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EX-31.2 - EXHIBIT 31.2 - ANCHOR BANCORP WISCONSIN INCex312.htm
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EX-32.1 - EXHIBIT 32.1 - ANCHOR BANCORP WISCONSIN INCex321.htm
EX-32.2 - EXHIBIT 32.2 - ANCHOR BANCORP WISCONSIN INCex322.htm
EX-24.1 - EXHIBIT 24.1 - ANCHOR BANCORP WISCONSIN INCex241.htm
EX-23.1 - EXHIBIT 23.1 - ANCHOR BANCORP WISCONSIN INCex231.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-34955
 
 
 
ANCHOR BANCORP WISCONSIN INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
39-1726871
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
25 West Main Street
Madison, Wisconsin 53703
(Address of principal executive office)
Registrant’s telephone number, including area code (608) 252-8700
Securities registered pursuant to Section 12 (b) of the Act:
Common stock, par value $0.01 per share
 
Nasdaq Global Market
(Title of Class)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12 (g) of the Act:
Not Applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.  ý
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.
Large accelerated filer
 
¨
Accelerated filer
 
ý
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Indicate by check mark whether the registrant has filed all reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court.    Yes  ý    No  ¨
As of February 29, 2016, 9,597,392 shares of the Registrant’s common stock were outstanding. The aggregate market value of the outstanding shares of common stock (based upon the $37.98 last sale price on June 30, 2015, the last trading date of the Company’s second fiscal quarter) held by non-affiliates (excluding outstanding shares reported as beneficially owned by directors and executive officers; does not constitute an admission as to affiliate status) was approximately $287.1 million.
Documents Incorporated by Reference
The information required to be disclosed pursuant to Part III of this report either shall be (i) deemed to be incorporated by reference from selected portions of the Registrant’s definitive proxy statement for the 2016 annual meeting of stockholders, if such proxy statement is filed with the Securities and Exchange Commission (the “SEC”) pursuant to Regulation 14A not later than 120 days after the end of the Registrant’s most recently completed fiscal year, or (ii) included in an amendment to this report filed with the SEC on Form 10-K/A not later than the end of such 120 day period.



ANCHOR BANCORP WISCONSIN INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
 
Page
 
PART I
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
 
Item 15.
 

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FORWARD-LOOKING STATEMENTS
In the normal course of business, Anchor BanCorp Wisconsin Inc. (the "Company", “we”, “our”), in an effort to help keep our stockholders and the public informed about our operations, may from time to time issue or make certain statements, either in writing or orally, that are or contain forward-looking statements, as that term is defined in the U.S. federal securities laws. This annual report contains “forward-looking statements” within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to business plans or strategies, projected or anticipated benefits from strategic transactions made by or to be made, projections involving anticipated revenues, earnings, liquidity, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as “anticipate,” “believe,” “project,” “continue,” “ongoing,” “expect,” “intend,” “plan,” “estimate” or similar expressions.
Although we believe that the anticipated results or other expectations reflected in our forward-looking statements are based on reasonable assumptions, we can give no assurance that those results or expectations will be attained. Forward-looking statements involve risks, uncertainties and assumptions, some of which are beyond our control, and as a result, actual results may differ materially from those expressed in forward-looking statements due to several factors more fully described in “Risk Factors,” as well as elsewhere in this report. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to, the following, as well as those discussed elsewhere herein:
our ability to successfully execute the merger with Old National Bancorp (as defined later);
our ability to successfully transform our business and implement our business strategy;
the risk that even though we have reversed substantially all of the deferred tax asset valuation allowance, we may be required to increase the valuation allowance in future periods, or we may not be able to realize the deferred tax assets in the future;
changes in the quality or composition of our loan and investment portfolios, other real estate owned values and the allowance for loan losses;
impact of potential impairment in a challenging economy;
the ability of AnchorBank, fsb (the "Bank"), the Company's wholly owned subsidiary, to pay dividends;
our ability to address our liquidity needs;
deterioration in the value of commercial real estate, land and construction loan portfolios resulting in increased loan losses;
uncertainties about market interest rates;
demand for financial services, loss of customer confidence and customer deposit account withdrawals;
competitive pressures intensifying and affecting our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments or bank regulatory reform;
security breaches of our information systems;
changes in the conditions of the securities markets, which could adversely affect, among other things, the value or credit quality of our assets, the availability and terms of funding necessary to meet our liquidity needs and our ability to originate loans;
soundness of other financial institutions with which we and the Bank engage in transactions;
the performance of third party investment products we offer;
environmental liability for properties which we own or to which we take title;
the effects of any changes to the servicing compensation structure for mortgage servicers pursuant to the programs of government sponsored-entities;
uncertainties relating to the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, the Dodd-Frank Act (as defined later), the implementation by the U.S. Department of the Treasury and federal banking regulators of a number of programs to address capital and liquidity issues in the banking system and additional programs that will apply to us in the future, all of which may have significant effects on us and the financial services industry; and
other risk factors included under “Risk Factors” in this report.
Undue reliance should not be put on any forward-looking statements. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update them in light of new information or future events, except to the extent required by federal securities laws.


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PART I
Item 1.
Business
General
Anchor BanCorp Wisconsin Inc. (the “Company,” “we”, “our”) is a savings and loan holding company formed in 1992 to be the holding company for AnchorBank, fsb (the “Bank” or “AnchorBank”). The Company is headquartered in Madison, Wisconsin. In 2013, the Company was reincorporated as a Delaware corporation. Through the Bank we offer a full range of retail and commercial banking services to customers through our branch and commercial office locations in Wisconsin. The Company’s strategy focuses on building a strong franchise with meaningful commercial banking market share and growing revenues complemented by operational efficiencies that can produce attractive risk-adjusted returns to enhance stockholder value.
The Company is regulated as a savings and loan holding company and is subject to the periodic reporting requirements of the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and regulated by the Federal Reserve Bank. For further discussion, please refer to the "Regulation and Supervision” section.
The Bank was organized in 1919 as a Wisconsin chartered savings institution and converted to a federally chartered savings institution in 2000. The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”). The Bank’s deposits are insured up to the maximum allowable amount by the Federal Deposit Insurance Company (“FDIC”).
The Bank’s core businesses listed below are dedicated to providing quality, personalized financial and investment services to local businesses and individuals:
Commercial banking division provides:
Cash management services;
Working capital lines of credit;
Loans for fixed asset purchases;
Lending for owner-occupied buildings;
Construction lending;
Commercial real estate lending including multi-family, retail, office and industrial; and
A full range of deposit products.
Retail banking division provides:
Investment and advisory services; and
A full range of consumer deposit and lending products, such as:
Checking accounts;
Interest-bearing checking accounts;
Savings accounts;
Money market accounts;
Certificates of deposit accounts;
Individual retirement accounts; and
Consumer lending, including home equity loans.
Retail lending division provides:
Residential mortgage lending;
Mortgage servicing; and
Home construction financing.
We believe our presence in the markets in which we serve, our local market knowledge and our ability to make responsive business decisions at the local level give us the ability to tailor our products and services to meet our customers' specific needs.
Business Combination
As previously announced on January 12, 2016, Evansville, Indiana based Old National Bancorp (NASDAQ: ONB) ("Old National") and the Company jointly announced the execution of a definitive agreement under which Old National will acquire the Company through a stock and cash merger.
Under the terms of the agreement, the Company's stockholders may elect to receive either 3.5505 shares of Old National common stock or $48.50 in cash for each share of the Company they hold, subject to the restriction that no more than 40% of the outstanding shares of the Company may receive cash. Based on Old National’s 10-day average closing share price through January 8, 2016, of $13.34, this represents a total transaction value of approximately $461.0 million. The transaction value is

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likely to change until closing due to fluctuations in the price of Old National common stock and is also subject to adjustment under certain limited circumstances as provided in the merger agreement. The definitive merger agreement has been unanimously approved by the Board of both Old National and the Company. The transaction remains subject to regulatory approval and the vote of the Company's stockholders. The transaction is anticipated to close in the second quarter of 2016.
Our Path to the Present
As a result of the last economic downturn, beginning in fiscal 2009 we experienced significant operating losses, high levels of under-performing assets, depleted levels of capital and difficulty in raising additional capital necessary to stabilize the Bank as required by our banking regulators. The Company had credit obligations under a credit facility which we were unable to repay. As a consequence of the financial crisis and related challenges, on June 26, 2009, the Company and the Bank each consented to the issuance of an Order to Cease and Desist (individually, the “Company Order” and the “Bank Order”, respectively and collectively the “C&D Orders”). The C&D Orders were administered by the governing regulatory bodies of the Company and the Bank and required, among other things, a larger capital ratio and the submission of a capital restoration plan along with a revised business plan.
In late 2009, in an effort to raise necessary capital, we issued Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “TARP Preferred Stock”) and warrants to purchase common stock (the “TARP Warrant”) to the United States Department of the Treasury (the “Treasury”) as part of the Troubled Asset Relief Program (“TARP”). Thereafter, we and our advisors negotiated with the lenders and U.S. Bank National Association (“U.S. Bank”), as administrative agent (the “Administrative Agent”) for the lenders under the credit facility ("the Credit Agreement"), and with the U.S. Treasury, for a satisfactory settlement of our outstanding obligations. For further discussion please refer to the “Senior Debt Settlement” section below.
On August 12, 2013, we filed a Chapter 11 Case in the Bankruptcy Court to implement a Plan of Reorganization (“the Plan of Reorganization”) in order to facilitate the restructuring of the Company and the recapitalization of the Bank. Subsequently, the Bankruptcy Court entered a confirmation order (the “Confirmation Order”), whereby it confirmed the Plan of Reorganization. On September 27, 2013 (the “Effective Date”), the Plan of Reorganization became effective in accordance with its terms.
The following is a summary of the transactions consummated in connection with the Plan of Reorganization. Also see Note 2 to the Consolidated Financial Statements in Item 8.
Delaware Conversion and Reverse Stock Split
Pursuant to the Plan of Reorganization, on September 25, 2013, we converted from a Wisconsin Corporation to a Delaware Corporation. The Certificate of Incorporation filed in Delaware as the result of the conversion was amended in October 2013 when we effected a reverse stock split (the “Reverse Stock Split”) reducing the authorized shares to 11,900,000 shares of common stock, par value $0.01 per share, and 100,000 shares of preferred stock, par value $0.01 per share. We sometimes refer to the Certificate of Incorporation, as amended, as the “Amended Charter.”
Private Placements
In connection with the Plan of Reorganization, we entered into stock purchase agreements (the “Investor SPAs”) with certain investors for the purchase and sale of 1,750,000,000 shares of our common stock (adjusted to 8,750,000 shares as a result of the Reverse Stock Split) at a pre-Reverse Stock Split purchase price of $0.10 per share (implying a $20.00 per share price after giving effect to the Reverse Stock Split) and received gross proceeds of $175.0 million (the “Private Placements”) and incurred transaction costs of $14.4 million. The investors were certain institutional investors, other private investors, directors and officers.
TARP Exchange
Also pursuant to the Plan of Reorganization, we exchanged the outstanding TARP Preferred Stock for 60,000,000 shares of common stock (adjusted to 300,000 common shares as a result of the Reverse Stock Split) (the “Treasury Issuance”) and cancelled the TARP Warrant in its entirety.
Following the effectiveness of the Plan of Reorganization, the Treasury sold to certain institutional investors (the “Secondary Investors”) all of the shares of common stock delivered to the Treasury in connection with the Treasury Issuance (the “Secondary Treasury Sales”). As a result of the Secondary Treasury Sales, the Treasury received gross proceeds of $6.0 million and ceased to be a stockholder.

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Cancellation of Legacy Common Stock
On the Effective Date, immediately following the consummation of the TARP Exchange and pursuant to the terms of the Plan of Reorganization, all 21,247,225 shares of previously issued and outstanding common stock of the Company (the “Legacy Common Stock”, including shares held as treasury stock and in any stock incentive plans), were cancelled for no consideration.
Senior Debt Settlement
The aggregate amount of our obligations under the Credit Agreement was approximately $183.5 million as of August 12, 2013 (including with respect to unpaid principal balance, accrued but unpaid interest thereon and all administrative and other fees or penalties). On the Effective Date, pursuant to the Plan of Reorganization, we satisfied all of our obligations under the Credit Agreement by a cash payment to the lenders of $49.0 million (plus expense reimbursement as contemplated by the Credit Agreement). As a result of the transaction, we recognized a gain on extinguishment of debt of $134.5 million. All other claims were unaffected by, and were paid in full under, the Plan of Reorganization.
Emergence Accounting
Upon emergence from bankruptcy as a result of the Plan of Reorganization, we determined we did not meet the requirements to apply fresh start reporting under applicable accounting standards because we did not meet the solvency criteria of Accounting Standards Codification (“ASC”) Topic 852-10-45-19. The reorganization value immediately before the date of confirmation was greater than the total of all post-petition liabilities and allowed claims and, therefore, indicative of not meeting the test to require fresh start accounting under ASC Topic 852 - Reorganizations. As of the date of confirmation, we estimated our enterprise value (or reorganization value) to be approximately $2.2 billion. The Company utilized the equity value using the income and market approach to approximate fair value. Accordingly, the consolidated financial statements do not include fresh start reporting, whereby the Company would have to revalue all of its assets and liabilities.
Lifting of the Regulatory Orders
Having satisfied the conditions of the C&D Orders, the OCC notified the Bank on April 2, 2014, that it had terminated the Bank Order. The Federal Reserve Bank on July 31, 2014 notified the Company that it had terminated the Company Order. The Company and the Bank are no longer under any regulatory orders.
Initial Public Offering
In October 2014, the Company completed its initial public offering (the “IPO”) in which the Company issued and sold 250,000 shares of common stock along with 55,794 additional shares to cover overallotments. The Company’s common stock is now listed on the Nasdaq Global Market under the symbol “ABCW.”
Employees
As of December 31, 2015, the Company had 527 full-time equivalent employees. The Company promotes equal employment opportunity and considers employee relations to be excellent. None of the Bank or Company employees are represented by a collective bargaining group.
Company Filings
The Company maintains a website at www.anchorbank.com. All of the Company’s filings under the Exchange Act are available through our website, free of charge, including copies of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, on the date that the Company files those materials with, or furnishes them to, the SEC. The contents of our website are not incorporated by reference herein or otherwise as part of this annual report.
Market Area
The Bank provides products and services through 46 full-service branches located throughout the state of Wisconsin. The general business climate in Wisconsin has improved since 2010. CEO magazine indicates “The State of Wisconsin has moved to the 12th Best State To Do Business in 2015 from 42nd in 2010”. In addition, CNBC’s “Best Places To Do Business” has Wisconsin ranked #15 in 2015 up from #29 in 2010.

