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EX-32 - EXHIBIT 32 - WCF Bancorp, Inc.wcffinancialbankq2exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - WCF Bancorp, Inc.wcffinancialbankq2exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - WCF Bancorp, Inc.wcffinancialbankq2exhibit311.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

OR

[   ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 001-37382

WCF Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Iowa
 
81-2510023
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
401 Fair Meadow Drive,
Webster City, Iowa
 
50595
(Address of Principal Executive Offices)
 
(Zip Code)
(515) 832-3071
(Registrant’s telephone number)

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

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

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

Large accelerated filer [   ]
 
Accelerated filer [   ]
Non-accelerated filer [   ]
 
Smaller reporting company [X]
(Do not check if smaller reporting company)
 
 

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

As of August 11, 2016, the Registrant had 2,563,224 shares of its common stock, par value $0.01 per share, issued and outstanding.



WCF Bancorp, Inc.
Form 10-Q

Index

 
 
 
 
Page
Part I - Financial Information
 
 
 
 
 
Item 1
 
Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015
 
 
 
 
 
 
 
 
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
 
Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
Item 2
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
Item 3
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
 
Item 4
 
Controls and Procedures
 
 
 
 
 
 
Part II - Other Information
 
 
 
 
 
Item 1
 
Legal Proceedings
 
 
 
 
 
 
Item 1A
 
Risk Factors
 
 
 
 
 
 
Item 2
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
Item 3
 
Defaults upon Senior Securities
 
 
 
 
 
 
Item 4
 
Mine Safety Disclosures
 
 
 
 
 
 
Item 5
 
Other Information
 
 
 
 
 
 
Item 6
 
Exhibits
 
 
 
 
 
 
 
 
Signature Page
 



EXPLANATORY NOTE

WCF Bancorp, Inc., an Iowa corporation (the “Company” or the “Registrant”), was formed on March 8, 2016 to serve as the savings and loan holding company for WCF Financial Bank (the “Bank”) as part of the mutual-to-stock conversion WCF Financial, M.H.C. As of June 30, 2016, the conversion had not been completed, and, as of that date, the Registrant had no assets or liabilities, and had not conducted any business other than that of an organizational nature. Accordingly, financial and other information of Webster City Federal Bancorp, the Bank’s predecessor savings and loan holding company, is included in this Quarterly Report.




Part I – Financial Information

Item 1    Financial Statements

Webster City Federal Bancorp and Subsidiaries
Consolidated Balance Sheets
June 30, 2016 (Unaudited) and December 31, 2015
Assets
June 30, 2016
 
December 31, 2015
Cash and due from banks
$
4,597,563

 
$
5,350,561

Federal funds sold
25,940,000

 
3,516,000

   Cash and cash equivalents
30,537,563

 
8,866,561

Time deposits in other financial institutions
3,065,000

 
2,950,111

Securities available-for-sale, at fair value
38,836,169

 
36,525,732

Loans
58,941,156

 
57,885,240

Allowance for loan losses
(516,255
)
 
(505,178
)
   Loans receivable, net
58,424,901

 
57,380,062

Federal Home Loan Bank (FHLB) stock, at cost
414,800

 
452,700

Bankers' Bank stock, at cost
147,500

 
147,500

Office property and equipment, net
4,426,515

 
4,570,371

Deferred taxes on income
439,327

 
486,849

Income taxes receivable
62,438

 

Accrued interest receivable
409,834

 
407,975

Goodwill
55,148

 
55,148

Prepaid expenses and other assets
1,174,331

 
1,072,915

 
$
137,993,526

 
$
112,915,924

Liabilities and Stockholders' Equity
 
 
 
Deposits
$
114,923,155

 
$
88,079,831

FHLB advances
7,000,000

 
8,000,000

Advance payments by borrowers for taxes and insurance
456,843

 
431,090

Accrued interest payable
11,682

 
9,008

Accrued expenses and other liabilities
1,720,914

 
1,812,853

Total liabilities
124,112,594

 
98,332,782

Commitments and contingencies (Note 8)


 


Stockholders' equity:
 
 
 
Preferred stock, $0.10 par value. Authorized 10,000,000 shares; issued none

 

Common stock, $0.10 par value. Authorized 20,000,000 shares; 4,334,478 and 3,019,005 issued and outstanding at June 30, 2016 and December 31, 2015
433,448

 
433,448

Additional paid-in capital
8,708,387

 
9,633,893

Retained earnings, substantially restricted
16,632,604

 
16,635,039

Accumulated other comprehensive income
318,908

 
93,177

Treasury stock, 1,315,473 shares at June 30, 2016 and December 31, 2015, at cost
(12,212,415
)
 
(12,212,415
)
Total stockholders' equity
13,880,932

 
14,583,142

Total liabilities and stockholders' equity
$
137,993,526

 
$
112,915,924

See notes to consolidated financial statements.

