of our common stock.

For additional information, see “Restrictions on Acquisition of WCF Bancorp” and “Management – Benefits to be Considered Following Completion of the Conversion.”

You may not revoke your decision to purchase WCF Bancorp common stock in the subscription or community offerings after you send us your order.

Funds submitted or automatic withdrawals authorized in connection with the purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering, including any extension of the expiration date and consummation of a syndicated offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, LC., among other factors, there may be one or more delays in completing the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond [extension date], or the number of shares to be sold in the offering is increased to more than 2,149,063 shares or decreased to fewer than 1,381,250 shares.

The distribution of subscription rights could have adverse income tax consequences.

If the subscription rights granted to certain current or former depositors of WCF Financial Bank are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth selected consolidated historical financial and other data of Webster City Federal Bancorp and its subsidiaries as of and for the periods indicated. The following is only a summary and you should read it in conjunction with the business and financial information regarding Webster City Federal Bancorp contained elsewhere in this prospectus, including the consolidated financial statements beginning on page F-1 of this prospectus. The information at December 31, 2015 and 2014 and for the years then ended is derived in part from the audited consolidated financial statements that appear in this prospectus.

 

     At December 31,  
     2015      2014  
     (In thousands)  

Selected Financial Condition Data:

     

Total assets

   $     112,916       $     111,235   

Cash and cash equivalents

     8,867         4,040   

Interest-bearing time deposits in banks

     2,950         5,094   

Investment securities

     36,526         40,675   

Loans, net

     57,380         55,039   

Office property and equipment, net

     4,570         4,557   

Deposits

     88,080         92,914   

FHLB advances

     8,000         1,000   

Accrued expenses and other liabilities

     1,813         2,121   

Total equity

     14,583         14,822   
     For the Years Ended
December 31,
 
   2015      2014  
     (In thousands)  

Selected Operations Data:

     

Interest income

   $ 3,707       $ 3,958   

Interest expense

     (613      (696
  

 

 

    

 

 

 

Net interest income

     3,094         3,262   

Provision for loan losses

     (190      (18
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     2,904         3,244   

Noninterest income

     644         120   

Noninterest expense

     (3,145      (2,814
  

 

 

    

 

 

 

Income before income tax expense

     423         550   

Income tax expense

     (29      (101
  

 

 

    

 

 

 

Net income

   $ 394       $ 449   
  

 

 

    

 

 

 

Earnings per share

   $ 0.13       $ 0.15   
  

 

 

    

 

 

 

 

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     At or For the Years Ended
December 31,
 
     2015     2014  

Selected Financial Ratios and Other Data:

    

Performance Ratios:

    

Return on average assets

     0.36     0.40

Return on average equity

     2.66     3.03

Interest rate spread (1)

     2.89     2.92

Net interest margin (2)

     2.99     3.05

Efficiency ratio (3)

     83.69     83.21

Non-interest expense to average total assets

     2.85     2.52

Average interest-earning assets to average interest-bearing liabilities

     116.50     119.61

Average equity to average total assets

     13.46     13.25

Asset Quality Ratios:

    

Non-performing assets to total assets

     0.70     0.18

Non-performing loans to total loans, net

     1.38     0.37

Allowance for loan losses to non-performing loans

     64.01     178.71

Allowance for loan losses to total loans

     0.88     0.66

Net charge-offs to average outstanding loans

     0.08     0.17

Capital Ratios (Bank only):

    

Total capital (to risk-weighted assets)

     27.78     29.84

Common equity Tier 1 capital (to risk-weighted assets)

     26.75     n/a   

Tier 1 capital (to risk-weighted assets)

     26.75     29.07

Tier 1 capital (to total assets)

     12.24     12.34

Other Data:

    

Number of full service offices

     2        2   

 

(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.
(2) Represents net interest income as a percent of average interest-earning assets.
(3) Represents non-interest expense divided by the sum of net interest income and non-interest income.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “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 quality of our loan and investment portfolios; and

 

    estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management 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.

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;

 

    changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

    our ability to access cost-effective funding;

 

    fluctuations in real estate values and both residential and commercial real estate market conditions;

 

    demand for loans and deposits in our market area;

 

    our ability to implement and change our business strategies;

 

    competition with depository and other financial institutions;

 

    inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments, our level of loan originations, or increases in the level of defaults, losses and prepayments on loans we have made and make;

 

    adverse changes in the securities markets;

 

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    changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

 

    the impact of the Dodd-Frank Act and the implementing regulations;

 

    changes in the quality or composition of our loan or investment portfolios;

 

    technological changes that may be more difficult or expensive than expected;

 

    the inability of third-party providers to perform as expected;

 

    our ability to manage market risk, credit risk and operational risk in the current economic environment;

 

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

 

    our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

 

    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 or the Public Company Accounting Oversight Board;

 

    our ability to retain key employees;

 

    adverse changes in the national agriculture economy and the agriculture economy in our market area;

 

    our compensation expense associated with equity allocated or awarded to our employees; and

 

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

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page 18. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $9.9 million and $13.8 million, or $16.0 million if the offering range is increased by 15%.

We intend to distribute the net proceeds as follows:

 

     Based Upon the Sale at $8.00 Per Share of  
     1,381,250 Shares     1,625,000 Shares     1,868,750 Shares     2,149,063 Shares (1)  
     Amount     Percent of
Net
Proceeds
    Amount     Percent of
Net
Proceeds
    Amount     Percent of
Net
Proceeds
    Amount     Percent of
Net
Proceeds
 
     (Dollars in thousands)  

Offering proceeds

   $ 11,050        $ 13,000        $ 14,950        $ 17,193     

Less offering expenses

     (1,200       (1,200       (1,200       (1,200  
  

 

 

     

 

 

     

 

 

     

 

 

   

Net offering proceeds

   $ 9,850        100.0   $ 11,800        100.0   $ 13,750        100.0   $ 15,993        100.0
  

 

 

     

 

 

     

 

 

     

 

 

   

Distribution of net proceeds:

                

To WCF Financial Bank

   $ 4,925        50.0   $ 5,900        50.0   $ 6,875        50.0   $ 7,996        50.0

To fund loan to employee stock ownership plan

   $ 884        9.0   $ 1,040        8.8   $ 1,196        8.7   $ 1,375        8.6

Retained by WCF Bancorp

   $ 4,041        41.0   $ 4,860        41.2   $ 5,679        41.3   $ 6,622        41.4

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of WCF Financial Bank’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if all shares were not sold in the subscription and community offerings and a portion of the shares were sold in a syndicated offering.

WCF Bancorp may use the proceeds it retains from the offering:

 

    to invest in securities;

 

    to pay cash dividends to stockholders;

 

    to repurchase shares of our common stock;

 

    to finance the potential acquisition of financial institutions or financial services companies, although we do not currently have any agreements or understandings regarding any specific acquisition transaction; and

 

    for other general corporate purposes.

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under current federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund the granting of restricted stock awards (which would require notification to the Federal Reserve Board) or tax qualified employee stock benefit plans.

 

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WCF Financial Bank may use the net proceeds it receives from the offering:

 

    to fund new loans;

 

    to enhance existing products and services, hire additional employees and/or support growth and the development of new products and services;

 

    to expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any understandings or agreements to acquire a financial institution or other entity;

 

    to invest in securities; and

 

    for other general corporate purposes.

Initially, a substantial portion of the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. We have not determined specific amounts of the net proceeds that would be used for the purposes described above. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions. The use of the proceeds may also change depending on our ability to receive regulatory approval to establish new branches or acquire other financial institutions.

We expect our return on equity to be low until we are able to reinvest effectively the additional capital raised in the offering. Until we can increase our net interest income and non-interest income, we expect our return on equity to be below the industry average, which may negatively affect the value of our common stock. See “Risk Factors – Risks Related to the Offering – Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.”

OUR DIVIDEND POLICY

Webster City Federal Bancorp currently pays a quarterly dividend of $0.05 per share, or $0.20 per share on an annualized basis. After the completion of the conversion and offering, we intend to continue to pay cash dividends on a quarterly basis. Initially, we expect the quarterly dividends to be $0.05 per share, which equals $0.20 per share on an annualized basis and an annual yield of 2.5% based on the offering price of $8.00 per share. The amount of dividends to be paid will be subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future.

WCF Bancorp will not be permitted to pay dividends on its common stock if its stockholders’ equity would be reduced below the amount of the liquidation account established by WCF Bancorp in connection with the conversion. The source of dividends will depend on the net proceeds retained by WCF Bancorp and earnings thereon, and dividends from WCF Financial Bank. In addition, WCF

 

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Bancorp will be subject to state law limitations and federal bank regulatory policy on the payment of dividends. Iowa law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

After the completion of the conversion, WCF Financial Bank will not be permitted to pay dividends on its capital stock to WCF Bancorp, its sole stockholder, if WCF Financial Bank’s stockholder’s equity would be reduced below the amount of the liquidation account established in connection with the conversion. In addition, WCF Financial Bank will not be permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. WCF Financial Bank must file an application with the Federal Reserve Board for approval of a capital distribution if the total capital distributions for the applicable calendar year exceed the sum of WCF Financial Bank’s net income for that year to date plus its retained net income for the preceding two years, or WCF Financial Bank would not be at least adequately capitalized following the distribution.

Any payment of dividends by WCF Financial Bank to WCF Bancorp that would be deemed to be drawn from WCF Financial Bank’s bad debt reserves established prior to 1988, if any, would require a payment of taxes at the then-current tax rate by WCF Financial Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distribution. WCF Financial Bank does not intend to make any distribution that would create such a federal tax liability. See “The Conversion and Offering – Liquidation Rights.” For further information concerning additional federal law and regulations regarding the ability of WCF Financial Bank to make capital distributions, including the payment of dividends to WCF Bancorp, see “Taxation – Federal Taxation.”

We will file a consolidated federal tax return with WCF Financial Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal tax purposes. Additionally, during the three-year period following the conversion, we will not be permitted to make any capital distribution to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

MARKET FOR THE COMMON STOCK

Webster City Federal Bancorp’s common stock is currently quoted on the OTC Pink Marketplace under the symbol “WCFB.” Upon completion of the conversion, we expect that the shares of common stock of WCF Bancorp will continue to be quoted on the OTC Pink Marketplace under the same symbol “WCFB.” In order to have our shares quoted on the OTC Pink Marketplace, we are required to have at least one broker-dealer who will make a market in our common stock. As of [voting record date], Webster City Federal Bancorp had approximately          registered market makers in its common stock. Keefe, Bruyette & Woods, Inc. has advised us that it intends to make a market in our common stock following the offering, but is under no obligation to do so.

The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee

 

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stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $8.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

The following table sets forth the high and low trading prices for shares of Webster City Federal Bancorp common stock for the periods indicated, as obtained from the OTC Pink Marketplace, and the dividends declared during the periods. As of the close of business on [voting record date], there were 3,019,005 shares of common stock outstanding, including 522,476 publicly held shares (shares held by stockholders other than WCF Financial, M.H.C.), and approximately ____ stockholders of record.

 

     Price Per Share      Dividends Per
Share
 
     High      Low     

Year Ending December 31, 2016

        

Second quarter (through [voting record date])

   $         $         $     

First quarter

   $         $         $ 0.05   

Year Ended December 31, 2015

        

Fourth quarter

   $ 7.65       $ 7.25       $ 0.05   

Third quarter

   $ 7.75       $ 7.30       $ 0.05   

Second quarter

   $ 7.75       $ 7.15       $ 0.04   

First quarter

   $ 7.95       $ 7.16       $ —     

Year Ended December 31, 2014

        

Fourth quarter

   $ 8.48       $ 6.91       $ —     

Third quarter

   $ 7.10       $ 6.85       $ —     

Second quarter

   $ 7.15       $ 6.75       $ —     

First quarter

   $ 7.10       $ 6.80       $ —     

On March 3, 2016, the business day immediately preceding the public announcement of the conversion, and on May        , 2016, the closing prices of Webster City Federal Bancorp common stock as reported on the OTC Pink Marketplace were $7.12 per share and $             per share, respectively. On the effective date of the conversion, all publicly held shares of Webster City Federal Bancorp common stock, including shares of common stock held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of WCF Bancorp common stock determined pursuant to the exchange ratio. See “The Conversion and Offering – Share Exchange Ratio for Current Stockholders.” The above table reflects actual prices and has not been adjusted to reflect the exchange ratio. See “Beneficial Ownership of Common Stock.”

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At December 31, 2015, WCF Financial Bank exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth the historical equity capital and regulatory capital of WCF Financial Bank at December 31, 2015, and the pro forma equity capital and regulatory capital of WCF Financial Bank, after giving effect to the sale of shares of common stock at $8.00 per share. The table also compares historical and pro forma capital levels to those required to be considered “well capitalized.” The table assumes the receipt by WCF Financial Bank of 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

     WCF Financial Bank
Historical at

December 31, 2015
    Pro Forma at December 31, 2015, Based Upon the Sale in the Offering of  
       1,381,250 Shares     1,625,000 Shares     1,868,750 Shares     2,149,063 Shares (1)  
     Amount      Percent of
Assets
    Amount     Percent of
Assets
    Amount     Percent of
Assets
    Amount     Percent of
Assets
    Amount     Percent of
Assets
 
     (Dollars in thousands)  

Equity

   $ 13,179         11.67   $ 16,778        14.40   $ 17,519        14.94   $ 18,260        15.47   $ 19,112        16.08
  

 

 

      

 

 

     

 

 

     

 

 

     

 

 

   

Tier 1 leverage capital (2)(3)

   $ 13,024         12.24   $ 16,623        15.11   $ 17,364        15.68   $ 18,105        16.24   $ 18,957        16.87

Tier 1 leverage requirement

     5,321         5.00        5,501        5.00        5,538        5.00        5,575        5.00        5,618        5.00   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 7,703         7.24   $ 11,122        10.11   $ 11,826        10.68   $ 12,530        11.24   $ 13,339        11.87
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 risk-based capital (2)(3)

   $ 13,024         26.75   $ 16,623        33.64   $ 17,364        35.03   $ 18,105        36.42   $ 18,957        38.00

Tier 1 risk-based requirement

     3,896         8.00        3,953        8.00        3,965        8.00        3,977        8.00        3,990        8.00   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 9,128         18.75   $ 12,670        25.64   $ 13,399        27.03   $ 14,128        28.42   $ 14,967        30.00
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total risk-based
capital (2)(3)

   $ 13,529         27.78   $ 17,128        34.66   $ 17,869        36.05   $ 18,610        37.44   $ 19,462        39.02

Total risk-based
requirement

     4,869         10.00        4,941        10.00        4,956        10.00        4,971        10.00        4,988        10.00   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 8,660         17.78   $ 12,187        24.66   $ 12,913        26.05   $ 13,639        27.44   $ 14,473        29.02
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common equity tier 1 risk-based capital (2)(3)

   $ 13,024         26.75   $ 16,623        33.64   $ 17,364        35.03   $ 18,105        36.42   $ 18,957        38.00

Common equity tier 1 
risk-based requirement

     3,165         6.50        3,212        6.50        3,222        6.50        3,231        6.50        3,242        6.50   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 9,859         20.25   $ 13,411        27.14   $ 14,142        28.53   $ 14,874        29.92   $ 15,714        31.50
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of capital infused into WCF Financial Bank:

  

               

Net proceeds

  

  $ 4,925        $ 5,900        $ 6,875        $ 7,996     

Less: Common stock acquired by stock-based benefit plan

  

    (442       (520       (598       (688  

Less: Common stock acquired by employee stock ownership plan

   

    (884       (1,040       (1,196       (1,375  
       

 

 

     

 

 

     

 

 

     

 

 

   

Pro forma increase

  

  $ 3,599        $ 4,340        $ 5,081        $ 5,933     
       

 

 

     

 

 

     

 

 

     

 

 

   

 

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Tier 1 leverage capital levels are shown as a percentage of total average assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(3) Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

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CAPITALIZATION

The following table presents the historical consolidated capitalization of Webster City Federal Bancorp at December 31, 2015 and the pro forma consolidated capitalization of WCF Bancorp after giving effect to the conversion and offering based upon the assumptions set forth in the “Pro Forma Data” section.