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Our primary market area is concentrated within the triangle formed by the Madison, Fox Valley and Milwaukee markets in Wisconsin where the Bank has 28 of its 46 branches. Collectively, these areas account for nearly half of Wisconsin’s population and we believe they provide a desirable platform for long-term local and regional growth.
Our headquarters are located in Madison, Wisconsin which is a vibrant business community. Madison is the state capital and home to both state and county governments, as well as the University of Wisconsin-Madison. Dane County, where Madison is located, has enjoyed steady population growth of 5.8% annually since 2010, a median household income 15.0% above the national average and relatively low unemployment at 2.9% versus the state average of 4.3% and the national average of 5.0%, each as of December 2015, according to the U.S. Census data. In 2015, Dane County accounted for 14.2% of the employment growth in Wisconsin. The decline in unemployment rates from 2012 through 2015 in Dane County and in the State of Wisconsin were 1.6% and 2.6%, respectively. The Bank has 17 branches located in Dane County.
The Bank has five branches located in Wisconsin’s Fox Valley region, consisting primarily of the cities of Appleton and Oshkosh and their associated satellite communities. We are investing our efforts into developing more commercial business and commercial real estate opportunities for the Bank in this area as we believe that market is attractive for further development. The Bank has six branches in the greater Milwaukee area, one of the largest metropolitan areas in the Midwest and home to approximately 1.6 million people and close to 60,000 businesses according to SNL Financial LC. Milwaukee has been a solid source of commercial real estate and commercial banking business for the Bank and the real estate climate continues to improve in that region. The Bank’s remaining 18 locations are based primarily in counties adjacent to Dane and the southwestern region of Wisconsin.
Competition
The Bank encounters competition in attracting both loan and deposit customers. Such competition includes other banks, savings institutions, mortgage banking companies, credit unions, finance companies, mutual funds, insurance companies, brokerage, investment banking firms and other non-banks.
We believe that we are well-positioned to challenge our competition, grow our franchise and create value for our stockholders as a result of the following competitive strengths:
Experienced and respected management team with a proven track record. Our President and Chief Executive Officer, Chris Bauer, joined us in 2009 and recruited an executive management team, bringing in highly experienced community bankers with extensive knowledge of the Wisconsin banking market. Each of these executives has significant experience at nationally recognized mid- to large-cap commercial banking institutions. Mr. Bauer has 46 years of financial services experience, with a combined 16 years as bank president at First Wisconsin Bank and Firstar Bank Milwaukee, N.A.
Strong capital position. At December 31, 2015, we had an 18.66% Common Equity Tier 1 ratio, an 18.66% tier 1 capital ratio, a 19.95% total capital ratio and a 13.52% tier 1 leverage ratio.
Disciplined enterprise-wide and credit risk management. Since 2009, we have invested significantly in our risk management platform in order to provide a consistent approach to identifying, assessing, managing, monitoring and reporting risk across the Company. Our focus both on remediating our classified assets and improving and implementing enhanced credit underwriting and administration over the last six years has enabled us to significantly improve asset quality and create a stable banking platform from which to grow.
Core funding. A significant component of our franchise is our core deposit base, such as checking and savings deposits, which we use to fund our loans and grow our balance sheet. At December 31, 2015, our total deposits were approximately $1.84 billion, 78.8% of which were core deposits (defined as total deposits excluding certificates of deposit). We seek to cross-sell deposit products at the time of loan origination to our clients as part of our focus on relationship banking in order to provide a stable source of funding. Our loan to deposit ratio was 89.7% at December 31, 2015.
Business Strategy
Our business strategy centers around the following initiatives:
Strengthening our franchise by increasing commercial banking relationships and market share. Our primary strategic focus is the transformation of the Bank from a residential/commercial real estate lender to a service-driven, relationship-based franchise with a focus on building the commercial banking business and a continued dedication to our retail banking and commercial real estate businesses. We believe there is an underserved base of small and middle market businesses that are interested in banking with a company with leadership and decision-making authority based in the markets in which we operate. We intend to maintain disciplined growth, a strong credit culture and a

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relationship-based and community service-focused approach to banking. We continue to recruit seasoned commercial banking talent and transition our corporate culture toward building relationships and pursuing cross-selling opportunities through a sales and service model.
Expanding our commercial lending services. We plan to increase our commercial banking staff and sales efforts, emphasizing our multi-family and other commercial real estate banking businesses and a comprehensive commercial and industrial banking program designed to service manufacturing businesses, professional service firms and privately owned businesses and their related business owners. We believe these services are a key component in our transition to a commercial bank.
Employing a sales and service culture and discipline. We are transitioning our corporate culture toward building relationships and pursuing cross-selling opportunities through a sales and service model. The sales and service model teaches the core elements of proactive sales and services, including bringing in more profitable sales from current clients, generating referrals, developing new relationships and servicing and retaining existing clients.
Continuing to improve asset quality. Over the last six years, we have dedicated significant resources to reducing our level of problem assets and improving our credit risk function, including implementing comprehensive credit policies, procedures and monitoring systems in order to better manage the loan portfolio and any delinquent and troubled loans. Through these efforts and working with customers sooner to resolve delinquency issues, we have been able to show positive results in this area.
Building a scalable and efficient operating model. Our management team is focused on sustainable expense control across all lines of business. We have made investments in information technology to improve efficiencies and enhance customer service, including upgraded account and data processing systems, improved loan monitoring and quality control systems and upgraded reporting systems. We implemented a sales activity database in the retail area of the Bank to better track sales performance and market penetration. In addition, we offered a Voluntary Separation Plan ("VSP") to eligible employees, consolidated six retail bank branches and created a new Universal Banker staffing model in the Bank's branch delivery system.
Focusing on generating core deposits. We continue to focus on growing our retail and commercial core deposits to fund our lending and investment opportunities by expanding our business development efforts and improving product offerings, including a rebranding effort and execution of an integrated strategic marketing plan. As part of the strategic plan, we are placing an emphasis on providing ancillary services such as debit cards, online banking, online bill pay, mobile banking and most recently, mobile deposit via smart phones to enhance deposit growth.
Recent Developments
Sale of Branches
Management regularly and periodically evaluates and assesses all aspects of the Bank’s operations, including, but not limited to, retail branch delivery and placement of its support functions, for opportunities to improve the profitability of the Company. In the case of branch delivery, this could include the closure, relocation, sale or other disposal of a branch or addition to the current branch structure.
The Bank sold its Viroqua branch operations on May 15, 2015. The sale consisted of selected loans and deposits. In addition, the sale included the building, furniture and equipment. As part of the sale, a lease on the land was terminated. Total deposits sold were $11.2 million and generated a gain on the sale of the branch operations of $448,000.
The Bank sold its Winneconne branch operations on September 25, 2015. The sale consisted of selected loans and deposits. In addition, the sale included the building, furniture and equipment. Total deposits sold were $11.9 million and generated a gain on the sale of the branch operations of $538,000. A gain of $294,000 was also recorded on the sale of the branch building.
Credit Card Arrangement
Up until December 31, 2014, credit was extended to Bank customers through credit cards issued by a third party, ELAN Financial Services (“ELAN”), pursuant to an agency arrangement under which the Company participated in outstanding balances, at levels of 25% to 28%. The Company also shared 33% to 37% of annual fees, and 30% of late payment, over limit and cash advance fees, as well as 25% to 30% of interchange income from the underlying portfolio net of our share of losses.
A new agreement was signed with ELAN effective January 1, 2015 providing the Bank an origination fee for each card sold. The Bank also receives a monthly fee from ELAN resulting from the performance of the originated portfolio, based on 11% of the interest income and 25% of the interchange income. As part of the new agreement, the Bank agreed to sell back to ELAN

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its participation in outstanding credit card balances totaling $6.6 million with no gain or loss recognized. The Bank is therefore no longer exposed to credit risk from the underlying consumer credit.
Purchase of New Building
In January 2015, the Bank completed the purchase of a new building located on the east side of Madison at a purchase price of $4.0 million. This facility, which houses the Bank’s support departments, became operational during the second quarter of 2015.
Operational Efficiency Measures
The Bank completed several actions during the third quarter of 2015 to address and improve overall operational efficiency. Management anticipates that these actions will result in an annual net cost savings related to reduced compensation, occupancy and other operating costs of approximately $5.4 million. These actions included:
Offering a VSP to eligible employees. It was designed to provide eligible employees with a variety of benefits, including additional compensation, subsidized COBRA health benefits and optional job placement services. The program was offered to a group of 140 of the Bank’s 705 employees and 78 employees accepted the VSP with agreed-upon exit dates through September 30, 2015.
Consolidating six retail bank branches in the Wisconsin communities of Appleton, Menasha, Oshkosh, Janesville, Franklin and Madison. Customers continue to have convenient and uninterrupted access to their deposit, lending and investment accounts at surrounding Bank locations in each of these markets, as well as access to online banking, ATMs and the Bank’s Contact Center. A total of 21 full- and part-time positions not eligible for the VSP were eliminated through the six branch consolidation.
Creating a new Universal Banker staffing model in the Bank’s branch delivery system to address consumer shift towards digital products and services which has resulted in lower transaction volumes. The Universal Banker can perform most branch transactions for customers resulting in improved customer service. The Universal Bank staffing model has a core of employees who can process teller transactions, open new accounts and provide customer service. This core group of employees is further supported with one or more customer service associates.
As a result of these operational efficiency measures, the Bank incurred one-time costs of $3.8 million, consisting primarily of employment severance and asset disposition costs. A gain of $1.4 million was recorded for the sale of the Appleton Fox River Drive branch building.
Deferred Tax Asset Valuation
During September 2009, the Company established a full deferred tax asset valuation allowance covering its federal and state tax loss carryforwards. As a result of management’s ongoing, periodic assessments of the deferred tax asset position, the Company determined that it is more likely than not it will be able to realize its deferred tax asset, including its entire federal tax loss carryforwards and a significant portion of its state tax loss carryforwards, with the exception of $4.2 million pertaining to certain multi state loss carryforwards, including states in which the Company no longer does business. Therefore, the Company reversed substantially all the deferred tax asset valuation allowance which resulted in the recognition of a $108.9 million income tax benefit, net of current tax provision.
Negative Provision for Loan Losses
The allowance for loan losses is maintained at a level believed appropriate by management to absorb probable and estimable losses inherent in the loan portfolio and is based on: the size and current risk characteristics of the loan portfolio; an assessment of individual impaired loans; actual and anticipated loss experience; and current economic events in specific industries and geographical areas. These economic events include unemployment levels, regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current economic trends, all of which may be susceptible to significant change. Therefore, the allowance for loan losses accounts for elements of imprecision and estimation risk inherent in the calculation.
During the year ended December 31, 2015, after a review of the factors listed above, the Company determined its levels of allowance were no longer warranted. The impact to the allowance for loan losses for the year ended December 31, 2015, was a $29.5 million negative provision for loan losses.

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Lending Activities
General
The Bank originates residential loans secured by properties located primarily in Wisconsin, with adjustable-rate loans generally being originated for inclusion in the Bank’s loan portfolio and fixed-rate loans generally being originated for sale into the secondary market. The Bank also originates loans for commercial, corporate and business purposes, lines of credit, equipment, and owner occupied real estate loans as well as commercial real estate loans, which include land and construction, multifamily, retail/office and other commercial real estate. Further, the Bank offers consumer loans which are primarily made up of closed end second mortgage and home equity lines of credit (“HELOCs”) in order to provide a wider range of financial services to our customers.
At December 31, 2015, the Bank’s loans held for investment, net totaled $1.61 billion, representing approximately 71.8% of its $2.25 billion of total assets at that date. Loans held for investment, net based on the portfolio segment consist of single-family residential loans with a gross loan balance of $529.8 million, multi-family residential loans of $318.3 million, retail/office loans of $161.5 million, other commercial real estate loans of $143.7 million, land and construction loans of $143.4 million, commercial and industrial loans of $25.2 million and consumer loans of $319.0 million, net of an allowance for loan losses of $25.1 million.
Loan Portfolio Composition
The following table presents the composition of loans held for investment, net at the dates indicated:
 
December 31,
 
March 31,
 
2015
 
2014
 
2013
 
2013
 
2012
 
Amount
 
Percent of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
(Dollars in thousands)
Residential
$
529,775

 
32.3
%
 
$
531,131

 
33.7
%
 
$
519,455

 
32.2
%
 
$
536,723

 
30.6
%
 
$
548,393

 
25.2
%
Commercial and industrial loans
25,199

 
1.5

 
16,514

 
1.0

 
21,591

 
1.3

 
30,574

 
1.7

 
38,977

 
1.8

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and construction
143,419

 
8.7

 
106,436

 
6.8

 
92,050

 
5.7

 
111,953

 
6.4

 
186,048

 
8.6

Multi-family
318,313

 
19.4

 
265,735

 
16.9

 
281,917

 
17.5

 
287,447

 
16.4

 
342,216

 
15.8

Retail/office
161,497

 
9.8

 
155,095

 
9.9

 
154,075

 
9.6

 
198,686

 
11.3

 
298,277

 
13.7

Other commercial real estate
143,696

 
8.8

 
156,243

 
9.9

 
174,313

 
10.8

 
172,857

 
9.9

 
248,275

 
11.4

Total commercial real estate
766,925

 
46.7

 
683,509

 
43.5

 
702,355

 
43.6

 
770,943

 
44.0

 
1,074,816

 
49.5

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Education
91,671

 
5.6

 
108,384

 
6.9

 
129,520

 
8.0

 
166,429

 
9.5

 
240,331

 
11.1

Other consumer
227,283

 
13.9

 
233,482

 
14.9

 
238,307

 
14.9

 
247,527

 
14.2

 
269,528

 
12.4

Total consumer
318,954

 
19.5

 
341,866

 
21.8

 
367,827

 
22.9

 
413,956

 
23.7

 
509,859

 
23.5

Total gross loans
1,640,853

 
100.0
%
 
1,573,020

 
100.0
%
 
1,611,228

 
100.0
%
 
1,752,196

 
100.0
%
 
2,172,045

 
100.0
%
Unamortized loan fees, net
(753
)
 
 
 
(1,544
)
 
 
 
(1,722
)
 
 
 
(1,838
)
 
 
 
(3,086
)
 
 
Loans held for investment
1,640,100

 
 
 
1,571,476

 
 
 
1,609,506

 
 
 
1,750,358

 
 
 
2,168,959

 
 
Allowance for loan losses
(25,147
)
 
 
 
(47,037
)
 
 
 
(65,182
)
 
 
 
(79,815
)
 
 
 
(111,215
)
 
 
Loans held for investment, net
$
1,614,953

 
 
 
$
1,524,439

 
 
 
$
1,544,324

 
 
 
$
1,670,543

 
 
 
$
2,057,744

 
 

7


The following table presents the scheduled contractual maturities of gross loans held for investment as of December 31, 2015, as well as the dollar amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates disaggregated according to current classifications:
 
Residential
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Consumer
 
Total
 
(In Thousands)
Amounts due:
 
 
 
 
 
 
 
 
 
In one year or less
$
6,010

 
$
8,689

 
$
88,498

 
$
13,216

 
$
116,413

After one year through five years
9,069

 
15,669

 
396,657

 
96,393

 
517,788

After five years
514,696

 
841

 
281,770

 
209,345

 
1,006,652

 
$
529,775

 
$
25,199

 
$
766,925

 
$
318,954

 
$
1,640,853

Interest rate terms on amounts due after one year:
 
 
 
 
 
 
 
 
 
Fixed
$
218,251

 
$
10,724

 
$
365,794

 
$
208,451

 
$
803,220

Adjustable
305,514

 
5,786

 
312,633

 
97,287

 
721,220

Residential Loans. At December 31, 2015, $529.8 million, or 32.3%, of the total gross loans consisted of single-family residential loans. Residential loans consist of both adjustable and fixed-rate first lien mortgage loans. The adjustable-rate loans currently in the portfolio have up to 30-year maturities and terms which provide for annual increases or decreases of the rate on the loans, based on a margin over a designated index. These rate changes are generally subject to a limit of 2% per adjustment and an aggregate 6% adjustment over the life of the loan. These loans are underwritten and documented according to standard industry practices. The Company originates a very limited number of interest-only loans which tend to have a shorter term to maturity and does not originate negative amortization or option payment adjustable-rate mortgages.
Adjustable-rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. We believe that the risks associated with changes in interest rates, which have not had a material adverse effect to date, generally are less than the risks associated with holding fixed-rate loans in an increasing interest rate environment. Also, as interest rates decline, borrowers may refinance their mortgages into fixed-rate loans thereby prepaying the balance of the loan prior to maturity. At December 31, 2015, approximately $305.7 million, or 57.7%, of the held for investment residential gross loan balance consisted of loans with adjustable interest rates.
The Company originates intermediate and long-term, fixed-rate conventional mortgage loans. Current production of these loans (with terms of 15 years or more) are generally sold to institutional investors, while a portion of loan production is retained in the held for investment portfolio. In order to provide a full range of products to its customers, the Company also participates in the loan origination programs of Wisconsin Housing and Economic Development Authority (“WHEDA”). The right to service substantially all loans sold is retained.
At December 31, 2015, approximately $224.1 million, or 42.3%, of the held for investment residential gross loan balance consisted of loans with fixed rates of interest. Although these loans generally provide for repayments of principal over a fixed period of 10 to 30 years, because of prepayments and due-on-sale clauses, such loans generally remain outstanding for a shorter period of time.
Commercial and Industrial Loans. The Company originates loans for commercial and business purposes, including issuing letters of credit. At December 31, 2015, the gross loan balance of commercial and industrial loans amounted to $25.2 million, or 1.5%, of the total gross loans. The commercial and industrial loan portfolio is comprised of loans that are funded for a variety of business purposes and generally are secured by equipment, real estate and other business assets. These loans generally have terms of five years or less and interest rates that float in accordance with a designated published index. Substantially all such loans are secured and backed by the personal guarantees of the owners of the business.
Commercial Real Estate Loans. The Company originates commercial real estate loans which include land and construction, multi-family, retail/office and other commercial real estate. Such loans generally have shorter terms than single-family residential loans, thus increasing the earnings sensitivity of the loan portfolio to changes in interest rates, as well as providing higher fees and rates than residential loans. At December 31, 2015, $766.9 million of gross loans were secured by commercial real estate, which represented 46.7% of the total gross loans.