1


Webster City Federal Bancorp and Subsidiaries
Consolidated Statements of Income
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
Loans receivable
$
726,902

 
$
719,528

 
$
1,447,540

 
$
1,433,576

Investment securities - taxable
89,835

 
106,554

 
171,159

 
226,905

Investment securities - tax exempt
103,223

 
82,232

 
211,452

 
175,674

Other interest earning assets
21,809

 
17,767

 
36,422

 
33,541

Total interest income
941,769

 
926,081

 
1,866,573

 
1,869,696

Interest expense:
 
 
 
 
 
 
 
Deposits
144,561

 
146,132

 
289,736

 
291,792

FHLB advances
19,174

 
11,642

 
38,398

 
20,766

Total interest expense
163,735

 
157,774

 
328,134

 
312,558

Net interest income
778,034

 
768,307

 
1,538,439

 
1,557,138

Provision for losses on loans
20,000

 
40,000

 
20,000

 
80,000

Net interest income after provision for losses on loans
758,034

 
728,307

 
1,518,439

 
1,477,138

Noninterest income:
 
 
 
 
 
 
 
Fees and service charges
105,205

 
88,803

 
184,198

 
153,637

Gains on sale of securities available-for-sale, net

 
17,740

 
15,247

 
190,712

Gain on disposition of office property and equipment

 
137,437

 

 
137,437

Other income
17,135

 
78

 
17,495

 
78

Total noninterest income
122,340

 
244,058

 
216,940

 
481,864

Noninterest expense:
 
 
 
 
 
 
 
Compensation, payroll taxes, and employee benefits
329,178

 
310,448

 
646,746

 
622,259

Advertising
28,128

 
21,308

 
41,815

 
37,844

Office property and equipment
126,846

 
93,009

 
264,851

 
168,080

Federal insurance premiums
21,865

 
14,538

 
39,071

 
31,526

Data processing services
104,174

 
90,836

 
182,481

 
184,504

Charitable contributions

 
260,000

 

 
260,000

Other real estate expenses, net
249

 
3,327

 
2,961

 
3,791

Dues and subscriptions
16,572

 
15,159

 
31,477

 
38,687

Accounting, regulatory and professional fees
106,908

 
42,094

 
219,683

 
94,325

Debit card expenses
2,325

 
12,760

 
16,515

 
25,362

Other expenses
82,974

 
74,262

 
190,334

 
140,755

Total noninterest expense
819,219

 
937,741

 
1,635,934

 
1,607,133

Earnings before taxes on income
61,155

 
34,624

 
99,445

 
351,869

Tax (benefit) expense
(19,919
)
 
(8,213
)
 
(49,071
)
 
84,035

Net income
$
81,074

 
$
42,837

 
$
148,516

 
$
267,834

Basic/diluted earnings per common share
$
0.03

 
$
0.01

 
$
0.05

 
$
0.09



See notes to consolidated financial statements.

2



Webster City Federal Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016

2015
 
2016
 
2015
Net income
$
81,074

 
$
42,837

 
$
148,516

 
$
267,834

 
 
 
 
 
 
 
 
Other comprehensive income (loss):

 

 
 
 
 
Net change in unrealized gains (losses) on securities
263,771

 
(222,825
)
 
375,850

 
(186,365
)
Reclassification adjustment for net gain realized in net income

 
(17,740
)
 
(15,247
)
 
(190,712
)
Tax (expense) benefit
(100,107
)
 
94,422

 
(134,872
)
 
140,758

Other comprehensive income (loss)
163,664

 
(146,143
)
 
225,731

 
(236,319
)
Comprehensive income (loss)
$
244,738

 
$
(103,306
)
 
$
374,247

 
$
31,515






























See notes to consolidated financial statements.

3



Webster City Federal Bancorp and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)


 
Common stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive income (loss)
 
Treasury stock
 
Total
Balance at December 31, 2014
$
433,448

 
$
9,689,603

 
$
16,664,227

 
$
214,517

 
$
(12,179,317
)
 
$
14,822,478

Net income

 

 
267,834

 

 

 
267,834

Other comprehensive (loss)

 

 

 
(236,319
)
 

 
(236,319
)
Dividends paid on common stock,
 
 
 
 
 
 
 
 
 
 
 
$0.04 per common share

 

 
(120,934
)
 

 

 
(120,934
)
Balance at June 30, 2015
$
433,448

 
$
9,689,603

 
$
16,811,127

 
$
(21,802
)
 
$
(12,179,317
)
 
$
14,733,059

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
433,448

 
$
9,633,893

 
$
16,635,039

 
$
93,177

 
$
(12,212,415
)
 
$
14,583,142

Net income

 

 
148,516

 

 

 
148,516

Other comprehensive income

 

 

 
225,731

 

 
225,731

Stock offering costs

 
(925,506
)
 

 

 

 
(925,506
)
Dividends paid on common stock,
 
 
 
 
 
 
 
 
 
 
 
$0.05 per common share

 

 
(150,951
)
 

 

 
(150,951
)
Balance at June 30, 2016
$
433,448

 
$
8,708,387

 
$
16,632,604

 
$
318,908

 
$
(12,212,415
)
 
$
13,880,932



























See notes to the consolidated financial statements.