 

     Webster City
Federal Bancorp
Historical at
December 31,
2015
    Pro Forma at December 31, 2015
Based upon the Sale in the Offering at
$8.00 per Share of
 
       1,381,250
Shares
    1,625,000
Shares
    1,868,750
Shares
    2,149,063
Shares (1)
 
     (Dollars in thousands)  

Deposits (2)

   $ 88,080      $ 87,412      $ 87,412      $ 87,412      $ 87,412   

Borrowed funds

     8,000        8,000        8,000        8,000        8,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits and borrowed funds

   $ 96,080      $ 95,412      $ 95,412      $ 95,412      $ 95,412   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

          

Preferred stock, $0.01 par value, 10,000,000 shares authorized (post-conversion) (3)

     —          —          —          —          —     

Common stock, $0.01 par value, 30,000,000 shares authorized (post-conversion); shares to be issued as reflected (3) (4)

     433        16        19        22        26   

Additional paid-in capital (3)

     9,634        7,689        9,636        11,583        13,821   

MHC capital contribution

     —          1,029        1,029        1,029        1,029   

Retained earnings (5)

     16,635        16,635        16,635        16,635        16,635   

Accumulated other comprehensive income

     93        93        93        93        93   

Less:

          

Treasury stock

     (12,212     —          —          —          —     

Common stock held by employee stock ownership plan (6)

     —          (884     (1,040     (1,196     (1,375

Common stock to be acquired by stock-based benefit plan (7)

     —          (442     (520     (598     (688
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 14,583      $ 24,136      $ 25,852      $ 27,568      $ 29,541   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Shares Outstanding

          

Shares offered for sale

     —          1,381,250        1,625,000        1,868,750        2,149,063   

Exchange shares issued

     —          266,190        313,165        360,140        414,161   
    

 

 

   

 

 

   

 

 

   

 

 

 

Total shares outstanding

     —          1,647,440        1,938,165        2,228,890        2,563,224   
    

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity as a percentage of total assets

     12.91     19.84     20.95     22.04     23.25

Tangible equity as a percentage of total assets

     12.84     19.78     20.89     21.98     23.19

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts to purchase shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3) Webster City Federal Bancorp currently has 20,000,000 authorized shares of common stock, $0.10 par value per share, and 10,000,000 authorized shares of preferred stock, $0.10 par value per share. On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of WCF Bancorp common stock to be outstanding.
(4) No effect has been given to the issuance of additional shares of WCF Bancorp common stock pursuant to the exercise of options under a stock-based benefit plan. If the plan is implemented within the first year after the closing of the offering, an amount up to 10% of the shares of WCF Bancorp common stock sold in the offering will be reserved for issuance upon the exercise of options under the plan. See “Management.”
(5) The retained earnings of WCF Financial Bank will be substantially restricted after the conversion. See “The Conversion and Offering – Liquidation Rights” and “Supervision and Regulation – Dividends.”

(footnotes continue on following page)

 

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(continued from previous page)

 

(6) Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from WCF Bancorp. The loan will be repaid principally from WCF Financial Bank’s contributions to the employee stock ownership plan. Since WCF Bancorp will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on WCF Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(7) Assumes a number of shares of common stock equal to 4% of the shares of common stock sold in the offering will be purchased for grant by a stock-based benefit plan. The funds to be used by such plan to purchase the shares will be provided by WCF Bancorp. The dollar amount of common stock to be purchased is based on the $8.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. WCF Bancorp will accrue compensation expense to reflect the vesting of shares pursuant to such stock-based benefit plans and will credit capital in an amount equal to the charge to operations. Implementation of such plan will require stockholder approval.

 

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PRO FORMA DATA

The following table summarizes historical data of Webster City Federal Bancorp and pro forma data of WCF Bancorp at and for the year ended December 31, 2015. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion.

The net proceeds in the table are based upon the following assumptions:

 

  (i) all of the shares of common stock will be sold in the subscription and community offerings;

 

  (ii) our employee stock ownership plan will purchase 8% of the shares of common stock sold in the offering with a loan from WCF Bancorp. The loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, as may be adjusted annually) over 25 years. Interest income that we earn on the loan will offset the interest paid by WCF Financial Bank. The effect on earnings for the employee stock ownership plan is the cost of amortizing the combined loan over 25 years, net of historical expense for the year ended December 31, 2015; and

 

  (iii) total expenses of the offering will be $1.2 million.

We calculated pro forma consolidated net income for the year ended December 31, 2015 as if the estimated net proceeds we received had been invested at the beginning of the period at an assumed interest rate of 1.76% (1.10% on an after-tax basis). This represents the yield on the five-year U.S. Treasury Note as of December 31, 2015, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate federal regulations require that we assume in presenting pro forma data.

We further believe that the reinvestment rate is factually supportable because:

 

    the yield on the U.S Treasury Note can be determined and/or estimated from third-party sources; and

 

    we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. For pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the year, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

The pro forma table gives effect to the implementation of a stock-based benefit plan. We have assumed that a stock-based benefit plan will acquire for restricted stock awards a number of shares of common stock equal to 4% of the shares of common stock sold in the offering at the same price for which they were sold in the stock offering. We have assumed that awards of common stock granted under such plan vest over a five-year period.

 

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We also have assumed that options will be granted under a stock-based benefit plan to acquire shares of common stock equal to 10% of the shares of common stock sold in the offering. In preparing the table below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $8.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $1.05 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 14.13% for the shares of common stock, a dividend yield of 2.5%, an expected option term of 10 years and a risk-free rate of return of 2.27%.

We may grant options and award shares of common stock under a stock-based benefit plan in excess of 10% and 4%, respectively, of the shares of common stock sold in the stock offering and that vest sooner than over a five-year period if the stock-based benefit plan is adopted more than one year following the completion of the stock offering.

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute 50% of the net proceeds from the stock offering to WCF Financial Bank, and we will retain the remainder of the net proceeds from the stock offering. We will use a portion of the proceeds we retain to fund a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.

The pro forma table does not give effect to:

 

    withdrawals from deposit accounts to purchase shares of common stock in the stock offering;

 

    our results of operations after the stock offering; or

 

    changes in the market price of the shares of common stock after the stock offering.

The following pro forma information may not be representative of the financial effects of the offering at the dates on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation accounts to be established in the conversion or, in the unlikely event of a liquidation of WCF Financial Bank, to the tax effect of the recapture of the bad debt reserve. See “The Conversion and Offering – Liquidation Rights.”

 

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Table of Contents
     At or for the Year Ended December 31, 2015
Based upon the Sale at $8.00 Per Share of
 
     1,381,250
Shares
    1,625,000
Shares
    1,868,750
Shares
    2,149,063
Shares (1)
 
     (Dollars in thousands, except per share amounts)  

Gross proceeds of offering

   $ 11,050      $ 13,000      $ 14,950      $ 17,193   

Market value of shares issued in the exchange

     2,130        2,505        2,881        3,313   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

   $ 13,180      $ 15,505      $ 17,831      $ 20,506   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross proceeds of offering

   $ 11,050      $ 13,000      $ 14,950      $ 17,193   

Expenses

     (1,200     (1,200     (1,200     (1,200
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds

     9,850        11,800        13,750        15,993   

Assets received from mutual holding company

     1,029        1,029        1,029        1,029   

Common stock purchased by employee stock ownership plan

     (884     (1,040     (1,196     (1,375

Common stock purchased by stock-based benefit plan

     (442     (520     (598     (688
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds, as adjusted

   $ 9,553      $ 11,269      $ 12,985      $ 14,958   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the Year Ended December 31, 2015

        

Consolidated net earnings:

        

Historical

   $ 394      $ 394      $ 394      $ 394   

Income on adjusted net proceeds

     94        113        132        154   

Income on assets from mutual holding company

     7        7        7        7   

Employee stock ownership plan (2)

     (22     (26     (30     (34

Stock awards (3)

     (55     (65     (75     (86

Stock options (4)

     (26     (31     (36     (41
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income

   $ 392      $ 392      $ 392      $ 394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share (5):

        

Historical

   $ 0.26      $ 0.22      $ 0.19      $ 0.16   

Income on adjusted net proceeds

     0.06        0.06        0.06        0.06   

Employee stock ownership plan (2)

     (0.01     (0.01     (0.01     (0.01

Stock awards (3)

     (0.04     (0.04     (0.04     (0.04

Stock options (4)

     (0.02     (0.02     (0.02     (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings per share (5)

   $ 0.25      $ 0.21      $ 0.18      $ 0.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price to pro forma net earnings per share

     32.00x        38.10x        44.44x        53.33x   

Number of shares used in earnings per share calculations

     1,541,360        1,813,365        2,085370        2,398,176   

At December 31, 2015

        

Stockholders’ equity:

        

Historical

   $ 14,583      $ 14,583      $ 14,583      $ 14,583   

Estimated net proceeds

     9,850        11,800        13,750        15,993   

Equity increase from the mutual holding company

     1,029        1,029        1,029        1,029   

Common stock acquired by employee stock ownership plan (2)

     (884     (1,040     (1,196     (1,375

Common stock acquired by stock-based benefit plans (3)

     (442     (520     (598     (688
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity (6)

   $ 24,136      $ 25,852      $ 27,568      $ 29,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets

   $ (75   $ (75   $ (75   $ (75
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma tangible stockholders’ equity (6)

   $ 24,061      $ 25,777      $ 27,493      $ 29,466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity per share (7):

        

Historical

   $ 8.85      $ 7.52      $ 6.54      $ 5.69   

Estimated net proceeds

     5.98        6.09        6.17        6.24   

Equity increase from the mutual holding company

     0.62        0.53        0.46        0.40   

Common stock acquired by employee stock ownership plan (2)

     (0.54     (0.54     (0.54     (0.54

Common stock acquired by stock-based benefit plan (3)

     (0.27     (0.27     (0.27     (0.27
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share (6) (7)

   $ 14.64      $ 13.33      $ 12.36      $ 11.52   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets

   $ (0.05   $ (0.04   $ (0.03   $ (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma tangible stockholders’ equity per share (6) (7)

   $ 14.59      $ 13.29      $ 12.33      $ 11.49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as percentage of pro forma stockholders’ equity per share

     54.64     60.02     64.72     69.44

Offering price as percentage of pro forma tangible stockholders’ equity per share

     54.83     60.20     64.88     69.63

Number of shares outstanding for pro forma book value per share calculations

     1,647,440        1,938,165        2,228,890        2,563,224   

(footnotes begin on following page)

 

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(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Assumes that 8% of the shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from WCF Bancorp, and the outstanding loan with respect to existing shares of Webster City Federal Bancorp held by the employee stock ownership plan will be refinanced and consolidated with the new loan. WCF Financial Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. WCF Financial Bank’s total annual payments on the employee stock ownership plan debt are based upon 25 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 718-40, “Compensation – Stock Compensation – Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by WCF Financial Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 37.3%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 4,420, 5,200, 5,980 and 6,877 shares were committed to be released during the year at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for net income per share calculations.
(3) Assumes a stock-based benefit plan purchase an aggregate number of shares of common stock equal to 4% of the shares sold in the offering. Stockholder approval of the plan and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from WCF Bancorp or through open market purchases. Shares in the stock-based benefit plan are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by WCF Bancorp. The table assumes that (i) the stock-based benefit plan acquires the shares through open market purchases at $8.00 per share, (ii) 20% of the amount contributed to the plan is amortized as an expense during the year ended December 31, 2015, and (iii) the plan expense reflects an effective combined federal and state tax rate of 37.3%. Assuming stockholder approval of the stock-based benefit plan and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 3.85%.
(4) Assumes that options are granted under a stock-based benefit plan to acquire an aggregate number of shares of common stock equal to 10% of the shares sold in the offering. Stockholder approval of the plan may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock-based benefit plan, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $8.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $1.05 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 37.3%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $8.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 9.09%.
(5) Per share figures include publicly held shares of Webster City Federal Bancorp common stock that will be exchanged for shares of WCF Bancorp common stock in the conversion. See “The Conversion and Offering – Share Exchange Ratio for Current Stockholders.” Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares that have not been committed for release during the year. See note 2, above. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.
(6) The retained earnings of WCF Financial Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering – Liquidation Rights” and “Supervision and Regulation – Dividends.”

(footnotes continue on following page)

 

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(continued from previous page)

 

(7) Per share figures include publicly held shares of Webster City Federal Bancorp common stock that will be exchanged for shares of WCF Bancorp common stock in the conversion. Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the offering and (ii) shares to be issued in exchange for publicly held shares at the minimum, midpoint and maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 0.5095, 0.5994, 0.6893 and 0.7927 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The number of shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited consolidated financial statements that appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Webster City Federal Bancorp and the consolidated financial statements provided in this prospectus.

Overview

Our profitability is highly dependent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds.

Our net income decreased $55,000, or 12.3%, to $394,000, or $0.13 per share, for the year ended December 31, 2015, compared to $449,000, or $0.15 per share, for the year ended December 31, 2014. The decrease was due to a decrease in interest income and increases in our provision for loan losses and noninterest interest expense, offset in part by a decrease in interest expense and an increase in total noninterest income. The increase in our provision for loan losses, which increased $172,000 to $190,000 for 2015 from $18,000 for 2014, reflected management’s ongoing assessment of the risks inherent in our loan portfolio, including increases in consumer loans and general concerns about our marker area economy which is largely dependent on farming and agriculture.