8


Commercial real estate loans are primarily secured by apartment buildings, office and industrial buildings, land, warehouses, small retail shopping centers and various special purpose properties, including community-based residential facilities and senior housing. Although terms vary, commercial real estate loans generally have fixed interest rates and amortization periods of 15 to 30 years, as well as balloon payments of two to seven years. The origination of such loans is generally limited to our primary market area.
Consumer Loans. The Company offers consumer loans in order to provide a wider range of financial services to its customers. At December 31, 2015, $319.0 million, or 19.5%, of the total gross loans consisted of consumer loans. Consumer loans, which include home equity loans, typically have higher interest rates than residential loans but generally involve more risk than residential loans because of the type and nature of the collateral and, in certain cases, the absence of collateral.
Approximately $91.7 million, or 5.6%, of the total gross loans at December 31, 2015 consisted of education loans. The origination of education loans was discontinued beginning October 1, 2010 following the March 2010 law ending loan guarantees provided by the U. S. Department of Education. Education loans generally have interest rates that adjust annually in accordance with a designated index. Both the principal amount of an education loan and interest thereon, up to 97% of the balance of the loan, are generally guaranteed by the Great Lakes Higher Education Company, which typically obtains reinsurance of its obligations from the U.S. Department of Education. Education loans may be sold to the U.S. Department of Education or to other investors. No education loans were sold during the years ended December 31, 2015 and 2014 and the nine months ended December 31, 2013.
Consumer loans secured by real estate include both first and second mortgages and consist primarily of the Express Refinance loan product (the Bank’s expedited first mortgage refinance and home equity loan product). Express Refinance loans are available for owner occupied one- to two-family residential properties, with loan amounts up to $200,000, a fixed interest rate, up to 15 year amortization, low fees and rapid closing timeframes. The primary home equity loan product is a home equity line of credit that has an adjustable rate linked to the prime interest rate and is secured by a mortgage, either a primary or a junior lien, on the borrower’s residence. New home equity lines do not exceed 85% of appraised value of the property at the loan origination date. A fixed-rate home equity second mortgage term product is also offered.
Beginning February 2015, the bank no longer offers the interest only payment option on new home equity lines of credit. Instead all loans are underwritten as if they were fully amortized over the life of the line and a minimum payment of 1% of the outstanding balance is due each month.
In May 2015, the Bank began offering a debit card for new and existing home equity lines of credit.
Net Fee Income From Lending Activities
Loan origination, commitment and other loan fees and certain direct loan origination costs are deferred and the net amounts are amortized as an adjustment to the related loan’s yield.
The Company also receives other fees and charges relating to existing residential, commercial and consumer loans, which include prepayment penalties, late charges and fees collected in connection with a change in borrower or other loan modifications. Other types of loans also generate fee income. These include annual fees assessed on credit card accounts, transactional fees relating to credit card usage and late charges on consumer loans.
In February 2015, the Bank began offering interest rate swap arrangements for certain commercial lending customers. The fees collected from the swap arrangements are recorded in loan fees in the Consolidated Financial Statements in Item 8.
Origination, Purchase and Sale of Loans
The Company’s new loan production comes from a number of sources. Residential mortgage loan production is originated primarily from depositors, branch customers, the Company’s website, non-compensated referrals from real estate brokers, builders and direct solicitations or purchased from other third-party mortgage originators. Commercial real estate and commercial and industrial loan production is obtained by direct solicitations and referrals. Consumer loans are originated from branch customers, existing depositors and mortgagors, and direct solicitation.
Credit Approvals. Loans may be approved by designated underwriting/concurrence officers or with the concurrence of the Chief Risk Officer, within pre-established limits, or by the Board. These pre-established limits are as follows:
Less than $3.0 million can be approved by a designated underwriting/concurrence officer;
$3.0 million to $5.0 million must be approved by the Chief Risk Officer;
In excess of $5.0 million must be approved by the Board.

9


The Company regularly reviews its credit policies and these policies remain subject to amendment with the approval of the Board.
Appraisals and Underwriting. Property appraisals or evaluations on the real estate and improvements securing single-family residential loans are made by independent appraisers and managed by a third party appraisal management company during the underwriting process. Appraisals are performed in accordance with federal regulations and policies.
The Company’s general policy for residential mortgage loans is to lend up to 80% of the lesser of the appraised value or the purchase price of the property. However, the Company will lend more than 80% of the appraised value of the property, but will require that the borrower obtain private mortgage insurance in an amount intended to reduce exposure to 80% or less of the appraised value of the underlying property. The Company offers higher LTV lending on a limited basis for community oriented and personal loan programs.
The Company’s underwriting criteria generally require that commercial real estate loans have loan-to-value ratios of 80% or less and debt service coverage ratios of at least 1.2% to 1.3%, depending on the asset class. The Bank also has an underwriting criterion of a debt yield ratio which ranges from a minimum of 8.5% to 12%. Personal guarantees are obtained on most multi-family residential, commercial real estate loans and business loans. The Bank obtains appraisals of the collateral from independent appraisal firms.
The portfolio of commercial real estate and commercial and industrial loans is monitored on a continuing basis by the relationship manager who is responsible for identifying and reporting recommendations to mitigate risk ratings in the portfolio. The risk management function provides an independent review of this activity.
Loan Sales. The Company has been actively involved in the mortgage secondary market since the mid-1980s and generally originates single-family residential mortgage loans under terms, conditions and documentation which permit sale to investors. A significant portion of the fixed-rate, single-family residential loans with terms over 10 years originated are sold to investors. The Company attempts to limit any interest rate risk created by interest rate lock commitments by limiting the number of days between the commitment and closing, charging fees for commitments and limiting the amounts of unhedged commitments at any one time. Forward sale contracts and agency mortgage backed security commitments are used to economically hedge closed loans and rate lock commitments to customers range from 70% to 100% of the closed and committed amounts.
The following table presents the activity in loans held for sale:
 
Year Ended December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2013
 
(In thousands)
Beginning Balance
$
6,594

 
$
3,085

 
$
18,058

Originations
264,244

 
146,894

 
228,748

Sales
(260,515
)
 
(143,385
)
 
(243,721
)
Ending Balance
$
10,323

 
$
6,594

 
$
3,085

Loan Servicing. The Company generally services all originated loans that have been sold into the secondary market. Servicing fees are recognized when the related loan payments are received. At December 31, 2015, $2.28 billion of loans are serviced for others.
At December 31, 2015, approximately $91.7 million of education loans and $3.7 million of purchased participation mortgage loans were being serviced for the Company by others.
Delinquency Procedures
Delinquent and problem loans are a normal part of any lending business. When a borrower fails to make a required payment by the 15th day after which the payment is due, internal collection procedures are instituted, if not earlier. The borrower is contacted to determine the reason for non-payment and attempts are made to cure the delinquency. Loan status, the condition of the property, and circumstances of the borrower are regularly reviewed. Based upon the results of our review, the Company may negotiate and accept a repayment program with the borrower, accept a voluntary deed in lieu of foreclosure, agree to the terms of a short sale or initiate foreclosure proceedings.
A decision as to whether and when to initiate foreclosure proceedings is based upon such factors as the amount of the outstanding loan in relation to the original indebtedness, the extent of delinquency, the value of the collateral, and the borrower’s financial ability and willingness to cooperate in curing the deficiencies. If foreclosed upon, the property is sold at a

10


public sale and the Company will generally bid an amount reasonably equivalent to the fair value of the foreclosed property or the amount of judgment due.
Real estate acquired by foreclosure or by deed in lieu of foreclosure as well as other repossessed assets (“OREO”) are held for sale and are initially recorded at fair value less a discount for estimated selling costs at the date of foreclosure. Any write down to fair value less estimated selling costs is charged to the allowance for loan losses. If the discounted fair value exceeds the net carrying value of the loans, recoveries to the allowance for loan losses are recorded to the extent of previous charge-offs, with any excess, which is infrequent, recognized as a gain in non-interest income. Subsequent to foreclosure, valuations are periodically performed and a valuation allowance is established if the carrying value exceeds the fair value less estimated selling costs. Costs relating to the development and improvement of the property may be capitalized, generally those greater than $10,000; holding period costs and subsequent changes to the valuation allowance are charged to OREO expense, net which is included in non-interest expense. Incremental valuation adjustments may be recognized in the Consolidated Statement of Operations if, in the opinion of management, additional losses are deemed probable.
For discussion of the Company’s asset quality, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. Also see Notes 1, 5 and 6 to the Consolidated Financial Statements in Item 8.
Investment Securities
In addition to lending activities, the Company conducts other investing activities on an ongoing basis in order to diversify assets, limit interest rate and credit risk, and meet regulatory liquidity requirements. The Company invests primarily in mortgage-related securities which are insured or guaranteed by Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae") and the Government National Mortgage Association ("Ginnie Mae" or "GNMA"); and U.S. government agency obligations. Investment decisions are made by authorized officers in accordance with policies established by the Board.
Management determines the appropriate financial reporting classification of securities at the time of purchase. Debt securities may be classified as held to maturity when the Company has the intent and ability to hold the securities to maturity. Held to maturity securities are carried at amortized cost. Securities are classified as trading when the Company intends to actively buy and sell securities in order to make a profit. Trading securities are carried at fair value, with unrealized holding gains and losses included in earnings. Held to maturity securities at December 31, 2015 were $15.5 million. There were no securities designated as held to maturity at December 31, 2014. There were no securities designated as trading at December 31, 2015 and 2014.
Securities not classified as held to maturity or trading are classified as available for sale. Available for sale securities are carried at fair value, with the unrealized gains and losses, net of tax (if any), reported as a separate component of stockholders’ equity. For the years ended December 31, 2015 and 2014 and the nine months ended December 31, 2013, this component of stockholders’ equity decreased $848,000, increased $4.2 million and decreased $10.2 million, respectively, to reflect net unrealized gains and losses on holding securities classified as available for sale.
The Company’s investment policy, which conforms with OCC regulations, permits investments including U.S. Government obligations, municipal bonds, mortgage backed securities, securities issued by various federal agencies, corporate debt, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds.
Agency-backed securities increase the quality of the Company’s assets by virtue of the insurance or guarantees of federal agencies that back them, require less capital under risk-based regulatory capital requirements than non-insured or guaranteed mortgage loans, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. At December 31, 2015, all available for sale securities either were AAA rated or are guaranteed by government sponsored agencies. At December 31, 2015, $92.3 million of the Company’s securities available for sale were pledged to secure various obligations of the Company.

11


The table below sets forth information regarding the amortized cost and fair values of the Company’s investment securities at the dates indicated:
 
December 31,
 
2015
 
2014
 
2013
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(In thousands)
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. government sponsored and federal agency obligations
$
3,130

 
$
3,136

 
$
3,245

 
$
3,261

 
$
3,359

 
$
3,376

Mortgage backed securities
342,211

 
338,384

 
293,755

 
291,335

 
281,047

 
274,141

Other securities
1

 
3

 
1

 
3

 
88

 
355

 
$
345,342

 
$
341,523

 
$
297,001

 
$
294,599

 
$
284,494

 
$
277,872

Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
15,492

 
$
15,422

 
$

 
$

 
$

 
$

The Company’s mortgage backed securities are made up of GNMA, government sponsored agency mortgage backed securities, and non-agency mortgage backed securities.
The following table sets forth the maturity and weighted average yield characteristics of investment securities at December 31, 2015, classified by term to maturity and reported at fair value:
 
Within One Year
 
One to Five Years
 
Five to Ten Years
 
Over Ten Years
 
 
 
Balance
 
Weighted
Average
Yield
 
Balance
 
Weighted
Average
Yield
 
Balance
 
Weighted
Average
Yield
 
Balance
 
Weighted
Average
Yield
 
Total
 
(Dollars in thousands)
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government sponsored and federal agency obligations
$

 
%
 
$
3,136

 
1.08
%
 
$

 
%
 
$

 
%
 
$
3,136

Mortgage backed securities
3

 
1.78

 
127

 
4.87

 
9,675

 
1.75

 
328,579

 
1.88

 
338,384

Other securities

 

 

 

 

 

 
3

 

 
3

 
$
3

 
1.78
%
 
$
3,263

 
1.22
%
 
$
9,675

 
1.75
%
 
$
328,582

 
1.88
%
 
$
341,523

Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$

 
%
 
$

 
%
 
$
15,422

 
4.76
%
 
$

 
%
 
$
15,422

Due to prepayments of the underlying loans, the actual maturities of certain investment securities are expected to be substantially earlier than the scheduled maturities.
For additional information regarding investment securities, see the Consolidated Financial Statements, including Note 4 thereto in Item 8.
Sources of Funds
General
Deposits are a major source of the Company’s funds for lending and other investment activities. In addition to retail and commercial deposits, funds are derived from principal repayments and prepayments on loan and mortgage backed securities, maturities of investment securities, sales of loans and securities, interest payments on loans and securities, advances from the Federal Home Loan Bank ("FHLB") of Chicago and, from time to time, repurchase agreements and other borrowings. Loan repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by the general level of interest rates, economic conditions, the stock market and competition. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. Borrowings may also be used on a longer term basis for general business purposes, including providing financing for lending and other investment activities and asset/liability management strategies.

12


Deposits
The Company’s deposit products include passbook and statement savings accounts, business and personal non-interest bearing checking, business and personal interest bearing checking accounts, business and personal money market deposit accounts and certificates of deposit ranging in terms from three months to five years. Included among these deposit products are Individual Retirement Account certificates and Keogh retirement certificates, as well as negotiable-rate certificates of deposit with balances of $100,000 or more (“jumbo certificates”).
Deposits are obtained primarily from residents of Wisconsin. The Company attracts deposits through a network of branch locations by utilizing a customer sales and service plan and by offering a wide variety of accounts and services, competitive interest rates and convenient customer hours. In determining the characteristics of deposit accounts, consideration is given to the profitability and liquidity of the Company, matching terms of the deposits with loan products, the attractiveness to customers and the rates offered by competitors.
The following table sets forth the amount and maturities of certificates of deposit by interest rate at December 31, 2015 and 2014:
 
Three
Months
and Less
 
Over Three
Months
Through
One Year
 
Over
One Year
Through
Two Years
 
Over Two
Years
Through
Three Years
 
Over
Three
Years
 
Total
 
 
 
 
(In thousands)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
0.00% to 0.99%
$
67,238

 
$
147,119

 
$
63,475

 
$
7,022

 
$
225

 
$
285,079

1.00% to 1.99%
1,329

 
13,046

 
36,512

 
20,900

 
25,299

 
97,086

2.00% to 2.99%
2,772

 
5,383

 

 

 

 
8,155

 
$
71,339

 
$
165,548

 
$
99,987

 
$
27,922

 
$
25,524

 
$
390,320

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
0.00% to 0.99%
$
86,393

 
$
186,310

 
$
79,733

 
$
6,707

 
$
4,747

 
$
363,890

1.00% to 1.99%
270

 
2,757

 
15,571

 
23,419

 
29,601

 
71,618

2.00% to 2.99%
1,481

 
1,634

 
8,590

 

 

 
11,705

 
$
88,144

 
$
190,701

 
$
103,894

 
$
30,126

 
$
34,348

 
$
447,213

At December 31, 2015, $64.8 million of certificates of deposit were greater than or equal to $100,000, of which $13.2 million are scheduled to mature in less than three months, $8.3 million in three to six months, $16.9 million in six to twelve months and $26.4 million in over twelve months. Certificates of deposit with balances greater than or equal to the FDIC insurance limit of $250,000 totaled $7.4 million at December 31, 2015.
Borrowings
From time to time the Company obtains advances from the FHLB of Chicago, which generally are secured by capital stock of the FHLB of Chicago and certain pledged mortgage loans and investment securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities.
The following table sets forth the outstanding balances and weighted average interest rates for borrowings at the dates indicated:
 
December 31,
 
2015
 
2014
 
2013
 
Balance
 
Weighted
Average Rate
 
Balance
 
Weighted
Average Rate
 
Balance
 
Weighted
Average Rate
 
(Dollars in thousands)
FHLB advances
$
10,000

 
2.33
%
 
$
10,000

 
2.33
%
 
$
10,000

 
2.33
%
Repurchase agreements
2,438

 
0.10

 
3,569

 
0.10

 
2,636

 
0.10

Long term lease obligation
124

 
2.46

 
183

 
2.46

 
241

 
2.46

Total
$
12,562

 
1.90
%
 
$
13,752

 
1.75
%
 
$
12,877

 
1.88
%

13


The following table sets forth information relating to short-term borrowings with original maturities of one year or less for the periods indicated:
 
December 31,
 
2015
 
2014
 
2013
 
Balance
 
Weighted
Average Rate
 
Balance
 
Weighted
Average Rate
 
Balance
 
Weighted
Average Rate
 
(Dollars in thousands)
Balance at end of period:
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
$

 
%
 
$

 
%
 
$

 
%
Credit agreement

 

 

 

 

 

Repurchase agreements
2,438

 
0.10

 
3,569

 
0.10

 
2,636

 
0.10

Maximum month-end balance:
 
 
 
 
 
 
 
 
 
 
 
FHLB advances

 

 

 

 

 