4



Webster City Federal Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
148,516

 
$
267,834

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
382,722

 
264,557

Provision for losses on loans
20,000

 
80,000

Charitable contribution - donation of building

 
260,000

Deferred taxes on income
(85,000
)
 
(894
)
Gain on sales of securities
(15,247
)
 
(190,712
)
Gain on sales of one-to-four family residential loans
(10,159
)
 
(14,776
)
Proceeds from sales of one-to-four family residential loans
847,000

 
1,345,076

Originations of one-to-four family residential loans
(836,841
)
 
(1,330,300
)
Gain on sale of office property and equipment

 
(137,437
)
Change in:
 
 
 
Accrued interest receivable
(1,859
)
 
8,932

Prepaid expenses and other assets
(68,805
)
 
18,655

Advance payments by borrowers for taxes and insurance
25,753

 
47,055

Accrued interest payable
2,674

 
8,907

Accrued expenses and other liabilities
(91,939
)
 
(863,764
)
Income tax receivable
(64,788
)
 
26,136

Net cash provided by (used in) operating activities
252,027

 
(210,731
)
Cash flows from investing activities:
 
 
 
Proceeds from maturity of time deposits in other financial institutions
1,600,111

 
4,625,000

Purchase of time deposits in other financial institutions
(1,715,000
)
 
(6,355,487
)
Proceeds from calls and maturities of investment securities available-for-sale
2,668,141

 
3,001,101

Proceeds from sale of investment securities available-for-sale
7,291,396

 
12,233,800

Purchase of investment securities available-for-sale
(12,100,079
)
 
(16,287,683
)
Net change in loans receivable
(1,457,437
)
 
(1,808,235
)
Net change in FHLB stock
37,900

 
(79,100
)
Proceeds from sale of office property and equipment

 
180,000

Purchase of office property and equipment
(32,911
)
 
(442,976
)
Net cash used in investing activities
(3,707,879
)
 
(4,933,580
)
Cash flows from financing activities:
 
 
 
Net change in deposits
27,203,311

 
764,255

Net change in FHLB advances
(1,000,000
)
 
2,000,000

Dividends paid
(150,951
)
 
(120,933
)
Stock offering costs
(925,506
)
 

Net cash provided by financing activities
25,126,854

 
2,643,322

Net increase (decrease) in cash and cash equivalents
21,671,002

 
(2,500,989
)
Cash and cash equivalents at beginning of year
8,866,561

 
4,039,704

Cash and cash equivalents at end of quarter
$
30,537,563

 
$
1,538,715

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
325,460

 
$
303,651

Taxes on income
13,367

 
140,921

Noncash investing activities:
 
 
 
Transfers to other real estate owned from loans
32,611

 
23,759


See notes to consolidated financial statements.

5



Webster City Federal Bancorp and Subsidiaries
Form 10-Q


Notes to Consolidated Financial Statements (unaudited)

(1)
Basis of Presentation
The accompanying unaudited consolidated financial statements of Webster City Federal Bancorp (the Company), and its wholly owned subsidiary WCF Financial Bank (the Bank), and Webster City Federal Service Corp, have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with SEC rules and regulations. Accordingly, the statements do not include all the information and footnotes required by GAAP for complete financial statements. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto that were included in the Company’s annual report for the year ended December 31, 2015. The consolidated balance sheet of the Company as of December 31, 2015, has been derived from the audited consolidated balance sheet of the Company as of that date. All significant intercompany transactions are eliminated in consolidation. In the opinion of the Company’s management, all adjustments necessary (i) for a fair presentation of the financial statements for the interim periods included herein and (ii) to make such financial statements not misleading have been made and are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year.
In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from the estimates. For further information with respect to significant accounting policies followed by the Company in preparation of the financial statements, refer to the Company’s annual report for the year ended December 31, 2015.
The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank (“FHLB”) system. The Bank maintains insurance on deposits accounts with the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”).
Investment Securities
Investment securities are classified based on the Company’s intended holding period. Securities that may be sold prior to maturity to meet liquidity needs, to respond to market changes, or to adjust the Company’s asset-liability position are classified as available-for-sale. Currently, all securities are classified as available-for-sale.
Securities available-for-sale are carried at fair value, with the aggregate unrealized gains or losses, net of the effect of taxes on income, reported as accumulated other comprehensive income or loss. Other-than-temporary impairment is recorded in net income. The Company’s net income reflects the full impairment (that is, the difference between the security’s amortized cost basis and fair value), if any, on debt securities that the Company intends to sell, or would more likely than not be required to sell, before the expected recovery of the amortized cost basis. For available-for-sale debt securities that management has no intent to sell, and believes that it will not more likely than not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in net income, while the rest of the fair value loss is recognized in other comprehensive income. The credit loss component recognized in net income is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using the Company’s cash flow projections using its base assumptions.
A decline in the fair value of any available‑for‑sale security below cost and that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount by fair value for the credit portion

6



of the loss. The impairment is charged to net income and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability to hold and lack of intent to sell the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and the general market conditions.
Net realized gains or losses are shown in the consolidated statements of income in the noninterest income line using the specific identification method. There were no net realized gains for the three months ended June 30, 2016 and $17,740 for the three months ended June 30, 2015 and $15,247 and $190,712 were recorded for the six months ended June 30, 2016 and 2015, respectively.
Loans Receivable, Net
Loans receivable are stated at the amount of unpaid principal, reduced by the allowance for loan losses, deferred loan fees and discounts on loans purchased. Loans receivable are charged against the allowance when management believes collectability of principal is unlikely.
Interest on loans receivable is accrued and credited to operations based primarily on the principal amount outstanding. Certain loan balances include unearned discounts, which are recorded as income over the term of the loan.
Accrued interest receivable on loans receivable that become more than 90 days in arrears is charged to an allowance that is established by a charge to interest income. Interest income is subsequently recognized only to the extent cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is reasonably assured, in which case the loan is returned to accrual status.
Under the Company’s credit policies, commercial loans are considered impaired when management believes it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate except, where more practical, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent.
Allowance for Loan Losses
The allowance for loan losses is based on management’s periodic evaluation of the loan portfolio and reflects an amount that, in management’s opinion, is appropriate to absorb probable losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, the composition of the loan portfolio, value of underlying collateral, and management’s estimate of probable credit losses.
Taxes on Income
Deferred income taxes are provided under the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalties on unrecognized tax benefits are classified as other noninterest expense.