An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income, which would have an adverse effect on our results of operations. As described in “ – Market Risk,” we expect that our net interest income and our net portfolio value would decrease as a result of an instantaneous increase in interest rates. We use a variety of strategies to help manage interest rate risk, as described in “ – Market Risk.” In addition, see “Risk Factors – Risks Related to Our Business – Future changes in interest rates may reduce our profits.”

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in north central and northeastern Iowa. Local economic conditions have a significant impact on our lending operations, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. Although we do not originate agricultural real estate or agricultural business loans, our market are is largely rural and agricultural. Accordingly, the agricultural economy generally has a significant effect on the financial stability of many of our customers. In addition, changes in economic conditions could result in increased actual losses or increased losses inherent in our loan portfolio, either of which could require us to significantly increase our provision for loan losses. Changes in economic conditions could further negatively affect us as described in “Risk Factors – Risks Related to Our Business – A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our results of operations, financial condition and earnings; and “– We are subject to specific market risks due to the dependence by many of our customers on an agriculture economy.”

 

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Business Strategy

Our goal is to build stockholder value by operating a well-capitalized and profitable financial institution that delivers a superior banking experience to our customers. We have sought to accomplish this objective by adopting a business strategy designed to maintain a strong capital position and high asset quality.

Our current principal business strategies are:

 

    Continuing to emphasize the origination of one- to four-family residential real estate loans. We will continue to emphasize the origination of one- to four-family residential real estate loans in our market area. At December 31, 2015, $46.5 million, or 80.1% of our total loan portfolio, consisted of owner-occupied one- to four-family residential real estate loans, compared to $45.7 million, or 82.1% of our total loan portfolio, at December 31, 2014. We will continue to originate these types of loans because it is a strong recurring source of interest income.

 

    Continuing to increase the origination of consumer loans. We plan to continue to increase the origination of consumer loans, including our direct automobile loans. Our consumer loans increased $1.5 million during 2015 to $4.5 million at December 31, 2015 from $3.1 million at December 31, 2014. Our consumer loans generally carry higher interest rates and shorter maturities than our one- to four-family residential real estate loans, thereby increasing our interest income and reducing our interest rate risk. In addition, we will attempt to expand our relationships with our consumer loan borrowers with the goal of increasing our non-interest income.

 

    Applying disciplined underwriting practices to maintain the quality of our loan portfolio. We believe that strong asset quality is a key to long-term financial success. Our goal is to maintain strong asset quality with moderate credit risk. We seek to accomplish this by applying conservative underwriting standards and by pursuing diligent monitoring and collection efforts. At December 31, 2015, our nonperforming loans (loans which are 90 or more days delinquent and loans which are less than 90 days delinquent but classified as nonaccrual) were 1.38% of our total loan portfolio.

 

    Enhancing core earnings by increasing lower-cost transaction and savings accounts. Demand, checking and money market accounts are a lower-cost source of funds than time deposits, and we have made a concerted effort to increase lower-cost transaction deposit accounts and reduce time deposits. Our ratio of core deposits (which we define as all deposit accounts except for certificate of deposit accounts) to total deposits has increased to 47.5% at December 31, 2015 from 44.0% at December 31, 2014. We plan to continue to market our core transaction accounts (primarily checking accounts), by emphasizing our high quality service and competitive pricing of these products. Additionally, we believe our implementation of additional products and improved technological services such as remote deposit capture will increase our core deposits.

 

    Managing interest rate risk. We intend to continue to manage our interest rate risk by maintaining our strategy of selling conforming, fixed-rate, one- to four-family residential real estate loans with terms of more than 20 years and increasing our originations of shorter-term consumer loans.

 

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    Growing our business by expanding our branch network. As opportunities arise and conditions permit, we will consider opportunities to expand our branch network through whole-bank or branch acquisitions, de novo branching or both. Although we do not currently have any agreements or understandings regarding specific acquisitions or de novo branching opportunities, our strategy is to grow our business within our consolidating market environment.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, other-than-temporary impairment of investment securities and the realizability of deferred tax assets. Management has discussed the development, selection and application of these critical accounting policies with the Audit Committee of the board of directors.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change. The allowance for loan losses has two components: general and specific as further discussed below.

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: one- to four-family residential real estate loans, consumer loans, non-owner occupied one- to four-family real estate loans and commercial real estate loans and land loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; loan concentrations, trends in volume and terms of loans; changes in lending practices and procedures; changes in lending management and staff; changes in the value of underlying collateral; changes in the quality of the loan review system; national and local economic trends and conditions; and the effects of other external factors. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the year ended December 31, 2015.

The specific component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent or foreclosure is probable. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual one- to four-family residential real estate loans or consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring (“TDR”) agreement.

 

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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.

We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired.

Other-Than-Temporary Impairment of Securities. Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment. The guidance addresses the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.

Deferred Tax Assets and Liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.

Comparison of Financial Condition at December 31, 2015 and December 31, 2014

Assets. Total assets increased $1.7 million, or 1.5%, to $112.9 million at December 31, 2015 from $111.2 million at December 31, 2014. The increase was due to increases in deferred taxes on income, prepaid expenses and other assets, net loans and cash and cash equivalents, offset in part by decreases in securities available-for-sale and time deposits.

Cash and Cash Equivalents and Time Deposits in Other Financial Institutions. Cash and cash equivalents increased $4.8 million, or 119.5%, to $8.9 million at December 31, 2015 from $4.0 million at December 31, 2014. The increase in cash and cash equivalents was primarily due to management’s decision to increase liquidity rather than reinvest these funds in securities available-for-sale or place these funds in time deposits with other financial institutions. Time deposits in other financial institutions decreased $2.1 million, or 42.1%, to $3.0 million at December 31, 2015 from $5.1 million at December 31, 2014 reflecting their maturations.

Securities available-for-sale. Investments in securities available-for-sale decreased $4.1 million, or 10.2%, to $36.5 million at December 31, 2015 compared to $40.7 million at December 31, 2014. The decrease resulted from management’s decision to deploy certain of these funds upon maturity into cash and cash equivalents.

 

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Net Loans. Net loans receivable increased $2.3 million, or 4.3%, to $57.4 million at December 31, 2015 from $55.0 million at December 31, 2014. The increase in net loans receivable was due primarily to an increase of $849,000, or 1.9%, in one- to four-family residential real estate loans to $46.5 million at December 31, 2015 from $45.7 million at December 31, 2014, and an increase of $1.5 million, or 47.6%, in consumer loans, to $4.5 million at December 31, 2015 from $3.1 million at December 31, 2014, reflecting our increased emphasis on growing our consumer loan portfolio.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock increased $279,000, or 160.8%, to $453,000 at December 31, 2015 from $174,000 at December 31, 2014. The increase reflects additional stock we were required to purchase as a result of our increase in FHLB advances during 2015.

Prepaid Expenses and Other Assets. Prepaid expenses and other assets increased $431,000, or 67.0%, to $1.1 million at December 31, 2015 from $642,000 at December 31, 2014. The increase represents the recognition of a receivable for a Tax Incremental Financing (“TIF”) agreement on our new headquarters building in Webster City. The remaining receivable balance at December 31, 2015 was $439,000 which was offset by a liability for the same amount included in “ – Accrued Expenses and Other Liabilities.”

Deposits. Total deposits decreased $4.8 million, or 5.2%, to $88.1 million at December 31, 2015 from $92.9 million at December 31, 2014. We experienced decreases in statement savings accounts of $157,000, or 1.4%, and in money market accounts of $374,000, or 3.1%. Additionally, certificates of deposit decreased $5.8 million, or 11.1%, due to the withdrawal of one public deposit of approximately $1.3 million during the year and management’s decision generally not to compete for certain longer-term retail funds with terms greater than 48 months. These decreases were offset in part by an increase in NOW accounts of $1.5 million, or 8.4%.

FHLB Advances. FHLB Advances increased $7.0 million, or 700.0%, to $8.0 million at December 31, 2015 from $1.0 million at December 31, 2014, as we replaced deposit outflows with low cost FHLB advances.

Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities decreased $308,000, or 14.5%, to $1.8 million at December 31, 2015 from $2.1 million at December 31, 2014. Invoices payable to contractors decreased $426,000 to $0 at December 31, 2015 from $426,000 at December 31, 2014, due to the completion of the construction of our new headquarters. Additionally, at December 31, 2014 we had a payable of $298,000 for the repurchase and retirement of 31,455 shares of common stock. These decreases were partially offset by the addition of unearned TIF revenue of $439,000 as of December 31, 2015 as described in “ – Prepaid Expenses and Other Assets.”

Stockholders’ Equity. Total stockholders’ equity decreased $239,000, or 1.6%, to $14.6 million at December 31, 2015 from $14.8 million at December 31, 2014. The decrease was primarily due to aggregate dividends paid of $423,000, share repurchases of $33,000 and other comprehensive loss of $121,000, offset in part by net income of $394,000 in 2015.

Comparison of Operating Results for the Years Ended December 31, 2015 and 2014

Net Income. Net income was $394,000, or $0.13 per share, for the year ended December 31, 2015 compared to $449,000, or $0.15 per share, for the year ended December 31, 2014.

 

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Interest Income. Interest income decreased $250,000, or 6.3%, to $3.7 million for the year ended December 31, 2015 from $4.0 million for the year ended December 31, 2014. The decrease in interest income was caused by decreases in income on loans and on investment securities, reflecting the ongoing decrease in average yields on our loan and investment securities portfolios in the current low interest rate environment. Specifically, the average yield on interest-earning assets decreased to 3.58% for 2015 from 3.70% for 2014. Additionally, the average balance of interest-earning assets decreased $3.4 million to $103.5 million for 2015 from $106.9 million for 2014.

Interest income on loans decreased $44,000, or 1.5%, to $2.9 million for the year ended December 31, 2015 from $2.9 million for the year ended December 31, 2014. This was due to a decrease in average yield offset in part by an increase in the average balance of loans. The average balance of loans increased $2.0 million to $56.4 million for 2015 from $54.4 million for 2014. The yield on average loans decreased 26 basis points to 5.09% for 2015 from 5.35% for 2014, due to continued repayments of higher-yielding loans and originating loans in a continuing lower interest rate environment.

Interest income on investment securities decreased $201,000, or 20.5%, to $777,000 for the year ended December 31, 2015 from $977,000 for the year ended December 31, 2014. The decrease was due to a decrease in the average balance of investment securities of $4.2 million, or 9.8%, to $38.8 million for 2015 from $43.0 million for 2014, and a 27 basis point decrease in the yield on average investment securities year to year to 2.00% for 2015 from 2.27% for 2014. The decrease in the average yield on investment securities resulted primarily from an increase in the average balance of municipal securities which increased $4.8 million, or 42.1%, year to year.

Interest Expense. Interest expense decreased $83,000, or 11.9%, to $613,000 for the year ended December 31, 2015 from $696,000 for the year ended December 31, 2014, due to decreases in interest expense on deposits. The decrease in interest expense reflected the current low interest rate environment, as our cost of average interest-bearing liabilities decreased nine basis points to 0.69% for 2015 from 0.78% for 2014. Additionally, our average balance of interest-bearing liabilities decreased $546,000 year-to-year.

Interest expense on deposits decreased $82,000, or 12.8%, to $562,000 for the year ended December 31, 2015 from $644,000 for the year ended December 31, 2014. Interest expense on certificates of deposits decreased $85,000, or 14.7%, to $494,000 for 2015 from $579,000 for 2014, due to a decrease in the average balance of certificates of deposit of $4.4 million and a decrease in the average rate we paid on such deposits, to 1.00% for 2015 from 1.08% for 2014. Interest expense on statement savings, money markets and NOW accounts remained relatively unchanged, increasing $2,000 year to year. The average cost of interest-bearing deposits decreased eight basis points to 0.65% for 2015 from 0.73% for 2014.

Interest expense on borrowings decreased $1,000, or 1.9%, to $51,000 for the year ended December 31, 2015 from $52,000 for the year ended December 31, 2014. Despite an increase in average borrowings of $1.6 million, to $2.6 million for 2015 from $1.0 million for 2014, the average rate paid on borrowings decreased 317 basis points to 1.96% for 2015 from 5.13% for 2014 as FHLB Advances matured and we added lower cost borrowings in late 2015.

Net Interest Income. Net interest income decreased $168,000, or 5.1%, to $3.1 million for the year ended December 31, 2015 from $3.3 million for the year ended December 31, 2014. Our average interest rate spread decreased to 2.89% for 2015 from 2.92% for 2014, and our net interest margin decreased to 2.99% for 2015 from 3.05% for 2014. Additionally, our average net interest-earning assets decreased $2.9 million, or 16.4%, year-to-year. Components of interest income vary from time to time based on the availability and interest rates of loans, securities and other interest-earning assets.

 

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Provision for Loan Losses. The provision for loan losses increased $172,000 to $190,000 for the year ended December 31, 2015 from $18,000 for the year ended December 31, 2014. Consistent with our loan loss methodology, the increase in the provision for loan losses during 2015 reflected management’s review of the risks inherent in the loan portfolio, including the increased amount of consumer loans, and the general risks associated with the farming and agricultural economy in our market area. Total past due loans 60 days and greater increased $330,000, or 41.7%, to $1.1 million at December 31, 2015 from $792,000 at December 31, 2014. The allowance for loan losses was $505,000 at December 31, 2015 compared to $361,000 at December 31, 2014. The ratio of the allowance to total loans outstanding was 0.88% as of December 31, 2015 compared to 0.66% as of December 31, 2014, and the ratio of the allowance to non-performing loans was 64.0% as of December 31, 2015 compared to 178.7% as of December 31, 2014. For further information, see “Business of WCF Financial Bank – Allowance for Loan Losses.”

Non-interest Income. Non-interest income increased $545,000, or 455.8%, to $664,000 for the year ended December 31, 2015 from $120,000 for the year ended December 31, 2014. The increase was due to an increase in fees and service charges of $53,000, to $317,000 for 2015 from $264,000 for 2014. In 2015, we recognized no impairment loss on securities available-for-sale compared to an impairment loss of $183,000 in 2014. Net gain on sale of securities increased $185,000, to $208,000 for 2015 from $22,000 for 2014. Additionally, in 2015 we recognized a gain on sale of office property and equipment of $137,000 compared to no gain or loss in 2014. These increases were partially offset by a decrease of $14,000 in other income.