Credit agreement

 

 

 

 
116,300

 
15.00

Repurchase agreements
6,629

 
0.10

 
3,569

 
0.10

 
4,949

 
0.12

Average balance:
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
48

 
0.02

 

 

 
3,055

 

Credit agreement

 

 

 

 
75,701

 
9.30

Repurchase agreements
3,014

 
0.10

 
3,030

 
0.10

 
5,122

 
0.09

Subsidiaries
Investment Directions, Inc. (“IDI”)
IDI is a wholly owned, non-banking subsidiary of the Company that has invested in various limited partnerships and subsidiaries funded by borrowings from us. The assets at IDI totaled $4.7 million at December 31, 2015, with $4.2 million related to deferred tax assets and the remaining assets primarily consisted of cash. For additional information regarding our deferred tax assets, see the Consolidated Financial Statements, including Note 17 thereto in Item 8. The assets at IDI totaled $520,000 at December 31, 2014, which primarily consisted of cash. IDI had net income of $5.9 million, $161,000, and $5.1 million for the years ended December 31, 2015 and 2014 and the nine months ended December 31, 2013.
ADPC Corporation (“ADPC”)
ADPC is a wholly owned subsidiary of the Bank that holds certain of the Bank’s foreclosed properties. The Bank's investment in ADPC at December 31, 2015 was $4.6 million, with $446,000 related to deferred tax assets and the remaining assets primarily consisted of cash. For additional information regarding our deferred tax assets, see the Consolidated Financial Statements, including Note 17 thereto in Item 8. The Bank’s investment in ADPC at December 31, 2014 was $4.1 million, which primarily consisted of cash. ADPC had net income of $526,000 for the year ended December 31, 2015, no net income or loss for the year ended December 31, 2014, and net income of $331,000 for the nine months ended December 31, 2013.
Regulation and Supervision
The U.S. banking industry is highly regulated under federal and state law. These regulations affect the operations of the Company and its subsidiaries. Statutes, regulations and policies limit the activities in which we may engage and the conduct of our permitted activities. Further, the regulatory system imposes reporting and information collection obligations. We incur significant costs relating to compliance with these laws and regulations. Banking statutes, regulations and policies are continually under review by federal and state legislatures and regulatory agencies, and a change in them, including changes in how they are interpreted or implemented, could have a material adverse effect on our business.
The material statutory and regulatory requirements that are applicable to us are summarized below. The description below is not intended to summarize all laws and regulations applicable to us.
The Bank as a Federal Savings Association
The Bank is a federal savings association organized under the federal Home Owners’ Loan Act (“HOLA”). A federal savings association is commonly referred to as a federal thrift. As a federal thrift, the Bank is currently subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the OCC. The OCC regulates all areas of banking

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operations, including investments, reserves, lending, mergers, payment of dividends, interest rates, transactions with affiliates (including the Company), establishment of branches and other aspects of the Bank’s operations. The Bank is subject to regular examinations by the OCC and is assessed amounts to cover the costs of such examinations.
The Company as a Savings and Loan Holding Company
Under Section 10 of HOLA, any entity that holds or acquires direct or indirect control of a thrift must obtain prior approval of the Federal Reserve to become a savings and loan holding company (“SLHC”). The Company, which controls the Bank, is registered with the Federal Reserve as an SLHC and is currently subject to ongoing and comprehensive Federal Reserve supervision, regulation, examination and enforcement. In addition, we must file quarterly and annual reports with the Federal Reserve describing the Company’s consolidated financial condition. This Federal Reserve jurisdiction also extends to any company that is directly or indirectly controlled by the Company.
FDIC Deposit Insurance
The FDIC is an independent federal agency that insures the deposits of federally insured depository institutions up to applicable limits. The FDIC also has certain regulatory, examination and enforcement powers with respect to FDIC-insured institutions. The deposits of the Bank are insured by the FDIC up to the applicable limits. As a general matter, the maximum deposit insurance amount is $250,000 per depositor.
Broad Supervision, Examination and Enforcement Powers
A principal objective of the U.S. bank regulatory system is to protect depositors by ensuring the financial safety and soundness of banking organizations. To that end, the banking regulators have broad regulatory, examination and enforcement authority. The regulators regularly examine the operations of banking organizations. In addition, banking organizations are subject to periodic reporting requirements. The regulators have various remedies available if they determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of a banking organization’s operations are unsatisfactory. The regulators may also take action if they determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other things:
enjoin “unsafe or unsound” practices;
require affirmative actions to correct any violation or practice;
issue administrative orders that can be judicially enforced;
direct increases in capital;
direct the sale of subsidiaries or other assets;
limit dividends and distributions;
restrict growth;
assess civil monetary penalties;
remove officers and directors; and
terminate deposit insurance.
The FDIC may terminate a depository institution’s deposit insurance after notice and a hearing upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements could subject the Company, and subsidiaries of the Company or their officers, directors and institution-affiliated parties, to the remedies described above and other sanctions.
The Dodd-Frank Act
The Dodd-Frank Act imposes significant regulatory and compliance requirements on financial institutions, including the designation of certain financial companies as systemically important financial companies, the changing roles of credit rating agencies, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. Additionally, the Dodd-Frank Act established a new framework of authority to conduct systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the OCC and the FDIC. The following items provide a brief description of certain provisions of the Dodd-Frank Act that are most relevant to the Company and the Bank.
Under the Dodd-Frank Act, the risk-based and leverage capital standards currently applicable to U.S. insured depository institutions will be imposed on U.S. bank holding companies and SLHCs, and depository institutions and their holding

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companies will be subject to minimum risk-based and leverage capital requirements on a consolidated basis. In addition, the Dodd-Frank Act requires that SLHCs be well capitalized and well managed in the same manner as bank holding companies in order to engage in the expanded financial activities permissible only for a financial holding company.
Source of strength. The Dodd-Frank Act requires all companies, including SLHCs, that directly or indirectly control an insured depository institution to serve as a source of strength for the institution. Under this requirement, the Company in the future could be required to provide financial assistance to the Bank should it experience financial distress.
Limitation on federal preemption. The Dodd-Frank Act significantly reduces the ability of national banks and federal thrifts to rely upon federal preemption of state consumer financial laws. Although the OCC, as the primary regulator of federal thrifts, will have the ability to make preemption determinations where certain conditions are met, the broad rollback of federal preemption has the potential to create a patchwork of federal and state compliance obligations. This could, in turn, result in significant new regulatory requirements applicable to us, with potentially significant changes in our operations and increases in our compliance costs. It could also result in uncertainty concerning compliance, with attendant regulatory and litigation risks.
Mortgage loan origination and risk retention. The Dodd-Frank Act contains additional regulatory requirements that may affect our operations and result in increased compliance costs. For example, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banking organizations, in an effort to require steps to verify a borrower’s ability to repay. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells or mortgage and other asset-backed securities that the securitizer issues. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation. On January 10, 2013, federal regulators released the “qualified mortgage” rule. The qualified mortgage rule is intended to clarify the application of the Dodd-Frank Act requirement that mortgage lenders have a reasonable belief that borrowers can afford their mortgages, or the lender may not be able to foreclose on the mortgage.
On August 28, 2013, the OCC, the Federal Reserve, the FDIC, the SEC, the Federal Housing Finance Agency and the U.S. Department of Housing and Urban Development issued a revised proposed rule in connection with the risk retention requirement mandated by Section 941 of the Dodd-Frank Act. The risk retention requirement generally requires a securitizer to retain no less than 5% of the credit risk in assets it sells into a securitization and prohibits a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to retain, subject to limited exemptions.
The proposed rule includes alternatives for structuring the economic interest required to be retained and the application of the rules to specific types of securitization transactions, as well as exemptions from the standard 5% risk retention requirement. One significant exemption is for securities entirely collateralized by “qualified residential mortgages” (“QRMs”), which are loans deemed to have a lower risk of default. The proposed rule defines QRMs to have the same meaning as the term “qualified mortgage,” as defined by the Consumer Financial Protection Bureau. In addition, the Proposed Rule provides for reduced risk retention requirements for qualifying commercial loan, commercial real estate loan and auto loan securitizations.
Imposition of restrictions on certain activities. The Dodd-Frank Act imposes a new regulatory structure on the over-the-counter derivatives market, including requirements for clearing, exchange trading, capital, margin, reporting, and record keeping. In addition, certain swaps and other derivatives activities are required to be “pushed out” of insured depository institutions and conducted in separately capitalized non-bank affiliates. The Dodd-Frank Act also requires certain persons to register as a “major security-based swap participant” or a “security-based swap dealer.” The U.S. Commodity Futures Trading Commission, the SEC and other U.S. regulators are in the process of adopting regulations to implement the Dodd-Frank Act. It is anticipated that this rulemaking process will further clarify, among other things, reporting and recordkeeping obligations, margin and capital requirements, the scope of registration requirements, and what swaps are required to be centrally cleared and exchange-traded. Rules will also be issued to enhance the oversight of clearing and trading entities. These restrictions may affect our ability to manage certain risks in our business.
Expanded FDIC resolution authority. While insured depository institutions have long been subject to the FDIC’s resolution process, the Dodd-Frank Act creates a new mechanism for the FDIC to conduct the orderly liquidation of certain “covered financial companies,” including bank and thrift holding companies and systemically significant non-bank financial companies. Upon certain findings being made, the FDIC may be appointed receiver for a covered financial company, and would conduct an orderly liquidation of the entity. The FDIC liquidation process is modeled on the existing Federal Deposit Insurance Act (the “FDIA”) bank resolution process, and generally gives the FDIC more discretion than in the traditional bankruptcy context. The FDIC has issued final rules implementing the orderly liquidation authority.
Consumer Financial Protection Bureau. The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”). While technically located within the Federal Reserve, the CFPB is and functions as an independent agency. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the

16


conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank and thrift consumers. For banking organizations with assets of more than $10 billion, the CFPB has exclusive rule making and examination, and primary enforcement authority under federal consumer financial law. For depository institutions with $10 billion or less in assets, such as the Bank, examination and primary enforcement authority will remain largely with the institutions’ primary regulator. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulator. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB. Compliance with any such new regulations would increase our cost of operations.
Deposit insurance. The Dodd-Frank Act made permanent the general $250,000 deposit insurance limit for insured deposits. Amendments to the FDIA also revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) of the FDIC will be calculated. Under the amendments, the assessment base is no longer the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. Several of these provisions may impact the FDIC deposit insurance premiums paid by the Bank.
Transactions with affiliates and insiders. The Dodd-Frank Act generally enhanced the restrictions on transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and a clarification of the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations were expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions were also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.
Enhanced lending limits. The Dodd-Frank Act strengthened the existing limits on a depository institution’s credit exposure to one borrower. Federal banking law currently limits a federal thrift’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include, for example, credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
Corporate governance. The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act (i) grants stockholders of U.S. publicly traded companies an advisory vote on executive compensation; (ii) enhances independence requirements for compensation committee members; (iii) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; and (iv) provides the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials.
Many of the requirements of the Dodd-Frank Act are in the process of being implemented and most will be subject to regulations implemented over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition.
Notice and Approval Requirements Related to Control
Banking laws impose notice, approval, and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. These laws include the Bank Holding Company Act, the Change in Bank Control Act, and the Savings and Loan Holding Company Act and the rules and regulations enacted thereunder. Among other things, these laws require regulatory filings by a stockholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. The determination whether an investor “controls” a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, a party is deemed to

17


control a depository institution or other company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting stock and any of certain additional control factors exist. Ownership by affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party’s ownership of the Company were to exceed certain thresholds, the investor could be deemed to “control” the Company for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.
In addition, except under limited circumstances, SLHCs are prohibited from acquiring, without prior approval:
control of any other savings institution or SLHC or all or substantially all the assets thereof; or
more than 5% of the voting shares of a savings institution or SLHC which is not already a subsidiary.
In evaluating an application by a holding company to acquire a savings association, the factors considered include the financial and managerial resources and future prospects of the holding company and savings association involved, the risk of the acquisition to the DIF, the convenience and needs of the community and the effect of the acquisition on competition.
Permissible Activities and Investments
A particular subset of SLHCs are generally permitted to engage in nonbanking and commercial activities without restriction. These SLHCs are known as “grandfathered unitary SLHCs.” A “grandfathered unitary SLHC” is a SLHC that owned a single savings association, or for which an application to acquire a single savings association was pending, on or before May 4, 1999. The Company currently qualifies as a grandfathered unitary SLHC and, as such, is generally permitted to engage in nonbanking and commercial activities without restriction.
In order to be able to continue to rely on this status, a grandfathered unitary SLHC must continue to control the thrift that caused it to qualify (or a successor to that thrift), and the thrift must meet the Qualified Thrift Lender ("QTL") test. If the savings association subsidiary of a grandfathered unitary SLHC fails to meet the QTL test, then the holding company will become subject to restrictions on its activities and, unless the savings association re-qualifies as a QTL within one year thereafter, would be required to register as, and become subject to the restrictions applicable to, a bank holding company. Regulation as a bank holding company could be adverse to our operations and impose additional and possibly more burdensome regulatory requirements on the Company.
In addition, if the OCC determines that there is reasonable cause to believe that the continuation by a SLHC, including a grandfathered unitary SLHC, of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings association, the OCC may impose such restrictions as it deems necessary to address such risk, including limiting (i) payment of dividends by the savings association; (ii) transactions between the savings association and its affiliates; and (iii) any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association.
The Dodd-Frank Act did not eliminate the general authority for grandfathered unitary SLHCs to conduct activities without restriction. However, under section 626 of the Dodd-Frank Act, the Federal Reserve is authorized to require a grandfathered unitary thrift holding company to put its financial activities beneath an intermediate holding company. Separating commercial and financial activities within an SLHC’s legal structure is intended, among other things, to make supervision of the financial activities easier and to reduce the reporting and supervision burden applicable at the top tier of a commercial SLHC. The Federal Reserve is required to promulgate rules setting forth the criteria for when a grandfathered unitary SLHC would be required to establish an intermediate holding company, but to date it has not yet proposed any such rules.
Qualified Thrift Lender Test
Federal banking laws require a thrift to meet the QTL test by maintaining at least 65% of its “portfolio assets” in certain “qualified thrift investments,” such as residential housing related loans, certain consumer and small business loans and residential mortgage backed securities, on a monthly average basis in at least nine months out of every twelve months. A thrift that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The Dodd-Frank Act imposes additional restrictions on the ability of any thrift that fails to become or remain a QTL to pay dividends. Specifically, the thrift is not only subject to the general dividend restrictions as would apply to a national bank (as under prior law), but also is prohibited from paying dividends at all (regardless of its financial condition) unless required to meet the obligations of a company that controls the thrift, permissible for a national bank and specifically approved by the OCC and the Federal Reserve. In addition, violations of the QTL test now are treated as violations of federal banking laws subject to remedial enforcement action. At December 31, 2015, the amount of the Bank’s assets invested in qualified thrift investments exceeded the percentage required to qualify the Bank under the QTL test.

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Regulatory Capital Requirements and Capital Adequacy
The federal banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The final supervisory determination on an institution’s capital adequacy is based on the regulator’s assessment of numerous factors.
The OCC established risk-based and leverage capital guidelines applicable to federal thrifts, including the Bank. As noted above, as a result of the Dodd-Frank Act, SLHCs, including the Company, are subject to regulatory capital requirements. The SLHC capital requirements are discussed below in “—Basel III.”
Basel I was based upon the 1988 capital accord of the International Basel Committee on Banking Supervision (“Basel Committee”), a committee of central banks and bank supervisors, as implemented by the U.S. federal banking agencies. As discussed further below, the federal banking agencies have adopted separate risk-based capital guidelines for so-called “core banks” based upon the Revised Framework for the International Convergence of Capital Measurement and Capital Standards (“Basel II”) issued by the Basel Committee in November 2005, and recently adopted rules implementing the revised standards referred to as Basel III.
Basel I
OCC regulations implementing the Basel I standards required that federal thrifts maintain: (i) tier 1 capital in an amount not less than 4.0% (3.0% if the federal thrift is assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System) of adjusted total assets (the “leverage ratio”), (ii) tier 1 capital in an amount not less than 4.0% of risk-weighted assets and (iii) total risk-based capital in an amount not less than 8.0% of risk-weighted assets.
Tier 1 capital (core capital) included common stockholders’ equity (including common stock, additional paid-in capital and retained earnings, but excluded any net unrealized gains or losses, net of related taxes, on certain securities available for sale), noncumulative perpetual preferred stock and any related surplus and non-controlling interests in the equity accounts of fully consolidated subsidiaries. Intangible assets generally were deducted from tier 1 capital, other than certain servicing assets and purchased credit card relationships, subject to limitations. Total capital, for purposes of the risk-based capital requirement, equaled the sum of tier 1 capital plus supplementary (tier 2) capital up to 100% of core capital (which generally includes the sum of, among other items, perpetual preferred stock not counted as tier 1 capital, limited life preferred stock, subordinated debt and general loan and lease loss allowances up to 1.25% of risk-weighted assets) less certain deductions.
Risk-weighted assets were determined by multiplying certain categories of assets, including off-balance sheet equivalents, by an assigned risk weight of 0% to 100% (or more) based on the degree of credit risk associated with those assets as specified in OCC regulations.
Capital requirements higher than the generally applicable minimum requirement may be established for a particular savings association if the OCC determines that the institution’s capital was or may become inadequate in view of its particular circumstances.
Basel II
Under the final U.S. Basel II rules issued by the federal banking agencies, there were a small number of “core” banking organizations that were required to use the advanced approaches under Basel II for calculating risk-based capital related to credit risk and operational risk, instead of the methodology reflected in the regulations effective prior to adoption of Basel II. The rules also required core banking organizations to have rigorous processes for assessing overall capital adequacy in relation to their total risk profiles, and to publicly disclose certain information about their risk profiles and capital adequacy. The Company and the Bank were not among the core banking organizations required to use Basel II advanced approaches.