7



Regulatory Environment
The Company is subject to regulations of certain state and federal agencies, including periodic examinations by those regulatory agencies. The Company and the Bank are also subject to minimum regulatory capital requirements. At June 30, 2016 and December 31, 2015, capital levels exceeded minimum capital requirements.
Investment in Affiliate
The Company records its investment in an affiliate, New Castle Players, LLC, in which it has a 27.17% interest using the equity method of accounting. The affiliate holds an investment in a local hotel in Webster City, Iowa. The Company records the value of its investment at year‑end based on the affiliate’s financial statements on a one-month lag. The investment in affiliate is analyzed annually. If impairment is determined to be other-than-temporary, the carrying amount is written down to fair value. The investment is included as a component of prepaid expenses and other assets on the consolidated balance sheets, while the equity income earned is included as a component of other noninterest income on the consolidated statements of income. Summary unaudited financial information of the affiliate as of and for the six months ended June 30, 2016 and 2015 is presented below.
 
Six Months Ended
June 30,
 
2016
 
2015
Current assets
$
125,170

 
$
126,208

Long-term assets
1,741,202

 
1,746,095

Current liabilities
67,892

 
107,276

Total equity
1,798,480

 
1,765,027

Total revenue
422,714

 
444,372

Net income
97,818

 
64,519

Earnings per Common Share
The calculation of earnings per common share and diluted earnings per common share for the three and six months ended June 30, 2016 and June 30, 2015 is presented below.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
81,074

 
$
42,837

 
$
148,516

 
$
267,834

 
 
 
 
 
 
 
 
Weighted average common shares and diluted common shares outstanding
3,019,005

 
3,023,360

 
3,019,005

 
3,023,360

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.03

 
$
0.01

 
$
0.05

 
$
0.09

Diluted earnings per common share
$
0.03

 
$
0.01

 
$
0.05

 
$
0.09

Subsequent Events
The Company has evaluated subsequent events through August 11, 2016, which is the date the consolidated financial statements were issued. There are no subsequent events requiring recognition or disclosure in the consolidated financial statements as noted by the Company, except as noted below.
Stock Conversion
On July 13, 2016, WCF Financial, MHC, the Company’s former federally chartered mutual holding company, consummated its mutual-to-stock conversion, and the Company consummated its initial stock

8



offering.  In the conversion and public offering, the Company sold 2,139,231 shares of its common stock, par value $0.01 per share, at $8.00 per share in a subscription offering, including 171,138 shares, equal to 8.0% of the shares sold in the offering, to the WCF Bancorp, Inc. employee stock ownership plan.

Through June 30, 2016, the Company had incurred approximately $981,216 in total conversion and offering costs, which are included in Stockholders’ Equity in the consolidated balance sheet and will be deducted from the proceeds of the offering.
In accordance with applicable federal conversion regulations, at the time of the completion of the mutual-to-stock conversion, the Company established a liquidation account in an amount equal to the Company’s total equity as of the latest balance sheet date in the final prospectus used in the Conversion.  Each eligible account holder or supplemental account holder is entitled to a proportionate share of this liquidation account in the event of a complete liquidation of the Bank, and only in such event.  This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record as of any June 30 and will cease to exist if the account is closed.  The liquidation account will never be increased despite any increase after Conversion in the related deposit balance.
 
Following completion of the Conversion, the Bank may not declare, pay a dividend on, or repurchase any of its capital stock of the Bank, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements.

Current Accounting Developments
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update simplifies the presentation of debt issuance costs by requiring the debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public companies, this update was effective for interim and annual periods beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects or recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update includes requiring changes in fair value of equity securities with readily determinable fair value to be recognized in net income and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with entities other deferred tax assets. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017, and is to be applied on a modified retrospective basis. The Company is currently assessing the impact that this guidance will have

9



on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. This is in contrast to existing guidance whereby credit losses generally are not recognized until they are incurred. For public companies, this update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.

(2)
Securities Available-for-Sale
Securities available-for-sale at June 30, 2016 and December 31, 2015 were as follows:
Description
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
June 30, 2016:
 
 
 
 
 
 
 
 
U.S. agency securities
 
$
998,617

 
$

 
$
975

 
$
997,642

Mortgage-backed securities
 
19,029,547

 
58,612

 
74,104

 
19,014,055

Municipal bonds
 
17,744,934

 
527,053

 
630

 
18,271,357

Corporate bonds
 
551,500

 
1,615

 

 
553,115

 
 
$
38,324,598

 
$
587,280

 
$
75,709

 
$
38,836,169

December 31, 2015:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
17,522,971

 
$
12,167

 
$
179,583

 
$
17,355,555

Municipal bonds
 
18,300,293

 
336,817

 
23,862

 
18,613,248

Corporate bonds
 
551,500

 
5,429

 

 
556,929

 
 