Non-interest Expense. Non-interest expense increased $331,000, or 11.8%, to $3.1 million for 2015 from $2.8 million for 2014. Office property and equipment increased $243,000, or 101.4%, to $482,000 for 2015 from $239,000 for 2014. The increase resulted from the move into our new headquarters in May 2015, which resulted in increased depreciation charges. Additionally, we recognized a charitable contribution expense of $260,000 in 2015 resulting from the partial donation of our former headquarters. This increase was offset, in part, by a decrease in data processing expense of $101,000, or 21.6%, to $366,000 for 2015 from $467,000 for 2014. Our data processing expense in 2014 reflected additional one-time costs incurred in connection with the Independence Bank acquisition.

Provision for Income Taxes. We had income tax expense of $30,000 for the year ended December 31, 2015 compared to income tax expense of $101,000 for the year ended December 31, 2014. Our effective tax rate was 7.0% for 2015, compared to 18.3% for 2014. The lower effective tax rate for 2015 resulted primarily from our charitable contribution taken during the year.

 

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Average Balance Sheet

Average balances and yields. The following table sets forth average balance sheets, average yields and costs, and certain other information at and for the years indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.

 

     At December 31,
2015
    For the Year Ended December 31,  
       2015     2014  
     Yield/
Cost%
    Average
Outstanding
Balance
     Interest      Yield/
Rate
    Average
Outstanding
Balance
     Interest      Yield/
Rate (1)
 
           (Dollars in Thousands)  

Interest-earning assets:

                  

Loans (4)

     4.92   $ 56,360       $ 2,869         5.09   $ 54,399       $ 2,913         5.35

Investment securities – taxable

     1.70        22,581         404         1.79        31,587         707         2.24   

Investment securities – non-taxable

     2.33        16,219         372         2.29        11,411         270         2.37   

Other interest-earning assets

     0.47        8,315         62         0.75        9,490         68         0.72   
    

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     3.44        103,475         3,707         3.58        106,887         3,958         3.70   
       

 

 

         

 

 

    

Noninterest-earning assets

       6,775              4,994         
    

 

 

         

 

 

       

Total assets

     $ 110,355            $ 111,881         
    

 

 

         

 

 

       

Interest-bearing liabilities:

                  

Savings accounts

     0.21   $ 11,977       $ 22         0.18      $ 11,314       $ 24         0.21   

Money market accounts

     0.39        12,121         33         0.27        11,926         29         0.24   

NOW

     0.10        12,771         13         0.10        11,337         12         0.11   

Certificates of deposit (5)

     1.20        49,346         494         1.00        53,772         579         1.08   
    

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     0.76        86,215         562         0.65        88,349         644         0.73   
       

 

 

            

Advances from FHLB of Des Moines

     0.95        2,603         51         1.96        1,014         52         5.13   
    

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     0.78        88,817         613         0.69        89,363         696         0.78   
       

 

 

         

 

 

    

Noninterest-bearing deposits

       5,129              5,317         

Total liabilities

       1,452              2,373         
    

 

 

               

Equity

       14,832              14,828         
    

 

 

         

 

 

       

Total liabilities and equity

     $ 110,230            $ 111,881         
    

 

 

         

 

 

       

Net interest income

        $ 3,094            $ 3,262      
       

 

 

         

 

 

    

Net interest rate spread (1)

     2.89           2.89           2.92   

Net interest-earning assets (2)

     $ 14,658            $ 17,524         
    

 

 

         

 

 

       

Net interest margin (3)

             2.99           3.05   

Average of interest-earning assets to
interest-bearing liabilities

     116.50           116.5           119.6

 

(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.
(2) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by total interest-earning assets.
(4) Amortization of fees, discounts and premiums included in interest income were $58,000 and $61,000 for the years ended December 31, 2015 and 2014, respectively.
(5) Amortization of premiums included in interest expense were $102,000 and $147,000 for the years ended December 31, 2015 and 2014, respectively.

 

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

     Years Ended December 31,
2015 vs. 2014
 
     Increase (Decrease)
Due to
     Total
Increase
(Decrease)
 
     Volume      Rate     
     (In thousands)  

Interest-earning assets:

        

Loans (1)

   $ 103       $ (147    $ (44

Securities available for sale—taxable

     (178      (125      (303

Securities available for sale – non-taxable

     111         (9      102   

Other interest-earning assets

     (9      3         (6
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     27         (278      (251
  

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

        

Savings accounts

     1         (4      (3

Money market accounts

     —           4         4   

NOW accounts

     2         (1      1   

Certificates of deposit (2)

     (46      (39      (85
  

 

 

    

 

 

    

 

 

 

Total deposits

     (43      (40      (83

Borrowings

     46         (46      —     
  

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     3         (86      (83
  

 

 

    

 

 

    

 

 

 

Change in net interest income

   $ 24       $ (192    $ (168
  

 

 

    

 

 

    

 

 

 

 

(1) Amortization of fees, discounts and premiums included in interest income were $58,000 and $61,000 for the years ended December 31, 2015 and 2014, respectively.
(2) Amortization of premiums included in interest expense were $102,000 and $147,000 for the years ended December 31, 2015 and 2014, respectively.

 

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Market Risk

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk (“IRR”). Our assets, consisting primarily of one- to four-family residential real estate loans, have longer maturities than our liabilities, consisting primarily of deposits and other borrowings. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income (“NII”) to changes in market interest rates. Accordingly, our board of directors has established an Asset/Liability Management Committee which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and generally meets at least on a quarterly basis to review our asset/liability policies and IRR position.

We have sought to manage our IRR to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset/liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the FHLB Des Moines, to “match fund” certain investments and/or loans; (ii) selling our fixed-rate conforming one- to four-family residential real estate loans with terms of greater than 20 years; (iii) continuing to emphasize increasing core deposits; (iv) offering adjustable rate and shorter-term consumer loans; and (v) investing in securities with variable rates or fixed rates with shorter durations. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.

Economic Value of Equity Analysis. We analyze the sensitivity of our financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between predicted changes in the fair value of our assets and predicted changes in the present value of our liabilities assuming various changes in current interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in our economic value of equity, resulting from an instantaneous and sustained parallel shift in the yield curve (+100, +200 and +300 basis points and -100 basis points) at December 31, 2015.

 

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Change in

Interest Rates

(basis points) (1)

   Estimated EVE (2)            EVE as a Percentage of Fair
Value of Assets (3)
 
      Estimated Increase
(Decrease) in EVE
    EVE
Ratio (4)
    Increase (Decrease)
(basis points)
 
      Amount     Percent      
(Dollars in thousands)  

+300

   $ 13,437       $ (4,152     (23.61 )%      13.26     (227

+200

     15,438         (2,151     (12.23 )%      14.61     (92

+100

     17,063         (526     (2.99 )%      15.56     3   

    —  

     17,589         —          —          15.53     —     

- 100

     16,932         (657     (3.74 )%      14.59     (94

 

(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the fair value of expected cash flows from assets, less the fair value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts.
(3) Fair value of assets represents then amount at which an asset could be exchanged between knowledgeable and willing parties in an arms-length transaction.
(4) EVE Ratio represents EVE divided by the fair value of assets.

The table above indicates that at December 31, 2015, in the event of a 100 basis point decrease in interest rates, we would experience a 3.7% decrease in our economic value of equity. In the event of a 300 basis points increase in interest rates, we would experience a decrease of 23.6% in economic value of equity.

The preceding simulation analysis does not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed.

Liquidity and Capital Resources

The term “liquidity” refers to the ability of Webster City Federal Bancorp and WCF Financial Bank to meet current and future short-term financial obligations. Webster City Federal Bancorp and WCF Financial Bank further define liquidity as the ability to generate adequate amounts of cash to fund loan originations, deposit withdrawals and operating expenses. Liquidity management is both a daily and long-term function of business management. WCF Financial Bank’s primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and investment securities, and FHLB advances. WCF Financial Bank can borrow funds from the FHLB based on eligible collateral of loans and securities. WCF Financial Bank had FHLB advances of $8.0 million outstanding as of December 31, 2015 with unused borrowing capacity of $24.4 million. Additionally, at December 31, 2015, we had the ability to borrow $1.0 million from the Bankers’ Bank.

WCF Financial Bank’s primary investing activities are the origination of loans and the purchase of investment securities. WCF Financial Bank’s originations net of loan principal repayments were $2.4 million for the year ended December 31, 2015 and $1.4 million for the year ended December 31, 2014. Historically we have not purchased loans, and we did not purchase any loans during 2015 or 2014 other than the loans acquired through our merger with Independence Bank. Purchases of securities totaled $19.9 million and $15.2 million for the years ended December 31, 2015 and 2014, respectively.

 

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Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors and by other factors. WCF Financial Bank monitors its liquidity position frequently and anticipates that it will have sufficient funds to meet its current funding commitments.

Certificates of deposit totaled $46.3 million at December 31, 2015, of which $22.8 million had maturities of one year or less. WCF Financial Bank relies on competitive rates, customer service and long-standing relationships with customers to retain deposits. Based on our experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with us.

Webster City Federal Bancorp is a separate legal entity from WCF Financial Bank and must provide for its own liquidity needs, such as repurchasing stock and paying dividends to stockholders. Webster City Federal Bancorp’s primary source of liquidity is the dividends it receives from WCF Financial Bank. At December 31, 2015, Webster City Federal Bancorp (on an unconsolidated, stand-alone basis) had cash and cash equivalents of $677,000.

The net proceeds from the stock offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, which will increase our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity will be adversely affected following the stock offering. See “Risk Factors – Our return on equity will be low following the stock offering. This could negatively affect the trading price of our shares of common stock.”

Management is not aware of any other known trends, events or uncertainties that will have, or are reasonably likely to have, a material effect on Webster City Federal Bancorp’s or WCF Financial Bank’s liquidity, capital or operations, nor is management aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on Webster City Federal Bancorp’s or WCF Financial Bank’s liquidity, capital or operations.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit, and letters of credit.

For the year ended December 31, 2015, we did not engage in any off-balance sheet transactions other than unused lines of credit in the normal course of our lending activities.

Impact of Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see note 1 of the notes to the consolidated financial statements beginning on page F-1 of this prospectus.

 

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Effect of Inflation and Changing Prices

The financial statements and related financial data presented in this prospectus have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

BUSINESS OF WCF BANCORP

WCF Bancorp is an Iowa corporation that was organized in March 2016. Upon completion of the conversion, WCF Bancorp will become the holding company of WCF Financial Bank and will succeed to all of the business and operations of Webster City Federal Bancorp. Webster City Federal Bancorp and WCF Financial, M.H.C. will cease to exist following the completion of the conversion.

As part of the conversion, WCF Bancorp will receive the cash, securities and other assets held by Webster City Federal Bancorp and WCF Financial, M.H.C., which totaled $779,000 as of December 31, 2015, and will retain 50% of the net proceeds of the offering. A portion of the net proceeds from the offering will be used to make a loan to the WCF Financial Bank employee stock ownership plan. WCF Bancorp will have no significant liabilities. WCF Bancorp intends to use the support staff and offices of WCF Financial Bank and will pay WCF Financial Bank for these services. If WCF Bancorp expands or changes its business in the future, it may hire its own employees.

WCF Bancorp intends to invest the net proceeds of the offering as discussed under “How We Intend to Use the Proceeds From the Offering.” In the future, we may pursue other business activities, including mergers and acquisitions, investment alternatives and diversification of operations. There are, however, no current understandings or agreements for these activities.

Our executive offices are located at 401 Fair Meadow Drive, Webster City, Iowa 50595 and our telephone number is (515) 832-3071. Our website address is www.wcfbank.com. Information on this website is not and should not be considered a part of this prospectus.

BUSINESS OF WEBSTER CITY FEDERAL BANCORP AND WCF FINANCIAL BANK

Webster City Federal Bancorp

In August 1994 we reorganized into a mutual holding company structure, and since July 1999 we have operated in a two-tiered mutual holding company structure. Webster City Federal Bancorp is a federal corporation that is a stock holding company and the parent company of WCF Financial Bank. At December 31, 2015, Webster City Federal Bancorp had consolidated assets of $112.9 million, deposits of $88.1 million and stockholders’ equity of $14.6 million. Webster City Federal Bancorp’s parent company is WCF Financial, M.H.C., a federally chartered mutual holding company. At December 31, 2015, Webster City Federal Bancorp had 3,019,005 shares of common stock outstanding, of which 522,476 shares, or 17.3%, were owned by the public, and the remaining 2,496,529 shares, or 82.7%, were owned by WCF Financial, M.H.C.

 

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On January 3, 2014, Webster City Federal Bancorp completed its merger with Independence Federal Bank for Savings (“Independence Bank”), a mutual savings association based in Independence, Iowa, which as of that date operated from one banking office in Independence, Iowa, and had assets with a fair value of $19.7 million, loans of $10.5 million and deposit balances with a fair value of $18.4 million. To reflect the mutual interests of the depositors of Independence Bank, as part of the transaction, Webster City Federal Bancorp issued 196,429 shares of common stock to WCF Financial, M.H.C. The operations of Independence Bank were merged with and into WCF Financial Bank.

Webster City Federal Bancorp’s executive office is located at 401 Fair Meadow Drive, Webster City, Iowa 50595 and the telephone number at that address is (515) 832-3071. Its internet address is www.wcfbank.com. Information on our website is not and should not be considered to be a part of this prospectus.

WCF Financial Bank

WCF Financial Bank is a community bank that was chartered and began operations in 1934. We have operated continuously in Webster City, Iowa since this time. Our business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in real estate loans secured by one- to four-family residences. To a lesser extent, we also originate consumer loans and non owner-occupied one- to four-family residential real estate loans. On a limited basis we have also originated commercial real estate loans, but have deemphasized the origination, and intend to continue to deemphasize the origination of, this type of lending. We offer a variety of deposit accounts, including certificates of deposit, commercial and regular checking accounts and savings accounts. We invest in securities primarily issued or guaranteed by United States Government sponsored enterprises and securities issued by municipalities. Our principal sources of funds are deposits, principal and interest payments on loans and investments, as well as borrowings from the FHLB of Des Moines.

WCF Financial Bank is subject to extensive regulation by the OCC. WCF Financial Bank is a member of the FHLB of Des Moines.

Our website address is www.wcfbank.com. Information on our website is not and should not be considered to be a part of this prospectus.

Market Area

We conduct our operations from our two offices located in Webster City, Iowa and Independence, Iowa. Webster City is the county seat for Hamilton County, Iowa and Independence is the county seat of Buchanan County, Iowa. We consider Hamilton County and Buchanan County, Iowa, and the surrounding contiguous counties, to be our primary market area.

