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EX-32 - EXHIBIT 32 - WCF Bancorp, Inc.wcffinancialbankq4exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - WCF Bancorp, Inc.wcffinancialbankq4exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - WCF Bancorp, Inc.wcffinancialbankq4exhibit311.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
[X]    Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
OR
[   ]    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File 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 [X]     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 [X]     NO [ ]



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]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on July 14, 2016, the first day of trading in the Registrants common stock ($8.79), was approximately $20.8 million.
As of March 24, 2017, the Registrant had 2,561,542 shares of its common stock, par value $0.01 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None



WCF Bancorp, Inc.
Form 10-K
Index
 
 
 
 
Page
Part I
 
 
 
 
 
Item 1
 
Business
 
 
 
 
 
 
Item 1A
 
Risk Factors
 
 
 
 
 
 
Item 1B
 
Unresolved Staff Comments
 
 
 
 
 
 
Item 2
 
Properties
 
 
 
 
 
 
Item 3
 
Legal Proceedings
 
 
 
 
 
 
Item 4
 
Mine Safety Disclosures
 
 
 
 
 
 
Part II
 
 
 
 
 
Item 5
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
 
 
 
Item 6
 
Selected Financial Data
 
 
 
 
 
 
Item 7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
Item 7A
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
 
Item 8
 
Financial Statements and Supplementary Data
 
 
 
 
 
 
Item 9
 
Changes in Disagreements with Accountants on Accounting and Financial Disclosure
 
 
 
 
 
 
Item 9A
 
Controls and Procedures
 
 
 
 
 
 
Item 9B
 
Other Information
 
 
 
 
 
 
Part III
 
 
 
 
 
Item 10
 
Directors, Executive Officers and Corporate Governance
 
 
 
 
 
 
Item 11
 
Executive Compensation
 
 
 
 
 
 
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related STockholder Matters
 
 
 
 
 
 
Item 13
 
Certain Relationships and Related Transactions, and Director Independence
 
 
 
 
 
 
Item 14
 
Principal Accounting Fees and Services
 
 
 
 
 
 
Part IV
 
 
 
 
 
Item 15
 
Exhibits, Financial Statement Schedules
 
 
 
 
 
 
Item 16
 
Form 10-K Summary
 
 
 
 
 
 
Signatures
 
 
 




Part I
Item 1    Business
Forward‑Looking Statements
This Form 10‑K contains forward‑looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward‑looking statements include, but are not limited to:
Statements of our goals, intentions and expectations;
Statements regarding our business plans, prospects, growth and operating strategies;
Statements regarding the quality of our loan and investment portfolios; and
Estimates of our risks and future costs and benefits.
These forward‑looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic, regulatory and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward‑looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward‑looking statements:
General economic conditions, either nationally or in our market areas, that are worse than expected;
Competition among depository and other financial institutions;
Inflation and changes in the interest rate environment that reduce our margins and yields or reduce the fair value of financial instruments;
Our success in continuing to emphasize agricultural and commercial loans;
Changes in consumer spending, borrowing and savings habits;
Our ability to enter new markets successfully and capitalize on growth opportunities;
Our ability to successfully integrate acquired branches or entities;
Adverse changes in the securities markets;
Changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC) or the Public Company Accounting Oversight Board;
Changes in our organization, compensation and benefit plans;
Our ability to retain key employees;
Changes in the level of government support for housing finance;

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Significant increases in our loan losses
Weaknesses in internal control; and
Changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward‑looking statements.
WCF Bancorp, Inc.
WCF Bancorp, Inc., an Iowa corporation (the Company), was organized in March 2016. Upon completion of the mutual-to-stock conversion of WCF Financial MHC (the MHC) in July 2016, the Company became the registered savings and loan holding company of WCF Financial Bank (the Bank) and succeeded to all of the business and operations of Webster City Federal Bancorp (the Old Bancorp), a federal corporation, and each of Webster City Federal Bancorp and the MHC ceased to exist. Since the completion of the mutual-to-stock conversion, the Company has not engaged in any significant business activity other than owning the common stock of WCF Financial Bank and making a loan to Bank's Employee Stock Ownership Plan, the Company has engaged in no material operations to date. Our executive office is located at 401 Fair Meadow Drive, Webster City, Iowa, and our telephone number at that address is (515) 832-3071.
WCF Financial Bank
WCF Financial Bank is an Iowa-based community bank that was chartered and began operations in 1934, and has operated in Webster City, Iowa continuously since this date. In January 2014 we completed our acquisition of Independence Federal Bank for Savings. We operate our business through our main office in Webster City, Iowa, and one full-service branch in Independence, Iowa. We believe our locations are strategically positioned within the State of Iowa along Highway 20, covering central and eastern portions of the state.
We are engaged primarily in the business of attracting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in real estate loans secured by one-to-four-family residences. To a lesser extent we also originate consumer loans and non-owner occupied one-to-four family residential real estate loans. On a limited basis, we have also originated commercial real estate loans, but have deemphasized the origination, and intend to continue to deemphasize the origination of this type of lending. Our primary lending area is broader than our primary deposit market area and includes north central and northeastern Iowa. We also invest in securities. Our revenues are derived principally from interest on loans and securities, and from loan origination and servicing fees. Our primary sources of funds are deposits, principal and interest payments on loans and securities and advances from the Federal Home Loan Bank of Des Moines (the FHLB).
As a federal savings bank, WCF Financial Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency (the OCC).
Available Information
Our website is located at www.wcfbank.com and our investor relations website is located at https://www.snl.com/IRW/CorporateProfile/4049239. The following filings are available through our investor relations website after we file them with the SEC: Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K. Information on these websites is not incorporated into, and should bot be considered part of this Annual Report.

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We provide notifications of news, financial highlights and announcements regarding our financial performance, including SEC filings, regulatory filings and press releases, as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts. Additional corporate governance information, including our board committee charters and code of conduct, also is available on our investor relations website under the heading “Governance Documents.”
Market Area
We conduct our operations from our two offices located in Webster City, Iowa and Independence, Iowa. Webster City is the county seat for Hamilton County, Iowa, and Independence is the county seat of Buchanan County, Iowa. We consider Hamilton County and Buchanan County, Iowa, and the surrounding contiguous counties, to be our primary market area.
Hamilton County is located approximately 60 miles north, and Buchanan County is approximately 125 miles northeast, of Des Moines, Iowa. Both counties consist primarily of small towns and rural areas. The total populations for Hamilton and Buchanan County, according to the Unites States Census Bureau in 2015, were approximately 15,000 and 21,000, respectively. According to SNL Financial, the population in Buchanan County has increased between the years 2010 to 2016, with a population growth rate of 0.80%, while the population in Hamilton County has decreased between the years 2010 to 2016, with a negative population growth rate of (4.82)%. The average median household income for 2016 for Hamilton County was $45,576, while the average median income for 2016 for Buchanan County was $62,984. By contrast, the national level of median household income for 2016 was $55,551. By 2021, the projected increases in household income are expected to be 0.72% for Hamilton County and 11.52% for Buchanan County. By 2021, the projected national level of increase in median household income is expected to be 7.77%.
The economy of our market area is heavily dependent on farming and agriculture. The major employers in our market area include the Van Diest Supply Company and the Van Diest Medical Center, Webster City Community School District, John Deere and the government of Webster City.
Competition
We face intense competition in our market areas both in making loans and attracting deposits. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds and insurance companies. Some of our competitors have greater name recognition and market presence, and offer certain services that we do not or cannot provide.
Lending Activities
Our primary lending activity is the origination of one-to-four family residential real estate loans. To a lesser extent, we also originate consumer loans and non-owner occupied one-to-four family residential real estate loans (which we sometimes refer to as one-to-four family investment property loans). On a very limited basis, we have originated commercial real estate and land loans. However, in recent years we have significantly reduced the emphasis on these types of loans and we do not intend to emphasize these types of loans in the future.

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Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated:
 
At December 31,
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
47,315

 
77.3
%
 
$
46,511

 
80.1
%
Non-owner occupied one-to-four family residential real estate
3,650

 
6.0

 
4,030

 
7.0

Commercial real estate
3,597

 
5.9

 
2,974

 
5.1

Consumer
6,605

 
10.8

 
4,543

 
7.8

 
 
 
 
 
 
 
 
Total loans receivable
61,167

 
100.0
%
 
58,058

 
100.0
%
 
 
 
 
 
 
 
 
Discount on loan purchases
(57
)
 
 
 
(85
)
 
 
Deferred loan fees
(47
)
 
 
 
(88
)
 
 
Allowance for loan losses
(487
)
 
 
 
(505
)
 
 
 
 
 
 
 
 
 
 
Total loans receivable, net
$
60,576

 
 
 
$
57,380

 
 
Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2016. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2017. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.
 