$
36,374,764

 
$
354,413

 
$
203,445

 
$
36,525,732

The amortized cost and estimated fair value of securities available-for-sale at June 30, 2016 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
June 30, 2016
 
Amortized
cost
 
Fair value
Due in one year or less
$
480,000

 
$
487,750

Due after one year through five years
2,639,816

 
2,684,298

Due after five years, but less than ten years
11,363,754

 
11,792,438

Due after ten years
4,259,981

 
4,304,513

Mortgage-backed securities
19,029,547

 
19,014,055

Corporate bonds
551,500

 
553,115

 
$
38,324,598

 
$
38,836,169




10



The details of the sales of investment securities for the three and six months ended June 30, 2016 and 2015 are summarized in the following table.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales
$
150,000

 
$
2,668,397

 
$
7,291,396

 
$
12,233,800

Gross gains on sales

 
25,653

 
50,200

 
218,142

Gross losses on sales

 
7,913

 
34,953

 
27,430

At June 30, 2016 and December 31, 2015, accrued interest receivable for securities available-for-sale totaled $196,667 and $189,862, respectively.
The following tables show the Company’s available-for-sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at June 30, 2016 and December 31, 2015.
 
June 30, 2016
 
Up to 12 months
 
Greater than 12 months
 
Total
 
Fair value
 
Gross unrealized loss
 
Fair value
 
Gross unrealized loss
 
Fair value
 
Gross unrealized loss
U.S. agency securities
$
997,642

 
$
975

 
$

 
$

 
$
997,642

 
$
975

Mortgage-backed securities
2,162,948

 
10,182

 
6,129,405

 
63,922

 
8,292,353

 
74,104

Municipal bonds
194,370

 
630

 

 

 
194,370

 
630

Total
$
3,354,960

 
$
11,787

 
$
6,129,405

 
$
63,922

 
$
9,484,365

 
$
75,709

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Up to 12 months
 
Greater than 12 months
 
Total
 
Fair value
 
Gross unrealized loss
 
Fair value
 
Gross unrealized loss
 
Fair value
 
Gross unrealized loss
Mortgage-backed securities
$
13,669,247

 
$
157,996

 
$
1,390,849

 
$
21,587

 
$
15,060,096

 
$
179,583

Municipal bonds
2,549,250

 
23,862

 

 

 
2,549,250

 
23,862

Total
$
16,218,497

 
$
181,858

 
$
1,390,849

 
$
21,587

 
$
17,609,346

 
$
203,445

The Company’s assessment of other‑than‑temporary impairment is based on its reasonable judgment of the specific facts and circumstances impacting each individual security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the security, the credit quality of the underlying assets, and the current and anticipated market conditions.
The Company does not intend to sell its available-for-sale investment securities and it is not likely that the Company will be required to sell them before the recovery of its cost. Due to the issuers’ continued satisfactions of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, and management’s intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, the Company believes that the investment securities identified in the tables above were temporarily depressed as of June 30, 2016 and December 31, 2015.
(3)
Loans Receivable
At June 30, 2016 and December 31, 2015, loans receivable consisted of the following segments:
 
June 30, 2016
 
December 31, 2015
Loans:
 
 
 
One-to-four family residential
$
46,071,610

 
$
46,510,605

Non-owner occupied one-to-four family residential
4,001,598

 
4,030,249

Commercial real estate
3,185,797

 
2,974,668

Consumer
5,822,859

 
4,542,892

Total loans receivable
59,081,864

 
58,058,414

Discounts on loans purchased
(70,807
)
 
(84,907
)
Deferred loan costs (fees)
(69,901
)
 
(88,267
)
Allowance for loan losses
(516,255
)
 
(505,178
)
 
$
58,424,901

 
$
57,380,062

Accrued interest receivable on loans receivable was $213,167 and $218,113 at June 30, 2016 and December 31, 2015, respectively.
The loan portfolio included approximately $43.1 million and $42.9 million of fixed rate loans and approximately $16.3 million and $15.2 million of variable rate loans as of June 30, 2016 and December 31, 2015, respectively.
The Company originates residential, commercial real estate loans and other consumer loans, primarily in its Hamilton County, and Buchanan County, Iowa market areas and their adjacent counties. A substantial portion of its borrowers’ ability to repay their loans is dependent upon economic conditions in the Company’s market area.

11



Allowance for Loan Losses
The following tables present the balance in the allowance for loan losses and recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2016 and December 31, 2015.
 
June 30, 2016
 
One-to-four family residential
 
Non-owner occupied on-to-four family residential
 
Commercial
real estate
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

 
$

 
$

Collectively evaluated for impairment
367,057

 
31,963

 
30,309

 
86,926

 
516,255

Total
$
367,057

 
$
31,963

 
$
30,309

 
$
86,926

 
$
516,255

 
 
 
 
 
 
 
 
 
 
Loans receivable:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$
297,538

 
$

 
$
297,538

Collectively evaluated for impairment
46,071,610

 
4,001,598

 
2,888,259

 
5,822,859

 
58,784,326

Total
$
46,071,610

 
$
4,001,598

 
$
3,185,797

 
$
5,822,859

 
$
59,081,864

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
One-to-four family residential
 
Non-owner occupied on-to-four family residential
 
Commercial
real estate
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

 
$

 
$

Collectively evaluated for impairment
366,858

 
44,510

 
32,443

 
61,367

 
505,178

Total
$
366,858

 
$
44,510

 
$
32,443

 
$
61,367

 
$
505,178

 
 