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Basel III
On December 16, 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, known as Basel III. The Basel III calibration and phase-in arrangements were previously endorsed by the Seoul G20 Leaders Summit in November 2010. Under these standards, when fully phased-in on January 1, 2019, banking institutions will be required to satisfy three risk-based capital ratios:
A new common equity tier 1 capital to risk-weighted assets ratio of at least 7.0%, inclusive of a 4.5% minimum common equity tier 1 capital ratio, net of regulatory deductions, and the new 2.5% “capital conservation buffer” of common equity to risk-weighted assets;
A tier 1 capital ratio of at least 8.5%, inclusive of the 2.5% capital conservation buffer; and
A total capital ratio of at least 10.5%, inclusive of the 2.5% capital conservation buffer.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a common equity tier 1 ratio above the minimum but below the conservation buffer may face constraints on dividends, equity repurchases, and compensation based on the amount of such shortfall. The Basel Committee also announced that a “countercyclical buffer” of 0% to 2.5% of common equity or other loss-absorbing capital “will be implemented according to national circumstances” as an “extension” of the conservation buffer during periods of excess credit growth.
Basel III also introduced a non-risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets and new liquidity standards. The Basel Committee had initially planned for member nations to begin implementing the Basel III requirements by January 1, 2013, with full implementation by January 1, 2019. On November 9, 2012, U.S. regulators announced that implementation of Basel III’s first requirements would be delayed. In July 2013, the federal banking agencies published final rules (the “Basel III Capital Rules”) that revised their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to implement, in part, agreements reached by the Basel Committee and certain provisions of the Dodd-Frank Act. The Basel III Capital Rules apply to banking organizations, including the Company and the Bank.
Among other things, the Basel III Capital Rules: (i) introduce a new capital measure entitled “Common Equity Tier 1” (“CET1”); (ii) specify that tier 1 capital consist of CET1 and additional financial instruments satisfying specified requirements that permit inclusion in tier 1 capital; (iii) define CET1 narrowly by requiring that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions or adjustments from capital as compared to the existing regulations. The Basel III Capital Rules also provide a permanent exemption from the proposed phase out of existing trust preferred securities and cumulative perpetual preferred stock from regulatory capital for banking organizations with less than $15 billion in total consolidated assets as of December 31, 2009.
The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios:
4.5% based upon CET1;
6.0% based upon tier 1 capital; and
8.0% based upon total regulatory capital.
A minimum leverage ratio (tier 1 capital as a percentage of total assets) of 4.0% is also required under the Basel III Capital Rules (even for highly rated institutions). The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer of 2.5% above these required minimum capital ratio levels. Banking organizations that fail to maintain the minimum 2.5% capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers.
The Basel III Capital Rules did not address the proposed liquidity coverage ratio (“LCR”) called for by the Basel Committee’s Basel III framework. On October 24, 2013, the Federal Reserve issued a proposed rule implementing a LCR requirement in the United States for larger banking organizations. Neither the Company nor the Bank would be subject to the LCR requirement as proposed.
Finally, the Basel III Capital Rules amend the thresholds under the “prompt corrective action” framework enforced with respect to the Bank by the OCC to reflect both (i) the generally heightened requirements for regulatory capital ratios as well as (ii) the introduction of the CET1 capital measure.
As a result of the enactment of the Basel III Capital Rules the Company and the Bank are subject to increased required capital levels. The Basel III Capital Rules became effective as applied to us and the Bank on January 1, 2015, with a phase in period that generally extends from January 1, 2015 through January 1, 2019.

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As of December 31, 2015, the Bank met the standard minimum regulatory capital requirements noted above, with CET1, tier 1 capital, total capital and tier 1 leverage ratios of 17.04%, 17.04%, 18.33% and 12.35%, respectively. As of December 31, 2015, the Bank was “well capitalized” under regulatory standards. See Note 11 in the Notes to Consolidated Financial Statements contained in Item 8.
Prompt Corrective Action ("PCA")
Under the FDIA, federal bank regulatory agencies must take “prompt corrective action” against undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” and are subjected to differential regulation corresponding to the capital category within which the institution falls. A depository institution is currently deemed to be “well capitalized” if the banking institution 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 CET1 of 6.5% or greater and a tier 1 leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A banking institution that is less than adequately capitalized is required to submit a capital restoration plan. Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including: termination of deposit insurance by the FDIC, restrictions on certain business activities, and appointment of the FDIC as conservator or receiver.
In addition, the Basel III Capital Rules amended the thresholds under the PCA framework for enforcement with respect to the Bank by the OCC to reflect both (i) the generally heightened requirements for regulatory capital ratios as well as (ii) the introduction of the CET1 capital measure.
Regulatory Limits on Dividends and Distributions
OCC and Federal Reserve regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. Under applicable regulations, a savings institution must file an application for approval of the capital distribution if:
the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years;
the institution would not be at least adequately capitalized under the PCA guidelines following the distribution;
the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition; or
the institution is not eligible for expedited treatment of its filings with the OCC.
If an application is not required to be filed, savings institutions such as the Bank which are a subsidiary of a holding company (as well as certain other institutions) must still file a notice with the OCC and Federal Reserve at least 30 days before the board of directors declares a dividend or approves a capital distribution.
An institution that either before or after a proposed capital distribution fails to meet its then applicable minimum capital requirement or that has been notified that it needs more than normal supervision may not make any capital distributions without the prior written approval of the OCC. In addition, the OCC may prohibit a proposed capital distribution, which would otherwise be permitted by OCC regulations, if the OCC determines that such distribution would constitute an unsafe or unsound practice.
The FDIC prohibits an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets while it remains in default in the payment of any assessment due the FDIC. The Bank is currently not in default in any assessment payment to the FDIC.
We are a legal entity separate and distinct from the Bank and its subsidiary. Our principal source of revenue consists of dividends from the Bank. As noted above, the payment of dividends by the Bank is subject to various regulatory requirements, including a minimum of 30 days’ advance notice to the OCC of any proposed dividend to us.
Limits on Transactions with Affiliates and Insiders
Insured depository institutions are subject to restrictions on their ability to conduct transactions with affiliates and other related parties. Section 23A of the Federal Reserve Act imposes quantitative limits, qualitative requirements, and collateral requirements on certain transactions by an insured depository institution with, or for the benefit of, its affiliates. Transactions covered by Section 23A include loans, extensions of credit, investment in securities issued by an affiliate, and acquisitions of

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assets from an affiliate. Section 23B of the Federal Reserve Act requires that most types of transactions by an insured depository institution with, or for the benefit of, an affiliate be on terms at least as favorable to the insured depository institution as if the transaction were conducted with an unaffiliated third party. Section 11 of HOLA applies Sections 23A and 23B to federal thrifts, including the Bank. In addition, Section 11 of HOLA prohibits the Bank from lending to any affiliate engaged in activities not permissible for a bank holding company and from acquiring the securities of any affiliate other than a subsidiary.
As noted above, the Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and a clarification of the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. The ability of the Federal Reserve to grant exemptions from these restrictions is also narrowed by the Dodd-Frank Act, including by requiring coordination with other bank regulators.
The Federal Reserve’s Regulation O and OCC regulations impose restrictions and procedural requirements in connection with the extension of credit by an insured depository institution to directors, executive officers, principal stockholders and their related interests.
Brokered Deposits
The FDIC restricts the use of brokered deposits by certain depository institutions. Under the applicable regulations, (i) a “well capitalized insured depository institution” may solicit and accept, renew or roll over any brokered deposit without restriction, (ii) an “adequately capitalized insured depository institution” may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC and (iii) an “undercapitalized insured depository institution” may not accept, renew or roll over any brokered deposit or solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution’s normal market area or in the market area in which such deposits are being solicited. The FDIC may, on a case-by-case basis and upon application by an adequately capitalized insured depository institution, waive the restriction on brokered deposits upon a finding that the acceptance of brokered deposits does not constitute an unsafe or unsound practice with respect to such institution.
At December 31, 2015 and 2014, the Bank was a well capitalized insured depository institution and had no outstanding brokered deposits.
Examination Fees
The OCC currently charges fees to recover the costs of examining national banks and federal thrifts, processing applications and other filings, and covering direct and indirect expenses in regulating national banks and federal thrifts and their affiliates. The Dodd-Frank Act provides various agencies with the authority to assess additional supervision fees.
Deposit Insurance Assessments
FDIC-insured depository institutions are required to pay deposit insurance assessments to the FDIC. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. Deposit insurance assessments fund the DIF. As noted above, the Dodd-Frank Act changed the way an insured depository institution’s deposit insurance premiums are calculated. These changes may impact assessment rates, which could impact the profitability of our operations.
Depositor Preference
The FDIC provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If we invest in or acquire an insured depository institution that fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including us, with respect to any extensions of credit they have made to such insured depository institution.
Federal Reserve System and FHLB System
The Federal Reserve has adopted regulations that require savings associations to maintain non-earning reserves against their transaction accounts (primarily negotiable order of withdrawal accounts and regular checking accounts). These reserves may be used to satisfy liquidity requirements imposed by the OCC. Because required reserves must be maintained in the form of vault

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cash, with a pass-through correspondent institution or an account at a Federal Reserve Bank, the effect of this reserve requirement is to potentially restrict the amount of the Bank’s assets.
The FHLB System consists of twelve regional Federal Home Loan Banks, each subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The Bank is a member of the FHLB of Chicago. The FHLBs provide a central credit facility for member savings associations, and impose collateral requirements on advances. The maximum amount that the FHLB of Chicago will advance fluctuates from time to time in accordance with changes in policies of the FHFB and the FHLB of Chicago, and the maximum amount generally is reduced by borrowings from any other source. In addition, the amount of FHLB of Chicago advances that a savings association may obtain is restricted in the event the institution fails to maintain its status as a QTL.
Bank Secrecy Act / Anti-Money Laundering
The Bank Secrecy Act (“BSA”), which is intended to require financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, mandates that every financial institution have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA. The program must, at a minimum: (1) provide for a system of internal controls to assure ongoing compliance; (2) provide for independent testing for compliance; (3) designate an individual responsible for coordinating and monitoring day-to-day compliance; and (4) provide training for appropriate personnel. In addition, financial institutions are required to adopt a customer identification program as part of its BSA compliance program. Financial institution are also required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA.
In addition to complying with the BSA, the Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”). The Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The Patriot Act mandates that financial service companies implement additional policies and procedures and take heightened measures designed to address any or all of the following matters: customer identification programs, money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, currency crimes, and cooperation between financial institutions and law enforcement authorities.
Anti-Money Laundering and Office of Foreign Assets Control
Under federal law, financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with non-U.S. financial institutions, non-U.S. customers and other high-risk customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various executive orders and acts of Congress. OFAC publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If the Company or the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the Company or Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities.

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Consumer Laws and Regulations
Banking organizations are subject to numerous laws and regulations intended to protect consumers. These laws include, among others:
Truth in Lending Act;
Truth in Savings Act;
Electronic Funds Transfer Act;
Expedited Funds Availability Act;
Equal Credit Opportunity Act;
Fair and Accurate Credit Transactions Act;
Fair Housing Act;
Fair Credit Reporting Act;
Fair Debt Collection Act;
Gramm-Leach-Bliley Act;
Home Mortgage Disclosure Act;
Right to Financial Privacy Act;
Real Estate Settlement Procedures Act;
Laws regarding unfair and deceptive acts and practices; and
Usury laws.
Many states and local jurisdictions have consumer protection laws analogous, and in addition to, those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans, or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general, and civil or criminal liability. The creation of the CFPB by the Dodd-Frank Act has led to enhanced enforcement of consumer financial protection laws.
The Community Reinvestment Act
The Community Reinvestment Act (“CRA”) is intended to encourage banks and thrifts to help meet the credit needs of their service areas, including low and moderate-income neighborhoods, consistent with safe and sound operations. The bank regulators examine and assign each bank a public CRA rating. The CRA then requires bank regulators to take into account the bank’s record in meeting the needs of its service area when considering an application by a bank to establish or relocate a branch or to conduct certain mergers or acquisitions. The Federal Reserve is required to consider the CRA records of an SLHC’s controlled thrift(s) when considering an application by the SLHC to acquire a banking organization or to merge with another SLHC. When the Company or the Bank applies for regulatory approval to make certain investments, the regulators will consider the CRA record of target institutions and the Bank. A less than satisfactory CRA record could substantially delay approval or result in denial of an application. The regulatory agency’s assessment of the institution’s record is made available to the public. Following its most recent CRA examination in June 2013, the Bank received an overall rating of “Satisfactory.”
Overdraft Fees
The Federal Reserve has adopted amendments under its Regulation E that impose restrictions on banks’ abilities to charge overdraft fees. The rule prohibits financial institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.
Interchange Fees
The Dodd-Frank Act, through a provision known as the Durbin Amendment, required the Federal Reserve to establish standards for interchange fees that are “reasonable and proportional” to the cost of processing the debit card transaction and imposes other requirements on card networks. Institutions like the Bank with less than $10 billion in assets are exempt. However, while we are under the $10 billion level that caps income per transaction, we have been affected by federal regulations that prohibit network exclusivity arrangements and routing restrictions. Essentially, issuers and networks must allow transaction processing through a minimum of two unaffiliated networks. These additional processing alternatives have negatively affected interchange income from our PIN/point of sale network.
Changes in Laws, Regulations or Policies
Federal, state and local legislators and regulators regularly introduce measures or take actions that would modify the regulatory requirements applicable to banks, their holding companies and other financial institutions. Changes in laws, regulations or regulatory policies could adversely affect the operating environment for the Company and the Bank in substantial and

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unpredictable ways, increase our cost of doing business, impose new restrictions on the way in which we conduct our operations or add significant operational constraints that might impair our profitability. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on our business, financial condition or results of operations. The Dodd-Frank Act imposes substantial changes to the regulatory framework applicable to us and our subsidiaries. The majority of these changes will be implemented over time by various regulatory agencies. The full effect that these changes will have on us remains uncertain at this time and may have a material adverse effect on our business and results of operations.
Federal Housing Finance Agency
In January 2011, the Federal Housing Finance Agency (“FHFA”) announced that it directed Fannie Mae and Freddie Mac to work on a joint initiative, in coordination with FHFA and HUD, to consider alternatives for future mortgage servicing structures and servicing compensation for their single-family mortgage loans. Not all aspects of the joint initiative have yet been implemented and it is as yet uncertain how the financial services industry in general and the Bank specifically will be affected by the final requirements.
The Volcker Rule
On December 10, 2013, five U.S. financial regulators, including the Federal Reserve and the OCC, adopted a final rule implementing the so-called “Volcker Rule.” The Volcker Rule was created by Section 619 of the Dodd-Frank Act and prohibits “banking entities” from engaging in “proprietary trading” and making investments and conducting certain other activities with “private equity funds and hedge funds.” Although the final rule provides some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Company and the Bank. The final rule became effective April 1, 2014 and had no financial impact on the Company.
Legislative and Regulatory Proposals
Proposals to change the laws and regulations governing the operations and taxation of, and federal insurance premiums paid by, savings banks and other financial institutions and companies that control such institutions are frequently raised in the U.S. Congress, state legislatures and before the FDIC, the OCC and other bank regulatory authorities. The likelihood of any major changes in the future and the impact such changes might have on us or our subsidiaries are impossible to determine. Similarly, proposals to change the accounting treatment applicable to savings banks and other depository institutions are frequently raised by the SEC, the federal banking agencies, the Internal Revenue Service (“IRS”) and other appropriate authorities, including, among others, proposals relating to fair market value accounting for certain classes of assets and liabilities. The likelihood and impact of any additional future accounting rule changes and the impact such changes might have on us or our subsidiaries are impossible to determine at this time.
Taxation
Federal
The Company files a consolidated federal income tax return on behalf of itself, the Bank and its subsidiaries on a calendar tax year basis.
State
Under current law, the state of Wisconsin imposes a corporate franchise tax of 7.9% on the combined taxable incomes of the members of the Company’s consolidated income tax group.
Tax Attribute Preservation Provision
In connection with the Plan of Reorganization, the Amended Charter contains provisions to protect certain tax attributes of the Company and its subsidiaries following emergence from bankruptcy. Until the third anniversary of the Effective Date, unless approved by the Board in accordance with the procedures set forth in the Amended Charter and subject to certain exceptions for permitted transfers, any attempted transfer of the Company’s common stock is prohibited and void ab initio to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons will own 4.95% or more of the outstanding shares of common stock or preferred stock of the Company or (ii) the ownership interest in the Company of any of its existing 5% stockholders will be increased. The Expiration Date may be extended in the Board’s discretion until the sixth anniversary of the Effective Date in order to protect the tax attributes of the Company.
Old National and the Company jointly announced the execution of a definitive agreement under which Old National will acquire the Company through a stock and cash merger. The definitive merger agreement has been unanimously approved by the