One-to-four family residential real estate
 
Non-owner occupied one-to-four family residential real estate
 
Commercial real estate and land
 
Consumer
 
Total
 
(In thousands)
Due During the Years Ending December 31,
 
2017
$
104

 
$
3

 
$

 
$
780

 
$
887

2018
291

 
15

 

 
496

 
802

2019 to 2020
480

 
51

 
22

 
1,973

 
2,526

2021 to 2025
3,343

 
340

 
1,011

 
2,677

 
7,371

2026 to 2030
7,861

 
1,424

 
746

 
49

 
10,080

2031 and beyond
35,236

 
1,817

 
1,818

 
630

 
39,501

 
 
 
 
 
 
 
 
 
 
Total
$
47,315

 
$
3,650

 
$
3,597

 
$
6,605

 
$
61,167


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The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2016 that are contractually due after December 31, 2017 .
 
Due After December 31, 2017
 
Fixed
 
Adjustable
 
Total
 
(In thousands)
One-to-four family residential real estate
$
15,752

 
$
30,676

 
$
46,428

Non-owner occupied one-to-four family residential real estate
865

 
2,785

 
3,650

Commercial real estate
589

 
3,008

 
3,597

Consumer

 
6,605

 
6,605

Total
$
17,206

 
$
43,074

 
$
60,280

Loan Approval Procedures and Authority. We make loans according to written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. We require “full documentation” on all of our loan applications.
Our policies and loan approval limits are established by the board of directors. For one-to-four family residential real estate loans, our loan committee, which is comprised of our President and Chief Executive Officer, Senior Vice President, Chief Lending Officer and another loan officer, has loan authority of up to $250,000. All one-to-four family residential real estate loans above $250,000 require the approval of our board of directors. For consumer loans, our loan officers have loan authority of up to $25,000. All consumer loans above $25,000 require the approval of the loan committee. All loans not requiring board approval are ratified at the next regularly scheduled board meeting.
We require appraisals of all real property securing one-to-four family residential real estate loans and non-owner occupied one-to-four family residential real estate loans. All appraisers are state-licensed or state-certified appraisers, and are approved by the board of directors annually.
One-to-Four Family Residential Real Estate Loans. Our primary lending consists of originating owner occupied, one-to-four family residential real estate loans, substantially all of which are secured by properties located in our market area. At December 31, 2016, $47.3 million, or 76.9% of our total loan portfolio, consisted of owner occupied one-to-four family residential real estate loans. We offer these loans with fixed-rate maturities of up to 30 years as well as adjustable rates. In recent years, in the historically low interest rate environment, nearly all of our one-to-four family residential real estate loan originations have had fixed-rates of interest. The average loan balance of our one-to-four family residential real estate loans at December 31, 2016 was $53,000.
One-to-four family residential real estate loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate one-to-four family residential real estate loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is generally $417,000 for single-family homes. We maintain in our portfolio all of the loans that we originate, except we currently sell most fixed-rate one-to-four family residential real estate loans with maturities of greater than 20 years.
Our adjustable-rate one-to-four family residential real estate loans generally consist of loans with initial interest rates fixed for one, three, five or seven years, and annual adjustments thereafter are indexed based on changes in the Monthly Federal Cost of Funds Index. Our adjustable-rate one-to-four family residential real estate loans generally have an interest rate adjustment limit of 200 basis points per adjustment, with a maximum lifetime interest rate adjustment limit of 600 basis points. In the current

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low interest rate environment, we have originated a significant dollar amount of adjustable-rate one-to-four family residential real estate loans.
Generally, we originate one-to-four family residential real estate loans with loan-to-value ratios of up to 80%, and will, on occasion, originate loans with a loan-to-value ratio of up to 90% with private mortgage insurance or readily marketable collateral. During the years ended December 31, 2016 and 2015, we did not originate a significant amount of one-to-four family residential real estate loans with loan-to-value ratios in excess of 80%. All borrowers are required to obtain an abstract of title and a title opinion. We also require fire and casualty insurance and, where circumstances warrant, flood insurance.
We do not offer “interest only” mortgage loans on one-to-four family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).
Non-owner occupied One-to-four family Residential Real Estate Loans. At December 31, 2016, $3.7 million, or 6.1%, of our total loan portfolio, consisted of non-owner occupied, or “investment,” one-to-four family residential real estate loans, all of which were secured by properties located in our market area. At December 31, 2016, our non-owner occupied one-to-four family residential real estate loans had an average balance of $37,000.
We originate fixed-rate and adjustable-rate loans secured by non-owner occupied one-to-four family properties. These loans may have a term of up to 20 years. In recent years, in the historically low interest rate environment, nearly all of our non-owner occupied one-to-four family residential loan originations have fixed-rates of interest. We generally lend up to 75% of the property’s appraised value. Appraised values are determined by an outside independent appraiser. In deciding to originate a loan secured by a non-owner occupied one-to-four family residential property, we review the creditworthiness of the borrower, the expected cash flow from the property securing the loan, the cash flow requirements of the borrower and the value of the property securing the loan. We require an abstract of title, a title opinion, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.
Non-owner occupied one-to-four family residential loans generally carry higher interest rates and have shorter terms than one-to-four family residential mortgage loans. Non-owner occupied one-to-four family residential loans, however, entail greater credit risks compared to the owner occupied one-to-four family residential mortgage loans we originate. The payment of loans secured by income-producing properties typically depends on the sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions could affect the value of the collateral for the loan or the future cash flow of the property.
Commercial Real Estate Loans. On a very limited basis, we have offered commercial real estate loans. In recent years we have significantly reduced the origination of these types of loans, and we do not intend to emphasize the origination of these types of loans in the future. At December 31, 2016, $3.6 million, or 6.0% of our total loan portfolio, consisted of commercial real estate loans, which are generally secured by retail, industrial, service or other commercial properties and loans secured by raw land. At December 31, 2016, our commercial real estate loans had an average balance of $75,000 and the latest maturity -+was January 2047.
We have offered fixed-rate and adjustable-rate commercial real estate loans. In recent years, in the historically low interest rate environment, nearly all of our commercial real estate loan originations have

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had adjustable-rates of interest. These loans generally have terms of up to 20 years. We generally lend up to 75% of the property’s appraised value. Appraised values are determined by an outside independent appraiser. In evaluating the property securing the loan, we review the creditworthiness of the borrower, the expected cash flow from the property securing the loan, the cash flow requirements of the borrower, the value and condition of the property securing the loan and the borrower’s experience in owning or managing similar property. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 1.15 times), computed after deduction for a vacancy factor and property expenses we deem appropriate. We require an abstract of title, a title opinion, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.
Commercial real estate loans afford us the opportunity to earn higher yields than those obtainable on one-to-four family residential real estate lending. Nevertheless, commercial real estate lending may involve greater risk than one-to-four family residential real estate loans because the loans generally have larger principal balances and repayment of these loans is dependent on the successful operation or management of the commercial property securing the loan. The success of the loan may also be affected by many factors outside the control of the borrower. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties. Land loans pose additional risks because the property generally does not produce income and may be relatively illiquid.
Consumer Loans. We offer a variety of consumer loans including new and used automobile loans, home improvement and home equity loans, recreational vehicle loans, and loans secured by certificates of deposits. At December 31, 2016, consumer loans totaled $6.6 million, or 11.0% of our loan portfolio, of which $4.3 million, or 65.2%, were automobile loans. At this date, $414,000 of our consumer loans were unsecured.
Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. We intend to continue to emphasize and grow our portfolio of consumer loans in the future.
Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
We also offer home equity loans secured by a first or second mortgage on residential property. Our home equity loans are made with fixed or adjustable rates, and with combined loan-to-value ratios up to 90% on an owner occupied principal residence or 100% with equity protection program insurance.
Loan Originations, Purchases, Sales and Servicing. Lending activities are conducted by our loan personnel operating at our offices. All loans that we originate are underwritten pursuant to our standard policies and procedures. Our ability to originate loans is dependent upon the relative customer demand for such loans and competition from other lenders, which is affected by market interest rates as well as anticipated future market interest rates. Our loan origination and sales activity may be adversely affected by a rising interest rate environment, which typically results in decreased loan demand. Our loan originations are generated by our loan personnel, existing customers, referrals from realtors, residential home builders, automobile dealers and walk-in business.