 
 
 
 
 
 
 
 
Loans receivable:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$
302,412

 
$

 
$
302,412

Collectively evaluated for impairment
46,510,605

 
4,030,249

 
2,672,256

 
4,542,892

 
57,756,002

Total
$
46,510,605

 
$
4,030,249

 
$
2,974,668

 
$
4,542,892

 
$
58,058,414



12



Activity in the allowance for loan losses by segment for the three and six months ended June 30, 2016 and 2015 is summarized in the following tables:
 
Three months ended June 30, 2016
 
Beginning Balance
 
Charge-offs
 
Recoveries
 
Provisions
 
Ending Balance
Loans:
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
344,708

 
$
5,610

 
$

 
$
27,959

 
$
367,057

Non-owner occupied one-to-four family residential
45,125

 

 

 
(13,162
)
 
31,963

Commercial real estate
35,961

 

 

 
(5,652
)
 
30,309

Consumer
75,771

 

 
300

 
10,855

 
86,926

Total
$
501,565

 
$
5,610

 
$
300

 
$
20,000

 
$
516,255

 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2015
 
Beginning Balance
 
Charge-offs
 
Recoveries
 
Provisions
 
Ending Balance
Loans:
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
300,086

 
$
8,000

 
$

 
$
(15,162
)
 
$
276,924

Non-owner occupied one-to-four family residential
28,833

 

 

 
11,277

 
40,110

Commercial real estate
18,218

 

 

 
3,419

 
21,637

Consumer
25,828

 
8,575

 
800

 
40,466

 
58,519

Total
$
372,965

 
$
16,575

 
$
800

 
$
40,000

 
$
397,190

 
Six Months Ended June 30, 2016
 
Beginning Balance
 
Charge-offs
 
Recoveries
 
Provisions
 
Ending Balance
Loans:
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
366,858

 
$
5,610

 
$

 
$
5,809

 
$
367,057

Non-owner occupied one-to-four family residential
44,510

 

 

 
(12,547
)
 
31,963

Commercial real estate
32,443

 

 

 
(2,134
)
 
30,309

Consumer
61,367

 
3,613

 
300

 
28,872

 
86,926

Total
$
505,178

 
$
9,223

 
$
300

 
$
20,000

 
$
516,255

 
 
 
Six Months Ended June 30, 2015
 
Beginning Balance
 
Charge-offs
 
Recoveries
 
Provisions
 
Ending Balance
Loans:
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
300,654

 
$
33,605

 
$

 
$
9,875

 
$
276,924

Non-owner occupied one-to-four family residential
26,949

 

 

 
13,161

 
40,110

Commercial real estate
15,192

 

 

 
6,445

 
21,637

Consumer
17,907

 
10,707

 
800

 
50,519

 
58,519

Total
$
360,702

 
$
44,312

 
$
800

 
$
80,000

 
$
397,190




13



(a)
Loan Portfolio Segment Risk Characteristics
One-to-four family residential: The Company generally retains most residential mortgage loans that are originated for its own portfolio. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in the Company’s market could increase credit risk associated with its loan portfolio. Additionally, real estate lending typically involves large loan principal amounts and the repayment of the loans generally is dependent, in large part, on the borrower’s continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances.
Non-owner occupied one-to-four family residential: The Company originates fixed-rate and adjustable-rate loans secured by non-owner occupied one-to-four family properties. These loans may have a term of up to 20 years. Generally the Bank will lend up to 75% of the property’s appraised value. Appraised values are determined by an outside independent appraiser. In deciding to originate a loan secured by a non-owner occupied one-to-four family residential property, management reviews the creditworthiness of the borrower and the expected cash flows from the property securing the loan, the cash flow requirements of the borrower and the value of the property securing the loan. This segment is generally secured by one-to-four family properties.
Commercial real estate: On a very limited basis, the Company originates fixed-rate and adjustable-rate commercial real estate and land loans. These loans may have a term of up to 20 years. Generally the Bank will lend up to 75% of the property’s appraised value. Appraised values are determined by an outside independent appraiser. In recent years, the Company has significantly reduced the emphasis on these types of loans and does not intend to emphasize these types of loans in the future. This segment is generally secured by retail, industrial, service or other commercial properties and loans secured by raw land, including timber.
Consumer: Consumer loans typically have shorter terms, lower balances, higher yields, and higher rates of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. This segment consists mainly of loans collateralized by automobiles. The collateral securing these loans, may depreciate over time, may be difficult to recover and may fluctuate in value based on condition.
(b)
Charge‑off Policy
The Company requires a loan to be at least partially charged off as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged off are as follows: (1) the potential for future cash flows; (2) the value of any collateral; and (3) the strength of any co-makers or guarantors.
(c)
Troubled Debt Restructurings (TDR)
All loans deemed troubled debt restructurings, or “TDR”, are considered impaired, and are evaluated for collateral sufficiency. A loan is considered a TDR when the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. There were no new troubled debt restructurings in the first six months of 2016.
(d)
Loans Measured Individually for Impairment
Loans that are deemed to be impaired are reserved for with the necessary allocation. All loans deemed troubled debt restructurings are considered impaired. Generally loans for 1-4 family residential and consumer are collectively evaluated for impairment.
(e)
Loans Measured Collectively for Impairment
All loans not evaluated individually for impairment are grouped together by type and further segmented by risk classification. The Company’s historical loss experiences for each portfolio segment are calculated using

14



the three‑year average loss rate for estimating losses adjusted for qualitative factors. The qualitative factors consider economic and business conditions, changes in nature and volume of the loan portfolio, concentrations, collateral values, level and trends in delinquencies, external factors, lending policies, experience of lending staff, and monitoring of credit quality.
The following tables set forth the composition of each class of the Company’s loans by internally assigned credit quality indicators.
 