Hamilton County is located approximately 60 miles north, and Buchanan County is approximately 125 miles northeast, of Des Moines, Iowa. Both counties consist primarily of small towns and rural areas. The total estimated populations for Hamilton and Buchanan County in July 2014, according to the United States Census Bureau, were approximately 15,000 and 21,000, respectively. According to SNL Financial, the population in Buchanan County increased 0.40% between 2010 to 2014, while the population of Hamilton County decreased by 3.50% between 2010 to 2014. The median household income for 2014 for Hamilton County was $47,358, while the median household income for 2014 for Buchanan County was $56,393. By contrast, the national level of median household income for 2014 was $53,482. According to Nielsen and SNL Financial, by 2021, the projected increases in household incomes are expected to be 0.72% for Hamilton County and 11.52% for Buchanan County. The projected national median household income is projected to increase by 7.77%.

 

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The economy of our market area is heavily dependent on farming and agriculture. The major employers in our market area include the Van Diest Supply Company and the Van Diest Medical Center, Webster City Community School District, John Deere and the governments of Webster City and Independence, Iowa.

Competition

We face competition in our market areas both in making loans and attracting deposits. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds and insurance companies. Some of our competitors have greater name recognition and market presence, and offer certain services that we do not or cannot provide.

Our deposit sources are primarily concentrated in the communities surrounding our banking offices in Webster City and Independence, Iowa. As of June 30, 2015 (the latest date for which information is publicly available), we ranked third in deposit market share out of five banks and thrift institutions with offices in Hamilton County, and we ranked sixth in deposit market share out of nine banks and thrift institutions with offices in Buchanan County, Iowa. Our deposit market share is approximately 19.5% and 3.9% for Hamilton County and Buchanan County, respectively.

Lending Activities

Our primary lending activity is the origination of one- to four-family residential real estate loans. To a lesser extent, we also originate consumer loans and non owner-occupied one- to four-family residential real estate loans (which we sometimes refer to as one- to four-family investment property loans). On a very limited basis, we have originated commercial real estate loans. However, in recent years we have significantly reduced the origination of commercial real estate loans and we do not intend to emphasize the origination of these types of loans in the future.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, by type of loan at the dates indicated.

 

     At December 31,  
     2015     2014  
     Amount      Percent     Amount      Percent  
     (Dollars in thousands)  

One- to four-family residential real estate

   $ 46,511         80.1   $ 45,662         82.1

Non owner occupied one- to four-family residential real estate

     4,030         7.0        4,257         7.7   

Commercial real estate

     2,974         5.1        2,636         4.7   

Consumer

     4,543         7.8        3,077         5.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans receivable

     58,058         100.0     55,632         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Discount on loan purchases

     (85        (113   

Deferred loan costs (fees)

     (88        (119   

Allowance for loan losses

     (505        (361   
  

 

 

      

 

 

    

Total loans receivable, net

   $ 57,380         $ 55,039      
  

 

 

      

 

 

    

 

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Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2015. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2016. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.

 

     One-to
four-family
residential
real estate
     Non owner-
occupied
one-to four-
family
residential
real estate
     Commercial
real estate
     Consumer      Total  
     (In Thousands)  

Due During the Years

Ending December 31,

              

2016

   $ 63       $ 65       $ —         $ 705       $ 833   

2017

     134         9         —           309         452   

2018

     482         27         —           618         1,127   

2019 to 2020

     722         87         30         1,681         2,520   

2021 to 2025

     4,193         623         1,155         584         6,555   

2026 to 2030

     9,712         1,396         824         —           11,933   

2031 and beyond

     31,205         1,823         965         646         34,639   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,511       $ 4,030       $ 2,974       $ 4,543       $ 58,058   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2015 that are contractually due after December 31, 2016.

 

     Due After December 31, 2016  
     Fixed      Adjustable      Total  
     (In thousands)  

One- to four-family residential real estate

   $ 32,388       $ 14,060       $ 46,448   

Non owner-occupied one- to four-family residential real estate

     3,001         964         3,965   

Commercial real estate

     2,773         201         2,974   

Consumer

     3,838         —           3,838   
  

 

 

    

 

 

    

 

 

 

Total

   $ 42,000       $ 15,225       $ 57,225   
  

 

 

    

 

 

    

 

 

 

Loan Approval Procedures and Authority. We make loans according to written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. We require “full documentation” on all of our loan applications.

Our policies and loan approval limits are established by the board of directors. For one- to four-family residential real estate loans, our loan committee, which is comprised of our President and Chief Executive Officer, Senior Vice President, Chief Lending Officer and another loan officer, has loan authority of up to $250,000. All one- to four-family residential real estate loans above $250,000 require the approval of our board of directors. Generally, all loans not requiring board approval are ratified at the next regularly scheduled board meeting. For consumer loans, our loan officers have loan authority of up to $25,000. All consumer loans above $25,000 require the approval of the loan committee.

 

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We require appraisals of all real property securing one- to four-family residential real estate loans and non owner-occupied one- to four-family residential real estate loans. All appraisers are state-licensed or state-certified appraisers, and are approved by the board of directors annually.

One- to Four-Family Residential Real Estate Loans. Our primary lending consists of originating owner-occupied, one- to four-family residential real estate loans, substantially all of which are secured by properties located in our market area. At December 31, 2015, $46.5 million, or 80.1% of our total loan portfolio, consisted of owner-occupied one- to four-family residential real estate loans. We offer these loans with fixed-rate maturities of up to 30 years as well as adjustable rates. In recent years, in the historically low interest rate environment, nearly all of our one-to four family residential real estate loan originations have had fixed-rates of interest. The average loan balance of our one- to four-family residential real estate loans at December 31, 2015 was $52,000. At December 31, 2015, our largest one- to four-family residential real estate loan had a principal balance of $409,000 and was performing in accordance with its repayment terms as of such date.

One- to four-family residential real estate loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate one- to four-family residential real estate loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is generally $417,000 for single-family homes. We generally underwrite loans that exceed this amount (“jumbo loans”) in the same manner as conforming loans. Traditionally, we have maintained in our portfolio all of the loans that we originate. However, in recent years, we have sold all fixed-rate one- to four-family residential real estate loans with maturities of greater than 20 years.

Our adjustable-rate one- to four-family residential real estate loans generally consist of loans with initial interest rates fixed for one, three, five or seven years, and annual adjustments thereafter are indexed based on changes in the Monthly Federal Cost of Funds Index. Our adjustable-rate one- to four-family residential real estate loans generally have an interest rate adjustment limit of 200 basis points per adjustment, with a maximum lifetime interest rate adjustment limit of 600 basis points. In the current low interest rate environment, we have not originated a significant dollar amount of adjustable-rate one- to four-family residential real estate loans.

Generally, we originate one- to four-family residential real estate loans with loan-to-value ratios of up to 80%, and will, on occasion, originate loans with a loan-to-value ratio of up to 90% with private mortgage insurance or additionally readily marketable collateral. During the years ended December 31, 2015 and 2014, we did not originate a significant amount of one- to four-family residential real estate loans with loan-to-value ratios in excess of 80%. All borrowers are required to obtain an abstract of title and a title opinion. We also require fire and casualty insurance and, where circumstances warrant, flood insurance.

We do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).

 

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We acquired $8.3 million of one- to four-family residential real estate loans in connection with our acquisition of Independence Bank in January 2014. At December 31, 2015 $3.1 million of our total one- to four-family residential loans that were acquired from Independence Bank were adjustable-rate loans.

Non Owner-Occupied One- to Four-Family Residential Real Estate Loans. At December 31, 2015, $4.0 million, or 7.0%, of our total loan portfolio, consisted of non owner-occupied, or “investment,” one- to four-family residential real estate loans, all of which were secured by properties located in our market area. At December 31, 2015, our non owner-occupied one- to four-family residential real estate loans had an average balance of $39,000. At December 31, 2015, our largest non owner-occupied one- to four-family residential loan had a principal balance of $194,000 and was performing in accordance with its repayment terms as of such date.

We originate fixed-rate and adjustable-rate loans secured by non owner-occupied one- to four-family properties. These loans may have a term of up to 20 years. In recent years, in the historically low interest rate environment, nearly all of our non owner-occupied one- to four-family residential loan originations have fixed-rates of interest. We generally lend up to 75% of the property’s appraised value. Appraised values are determined by an outside independent appraiser. In deciding to originate a loan secured by a non owner-occupied one- to four-family residential property, we review the creditworthiness of the borrower, the expected cash flow from the property securing the loan, the cash flow requirements of the borrower and the value of the property securing the loan. We require an abstract of title, a title opinion, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.

Non owner-occupied one- to four-family residential loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans. Non owner-occupied one- to four-family residential loans, however, entail greater credit risks compared to the owner-occupied one- to four-family residential mortgage loans we originate. The payment of loans secured by income-producing properties typically depends on the sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions could affect the value of the collateral for the loan or the future cash flow of the property.

Commercial Real Estate Loans. On a very limited basis, we have offered commercial real estate loans. In recent years we have significantly reduced the origination of these types of loans, and we do not intend to emphasize the origination of these types of loans in the future. At December 31, 2015, $3.0 million, or 5.1% of our total loan portfolio, consisted of commercial real estate loans, which are generally secured by retail, industrial, service or other commercial properties and loans secured by raw land. At December 31, 2015, our commercial real estate loans had an average balance of $73,000. At December 31, 2015, our largest commercial real estate loan had a principal balance of $302,000.

We have offered fixed-rate and adjustable-rate commercial real estate loans. In recent years, in the historically low interest rate environment, nearly all of our commercial real estate loan originations have had fixed-rates of interest. These loans generally have terms of up to 20 years. We generally lend up to 75% of the property’s appraised value. Appraised values are determined by an outside independent appraiser. In evaluating the property securing the loan, we review the creditworthiness of the borrower, the expected cash flow from the property securing the loan, the cash flow requirements of the borrower, the value and condition of the property securing the loan and the borrower’s experience in owning or managing similar property. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 1.15 times), computed after deduction for a vacancy factor and property expenses we deem appropriate. We require an abstract of title, a title opinion, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.

 

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Commercial real estate loans afford us the opportunity to earn higher yields than those obtainable on one- to four-family residential real estate lending. Nevertheless, commercial real estate lending may involve greater risk than one- to four-family residential real estate loans because the loans generally have larger principal balances and repayment of these loans is dependent on the successful operation or management of the commercial property securing the loan. The success of the loan may also be affected by many factors outside the control of the borrower. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties. Land loans pose additional risks because the property generally does not produce income and may be relatively illiquid.

Consumer Loans. We offer a variety of consumer loans including new and used automobile loans, home improvement and home equity loans, recreational vehicle loans, and loans secured by certificates of deposits. We do not purchase indirect automobile loans from dealers. At December 31, 2015, consumer loans totaled $4.5 million, or 7.8% of our loan portfolio, of which $2.7 million, or 60.0%, were automobile loans. At this date, $291,000 of our consumer loans were unsecured.

Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. We intend to continue to emphasize and grow our portfolio of consumer loans in the future.

Consumer 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.

We also offer home equity loans secured by a first or second mortgage on residential property. Our home equity loans are made with fixed or adjustable rates, and with combined loan-to-value ratios up to 90% on an owner-occupied principal residence.

We do not make second mortgage loans unless we also hold the first mortgage on the borrower’s primary residence. With respect to our second mortgage loans, decreases in real estate values could adversely affect the value of property used as collateral for our loans.

Loan Originations, Purchases, Sales and Servicing. Lending activities are conducted by our loan personnel operating at our offices. All loans that we originate are underwritten pursuant to our standard policies and procedures. Our ability to originate loans is dependent upon the relative customer demand for such loans and competition from other lenders, which is affected by market interest rates as well as anticipated future market interest rates. Our loan origination and sales activity may be adversely affected by a rising interest rate environment, which typically results in decreased loan demand. Our loan originations are generated by our loan personnel, existing customers, referrals from realtors, residential home builders, automobile dealers and walk-in business.

 

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In recent years we have not purchased loans, and we do not intend to purchase loans in the near future. Pursuant to our acquisition of Independence Bank in January 2014, we acquired $10.5 million in loans, substantially all of which were secured by properties located in Buchanan County, Iowa.

Substantially all of the one- to four-family residential real estate loans that we originate meet the underwriting guidelines established by Fannie Mae and Freddie Mac. In recent years, we have sold our conforming, fixed-rate one- to four-family residential real estate loans that have terms of greater than 20 years, on a servicing-released basis.

The following table sets forth our loan origination, purchase, sale and principal repayment activity during the periods indicated.

 

     Years Ended December 31,  
     2015      2014  

Total loans, at beginning of period

   $ 55,632       $ 43,769   

Loans originated:

     

One- to four-family residential

     7,675         6,241   

Non owner-occupied one- to four-family residential

     113         286   

Commercial real estate

     422         502   

Consumer

     3,094         508   
  

 

 

    

 

 

 

Total loans originated

     11,305         7,535   

Loans acquired:

     

One- to four-family residential

     —           8,313   

Non owner-occupied one- to four-family residential

     —           2,149   

Commercial real estate

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 

Total loans acquired

     —           10,462   

Loans sold:

     

One- to four-family residential

     (2,577      (1,512

One- to four-family investment

     —           —     

Commercial real estate

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 

Total loans sold

     (2,577      (1,512

Other:

     

Principal repayments

     (6,301      (4,622

Net loan activity

     2,427         11,863   
  

 

 

    

 

 

 

Total loans, including loans held for sale, at end of period

   $ 58,058       $ 55,632   
  

 

 

    

 

 

 

Non-Performing and Problem Assets

Delinquency Procedures. When a borrower fails to make a required monthly loan payment, a late notice is generated, generally on the 15th day after the payment due date, stating the payment and late charges due. A follow-up notice is sent every 15 days thereafter. On a case-by-case basis, we will also include follow-up phone calls. The accrual of interest on loans is discontinued at the time future payments are not reasonably assured or the loan is 90 days delinquent, unless the credit is well secured. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Our President and Chief Executive Officer determines on a case-by-case basis further actions. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments. The loan will remain on nonaccrual status until a timely repayment history of six months has been established.

 

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When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate held for sale until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell. Any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal or an in-house evaluation which is obtained as soon as practicable, typically at the start of the foreclosure proceeding. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized as long as the total cost basis of the property does not exceed estimated fair value less estimated costs to sell.

Delinquent Loans. The following table sets forth our loan delinquencies by type, by amount and by percentage of type at the dates indicated.