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In recent years we have not purchased loans, and we do not intend to purchase loans in the near future. Pursuant to our acquisition of Independence Bank in January 2014, we acquired $10.5 million in loans, substantially all of which were secured by properties located in Buchanan County, Iowa.
Substantially all of the one-to-four family residential real estate loans that we originate meet the underwriting guidelines established by Fannie Mae and Freddie Mac. In recent years, we have sold our conforming, fixed-rate one-to-four family residential real estate loans that have terms of greater than 20 years, on a servicing-released basis.
The following table sets forth our loan origination, purchase, sale and principal repayment activity during the periods indicated.
 
Years Ended December 31,
 
2016
 
2015
 
(in thousands)
Total loans, at beginning of period
$
58,058

 
$
55,632

 
 
 
 
Loans originated:
 
 
 
One-to-four family residential
10,704

 
7,675

Non-owner occupied one-to-four family residential real estate
180

 
113

Commercial real estate
995

 
422

Consumer
5,944

 
3,094

Total loans originated
17,823

 
11,304

 
 
 
 
Loans purchased:
 
 
 
One-to-four family residential

 

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

 

Commercial real estate

 

Consumer

 

Total loans purchased

 

 
 
 
 
Loans sold:
 
 
 
One-to-four family residential
(1,448
)
 
(2,577
)
Non-owner occupied one-to-four family residential real estate

 

Commercial real estate

 

Consumer

 

Total loans sold
(1,448
)
 
(2,577
)
 
 
 
 
Other:
 
 
 
Principal repayments
(13,266
)
 
(6,301
)
 
 
 
 
Net loan activity
3,109

 
2,426

Total loans, including loans held for sale, at end of period
$
61,167

 
$
58,058

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

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When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate held for sale until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell which establishes a new cost basis. Any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal or an in-house evaluation which is obtained as soon as practicable, typically at the start of the foreclosure proceeding. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized as long as the total cost basis of the property does not exceed estimated fair value less estimated costs to sell.
Delinquent Loans. The following table sets forth our loan delinquencies by type and amount of type at the dates indicated.
 
Loans Delinquent For
 
Total
 
30-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
25

 
$
978

 
7

 
$
258

 
32

 
$
1,236

Non-owner occupied one-to-four family residential real estate
1

 
36

 
2

 
57

 
3

 
93

Commercial real estate
1

 
27

 
1

 
298

 
2

 
325

Consumer
28

 
271

 
2

 
1

 
30

 
272

Total
55

 
1,312

 
12

 
614

 
67

 
1,926

 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
35

 
$
1,437

 
9

 
$
460

 
44

 
$
1,897

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

 

 

 

 

 

Commercial real estate

 

 
1

 
302

 
1

 
302

Consumer
16

 
100

 
7

 
27

 
23

 
127

Total
51

 
$
1,537

 
17

 
$
789

 
68

 
$
2,326

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

12



 
At December 31,
 
2016
 
2015
 
(Dollars in thousands)
 
 
 
 
Non-accrual loans:
 
 
 
One-to-four family residential real estate
$
292

 
$
185

Non-owner occupied one-to-four family residential real estate
314

 

Commercial real estate
297

 
302

Consumer
9

 

Total
912

 
487

 
 
 
 
Accruing loans 90 days or more past due:
 
 
 
One-to-four family residential real estate
$
193

 
$
275

Non-owner occupied one-to-four family residential real estate
57

 

Commercial real estate

 

Consumer
1

 
27

Total loans 90 days or more past due
251

 
302

 
 
 
 
Total non-performing loans
1,163

 
789

 
 
 
 
Real estate owned
58

 
6

Other non-performing assets

 

 
 
 
 
Total non-performing assets
$
1,221

 
$
795

 
 
 
 
Ratios:
 
 
 
Total non-performing loans to total loans
1.90
%
 
1.38
%
Total non-performing assets to total assets
0.99
%
 
0.7
%
For the year ended December 31, 2016, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was immaterial, and the amount of interest we recorded on these loans was $0.
At December 31, 2016, nonaccrual loans consisted of four one-to-four family residential real estate loans totaling $291,778, nine non-owner occupied one-to-four family residential real estate totaling $314,379, one commercial real estate loan totaling $297,538, and three consumer loans totaling $8,554.
At December 31, 2016, we had $1.3 million in loans that were not currently classified as nonaccrual, 90 days past due or troubled debt restructurings, but where known information about possible credit problems of borrowers caused management to have concerns as to the ability of the borrowers to comply with existing loan repayment terms and that could result in disclosure as nonaccrual, 90 days past due or troubled debt restructurings.
Troubled Debt Restructurings. Troubled debt restructurings are defined under ASC 310-40 to include loans for which either a portion of interest or principal has been forgiven, or for loans modified at interest rates or on terms materially less favorable than current market rates. At December 31, 2016 and 2015, we had no loans that were classified as a troubled debt restructuring.
Foreclosed Real Estate Held for Sale. At December 31, 2016, we had $58,000 in foreclosed real estate held for sale, consisting of one residential real estate property.
Classified Assets. Federal regulations provide that loans and other assets of lesser quality should be classified as “substandard”, “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral

13



pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention/watch” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required to charge-off the amount of such assets. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional loss allowances.
In connection with the filing of our periodic reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or because of delinquency status, or if the loan possesses weaknesses although currently performing. Management reviews the status of each loan on our watch list with the Loan Committee and then with the full board of directors at the next regularly scheduled board meeting. If the asset quality of a loan deteriorates, the classification is changed to “special mention/watch,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.”
Assets that do not expose us to risk sufficient to warrant classification, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention/watch. As of December 31, 2016, we had $1.6 million of assets designated as special mention/watch.
We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of our assets at December 31, 2016, substandard assets consisted of loans of $1.1 million. There were no doubtful or loss assets at December 31, 2016.
As of December 31, 2016, our largest substandard loan classification had a principal balance of approximately $298,000 and was secured by raw land. Management believes this loan is adequately collateralized.

14



The following table sets forth our amounts of classified loans and loans designated as special mention as of December 31, 2016 and 2015.
 
At December 31,
 
2016
 
2015
 
(In thousands)
Classification of loans:
 
 
 
Substandard
$
1,107

 
$
488

Doubtful

 

Loss

 

Total classified loans
$
1,107

 
$
488

Special mention
$
1,575

 
$
2,003

Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on at least a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for impaired loans, and (2) a general valuation allowance for non-impaired loans. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
This analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.
Specific Allowances on Impaired Loans. We establish a specific allowance when non-owner occupied one-to-four family residential real estate and commercial loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral for the mortgage.
General Valuation Allowance on Non-impaired Loans. We establish a general allowance for non-impaired loans to recognize the probable losses associated with lending activities. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience for the last three years, adjusted for qualitative factors that could impact the allowance for loan losses. These qualitative factors may include risk selection and underwriting standards, and other changes in lending policies, procedures and practices; level of experience, ability, and depth of lending management and other relevant staff experience; quality of the loan review system; nature, trends in volume of the portfolio and terms of loans; volume and severity of past due loans; value of underlying collateral for collateral dependent loans; credit concentrations and levels of such concentrations; external factors (i.e. competition, legal and regulatory) on level of estimated credit losses; and national, regional and local economic trends and conditions. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

15



In addition, as an integral part of their examination process, the OCC with respect to WCF Financial Bank, and the Federal Reserve Bank of Kansas City with respect to WCF Bancorp, Inc. will periodically review our allowance for loan losses and may require that we recognize additions to the allowance based on their judgment of information available to them at the time of their examinations.
The allowance for loan losses decreased $18,000, or 3.6%, to $487,000 at December 31, 2016 from $505,000 at December 31, 2015. In addition, the allowance for loan losses to total loans receivable decreased to 0.80% at December 31, 2016 from 0.88% at December 31, 2015. The allowance for loan losses as a percentage of non-performing loans decreased to 41.87% at December 31, 2016 from 64.01% at December 31, 2015. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at December 31, 2016 and 2015.
Allowance for Loan Losses.  The following table sets forth information regarding our allowance for loan losses and other ratios at or for the dates indicated.
 