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Board of both Old National and the Company. The transaction remains subject to regulatory approval and the vote of the Company's stockholders. The transaction is anticipated to close in the second quarter of 2016.
Tax Bad Debt Reserves
Effective for tax years commencing January 1, 1996, federal tax legislation modified the methods by which a thrift computes its bad debt deduction. As a result, the Bank is only allowed to claim a deduction equal to its actual loss experience and the reserve method is no longer available. Any cumulative reserve additions (i.e. bad debt deductions) in excess of actual loss experience for tax years 1988 through 1995 have been fully recaptured over a six year period. Generally, reserve balances as of December 31, 1987 (the "Base Year Reserve") will only be subject to recapture upon distribution of such reserves to stockholders.
To the extent that the Bank makes nondividend distributions to stockholders, such distributions will be considered to result in distributions from the Bank’s Base Year Reserve to the extent thereof, and then from its supplemental tax-basis reserve for losses on loans and an amount based on the amount distributed, will be included in the Bank’s taxable income. Nondividend distributions include distributions in excess of Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank’s current or accumulated earnings and profits will not constitute nondividend distributions and, therefore, will not be included in Bank’s taxable income.
Item 1A.
Risk Factors
Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K. The risks described below are not the only ones facing our company. Our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected by any of these risks. The value of shares of our common stock could decline due to any of these risks. This report, including the documents incorporated by reference herein, also contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below.
Risks Related to Our Business
We may not be able to fully execute on our business initiatives, which could have a material adverse effect on our consolidated financial condition or results of operations.
We are primarily a community-oriented commercially focused retail bank offering traditional deposit products and have historically focused on retail banking and residential mortgage lending. We have been developing strategies to grow other loan categories to diversify earning assets and to increase low cost core deposits, including transforming our business to a relationship-focused commercial bank, expanding our commercial banking services and other business strategies. These strategies include, over time, expanding our business banking operations. Our business banking initiative includes focusing on small and mid-sized businesses, with an emphasis on attracting clients from competitors. There are costs, risks and uncertainties associated with the development, implementation and execution of these initiatives, including the investment of time and resources, the possibility that these initiatives will be unprofitable and the risk of additional liabilities associated with these initiatives. In addition, our ability to successfully execute on these new initiatives will depend in part on our ability to attract and retain talented individuals to help manage these initiatives and the existence of satisfactory market conditions that will allow us to profitably grow. Our potential inability to successfully execute these initiatives could have a material adverse effect on our business, consolidated financial condition or results of operations.
While we recently reversed substantially all of the valuation allowance for our deferred tax asset, we may not be able to realize the asset in the future and the deferred tax asset may be subject to additional valuation allowances.
During September 2009, the Company established a full deferred tax asset valuation allowance covering its federal and state tax loss carryforwards and other deferred tax assets. As a result of management’s ongoing periodic assessments of the deferred tax asset position, the Company determined that it was appropriate to substantially reverse this deferred tax asset valuation allowance. In 2015, the Company determined that it is more likely than not it will be able to realize its deferred tax asset, including its entire federal tax loss carryforwards and a significant portion of its state tax loss carryforwards, with the exception of $4.2 million pertaining to certain multi state loss carryforwards, including states in which the Company no longer does business. This action resulted in the recognition of a $108.9 million income tax benefit, net of current tax provision.

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The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods that the related net operating losses and certain recognized built-in losses and net unrealized built-in losses, if any (collectively, “pre-change losses”), may be utilized and is also subject to the rules of Section 382 of the Code, described below. If our estimates and assumptions about future taxable income or our assessment of the positive and negative evidence are not accurate, the value of our deferred tax asset may not be recoverable and our cash flow available to fund operations could be adversely affected.
Our ability to realize the benefit of our deferred tax assets may be materially impaired.
Our ability to use our deferred tax assets to offset future taxable income will be limited if we experience an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the” Code”). Due to the complexity of Section 382, it is difficult to conclude with certainty at any given point in time whether an ownership change has occurred. A Company that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-change losses equal to the equity value of the Company immediately before the ownership change (in some cases, reduced by certain capital contributions received in the two years preceding the ownership change), multiplied by the applicable “long-term tax-exempt rate” (a rate that changes monthly and was 2.61% for ownership changes occurring in December 2015). While the Tax Attribute Preservation Provision has been included in our Amended Charter to prohibit and void ab initio future transactions in our common stock that would result in an ownership change, such an ownership change nevertheless could occur in the future, which likely would have a material adverse effect on our results of operations, consolidated financial condition and stockholder value. Any change in applicable law may result in an ownership change. Further, this provision may limit our ability to raise capital by selling shares of our common stock.
Old National and the Company jointly announced the execution of a definitive agreement under which Old National will acquire the Company through a stock and cash merger. The definitive merger agreement has been unanimously approved by the Board of both Old National and the Company. The transaction remains subject to regulatory approval and the vote of the Company's stockholders. The transaction is anticipated to close in the second quarter of 2016 and upon consummation, it is anticipated that the Company will experience an ownership change under Section 382.
We depend on our key officers and employees to continue the implementation of our long-term business strategy and could be harmed by the loss of their services. Management’s ability to retain key officers and employees may change.
We believe that the implementation of our long-term business strategy and future success will depend in large part on the skills of our current senior management team. We believe our senior management team possesses valuable knowledge about and experience in the banking industry and that their knowledge and relationships would be very difficult to replace. Although most of our senior management team has entered into employment agreements with us, they may not complete the term of their employment agreements or renew them upon expiration. Our success also depends on the experience of our branch managers and lending officers and on their relationships with the customers and communities they serve.
Our future operating results also depend in significant part upon our ability to attract and retain qualified management, financial, technical, marketing, sales and support personnel, particularly in respect of the implementation of our business strategy, which may require the recruitment of new personnel in new or expanded business areas. Competition for qualified personnel is intense, and we may not be successful in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time. The loss of service of one or more of our key officers and employees, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, consolidated financial condition or operating results.
Our allowance for losses on loans may not be adequate to cover probable losses.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when we believe that repayment of principal is unlikely. Our level of non-performing loans decreased significantly in the year ended December 31, 2015, relative to the prior year period.
However, any material declines in the creditworthiness of our customers, real estate market conditions and values, general economic conditions or changes in regulatory policies would likely result in a higher probability that principal on some loans will not be repaid and require us to increase our allowance for loan losses. A material increase in the allowance for loan losses would adversely affect our results of operations and our capital.

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The Bank’s business is subject to liquidity risk and changes in its source of funds may adversely affect our performance and consolidated financial condition by increasing its cost of funds.
The Bank’s ability to make loans and fund expenses is directly related to its ability to secure funding. Retail and commercial core deposits are the Bank’s primary source of liquidity. The Bank also relies on cash from payments received from loans and investments, as well as advances from the FHLB of Chicago as a funding source.
Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans and payment of operating expenses. Core deposits represent a significant source of low-cost funds. Alternative funding sources such as large balance time deposits or borrowings are a comparatively higher-cost source of funds. Liquidity risk arises from the inability to meet obligations when they come due or to manage unplanned decreases or changes in funding sources. Significant fluctuations in lower cost funding vehicles would cause the Bank to pursue higher-cost funding which would adversely affect our consolidated financial condition and results of operations.
The Company’s liquidity is dependent upon our ability to receive dividends from the Bank, which accounts for substantially all our revenue which could affect our ability to pay dividends, and we may be unable to generate liquidity from other sources.
We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from the Bank, which we use as the principal source of funds to pay our expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If the Bank does not receive regulatory approval or if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our ability to pay our expenses, our business, our consolidated financial condition or our results of operations could be materially and adversely impacted. During the year ended December 31, 2015, the Bank declared and paid a dividend to us.
Increases in our level of non-performing assets would have an adverse effect on our consolidated financial condition and results of operations.
If loans that are currently performing become non-performing, we may need to increase our allowance for loan losses if additional losses are anticipated which would have an adverse impact on our consolidated financial condition and results of operations. The increased time and expense associated with the work out of non-performing assets and potential non-performing assets also could adversely affect our operations.
If our investment in the capital stock of the FHLB of Chicago is other than temporarily impaired, our consolidated financial condition and results of operations could be impaired.
The Bank owns capital stock of the FHLB of Chicago. The capital stock is held to qualify for membership in the FHLB System and to be eligible to borrow funds under the FHLB of Chicago’s advance program. There is no market for the FHLB of Chicago capital stock and, while redemptions may be requested, they are at the discretion of the FHLB of Chicago.
The Bank evaluates the FHLB of Chicago stock for impairment on a regular basis. The determination of whether FHLB of Chicago stock is impaired depends on a number of factors and is based on an assessment of the ultimate recoverability of cost rather than changes in the book value of the shares. If our investment in the capital stock of the FHLB of Chicago were to become other than temporarily impaired, our consolidated financial condition and results of operations could be affected.
Maintaining or increasing market share depends on market acceptance and regulatory approval of new products and services.
Our success depends, in part, on the ability to adapt products and services to evolving industry and regulatory standards. There is increasing pressure to provide products and services at lower prices. This can reduce net interest income and non-interest income from fee-based products and services. In addition, the widespread adoption of new technologies could require us to make substantial capital expenditures to modify or adapt existing products and services or develop new products and services. We may not be successful in introducing new products and services in response to industry trends or development in technology or those new products may not achieve market acceptance. As a result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to cost increases.
Deterioration in the real estate markets and economic conditions could lead to additional losses, which could have a material negative effect on our consolidated financial condition and results of operations.
Our success depends on general and local economic conditions and the real estate and business markets in which we compete. Any future declines in real estate values may reduce the value of collateral securing loans and impact the customer’s ability to

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borrow or repay. Increases in delinquency levels or declines in real estate values could have a material negative effect on our business and results of operations.
While we attempt to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition, we may not be able to economically hedge our interest rate risk. A rapid or substantial increase or decrease in interest rates could adversely affect our net interest income and results of operations.
Our earnings and cash flows depend to a great extent upon the level of our net interest income. The amount of interest income is dependent on many factors, including the volume of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the level of non-performing loans. The cost of funds varies with the amount of funds required to support earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds and the levels of non-interest-bearing demand deposits and equity capital.
Different types of assets and liabilities are impacted differently, and at different times, by changes in market interest rates. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control including inflation, recession, unemployment, money supply, domestic and international events, changes in the United States and other financial markets and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal Reserve System. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, credit spreads, relationships between interest sensitive instruments and key driver rates, balance sheet growth, client loan and deposit preferences and the timing of changes in these variables. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage backed securities portfolios and increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets, loan origination volume, loan and mortgage backed securities portfolios, and our overall results.
We attempt to manage our risk from changes in market interest rates through asset/liability management by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities. Interest rate risk management techniques, however, are not precise, and we may not be able to successfully manage our interest rate risk. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations.
Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs and risks associated with the ownership of real property, which could have an adverse effect on our business and results of operations.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans, in which case, we are exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including:
general or local economic conditions;
environmental cleanup liabilities;
neighborhood values;
real estate tax rates;
operating expenses of the mortgaged properties;
supply of and demand for rental units or properties;
ability to obtain and maintain adequate occupancy of the properties;
zoning laws;
governmental rules, regulations and fiscal policies; and
extreme weather conditions or other natural or man-made disasters.
Certain expenditures associated with the ownership of real estate, principally maintenance costs, may also adversely affect our operating expenses.
An interruption in or breach in security of our information systems may result in a loss of customer business.
We rely heavily on communications and information systems to conduct our business. Any failure, interruptions or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, servicing or loan origination systems. The occurrence of any failures, interruptions or security breaches of information systems used to process customer transactions could damage our reputation, result in a loss of customer business, subject us to

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additional regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our consolidated financial condition, results of operations and cash flows. Additionally, we outsource portions of our data processing to third parties. If our third party provider encounters difficulties or if we have difficulty in communicating with such third party, it will significantly affect our ability to adequately process and account for customer transactions, which would significantly affect our business operations. Furthermore, breaches of such third party’s technology may also cause reimbursable loss to our consumer and business customers, through no fault of our own.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, cash flows and consolidated financial condition.
Our regional concentration makes us particularly at risk for changes in economic conditions in our primary market.
Our business is primarily located in Wisconsin. Due to our lack of geographic diversification, we are particularly vulnerable to adverse changes in economic conditions in Wisconsin and the Midwest more generally. The economic conditions in Wisconsin and the Midwest affect our business, consolidated financial condition, results of operations and future prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of non-performing assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing portfolio. Any regional or local economic downturn that affects existing or prospective borrowers or property values in such areas may affect us and our profitability more significantly and more adversely than our competitors whose operations are less geographically concentrated.
Our asset valuations include observable inputs and may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to asset valuations that may materially adversely affect our results of operations or consolidated financial condition.
We use estimates, assumptions and judgments when financial assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party sources, when available. When such third-party information is not available, we estimate fair value primarily by using cash flows and other financial modeling techniques utilizing assumptions such as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying inputs, factors, assumptions or estimates in any of the areas underlying our estimates could materially impact our future consolidated financial condition and results of operations.
We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud or certain borrower defaults, which could harm our liquidity, results of operations and consolidated financial condition.
When we sell mortgage loans we are required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. While we sell mortgage loans with no recourse, our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower fraud. If the level of repurchase and indemnity activity becomes material, our liquidity, results of operations and consolidated financial condition could be materially and adversely affected.
Certain provisions in our Amended Charter limit our likelihood of being acquired in a manner not approved by the Board.
The Plan of Reorganization the Amended Charter contain provisions to protect certain tax attributes of the Company and its subsidiaries following emergence from bankruptcy. Until the third anniversary of the Effective Date, unless approved by the Board in accordance with the procedures set forth in the Amended Charter and subject to certain exceptions for permitted transfers, any attempted transfer of the Company’s common stock is prohibited and void ab initio to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons will own 4.95% or more of the outstanding shares of common stock or preferred stock of the Company or (ii) the ownership interest in the Company of any of its existing 5% stockholders will be increased. The Expiration Date may be extended in the Board’s discretion until the sixth anniversary of the Effective Date in order to protect the tax attributes of the Company.
The existence of the Tax Attribute Preservation Provision may make it more difficult, delay, discourage, prevent or make it more costly to acquire us or affect a change in control that is not approved by the Board. This, in turn, could prevent our