 

     Loans Delinquent For         
     30-89 Days      90 Days and Over      Total  
     Number      Amount      Number      Amount      Number      Amount  
     (Dollars in thousands)  

At December 31, 2015

                 

One- to four-family residential

     35       $ 1,437         9       $ 460         44       $ 1,897   

Non owner occupied one- to four-family residential

     —           —           —           —           —           —     

Commercial real estate

     —           —           1         302         1         302   

Consumer

     16         100         7         27         23         127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     52       $ 1,537         17       $ 789         68       $ 2,326   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014

                 

One- to four-family residential

     34       $ 1,408         11       $ 364         45       $ 1,772   

Non owner occupied one- to four-family residential

     —           —           —           —           —           —     

Commercial real estate

     —           —           —           —           —           —     

Consumer

     16         128         7         25         23         153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     50       $ 1,536         18       $ 389         68       $ 1,925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Performing Assets. The accrual of interest on loans is discontinued at the time future payments are not reasonably assured or the loan is 90 days delinquent, unless the credit is well secured. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans is applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Restructured loans are restored to accrual status when the obligation is brought current, has performed in accordance with the revised contractual terms for a reasonable period of time (typically six months) and the ultimate collectibility of the total contractual principal and interest is reasonably assured.

 

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The following table sets forth information regarding our non-performing assets at the dates indicated. We had no TDRs at the dates indicated.

 

     At December 31,  
     2015     2014  
     (Dollars in thousands)  

Non-accrual loans:

    

One- to four-family residential real estate

   $ 185      $ 202   

Non owner-occupied one- to four-family residential real estate

     —          —     

Commercial real estate

     302        —     

Consumer

     —          —     

Total

     487        202   
  

 

 

   

 

 

 

Non owner-occupied one- to four-family residential real estate

     —          —     

Accruing loans 90 days or more past due:

    

One- to four-family residential real estate

     275        —     

Commercial real estate

     —          —     

Consumer

     27        —     

Total loans 90 days or more past due

     302        —     
  

 

 

   

 

 

 

Total non-performing loans

     789        202   
  

 

 

   

 

 

 

Real estate owned

     6        —     

Other non-performing assets

     —          —     
  

 

 

   

 

 

 

Total non-performing assets

   $ 795      $ 202   
  

 

 

   

 

 

 

Ratios:

    

Total non-performing loans to total net loans

     1.38     0.37

Total non-performing assets to total assets

     0.70     0.18

For the year ended December 31, 2015, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms and interest income recognized on such loans was immaterial, and the amount of interest we recorded on these loans was $0.

At December 31, 2015, nonaccrual loans consisted of three one- to four-family residential real estate loans totaling $185,000 and one commercial real estate loan totaling $302,000.

At December 31, 2015, we had $2.0 million in loans that were not currently classified as nonaccrual, 90 days past due or troubled debt restructurings, but where known information about possible credit problems of borrowers caused management to have concerns as to the ability of the borrowers to comply with existing loan repayment terms and that could result in disclosure as non-accrual, 90 days past due or troubled debt restructurings.

Troubled Debt Restructurings. Troubled debt restructurings are defined under ASC 310-40 to include loans for which either a portion of interest or principal has been forgiven, or for loans modified at interest rates or on terms materially less favorable than current market rates. At December 31, 2015 and 2014, we had no loans that were classified as a troubled debt restructuring.

Foreclosed Real Estate Held for Sale. At December 31, 2015, we had $6,000 in foreclosed real estate held for sale, consisting of one residential real estate property.

 

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Classified Assets. Federal regulations provide that loans and other assets of lesser quality should be classified as “substandard”, “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention/watch” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required to charge-off the amount of such assets. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional loss allowances.

In connection with the filing of our periodic reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or because of delinquency status, or if the loan possesses weaknesses although currently performing. Management reviews the status of each impaired loan on our watch list with the Loan Committee and then with the full board of directors at the next regularly scheduled board meeting. If the asset quality of a loan deteriorates, the classification is changed to “special mention/watch,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.”

Assets that do not expose us to risk sufficient to warrant classification, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention/watch. As of December 31, 2015, we had $2.0 million of assets designated as special mention/watch.

We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of our assets at December 31, 2015, substandard assets consisted of loans of $488,000. There were no doubtful or loss assets at December 31, 2015.                

As of December 31, 2015, our largest substandard loan classification had a principal balance of $302,000 and was secured by raw land. Management believes this loan is adequately collateralized.    

See Note 4 to our consolidated financial statements beginning on page F-1 of this prospectus for a description by loan category of our classified and special mention/watch assets as of December 31, 2015 and 2014.

 

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Allowance for Loan Losses

Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on at least a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for impaired loans, and (2) a general valuation allowance for non-impaired loans. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

This analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.

Specific Allowances on Impaired Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral for the mortgage.

General Valuation Allowance on Non-impaired Loans. We establish a general allowance for non-impaired loans to recognize the probable losses associated with lending activities. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience for the last three years, adjusted for qualitative factors that could impact the allowance for loan losses. These qualitative factors may include changes in lending policies and procedures, existing general economic and business conditions affecting our primary market area, volume and severity of non-performing loans, collateral value, nature and volume of the loan portfolio and existence and effect of any concentrations of credit and the level of such concentrations, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

In addition, as an integral part of their examination process, the OCC with respect to WCF Financial Bank, and the Federal Reserve Bank of Kansas City with respect to Webster City Federal Bancorp, will periodically review our allowance for loan losses and may require that we recognize additions to the allowance based on their judgment of information available to them at the time of their examinations.

The allowance for loan losses increased $144,000, or 40.1%, to $505,000 at December 31, 2015 from $361,000 at December 31, 2014. In addition, the allowance for loan losses to total loans receivable increased to 0.87% at December 31, 2015 from 0.65% at December 31, 2014. The allowance for loan losses as a percentage of non-performing loans decreased to 63.95% at December 31, 2015 from 92.78% at December 31, 2014. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at December 31, 2015 and December 31, 2014.

 

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Net charge-offs to average loans outstanding were 0.90% for the year ended December 31, 2015, compared to 0.63% for the year ended December 31, 2014.

Appraisals are performed by a rotating list of independent, certified appraisers to obtain fair values on non-homogenous loans secured by real estate. The appraisals are generally obtained when a loan becomes impaired.

We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.

The accrual of interest on loans is discontinued at the time future payments are not reasonably assured or the loan is 90 days delinquent, unless the credit is well secured. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. Subsequent collection of interest on nonaccrual loans is recorded as income when received or applied to reduce the loan balance. Loans are returned to accrual status when there is no longer any reasonable doubt as to the timely collection of interest.

 

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Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

     At or For the Years Ended
December 31,
 
   2015     2014  
     (Dollars in thousands)  

Balance at beginning of year

   $ 361      $ 436   

Charge-offs:

    

One- to four-family residential

     (33     (97

Non-owner occupied one- to four-family residential

     —          —     

Commercial real estate

     —          —     

Consumer

     (13     —     
  

 

 

   

 

 

 

Total charge-offs

     (46     (97
  

 

 

   

 

 

 

Recoveries:

    

One- to four-family residential

     —          —     

Non-owner occupied one- to four-family residential

     —          —     

Commercial real estate

     —          —     

Consumer

     —          4   
  

 

 

   

 

 

 

Total recoveries

     —          4   

Net charge-offs

     (46     (93
  

 

 

   

 

 

 

Provision for loan losses

     190        18   
  

 

 

   

 

 

 

Balance at end of year

   $ 505      $ 361   
  

 

 

   

 

 

 

Ratios:

    

Net charge-offs to average loans outstanding

     0.08     0.17

Allowance for loan losses to non-performing loans at end of year

     64.01     178.71

Allowance for loan losses to total loans at end of year

     0.88     0.66

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

     At December 31,  
     2015     2014  
     Amount      Percent of
Allowance to
Total
Allowance
    Percent of
Loans in
Category to
Total Loans
    Amount      Percent of
Allowance to
Total
Allowance
    Percent of
Loans in
Category to
Total Loans
 
     (Dollars in thousands)  

One- to four-family residential

   $ 367         72.7     80.1   $ 301         83.4     82.1

Non owner-occupied one- to four-family residential

     46         9.1        6.9        27         7.5        7.7   

Commercial real estate

     32         6.3        5.1        15         4.2        4.7   

Consumer

     60         11.9        7.8        18         5.0        5.5   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 505         100.0     100.0   $ 361         100.0     100.0
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Investments

General. Our investment policy is established by the board of directors. Our investment policy dictates that investment decisions will be made based on the safety of the investment, liquidity and pledging requirements, our interest rate risk and our potential long term earnings. The Investment Committee of the board of directors is responsible for overseeing our investment program and evaluating on an ongoing basis our investment policy and objectives. Our Chief Executive Officer has the authority to purchase securities within specific guidelines established by the investment policy. All transactions are reviewed by the board of directors at its regular meetings. U.S. GAAP requires that securities be categorized as “held to maturity,” “trading securities” or “available for sale,” based on management’s intent as to the ultimate disposition of each security. U.S. GAAP allows debt securities to be classified as “held to maturity” and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, or other similar factors cannot be classified as “held to maturity.”

At December 31, 2015, all of our securities were classified as available-for-sale.

Our investment policy does not permit hedging activities, such as futures, options or swap transactions, gains trading or short sales. Additionally, securities deemed unacceptable for our portfolio include any security whose interest rate is tied to a foreign currency exchange rate.

The following table sets forth the amortized cost and fair value of our securities portfolio (excluding Federal Home Loan Bank of Des Moines and Bankers’ Bank common stock) at the dates indicated. At the dates indicated, all of our investment securities were held as available for sale.

 

     At December 31,  
     2015      2014  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In thousands)  

U.S government and agency securities

   $ —         $ —         $ 3,809       $ 3,809   

Mortgage-backed securities (1)

     17,523         17,356         21,088         21,232   

Municipal securities

     18,300         18,613         14,383         14,569   

Corporate securities

     552         557         1,052         1,065   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 36,375       $ 36,526       $ 40,332       $ 40,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents securities issued by Fannie Mae, Freddie Mac or Ginnie Mae, and are backed by residential mortgage loans.

 

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Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio and the mortgage-backed securities portfolio at December 31, 2015 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. No tax-equivalent yield adjustments were made. Our municipal securities are all tax-exempt. All of our securities at this date were held as available-for-sale.

 

    One Year or Less     More than One Year
through Five Years
    More than Five Years
through Ten Years
    More than Ten Years     Total Securities  
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Fair Value     Weighted
Average
Yield
 
    (Dollars in thousands)  

Mortgage-backed securities

  $ 5        4.76   $ 20        2.28   $ 5,885        1.55   $ 11,613        1.68   $ 17,523      $ 17,356        1.64

Municipal securities

    445        2.48     2,476        1.96     13,593        2.34     1,786        2.76     18,300        18,613        2.33

Corporate securities

    —              500        2.69     —            $ 52        6.45   $ 552      $ 557        3.04
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

  $ 450        2.51   $ 2,996        2.09   $ 19,478        2.10   $ 13,451        1.84   $ 36,375      $ 36,526        2.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Sources of Funds

General. Deposits traditionally have been our primary source of funds for our lending activities and, as applicable, other investments. We also borrow from the Federal Home Loan Bank of Des Moines to supplement cash flow needs, and at December 31, 2015 we had $8.0 million of FHLB advances outstanding. We also have an available line of credit in the amount of $1.0 million at Bankers’ Bank, of which there was no amount outstanding at December 31, 2015. Our additional sources of funds are scheduled loan repayments, loan prepayments, retained earnings and the proceeds of loan and securities sales.

Deposits. We accept deposits primarily from individuals who reside in and businesses located in our market area. We rely on our competitive pricing and products, convenient location and quality customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of statement savings accounts, money market accounts, NOW accounts and certificates of deposits.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements and our deposit growth goals. Historically we have not relied on brokered deposits and at December 31, 2015 and 2014, we did not have any brokered deposits.

The following table sets forth the distribution of average total deposits by account type, for the periods indicated.

 

     For the Years Ended December 31,  
     2015     2014  
     Average
Balance
     Percent     Weighted
Average
Rate
    Average
Balance
     Percent     Weighted
Average
Rate
 
     (Dollars in thousands)  

Deposit type:

              

Statement savings

   $ 11,977         13.1     0.18   $ 11,314         12.1     0.21

Money market

     12,121         13.3        0.27        11,926         12.7        0.24   

NOW

     17,900         19.6        0.07        16,654         17.8        0.11   

Certificates of deposit

     49,346         54.0        1.00        53,772         57.4        1.08   
  

 

 

    

 

 

     

 

 

    

 

 

   

Total deposits

   $ 91,344         100.0     0.65   $ 93,666         100.0     0.73
  

 

 

    

 

 

     

 

 

    

 

 

   

 

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The following table sets forth all our certificates of deposit classified by interest rate as of the dates indicated.

 

     At December 31,  
     2015      2014  
     (In thousands)  

Interest Rate:

     

Less than 1%

   $ 18,969       $ 22,309   

1.00% - 1.99%

     18,038         14,592   

2.00% - 2.99%

     9,252         12,660   

3.00% - 3.99%

     —           2,479   
  

 

 

    

 

 

 

Total

   $ 46,259       $ 52,040   
  

 

 

    

 

 

 

The following table sets forth the amount and maturities of all our certificates of deposit by interest rate at December 31, 2015.

 

     At December 31, 2015  
     Period to Maturity  
     Less Than
or Equal to
One Year
     Over One
Year to Two
Years
     Over Two
Years to
Three Years
     Over Three
Years
     Total      Percentage
of Total
Certificate
Accounts
 
     (Dollars in thousands)  

Interest Rate:

                 

Less than or equal to1.00%

   $ 15,341       $ 3,449       $ 179       $ —         $ 18,969         41.0

1.00% - 1.99%

     3,594         4,340         3,371         6,733         18,038         39.0   

2.00% - 2.99%

     3,904         4,854         494         —           9,251         20.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,839       $ 12,623       $ 4,044       $ 6,733       $ 46,258         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2015, the aggregate amount of our outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $13.3 million. The following table sets forth the maturity of those certificates as of December 31, 2015.