At or For the Years Ended December 31,
2016
 
2015
 
(Dollars in thousands)
 
 
 
 
Balance at beginning of year
$
505

 
$
361

 
 
 
 
Charge-offs:
 
 
 
One-to-four family residential
(15
)
 
(33
)
Non-owner occupied one-to-four family residential real estate

 

Commercial real estate
(29
)
 

Consumer
(38
)
 
(13
)
Total charge-offs
(82
)
 
(46
)
 
 
 
 
Recoveries:
 
 
 
One-to-four family residential

 

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

 

Commercial real estate

 

Consumer
4

 

Total recoveries
4

 

 
 
 
 
Net charge-offs
(78
)
 
(46
)
 


 


Provision for loan losses
60

 
190

 
 
 
 
Balance at end of year
$
487

 
$
505

 
 
 
 
Ratios:
 
 
 
Net charge-offs to average loans outstanding
0.13
%
 
0.08
%
Allowance for loan losses to non-performing loans at end of year
41.87
%
 
64.01
%
Allowance for loan losses to total loans at end of year
0.80
%
 
0.88
%
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

16



 
At December 31,
 
2016
 
2015
 
Amount
 
Percent of Allowance to Total Allowance
 
Percent of Loans in Category to Total Loans
 
Amount
 
Percent of Allowance to Total Allowance
 
Percent of Loans in Category to Total Loans
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
320

 
65.7
%
 
77.3
%
 
$
367

 
72.7
%
 
80.1
%
Non-owner occupied one-to-four family residential real estate
28

 
5.8

 
6.0

 
45

 
8.9

 
7.0

Commercial real estate
37

 
7.6

 
5.9

 
32

 
6.3

 
5.1

Consumer
102

 
20.9

 
10.8

 
61

 
12.1

 
7.8

Total allowance for loan losses
$
487

 
100.0
%
 
100.0
%
 
$
505

 
100.0
%
 
100.0
%
Investment Activities
General. Our investment policy is established by the board of directors. Our investment policy dictates that investment decisions will be made based on the safety of the investment, liquidity and pledging requirements, our interest rate risk and our potential long term earnings. The Investment Committee of the board of directors is responsible for overseeing our investment program and evaluating on an ongoing basis our investment policy and objectives. Our Chief Executive Officer has the authority to purchase securities within specific guidelines established by the investment policy. All transactions are reviewed by the board of directors at its regular meetings. U.S. GAAP requires that securities be categorized as “held to maturity,” “trading securities” or “available-for-sale,” based on management’s intent as to the ultimate disposition of each security. U.S. GAAP allows debt securities to be classified as “held to maturity” and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, or other similar factors cannot be classified as “held to maturity.”
At December 31, 2016, all of our securities were classified as available-for-sale.
Our investment policy does not permit hedging activities, such as futures, options or swap transactions, gains trading or short sales. Additionally, securities deemed unacceptable for our portfolio include any security whose interest rate is tied to a foreign currency exchange rate.
The following table sets forth the amortized cost and fair value of our securities portfolio (excluding Federal Home Loan Bank of Des Moines and Bankers’ Bank common stock) at the dates indicated. At the dates indicated, all of our investment securities were held as available-for-sale.
 
At December 31,
 
2016
 
2015
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(In thousands)
U.S government and agency securities
$
250

 
$
243

 
$

 
$

Mortgage-backed securities(1)
31,885

 
31,397

 
17,523

 
17,356

Municipal securities
12,685

 
12,514

 
18,300

 
18,613

Corporate securities
500

 
499

 
552

 
557

Total securities available-for-sale
$
45,320

 
$
44,653

 
$
36,375

 
$
36,526

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

17



Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio and the mortgage-backed securities portfolio at December 31, 2016 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. No tax-equivalent yield adjustments were made. Our municipal securities are all tax-exempt. All of our securities at this date were held as available-for-sale.
 
One Year or Less
 
More than One Year through Five Years
 
More than Five Years through Ten Years
 
More than Ten Years
 
Total Securities
 
Amortized Cost
 
Weighted Average Yield
 
Amortized Cost
 
Weighted Average Yield
 
Amortized Cost
 
Weighted Average Yield
 
Amortized Cost
 
Weighted Average Yield
 
Amortized Cost
 
Fair Value
 
Weighted Average Yield
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$

 
%
 
$

 
%
 
$
250

 
1.30
%
 
$

 
%
 
$
250

 
$
243

 
1.30
%
Mortgage-backed securities

 

 

 

 
12,152

 
1.50

 
19,733

 
1.84

 
31,885

 
31,397

 
1.67

Municipal securities
575

 
1.93

 
2,164

 
1.32

 
6,296

 
1.71

 
3,649

 
2.45

 
12,684

 
12,514

 
2.62

Corporate securities
500

 
2.69

 

 

 

 

 

 

 
500

 
499

 
2.69

Total securities available-for-sale
$
1,075

 
2.28
%
 
$
2,164

 
1.32
%
 
$
18,698

 
1.57
%
 
$
23,382

 
1.94
%
 
$
45,319

 
$
44,653

 
1.95
%
Sources of Funds
General. Deposits traditionally have been our primary source of funds for our lending activities and, as applicable, other investments. We also borrow from the Federal Home Loan Bank of Des Moines to supplement cash flow needs, and at December 31, 2016 we had $5.5 million of FHLB advances outstanding. We also have an available line of credit in the amount of $2.5 million at Bankers’ Bank, of which there was no amount outstanding at December 31, 2016. Our additional sources of funds are scheduled loan repayments, loan prepayments, retained earnings and the proceeds of loan and securities sales.
Deposits. We accept deposits primarily from individuals who reside in and businesses located in our market area. We rely on our competitive pricing and products, convenient location and quality customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of statement savings accounts, money market accounts, NOW accounts and certificates of deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements and our deposit growth goals. Historically we have not relied on brokered deposits and at December 31, 2016 and 2015, we did not have any brokered deposits.

18



The following table sets forth the distribution of average total deposits by account type, for the periods indicated.
 
For the Years Ended December 31,
 
2016
 
2015
 
Average Balance
 
Percent
 
Weighted Average Rate
 
Average Balance
 
Percent
 
Weighted Average Rate
 
(Dollars in thousands)
Deposit type:
 
 
 
 
 
 
 
 
 
 
 
Statement savings
$
11,509

 
12.8
%
 
0.21
%
 
$
11,977

 
13.1
%
 
0.18
%
Money market
11,185

 
12.4

 
0.32

 
12,121

 
13.3

 
0.27

NOW
20,542

 
22.9

 
0.07

 
17,900

 
19.6

 
0.07

Certificates of deposit
46,638

 
51.9

 
1.07

 
49,346

 
54.0

 
1.00

 
 
 
 
 
 
 
 
 
 
 
 
Total deposits
$
89,874

 
100.0
%
 
0.64
%
 
$
91,344

 
100.0
%
 
0.65
%
The following table sets forth all our certificates of deposit classified by interest rate as of the dates indicated.
 
At December 31,
 
2016
 
2015
 
(In thousands)
Interest Rate:
 
 
 
Less than 1%
$
13,881

 
$
18,969

1.00% - 1.99%
25,083

 
18,038

2.00% - 2.99%
6,435

 
9,252

 
 
 
 
Total
$
45,399

 
$
46,259

The following table sets forth the amount and maturities of all our certificates of deposit by interest rate at December 31, 2016.
 
At December 31, 2016
 
Period to Maturity
 
Less Than
or Equal to
One Year
 
Over One
Year to Two
Years
 
Over Two
Years to
Three Years
 
Over Three
Years
 
Total
 
Percentage
of Total
Certificate
Accounts
 
(Dollars in thousands)
Interest Rate:
 
 
 
 
 
 
 
 
 
 
 
Less than or equal to1.00%
$
11,225

 
$
2,632

 
$
24

 
$

 
$
13,881

 
30.5
%
1.00% - 1.99%
9,188

 
5,259

 
2,854

 
7,782

 
25,083

 
55.3

2.00% - 2.99%
4,982

 
665

 
788

 

 
6,435

 
14.2

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
25,395

 
$
8,556

 
$
3,666

 
$
7,782

 
$
45,399

 
100
%

19



As of December 31, 2016, the aggregate amount of our outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $14.5 million. The following table sets forth the maturity of those certificates as of December 31, 2016.
 
At December 31, 2016
 
(In thousands)
 
 
Three months or less
$
1,392

Over three months through six months
1,471

Over six months through one year
6,406

Over one year to three years
3,078

Over three years
2,104

 
 
Total
$
14,451

Borrowings. We may obtain advances from the FHLB of Des Moines utilizing the security of the common stock we own in the FHLB of Des Moines and qualifying residential mortgage loans as collateral, provided certain standards related to creditworthiness are met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. FHLB of Des Moines advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. The following table sets forth information concerning balances and interest rates on our borrowings at and for the periods shown:
 
At or For the Years Ended
December 31,
 
2016
 
2015
 
(Dollars in thousands)
 
 
 
 
FHLB:
 
 
 
Balance at end of period
$
5,500

 
$
8,000

Average balance during period
$
6,707

 
$
2,603

Maximum outstanding at any month end
$
8,000

 
$
8,000

Weighted average interest rate at end of period
1.08
%
 
0.95
%
Average interest rate during period
0.99
%
 
1.96
%
Personnel
As of December 31, 2016, we had 21 full-time equivalent employees. Our employees are not represented by any collective bargaining group. We believe that we have a good working relationship with our employees.
Subsidiary Activity
WCF Financial Bank is the only direct subsidiary of WCF Bancorp, Inc. WCF Financial Bank has one subsidiary, WCF Financial Service Corp., an inactive Iowa corporation that previously provided insurance products, but no longer conducts any business.