30


stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and adversely affect the market price of our common stock.
Old National and the Company jointly announced the execution of a definitive agreement under which Old National will acquire the Company through a stock and cash merger. The definitive merger agreement has been unanimously approved by the Board of both Old National and the Company. The transaction remains subject to regulatory approval and the vote of the Company's stockholders. The transaction is anticipated to close in the second quarter of 2016.
We offer third-party products, including mutual funds, annuities, life insurance, individual securities and other wealth management services which could experience significant declines in value subjecting us to reputational damage and litigation risk.
We offer third-party products, including mutual funds, annuities, life insurance, individual securities and other wealth management products and services. If these products do not generate competitive risk-adjusted returns that satisfy clients in a variety of asset classes, we will have difficulty maintaining existing business and attracting new business. Additionally, our investment services business involves the risk that clients or others may sue us, claiming that we have failed to perform under a contract or otherwise failed to carry out a duty owed to them. Our investment services businesses are particularly subject to this risk and this risk may be heightened during periods when credit, equity or other financial markets are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses. Significant declines in the performance of these third-party products could subject us to reputational damage and litigation risk.
We are exposed to risk of environmental liabilities with respect to properties to which we own or take title.
In the course of our business we may own or foreclose and take title to real estate that could be subject to environmental liabilities. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, consolidated financial condition, cash flows, liquidity and results of operations could be materially and adversely affected.
Risks Related to the Ownership of our Common Stock
An active, liquid and orderly trading market for our common stock may not develop and the stock price may be volatile.
Since our common stock is not widely traded, its market value could be subject to wide fluctuations in response to various risk factors including:
changes in laws or regulations applicable to our industry, products or services;
additions or departures of key personnel;
price and volume fluctuations in the overall stock market;
volatility in the market value and trading volume of companies in our industry or companies that investors consider comparable;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
sales of our common stock by us or our stockholders;
the expiration of contractual lock-up agreements;
litigation involving us, our industry or both;
the impact of changes in the economic environment;
the impact of changes in the political environment;
activities by our competitors;
loss of significant customers;
major catastrophic events; and
general economic and market conditions and trends.
As a result of the Plan of Reorganization, a limited number of stockholders are substantial holders of the shares of our common stock.
As a result of the Private Placements pursuant to the Plan of Reorganization, as of September 30, 2013, certain investors own up to 9.9% of our common stock and certain other investors own up to 4.9% of our common stock. Having a large portion of our shares of common stock held by a relatively small number of stockholders could result in a material impact on the trading

31


volume and price per share of our common stock if any of these stockholders decide to sell a significant portion of their holdings. As a result, a small number of holders of our common stock are able to exercise significant influence over matters requiring stockholder approval.
The Investor SPAs and the Secondary SPAs grant the Investors and the Secondary Investors, respectively, certain preemptive rights and approval rights which could impede our ability to raise additional equity capital. Under the Investor SPAs and the Secondary SPAs, in certain instances, the Investors and the Secondary Investors, respectively, have preemptive rights to purchase equity securities we may offer in non-SEC registered capital raising transactions. These rights may adversely affect our ability to raise additional equity capital on favorable terms. If management determines we need to raise additional equity capital for our business, our inability to do so on favorable terms may have a material adverse effect on our business, consolidated financial condition and results of operations and, as a result, a material adverse effect on our ability to satisfy our debt obligations.
“Anti-takeover” provisions and the regulations to which we are subject may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to our stockholders.
Anti-takeover provisions in Delaware law and our Amended Charter and bylaws (the “Amended Bylaws”), as well as regulatory approvals that would be required under federal law, could make it more difficult for a third party to take control of us and may prevent stockholders from receiving a premium for their shares of our common stock. These provisions could adversely affect the market value of our common stock and could reduce the amount that stockholders might get if we are sold.
Our Amended Charter provides for, among other things:
advance notice for nomination of directors and other stockholder proposals;
limitations on the ability of stockholders to call a special meeting of stockholders;
the approval by a super-majority of outstanding shares to amend certain provisions of the Amended Bylaws and the certificate of incorporation; and
the Tax Attribute Preservation Provision.
Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. We believe that these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board and by providing our Board with more time to assess any acquisition proposal. However, these provisions apply even if the offer may be determined to be beneficial by some stockholders and could delay or prevent an acquisition that our Board determines is not in the best interest of our stockholders.
Furthermore, banking laws impose notice, approval and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. These laws include the Federal Savings and Loan Holding Company Act, the Bank Holding Company Act of 1956 and the Change in Bank Control Act. These laws could delay or prevent an acquisition.
Old National and the Company jointly announced the execution of a definitive agreement under which Old National will acquire the Company through a stock and cash merger. The definitive merger agreement has been unanimously approved by the Board of both Old National and the Company. The transaction remains subject to regulatory approval and the vote of the Company's stockholders. The transaction is anticipated to close in the second quarter of 2016.
Risks Related to Our Industry
Our business may be adversely affected by the pace of economic activity and recovery, current conditions in the financial markets, the real estate market and economic conditions generally.
The pace of this economic recovery has resulted in lower levels of lending by some financial institutions to their customers in contrast to lending experienced in other periods of economic recovery. This has continued to result in a lack of customer confidence, increased market volatility and a widespread lower level of general business activity. Competition among financial institutions for deposits and loans continues to be high, and access to deposits or borrowed funds remains lower than average.
The soundness of other financial institutions could materially and adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Transactions with other financial institutions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk is likely to be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. Any losses

32


resulting from such defaults by us, our counterparties or our clients could materially and adversely affect our results of operations.
Competition in the financial services industry is intense and could result in losing business or reducing margins.
We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. We face aggressive competition from other domestic and foreign lending institutions and from numerous other providers of financial services. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures.
Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. This may significantly change the competitive environment in which we conduct business. As a result of these various sources of competition, we could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which would adversely affect our profitability.
We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our consolidated financial condition, results of operations and cash flows.
Risks Related to Recent Market, Legislative and Regulatory Events
We are highly dependent upon programs administered by Fannie Mae, Freddie Mac and Ginnie Mae. Changes in existing U.S. government-sponsored mortgage programs or servicing eligibility standards could materially and adversely affect our business, financial position, results of operations or cash flows.
Our ability to generate revenues through mortgage loan sales to institutional buyers depends to a significant degree on programs administered by Fannie Mae, Freddie Mac, Ginnie Mae and others that facilitate the issuance of mortgage backed securities in the secondary market. Our status as a Fannie Mae and Freddie Mac approved seller/servicer is subject to compliance with each entity’s respective selling and servicing guides.
We also derive other material financial benefits from our relationships with Fannie Mae and Freddie Mac, including the assumption of credit risk by these entities on loans included in mortgage backed securities in exchange for our payment of guarantee fees and the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures. Any discontinuation of, or significant reduction or material change in, the operation of these entities or any significant adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of these entities would likely prevent us from originating and selling most, if not all, of our mortgage loan originations.
In addition, we service loans on behalf of Fannie Mae and Freddie Mac, as well as loans that have been securitized pursuant to securitization programs sponsored by Fannie Mae and Freddie Mac in connection with the issuance of agency guaranteed mortgage backed securities and a majority of our mortgage servicing rights (“MSR”) relate to these servicing activities.
Potential changes to the government-sponsored mortgage programs, and related servicing compensation structures, could require us to fundamentally change our business model in order to effectively compete in the market. Our inability to make the necessary changes to respond to these changing market conditions or loss of our approved seller/servicer status with any of these entities, would have a material adverse effect on our overall business and our consolidated financial position, results of operations and cash flows.
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, may adversely affect us.
As a SLHC and a federal savings association, we and the Bank are subject to extensive regulation, supervision and legal requirements that govern almost all aspects of our operations. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividends or

33


distributions that the Bank can pay to us, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than generally accepted accounting principles. Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect us adversely, including limiting the types of financial services and products we may offer and/or increasing the ability of non-banks to offer competing financial services and products. Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and consolidated financial condition.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations may adversely affect us.
Federal banking agencies, including the OCC and Federal Reserve, periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the consolidated financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we or the Bank or its management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our or the Bank’s capital, to restrict our growth, to assess civil monetary penalties against us, our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance.
Regulatory requirements may affect our ability to attract and retain management and directors.
If we fail to meet various regulatory requirements, such failure could potentially affect our ability to attract and retain management and directors.
Financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal BSA, the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the BSA, is authorized to impose significant civil money penalties for violations of those requirements, and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, U.S. Drug Enforcement Administration and IRS. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to the development of our anti-money laundering program, adopting enhanced policies and procedures and implementing a robust automated anti-money laundering software solution. If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plans.
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

34


The FDIC’s restoration plan and the related increased assessment rate could adversely affect our earnings.
Market developments have significantly depleted the DIF of the FDIC and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC has increased the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect results of operations.
We may be subject to more stringent capital requirements.
The Dodd-Frank Act requires the federal banking agencies to establish stricter risk-based capital requirements and leverage limits to apply to banks and bank and savings and loan holding companies. In July 2013, the federal banking agencies published the Basel III Capital Rules that revised their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to implement, in part, agreements reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The Basel III Capital Rules apply to banking organizations, including the Company and the Bank.
The Company and the Bank became subject to regulatory capital requirements under Basel III Capital Rules effective January 1, 2015, with a phase in period that generally extends from January 1, 2015 through January 1, 2019. Since the effective date of Basel III neither the Company nor the Bank has experienced any material impact involving the new rules. Subsequent potential rules adjustment by the regulatory governing bodies could still impact the Company or the Bank when they become effective.
The fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings.
The Federal Reserve regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. The resulting changes in interest rates can also materially decrease the value of certain financial assets we hold, such as debt securities. Its policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve policies are beyond our control and difficult to predict.
Risks Relating to the Old National Merger
We will be subject to contractual restrictions and business uncertainties while the Old National merger is pending.
Our merger agreement with Old National restricts us from operating our business other than in the ordinary course and prohibits us from taking specified actions without Old National’s consent until the merger occurs. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger. In addition, uncertainty about the effect of the Old National merger on our employees and clients may have an adverse effect on our business. We may have difficulty retaining employees while the merger is pending, as certain employees may experience uncertainty about their future roles with Old National. In addition, the uncertainty caused by the pending merger could cause our clients and business associates to seek to change their existing business relationships with us. These uncertainties may impair our ability to attract, retain and motivate key personnel and retain and grow our client base until we complete the merger.
The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed. Failure to complete the merger with Old National could negatively affect our business.
The merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and adoption of the merger by the Company's stockholders. If any condition to the merger is not satisfied or waived, to the extent permitted by law, including the absence of any materially burdensome condition in the regulatory approvals, the merger will not be completed. In addition, either Old National or the Company may terminate the merger agreement under certain circumstances even if the merger is adopted by the Company's stockholders, including but not limited to, if the merger has not been completed on or before October 11, 2016, provided that Old National may extend the date to January 11, 2017, if on October 11, 2016, all closing conditions except obtaining the required regulatory approvals have been satisfied or waived and Old National in good faith believes such regulatory approvals will be received by January 11, 2017. If we do not complete the merger, we would not

35


realize any of the expected benefits of having completed the merger. If the merger is not completed, additional risks could materialize, which could materially and adversely affect the business, financial results and consolidated financial condition.
If the merger is not completed, we will have incurred material expenses without realizing the expected benefits of the merger.
We will have incurred material expenses in connection with the negotiation and signing of the merger agreement, the receipt of regulatory and stockholder approvals and in anticipation of the completion of the merger. If the merger is not completed, we will have to recognize these expenses without realizing the expected benefits of the merger.
The merger is subject to the receipt of consents and approvals from governmental entities that may impose conditions that could have an adverse effect on the combined company following the merger.
Before the merger may be completed, various approvals or consents must be obtained from regulatory authorities. These regulatory authorities, including the Federal Reserve Board and the OCC, may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying completion of the merger, giving Old National the right to terminate the merger agreement or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have an adverse effect on the combined company following the merger. On February 12, 2016, the Federal Reserve Board granted Old National's request for a waiver of the Federal Reserve Board's application requirements. There can be no assurance as to whether all the regulatory approvals will be received, the timing of such approvals, or whether any conditions will be imposed.
We cannot be sure of the market value of the merger consideration that our stockholders will receive as a result of the announced merger with Old National.
If the merger is completed, each share of the Company's common stock will be converted into the right to receive, at the holder’s election and subject to the proration as set forth in the merger agreement, 3.5505 shares of Old National common stock or $48.50 in cash; however the exchange ratio for shares of stock is subject to adjustment if (i) the after-tax environmental costs in relation to our properties are in excess of $5,000,000 or (ii) at any time during the five-day period starting on the date on which all regulatory approvals required for the completion of the merger are received, the average closing price of a share of Old National common stock for the ten consecutive trading days prior to the first date on which all required regulatory approvals are received is less than $10.67 per share and decreases by more than 20% in relation to the change in the NASDAQ Bank Index.
Additionally, the market value of the merger consideration may vary from the closing price of Old National common stock on the date we announced the merger, on the date that the proxy statement/prospectus is mailed to our stockholders, on the date of the special meeting of our stockholders, on the date we complete the merger and thereafter. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in our respective businesses, operations and prospects, and the regulatory situation of Old National and the Company. Many of these factors are beyond our control. Any change in the market price of Old National common stock prior to completion of the merger will affect the amount of and the market value of the merger consideration that our stockholders will receive upon completion of the merger. Accordingly, at the time of the special meeting, our stockholders will not know or be able to calculate the amount or the market value of the merger consideration they would receive upon completion of the merger.
Further, the businesses of Old National and the Company differ in important respects and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations of Old National and the Company.
We may fail to realize all of the anticipated benefits of the merger.
The success of the merger will depend, in part, on Old National’s ability to realize anticipated benefits and cost savings from combining the businesses of Old National and the Company and to combine the businesses of Old National and the Company in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of the Company or decreasing revenues due to loss of customers. However, to realize these anticipated benefits and cost savings, Old National must successfully combine the businesses of Old National and the Company. If the combined company is not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected.
The Company has operated and, until the completion of the merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees who may then receive severance benefits, the disruption of each company’s ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect the

36


combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. The anticipated cost savings from the merger are largely expected to derive from the absorption by Old National of many of our back-office and other duplicative administrative functions. Integration efforts between the two companies will also divert significant management attention and resources that will not be available for normal operations. An inability to successfully market Old National’s products to the Company's customer base could cause the earnings of the combined company to be less than anticipated. An expected benefit from the merger is an expected increase in the revenues of the combined company from anticipated sales of Old National’s wide variety of financial products, and from increased lending out of the combined company’s larger capital base and legal lending limits. An inability to successfully market Old National’s products to our customer base could cause the earnings of the combined company to be less than anticipated. Integration matters and the transition to Old National could have an adverse effect on the Company and Old National during the pre-merger transition period, and on Old National for an undetermined period after consummation of the merger.
The merger agreement limits our ability to pursue an alternative acquisition proposal and could require us to pay a termination fee of $15.0 million under certain circumstances relating to alternative acquisition proposals.
The merger agreement prohibits the Company from soliciting, initiating or knowingly encouraging certain alternative acquisition proposals with any third party, subject to exceptions set forth in the merger agreement. The merger agreement also provides for the payment by the Company to Old National of a termination fee in the amount of $15.0 million (and, in some cases, Old National's documented out-of-pocket expenses incurred in connection with the merger) in the event that the Company or Old National terminates the merger agreement for certain specified reasons. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition.
Item 1B.
Unresolved Staff Comments.
Not applicable.
Item 2.
Properties
At December 31, 2015, the Company conducted its business from its main office headquarters, which includes a full service branch, at 25 West Main Street, Madison, Wisconsin, 45 other full-service offices and one loan origination office. The Company leases 18 branch offices and office facilities under non-cancelable operating leases which expire on various dates through 2029. During 2015, the Bank sold its Viroqua branch, which was a leased facility, and its Winneconne branch. In addition, the Bank completed the purchase of a new building, located on the east side of Madison, to house the Bank's support departments, as well as opened a new branch in Appleton. As part of several actions to improve overall operational efficiencies, six retail bank branches in Wisconsin were consolidated. See Note 7 to the Consolidated Financial Statements included in Item 8 for a further discussion of these events.
Item 3.
Legal Proceedings
In the ordinary course of business, there are legal proceedings against the Company and its subsidiaries. Management considers the aggregate liabilities, if any, resulting from such actions would not have a material, adverse effect on the consolidated financial position of the Company.
On February 25, 2016, a plaintiff filed a purported class action complaint in the United States District Court for the Western District of Wisconsin on behalf of himself and other Company stockholders against the Company, its Board, and Old National in connection with a proposed transaction between the Company and Old National, pursuant to which the Company will be acquired by Old National.  The lawsuit is captioned Parshall v. Anchor Bancorp Wisconsin, Inc., et al., Case No. 16-CV-120 (W.D. Wis.), and alleges state law breach of fiduciary duty claims against the Company’s Board for, among other things, seeking to sell the Company through an allegedly defective process, for an unfair price and on unfair terms.  The lawsuit seeks, among other things, to enjoin the consummation of the transaction and damages.  The complaint alleges that Old National aided and abetted the directors’ breaches of fiduciary duty.  The complaint also brings state and federal law claims alleging that the Form S-4 Registration Statement that was filed with the U.S. Securities and Exchange Commission on February 17, 2016 for the transaction, omitted certain material information.

37


Item 4.
Mine Safety Disclosures
Not applicable.