 

     At
December 31, 2015
 
     (In thousands)  

Three months or less

   $ 1,152   

Over three months through six months

     699   

Over six months through one year

     5,749   

Over one year to three years

     3,865   

Over three years

     1,808   
  

 

 

 

Total

   $ 13,273   
  

 

 

 

Borrowings. We may obtain advances from the FHLB of Des Moines utilizing the security of the common stock we own in the FHLB of Des Moines and qualifying residential mortgage loans as collateral, provided certain standards related to creditworthiness are met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. FHLB

 

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of Des Moines advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. The following table sets forth information concerning balances and interest rates on our borrowings at and for the periods shown:

 

     At or For the Years Ended
December 31,
 
     2015     2014  
     (Dollars in thousands)  

FHLB:

    

Balance at end of period

   $ 8,000      $ 1,000   

Average balance during period

   $ 2,603      $ 1,014   

Maximum outstanding at any month end

   $ 8,000      $ 1,100   

Weighted average interest rate at end of period

     0.95     5.10

Average interest rate during period

     1.96     5.13

Properties

We operate from our main office located at 401 Fair Meadow Drive, Webster City, Iowa 50595 and our branch office located at 305 First Street West, Independence, Iowa 50644. Both of our premises are owned. The net book value of our premises, land and equipment was $4.6 million at December 31, 2015. We believe that our current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.

Legal Proceedings

At December 31, 2015, we were not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.

Personnel

As of December 31, 2015, we had 20 full-time equivalent employees. Our employees are not represented by any collective bargaining group. We believe that we have a good working relationship with our employees.

Subsidiary Activity

WCF Financial Bank is the only direct subsidiary of Webster City Federal Bancorp. WCF Financial Bank has one subsidiary, WCF Financial Service Corp., an inactive Iowa corporation that previously provided insurance products, but no longer conducts any business.

Upon completion of the conversion, WCF Financial Bank will become the wholly owned subsidiary of WCF Bancorp.

SUPERVISION AND REGULATION

General

As a federal savings bank, WCF Financial Bank is subject to examination and regulation by the OCC, and is also subject to examination by the FDIC. The federal system of regulation and supervision establishes a comprehensive framework of activities in which WCF Financial Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund. This

 

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regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors, and not for the protection of security holders. WCF Financial Bank also is a member of and owns stock in the Federal Home Loan Bank of Des Moines, which is one of the 11 regional banks in the Federal Home Loan Bank System.

Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as WCF Financial Bank or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.

In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.

As a savings and loan holding company following the conversion, WCF Bancorp will be required to comply with the rules and regulations of the Federal Reserve Board. It will be required to file certain reports with the Federal Reserve Board and will be subject to examination by and the enforcement authority of the Federal Reserve Board. WCF Bancorp will also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in applicable laws or regulations, whether by the OCC, the FDIC, the Federal Reserve Board or Congress, could have a material adverse impact on the operations and financial performance of WCF Bancorp and WCF Financial Bank.

Set forth below is a brief description of material regulatory requirements that are or will be applicable to WCF Financial Bank and WCF Bancorp. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on WCF Financial Bank and WCF Bancorp.

Federal Banking Regulation

Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, WCF Financial Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. WCF Financial Bank may also establish subsidiaries that may engage in certain activities not otherwise permissible for WCF Financial Bank, including real estate investment and securities and insurance brokerage.

 

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Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% of risk-weighted assets on January 1, 2019.

At December 31, 2015, WCF Financial Bank’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2015, WCF Financial Bank was in compliance with the loans-to-one borrower limitations.

Qualified Thrift Lender Test. As a federal savings association, WCF Financial Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, WCF Financial Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

 

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WCF Financial Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended. This test generally requires a savings association to have at least 75% of its deposits held by the public and earn at least 25% of its income from loans and U.S. government obligations. Alternatively, a savings association can satisfy this test by maintaining at least 60% of its assets in cash, real estate loans and U.S. Government or state obligations.

A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2015, WCF Financial Bank satisfied the QTL test.

Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application with the OCC for approval of a capital distribution if:

 

    the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;

 

    the savings association would not be at least adequately capitalized following the distribution;

 

    the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

 

    the savings association is not eligible for expedited treatment of its filings, generally due to an unsatisfactory CAMELS rating or being subject to a cease and desist order or formal written agreement that requires action to improve the institution’s financial condition.

Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as WCF Financial Bank, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

A notice or application related to a capital distribution may be disapproved if:

 

    the federal savings association would be undercapitalized following the distribution;

 

    the proposed capital distribution raises safety and soundness concerns; or

 

    the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

 

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In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.

Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the OCC is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.

The Community Reinvestment Act requires all institutions insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. WCF Financial Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository institution such as WCF Financial Bank. WCF Bancorp will be an affiliate of WCF Financial Bank because of its control of WCF Financial Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.

WCF Financial Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

 

    be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

    not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of WCF Financial Bank’s capital.

 

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In addition, extensions of credit in excess of certain limits must be approved by WCF Financial Bank’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, shareholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Interstate Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.

Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The applicable OCC regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. Under the amended regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage

 

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ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the Federal Reserve Board to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

At December 31, 2015, WCF Financial Bank met the criteria for being considered “well capitalized.”

Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as WCF Financial Bank. Deposit accounts in WCF Financial Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s deposits.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC, which has exercised that discretion by establishing a long range fund ratio of 2%.

 

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The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of WCF Financial Bank. We cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2015, the annualized FICO assessment was equal to 0.60 basis points of total assets less tangible capital.

Privacy Regulations. Federal regulations generally require that WCF Financial Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, WCF Financial Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. WCF Financial Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

USA Patriot Act. WCF Financial Bank is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.

Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Other Regulations

Interest and other charges collected or contracted for by WCF Financial Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:

 

    Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

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    Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

    Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; and

 

    Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such federal and state laws.

The deposit operations of WCF Financial Bank also are subject to, among others, the:

 

    Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

    Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and

 

    Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Federal Reserve System

The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $103.6 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $103.6 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $14.5 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. WCF Financial Bank is in compliance with these requirements.

Federal Home Loan Bank System

WCF Financial Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. WCF Financial Bank was in compliance with this requirement at December 31, 2015. Based on redemption provisions of the Federal Home Loan Bank of Des Moines, the stock has no quoted market value and is carried at cost. WCF Financial Bank reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of Des Moines stock. As of December 31, 2015, no impairment has been recognized.

 

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Holding Company Regulation

WCF Bancorp will be a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board will have enforcement authority over WCF Bancorp and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to WCF Financial Bank.

As a savings and loan holding company, WCF Bancorp’s activities will be limited to those activities permissible by law for financial holding companies (if WCF Bancorp makes an election to be treated as a financial holding company and meets the other requirements to be a financial holding company) or multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending and other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, insurance and underwriting equity securities. Multiple savings and loan holding companies are authorized to engage in activities specified by federal regulation, including activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act.

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.

Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act requires the Federal Reserve Board to establish minimum consolidated capital requirements for all depository institution holding companies that are as stringent as those required for the insured depository subsidiaries. However, legislation was enacted in December 2014 that required the Federal Reserve Board to amend its “Small Bank Holding Company” exemption from consolidated holding company capital requirements to generally extend its applicability to bank and savings and loan holding companies of up to $1 billion in assets. Regulations implementing this amendment were effective May 15, 2015. Consequently, savings and loan holding companies of under $1 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in particular cases.

The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” policy that require holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

 

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The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of WCF Bancorp to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

In order for WCF Bancorp to be regulated as savings and loan holding company by the Federal Reserve Board, rather than as a bank holding company, WCF Financial Bank must qualify as a “qualified thrift lender” under federal regulations or satisfy the “domestic building and loan association” test under the Internal Revenue Code. Under the qualified thrift lender test, a savings institution is required to maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangible assets, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine out of each 12 month period. At December 31, 2015, WCF Financial Bank maintained 88.6% of its portfolio assets in qualified thrift investments and was in compliance with the qualified thrift lender requirement.

Federal Securities Laws

WCF Bancorp common stock will be registered with the Securities and Exchange Commission after the conversion and stock offering. WCF Bancorp will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in WCF Bancorp’s public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of WCF Bancorp may be resold without registration. Shares purchased by an affiliate of WCF Bancorp will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If WCF Bancorp meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of WCF Bancorp that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of WCF Bancorp, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, WCF Bancorp may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

 

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Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as WCF Bancorp unless the Federal Reserve Board has been given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as will be the case with WCF Bancorp, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.    

TAXATION

WCF Financial, M.H.C., Webster City Federal Bancorp and WCF Financial Bank are, and WCF Bancorp will be, subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent tax matters and is not a comprehensive description of the tax rules applicable to Webster City Federal Bancorp, WCF Bancorp or WCF Financial Bank.

Webster City Federal Bancorp is currently open to audit under statute of limitations by the Internal Revenue Service and state taxing authorities for the fiscal years ended December 31, 2012 through December 31, 2015. Neither the federal tax return nor the state tax return has been audited for the last five years.

Federal Taxation

Method of Accounting. For federal income tax purposes, Webster City Federal Bancorp and WCF Financial Bank currently report their income and expenses on the accrual method of accounting and use a tax year ending December 31 for filing their federal income tax returns.

Bad Debt Reserves. Prior to the Small Business Protection Act of 1996 (the “1996 Act”), WCF Financial Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of the 1996 Act, WCF Financial Bank has elected to use the experience method in

 

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computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At December 31, 2015, WCF Financial Bank had no reserves subject to recapture in excess of its base year reserves.

Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if WCF Financial Bank failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift-related recapture rules. At December 31, 2015, our total federal pre-1988 base year reserve was approximately $2.1 million. However, under current law, pre-1988 base year reserves remain subject to recapture if WCF Financial Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.

Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences, which we refer to as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years. At December 31, 2015, Webster City Federal Bancorp had $62,000 of AMT payments available to carry forward to future periods.

Net Operating Loss Carryovers. A company may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2015, Webster City Federal Bancorp had $0 in net operating loss carry forwards for federal income tax purposes.

Corporate Dividends-Received Deduction. Webster City Federal Bancorp may exclude from its income 100% of dividends received from WCF Financial Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is 80% in the case of dividends received from a corporation in which a corporate recipient owns at least 20% of its stock, and corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.

State Taxation

WCF Bancorp will file an Iowa corporation tax return, and the Bank files an Iowa franchise income tax return.

The Iowa corporate income tax rate ranges from 6% to 12% depending upon Iowa taxable income. Interest from federal securities is not taxable for purposes of the Iowa corporate income tax.

Iowa imposes a financial institution franchise tax, in lieu of the corporate income tax, on the Iowa franchise taxable income of financial institutions at the rate of 5%. Iowa franchise taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable, and no deduction is allowed for state franchise taxes. The net operating loss carryforward rules are similar to the federal rules. However, Iowa no longer allows carrybacks of net operating losses for tax years beginning on or after January 1, 2009.

 

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MANAGEMENT

Our Directors and Executive Officers

Directors of WCF Bancorp serve three-year staggered terms so that approximately one-third of the directors are elected at each annual meeting. The executive officers of WCF Bancorp and WCF Financial Bank are elected annually. The following table states our directors’ and executive officers’ names, their ages as of December 31, 2015, the years when they began serving as directors of WCF Financial Bank and the years when their current terms expire.

 

Name (1)

  

Position(s) Held With

WCF Bancorp and WCF Financial Bank

   Age     

Director

Since

  

Current Term
Expires

C. Thomas Chalstrom

   Director      51       2014    2019

Leo Moriarity

   Director      56       2000    2017

Stephen L. Mourlam

   President, Chief Executive Officer and Director      63       2001    2018

Harold J. Pursley

   Chairman of the board of directors      73       2007    2019

Kyle R. Swon

   Senior Vice President and Director      54       2001    2017

Kasie L. Doering

   Chief Financial Officer      38       n/a    n/a

 

(1) The mailing address for each person listed is 401 Fair Meadow Drive, Webster City, Iowa 50595.

The business experience for the past five years of each of our directors and executive officers is set forth below. With regard to our directors, the biographies also contain information regarding the person’s experience, qualifications, attributes or skills that caused the board of directors to determine that the person should serve as a director. Each director is also a director of WCF Financial Bank. Unless otherwise indicated, directors and executive officers have held their positions for the past five years.

Directors

C. Thomas Chalstrom is the President and Chief Executive Officer of First Federal Credit Union, Cedar Rapids, Iowa, a position he has held since September 2013. Prior to this, from June 2012 until August 2013, following the sale of First Federal Savings Bank of Iowa, Mr. Chalstrom was a consultant. From 1985 until its sale in 2012, Mr. Chalstrom served in positions of increasing importance at First Federal Savings Bank of Iowa. Mr. Chalstrom has over 25 years experience as a senior executive of a financial institution and his extensive banking experience in both lending and management provides the board with industry insights and valuable perspectives in assessing strategic direction of WCF Financial Bank.    

Dr. Leo Moriarity is a dentist with offices in Webster City and Clarion, Iowa. Dr. Moriarity is our longest serving board member and as such provides the board with extensive institutional knowledge of WCF Financial Bank. Additional, Dr. Moriarity provides the board with managerial and financial experience as a small business owner.

Stephen L. Mourlam is our President and Chief Executive Officer, positions he has held since January 2009. Mr. Moral began his employment with WCF Financial Bank in 1979 and held positions of increasing responsibility during his tenure. Mr. Mourlam’s experience provides the Board with a perspective on the day to day operations of WCF Financial Bank, and assists the board in assessing the trends and developments in the financial institutions industry on a local and national basis. Additionally, Mr. Mourlam has extensive ties to the communities that support our business generation.

 

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Harold J. Pursley is retired. Prior to his retirement in 2008, Mr. Pursley was the chief executive officer of IMD Medical, a medical device company. Mr. Pursley additionally had over 30 years of accounting experience during his career, including serving as controller or chief financial officer for various companies. Mr. Pursley’s expertise and background with regard to accounting matters and internal controls and business finance provide the board and the Audit Committee with valuable insight into accounting issues involving WCF Financial Bank.

Kyle R. Swon is our Senior Vice President, a position he has held since January 2009. Mr. Swon has been employed by WCF Financial Bank since 1987. Mr. Swon’s experience provides the board with a perspective on the day to day operations of WCF Financial Bank, and assists the board in assessing the trends and developments in the financial institutions industry on a local basis. Additionally, Mr. Swon has extensive ties to the communities that support our business generation.

Executive Officer Who is Not a Director

Kasie L. Doering is our Chief Financial Officer, a position she has held since February 2016. Prior to her employment with WCF Financial Bank, from 2007 until January 2016, Ms. Doering held the position of Program Manager for Academic Budgeting and Planning at Iowa State University, Ames, Iowa.

Board Independence

The board of directors has determined that, except for Messrs. Mourlam and Swon, each member of the board of directors is an “independent director” as defined in the Nasdaq listing rules, which we choose to follow. Messrs. Mourlam and Swon are not considered independent because they serve as executive officers of Webster City Federal Bancorp and WCF Financial Bank. In evaluating the independence of our independent directors, we found no transactions between us and our independent directors that are not required to be reported under “ – Transactions With Certain Related Persons,” below, and that had an impact on our determination as to the independence of our directors.

Codes of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that is applicable to our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Business Conduct and Ethics is available on our website at www.wcfbank.com. Amendments to and waivers from the Code of Business Conduct and Ethics will also be disclosed on our website.