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Supervision and Regulation
General
As a federal savings bank, WCF Financial Bank is subject to examination and regulation by the OCC, and is also subject to examination by the Federal Deposit Insurance Corporation (FDIC). The federal system of regulation and supervision establishes a comprehensive framework of activities in which WCF Financial Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors, and not for the protection of security holders. WCF Financial Bank also is a member of and owns stock in the Federal Home Loan Bank of Des Moines, which is one of the 11 regional banks in the Federal Home Loan Bank System.
Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as WCF Financial Bank or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.
As a savings and loan holding company, WCF Bancorp, Inc. is required to comply with the rules and regulations of the Federal Reserve Board. It is required to file certain reports with the Federal Reserve Board and will be subject to examination by and the enforcement authority of the Federal Reserve Board. WCF Bancorp, Inc. is also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Any change in applicable laws or regulations, whether by the OCC, the FDIC, the Federal Reserve Board or Congress, could have a material adverse impact on the operations and financial performance of WCF Bancorp, Inc. and WCF Financial Bank.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to WCF Financial Bank and WCF Bancorp, Inc. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on WCF Financial Bank and WCF Bancorp, Inc.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, WCF Financial Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. WCF Financial Bank may also establish subsidiaries that may engage

21



in certain activities not otherwise permissible for WCF Financial Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a 4.0% Tier 1 capital to total assets leverage ratio, a common equity Tier 1 capital to risk-based assets ratio of 5.125%, a total capital to risk-based assets of 8.625%, and a Tier 1 capital to risk-based assets ratio of 6.625%. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% of risk-weighted assets on January 1, 2019.
At December 31, 2016, WCF Financial Bank’s capital exceeded all applicable requirements.
Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2016, WCF Financial Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, WCF Financial Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, WCF Financial Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

22



WCF Financial Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended. This test generally requires a savings association to have at least 75% of its deposits held by the public and earn at least 25% of its income from loans and U.S. government obligations. Alternatively, a savings association can satisfy this test by maintaining at least 60% of its assets in cash, real estate loans and U.S. Government or state obligations.
A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2016, WCF Financial Bank satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application with the OCC for approval of a capital distribution if:
the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;
the savings association would not be at least adequately capitalized following the distribution;
the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
the savings association is not eligible for expedited treatment of its filings, generally due to an unsatisfactory CAMELS rating or being subject to a cease and desist order or formal written agreement that requires action to improve the institution’s financial condition.
Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as WCF Financial Bank, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution may be disapproved if:
the federal savings association would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.
Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the OCC is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in

23



denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. WCF Financial Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository institution such as WCF Financial Bank. WCF Bancorp, Inc. is an affiliate of WCF Financial Bank because of its control of WCF Financial Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.
WCF Financial Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of WCF Financial Bank’s capital
In addition, extensions of credit in excess of certain limits must be approved by WCF Financial Bank’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, shareholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting,

24



interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Interstate Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.
Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The applicable OCC regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. Under the amended regulations, an institution is deemed to be “well capitalized” if it has a tangible capital ratio of 5.0% or greater, a common equity Tier 1 ratio of 6.5% or greater, a total risk-based capital ratio of 10.0% or greater, and a Tier 1 risk-based capital ratio of 8.0% or greater. An institution is “adequately capitalized” if it has a tangible capital ratio of 4.0% or greater, a common equity Tier 1 ratio of 5.125% or greater, a total risk-based capital ratio of 8.625% or greater, and a Tier 1 risk-based capital ratio of 6.625% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 5.125% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.625%, a Tier 1 risk-based capital ratio of less than 6.625%. An institution is deemed to be “significantly undercapitalized” if it has a tangible capital ratio of less than 3.0%, a common equity Tier 1 ratio of less than 3.0%, a total risk-based capital ratio of less than 6.0%, or a Tier 1 risk-based capital ratio of less than 4.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the Federal Reserve Board to sell sufficient voting stock to become adequately capitalized,

25



requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
At December 31, 2016, WCF Financial Bank met the criteria for being considered “well capitalized.”
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as WCF Financial Bank. Deposit accounts in WCF Financial Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s deposits.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC, which has exercised that discretion by establishing a long range fund ratio of 2%.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of WCF Financial Bank. We cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the year ended December 31, 2016, the annualized FICO assessment was equal to 0.70 basis points of total assets less tangible capital.
Privacy Regulations. Federal regulations generally require that WCF Financial Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, WCF Financial Bank is required to provide its customers with the ability to “optout” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. WCF Financial Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

26



USA Patriot Act. WCF Financial Bank is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.
Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Other Regulations
Interest and other charges collected or contracted for by WCF Financial Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; and
Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such federal and state laws.
The deposit operations of WCF Financial Bank also are subject to, among others, the:
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $103.6 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $103.6 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%).

27



The first $14.5 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. WCF Financial Bank is in compliance with these requirements.
Federal Home Loan Bank System
WCF Financial Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. WCF Financial Bank was in compliance with this requirement at December 31, 2016. Based on redemption provisions of the Federal Home Loan Bank of Des Moines, the stock has no quoted market value and is carried at cost. WCF Financial Bank reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of Des Moines stock. As of December 31, 2016, no impairment has been recognized.
Holding Company Regulation
WCF Bancorp, Inc. is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over WCF Bancorp, Inc. and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to WCF Financial Bank.
As a savings and loan holding company, WCF Bancorp, Inc.’s activities are limited to those activities permissible by law for financial holding companies or multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending and other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, insurance and underwriting equity securities. Multiple savings and loan holding companies are authorized to engage in activities specified by federal regulation, including activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act.
Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.
Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act requires the Federal Reserve Board to establish minimum consolidated capital requirements for all depository institution holding companies that are as stringent as those required for the insured depository subsidiaries. However, legislation was enacted in December 2014 that required the Federal Reserve Board to amend its “Small Bank Holding Company” exemption from consolidated holding company capital requirements to generally extend its applicability to bank and savings and loan holding companies of up to $1 billion in assets. Regulations implementing this amendment were effective May 15, 2015. Consequently, savings and loan holding companies of under $1 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in particular cases.

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The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” policy that require holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of WCF Bancorp, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Federal Securities Laws
WCF Bancorp, Inc. common stock is registered with the Securities and Exchange Commission. WCF Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as WCF Bancorp, Inc. unless the Federal Reserve Board has been given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with WCF Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company that acquires

29



such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.
TAXATION
WCF Bancorp, Inc. and WCF Financial Bank are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent tax matters and is not a comprehensive description of the tax rules applicable to WCF Bancorp, Inc. or WCF Financial Bank.
WCF Bancorp, Inc. is currently open to audit under statute of limitations by the Internal Revenue Service and state taxing authorities for the fiscal years ended December 31, 2013 through December 31, 2016. Neither the federal tax return nor the state tax return has been audited for the last five years.
Federal Taxation
Method of Accounting. For federal income tax purposes, WCF Bancorp, Inc. and WCF Financial Bank currently report their income and expenses on the accrual method of accounting and use a tax year ending December 31 for filing their federal income tax returns.
Bad Debt Reserves. Prior to the Small Business Protection Act of 1996 (the “1996 Act”), WCF Financial Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of the 1996 Act, WCF Financial Bank has elected to use the experience method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At December 31, 2016, WCF Financial Bank had no reserves subject to recapture in excess of its base year reserves.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if WCF Financial Bank failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift-related recapture rules. At December 31, 2016, our total federal pre-1988 base year reserve was approximately $2.1 million. However, under current law, pre-1988 base year reserves remain subject to recapture if WCF Financial Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.
Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences, which we refer to as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years. At December 31, 2016, WCF Bancorp, Inc. had $35,000 of AMT payments available to carry forward to future periods.
Net Operating Loss Carryovers. A company may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2016, WCF Bancorp, Inc. had $370,000 in net operating loss carry forwards for federal income tax purposes.
Corporate Dividends-Received Deduction. WCF Bancorp, Inc. may exclude from its income 100% of dividends received from WCF Financial Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is 80% in the case of dividends received from a corporation in which a corporate recipient owns at least 20% of its stock, and corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.