Pass
 
Special
mention/watch
 
Substandard
 
Doubtful
 
Total
June 30, 2016:
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
44,796,353

 
$
1,124,646

 
$
150,611

 
$

 
$
46,071,610

Non-owner occupied one-to-four family residential
4,001,598

 

 

 

 
4,001,598

Commercial real estate
2,837,029

 
51,230

 
297,538

 

 
3,185,797

Consumer
5,620,541

 
202,318

 

 

 
5,822,859

Total
$
57,255,521

 
$
1,378,194

 
$
448,149

 
$

 
$
59,081,864

 
 
 
 
 
 
 
 
 
 
 
Pass
 
Special
mention/watch
 
Substandard
 
Doubtful
 
Total
December 31, 2015:
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
44,448,707

 
$
1,876,618

 
$
185,280

 
$

 
$
46,510,605

Non-owner occupied one-to-four family residential
4,030,249

 

 

 

 
4,030,249

Commercial real estate
2,672,256

 

 
302,412

 

 
2,974,668

Consumer
4,416,516

 
126,376

 

 

 
4,542,892

Total
$
55,567,728

 
$
2,002,994

 
$
487,692

 
$

 
$
58,058,414

Special Mention/Watch – Loans classified as special mention/watch are assets that do not warrant adverse classification but possess credit deficiencies or potential weakness deserving close attention.
Substandard – Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well‑defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable, and improbable.
The Company had one impaired loan as of June 30, 2016 and December 31, 2015. No interest income was recorded on impaired loans during 2016 or 2015.
(f)
Nonaccrual and Delinquent Loans
Loans are placed on nonaccrual status when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more (unless the loan is well secured with marketable collateral).

15



A nonaccrual asset may be restored to an accrual status when all past‑due principal and interest has been paid and the borrower has demonstrated satisfactory payment performance (excluding renewals and modifications that involve the capitalizing of interest).
Delinquency status of a loan is determined by the number of days that have elapsed past the loan’s payment due date, using the following classification groupings: 30‑59 days, 60‑89 days, and 90 days or more. Loans shown in the 30‑59 day’s and 60‑89 day’s columns in the table below reflect contractual delinquency status only, and include loans considered nonperforming due to classification as a TDR or being placed on nonaccrual.
The following tables set forth the composition of the Company’s past‑due loans at June 30, 2016 and December 31, 2015.
 
30-59 days
past due
 
60-89 days
past due
 
90 days
or more
past due
 
Total
past due
 
Current
 
Total loans receivable
 
Recorded investment > 90 days and accruing
June 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
742,603

 
$
313,251

 
$
219,403

 
$
1,275,257

 
$
44,796,353

 
$
46,071,610

 
$
133,549

Non-owner occupied one-to-four family residential

 

 

 

 
4,001,598

 
4,001,598

 

Commercial real estate
297,538

 

 
51,230

 
348,768

 
2,837,029

 
3,185,797

 
51,230

Consumer
105,621

 
22,452

 
74,245

 
202,318

 
5,620,541

 
5,822,859

 
74,245

Total
$
1,145,762

 
$
335,703

 
$
344,878

 
$
1,826,343

 
$
57,255,521

 
$
59,081,864

 
$
259,024

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-59 days
past due
 
60-89 days
past due
 
90 days
or more
past due
 
Total
past due
 
Current
 
Total loans receivable
 
Recorded investment > 90 days and accruing
December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
1,148,965

 
$
288,087

 
$
460,485

 
$
1,897,537

 
$
44,613,068

 
$
46,510,605

 
$
275,205

Non-owner occupied one-to-four family residential

 

 

 

 
4,030,249

 
4,030,249

 

Commercial real estate

 

 
302,412

 
302,412

 
2,672,256

 
2,974,668

 

Consumer
54,592

 
44,988

 
26,796

 
126,376

 
4,416,516

 
4,542,892

 
26,796

Total
$
1,203,557

 
$
333,075

 
$
789,693

 
$
2,326,325

 
$
55,732,089

 
$
58,058,414

 
$
302,001

The following tables set forth the composition of the Company’s recorded investment in loans on nonaccrual status as of June 30, 2016 and December 31, 2015.
 
June 30, 2016
 
December 31, 2015
Loans
 
 
 
One-to-four family residential
$
150,611

 
$
185,280

Non-owner occupied one-to-four family residential

 

Commercial real estate
297,538

 
302,412

Consumer

 

Total
$
448,149

 
$
487,692

(4)
Deposits
At June 30, 2016 and December 31, 2015, deposits are summarized as follows:
 
June 30, 2016
 
December 31, 2015
Statement savings
$
11,720,718

 
$
11,163,443

Money market plus
11,416,979

 
11,688,644

NOW
44,235,320

 
18,968,879

Certificates of deposit
47,550,138

 
46,258,865

 
$
114,923,155

 
$
88,079,831


Included in the NOW accounts were approximately $31.1 million and $4.7 million of non-interest bearing deposits as of June 30, 2016 and December 31, 2015, respectively.