Transactions With Certain Related Persons

All transactions between Webster City Federal Bancorp and its executive officers, directors, holders of 10% or more of the shares of its common stock and affiliates thereof, are on terms no less favorable to Webster City Federal Bancorp than could have been obtained by it in arms-length negotiations with unaffiliated persons. Such transactions must be approved by a majority of the independent directors of Webster City Federal Bancorp not having any interest in the transaction. In the ordinary course of business, WCF Financial Bank makes loans available to its directors, officers and employees. These loans are made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to WCF Financial Bank. These loans neither involve more than the normal risk of collectibility nor present other unfavorable features.

 

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Section 402 of the Sarbanes-Oxley Act of 2002 generally prohibits an issuer from (1) extending or maintaining credit, (2) arranging for the extension of credit, or (3) renewing an extension of credit in the form of a personal loan, to an officer or director. There are several exceptions to this general prohibition, one of which is applicable to Webster City Federal Bancorp. The Sarbanes-Oxley Act does not apply to loans made by a depository institution that is insured by the FDIC and is subject to the insider lending restrictions of the Federal Reserve Act. All loans to WCF Financial Bank’s directors and officers are made in conformity with the Federal Reserve Act and applicable regulations.

In accordance with the listing standards of the Nasdaq Stock Market which we choose to follow, any transactions that would be required to be reported under this section of this prospectus must be reviewed by our audit committee or another independent body of the board of directors. In addition, any transaction with a director is reviewed by and subject to approval of the members of the board of directors who are not directly involved in the proposed transaction, to confirm that the transaction is on terms that are no less favorable as those that would be available to us from an unrelated party through an arms-length transaction.

Executive Compensation

The following table sets forth for the years ended December 31, 2015 and 2014 certain information as to the total remuneration paid by us to Messrs. Mourlam and Swon. No other executive officer received total compensation for the year ended December 31, 2015 of more than $100,000. Each individual listed below is referred to as a “named executive officer.”

 

     SUMMARY COMPENSATION TABLE  

Name and Principal Position

   Year      Salary ($)      Bonus ($)(1)      All Other
Compensation
($) (2)
     Total ($)  

Stephen L. Mourlam

President and Chief Executive Officer

     2015         139,417         500         12,450         152,367   

Kyle R. Swon

Senior Vice President

     2015         105,994         500         12,450         118,944   

 

(1) Represents a holiday bonus payable to all employees of WCF Financial Bank.
(2) Represents board fees payable for services rendered in 2015. Beginning in 2016, directors who are also officers of WCF Financial Bank will no longer receive board fees.

Benefit Plans

Change in Control Agreements. As of the effective date of the conversion, WCF Financial Bank intends to enter into change in control agreements with Messrs. Mourlam and Swon that will supersede and replace their existing severance agreements with WCF Financial Bank. The terms of proposed change in control agreements are substantially similar to with the existing severance agreements.

 

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The change in control agreements will have an initial term of two years. At least 60 days prior to the anniversary date of the agreements, the disinterested members of the board of directors must conduct a comprehensive performance evaluation and affirmatively approve any extension of the agreements for an additional year or determine not to extend the term of the agreements. If the board of directors determines not to extend the term, it must notify the executive at least 30 days, but not more than 60 days, prior to such date.

In the event that the executive’s involuntary termination of employment other than for cause, disability or death, or voluntary resignation for “good reason” occurs on or after the effective date of a change in control of WCF Bancorp or WCF Financial Bank, the executive would be entitled to a severance payment equal to two times the average of the three preceding years’ annual base salary, bonuses and any other cash compensation paid or accrued by the executive during such years, and the amount of any benefits received pursuant to any employee benefit plans on behalf of the executive by WCF Financial Bank during such years, excluding health and welfare benefits. Such payment will be payable in a lump sum within 30 days following the executive’s date of termination. In addition, the executive would be entitled to the continuation of substantially comparable life insurance and non-taxable medical and dental insurance coverage under the same cost sharing arrangements that apply for active employees of WCF Financial Bank. Such coverage will cease upon the date which is two years after the executive’s date of termination.

Notwithstanding the foregoing, the payments required under the agreements will be reduced to the extent necessary to avoid penalties under Code Section 280G. For purposes of the change in control agreements, “good reason” is defined as: (1) a material reduction in the executive’s base compensation in effect immediately prior to the date of a change in control; (2) a material reduction in the executive’s duties or responsibilities as in effect prior to a change in control; (3) a material diminution in the authority, duties or responsibilities of the officer to whom the executive is required to report; (4) any material change in the geographic location at which the executive must perform his services to WCF Financial Bank; and (5) a material breach of the change in control agreements by WCF Financial Bank.

401(k) Plan. Webster City Federal Bancorp and WCF Financial Bank currently maintain The Architect 401(k) MEP, which is a multiple-employer tax-qualified profit sharing plan with a salary deferral feature under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). All employees who have attained age 21 and have completed one year of employment during which they worked at least 1,000 hours are eligible to participate in the plan.

A participant may elect to contribute up to 100% of his or her compensation to the 401(k) Plan on a pre-tax basis, subject to the limitations imposed by the Internal Revenue Code. For 2016, the pre-tax deferral contribution limit is $18,000, provided, however, that a participant over age 50 may contribute, on a pre-tax basis, an additional $6,000 to the 401(k) Plan. In addition to salary deferral contributions, the 401(k) Plan provides that WCF Financial Bank will make a matching contribution to each participant’s account equal to 100% of the participant’s contribution, up to 6% of the participant’s elective deferral contributions. WCF Financial Bank may, in its sole discretion, make a profit sharing contribution to the 401(k) Plan on behalf of the participants. A participant is always 100% vested in his or her salary deferral and employer contributions. The 401(k) Plan permits a participant to direct the investment of his or her own account into various available investment options.

Generally, a participant (or participant’s beneficiary) may receive a distribution from his or her vested account at retirement, age 59 12 (while employed), death, disability or termination of employment, and the distribution will be made in a cash lump sum payment.

 

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Stock Benefit Plans

Employee Stock Ownership Plan. In connection with the conversion, WCF Financial Bank adopted an employee stock ownership plan for eligible employees. WCF Financial Bank’s named executive officers are eligible to participate in the employee stock ownership plan just like any other employee. Eligible employees who have attained age 21 and were employed by us as of January 1, 2016 will begin participation in the employee stock ownership plan on the later of the effective date of the employee stock ownership plan or upon the first entry date commencing on or after the eligible employee’s completion of 1,000 hours of service during a continuous 12-month period.

The employee stock ownership plan trustee is expected to purchase, on behalf of the employee stock ownership plan, 8% of the total number of shares of WCF Bancorp common stock sold in the offering. We anticipate that the employee stock ownership plan will fund its stock purchase with a loan from WCF Bancorp equal to the aggregate purchase price of the common stock. The loan will be repaid principally through WCF Financial Bank’s contribution to the employee stock ownership plan and dividends payable on common stock held by the employee stock ownership plan over the anticipated 25-year term of the loan. The interest rate for the employee stock ownership plan loan is expected to be an adjustable rate equal to the prime rate, as published in The Wall Street Journal, on the closing date of the offering. Thereafter the interest rate will adjust annually and will be the prime rate on the first business day of the calendar year, retroactive to January 1 of such year. See “Pro Forma Data.”

The trustee will hold the shares purchased by the employee stock ownership plan in an unallocated suspense account, and shares will be released from the suspense account on a pro-rata basis as we repay the loan. The trustee will allocate the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. A participant will become vested in his or her account balance at a rate of 20% per year over a 6-year period, beginning in the second year. Participants who were employed by WCF Financial Bank immediately prior to the offering will receive credit for vesting purposes for years of service prior to adoption of the employee stock ownership plan. Participants also will become fully vested automatically upon normal retirement, death or disability, a change in control, or termination of the employee stock ownership plan. Generally, participants will receive distributions from the employee stock ownership plan upon separation from service. The employee stock ownership plan reallocates any unvested shares forfeited upon termination of employment among the remaining participants.

The employee stock ownership plan permits participants to direct the trustee as to how to vote the shares of common stock allocated to their accounts. The trustee votes unallocated shares and allocated shares for which participants do not provide instructions on any matter in the same ratio as those shares for which participants provide instructions, subject to fulfillment of the trustee’s fiduciary responsibilities.

Under applicable accounting requirements, WCF Financial Bank will record a compensation expense for the employee stock ownership plan at the fair market value of the shares as they are committed to be released from the unallocated suspense account to participants’ accounts, which may be more or less than the original issue price. The compensation expense resulting from the release of the common stock from the suspense account and allocation to plan participants will result in a corresponding reduction in WCF Bancorp’s earnings.

 

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Director Compensation

The following table sets forth for the year ended December 31, 2015 certain information as to the total remuneration paid to directors other than Messrs. Mourlam and Swon.

 

     DIRECTOR COMPENATION  

Name

   Fees Earned or
Paid in Cash ($)
     Nonqualified
Deferred
Compensation
Earnings ($)(1)
     All Other
Compensation ($)
     Total ($)  

C. Thomas Chalstrom

     12,450         —           —           12,450   

Leo Moriarity

     12,450         —           —           12,450   

Harold Pursley

     12,450         968         —           13,418   

Dennis Tasler (2)

     4,000         —           —           4,000   

 

(1) Represents above-market earnings on compensation that was deferred by Mr. Pursley pursuant to the 2005 Director Deferred Compensation Plan, as calculated in accordance with SEC rules.
(2) Mr. Tasler retired from the board of directors in May 2015.

Director Fees

WCF Financial Bank pays each outside director a monthly retainer of $600 and an additional $400 per meeting attended. Directors do not receive additional fees for board committees. Webster City Federal Bancorp does not separately compensate directors for their service.

Director Plans

2005 Director Deferred Compensation Plan. WCF Financial Bank adopted the Amended and Restated WCF Financial Bank 2005 Director Deferred Compensation Plan, effective January 1, 2005. Any member of the board of directors is eligible to participate in the plan. The plan allows for a participant to elect to defer up to 100% of his director fees to the plan. All amounts contributed to the plan are credited to a bookkeeping account established on behalf of each participant. The participant’s account balance will be credited with earnings based on an adjustable rate equal to 1.0% above the prime rate, as published in The Wall Street Journal. The interest rate adjusts annually and will be 1.0% above the prime rate on the first business day of the plan year, retroactive to January 1, of such year.

Each participant will have the right to elect for the payment of his account balance to commence on either a specified date or upon his separation from service (the “commencement date”). However, the participant’s account balance may be paid out prior to the commencement date due to the participant’s death or disability. Generally, the participant’s account balance will be payable in a lump sum distribution. However, a participant can elect for his account balance to be payable in equal monthly installments over a period of either five or 10 years. In the event of the director’s separation from service within two years following a change in control of WCF Bancorp or WCF Financial Bank, the participant’s account balance will accrue earnings at an interest rate equal to 7.0% from his date of termination until his account balance has been fully distributed.

Benefits to be Considered Following Completion of the Conversion

Following the stock offering, we intend to adopt a stock-based benefit plan that will provide for grants of stock options and restricted common stock awards. If adopted within 12 months following the completion of the conversion, the aggregate number of shares reserved for the exercise of stock options or available for stock awards under the stock-based benefit plan would be limited to 10% and 4%, respectively, of the shares sold in the stock offering.

 

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The stock-based benefit plan will not be established sooner than six months after the stock offering, and if adopted within one year after the stock offering, the plans must be approved by a majority of the votes eligible to be cast by our stockholders. If stock-based benefit plans are established more than one year after the stock offering, they must be approved by a majority of votes cast by our stockholders. The following additional restrictions would apply to our stock-based benefit plans only if such plans are adopted within one year after the stock offering:

 

    non-employee directors in the aggregate may not receive more than 30% of the options and restricted stock awards authorized under the plans;

 

    any one non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plans;

 

    any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plans;

 

    any tax-qualified employee stock benefit plans and restricted stock plans, in the aggregate, may not acquire more than 10% of the shares sold in the offering, unless WCF Financial Bank has tangible capital of 10% or more, in which case tax-qualified employee stock benefit plans and restricted stock plans may acquire up to 12% of the shares sold in the offering;

 

    the options and restricted stock awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plans;

 

    accelerated vesting is not permitted except for death, disability or upon a change in control of WCF Financial Bank or WCF Bancorp; and

 

    our executive officers or directors must exercise or forfeit their options in the event that WCF Financial Bank becomes critically undercapitalized, is subject to enforcement action or receives a capital directive.

We have not determined whether we will present the stock-based benefit plan for stockholder approval prior to or more than 12 months after the completion of the conversion. If either federal or state regulators change their regulations or policies regarding stock-based benefit plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.

We may obtain the shares needed for our stock-based benefit plan by issuing additional shares of common stock from authorized but unissued shares or through stock repurchases.

 

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Table of Contents

The actual value of the shares awarded under a stock-based benefit plan would be based in part on the price of WCF Bancorp’s common stock at the time the shares are awarded. The following table presents the total value of all shares of restricted stock that would be available for issuance under the stock-based benefit plans, assuming the shares are awarded when the market price of our common stock ranges from $6.00 per share to $12.00 per share.

 

Share Price     55,250 Shares
Awarded at Minimum of
Offering Range
    65,000 Shares
Awarded at Midpoint
of Offering Range
    74,750 Shares
Awarded at Maximum of
Offering Range
    85,963 Shares
Awarded at
Adjusted Maximum
of Offering Range
 
(In thousands, except share price information)  
$ 6.00      $ 332      $ 390      $ 449      $ 516   
  8.00        442        520        598        688   
  10.00        553        650        748        860   
  12.00        663        780        897        1,032   

The grant-date fair value of the options granted under the stock-based benefit plan will be based in part on the price of shares of common stock of WCF Bancorp at the time the options are granted. The value also will depend on the various assumptions utilized in the option pricing model ultimately adopted. The following table presents the total estimated value of the options to be available for grant under the stock-based benefit plans, assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares is $6.00 per share to $12.00 per share. The Black-Scholes option pricing model provides an estimate only of the fair value of the options, and the actual value of the options may differ significantly from the value set forth in this table.

 

Exercise Price     Grant-Date Fair
Value Per Option
    138,125 Options at
Minimum of Offering
Range
    162,500 Options at
Midpoint of Offering
Range
    186,875 Options at
Maximum of Offering
Range
    214,906 Options at
Adjusted Maximum of
Offering Range
 
(In thousands, except exercise price and fair value information)  
$ 6.00      $ 0.79      $ 109      $ 128      $ 148      $ 170   
  8.00        1.05        145        171        196