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State Taxation
WCF Bancorp, Inc. files an Iowa corporation tax return, and the Bank files an Iowa franchise income tax return. The Iowa corporate income tax rate ranges from 6% to 12% depending upon Iowa taxable income. Interest from federal securities is not taxable for purposes of the Iowa corporate income tax.
Iowa imposes a financial institution franchise tax, in lieu of the corporate income tax, on the Iowa franchise taxable income of financial institutions at the rate of 5%. Iowa franchise taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable, and no deduction is allowed for state franchise taxes. The net operating loss carryforward rules are similar to the federal rules. However, Iowa no longer allows carrybacks of net operating losses for tax years beginning on or after January 1, 2009.
Item 1A    Risk Factors
This item is not applicable because we are a smaller reporting company.
Item 1B    Unresolved Staff Comments
Not applicable.
Item 2    Properties
The following table sets forth certain information relating to our properties as of December 31, 2016.
 
 
Year
Opened
 
Owned/
Leased
 
Date of Lease
Expiration
 
Net Book
Value as of
Location
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
(In thousands)
Main Office:
 
 
 
 
 
 
 
 
401 Fair Meadow Drive
 
1934
 
Owned
 
Not applicable
 
$
2,887

Webster City, Iowa
 
 
 
 
 
 
 
 
Full Service Branch:
 
 
 
 
 
 
 
 
305 First Street West
 
2014
 
Owned
 
Not applicable
 
$
248

Independence, Iowa
 
 
 
 
 
 
 
 
We believe that our facilities are adequate for the business conducted.
Item 3    Legal Proceedings
At December 31, 2016, there were no material legal proceedings to which the Company is a party or of which any of its property is subject. From time to time, the Company is a party to various legal proceedings incident to its business.
Item 4    Mine Safety Disclosures
Not applicable.

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Part II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Common Stock
Shares of the Company’s common stock commenced trading on the NASDAQ Capital Market on July 14, 2016 under the symbol “WCFB” following the completion of the conversion and offering. Prior to that date, trades in the common stock of Webster City Federal Bancorp had been quoted on the OTC Pink Marketplace operated by the OTC Markets Group Inc. under the symbol “WCFB.”
The following table sets forth the high and low trading prices for WCF Bancorp, Inc. and Webster City Federal Bancorp common stock for each quarter during the last two fiscal years, as obtained from NASDAQ and the OTC Bulletin Board and the OTC Pink Marketplace operated by OTC Markets Group Inc., and the dividends paid during those periods. We have adjusted the share prices to reflect the 0.8115 exchange ratio in the conversion.
 
Price per share
 
Dividends
 
High
 
Low
 
Paid
Year Ending December 31, 2016
 
 
 
 
 
Fourth quarter
$
10.18

 
$
8.33

 
$
0.05

Third quarter
8.79

 
7.90

 
0.05

Second quarter
8.90

 
7.60

 

First quarter
8.90

 
7.12

 
0.05

Year Ending December 31, 2015
 
 
 
 
 
Fourth quarter
7.35

 
7.20

 
0.05

Third quarter
7.75

 
7.30

 
0.05

Second quarter
7.75

 
7.15

 
0.04

First quarter
7.95

 
7.16

 

On March 23, 2017, the Company had 187 stockholders of record, not including those who hold shares in “street name.”
Stock Repurchases
The Company did not repurchase any shares of its common stock during the year ended December 31, 2016.
Item 6    Selected Financial Data
This item is not applicable because we are a smaller reporting company.
Item 7    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations at December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the audited consolidated financial statements and the notes thereto, appearing in Part II, Item 8 of this report. All references herein to the “Company”, “we”, “us”, or similar terms refer to WCF Bancorp, Inc. and its subsidiaries.
Overview
Our profitability is highly dependent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds.
Our net income decreased $284,000, or 72.1%, to $109,000, or $0.05 per share, for the year ended December 31, 2016, compared to $394,000, or $0.16 per share, for the year ended December 31, 2015. The decrease was due to a decrease in gains on disposition of office property and equipment and increases in noninterest expenses. Gains on disposition of office property and equipement decreased to $0 in 2016 from $137,000 in 2015. Compensation, payroll taxes, and employee benefits increased $159,000 to $1.4 million in 2016 from $1.2 million in 2015. The increase was due to the hiring of a Chief Financial Officer and the addition of ESOP expenses. Accounting, regulatory and professional fees increased $384,000 to $640,000 in 2016 from $256,000 in 2015 due to the additional costs associated with the conversion.
An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income, which would have an adverse effect on our results of operations. As described in “ - Market Risk,” we expect that our net interest

32



income and our net portfolio value would decrease as a result of an instantaneous increase in interest rates. We use a variety of strategies to help manage interest rate risk, as described in “ - Market Risk.”
Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in north central and northeastern Iowa. Local economic conditions have a significant impact on our lending operations, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. Although we do not originate agricultural real estate or agricultural business loans, our market are is largely rural and agricultural. Accordingly, the agricultural economy generally has a significant effect on the financial stability of many of our customers. In addition, changes in economic conditions could result in increased actual losses or increased losses inherent in our loan portfolio, either of which could require us to significantly increase our provision for loan losses. Changes in economic conditions could further negatively affect us. A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our results of operations, financial condition and earnings. We are subject to specific market risks due to the dependence by many of our customers on an agriculture economy.
Business Strategy
Our goal is to build stockholder value by operating a well-capitalized and profitable financial institution that delivers a superior banking experience to our customers. We have sought to accomplish this objective by adopting a business strategy designed to maintain a strong capital position and high asset quality.
Our current principal business strategies are:
Continuing to emphasize the origination of one-to-four family residential real estate loans. We will continue to emphasize the origination of one-to-four family residential real estate loans in our market area. At December 31, 2016, $47.3 million, or 77.3% of our total loan portfolio, consisted of owner-occupied one-to-four family residential real estate loans, compared to $46.5 million, or 80.1% of our total loan portfolio, at December 31, 2015. We will continue to originate these types of loans because it is a strong recurring source of interest income.
Continuing to increase the origination of consumer loans. We plan to continue to increase the origination of consumer loans, including our direct automobile loans. Our consumer loans increased $2.1 million during 2016 to $6.6 million at December 31, 2016 from $4.5 million at December 31, 2015. Our consumer loans generally carry higher interest rates and shorter maturities than our one-to-four family residential real estate loans, thereby increasing our interest income and reducing our interest rate risk. In addition, we will attempt to expand our relationships with our consumer loan borrowers with the goal of increasing our interest income.
Applying disciplined underwriting practices to maintain the quality of our loan portfolio. We believe that strong asset quality is a key to long-term financial success. Our goal is to maintain strong asset quality with moderate credit risk. We seek to accomplish this by applying conservative underwriting standards and by pursuing diligent monitoring and collection efforts. At December 31, 2016, our nonperforming loans (loans which are 90 or more days delinquent and loans which are less than 90 days delinquent but classified as nonaccrual) were 1.90% of our total loan portfolio.
Enhancing core earnings by increasing lower-cost transaction and savings accounts. Demand, checking and money market accounts are a lower-cost source of funds than time deposits, and we have made a concerted effort to increase lower-cost transaction deposit accounts and reduce time deposits. Our ratio of core deposits (which we define as all deposit accounts except for certificate of deposit accounts) to total deposits has increased to 47.9% at December 31, 2016 from 47.5% at December 31, 2015. We plan to continue to market our core transaction accounts (primarily checking accounts), by emphasizing our high quality service and competitive pricing of these

33



products. Additionally, we believe our implementation of additional products and improved technological services such as remote deposit capture will increase our core deposits.
Managing interest rate risk. We intend to continue to manage our interest rate risk by maintaining our strategy of selling conforming, fixed-rate, one-to-four family residential real estate loans with terms of more than 20 years and increasing our originations of shorter-term consumer loans.
Growing our business by expanding our branch network. As opportunities arise and conditions permit, we will consider opportunities to expand our branch network through whole-bank or branch acquisitions, de novo branching or both. Although we do not currently have any agreements or understandings regarding specific acquisitions or de novo branching opportunities, our strategy is to grow our business within our consolidating market environment.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, other-than-temporary impairment of investment securities and the realizability of deferred tax assets. Management has discussed the development, selection and application of these critical accounting policies with the Audit Committee of the board of directors.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change. The allowance for loan losses has two components: general and specific as further discussed below.
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: one-to-four family residential real estate loans, consumer loans, non-owner occupied one-to-four family real estate loans and commercial real estate loans and land loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; loan concentrations, trends in volume and terms of loans; changes in lending practices and procedures; changes in lending management and staff; changes in the value of underlying collateral; changes in the quality of the loan review system; national and local economic trends and conditions; and the effects of other external factors. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the year ended December 31, 2016.
The specific component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent or foreclosure is probable. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual one-to-four family residential real estate loans or consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring (“TDR”) agreement.