38


PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
On October 22, 2014, the Company completed the IPO in which the Company issued and sold 250,000 shares of common stock at a public offering price of $26.00 per share. In addition, the underwriters of the offering purchased an additional 55,794 shares at the offering price on October 30, 2014 to cover over-allotments. Our common stock is listed on the NASDAQ Global Market under the symbol “ABCW.”
All shares of the outstanding Legacy Common Stock, including shares held as treasury stock and in any stock incentive plans, were cancelled on September 27, 2013 pursuant to the Plan of Reorganization.
The Company had 92 stockholders of record at February 29, 2016.
Quarterly Stock Price and Dividend Information
The table below presents the reported high and low sale prices of the Company’s common stock during the periods indicated. As noted previously, the Company completed its IPO of common stock in October 2014, and the common stock was listed for trading upon completion of the IPO. Accordingly, the table below begins with the fourth quarter of 2014.
Quarter Ended
High
 
Low
 
Cash Dividend
December 31, 2015
$
45.42

 
$
40.66

 
$

September 30, 2015
42.59

 
37.01

 

June 30, 2015
38.30

 
34.29

 

March 31, 2015
35.24

 
32.80

 

December 31, 2014
35.00

 
29.51

 

For information regarding restrictions on the payments of dividends by the Bank to the Company, see “Item 1. Business – Regulation and Supervision", “Item 1A. Risk Factors – Risks Related to Our Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Dividends
There were no dividends declared or paid on the Company’s common stock for the years ended December 31, 2015 and 2014 or the nine months ended December 31, 2013.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities for the quarter ended December 31, 2015.
Recent Repurchases of Common Stock
There were no repurchases of the Company’s common stock for the quarter ended December 31, 2015.

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Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company's common stock, based on the market price of the common stock and assuming reinvestment of cash dividends, with the cumulative total return of companies on the KBW Regional Banking Index and the NASDAQ Market Index. The graph assumes that $100 was invested on October 22, 2014, in Company common stock and each of those indices.


40


Item 6.
Selected Financial Data
The following information at and for the years ended December 31, 2015 and 2014, the nine months ended December 31, 2013 and the fiscal years ended March 31, 2013 and 2012 has been derived primarily from the Company’s historical audited consolidated financial statements for those periods.
 
Year Ended December 31,
 
Nine Months Ended
December 31,
 
Fiscal Year Ended March 31,
 
2015
 
2014
 
2013
 
2013
 
2012
 
(Dollars in thousands – except per share amounts)
Operations:
 
 
 
 
 
 
 
 
 
Interest income
$
73,210

 
$
75,580

 
$
62,223

 
$
99,882

 
$
127,253

Interest expense
4,429

 
4,344

 
14,117

 
37,399

 
55,329

Provision for loan losses
(29,496
)
 
(4,585
)
 
275

 
7,733

 
33,887

Non-interest income (1)
34,971

 
30,519

 
159,533

 
45,901

 
49,261

Non-interest expense
84,937

 
91,708

 
95,732

 
135,004

 
124,026

Income (loss) before income taxes
48,311

 
14,632

 
111,632

 
(34,353
)
 
(36,728
)
Income tax expense (benefit)
(89,447
)
 
10

 
9

 
(181
)
 
10

Net income (loss)
137,758

 
14,622

 
111,623

 
(34,172
)
 
(36,738
)
Preferred stock dividends in arrears (2)

 

 
(2,538
)
 
(6,560
)
 
(6,278
)
Preferred stock discount accretion

 

 
(6,167
)
 
(7,412
)
 
(7,413
)
Retirement of preferred shares

 

 
104,000

 

 

Net income (loss) available to common equity
137,758

 
14,622

 
206,918

 
(48,144
)
 
(50,429
)
Per Common Share:
 
 
 
 
 
 
 
 
 
Basic earnings (loss)
$
14.64

 
$
1.61

 
$
12.18

 
$
(2.27
)
 
$
(2.37
)
Diluted earnings (loss)
14.57

 
1.60

 
12.18

 
(2.27
)
 
(2.37
)
Book value
38.20

 
23.85

 
22.34

 
(7.99
)
 
(6.57
)
Dividends

 

 

 

 

Financial Condition:
 
 
 
 
 
 
 
 
 
Total assets
$
2,248,498

 
$
2,082,379

 
$
2,112,474

 
$
2,367,583

 
$
2,789,452

Investment securities available for sale (AFS)
341,523

 
294,599

 
277,872

 
266,787

 
242,299

Investment securities held to maturity (HTM)
15,492

 

 

 

 

Loans held for investment, net
1,614,953

 
1,524,439

 
1,544,324

 
1,670,543

 
2,057,744

Deposits
1,840,724

 
1,814,171

 
1,875,293

 
2,025,025

 
2,264,901

Borrowed funds
12,562

 
13,752

 
12,877

 
317,225

 
476,103

Stockholders’ equity (deficit)
366,641

 
227,663

 
202,198

 
(59,864
)
 
(29,550
)
Common shares outstanding (3)
9,597,392

 
9,547,587

 
9,050,000

 
21,247,225

 
21,247,725

Other Financial Data:
 
 
 
 
 
 
 
 
 
Yield on interest-earning assets
3.59
%
 
3.74
%
 
3.80
%
 
3.96
%
 
4.34
%
Cost of funds
0.24

 
0.23

 
0.86

 
1.45

 
1.79

Interest rate spread
3.35

 
3.51

 
2.94

 
2.51

 
2.55

Net interest margin (4)
3.37

 
3.53

 
2.94

 
2.48

 
2.45

Return on average assets (5)
6.36

 
0.69

 
6.54

 
(1.30
)
 
(1.17
)
Average equity (deficit) to average assets
13.59

 
10.04

 
1.19

 
(1.32
)
 
(0.49
)
(1) The period ended December 31, 2013 includes $134.5 million for extinguishment of debt.
(2) All periods include compounding.
(3) At December 31, 2013 common shares outstanding represent all new common stock issued pursuant to the Plan of Reorganization. All legacy common shares were canceled.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(5) Return on average assets represents net income (loss) as a percentage of average total assets.

41


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Set forth below is a discussion and analysis of the Company’s consolidated financial condition and results of operations, including information on asset/liability management strategies, sources of liquidity and capital resources and critical accounting policies at the dates and for the periods indicated. Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and supplemental data contained elsewhere in this report.
Management is required to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements. Accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our consolidated financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be its critical accounting policies. Management has reviewed the application of these polices with the Audit Committee of our Board.
Critical Accounting Estimates and Judgments
The consolidated financial statements are prepared by applying certain accounting policies. Certain of these policies require management to make estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations that may significantly affect the reported results and consolidated financial position for the period or in future periods. Some of the more significant policies are as follows:
Fair Value Measurements
In preparing the consolidated financial statements, management is required to make estimates, assumptions and judgments when assets and liabilities are required to be recorded at, or adjusted to reflect, fair value under Generally Accepted Accounting Principles (“GAAP”). Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the allowance for loan losses, the valuation of OREO, the net carrying value of MSRs, the valuation of deferred tax assets and the fair value of investment securities, interest rate lock commitments, forward contracts to sell mortgage loans, interest rate swap contracts and loans held for sale. The valuation of both financial and nonfinancial assets and liabilities in these transactions requires numerous assumptions and estimates and the use of third-party sources including appraisers and valuation specialists. For a more detailed discussion, see Notes 1 and 16 in the Notes to Consolidated Financial Statements contained in Item 8.
Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Assets and liabilities measured at fair value on a recurring basis include available for sale investment securities, loans held for sale, interest rate lock commitments, forward contracts to sell mortgage loans and interest rate swap contracts. Assets and liabilities measured at fair value on a non-recurring basis may include certain impaired loans, MSRs and OREO. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such third-party information is not available, fair value is estimated primarily by using cash flow and other financial modeling techniques. Changes in underlying factors, assumptions or estimates in any of these areas could materially impact future financial condition and results of operations.
Investment Securities
Declines in the fair value of investment securities below amortized cost basis that are deemed to be an other-than-temporary impairment (“OTTI”), are reflected as impairment losses. To determine if an other-than-temporary impairment exists on a debt security, the Company first determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Company will recognize an other-than-temporary impairment in earnings equal to the difference between the fair value of the security and its amortized cost basis. If either of the conditions is met, the Company determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present values of the cash flows expected to be collected discounted at the purchase yield or current accounting yield and the amortized cost basis is the credit loss. The amount of the credit loss is included in the consolidated statements of operations as an other-than-temporary impairment on securities and is a reduction in the cost basis of the security. The portion of the total impairment that is related to all other factors is included in other comprehensive income (loss). See Notes 1 and 4 in the Notes to Consolidated Financial Statements contained in Item 8.

42


Allowance for Loan Losses
The allowance for loan losses is a valuation account for probable and inherent losses incurred in the loan portfolio. Management maintains an allowance for loan losses at levels that we believe to be adequate to absorb estimated probable credit losses incurred in the loan portfolio. The adequacy of the allowance for loan losses is determined based on periodic evaluations of the loan portfolios and other relevant factors. The allowance for loan losses is comprised of general and specific components. Even though the entire allowance is available to cover losses on any loan, specific allowances are provided on impaired loans pursuant to accounting standards. The general allowance is based on historical loss experience, adjusted for qualitative factors. At least quarterly, management reviews the assumptions and methodology related to the general and specific allowance in an effort to update and refine the estimate. See Notes 1 and 5 in the Notes to Consolidated Financial Statements contained in Item 8.
Valuation of OREO
Real estate acquired by foreclosure or by deed in lieu of foreclosure as well as other repossessed assets are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. When a loan is transferred to OREO the write down to fair value less estimated selling costs is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed and a valuation allowance is established if the carrying value exceeds the fair value less estimated selling costs. See Notes 1 and 6 in the Notes to Consolidated Financial Statements contained in Item 8.
Mortgage Servicing Rights
MSRs are recorded as an asset, measured at fair value, when loans are sold to third parties with servicing rights retained. MSRs are amortized in proportion to, and over the period of, estimated net servicing revenues. The carrying value of these assets is periodically reviewed for impairment using a lower of amortized cost or fair value methodology. See Notes 1 and 8 in the Notes to Consolidated Financial Statements contained in Item 8.
Deferred Tax Assets
The Company’s provision for federal and state income taxes results in the recognition of a deferred tax liability or deferred tax asset computed by applying the current statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will produce taxable income or deductible expenses in future periods. The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the net deferred tax assets.
In evaluating this available evidence, management considers, among other things, historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.
As a result of this evaluation, the Company reversed substantially all its valuation allowance against the deferred tax asset during 2015. For additional information regarding our deferred taxes, see Notes 1 and 17 of the Notes to Consolidated Financial Statements contained in Item 8.
Recent Accounting Pronouncements
Refer to Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 for a description of recent accounting pronouncements, including the respective dates of adoption and effects on results of operations and financial condition.
Comparison of Financial Condition at December 31, 2015 and December 31, 2014
Total assets increased $166.1 million, or 8.0%, to $2.25 billion at December 31, 2015, from $2.08 billion at December 31, 2014. The increase was primarily caused by a $90.6 million increase in the deferred tax asset, net, a $90.5 million increase in loans held for investment, net, and a $46.9 million increase in investment securities available for sale. These increases were partially offset by a decrease of $72.0 million in cash and cash equivalents.

43


The deferred tax asset, net, increased $90.6 million since December 31, 2014 due to the reversal of substantially all of the Company's deferred tax asset valuation allowance as a result of management's periodic assessment of all available evidence.
The increase in loans held for investment, net, of $90.5 million, or 5.9%, since December 31, 2014 was primarily due to increases of $52.6 million and $37.0 million in multi-family and land and constructions loans, respectively. These fluctuations were primarily due to loan originations exceeding repayments during the period. The Bank also purchased $33.7 million of residential loans, consisting of 1-4 family adjustable and fixed rate loans. Negative loan loss provision of $29.5 million was also recorded through the allowance for loan loss account. As a result of a review of all available evidence, the Company determined its levels of allowance were no longer warranted. The allowance for loan losses declined $21.9 million from December 31, 2014, as the loan portfolio continues to improve its performance with recoveries net of charge offs of $7.6 million for the year ended December 31, 2015.
Investment securities also increased $62.4 million, or 21.2%, from December 31, 2014 while cash and cash equivalents decreased $72.0 million, or 48.9%, from December 2014 as cash was invested into earning assets.
Total liabilities increased $27.1 million, or 1.5%, to $1.88 billion at December 31, 2015, from $1.85 billion at December 31, 2014. The increase was primarily due to a $26.6 million, or 1.5%, increase in deposits with an increase in checking accounts of $42.2 million, money market accounts of $26.4 million and in savings accounts of $15.0 million which was offset by a decrease in certificates of deposit of $56.9 million as a result of the low interest rate environment. The overall increase in deposits was accomplished despite the branch deposit sales of $23.1 million during the year ended December 31, 2015.
Stockholders’ equity increased $139.0 million, or 61.0%, to $366.6 million at December 31, 2015, from $227.7 million at December 31, 2014. The increase was primarily due to net income for the year ended December 31, 2015, of $137.8 million.
Comparison of the Results of Operations for the Years Ended December 31, 2015 and 2014
Net income from operations for the years ended December 31, 2015 increased $123.1 million, or 842.1%, to $137.8 million from $14.6 million in the year ended December 31, 2014. The increase in net income was primarily the result of an income tax benefit, net of tax provision, of $89.4 million from the reversal of substantially all of the Company’s valuation allowance against its deferred tax asset during the year ended December 31, 2015. In addition, a negative provision for loan losses of $29.5 million was recorded. In 2015, net interest income decreased $2.5 million, non-interest income increased $4.5 million and non-interest expense decreased $6.8 million compared to 2014. The discussion that follows in this section provides details regarding these results for the year ended December 31, 2015.

44


Net Interest Income
The following table shows the Company’s average balances, interest, average rates, the spread between the combined average rates earned on interest-earning assets and average cost of interest-bearing liabilities, net interest margin, which represents net interest income as a percentage of average interest-earning assets and the ratio of average interest-earning assets to average interest-bearing liabilities for the years ended December 31, 2015 and 2014. The average balances are derived from daily balances.
 
Year Ended December 31,
 
2015
 
2014
 
Average
Balance
 
Interest
 
Average
Yield/
Cost
 
Average
Balance
 
Interest
 
Average
Yield/
Cost
 
(Dollars in thousands)
Interest-Earning Assets
 
 
 
 
 
 
 
 
 
 
 
Mortgage and commercial real estate loans
$
1,210,304

 
$
49,837

 
4.12
%
 
$
1,197,999

 
$
51,379

 
4.29
%
Consumer loans
322,149

 
14,737

 
4.57

 
351,113

 
16,766

 
4.78

Commercial and industrial loans
37,103

 
1,889

 
5.09

 
19,032

 
1,068

 
5.61

Total loans held for investment (1)(2)
1,569,556

 
66,463

 
4.23

 
1,568,144

 
69,213

 
4.41

Investment securities - AFS (3)
329,263

 
6,055

 
1.84

 
290,381

 
5,931

 
2.04

Investment securities - HTM
6,387

 
298

 
4.67

 

 

 

Interest-earning deposits
123,402

 
335

 
0.27

 
147,915

 
371

 
0.25

Federal Home Loan Bank stock
11,940

 
59

 
0.49

 
11,940

 
65

 
0.54

Total interest-earning assets
2,040,548

 
73,210

 
3.59

 
2,018,380

 
75,580

 
3.74

Non-interest-earning assets
125,793

 
 
 
 
 
96,390

 
 
 
 
Total assets
$
2,166,341

 
 
 
 
 
$
2,114,770

 
 
 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
$
1,053,407

 
$
1,515

 
0.14
%
 
$
1,021,022

 
$
1,178

 
0.12
%
Regular savings
361,579

 
351

 
0.10

 
348,680

 
353

 
0.10

Certificates of deposit
415,705

 
2,320

 
0.56

 
496,189

 
2,568

 
0.52

Total deposits
1,830,691

 
4,186

 
0.23

 
1,865,891

 
4,099

 
0.22

Other borrowed funds
14,312

 
243

 
1.70

 
14,858

 
245

 
1.65

Total interest-bearing liabilities
1,845,003

 
4,429

 
0.24

 
1,880,749

 
4,344

 
0.23

Non-interest-bearing liabilities
26,826

 
 
 
 
 
21,748

 
 
 
 
Total liabilities
1,871,829

 
 
 
 
 
1,902,497

 
 
 
 
Stockholders’ equity
294,512

 
 
 
 
 
212,273

 
 
 
 
Total liabilities and stockholders’ equity
$
2,166,341

 
 
 
 
 
$
2,114,770

 
 
 
 
Net interest income/interest rate spread (4)
 
 
$
68,781

 
3.35
%
 
 
 
$
71,236

 
3.51
%
Net interest-earning assets
$
195,545

 
 
 
 
 
$
137,631

 
 
 
 
Net interest margin (5)
 
 
 
 
3.37
%
 
 
 
 
 
3.53
%
Ratio of average interest-earning assets to average interest-bearing liabilities
110.60
%