16



(5)
Taxes on Income
Taxes on income comprise the following:
 
June 30, 2016
 
Federal
 
State
 
Total
Current
$
31,298

 
$
4,631

 
$
35,929

Deferred
(84,000
)
 
(1,000
)
 
(85,000
)
 
$
(52,702
)
 
$
3,631

 
$
(49,071
)
 
June 30, 2015
 
Federal
 
State
 
Total
Current
$
67,000

 
$
17,929

 
$
84,929

Deferred
106

 
(1,000
)
 
(894
)
 
$
67,106

 
$
16,929

 
$
84,035


Taxes on income differ from the amounts computed by applying the federal income tax rate of 34% to earnings before taxes on income for the following reasons, expressed in dollars:
 
June 30, 2016
 
June 30, 2015
Federal tax at statutory rate
$
33,811

 
$
119,635

Items affecting federal income tax rate:
 
 
 
State taxes on income, net of federal benefit
2,360

 
11,173

Tax-exempt income
(66,277
)
 
(68,062
)
Building donation

 
(27,620
)
Valuation allowance

 
49,000

Other
(18,965
)
 
(91
)
 
$
(49,071
)
 
$
84,035


Federal income tax expense for the periods ended June 30, 2016 and December 31, 2015 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the Bank.

17



The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at June 30, 2016 and December 31, 2015 are presented below:
 
June 30, 2016
 
December 31, 2015
Deferred tax assets:
 
 
 
Deferred directors’ fees
$
356,000

 
$
369,000

Allowance for loan losses
193,000

 
188,000

Net operating loss carryforward
49,000

 

AMT credit
62,000

 
62,000

Charitable contribution
82,000

 
81,000

Other
32,000

 
34,000

Gross deferred tax assets
774,000

 
734,000

Valuation allowance
(49,000
)
 
(49,000
)
Net deferred tax assets
725,000

 
685,000

Deferred tax liabilities:
 
 
 
Securities
(189,673
)
 
(57,058
)
Prepaid expenses
(18,000
)
 
(18,000
)
FHLB stock dividends
(38,000
)
 
(38,000
)
Fixed assets
(13,000
)
 
(19,000
)
Intangible assets
(27,000
)
 
(28,000
)
Other

 
(38,093
)
Gross deferred tax liabilities
(285,673
)
 
(198,151
)
Net deferred tax assets
$
439,327

 
$
486,849


Based upon the Company’s level of historical taxable income and anticipated future taxable income over the periods that the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. No valuation allowance was required for deferred tax assets at June 30, 2016 and December 31, 2015, except for a valuation allowance related to the charitable contribution carryforward. The valuation allowance increased by $49,000 during 2015 due to the charitable contribution carryforward. The charitable contribution expires if not used by 2020.
As of December 31, 2015, the Company had no material unrecognized tax benefits. The evaluation was performed for those tax years that remain open to audit. The Company files a consolidated tax return for federal purposes and separate tax returns for the State of Iowa purposes.
Under previous law, the provisions of the IRS and similar sections of Iowa law permitted the Bank to deduct from taxable income an allowance for bad debts based on 8% of taxable income before such deduction or actual loss experience. Legislation passed in 1996 eliminated the percentage of taxable income method as an option for computing bad debt deductions for 1996 and in future years.
Deferred taxes have been provided for the difference between tax bad debt reserves and the loan loss allowances recorded in the financial statements subsequent to December 31, 1987. However, at June 30, 2016 and December 31, 2015, retained earnings contain certain historical additions to bad debt reserves for income tax purposes of approximately $2,134,000 as of December 31, 1987, for which no deferred taxes have been provided because the Bank does not intend to use these reserves for purposes other than to absorb losses. If these amounts which qualified as bad debt deductions are used for purposes other than to absorb bad debt losses or adjustments arising from the carryback of net operating losses, income taxes may be imposed at the then-existing rates. The approximate amount of unrecognized tax liability associated with these historical additions is $800,000.
(6)
Stockholders’ Equity
(a)
Common Stock Repurchase
The Company repurchased no shares during the three and six months ended June 30, 2016 and 2015.
(b)
Regulatory Capital Requirements
The Company and WCF Financial Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators which, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and WCF Financial Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and WCF Financial Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes the Company and WCF Financial Bank met all capital adequacy requirements to which they were subject as of June 30, 2016 and December 31, 2015.
The Company’s and WCF Financial Bank’s capital amounts and ratios are presented in the following table as of June 30, 2016 and December 31, 2015 (dollars in thousands).
 
June 30, 2016
 
 
 
 
 
For capital adequacy
 
To be well-capitalized under
 
 
 
 
 
with capital conservation
 
prompt corrective action
 
Actual
 
buffer purposes
 
provisions
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Tangible capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
13,499

 
11.4
%
 
$
4,737

 
4.00
%
 
N/A

 
N/A

WCF Financial Bank
13,187

 
11.2

 
4,711

 
4.00

 
5,889

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
13,499

 
24.1

 
2,874

 
5.125

 
3,646

 
6.5

WCF Financial Bank
13,187

 
23.7

 
2,846

 
5.125

 
3,610