34



A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired.
Other-Than-Temporary Impairment of Securities. Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment. Accounting Standard Codification (ASC) 320-10-Investment addresses the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.
Deferred Tax Assets and Liabilities. Deferred income 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.
Comparison of Financial Condition at December 31, 2016 and December 31, 2015
Total assets increased $10.8 million, or 9.5%, to $123.6 million at December 31, 2016 from $112.9 million at December 31, 2015. The increase was primarily due to an increase in securities available-for-sale of $8.1 million, or 22.3%, to $44.7 million at December 31, 2016 from $36.5, at December 31, 2015. This increase was due to the investment of funds received in the second step conversion stock offering, which closed on July 13, 2016. Cash and due from banks decreased $3.6 million, or 67.4%, to $1.7 million at December 31, 2016 compared to $5.4 million at December 31, 2015. The decrease resulted from excess funds being used to finance additional loans and to purchase investment securities. Federal funds sold decreased $2.2 million, or 62.9%, to $1.3 million at December 31, 2016 from $3.5 million at December 31, 2015. Net loans receivable increased $3.2 million, or 5.6%, to $60.6 million at December 31, 2016 from $57.4 million at December 31, 2015. The increase in net loans receivable was due to an increase of $804,000, or 1.7%, in one-to-four family residential real estate to $47.3 million at December 31, 2016 from $46.5 million at December 31, 2015, and an increase of $622,000, or 20.9%, in non-owner occupied one-to-four family residential to $3.6 million at December 31, 2016 from $3.0 million at December 31, 2015, and an increase of $2.1 million in consumer loans to $6.6 million at December 31, 2016 from $4.5 million at December 31, 2015, reflecting our increased emphasis on growing our consumer loan portfolio. The increase also included the investment in bank-owned life insurance of $3.0 million in 2016 compared to no bank-owned life insurance in 2015.
Total liabilities decreased $3.5 million, or 3.6%, to $94.8 million at December 31, 2016 from $98.3 million at December 31, 2015. The decrease in liabilities was mainly due to the payoff of FHLB advances. FHLB advances decreased $2.5 million, to $5.5 million as of December 31, 2016 from $8.0 million as of

35



December 31, 2015. Deposits at December 31, 2016 were $87.1 million compared to $88.1 million at December 31, 2015. The decrease in deposits was mainly due to depositors using funds to purchase the second step conversion stock.
Stockholders equity increased $14.3 million, or 97.7%, to $28.8 million at December 31, 2016 from $14.6 million at December 31, 2015. The increase in stockholders’ equity resulted from $15.7 million in stock proceeds from the subscription funds received in the second step conversion stock offering, $863,000 from the merger of the WCF Financial MHC into WCF Bancorp, Inc., $109,000 of net income during the year ended December 31, 2016, offset by a $514,000 decrease in market value of securities available-for-sale, $1.6 million of expenses related to the second step conversion stock offering, and $390,000 paid in dividends.
Comparison of Results of Operations for the Years Ended December 31, 2016 and 2015
Net income decreased $284,000, or 72.1%, to $109,000 for the year ended December 31, 2016, from $394,000 for the year ended December 31, 2015. Basic/diluted earnings per share were $0.05 for 2016 and were 2015. Total interest income increased $79,000, or 2.1%, to $3.8 million for the year ended December 31, 2016, from $3.7 million for the year ended December 31, 2015. The increase was mainly from loan interest received due to the increase in loan originations. Total interest expense was $639,000, for the year ended December 31, 2016, compared to $613,000 for the year ended December 31, 2015. The $26,000 increase was due to higher interest being paid on deposits and FHLB advances during 2016, compared to 2015.
Each quarter an analysis of the factors described in “Critical Accounting Policies - Allowance for Loan Losses” is completed. Based on these factors, a $60,000 provision for loan losses was recorded for the year ended December 31, 2016, compared to a provision of $190,000 for the year ended December 31, 2015. The allowance for loan losses reflects the estimate believed to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at December 31, 2016 compared to those at December 31, 2015. While we believed the estimates and assumptions used in the determination of the adequacy of the allowance are reasonable, the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact the financial condition and results of operations.
Net interest income after provision for losses on loans increased $183,000, or 6.3%, to $3.1 million for the year ended December 31, 2016, from $2.9 million for the year ended December 31, 2015.
Noninterest income decreased $70,000, or 10.6% to $594,000, for the year ended December 31, 2016 from $664,000 for the year ended December 31, 2015. The decrease was due to $145,000 in gains from sales of securities available-for-sale and no gain on disposition of office property and equipment for the year ended December 31, 2016 compared to $208,000 in gains on the sales of securities available-for-sale and a $137,000 gain on disposition of office property and equipment for 2015. Fees and service charges increased $78,000, or 24.6%, to $395,000 for the year ended December 31, 2016 compared to $317,000 for the year ended December 31, 2015. The increase was due to the evaluation of our fee structure and modifications of fee amounts. Other income increased during the year ended December 31, 2016, by $30,000, compared to $3,000 in other income for the year ended December 31, 2015. This increase was due to equity income received from the investment in affiliate.
Noninterest expense consists primarily of compensation and employee benefits, office property and equipment, data processing services, FDIC insurance premiums, charitable contributions and professional fees. During the year ended December 31, 2016, noninterest expense increased $444,000, or 14.1%, to $3.6 million, compared to $3.1 million for the year ended December 31, 2015. Compensation and employee benefits increased $159,000, or 12.8%, due to hiring a CFO in February of 2016 and the additional ESOP expenses in 2016 compared to 2015. Office property and equipment decreased $15,000, or 3.1%, to

36



$468,000 during the year ended December 31, 2016 compared to $482,000 for the year ended December 31, 2015. The decrease was due to the selling of the previous bank headquarters in 2015. FDIC insurance premiums decreased $8,000, or 11.8%, during the year ended December 31, 2016, due to the decrease in deposits during the year ended December 31, 2016 compared to the year ended December 31, 2015. Professional fees increased $384,000, or 150.0%, in 2016 due to additional costs associated with the conversion. Data processing services increased $54,000, or 14.8%, for the year ended December 31, 2016 compared to the same period in 2015. The increase was due to additional services contracted in 2016.
We recognized an income tax benefit of $18,000 for the year ended December 31, 2016 compared to an income expense of $30,000 for the year ended December 31, 2015. During 2016 we had gains on sales of securities available-for-sale, net of $145,000 compared to $208,000 for 2015. There were no gains on the disposition of office property and equipment during 2016 compared to $137,000 in gains during 2015. With these gains, earnings before taxes on income were $91,000 and $423,000 for the years ended December 31, 2016 and 2015, respectively.
Average Balance Sheet
Average balances and yields. The following table sets forth average balance sheets, average yields and costs, and certain other information at and for the years indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.

37




For the Year Ended December 31,

2016
2015

Average
Outstanding
Balance
Interest
Yield/
Rate
Average
Outstanding
Balance
Interest
Yield/
Rate
(1)

(Dollars in thousands)
Interest-earning assets:






Loans (1)
$
58,558

$
2,919

4.98
%
$
56,360

$
2,869

5.09
%
Investment securities - taxable
24,173

401

1.66

22,581

404

1.79

Investment securities - non-taxable
15,977

374

2.34

16,219

372

2.29

Other interest-earning assets
14,010

92

0.66

8,315

62

0.75

   Total interest-earning assets
112,718

3,786

3.36

103,475

3,707

3.58

Noninterest-earning assets
7,654



6,755



   Total assets
$
120,372



$
110,230










Interest-bearing liabilities:






Savings accounts
11,509

24

0.21

11,977

$
22

0.18

Money market accounts
11,185

36

0.32

12,121

33

0.27

NOW
15,312

14

0.09

12,771

13

0.10

Certificates of deposit (2)
46,638

499

1.07

49,346

494

1.00

   Total interest-bearing deposits
84,644

573

0.68

86,215

562

0.65

Advances from FHLB of Des Moines
6,708

66

0.98

2,602

51

1.96

   Total interest-bearing liabilities
91,352

639

0.70

88,817

513

0.69
Noninterest-bearing checking deposits
5,230

 
 
5,129

 
 
Noninterest-bearing liabilities
2,474



1,452



   Total liabilities
99,056



95,398



Equity
21,316



14,832



   Total liabilities and equity
$
120,372



$
110,230










Net interest income

$
3,147



$
3,094


Net interest rate spread (3)


2.66
%


2.89
%
Net interest-earning assets (4)
$
21,366




$
14,658




Net interest margin (5)


2.79
%


2.99
%
Average of interest-earning assets to interest-bearing liabilities


123.39
%


116.50
%
(1) Amortization of fees, discounts and premiums included in interest income were $31,000 and $58,000 for the years ended December 31, 2016 and 2015, respectively.
(2) Amortization of premiums included in interest expense were $65,000 and $98,000 for the years ended December 31, 2016 and 2015, respectively.
(3) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by total interest-earning assets.
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

38



 
Years Ended December 31,
 
2016 vs. 2015
 
Increase (Decrease) Due to
Total Increase (Decrease)
 
Volume
Rate
 
(In thousands)
 
 
 
 
Interest-earning assets:
 
 
 
Loans (1)
$
112

$
(62
)
$
50

Securities available-for-sale - taxable
28

(31
)
(3
)
Securities available-for-sale - non-taxable
(6
)
8

2

Other interest-earning assets
43

(13
)
30

 
 
 
 
   Total interest-earning assets
177

(98
)
79

 
 
 
 
Interest-bearing liabilities:
 
 
 
Savings accounts
(1
)
3

2

Money market accounts
(3
)
6

3

NOW accounts
3

(2
)
1

Certificates of deposit (2)
(27
)
32

5

   Total deposits
(28
)
39

11

 
 
 
 
Borrowings
80

(65
)
15

 
 
 
 
   Total interest-bearing liabilities
52

(26
)
26

 
 
 
 
Change in net interest income
$
125

$
(72
)
$
53

(1) Amortization of fees, discounts and premiums included in interest income were $31,000 and $58,000 for the years ended December 31, 2016 and 2015, respectively.
(2) Amortization of premiums included in interest expense were $65,000 and $98,000 for the years ended December 31, 2016 and 2015, respectively.

Market Risk
The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk (“IRR”). Our assets, consisting primarily of one-to-four family residential real estate loans, have longer maturities than our liabilities, consisting primarily of deposits and other borrowings. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income (“NII”) to changes in market interest rates. Accordingly, our board of directors has established an Asset/Liability Management Committee which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and generally meets at least on a quarterly basis to review our asset/liability policies and IRR position.
We have sought to manage our IRR to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset/liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the FHLB Des Moines, to “match fund” certain investments and/or loans; (ii) selling our fixed-rate conforming one-to-four family residential real estate loans with terms of greater than 20 years; (iii) continuing to emphasize increasing

39



core deposits; (iv) offering adjustable rate and shorter-term consumer loans; and (v) investing in securities with variable rates or fixed rates with shorter durations. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.
Economic Value of Equity Analysis. We analyze the sensitivity of our financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between predicted changes in the fair value of our assets and predicted changes in the present value of our liabilities assuming various changes in current interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in our economic value of equity, resulting from an instantaneous and sustained parallel shift in the yield curve (+100, +200 and +300 basis points and -100 basis points) at December 31, 2016.
Change in Interest Rates (basis points) (1)
Estimated EVE (2)
Estimated Increase (Decrease) in EVE
EVE as a Percentage of Fair Value of Assets (3)
EVE Ratio (4)
Increase (Decrease) (basis points)
Amount
Percent
(Dollars in thousands)
 
 
 
 
 
 
300
$
18,216

$
(5,481
)
(23.13
)%
17.05
%
$
(259
)
200
20,685

(3,012
)
(12.71
)
18.51

(113
)
100
22,727

(970
)
(4.09
)
19.52

(12
)
23,697



19.64


(100)
23,299

(398
)
(1.68
)
18.80

(84
)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the fair value of expected cash flows from assets, less the fair value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts.
(3) Fair value of assets represents then amount at which an asset could be exchanged between knowledgeable and willing parties in an arms length transaction.
(4) EVE Ratio represents EVE divided by the fair value of assets.

The table above indicates that at December 31, 2016, in the event of a 100 basis point decrease in interest rates, we would experience a 1.68% decrease in our economic value of equity. In the event of a 300 basis points increase in interest rates, we would experience a decrease of 23.13% in economic value of equity.
The preceding simulation analysis does not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed.
Liquidity and Capital Resources
The term “liquidity” refers to the ability of WCF Bancorp, Inc. and WCF Financial Bank to meet current and future short-term financial obligations. WCF Bancorp, Inc. and WCF Financial Bank further define liquidity as the ability to generate adequate amounts of cash to fund loan originations, deposit withdrawals and operating expenses. Liquidity management is both a daily and long-term function of business management. WCF Financial Bank’s primary sources of liquidity are deposits, scheduled amortization and

40



prepayments of loan principal and investment securities, and FHLB advances. WCF Financial Bank can borrow funds from the FHLB based on eligible collateral of loans and securities. WCF Financial Bank had FHLB advances of $5.5 million outstanding as of December 31, 2016 with unused borrowing capacity of $28.1 million. Additionally, at December 31, 2016, we had the ability to borrow $2.5 million from the Bankers’ Bank.
WCF Financial Bank’s primary investing activities are the origination of loans and the purchase of investment securities. WCF Financial Bank’s originations net of loan principal repayments were $3.2 million for the year ended December 31, 2016 and $2.5 million for the year ended December 31, 2015. Historically we have not purchased loans, and we did not purchase any loans during 2016 or 2015. Purchases of securities totaled $29.3 million and $19.9 million for the years ended December 31, 2016 and 2015, respectively.
Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors and by other factors. WCF Financial Bank monitors its liquidity position frequently and anticipates that it will have sufficient funds to meet its current funding commitments.
Certificates of deposit totaled $45.4 million at December 31, 2016, of which $25.4 million had maturities of one year or less. WCF Financial Bank relies on competitive rates, customer service and long-standing relationships with customers to retain deposits. Based on our experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with us.
WCF Bancorp, Inc. is a separate legal entity from WCF Financial Bank and must provide for its own liquidity needs, such as repurchasing stock and paying dividends to stockholders. WCF Bancorp Inc.’s primary source of liquidity is the dividends it receives from WCF Financial Bank. At December 31, 2016, WCF Bancorp, Inc. (on an unconsolidated basis) had cash and cash equivalents of $4.7 million.
The net proceeds from the stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, which will increase our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity will be adversely affected following the stock offering.
Management is not aware of any other known trends, events or uncertainties that will have, or are reasonably likely to have, a material effect on WCF Bancorp Inc.’s or WCF Financial Bank’s liquidity, capital or operations, nor is management aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on WCF Bancorp Inc.’s or WCF Financial Bank’s liquidity, capital or operations.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit, and letters of credit.

41



For the year ended December 31, 2016, we did not engage in any off-balance sheet transactions other than unused lines of credit in the normal course of our lending activities.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements that are applicable to the Company, please see Note 1 of the notes to the Company’s consolidated financial statements, beginning on page 62.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented in this prospectus have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 7A    Quantitative and Qualitative Disclosures About Market Risk
Not applicable, as the Registrant is a smaller reporting company.

42



Item 8    Financial Statements and Supplementary Data
Description
 
 
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets as of December 31, 2016 and 2015
 
Consolidated Statements of Income for the Years ended December 31, 2016 and 2015
 
Consolidated Statements of Comprehensive Income (Loss) for the Years ended December 31, 2016 and 2015
 
Consolidated Statements of Changes in Equity for the Years ended December 31, 2016 and 2015
 
48 
Consolidated Statements of Cash Flows for the Years ended December 31, 2016 and 2015
 
Notes to Consolidated Financial Statements 
 

43




Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
WCF Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of WCF Bancorp, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WCF Bancorp, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ RSM US LLP
Des Moines, Iowa
March 24, 2017

44


WCF Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2016 and 2015
Assets
2016
 
2015
Cash and due from banks
$
1,716,578

 
$
5,350,561

Federal funds sold
1,306,000

 
3,516,000

   Cash and cash equivalents
3,022,578

 
8,866,561

Time deposits in other financial institutions
5,037,068

 
2,950,111

Securities available-for-sale, at fair value
44,652,837

 
36,525,732

Loans receivable
61,063,501

 
57,885,240

Allowance for loan losses
(487,114
)
 
(505,178
)
   Loans receivable, net
60,576,387

 
57,380,062

Federal Home Loan Bank (FHLB) stock, at cost
354,800

 
452,700

Bankers' Bank stock, at cost
147,500

 
147,500

Office property and equipment, net
4,041,525

 
4,320,371

Deferred taxes on income
934,579

 
486,849

Income taxes receivable
60,839

 

Accrued interest receivable
422,949

 
407,975

Goodwill
55,148

 
55,148

Bank-owned life insurance
3,021,501

 

Prepaid expenses and other assets
1,319,636

 
1,322,915

 
$
123,647,347

 
$
112,915,924

Liabilities and Stockholders' Equity
 
 
 
Deposits
$
87,089,680